The (proper) microfoundations of routines and capabilities: a response to Winter, Pentland, Hodgson and Knudsen

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Journal of Institutional Economics : page 1 of 18 C The JOIE Foundation 2011 doi:10.1017/S1744137411000506

The (proper) microfoundations of

routines and capabilities: a response toWinter, Pentland, Hodgson and Knudsen

T E P P O F E L I N ∗

Organizational Leadership and Strategy, Marriott School, Brigham Young University, Provo, UT 84602, USA

N I C O L A I J . F O S S ∗∗

Department of Strategic Management and Globalization, Copenhagen Business School, Kilevej 14, 2 fl., 2000

Frederiksberg, Denmark and Department of Strategy and Management, Norwegian School of Economics and Business

Administration, Breiviksveien 40, N-5045, Bergen, Norway

Abstract: Sidney Winter (2011), Brian Pentland (2011), and Geoffrey Hodgsonand Thorbjørn Knudsen (2011) take issue with the arguments in Teppo Felin andNicolai J. Foss (2011), along with more generally critiquing the‘microfoundations project’ related to routines and capabilities. In this rejoinderwe argue that the responses of our critics reinforce a number of the points statedin our writings on the routines and capabilities literature. In response to theirmany points we address the following key issues in the debate: (1) lack of construct clarity; (2) universal mechanisms or comparative chauvinism;(3) models of mind and man; (4) levels of analysis; (5) agency and uncaused

causes; and then further discuss (6) a rationalist alternative.

1. Introduction

We are flattered by the detailed and thoughtful reactions to our critique of theroutines and capabilities literature (Felin and Foss, 2011) provided by SidneyWinter (2011), Brian Pentland (2011), and Geoffrey Hodgson and ThorbjørnKnudsen (2011). Though we disagree with a significant portion of their criticalreactions, we welcome the opportunity to engage in this important discussionand debate on the foundations of this literature.

As we will highlight, the responses reinforce the main point of our originalarticle, namely that the theoretical, philosophical and psychological foundationsof the routines and capabilities literature are shaky. Our critics also go beyondthe target paper (Felin and Foss, 2011) and raise issues with the more general‘microfoundations’ program of research that we have advocated elsewhere (e.g.,Felin and Foss, 2005, 2009; Abell et al., 2008). Our basic point in stressingthis agenda is that we want the constructs of routines and capabilities to be

∗Email: [email protected]

∗∗Email: [email protected]

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2 T E P P O F E L I N A N D N I C O L A I J . F O S S

built on proper microfoundations (rather than attached to behaviorism andempiricism) that make these constructs intelligible in terms of individual actionsand interaction. To us, the implication is that the routine and capabilitiesliterature must address the need for models that appropriately account for

human nature and that bridge the micro- and macro-levels. While the currentemphasis on experience, history, repetition and so on may be argued to constitutemicrofoundations of some sort, we call for microfoundations that place moreemphasis on choice, foresight, anticipation and rationality.

Our goal in this response, then, is to further clarify and reinforce ouroriginal point about problems associated with extant behavioral and empiricistfoundations of routines and capabilities-based literature, to further link thisdiscussion with microfoundations, and concurrently respond to importantmatters raised by the three critiques. Our response is organized into the followingsections: (1) lack of construct clarity; (2) universal mechanisms or comparativechauvinism; (3) models of mind and man; (4) levels of analysis; (5) agency anduncaused causes; and (6) the nature of a rationalist alternative.

2. Lack of construct clarity: why it may not be helpful to ‘focus on real routines’

It is preferable in a debate if the debating parties can agree about the natureof the subject being discussed, or, if this is not possible, define some sharedconceptual ground that may help to resolve disagreements. A basic problemwith much routines-based reasoning and associated work on capabilities is that

it suffers from problems of construct or conceptual clarity, which makes debate,such as the present one, inherently difficult. Moreover, it also hampers scientificprogress (Williamson, 1999). An example is the difficulty of pinning down whatexactly we may mean by the ‘foundations’ of a concept that is still so elusiveas that of ‘routine’ (see Becker, 2004). A further problem is the fair amount of ad hoc theorizing that is thriving in this literature – and which we discern in theresponses of our opponents.

Specifically, proponents of routines are characteristically inclusive in theirunderstanding of routines – at the expense of construct clarity. 1 New constructsdo not come ready-made with clear definitions (Leijonhufvud, 1976), and, inrecognition of this, sorting out definitional issues, scope conditions, semantics,etc. constitutes a quite significant and important part of scientific activity,not the least in the social sciences.2 However, the routines literature has

1 Barbara Levitt and James March explain that the ‘generic term “routines” includes the forms, rules,

procedures, conventions, strategies, and technologies around which organizations are constructed and

through which they operate. It also includes the structure of beliefs, frameworks, paradigms, codes,

cultures, and knowledge that buttress, elaborate and contradict the formal routines’ (Levitt and March,

1988: 320).

2 As Roy Suddaby explains, there are four basic elements of providing clear constructs – namely,

providing definitions which involves ‘the skillful use of language to persuasively create precise and



The (proper) microfoundations of routines and capabilities 3

been significantly underperforming with respect to promoting construct clarity.Consider, for example, Pentland’s definition of a routine as ‘repetitive,recognizable patterns of interdependent actions, carried out by multiple actors’(Pentland, 2011: 280). According to this definition, the patterns of pricing

decisions we observe in oligopolistic markets are routines. So is the fact thatdrivers tend to stop when the traffic lights are red (they are interdependentbecause other drivers adjust their actions). Voting behaviors in parliamentare routines according to the definition. In fact, Pentland’s definition isso inclusive that much of what is meant by an ‘institution’ is coveredby it.

Pentland tells us to ‘focus on real routines’ and this, he submits, will help us‘avoid confusion’ (ibid.). Accordingly, he offers an example of invoice processing.But, as he describes it, it sounds exactly like what may be called a ‘standardoperating procedure’. These are typically designed. Fine. But a planned/designedsequence of interdependent actions is just one interpretation of routines. Othersstress the emergent, unplanned character of routines (Nelson & Winter, 1982).Unfortunately, the literature seldom makes it explicit whether a given discussionconcerns intentionally designed standard operating procedures a la Richard Cyertand James March (1963) or emergent routines a la Richard Nelson and SidneyWinter (1982).

One may question whether it is a problem that the routines literature workswith such an inclusive key construct: if a host of heterogeneous phenomena inthe social world share the characteristic of ‘routine-ness’, then why not analyze

them all as manifestations of the same thing? While this research strategy soundscompelling, we are worried that it may suppress too much variation. Thus,are routines in a hospital emergency room really the same ‘thing’ as routinesin a research and development laboratory in a major industrial corporation?Do they emerge in the same manner? Are they maintained and changed in thesame manner? Are the underlying microfoundations the same? Thus, we aresimply not too charmed by the proposal to ‘focus on real routines’. First, thereis so much heterogeneity with respect to what may conceivably qualify as ‘realroutines’. Second, pace Pentland, ‘focusing on real routines’ does not resolve anyof the deep-seated philosophical, theoretical, explanatory, etc. problems thatwe focused on in Felin and Foss (2011). Third, Pentland’s admonition fails torecognize that observation and reality are preceded by theory. We discuss theseissues further below.

parsimonious categorical distinctions between concepts’ (Suddaby, 210: 347); identifying scope conditions

that delineate the circumstances under which the concept meaningfully applies; clarifying semantic

relationships to other related constructs (as constructs do not arise de novo, but build on other, existing

constructs); and, finally, demonstrating the logical consistency or coherence of the construct in relation

to the overall theoretical argument being made.




3. Universal mechanisms or comparative chauvinism?

While the arguments of our critics are sometimes hard to pin down, nonethelessthere is strong evidence in their responses that very directly supports the claims

in our original paper. To illustrate, Winter says that he ‘take[s] some pride’in the direct links between routines-based reasoning and the sciences thatplace an emphasis on ‘incremental and experiential evolution, randomness, andenvironmental selection’ (Winter, 2011: 261). He even argues that we engagein ‘species chauvinism’ (ibid.: 272) (when comparing human capability withmachine capability). We are proud of this type of chauvinism. Namely, thechauvinism comment is highly instructive as it precisely illustrates our pointabout the need to focus on the endogenous characteristics of actors themselves,whether individual or collective, rather than – as Winter would have it – focuson universal, species-independent , environmental mechanisms that (somehow)

operate outside the organism under study, as if the nature of the organism itself did not matter. One way to summarize the argument of our original paper is toindeed say that we think that comparative chauvinism is warranted.

Evolutionary economics embraces a type of scientific universalism whereenvironmental selection is seen as the key general mechanism (Winter, 1964;Aldrich et al., 2008; Hodgson and Knudsen, 2010). Winter has in fact arguedthat:

natural selection and evolution should not be viewed as concepts developedfor the specific purposes of biology and possibly appropriable for the specificpurposes of economics, but rather as elements of the framework of a newconceptual structure that biology, economics and other social sciences cancomfortably share (Winter, 1987: 617).

However, while there might be some similarities across species and mechanisms –thus suggesting the possibility for a grand unified theory – we remain skepticalof this and would rather focus elsewhere. Specifically, there are important,comparative differences between species, in the underlying nature of the thingsunder study. Part of the impetus for our original article was to make a pointabout the unique nature and capability of humans, something that universal,species-independent and grand theorizing tends to ignore.

The eagerness to apply theories and methodologies from the natural sciencesdirectly to the social sciences of course is not new and is the impetus for the‘empiricism’ (and associated ‘behaviorism’) that we criticize. From the Britishempiricists to Auguste Comte and Herbert Spencer onwards there has been adesire to ‘unite’ the sciences under a common, empiricist framework. This grandprogram, and its direct links to evolutionary mechanisms, led Ernst Mach tothe ‘conviction that the foundations of science as a whole, and of physics inparticular, await their next greatest elucidations from the side of biology, and

especially, from the analysis of the sensations’ (Mach, 1897: preface). Thus,




while Winter says that he has ‘difficulty . . . in recognizing . . . the intellectualterritory’ (Winter, 2011: 262) that we place him in, nonetheless this brand of empiricism, as well as the associated universal Darwinism that evolutionaryeconomics subscribes to, falls directly into this intellectual tradition and larger

program of research.Granted, there are many types of empiricisms – for example, ‘sensationalist’

or ‘logical’ (Ernst Mach and the Vienna Circle), ‘instrumentalist’ (Dewey) –with differing foci, whether perceptions, immediate actions or doing, varioustypes of experiences and observations (associational mechanisms) and so forth.But what all of these empiricisms share is an underlying unity in black boxingthe characteristics of the organism itself – its nature – and focusing largely on theenvironment. All this is done in the name of a seemingly more objectivescience where a priori knowledge and/or native characteristics and capabilitiesof the organism itself are rejected (or, certainly these are not the primary driversof any empiricist model). Evolutionary economics is not alone in linking withthis type of empiricism – various aspects of empiricism have also been central forother streams of economic thought. For example, the German Historical Schoolplaced an emphasis on real, observable history and experience and shunned‘abstract’ theory. American institutionalism, including John Dewey’s studentWesley Clair Mitchell, also explicitly sought to lay behaviorist and empiricistfoundations for economics (for some historical discussion of this point, seeCaldwell, 2004).

In his response, Pentland hopes to circumvent the above philosophical and

methodological issues, but he inadvertently places them center stage. Pentland(2011: 285–286) argues that we fail to ‘incorporate current thinking about theontology of organizational routines’ (ibid.: 285). Specifically, we allegedly neglecttechnology, managerial design, institutional rules and norms, and experience,and we do not realize that in ‘. . . any given context, when people need to gettheir work done, they adopt whatever strategies (patterns of actions) that seembest, and adapt them as necessary. For the people involved, there are no deepphilosophical issues, and no shaky foundations’ (ibid.). Apparently, Pentlandthinks that because people seem perfectly capable of adopting routines, thereis no need to ask microfoundational questions. Try telling an economist or asociologist that because we can observe people interacting fairly successfullyin the market place, there is no need for further inquiry into their motives,preferences, actions, and so on. This is obviously a glaring non sequitur.

But methodological stands are inevitable. In fact, Pentland’s focus onobservation ironically parallels some of the basic tenets of the ‘wissenschaftlicheauffassung ’ (‘scientific view’) of the Vienna Circle empiricists (for an overview,see Carnap and Morris, 1969). Specifically, throughout his response Pentlandcalls for us to focus on ‘real problems’, with an emphasis on the observationof ‘actual routines’ and ‘work practices’. But our precise point is that these

observations – whether in the case of the subjects we study or in the case




of scientists themselves – are highly problematic as sources for understandingactual behavior and reality.3 To illustrate, the observation of an apple falling inno way embodies the law of gravitation within it for the observer. Or to provideanother example, while it still appears that the sun orbits the earth, the truth is

the opposite. Whether we are dealing with scientists or the ‘lay’ people that westudy, observation and reality are preceded by theory.

We are scarcely the first to highlight serious problems associated with naiveempiricism in economic and social theory. Freidrich Hayek (1952) criticizedsocial scientists of his time for their ‘scientism’, the effort to mimic the naturalsciences even though there are comparative and obvious differences betweenhumans and the subjects that the other sciences study. Karl Popper (1972) alsomade strong claims about the highly problematic and simplistic input–output,‘bucket’ nature of empiricist theorizing. Of course, such critiques do not meanthat observation or experience (along with other perceptual mechanisms) donot matter, of course they do – as we discuss, they play a ‘triggering’ role (seeour ‘Poverty of stimulus’ discussion; Felin and Foss, 2011: 245–250) – but ourpoint is that these ‘externalist’ factors should not be given primacy as they may(and indeed often do) lead theorizing astray.

4. Models of mind and man

The center stage of the present debate is occupied by questions about theappropriate model of mind and man. As discussed above, the problem with

universal and empiricist models is that they do not require theories about thenature of the organism itself, as the heavy lifting of these theories is largelydone by the environment. It is at this level where we see significant overlapbetween routines and capabilities-based theorizing of evolutionary economicsand psychological behaviorism and empiricism. Thus, while Winter (2011)takes issue with our ascription of ‘rat-psychology’ to leading scholars in theroutines and capabilities space, we nonetheless see crucial overlaps in the keyconstructs and mechanisms, specifically between the behaviorism of psychologyand ‘behavioral ism’ of organization theory.

Behavioralism partly emerged as a critical reaction to a number of extremeassumptions in the modeling of man in economics (see Simon, 1955) and wasan attempt to add greater descriptive realism to the analysis of individual andorganizational behavior (March and Simon, 1958; Cyert and March, 1963).4

3 For further discussion of the ‘underdetermination’ of the observation/experience–behavior/learning

link, see Felin and Zenger (2009).

4 However, as Fritz Machlup (1967) argued, the behavioralists in their attack on the ‘neoclassical’

theory of the firm got the whole purpose of that theory wrong: the model of the firm in neoclassical theory

is highly anonymous because it is not designed to explain firm behavior per se, but is only a means in

price-theoretic analysis. We think that many of the current difficulties with the missing micro-foundations

of routines are traceable to evolutionary economics (Nelson and Winter, 1982) being designed as an




Herbert Simon’s boundedly rational actor has been the underlying model of many extant theories of organization (March and Simon, 1958; Mahoney,2005), notably providing important foundations – and the point of departurevis-a-vis the neoclassical theory of the firm – for Cyert and March (1963),

a key source publication for much strategic management thinking as wellas institutional economics (Williamson, 1975; Pierce et al., 2008). Simon’sconception of rationality is, of course, an explicit reaction to the modeling of man in economics. It models agents in terms of information processing, andadds situational determinants of decision-making, such as information access oravailability. Thus, rather than assume that somehow information disseminatesperfectly, bounded rationality points to the localness of information and itsdiffusion and bounds. This intuition is important in models of organizationalsearch (Gavetti and Levinthal, 2000).

Winter suggests that our reading of the routines and capabilities literature andthe way we link it to behaviorist psychology may be a rational reconstructionrather than a literal depiction of ‘how it really happened (Winter, 2011: 264).He specifically takes issue with our attribution of ‘rat-psychology’ to leadingscholars who work on routines and capabilities. We agree with Winter thatbehaviorism and behavioralism are not fully congruent; nevertheless, thereare crucial overlaps.5 At first glance behavioralism mainly seems to be aboutadding realism to the understanding of behavior (vis-a-vis the rational economicman bogey). However, behavioral approaches start with environmental andexperiential factors as the causal starting-point for explaining human activity

and behavior, and add behavioral programs (i.e. routines) that are triggered byenvironmental stimuli to understand decision-making. To understand behavior,so the argument goes, we need to understand these programs as well as theenvironment that supplies the stimuli.6 In marked contrast, rational choice-type(and more generally ‘rationalist’) models are strongly future-oriented and focusedon the a priori capabilities and choices of the subject itself. Thus, in behavioralapproaches the temporal orientation on the past manifests itself with a centralfocus given to experience in its various forms – which we find very problematic –where experience provides the key driver of organizational decision-making andbehavior.

While we can agree that the behavioral program in organizational researchhas not gone to the extremes of Skinnerian behaviorism, we maintain that

explicit alternative to neoclassical theory, including neoclassical price theory. If this is the aim, then there

is little reason to be terribly detailed about the micro-foundations of routines.

5 However, this is Simon writing to a colleague in 1954: ‘We need a less God-like and more rat-like

chooser’ (Crowther-Heyck, 2005: 6).

6 In fact, sometimes the whole explanatory burden is placed on the environment. Simon echoes this

environmental focus: ‘A man, viewed as a behaving system, is quite simple. The apparent complexity

of his behavior over time is largely a reflection of the complexity of the environment in which he finds

himself’ (Simon, 1969: 65).




behavioralism, like behaviorism, puts a premium on treating individual cognitionand decision-making in the very simplest possible terms. Individuals arerepresented as rather rigid followers of rules, routines, heuristics, or just plaindumb (an illuminating panel discussion by leading scholars confirms this: see

Murmann et al., 2003).7 In fact, there is an explicit attempt to cram virtually allbehavior into the routines box, so that even highly creative behaviors are placedunder ‘dynamic routines’ or ‘dynamic capabilities’ or ‘second/nth order’ headings(Nelson and Winter, 1982; Teece et al., 1997; Eisenhardt and Martin, 2000;Winter, 2003). Behavior that cannot be treated in this manner is relegated to aresidual category of ‘ad hoc problem solving’ (Winter, 2003), and by implication,we fear, seen as deserving of less interest on the part of researchers.

The attraction of behavioralism was that it promised an ostensibly morerealistic model of man that could take behavioral variety, learning behavior,adaptive preferences, and so on more fully into account. In contrast, economicsmodels of behavior were seen as static, excluding learning (Cyert and March,1963). However, as Mark Casson observes, the exact opposite is closer to thetruth:

Learning does not appear explicitly in the rational action approach because itis built in from the outset. Because of learning, the rational actor continuouslyadapts his behavior to changes in the environment. In the absence of information costs, his adaptation is instantaneous and complete, which isclearly unrealistic, but when positive information costs prevail this is no longertrue: adaptation becomes an incremental and time-consuming process (Casson,

1996: 1163).

More broadly, Michael Jensen and William Meckling (1994) argue that theview of man in the ‘rational action’ or situational analysis approach is thatof a ‘resourceful, evaluative, maximizing’ man (i.e., the REMM model) – aview that they argue is entirely consistent with differences in observed behaviorand with learning: ‘Human beings are not only capable of learning about newopportunities, they also engage in resourceful, creative activities that expandtheir opportunities in various ways’ (Jensen and Mecking, 1994: 5). If Cassonand Jensen and Meckling are right, the behavioralist criticism of the rational

action model may have been based on a strawman right from the beginning.What is more, the behavioralist critique of the neoclassical view of man can

justifiably be leveled at behavioralism itself. As noted by Richard Langlois andL aszl o Csontos: ‘. . . behavioralists tend to assume that agents are (1) hard-headedrule followers or (2) pre-programmed satisficers ab ovo’ (Langlois and Csontos,

7 The implication of a focus on collective-level variables too easily becomes that individuals simply

do not matter: ‘If we truly focused on routines, competencies, practices and so on, we would not follow

people anymore in our research. Instead we would follow how competencies spread, replicate, and

insinuate themselves into organizations. People would disappear from our equations’ (Howard Aldrich

in Murmann et al., 2003: 27).




1993: 118). The human rats in behavioralism are surely hardwired with moresophisticated wirings than real rats, but their psychological makeup still makesthem behave in a rat-like manner. Furthermore, an additional problem withbehaviorism of course is that it not only is an inappropriate scientific model for

humans but for rats as well (as highlighted by a large body of work in ethology) –a pseudo-scientific program of research (Chomsky, 1959).

One way to then restate a central point of our original article is to arguethat models that feature bounded rationality should focus more on the nature of rationality itself and not just its historical, structural, contextual, perceptual,experiential and environmental boundedness. The latter of course are thekey mechanisms of work on routines and capabilities. While experience andhistory provide external data that appear scientific (as we discussed previously),nonetheless it does not help us understand the intentional and purposive factorsassociated with individual and organizational behavior. As Lionel Robbinsargued:

It is really not possible to understand the concepts of choice, of the relationshipof means and ends, the central concepts of our science, in terms of observationof external data. The conception of purposive conduct . . . does involve links inthe chain of causal explanation which are psychical, not physical , and whichare, for that reason, not necessarily susceptible of observation by behaviorist methods (Robbins, 1932: 89–90; emphasis added).

In short, we are dealing with human actors and thus a theory of these actors isneeded, a theory of their nature, creative capacities, rationality and so forth.

5. Levels of analysis

Our effort in the target article (Felin and Foss, 2011) was to raise a levels-independent argument about the problematic nature of experience as a keymechanism (and associated empiricist foundations) for explaining behavior,whether individual or organizational, but both Hodgson and Knudsen (2011)and Pentland (2011) extend their critiques and also raise concerns about somelevels-related issues from our previous work on microfoundations (e.g., Felinand Foss, 2005; Abell et al., 2008). We thus address each in turn.

Hodgson and Knudsen applaud us for emphasizing ‘the role of humanagency and individual psychology in the analysis of routines’ (Hodgson andKnudsen, 2011: 295), but take issue with our endorsement of methodologicalindividualism, because they think we pose ‘individuals versus social structureas alternative explanantia’ and doing this is a ‘false dichotomy’. Pentland alsoseems to believe that we think that routines are ‘individual-level phenomena’and that ‘routines are . . . exclusively a function of human psychology’ (Pentland,2011: 287). This rests on a misreading of our papers: nowhere do we deny

that social structure influences individual action and interaction. In fact, we




have often used the simple expository device known as the ‘Coleman bathtub’(Coleman, 1990) – which brings out the macro–micro link quite explicitly (seeAbell et al., 2008).8 We do think that there are significant benefits for bottom-up-type modeling which explains the origins of collective structures, such as

norms – rather than just assuming their existence – but naturally these collectivestructures in turn also play a role in enabling and constraining subsequentinteraction and outcomes. However, we maintain the basic point that thereis no meaningful role for macro-level (macro-to-macro) causation. In the socialdomain, at least, macro-variables are necessarily linked to other macro-variablesthrough mediating micro-variables.

Pentland argues that ‘the most serious flaw of the microfoundationsproject’ and its ‘individualism’ is that it ‘fails to incorporate the ontologyof organizational routines’ and ignores ‘sociomateriality’. In turn, Pentlandargues that that the proper foundations, rather than individualism, are inthe work of Anthony Giddens and Pierre Bourdieu, and levels-independentconcepts such as ‘structuration’ and ‘practices’. The problem with Pentland’ssolution of essentially ignoring levels (individual and collective) and supposedlyunproductive dichotomies (agency and structure) is that theoretical explanation,and the uncovering of mechanisms, gets subverted by the invention of vagueconcepts such as ‘structuration’ that only seem to mystify rather than explainsocial outcomes. We are not the only ones to make this point. Margaret Archernotes that Giddens’s notion of ‘structuration . . . throws a blanket over the twoconstituents, structure and agency, which only prevents us from examining what

is going on beneath it’ (Archer, 1995: 102). Precisely. In other words, conceptssuch as structuration and practice ‘lose’ their problem at the very outset bysimply giving them a name (structuration or practice), a collective equilibriumthat should be explained rather than named (see Coleman, 1990). Whilewe appreciate how these approaches might attune us to process, nonethelessthere is little modeling or theoretical development about how, for example,heterogeneous interests or beliefs aggregate to collective-level consensus andemergent outcomes (or not). The precise point of the microfoundations programis to unpack, where possible, the central constituents, processes and interactionsamong individuals in order to explain the origins, maintenance and reproductionof collective outcomes such as norms, routines, capabilities and so forth. Tosimply tightly couple these constructs, then name them, does not meaningfullyadvance our theoretical understanding. Our preference is for sharper, analyticmodels.

Related to this levels issue, we might briefly note here that we indeed see thetarget paper of the present debate (Felin and Foss, 2011) as part of a widermicrofoundations discussion and thus welcome the opportunity to clarify what

8 See also Joseph Agassi (1975) for a defence of ‘institutional individualism’ – a position that we

subscribe to (e.g., Felin and Foss, 2007; Abell et al., 2008; King et al., 2010).




we think the proper foundations are. Microfoundations, after all, could also bebased in behaviorism. George Homans, for example, was an important advocateof microfoundations in social theory, but, as noted by Coleman (1986: 1131),his social theories ended up being highly reductionist and essentially grounded

in precisely the type of behaviorism that we criticize. Thus, there are variousforms of reduction, of how we might study and specify the constituent elementsthat make up organizations, and we argue that subjective, forward-looking andchoice-based – rather than observation-, experience- and environment-based –models more fruitfully account for human and organizational behavior.

6. Agency, choice and uncaused causes

Hodgson and Knudsen (2011) raise the issue of the nature and explanation of human agency, which indeed is a difficult and fundamental concern. Essentially,they argue that we want to treat choice as an uncaused cause (a la GeorgeShackle), and that this is fundamentally unscientific as the hallmark of scientificexplanation is a causal approach. They argue that ‘asserting the importanceof human agency does not give an excuse to terminate the search for causalexplanation, which is the essence of science’ (Hodgson and Knudsen, 2011:296).

We agree with Hodgson and Knudsen here, and suggest that they put theirfinger on one of the most difficult issues in the understanding of agency: howmuch determinacy do we want to introduce to our explanations of human action

and how do we introduce such determinacy? The issues here, as Hodgson andKnudsen note, are ultimately deeply philosophical. They go back to David Humewho argued that human behavior must either be determined and (therefore)predictable, or it is random and (therefore) unpredictable. Both options eliminatenotions of ‘free will’, ‘creativity’, ‘innovation’ and indeed choice itself.

In a classic discussion of this dilemma, Popper offers the notions of ‘clocks’and ‘clouds’ as illuminating metaphors. Specifically, he uses clocks to representsystems ‘which are regular, orderly, and highly predictable in their behavior’(Popper, 1972: 207; emphasis in original). Clouds, on the other hand, representsystems that are disorderly and unpredictable. Real-world behavior, accordingto Popper, resides somewhere between clouds and clocks. A key notion in thisontology is that of ‘plastic control’. Popper argues that biological evolution hasadded a number of higher-level functions in organisms that ‘. . . do not replacethe lower ones . . . but they establish a kind of plastic control in them – a controlwith feedback’ (ibid.: 239). Thus, plastic control is a system property, whetherthat system is the mind, an organism, or, perhaps, an organization, and it is keyto Popper that plastic control differs from iron-clad control, i.e., determinism.

In contemporaneous work, Popper (1972) offers the rationality principle asthe middle ground between clouds and clocks. Popper argues that the social

sciences should explain behavior in terms of the conjunction of a ‘situational




analysis’ and the principle of rationality. The situational analysis includes bothexternal constraints (e.g., prices in microeconomics) and internal features of the agent himself, such as his goals and knowledge. In Popper’s account thesefeatures should be objectified in the sense of building a model of the agent’s

situation which may be more or less detailed (or anonymous) depending on whatone seeks to explain. Popper relates his approach to the traditional coveringlaw model in the philosophy of the natural science (according to which oneexplains by subsuming particulars under universals). The features of an agent’ssituation then correspond to initial conditions in the explanation of a physicalphenomenon, and Popper argues that what stands in for the role of a ‘law’ insocial models is the rationality principle (Latsis, 1983: 133).

The key link to Popper’s (1972) analysis of clouds and clocks is thatsituational analysis implies that decision-making behavior is not deterministicallydetermined, for example, by inbuilt heuristics or decision rules, but is plasticallycontrolled. What drives such control is in the first instance mental states, such aspurposes, expectations, preferences, etc., but also theories and critical discussion(ibid: 247). Thus, situational analysis is in essence a description of plastic control,that is, an account of how action emerges from situational features that, however,do not force particular behaviors (Latsis, 1983: 140). It reconciles the ontologyof plastic control, and therefore such notions as free will, real choice, creativity,etc., with the notion that we can in fact explain in a deductive manner in thesocial domain. To us this provides a strong argument why situational analysis ispreferable to behavioralism: the distinction, so basic to behavioralism, between

routinized/programmed and non-routinized/non-programmed behavior suggeststhat creativity, new solutions, innovation, and indeed choice ‘are activitiespresent only in extraordinary, exceptional circumstances’ (Bianchi, 1990: 161).

Note that this actually highlights some key behavioralist ideas: The Popperianemphasis on the fallibility of knowledge and the strong stress on theimportance of procedures in testing theories (Popper, 1972) explicitly takebounded rationality and heuristics into account. However, what is at stake isthat behavioralist agents have been programmed to follow experience-basedheuristics, rules, routines, etc. in a non-critical, unreflective manner. This isparticularly problematic given that the behavioral tradition has had a penchantfor dealing with those biases to decision-making that, in the light of classicaldecision theory, stand out as decision-making errors. Grandori relatedly pointsout that the behavioral tradition:

. . . has devoted much more attention to the commonly followed shortcuts,rules of thumb and routines, quick (and often dirty) methods able to reducecognitive effort and search costs; and much less attention to another, betterclass of heuristics, i.e., rational research methods aimed at producing valid and

reliable knowledge (Grandori, 2010: 478).




Different attempts in social science at explaining human action/behavior reachdeterminacy in quite different ways, one by means of situational constraints (ina broad sense) and one by means of programming the agent. Note, however,that in the situational analysis, while the agent’s behavior is not forced, it is still

influenced by factors at different levels, some of them internal and some externalto the agent (Jensen and Meckling, 1994). Such factors may be more or less‘influencing’. Thus, the situational constraints may be such that it seems thatthey actually fully control (rather than plastically control) the decisions of theagent. If a fire breaks out in a movie theater, an agent does have the possibilityof not trying to escape through the closest exit. Or, a producer in a competitivemarket may decide to sell at a price above the competitive price. But those choicesprobably mean death (physically and economically). The point is that certainfeatures of the situation may overwhelm other ones; for example, environmentalfeatures (a fire, competitive pressures) may overwhelm the features of beliefsand expectations. In such cases, situational analysis may be observationallyindistinguishable from behavioralism: the agent is forced to adopt a certainaction (a single-exit solution). However, in the case of situational analysis,the environment forces him to do so, while in the case of behavioralism he isprogrammed to adopt the action based on a given environmental stimulus. Whileboth Popperian situational analysis and behavioralism seek to reach determinateimplications concerning human action/behavior, determinacy is reached in verydifferent ways. Overall, in behavioral models, agents are hard-wired to choosecertain courses of actions, whereas situational analysis tries to reach determinate

outcomes without compromising the free will of the agent. Langlois and Csontosneatly sum up the basic differences between the two models:

An agent who is programmed [i.e., the behavioralist agent] acts in a determinateway even in the most open and unconstrained situations, whereas the agentwith free will does not. A strict satisficer stops seeking income when he or shehas reached an aspiration level–even if a 50 dollars bill suddenly appears on thesidewalk. The [agent in situational analysis] might pick up the bill (Langloisand Csontos, 1993: 121).

All that said, we think that starting with individual-level preferences, beliefs andexpectations provides a natural starting point for economic and social theory.While the reductionist logic might be pushed to look at issues of free will andcompatibilism versus incompatibilism (as discussed by Hodgson and Knudsen,2011: 297), or to even look at genes (or as Winter argues: the Big Bang; Winter,2011: 266), we think that choices are a very basic nexus where alternativetrajectories and possible histories can and do occur. In other words, the free willdiscussion need not necessarily be solved to look at choices in economic andsocial situations. Furthermore, the type of evolutionary psychology pushed bysome is nigh irrelevant, due to the excessively long timeframes, to the very basic,

day-to-day decisions actors make.




Thus, we essentially agree with Popper that ‘what social science wants tounderstand is how such non-physical things as purposes, plans, decisions,theories, intentions and values, can play a part in bringing about physical changesin the physical world’ (Popper, 1972: 229). To arrive at an understanding of this,

we need appropriate models of human nature and behavior. While these modelscan hardly be fully predictive and still be models of decision makers with freewill, they can certainly still further our understanding. As Gerald O’Driscoll andMario Rizzo argue:

[our . . .] choice-theoretic explanatory schema must render the givenphenomenon [i.e., what a decision-maker actually decided to do] more likelythan if the particular model had not been presented . . . Thus, with [the] modela number of alternative decisions can be seen as possible, but, given the model,that which actually did occur is rendered more likely than it would have been

given some alternative model (O’Driscoll and Rizzo, 1985: 26).

7. Toward a rationalist alternative: key points

Winter insists that we specify an alternative to the literature we criticize:

Nelson and I . . . offered a broad, routine-centered formula for approachingthe problem of predicting firm behavior . . .. To our critics I would say, whatspecifically is it that you propose to substitute for that recipe, and what is thebasis for thinking that it is both feasible and an improvement? (Winter, 2011:260).

Now, the for-your-critique-to-be-taken-seriously-you-must-specify-the-alter-native objection is a classic conversation stopper. The history of science providesmany examples of important refuting instances, decisive critique, etc. that weremade without any clearly stated alternative.9 Nevertheless, it may well be that oldtheories are only abandoned when new theories emerge. So, Winter’s objectionhas some force.

As we argue in our original article (Felin and Foss, 2011), central to ourrationalist approach is the specification of the proper psychological foundationsand understanding of the nature of man. We think individuals are rational

decision-makers who engage in best-efforts satisficing, but also creative problem-solving and solution-generation. Our effort to build up a model of man scarcelyneeds to be done in a vacuum, as our conception shares many similarities with a‘rationalism’ that has an intellectual history going back to Plato (e.g., Chomsky,2003 [1966], provides an overview). Central to this rationalism is the view that

9 That said, in outlining an alternative, we began to ask questions about, an alternative to what ?

What is it that evolutionary theorizing in economics seeks to succinctly and theoretically explain? As we

discussed at the outset of this response, evolutionary economics and associated routines-based work is

extremely hard to pin down given its all-encompassing nature. We think that a focusing of the routines

and evolutionary economics program of research is certainly warranted.




humans theorize, reason and imagine possibilities. As noted by Samuel TaylorColeridge, ‘the meanest of men has his Theory: and to think at all is to theorize’(Coleridge, 1969[1840]: 430). In economics this sentiment links with AdamSmith, who also saw the forward-looking, anticipatory aspects of individuals as

central for his theories of markets and human interaction (see Rothschild, 2001).So have most economists since Smith. Individuals have subjective plans, beliefs,theories and expectations about the environment and these inform their choicesand behavior. This conception of humans is diametrically opposed to empiricistand behaviorist views of decision-making.

This form of rationalism differs markedly from the caricatured versions of objective ‘rational choice’ in economics. Actors need not be super-human intheir abilities to process information, but more realistically they both utilizelocal information and make conjectures and have theories about the future: aboutwhat actions to take, the value of alternatives, possible forms of organization,etc. In other words, we allow economic actors the same prerogative as wegive to scientists within their domain, rather than somehow treating themaltogether differently. A rationalist approach, then, can be seen as a responseto the somewhat glib portrayals of dumb and bounded (in various ways) viewsof human subjects. After all, human societies have made stunning progress invarious technological and other domains, and this progress and the associatedorganization behind it requires better theoretical thinking and explanation.

The poverty of stimulus notion, we feel, shows some promise as a way of meta-theoretically thinking about what needs to be explained vis-a-vis human nature

and behavior in economic contexts. That is, the capabilities that individuals andorganizations have are completely under-determined by the experiences theyhave (see Felin and Zenger, 2009). While the senses receive significant weightin extant theories, we think that observation and perception are preceded byimportant mechanisms related to endogenous factors such as human nature, a priori knowledge, theoretical conjecture and so forth. Thus while the responses(particularly by Winter, 2011) call for a focus on universal mechanisms primarilyassociated with the environment, we think that a more fruitful approach totheorizing is to study the endogenous factors and capabilities of individual andcollective actors.

8. Coda

We might note that our call to understand the endogenous factors associatedwith human action and behavior in economic settings coincides with abroader discussion and debate in biology and philosophy about the appropriatemodels for understanding behavior and evolution. While we have argued for‘comparative chauvinism’ vis-a-vis understanding and specifying human nature,the original critiques of behaviorism applied to rats just as well as humans: neither

can meaningfully be said to behave according to stimulus–response-type models.




Some have indeed recently linked the problems associated with behaviorismand natural selection to the root problem of giving excessive primacy to theenvironment (Fodor and Piattelli-Palmarini, 2010). We have no need to take sidesin this heated debate as it relates to biology, though we whole-heartedly agree

that understanding the endogenous nature of organisms themselves – which in thecase of humans includes thought, beliefs, expectations, preferences, theorizingand so forth – should be center-stage rather than relegating the explanatory ap-paratus to the environment, as evolutionary economics and empiricist models do.

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Documents

The (proper) microfoundations of routines and capabilities: a response to Winter, Pentland, Hodgson and Knudsen