An interesting paper on Leigh Tesfatsion's site is Douglass North's Economics and Cognitive Science (1996). It links our internal mental models (beliefs) to the external environment (ideologies and institutions) through our attempt to reduce uncertainty or create order from disorder. As a result of evolutionary learning, personal beliefs form which are unique to each of us, ideologies form which structure our general mental environment, and institutions form which structure our external environment.
North starts by noting that the competitive markets and general equilibrium assumptions at the core of the neoclassical approach to economics are valuable in theory for understanding how a decentralized system of market forces could generate efficient resource allocation. "But valuable as this model has been for the development of an elegant body of theory it is a very imperfect tool for solving economic problems both at a moment of time but particularly over time ... In the real world of imperfectly competitive markets beliefs determine the choices of the actors."
North first looks at how imperfect information and uncertainty complicate the neoclassical model, especially over time. He then summarizes the nature of ideologies and issues for cognitive science.
Beliefs > preferences
Neoclassical theory assumes that preferences are stable and choices are made within income and technology constraints. But significantly there are no institutional constraints: in a world of perfect information institutions are unnecessary, since"Institutions exist to structure human interaction in a world of uncertainty."
"Once we recognize this fundamental role of institutions in reducing uncertainty we must restructure the theoretical framework we use in economics and the social sciences."
Institutions provide an incentive structure at any point in time and drive the process of social change over time. They are therefore "central to the theoretical construct." Institutions comprise formal rules, informal constraints, and their enforcement characteristics.
North also notes that time "is the dimension in which human learning occurs". Over time our societies become increasingly interdependent and institutional structures become more complex.
Note- the mix between genes and cultural heritage is "in dispute" (this was written in 1995-6, I imagine there is much more research on the topic now but I'm not familiar with it).
How do diverse belief systems arise?
"The pervasive human attempt to reduce uncertainty is the key to understanding the way belief systems evolve. In order to make uncertain situations "comprehensible" humans will develop explanations. The pervasiveness of myths, taboos and particularly religions throughout history (and prehistory, as well) suggests that humans have always felt a need to explain the unexplainable and indeed it is probably an evolutionarily superior trait to have any explanation rather than no explanation."
Humans thinking in terms of narratives has been a bit of a theme lately- most recently covered in Kay and King's Radical Uncertainty. A thought from this paper is that when thinking in terms of an economic model, the effect of inductive thinking should probably be considered not just at the individual level but at the overall system level too (if those things can be meaningfully differentiated).
