by Roger Koppl
Bill Butos edited the latest volume of Advances in Austrian Economics, which is devoted to “The Social Science of Hayek’s The Sensory Order.” It is a terrific volume demonstrating that Hayek’s classic 1952 book in psychology matters for the social sciences, including economics.
Contributors include G. R. Steele, Leslie Marsh, Lorenzo Infantino, Francesco Di Iorio, and Peter Earl. Bill’s introduction rewards careful reading.
My imagination was captured by Jean-Paul Carvalho and Mark Koyama’s paper “Instincts and institutions: the rise of the market.” Carvalho and Koyama identify and close an important gap in our understanding of the evolution of trade. Thanks to Greif, Milgrom, North, and others, we have a pretty good idea how medieval institutions promoted trade and enabled the emergence of capitalism. Thanks to Cosmides, Fehr, Bowles and others we have a pretty good idea how our evolved psychology supports the institutional fabric of modern capitalist economies. What we have not understood, however, is how our evolved psychology could be consistent with the emergence of the medieval institutions that promoted trade early on. How could we have bootstrapped those early trade-promoting institutions? Our evolved psychology was meant for life in band-level society. Thus, it should have thwarted the early expansion of trade beyond relatively small groups.
Thanks to Greif, Milgrom, North, Cosmides, Fehr, Bowles and others, it is no longer such a puzzle that a vast network of trade with strangers can persist. It remains deeply puzzling, however, that this vast network emerged in the first place. Carvalho and Koyama show that our evolved psychology actually promoted the emergence of medieval trading institutions. The really key point comes from de Quervain et al., who show that revenge is sweet: people are willing to pay a price to punish those who betray them. Thus, when Europeans were largely unaccustomed to trade with strangers, feuding supported trade and set the stage for later developments such as the law merchant. This is an important and original argument. It shows just how important the paper of deQuervain et al. is. And it is a good example of how research in economics is converging with research in once distinct fields such as neuroscience. I suppose that last remark brands me as a neuro-Hayekian, and you can read about that subject as well (start here) in Bill’s wonderful volume.