The herd instinct and the common theory

Below are two thought-provoking, stand-on-their-own sections from Patrick Spread‘s paper “Science and Support: The Struggle for Mastery in Economics” in the new issue of RWER. 

The herd instinct

Fullbrook (2010a, p. 102), in the quotation above on page 3, refers to the AEA and neoclassical economists as ‘the old herd.’ References to ‘the herd instinct’ are fairly common in academic literature but its nature is never specified. The phenomenon is easily understood in terms of support-bargaining. An individual advances an idea that looks likely to advance the interests of himself, or herself, and his or her associates. The idea is taken up within the group and, since the group is seen to be advancing, others join the group. People all go in one direction with the one idea. The group members convince each other that the idea is the answer they have all been looking for. Then some event occurs that casts doubt on the idea. A rival individual puts forward an alternative idea, and gains support. People begin to move away from the first idea and edge towards the second. At a certain point, the erosion of support erodes the confidence of the old group, and a trickle of defections becomes a torrent. The new group gains confidence from the build-up of its support. The new group, with the new idea, becomes ascendant. People move with the herd because it gives a sense of security, whatever the status of the herd ideas. The course of events, favourable or unfavourable to a particular idea, can influence the way support moves. To stem the ebb and flow that is associated with the herd instinct, a herd has to be corralled in an institution, so that its members have institutional incentives to stick with the herd idea. Through institutionalisation the life of an idea can be prolonged way beyond what science or the course of events suggest to outsiders is appropriate.

References to ‘the herd instinct’ have become common in recent years in the context of the behaviour of stock exchanges. Groups form amongst stock market investors with certain ideas about how markets will behave. Mutual support within the group gives rise to confidence that the ideas can only be right, and shares are bid up on the strength of the idea. Then events show the ideas to be less than wholly valid, and support for the relevant shares is lost. This pattern of behaviour can be seen in the ‘.com boom’ and subsequent ‘bust’ at the turn of the century. The confidence of investors in the idea that economists had developed mathematical techniques of pricing securities so that all risks were covered, coupled with confidence in free markets that forestalled regulatory intervention, probably played a part in the heavy investment in high-risk securities in the period before the financial crisis of 2007-9. What appears as the herd instinct is a consequence of support-bargaining.

Common theory

The association of theories with the groups that hold them gives rise to the idea of a common theory – a theory developed by common people for their own guidance in the conduct of their lives. It can, of course, immediately be questioned whether it is appropriate to regard the varied and disorganised jumble of ideas and beliefs that is characteristic of popular thought as amounting to a ‘theory.’ Even common theories might be too great a stretch. But if it is accepted that theories are inseparable from theory groups, then it has to be accepted that people form theories. At the most basic level, and hence most widespread, and hence most worthy of the name ‘common theory’, there are ideas about the passage of time, about distance, the nature of objects, the nature of humans, and the nature of existence, that are held broadly in common by humans and which have enabled them to survive. Many of the elements of common theory appear to be built into language. We communicate on the basis of common ideas which are embedded in language. Different language groups will then have different common theories, except in so far as different languages incorporate the same elements of theoretical understanding. Many do probably incorporate the same or very similar understanding of those basic ideas regarding time, space, the existence of objects and the nature of people.

The common theory then constitutes a basic ‘world view’ for all humans, including scholars seeking to develop more refined theories about issues relating to human interests in general or to factional interests. Everyone unavoidably uses this common theory or world view, if only on account of the necessity of expressing themselves in language. Some explicitly acknowledge that they will draw on it. Simon (1957, p. 198) writes,
“Lacking the kinds of empirical knowledge of the decisional processes that will be required for a definitive theory, the hard facts of the actual world can, at the present stage, enter the theory only in a relatively unsystematic and unrigorous way. But none of us is completely innocent of acquaintance with the gross characteristics of human choice, or the broad features of the environment in which this choice takes place. I shall feel free to call on this common experience as a source of the hypotheses needed for the theory about the nature of man and his world.”

In other words, Simon sees in common experience readymade hypotheses about the nature of the world which he is at liberty to draw on. It is, in effect, an acknowledgement of the necessity of drawing on an established common theory. The argument here is that everyone does it. Even Friedman in his article on methodology (1953, pp. 8-10, 40) acknowledges the overriding importance of ‘experience’ in the evaluation of theory. Ruccio (2003, p. 42) and Guala (2006, p. F320) criticise Lawson (1997; 2003; 2004) for his appeals to common knowledge in his exposition of the importance of ontology. But if our basic ideas about ‘being’ are part of the common theory, Lawson can hardly avoid appeal to common theory when he discusses ‘being.’ Common theory constitutes the basic world view for Lawson, as for everyone else.

Economic theorists draw copiously on the common knowledge of what goes on amongst traders, consumers and manufacturers. They draw informally on the buying and selling, the calculations of income and profit, the uncertainty and preferences that surround everyday deliberations. Yet at the same time they deny common theory any part in the neoclassical model. The neoclassical model is conceived very distinctly as a means of eliminating the misconceptions that hold sway amongst ordinary people. It purports to show that what seems right in common theory is not right in reason. The pursuit of individual self-interest, rather than personal benevolence, advances communal interest. The neoclassical model exalts reason above the emotionalism that is seen as dominating the ideas and actions of ordinary people.

Even the common theory of less than common people is rejected. Henderson (2001, p. 82; see also Spread, 2008, pp. 350-52) dismisses ideas on economics put forward by non-economists as ‘do-it-yourself’ economics and continues:
“…what is in question here is not just ‘popular economic fallacies’, the uninstructed beliefs of ordinary and unimportant people. These same ideas are held with equal conviction, and expressed in much the same language, by political leaders, top civil servants, chief executives of businesses, general secretaries of trade unions, well-known journalists and commentators, religious leaders, senior judges and eminent professors – as also by economists themselves, in uninstructed or unguarded moments.”

The ideas not just of common people, but of distinguished people, in their areas of practical expertise, are dismissed as of no significance. Henderson clearly regards himself as representative of the mainstream economic theory group and displays the self-assurance of a member of a group accustomed to the copious support of his peers. But notably, there are apparently times when economists cannot prevent themselves from expressing common theory. Neoclassical economics only makes sense within the theory group, where neoclassical economists assure each other that it makes sense. Let out on their own, economists may ‘go native’ with the common theory.

Retention of the neoclassical model

By reference to common theory, neoclassical economics makes no sense at all. Most obviously, it has no understanding of spatial issues and the problems of distance. It has no understanding of  . . . . . . .

read Spread’s whole paper here: “Science and Support: The Struggle for Mastery in Economics“

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