Seminar 1 Comparative Socio economics Systems

Professor Thomas Marmefelt

How do formal and informal institutions contribute to the extended market order,
according to Hayek and Boulding?

Boulding:
In terms of the Market order, many formal and informal institutions may contribute Land,
labor and capital; supply and demand; life situations; quantity of Money; expectations; wages;
stock of commodities; credit, etc.

Land In terms of production, land is necessary to produce X. Depending on the availabity of

land, fertility of land in terms of natural products, price and distance from the Market; there
can be huge difference in the price. If X is produced in a cheap land, a fertil land that is not far
away for the commerce, the price could be just the value plus the profit. Otherwise, if X is
produced in an expensive, far away, non fertile land, the price would be the value of the
commodity, plus this expenses, plus the profit.

Labor Also affects production, as the lack of people to do the job or lack of knowledge to this
people might lead to enhancing costs to the commodities.

Capital The availability of capital to invest on the production, as the lack or excess of credit
may influence the Market, specialy the price of the commodities. Also inflation and deflation
have affects in the Market, leading to more or minus production and prices may get higher or
lower, depending on the situation.

Demand and supply Two of the features that most influence in the markets, and also prices
of commodities are supply and demand. In the case of a excess of demand by the good X, the
price will go up until the equilibrium is found. In the case of a excess of supply by the good X,
the price will go down until the equilibrium is found. One other way to solve the differences
betweeb demand and supply is to adjust the production, maintaning the profit but finding the
equilibrium with the costumers needs.

Life situations In terms of wars, economic crisis, poverty, etc, the Market may need to adapt
and make changes. In a economic crisis there could have lack of demand on the commodities,
as in wars, other commodities could be demanded, changing the environment of the Market.
Changes in the human environment that change their economic preferences and need, shall
lead to changes in the Market.

Expectations
It doesn't just matter what is currently going on - one's expectations can also affect how much
of a product one is willing and able to sell. For example, if your firm produces mp3 players and
you hear that Apple will soon introduce a new iPod that has more memory and longer battery
life, you (and other producers) may decide to hurry up and sell your players to stores before
the new iPod comes out. When people decide to increase production/sales today, they are
increasing the current supply for mp3 players because of what they EXPECT to happen in the
future.
Besides that, theres expectations of value, where certain product is expected to cost, lets say
1000 dollars, but the price that selling occurs is at 1100 dollars. It depends of the demand, the
supply and how much does the buyer think this certain product is worth to him.

Wages As in the case of the labor, if there is a scarse situation to whether there are enough
workers, enough workers with knowledge, workers that will accept this payment for their
service. In this terms, if there is less people than needed for the job, their wages will go up and
vice versa. It is the same situation for workers that will accept the payment or if there are
workers with the knowledge needed.

Stock of commodities Back to the demand and supply, the stock of commodities can affect
the markets. Whether you have excess of a product because a better one appeared in the
Market, the price of this product will go down. If, however, it is christmas and everybody
wants the present X, the price of this product will go up until people buy less or the company
produces more. In terms of financial markets, it is the same, just correlating to other products.

Credit
Credit leads to evolution on industries, production, finance, everything. Once there is more
credit, there are more people investing, more people being hired, more people building
houses, etc. Credit may lead to a expansion of a Market, as there is more investment in the
field. Once someone gets credit, it can buy and build, and involve more people. Nevertheless,
the lack of credit may reduce markets and production, leading to losses in the economy.

Hayek:
Chapter 2 Cosmos and Taxis

The concept of order

Two types of order: made and grown order.
The term order can be referred to system, structure or pattern.
Its a state of affairs in which a multiplicity of elements of various kinds are so related to each
other that we may learn from our acquaintance with some spatial or temporal part of the
whole to form correct expectations concerning the rest, or at least expectations which have a
good chance of proving correct.
It is clear that every society must in this sense possess an order and that such an order will
often exist without having been deliberately created.
Living as members of society and dependent for the satisfaction of most of our needs on
various forms of co-operation with others, we depend for the effective pursuit of our aims
clearly on the correspondence of the expectations concerning the actions of others on which
our plans are based with what they will really do.
This matching of the intentions and expectations that determine the actions of different
individuals is the form in which order manifests itself in social life.
The authoritarian connotation of the concept of order derives, however, entirely from the
belief that order can be created only by forces outside the system (or exogenously). It does not
apply to an equilibrium set up from within (or endogenously) such as that which the general
theory of the market endeavours to explain. A spontaneous order of this kind has in many
respects properties different from those of a made order.
The made order which we have already referred to as an exogenous order or an arrangement
may again be described as a construction, an artificial order or, especially where we have to
deal with a directed social order, as an organization.
The grown order, on the other hand, which we have referred to as a self-generating or
endogenous order, is in English most conveniently described as a spontaneous order. Classical
Greek has distinct single words for the tow kinds of order, namely taxis for a made order,
such as, for an order of battle, and kosmos for a grown order, meaning originally a right
order in a state or a community.
In the economic sphere, in particular, critics still pour uncomprehending ridicule on Adam
Smiths expression of the invisible hand by which, in the language of his time, he described
how man is led to promote an end which was no part of his intentions.
The degree of power of control over the extended and more complex order will be much
smaller than that which we could exercise over a made order or taxis. There will be many
aspects of it over which we will possess no control at all, or which at least we shall not be able
to alter without interfering with and to that extent impeding the forces producing the
spontaneous order.
The market order in particular will regularly secure only a certain probability that the expected
relations will prevail, but it is, nevertheless, the only way in which so many activities depending
on dispersed knowledge can be effectively integrated into a single order.
The formation of spontaneous orders is the result of their elements following certain rules in
their responses to their immediate environment.

Our problem is what kind of rules of conduct will produce an order of society and what kind of
order particular rules will produce.
Our main interest will then be those rules which, because we can deliberately alter them,
become the chief instrument whereby we can affect the resulting order, namely the rules of
law.
In any group of men than the smallest size, collaboration will always rest both on spontaneous
order as well as on deliberate organization.
The fact is that we can preserve an order of such complexity not by the method of directing
the members, but only indirectly by enforcing and improving the rules conducive to the
formation of a spontaneous order.
What the general argument against interference thus amounts to is that, although we can
endeavor to improve a spontaneous order by revising the general rules on which it rests, and
can supplement its results by the efforts of various organizations, we cannot improve results
by specific commands that deprive its members of the possibility of using their knowledge for
their purposes.
Since the beginning of the nineteenth century the terms organism and organization have
been frequently used to contrast the two types of order.
The interpretation of society as an organism has almost invariably been used in support of
hierarchic and authoritarian views to which the more general conception of the spontaneous
order gives no support.
The idea of organization in this sense (made order or taxis) is a natural consequence of the
discovery of the powers of the human intellect and especially of the general attitude of
constructivist rationalism.
Chapter 5 Nomos : The law of liberty
In this chapter, author examine the distinct attributes of what political theorists have long
regarded simply as the law, the lawyers law, or the nomos of the ancient Greeks and the
ius of the Romans (in other languages is distinguished as droit, Recht, or diritto from the loi,
Gesetz, or legge).
The judge is in this sense an institution of spontaneous order. He will always find such an order
in existence as an attribute of an ongoing process in which the individuals are able successfully
to pursue their plans because they can form expectations about the actions of their fellows
which have a good chance of being met.
Not all law can therefore be the product of legislation; but power to legislate presupposes the
recognition of some common rules; and such rules which underlie the power to legislate may
also limit that power. No group is likely to agree on articulated rules unless its members
already hold opinions that coincide in some degree.
Even where the judge has to find rules which have never been stated and perhaps never been
acted upon before, his task will thus be wholly different from that of the leader of an
organization who has to decide what action ought to be taken in order to achieve particular
results.

The property which will of necessity belong to the law as it emerges from the judicial process:
it will consist of rules regulating the conduct of persons towards others, applicable to an
unknown number of future instances and containing prohibitions delimiting the boundary of
the protected domain of each person.
We shall see that those rules of the latter kind which must be deliberately laid down by a
legislature for the organization of government and which constitute the chief occupation of
the existing legislatures, can in their nature not be restricted by those considerations which
guide and restrict the law-making power of the judge.
The difference between the rules of just conduct which emerge from the judicial process, the
nomos or law of liberty, and the rules of organization laid down by authority which we shall
have to consider, lies in the fact that the former are derived from the conditions of a
spontaneous order which man has not made, while the latter serve the deliberate building of
an organization serving specific purposes.

Chapter 6 Thesis: The Law of Legislation

The judge addresses himself to standards of consistency, equivalence, predictability, the

legislator to fair shares, social utility and equitable distribution Paul A. Freund
The chief concern of what we call legislatures has always been the control and regulation of
government, that is the direction of an organization and of an organization only one of
whose aims was to see that the rules of just conduct were obeyed.
The pursuit of social justice made necessary for governments to treat the citizen and his
property as an object of administration with the aim of securing particular results for particular
groups. When the aim of legislation is higher wages for particular groups of workers, or higher
incomes for small farms, or better housing for the urban poor, it cannot be achieved by
improving the general rules of conduct.
In Germany it had come to be widely understood that the pursuit of these social aims involved
the progressive replacement of private law by public law. It found expression in conceptions,
then still largely unintelligible in the Western world, such as that the citizen is the subject of
the administration, and that administrative law is law peculiar to the relations between the
administering state and the subjects it encounters in its activities.

Chapter 10 The Market Order or Catallaxi

We should regard as the most desirable order of society one which we would choose if we
knew that our initial position in it would be decided purely by chance. Since the attraction such
chance would possess for any particular adult individual would probably be dependent on the
particular skills, capacities and tastes he has already acquired, a better way of putting this
would be to say that the best society would be that in which we would prefer to place our
children if we knew that their position in it would be determined by lot. Very few people
would probably in this case prefer a strictly egalitarian order.

Yet, while one might, for instance, regard the kind of life lived in the past by the landed
aristocracy as the most attractive kind of life, and would choose a society in which such a class
existed if he were assured that he or his children would be a member of that class, he would
probably decide differently if he knew that that position would be determined by drawing lots
and that in consequence it would be much more probable that he would become an
agricultural laborer.
He would then very likely choose that type of industrial society which did not offer such
delectable plums to a few but offered better prospecto the great majority.

Chapter 14 The Public Sector and The Private Sector

Some theorists in the past have advocated such a minimal state. It may be true that in certain
conditions, where an undeveloped government apparatus is scarcely yet adequate to perform
this prime function, it would be wise to confine it to it, since an additional burden would
exceed its weak powers and the effect of attempting more would be that it did not even
provide the indispensable conditions for the functioning of a free society. Such considerations
are not relevant to advanced Western societies, and have nothing to do with the aim of
securing individual liberty to all, or with making the fullest use of the spontaneous ordering
forces of Great Society.

It was necessary to discuss in terms of a unitary, central government. Yet one of the most
important conclusions to be derived from our general approach is the desirability of devolving
many of these functions of these functions of government to regional or local authorities.
Indeed, much is to be said in favor of limiting the task of whatever is the supreme authority to
the essentially limited one of enforcing law and order on all the individuals, organizations and
sectional government bodies, and leaving all rendering of positive services to smaller
governmental organizations.

Chapter 15 Government Policy and the Market

The pure market economy assumes that government, the social apparatus of compulsion and
coercion, is intent upon preserving the operation of the market system, abstains from
hindering its functioning, and protects it against encroachment on the part of other people.
Ludwig von Mises.
Olsons demonstration that, first, only relatively small groups will in general spontaneously
form an organization, second that the organizations of the great economic interest which
today dominate to a large extent have come about only with the help of the power of that
government, and, third, that is impossible in principle to organize all interests and that in
consequence the organization of certain large groups assisted by government leads to a
persistent exploitation of unorganized and unorganizable groups is here of fundamental
importance.

To the latter seems to belong such important groups as the consumers in general, the
taxpayers, the women, the aged, and many others who together constitute a very substantial
part of the population. All these groups are bound to suffer from the power of organized group
interests.

Seminar 2 Social Capital and Interpersonal Relations

Professor Thomas Marmefelt
What role does culture as social capital have in the capital structure of
the economy?
Vilfredo Pareto was one of the first economists to use indifference curves as an analytical tool.
He described a persons indifference map as a photograph of his tastes.
Once we know a persons indifference map, we have everything we need to analyze his
economic behavior. Economic theory models human being as abstract rational agents; their
identities as particular people are represented only in the preferences that they have as
individuals. This approach commits economics to a modelling strategy in which relations
between people are impersonal and instrumental.
Over the last twenty years, however, it has become increasingly common for economists to
consider the possibility that economic behaviors not always instrumental in its motivation.
Economists have been able to claim that there are areas of human life, such as family, in which
relations are non-instrumental and then to say these areas lie outside the domain of
economic explanation.
This more recent re-thinking seems to reflect a growing sense that non-instrumental
motivations affect behavior in relations that are indisputably economic for example,
contracting between firms, employer-employee relationships, and the supply of public goods
through voluntary contributions and that economics needs to recognize sociality as a
characteristic of human life. The result has been an outpouring of theoretical and experimental
work by economists on such topics as trust, social capital, social norms, reciprocity and
fairness.
The author develops the idea by which the affections of different individuals interact with one
another. He develops this idea by using a concept of fellow-feeling that derives from Adam
Smiths Theory of Moral Sentiments.
Smiths hypothesis is that there is a general tendency for fellow-feeling among human beings
with respect to all affective states, whether pleasurable or painful. However, the strength of
fellow-feeling is greater the more closely related the individuals are and the more vividly the
circumstances of the person directly affected are represented to the observer.
Smith uses the term propriety to refer to judgments of approval of sentiments based on
fellow-feeling or conditional sympathy. In Smiths theory, moral sentiments are nothing more
than norms of proprietry: the general rules of morality are ultimately founded upon
experience of, what, in particular instances, our moral faculties, our natural sense of merit and
proprietry, approve, or disapprove of.

The psychological mechanisms of approval and disapproval tend to induce norms of proprietry
of sentiment within any group of interacting people.
These inducements lead us, consciously or unconsciously, to adapt our sentiments so as to
align the with whatever norms of proprietry are approved of by others.
The author proposed a way of thinking about the affective qualities of interpersonal relations. .
His approach explicitly sets out to model peoples affective states, and the ways in which one
persons affective state impact on anothers. He argued that this approach can help to explain
how interpersonal relations can be sources of value directly, through inducing
correspondences of sentiment that are intrinsically pleasurable and that help to sustain
motivations of trust and reciprocity.
These values can be important parts of employment contracts and of packages of services that
are bought and sold on markets; and practices of trust and reciprocity may be preconditions
for many economic transactions. On any plausible definition of the subject matter of
economics, the value created in interpersonal relations is a matter of economic significance.
Chapter 5 Under Trusting Eyes: The Responsive Nature of Trust pp. 105 124
In his Under Western Eyes, first published in 1909, Joseph Conrad tells the story of Razumov, a
solitary but well-respected young student, and of his charismatic colleague Victor Victorovitch
Haldin. While Razumov is considered by his fellow students as reserved but reliable, Haldin has
been classified as restless and unstable even by the local authorities.
Razumov has a good reputation: a man who is always willing to help others, even at personal
cost. Knowing this, one day Haldin knocks desperately on his door. Razumov lets him in. Haldin
looks distraught; he immediately confesses his secret to Razumov: it was he who was
responsible, that morning, for the act of terrorism against the carriage of Mr de P., the feared
and brutal president of the notorious repressive commission. Razumov is horrified, first for
the gravity of what has happened, but also because, knowing Haldins secret, he too now is
part of that tragic and dangerous conspiracy. Still shocked, he replies to Haldins confession:
But pardonme, Victor Victorovitch. We know each other so little... I dont see why you...
Trust, replies Haldin. This word Conrad tells us sealed Razumovs lips as if a hand had
been clapped on his mouth. His brain seethed with arguments (p. 5).
These are brief excerpts from the novels prologue; the rest of the story narrates the details of
Razumovs reaction to having been so heavily trusted, his inner struggle and, finally, the
consequences of his behaviour.
This story also introduces us to the so-called problem of trust, the main topic of this chapter.
We develop a theoretical framework to reveal the reasons and feelings that such an episode
probably elicited in Razumov, taking this episode as emblematic of a generic trusting
relationship.
The problem of trust has recently gained importance and centrality in many areas of the social
sciences: economics, sociology, political science and organizational sciences. In the economic
domain, trust is perceived as playing a crucial role in inter- and intra-organisational
relationships, contract theory, labour economics, in the area of socio-economic development
and in the huge literature focused on social capital, to quote only a few relevant fields.

This chapter focuses in particular on the understanding of the hypothesis of trust

responsiveness, its functioning, historical roots and philosophical foundations.

2. Telling a secret formalised

Haldin first has the choice between telling Razumov his secret or keeping it to himself. If he
decides to tell his secret, then Razumov will have the choice between remaining silent about it
or telling the truth by reporting Haldin to the police, and eventually receiving a reward.
The relationship between Razumov and Haldin is one in which the latters trust is gratuitous
in the sense that the formers trustworthiness does not yield mutual gains. The central
question now is: how would a rational Razumov and a rational Haldin behave in such a
situation?
On the empirical side, the prediction that emerges from the backward induction argument is
often falsified by robust experimental findings that show that people are more trustful and
trustworthy than theory would suggest.
3. Tautologism
The most radical response to the divergence between theoretical prediction and observed
behaviour implies the interpretation of the payoffs in the game as ex post indexes of players
preferences.
4. Enlightened self-interest
A second, less radical though still conservative, reaction is based on the idea of repetition of
the interaction. If the players know that there is a positive though small probability that there
will be another round after that actually being played, they may be motivated to forgo an
immediate gain in order to foster a long-standing and more remunerative relation.
5. Altruism
The egos own welfare is directly affected by the alters welfare. In game theoretical terms, an
altruist is defined as a subject whose utility increases (decreases) as the others payoff
increases (decreases).
6. Inequity aversion
An agent is considered inequity-averse when he aims both at maximizing his payoff and
minimizing the difference between his own payoff and those of other agents. The basic idea is
twofold: first, people dislike being part of an unequal distribution of wealth; second, in such
unequal distributions they dislike being in the disadvantageous position even more than in the
advantageous one.
7. Team thinking
When an agent comes to perceive himself as a member of a team, his reasoning style switches
to a mode that no longer responds to the question What should I do optimally to attain my
goal? but to What should I do to play my part in accomplishing the teams plan?
While altruism and other theories affect the preference formation process, team thinking
postulates a different way of satisfying the teams preferences.

8. The motivating power of expectations

The crucial assumption in this theory is the so-called resentment hypothesis. Resentment is
a feeling which compounds disappointment at the frustration of ones expectations with
anger and hostility directed at the person who is frustrating (or has frustrated) them.
9. Reciprocity
Theories of reciprocity incorporate the idea that an agent would be willing to sacrifice part of
his material wealth in order to be kind to someone who has been kind, or is expected to be,
kind to him and to punish anyone who has been, or is expected to be, unkind to him.
If you provide a benefit to me in playing your materially self-interested equilibrium strategy,
then you are not being kind to me, and there is nothing unfair if I pursue my own material selfinterest.
10. Trust responsiveness
The main idea of the responsive conception of trust is that trust is basically a matter of
interpersonal relationships and that the relational factor should play a central part in its
understanding.
Psychologist Jonathan Baron, for instance, suggests that following the norm of trust has an
effect on both the beliefs and the norms of others. It creates a virtuous circle . . . if we act as if
we expect the best from the others, they will often behave better as a result
11. Relational motivation: the evolution of an idea
One of the most complete accounts of trustworthiness is grounded on the agents desire to be
well regarded by his peers. The authors explore the development of the idea of self-love,
broadly conceived as desire for the good opinion of others.
Reverberating or reflective nature of sympathy is a quality that implies that we aim at
gaining our own approval at least as much as we desire to obtain others.
12. Self-reflection and trustworthiness
The trust responsiveness hypothesis suggests that some of the reasons for being trustworthy
derive from the mere fact of having been made an object of trust. Nature has, in fact, made us
desire not only to be praised but to deserve praise.
13. How trust responsiveness is different
In Rabins theory, the trustees motivation is a response to the trustors intentions, but in the
sense that the trustee assumes the position of a judge, evaluating the trustors action and
deciding whether to reward or punish it. The trustee considers the trustor as forward-looking,
infers his degree of altruism or selfishness from his intentions and then decides to react
consequently.
Trust responsiveness has two main sources of motivation. The first is the desire for the good
opinion of others, or vanity, which maintains the negative moral flavour Pettit assigns to it,
but there is also a second source of motivation, which derives from our sense of self-worth.
14. Trustworthiness as relational good

The best way of describing the nature of trustworthiness is by using the term relational.
Trustworthiness comes about as a product of the action of self-reflection, which, in turn, arises
from the relation with others others as a mirror of the self. There then arises the similarity
between such a conception of trustworthiness and the idea of relational good.
A relational good is, essentially, a kind of good that is produced and consumed within a
specific relation.
15. Concluding remarks: what happened to Haldin
This chapter has discussed the phenomenon of trust and some of the theories that have been
developed to explain trustful and trustworthy behavior. In particular, a novel explanatory
principle is proposed, grounded on the relational nature of any trusting interaction. The
hypothesis of trust responsiveness is unraveled in its philosophical and historical roots,
functioning, and underlying psychological structure.
In Conrads book, Razumov cannot foresee the cost (psychological losses due to his betrayal of
a desperate friend) and decides to report Haldin to the police. The rest of the novel tells us
how Razumov spends the rest of his life repenting his untrustworthy behaviour. What emerges
clearly is the nature of the psychological cost that most of us wish to avoid by being
trustworthy when someone trusts us.
The very essence of that cost derives from our own social nature, our own need for mutual
recognition. Our identity is shaped in a social environment and we acquire a good amount of
self-knowledge through the mirroring effect of others.

Seminar 3 Comparative Socio economics Systems

Professor Thomas Marmefelt

The book makes it clear that in the short run, all resources are limited. In a longer run, thats a
different story; The standard of living has risen along with the size of worlds population since
the beggining of recorded time. There is no convincing economics reason why these trends
towards a better life should not continue indefinitely.
A greater consumption due to increase in population and growth of income heightens scarcity
and leads to less supply than demand, therefore, higher prices. These higher prices represent
opportunity that leads investors and business-people to seek new ways to satisfy the
shortages.
Contradicting the doomsayers, the authors takes the view that cost reductions from increased
efficiency that will inevitably take place in the future, the doomsavers do not foresse that the
total cost of enery, that is a very small part o four economy, will become smaller in the future.
Paley comission fears of raw material shortages during and after World War II. There are two
reasons to why the Paley Comission were wrong:
- The comission reasoned from the notion of finiteness and used a static technical analysis. The
resources are being used in higher speed than they are expanding, according to the group.
- It looked at the wrong facts, for example, examing 1940 to 1950 instead of 1900 to 1940.
Cornucopian those who believe natural resources are available in pratically limitless
abundance, contrast with doomsters. The author is not cornucopian. Cornucopia is the
human mind and heart, and not a Santa Claus natural environment. Past, present and future
are there to prove it.
Populational growth leads to great improvements in social infrastructure (transportation,
communications systems). The growth also gives a boost to agricultural saving, minimizing a
popular belief that more people lead to scarcity of commodities and real problems
populational growth can reduce and can grow nonagricultural saving.
Any particular raw material or aspect of material human life will get better for example, the
centuries of decline in the price of cooper. This same improving trend will take place for all
natural resources and other aspects of material life. On average, the people in each generation
create a bit more than they use up - on average, the people in each generation create a bit
more than they use up.
There isnt any proof of larger use of natural resources in the case of larger population leads to
deleterious effects upon the economy in the future. The cost of energy is not an importante
point when evaluating the impact of population growth.

The availability of mineral resources, as mesured by their prices, may be expected to increase
that is, costs may be expected to decrease despite all notions about finiteness.
Also in the subject of availability of resources, a necessary element the economic of resources
and population is if the economic system gives people the freedom to exercise their talents
and profit the opportunities.
The Malthusian theory is contradicted by the empirical data.