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Relation exchange (관계 교환)

 

 Economics has confined their interests on the exchanges in the market, which take place with price used as mediatory instrument. Relation exchange economics (RXE in short) perceives any interpersonal interactions as exchange action. RXE is not unprecedented in attempts to consider personal relationship as holding effects on the exchange activities. Examples are relational exchange (Macneil 1987; Goldberg 1980), goodwill (Dore 1983), cooperation (Richardson 1972), relational contracting (Williamson 1985) and so on. Despite their shared value which is laid on the importance of interpersonal relationship, their attempts were not combined with behavioral arguments on human cognitive system (Kahneman 2003). On the assumption of human cognitive system, the human behavior of exchange becomes stretched out to all the actions of interpersonal interaction from the actions of exchange in the market. Relation exchange is proven to be more fundamental than value exchange (Rhee 2012b, 2017b). Relation exchange is human behavior which accords with the tenet of bounded rationality (Rhee 2017a).

 

 

Sympathy-consent process

 

 Behavioral studies presented the scheme of human cognitive system, which distinguishes the steps of sensory order (Kahneman 2003). Human cognition begins with perceptions, from which intuition comes off as fast, parallel, automatic, effortless and emotional system. Reasoning is slow, serial, controlled, effortful and rule-governed system of cognition. Sympathy (Hume 1739; Smith 1759) and consent (Buchanan and Tullock 1962) are the only available conduit between and among different cognitive systems of different individuals, from which relation exchange grows out. Sympathy-consent process is indeterminate, incomplete, coincidental, emotional rather than rational, and path dependent process. So, does relation exchange. It is open/indeterminate system in comparison with the closed/determinate system of value-cost rationality model. The fundamentality of relation exchange over value exchange is proved from the property of open set, which vindicates the legitimacy of relation exchange as the model of bounded rationality (Rhee 2017b).

 

 

Open/indeterminate system

 

 Rational agent model is built on the premise that at any incidence, it is possible to measure value-cost indices consistently (Arrow and Debreu 1954; Arrow and Hahn 1971). Without this premise, it is not possible to operate rational agent model. With this premise, it is possible to operate the optimization-equilibrium algorithm. In other words, the state of economy is identified only as the outcome of optimization-equilibrium solution in the rational agent model. In the sense that the recognition of economic state is confined by the optimization-equilibrium algorithm, this approach of economics is defined to be closed/determinate system (Rhee 2013b).

 The premise of consistent measuring of value-cost indices is unrealistic. Number or index is not the fundamental underpinning of human knowledge and understanding (Kahneman 2003). Perception does not begin with number or index, but likely with emotion or feeling (Tversky and Kahneman 1981, 1986) or impression (Hume 1739). Perception and intuition (Kahneman 2003) or impression and image (Hume 1739) are primary steps of cognition process than reasoning (Kahneman 2003) or idea (Hume 1739). Intuition or impression is more accessible in cognitive sense than reasoning (E. Tory Higgins 1996; Kahneman 2003) and idea (Hume 1739) are not.

 The extensionality and invariance of preference are an essential aspect of rationality (Tversky and Kahneman 1986). However, “invariance is violated in framing effects, where extensionally equivalent descriptions lead to different choices by altering the relative salience of different aspects of the problem” (Tversky and Kahneman 1981; Kahneman 2003). People rely on heuristics when making judgments under uncertainty (Kahneman and Tversky 1973; Tversky and Kahneman 1974; Kahneman et al. 1982). Heuristics stems from percepts and intuition because the latters are more accessible in cognition process (Kahneman 2003). In behavioral approach, the role of emotion is more highlighted in its influence on the making of percepts and intuition (Kahneman 2003).

 The root-core problem is the difference of cognitive systems into which perception-intuition and reasoning are pigeonholed. Rationality and its premise belong to the cognitive system of reasoning. However, human knowledge and understanding including heuristics comes from more accessible cognitive system of perception and intuition (Kahneman 2003) and impression (Hume 1739). Due to the coincidental development of perception or intuition system, the extensionality and invariance of reasoning system becomes untenable in cognitive process. That is, the premise of consistent measuring of value-cost indices becomes untenable.

 Closed/determinate system is built on the premise of consistent measurement of value-cost indices. Hence, the failure to uphold the consistency of measurement of value-cost indices and its consequence to the state of economy lay ground for the making of the open/indeterminate system. The open/indeterminate system is the set of economic states which are defined by the interactions between and among individuals when the premise of consistent measurement of value-cost indices fails to be upheld. Clearly, the domain of economy, which is defined by heuristic, framing and reference point that are built on perception and intuition as more accessible cognitive system than the extensionality and invariance of reasoning, belongs to the category of open/indeterminate system.

 In the open/indeterminate system, coincidence begins to matter. In the closed/determinate system, the solution always ends up as the outcome of optimization-equilibrium algorithm. There remains no place for the coincidental factor to cut in into. However, in the open/indeterminate system, the coincidental factors, which come as more accessible step in cognitive process such as perception and intuition (Kahneman 2003) or impression and image (Hume 1739), are enforced to the actions in the next step of cognitive system such as reasoning.

 From the definition, the rational agent model belongs to the closed/determinate system. The empiricist approach of economics, as defined in Rhee (2016b), presumes that human beings learn understanding and knowledge from experiences. From experiences, they obtain perceptions-intuitions or impression as the primary system of cognitive process. Sympathy-consent process is the conduit through which the commutation is carried out between and among different cognitive systems of different individuals. The empiricist approach of economics belongs to the open/indeterminate system.

 

 

Price path dependence

 

 In the economics of empiricism, where individuals are bounded-rational, relation exchange replaces the exchange in the market. What changes to economics by the modeling of bounded rationality or the introduction of empiricist approach? Most distinctive change is that it is not market-clearing system D(p)=S(p), but the sympathy-consent process that determines (relation) exchange transaction. The sympathy-consent process determines relation exchange transaction, which belongs to the open/indeterminate system. It is haggling, bid/ask, auction, markup, and administered pricing that determine the pricing. These pricing systems also are parts of the sympathy-consent process. In the sympathy-consent dimension, it is relation exchange that determines exchange transaction. Relation exchange is determined as the outcome of sympathy-consent process. Hence, the sympathy-consent process affects the pricing process of transaction. The instances of path dependence of pricing are often times witnessed. Every exchange transaction scheme, such as haggling, bid/ask, auction, markup, administered pricing, makes reference to previous closing price as reference point. Price downward rigidity is the general phenomena, which are not isolated to the wage determination of labor market.

 

Wavering

 

 Most serious problem of rational agent model is its inability to recognize the cases of indeterminateness of exchange actions. Wavering is common and natural action of human beings. In most of human action, the dividing line between action and inaction is blurred by wavering. According to the rational agent model, interpersonal interactions are recognized only in the market exchange with the price used as the medium of exchange. Most serious doubt to this direction of approach was raised by the case of market failure (Akerlof 1970). It was a mistake to blame the information asymmetry for market failure and restricted the market failure as exceptional cases. It is congenital problem to the approach which attempted to rule out all the human interactions to restrict our attention only to the cases of market exchange. What rational agent model considers as market failure due to information asymmetry is conceived as wavering action in the sympathy-consent dimension. Wavering is very familiar and akin instance in human life. If the frequent instances as such are recognized only as market failure and cannot be perceived in the analytical thinking, it confirms the need and legitimacy of empiricist approach of economics.

 

 

 

References

 

  • Akerlof, G. A. (1970), “The market for ‘lemons’: quality uncertainty and the market mechanism,” Quarterly journal of economics, 84(3): 488-500.

  • Arrow, K. J. and G. Debreu (1954), “Existence of an equilibrium for a competitive economy,” Econometrica, 22, 265-292.

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  • Goldberg, Victor P. (1980), “Relational exchange; economics and complex contracts,” American behavioral scientist, 23(3): 337-352.

  • Tory E. Higgins (1996), “Knowledge activation: accessibility, applicability, and salience,” in E. Tory Higgins and Arie W. Kruglanski, eds., Social psychology: handbook of basic principles, New York: Gilford Press, 133-68.

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  • Kahneman, Daniel, Paul Slovic and Amos Tversky (1982), Judgment under uncertainty: heuristics and biases, Hew York: Cambridge University.

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  • Macneil, Ian R. (1978), “Contracts: adjustment of long-term economic relations under classical, neoclassical, and relational contract law,” Northwestern university law review, 72: 854-905.

  • Rhee, Sung Sup (2012b), “KwankaeKyohwanKyongjaehak (Relation Exchange Economics),” Jaedo wa Kyongjae (Review of Institution and Economics), 6(2): 123-151.

  • _____________ (2013b), “YulrinKyongjaehak qua DatchinKyongjaehak (Open system of economics vs. closed system of economics)”, Jaedo wa Kyongjae (Review of Institution and Economics), 7(2), 13-43.

  • _____________ (2017a), “Relation exchange as the model of bounded rationality,” presented at 2017 KEA-APEA conference in Seoul, Korea, July 14-15, 2017.

  • _____________ (2018c), “Sympathy-consent-process mapping as the model of bounded rationality,” presented at 2017 WINIR conference in Utrecht, Netherland, September 14-17, 2017; 2018 Annual Conference of The Korea Econometric Society, Choonchun, February 1, 2018.

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  • Williamson, Oliver E. (1985), The economic institutions of capitalism: firms, markets, relational contracting, New York: Free Press.

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