Mainstream microeconomic theory assumes individuals with exogenous preferences (McTaggart, et al., 2003; Sloman & Norris, 2008) . This simplifying assumption is important. If relaxed, doubts would arise as to the meaning of wellbeing and of preferences expressed through markets, the political process, or economic evaluation methods (McCain, 1992, p. 153). However, the persuasive influence of some over others by virtue of authority has already been mentioned, and the exogeneity assumption is also put in doubt by evidence on group perceptions and behaviour. Group cultures exist.69 They are an inherent part of any organisation, with its hierarchies, procedures and processes, and its framing of issues. They apply within academic disciplines, professions, institutions and elsewhere. Different group cultures can co- exist in the same society. They may be benign, beneficial or harmful.
Consider the differing approaches that various social sciences may take to the analysis of the same phenomena. Discussion above on theories and disciplines suggests that members of a discipline (economists included) are likely to be subscribing to partial assessments that are inconsistent with those of other disciplines. In relation to this thesis, politicians are grouped by party, lawyers by profession and common training, and those working in a court by institution. Group cultures, understandings and accepted reasoning and behaviours may be significant influences on outcomes. They may also be important when considering what should be thought of as rational behaviour.
This call has been taken up to some extent within the discipline, with attention being given to the work of Tversky and Kahneman (1981) and the growth of behavioural economics. However, there are other well-known phenomena that could also be considered. Here are three examples that are well known because they are extreme. If
69 Mayo has given mainstream economics assumptions about individuals the label the ―rabble hypothesis‖, objecting to the representation of society as unorganised individuals (Perrow, 1986, pp. 59- 60).
extreme outcomes such as these can occur, it can be expected that numerous less dramatic instances also arise under more normal circumstances.
1. The Stanford prison experiment
This was first conducted at Stanford in 1971, and involved subjects being allocated the roles of either prison guard or prisoner (Zimbardo, 1999). The subjects were ordinary college students. As described on the web site:
―Our planned two-week investigation into the psychology of prison life had to be ended prematurely after only six days because of what the situation was doing to the college students who participated. In only a few days, our guards became sadistic and our prisoners became depressed and showed signs of extreme stress.‖
2. The Milgram experiment
This was conducted at Yale by Stanley Milgram and described in an article published in 1963. Subjects were instructed to apply what they believed were electric shocks of increasing severity. The intention was to see if extreme behaviours, such as those by concentration camp guards, were due to the people being sadistic or just ordinary people obeying orders. They found that many subjects were prepared to follow instructions to administer severe shocks:
―Ordinary people, simply doing their jobs, and without any particular hostility on their part, can become agents in a terrible destructive process. Moreover, even when the destructive effects of their work become patently clear, and they are asked to carry out actions incompatible with fundamental standards of morality, relatively few people have the resources needed to resist authority.‖ (Milgram, 1974, p. 6)
3 The Stockholm syndrome
This is based on the well-known story of hostages in a Stockholm bank robbery who sided with the hostage takers, with the heiress Pattie Hearst being considered a later example. The concept has been extended further to describe a ―societal Stockholm syndrome‖ whereby women became willing participants in their patriarchal oppression
(Graham, 1994). The existence of the syndrome has been questioned (Namnyak et al., 2008) , and a description of the original hostage taking (Bejerot, 1974) does not mention the claimed behaviour. Nevertheless, the syndrome‘s acceptance indicates its plausibility (such that people can be persuaded to believe in it).
All three of these suggest that people may find themselves in environments in which they behave in unexpected ways.70 However, economists still tend to focus on people as individuals, so the full importance of the social context may be overlooked. There are a few exceptions. Williamson (1975) notes the importance of ―atmosphere‖71 and ―informal group influences‖72
, and Laffont and Martimort refer to interactions between private incentives and cultural norms of behaviour.
―How private incentives interact with cultura
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norms of behavior might be the next important step of research needed to offer sensible advice on the design of institutions.‖ (Laffont & Martimort, 2001, p. 3)The usual examples that are presented of these three phenomena relate to extreme behaviour, but related responses may be expected in less dramatic situations.73 Each organisation or social grouping has its own culture, rules and norms. The experiments
70 The first two approaches were used in an attempt to understand the behaviour of American soldiers in Iraq (Montgomery & Phillips, 2009; Sommers, 2009)
71
Described as follows (italics in the original):
―...technological separability does not imply attitudinal separability. Reference to atmosphere is intended to make allowance for attitudinal interactions and the systems consequences that are associated therewith.‖ (Williamson, 1975, p. 37)
He uses the Titmuss blood donor example to illustrate his point. Note the mention of process:
―It may be more accurate to regard the exchange process itself as an object of value...supplying a satisfying exchange relation is made part of the economic problem.‖ (Williamson, 1975, p. 38)
72When a contractor becomes an employee:
―He becomes a member of a team, and, as a member of a team becomes subject to a different set of expectations regarding his relations to the whole...Informal group influences...are brought more systematically to bear when behaviour contrary to the interests of the firm occurs.‖ (Williamson, 1975, p. 99)
73 For dramatic effects on an entire country, see Haffner (2002) for observations of Germany prior to World War II.
simply suggest that these may be formed, and conformed to, in ways that we might not have anticipated.74 Goleman describes this possibility in terms of frames and schemas and self-deception by groups:
―Self-deception operates both at the level of the individual mind, and in the collective awareness of the group. To belong to a group of any sort, the tacit price of membership is to agree not to notice one's own feelings of unease and misgiving, and certainly not to question anything that challenges the group's way of doing things.‖ (Goleman, 1997, p. 12)
And:
―...shared schemas guide group dynamics...the social construction of reality. Shared schemas are at work in the social realm, creating a consensual reality. This social reality is pocked with zones of tacitly denied information. The ease with which such social blind spots arise is due to the structure of the individual mind. Their social cost is shared illusions.‖ (Goleman, 1997, p. 23)
While economics recognises the significance of perverse incentives, it has paid relatively little if any attention to group culture and its impact on perceptions and behaviour. It may be an important aspect of policy making and implementation. In relation to the implementation of law, consider the reported words of a U.S. Senator:
―Nothing ‗did more to damage America's place in the world than the revelation that our great nation stretched the law and the bounds of executive power to authorize torture and cruel treatment,‘ Sen. Patrick Leahy said at the start of a committee hearing.‖ ("Leahy calls for 'truth commission' on torture," 2009)
On this same policy issue, internal memos advocating such actions are described by Frieden (2009). The internal culture allowed the actions, and others were then prepared
74 Consider, for example, the willingness of the public to favour an incumbent prime minister and the views of an incumbent government, or people‘s acceptance of the culture in an organisation. This has been described as ―system justification‖ (Jost, Banaji, & Nosek, 2004).
to carry them out even though they were arguably contrary to fundamental principles of the society.
There may be numerous areas where theorising on the basis of the above phenomena could yield plausible explanations of behaviour. In New Zealand, Rodney Hide has contended that the Inland Revenue Department had ―a tactic of engaging in protracted audits of taxpayers, in order to delay GST refunds to drive certain taxpayers broke‖ (Hide, 2003). Similarly, in 2000 he claimed that a ―taxpayer had been harassed and bullied by the IRD to the point of a breakdown‖ (Bruce, 2000). Recently hitting the headlines, we also hear of Immigration‘s Pacific ―fiefdom‖ (Trevett, 2009):
―The Ernst and Young report said that since being set up in 2005 to deal with applications from people in Pacific nations and fill the Pacific quota, the division...had become isolated from the rest of the Immigration Service as its leadership created an ‗us and them‘ approach.‖
There may be group dynamics active in determining collective views and behaviour. Numerous examples were given by Mackay over 150 years ago in his book,
Extraordinary popular delusions and the madness of crowds (Mackay, 1995). Even among economists, and for economics as a discipline, there may be common acceptance of our conventions despite cause for unease. Kuhn, describing scientists, writes:
―[T]he members of a scientific community see themselves and are seen by others as the men uniquely responsible for the pursuit of a set of shared goals, including the training of their successors. Within such groups communication is relatively full and professional judgment relatively unanimous. Because the attention of different scientific communities is, on the other hand, focused on different matters, professional communication across group lines is sometimes arduous, often results in misunderstanding, and may, if pursued, evoke significant and previously unsuspected disagreement.‖ (T. S. Kuhn, 1970, p. 177)
There are commonly held perspectives on, and a collective understanding of, the economy. These are held by the mass of people within the discipline, despite internal dissention on some finer points. Might they be as much the result of a collective group
dynamic as a logical, reasoned, and regularly reviewed and revised, assessment of theory and evidence? New entrants are educated as to the established conventions and their acceptance into the group depends on a demonstrated competence according to those conventions. Similarly, the global financial and economic situation that arose with the sub-prime crisis in the United States may have been in part due to the culture within financial institutions. If this dimension of behaviour is important, then economic models that overlook it may be omitting a relevant variable, with all the associated consequences.
Rhetoric and groups are inevitable aspects of societies. Many economic models treat preferences as exogenous, and people as individuals. In this context, rhetoric and groups would have to be considered as causing ―failures‖, deviations from the theoretical ideal. This means that second best problems arise when applying the theories to the real world.75 In addition, understanding of issues, attitudes towards groups, the effectiveness of rhetoric, and the development, evolution and implementation of laws may depend on the perspectives of dominant groups and influences on their understanding. Consequently, these aspects are expressly considered in later chapters of this thesis.