i) Constructivist Rationality

Derived in part from Descartes, Bacon, and Hobbes, constructivist rationality is traditionally identified with the postulates of the standard model of the social sciences. An agent is characterized as selfish and maximizing. He makes decisions coldly, seeking only to optimize his gains, defined as pure wealth or utility. In summary, the economic man (^{Smith, 2003}).

Vernon Smith recognizes that an agent has rational capacities of consciousness and deliberation, but does not accept the assumptions of complete and perfect information, which are indispensable hypotheses of neoclassical theory. On the contrary, he posits the existence of incomplete and imperfect information, as well as time constraints that weight on the decision-making process. It is impossible to be consciously involved in each and every single situation of daily life. It is simply not possible to calculate the costs and benefits of each alternative when decisions must be made under time pressure, or with information scarcities (^{Smith and Szidarovsky, 2003}).⁷ Pursuant to the concept of limited rationality from Herbert ^{Simon (1996)}, Vernon Smith considers that agents have limited cognitive resources.

Smith assigns a key function to constructivist rationality: it is a powerful mechanism that “in cultural and biological evolution […] is good at generating variation, but not selection. Constructivism is indeed an engine for generating variation, but is far too limited in its ability to comprehend and apply all the relevant facts to serve the process of selection, which is better left to ecological processes” (^{Smith, 2005a: 207}). Reason is a powerful mechanism that creates novelty and generates new subsets of rules. However, consciousness and deliberation are limited in their capacity to select facts and variations.

ii) Ecological Rationality⁸

Deliberation processes only explain part of the story. The agent must use other capacities or resources in order to survive. Ecological rationality, through time and the environment, selects the best variants to resolve situations the agent faces, resulting from the use of conscious reason. It allows only the best practices to survive and spread, whether through imitation, explicit teaching (^{Smith, 2002}), experience, or collective processes of trial and error (^{Smith, 2005a}).

Ecological rationality is an “emergent order based on trial-and-error cultural and biological evolutionary processes. It yields home-and socially-grown rules of action, traditions, and moral principles” (^{Smith, 2005: 206}). These home-grown rules of action related to the “autobiographical character of memory” (^{Smith, 2005a: 204}) express forms of experience and learning—conscious and unconscious—belonging to each individual and which lead to the emergence of unintentional forms of behavior. Likewise, the rules, traditions, and moral principles are integrated into the analysis as the set of institutional rules that spontaneously emerge in society.

From this perspective, ecological rationality contributes to an understanding of the “emergent order in human cultures" (^{Smith, 2005a: 206}), the outcome of unintentional biological and cultural evolutionary processes. This rationality represents distinct and successful forms, both individual and collective, of prior adaptation, and permits adaptation to changing environments. Accordingly, "the behavior of an individual, a market, an institution, or other social system involving collectives of individuals is ecologically rational to the degree that it is adapted to the structure of its environment" (^{Smith, 2008: 36}).

In laboratory experiments, the existence of this rationality contributes to explaining how individuals with zero intelligence or who are too simple to use instruments of constructivist reasoning adapt to their situation (^{Smith, 2008}). This is so, insofar as these individuals have the unconscious capacity to discover the intelligence contained in the rules and structure of the situation (^{Smith, 2008}). It is the ecological conditions that drive the individual to make efficient decisions, rather than the assumptions of economic theory revolving around the internal structure of choice and individual valuations.

In contrast with the strategy of the agent in neoclassical economic theory—monothematic, excessively rational, and converted into a utilitarian machine in terms of its reaction—, the response of an agent endowed with ecological rationality is context-dependent.⁹ Individuals do not always act the same way, even in situations that may seem very similar to one another. Depending on the context, the same individual may act selfishly or opportunistically, or be conditionally cooperative or altruistic.¹⁰ Individuals are capable of creating back-up strategies, and are able to select the right course of action to take in a concrete ecological environment.¹¹ This poses a key question: what capacities enable an agent to make decisions with respect to a changing environment?

i) The Internal Order of the Mind

Just like ^{Hayek in The Sensory Order (1952)}, Smith is interested in explaining the way in which the mind is organized, aiming to capture the idea of a self-organizing and flexible internal order. The mind is the non-conscious product of the joint biological and cultural evolution of our brain (^{Smith, 2008}). One of the qualities of this order is that it begins with experience, and with the lowest cognitive cost possible, the agent learns and adapts to the surroundings.¹²

Vernon Smith understands mind to refer to the brain circuit that operates deliberately and has conscious self-awareness (^{Smith, 2009: 177}). From the perspective of decision-making and problem-solving, one of the most important products of awareness is that the agents are, in no negligible sense, autonomous: they can choose, reject, or undo a choice. And the most distinctive, insofar as they have language, is that they can be self-aware in this process.

Conscious mind or attention is a scarce resource, which is why the brain has developed mechanisms to conserve these specialized capabilities to confront critical non-habitual tasks.¹³ That is why the brain allows some of memory and learning to depend on unconscious forms of attention.¹⁴ We do not remember—Smith asserts—having learned the majority of our operational knowledge. Natural language is the most notable example, but so is music and practically everything that constitutes our progressive socialization. We learn the rules of a language and efficient social relations without ever receiving explicit instructions, simply by being exposed to our families and social networks (^{Kagan and Lamb, 1987}; Page ^{Fiske, 1991}; ^{Kagan, 1994}; ^{Pinker, 1994}). “That the brain is capable of off-line subconscious learning is shown by experiments with amnesiacs who are taught a new task.¹⁵ They learn to perform well, but memory of having learned the task escapes them (^{Knowlton et al., 1996})” (^{Smith, 2005b: 205}). Ergo, it is necessary to recognize that the mind does not control the learning processes essential to our survival.

It is then that Vernon Smith asserts, emphatically, that it is “necessary to constantly remind ourselves that human activity is diffused and dominated by unconscious, autonomic, neuropsychological systems that enable people to function effectively without always calling upon the brain’s scarcest resources—attentional and reasoning circuitry” (^{Smith, 2002: 204}). Automatic thought processes contribute to rapid adaptation and reduce the demand for computing capacities, and moreover integrate knowledge that the conscious mind is incapable of understanding. “The brain knows things that the mind does not understand” (^{Smith, 2009: 179}).

The science of the brain aims to explain how it functions, and what features are common or different in the brains of adaptable agents. Vernon Smith wrote: “But I believe that most of our learning about the brain will come from the study of the breadth of extreme variations in particular mental characteristics across individuals in the population. It’s the breadth of variation, not the average that is significant in humans, and perhaps all primates" (^{Smith, 2009: 178}). To Smith, it is essential to integrate into analysis the mental and neuro-anatomical outliers across the range of individuals.

ii) The External Order of Personal Socioeconomic Exchange

The second order is centered on human socializing in small groups of interaction. Diverse factors affect how an agent will behave, in a joint mix of cultural and biological evolution, where the latter provides the abstract potential for definition and the former shapes diverse alternatives forms of observable solutions.

Key to the functioning of this order is reciprocity, which is the foundation, in human nature, of our unique status as creatures of social exchange, being universal, spontaneous, and of great evolutionary value. As Adam Smith wrote: “kindness is the parent of kindness” (^{Smith, 2008: 201}). To Smith, there is no suggestion of a deliberate calculation in an act of reciprocity, but rather it is an act that occurs naturally as part of a style acquired throughout history (^{Smith, 2008}).¹⁶ The evolutionary argument is that a predisposition to reciprocity is an adjustment value, which has persisted through diverse cultures of homo sapiens for two or three million years (^{Plott and Smith, 2008}). This capacity enabled forms of positive and negative reciprocity to emerge (^{McCabe, Rasenti, and Smith, 1996}).¹⁷ In other words, part of our evolutionary history as animals made it possible for us to develop evolved and complex forms of cooperation and ownership (^{Smith, 1998}). "Reciprocity in human nature (and prominently in our closest primate relative, the chimpanzee) is the foundation of our uniqueness as creatures of social exchange which we extended to include trade with nonkin and nontribal members long, long, before we adopted herder and farmer life styles” (^{Smith, 1998: 3}).

Human beings are characterized, pursuant to Adam Smith (which Smith mentions) by their “disposition to truck, barter, and exchange" (^{Smith, 2000: 16}). Engaging in trade is a quality that distinguishes us from animals. "It is common to all men, and to be found in no other race of animals (…) Nobody ever saw a dog,” wrote Smith, “make a fair and deliberate exchange of one bone for another with another dog" (^{Smith, 2000: 16}). There is a key difference between reciprocity and exchange. Reciprocity is the exchange of favors: I'll scratch your back if you scratch mine. It means exchanging the same resource or thing at separate moments in time, “not simultaneously” (^{Smith, 1998: 3}). Exchange, trucking, or trade, on the other hand, entails simultaneously exchanging two different objects, not favors. It is a form of interaction that demands greater cognitive sophistication than the reciprocity game. The human capacity of exchange arose in the last 100,000 years, embedded in linguistic processes. This capacity is the foundation of the emergence of self-sustaining ownership rights (^{Smith, 1985}, ¹⁹⁹⁸).

Exchange implies uncertainty. It requires a double concurrence of desires to trade two different pairs of goods. In the biological evolutionary timescale, those individuals equipped with strategic interactive capacities were more successful in evolving towards more widespread forms of social exchange. What does Vernon Smith believe are the cognitive capacities that permitted reciprocity to evolve towards exchange?

He presupposes the existence of distinguishable capacities inherent to human beings. To ^{McCabe, Smith, and LePore (2000: 4004)}, the important principle that permits better coordination is "derived from the human capacity to read another person's thoughts." Such "mind-reading" enables the agent to detect the intentions underlying the reciprocity (^{Smith, 2008}).

Likewise, based on a memory of favors given and received, an agent can engage in “mental accounting” and “goodwill accounting” (^{McCabe and Smith, 2002}). Kindness towards others and working for the good of others are sophisticated forms of behavior, consistent with long-term self-satisfaction and closely tied to creating value and upholding one's reputation. In personal exchanges, reciprocity is used to reduce risk, recognizing that the desire to maintain a good reputation (a high goodwill count between candidate agents for engaging in exchanges) can change the behavior of an agent (^{McCabe and Smith, 2002}).

In evolutionary psychology, “humans have a faculty of social cognition, consisting of a rich collection of dedicated, functionally specialized, interrelated models […] organized to collectively guide thought and behavior with respect to the evolutionarily recurrent adaptive problems posed by the social world” (^{Cosmides and Tooby, 1992: 163}). Based on this idea, ^{McCabe and Smith (2002)} describe a series of functional models specialized in solving the evolutionary problem of social exchange:

(a) intentionality detector (ID); (b) eye direction detector (EDD); (c) shared-attention mechanism (SAM); (d) theory-of-mind mechanism (TOMM), believing that they will all be interconnected such that the ID and EDD serve as information inputs for the SAM, which will in turn become an input for the TOMM (^{McCabe and Smith, 2002: 327}).

Together, these capacities permit the construction, learning, and discovery of individual and group preferences. As asserted by ^{Hoffman, McCabe, and Smith (1996: 23-24)} about one of the outcomes of their experimental economics:

A one-shot game in the laboratory is part of a life-long sequence, not an isolated experience that calls for behavior that deviates sharply from one’s reputational norm. Thus, we should expect subjects to rely upon reciprocity norms in experimental settings, unless they discover in the process of participating in a particular experiment that reciprocity is punished and other behaviors are rewarded. In such cases they abandon their natural instincts, and attempt other strategies that better serve their interests.

In keeping with the tenets of evolution, groups that rely on these capacities discover norms and heuristics that help them reduce transaction costs and remain in existence over time. Norms that last long enough are, on the personal level, internalized and then become common practices. These practices may lead to social laws or norms, although given the changing nature of any environment, emerging practices may always arise that permit adaptation to the context and reduce transaction costs (^{Smith, 2008}).

In other words, reciprocity and personal social exchange—exclusive to human beings—permit specialization, the division of labor in increasingly numerous groups of humans, improved productivity, and welfare. Reciprocity is at the heart of building partnerships in societies without a State, the cement of social constructions that enables the provision of essential public goods (^{Smith, 2008}).

iii) The Extended Order of the Market

Laboratory experiments have demonstrated the notable capacity of their unsophisticated subjects to discover equilibrium states, even without the tools presupposed by the neoclassical model (rationality and unlimited time, complete and perfect information, etc.). According to Vernon Smith, it is likely that this achievement will be the result of the agent making use of the institutions of the impersonal market. This analytical perspective of the functioning of the market diverges from neoclassical theory in the sense that what is essential in neoclassical theory is to explain how supply and demand adjust to match each other, but for Vernon Smith, the most pertinent focus is to study the behavior of the market as a discovery process (^{Smith, 2012}).²⁰

So, how does this process come about? It is illustrative to follow Vernon Smith's logic of argumentation on this subject. Once the processes are formed, people are ready to discover, through calculations, what it is that they do and do not like, what they do and do not desire, what they want to consume or produce, and how to innovate. In Vernon Smith's point of view, "neoclassical economics turned this message upside down and inside out; it define equilibrium conditional ’n preferences and technology (specialization alternatives) being given and known to individuals, and was mute as to how and what information was to be required. But dozens of millennia before Smith wrote, his axiom had driven human adaptations (…)” (^{Smith, 2012: 8}). In impersonal exchange, agents employ the rules and information existing in the market. Through these rules and information, agents economize the personal mental effort required to clarify the information, create, agree upon, and implement new rules for each new trade. The markets aggregate information beyond what each individual, alone, knows or is capable of comprehending.

Even when information is distributed heterogeneously and asymmetrically between agents, it is possible, through a narrow trial and error process, to converge on a sufficiently good point of stability. The equilibrium is reached not as the result of a deliberate and conscious strategy, but rather as the result of patterns of collective interaction, learning, and imitation. For this reason, the use of the market, by demanding few mental resources of agents, permits greater productivity through specialization.

Therefore, the set of responses the agent will give changes depending on whether he finds himself in a situation of personal exchange or a market situation. In the former case, the capacities of mind-reading, goodwill accounting, recollections of previous exchanges, and a personal search for information in the environment are used. All of these comprise the essential sources of information and knowledge in personal exchanges. In a market situation, by contrast, where relationships are impersonal and, therefore, it is much more feasible to behave opportunistically, the agent will rely more on formal institutions. In this way, ecological and constructivist rational capacity permit the agent to adapt to his environment, building solutions consciously or use those that have already been proven and screened evolutionarily.