DBJ Discussion Paper Series, No.1501

On the Limit of Human Cognition:
Is Artisanship always Dominated by Profit Motive?

Masayuki Otaki(Institute of Social Science, University of Tokyo)

April

2015

Discussion Papers are a series of preliminary materials in their draft form. No quotations,reproductions or circulations should be made without the written consent of the authors in orderto protect the tentative characters of these papers. Any opinions, findings, conclusions or
recommendations expressed in these papers are those of the authors and do not reflect the viewsof the Institute.

On the Limit of Human Cognition: Is Artisanship always Dominated by Profit Motive?
Masayuki Otaki
ohtaki@iss.u-tokyo.ac.jp
Institute of Social Sciences, University of Tokyo

Abstract
This article examines the limit of human cognition in the following sense. While allindividuals have the same utility function, their ex-ante objectives differ. One type ofindividuals maximizes the quality of their produced goods as conferred by theelaboration of their labor. The other type maximizes their pecuniary profits. The ex-post
utility is assumed to be the sum of the quality of the provided good and the earned profit.
That is, we presume that there is a limit to human cognition in the sense that
individuals are unable to assess the interdependence of the quality and the price of his
producing goods precisely in advance and are forced to decide their way of life between
the pursuit of quality or profit. We dub the former type artisan and the latter type

capitalist. It is shown by using a simple evolutionary game that, artisanship may
flourish even in a free-will market economy and this outcome heightens economic
welfare. This is not merely because artisanship enables the circulation of high quality
goods, but also because artisans can feel deeper self-confidence than capitalists.
Keywords: Bounded Rationality; Life Choices; Artisanship; Capitalism; EvolutionaryGame
JEL Classifications:11. Introduction
Since there are very many ways of life for human beings and the choice between themis too complicated for juveniles, education, especially by parents and teachers, plays acrucial role in deciding their future. Putting it differently, the boundedness of cognition
is prominent in the choice of one’s way of life. This article assumes that there are two
types of way of life: artisan and capitalist. They differ in the motives they bring to theirjobs. Those who are educated as artisans pursue the refinement the quality of theirproduced goods through their associated elaboration. The rewards (profits) are only of
their secondary concern. A capitalist is directed to concentrate on maximizing his/her
profits (price minus the cost of elaboration) regardless of the quality of their produced
goods. That is, the quality of goods that capitalists produce is only of their secondary
concern to them.
The economy comprises these two types of individuals. Captives of naïve neoclassicaleconomics might consider that artisans are swept out by capitalists in a market milieu
becauseearned profits

incentivize

individuals

more strongly

thanaesthetic

consideration. Nevertheless, this prospect is narrow in scope. One must note thathuman beings are motivated by other reasons than pure profit. An artisan is anindividual who puts much importance on the self-confidence nurtured by thearticulation of his/her trade. Insomuch as the price and/or wage fully reflect the qualityof produced goods (i.e., perfect information), an artisan earns much more than acapitalist although the required degree of elaboration is far higher.
As long as the probability is sufficiently high that he/she can engage with customers
who can afford the quality of goods, an artisan enjoys a more fruitful life than that of acapitalist. This is because the utility of each type of individual is assumed to be the sumof the pecuniary factor (i.e., the price of goods or level of wages) and the self-confidence
factor (i.e., produced quality minus the fatigue from the toil involved in production). In
both factors, the utility of an artisan dominates that of capitalist in principle, because
high quality goods sell dearer than low quality ones.
At present, however, the more prevalent way of life is capitalist. This article also
explores the reason that provokes this paradox by applying a simple evolutionary game.
Some kinds of mutation such as the widespread introduction of machinery, which had
proceeded since the 18th century, and the surge of foreign direct investment (FDI) fromthe end of 20th century may be significant. One must note that a major surge of FDI
could not be achieved until computer technology and its associated internet
infrastructure had been developed. These historical economic changes possess common
features. One is the standardization of jobs. The other is the massive use of cheap and2

unskilled domestic or overseas labor.
These features come from the same origin: the mass production of cheap and lessrefined goods. Machinery overcomes the lack of skills of employees and enables theadequate production quality for less finished goods. Although earned wages in such a
production process is lower than those earned by artisans, because cheaper and lesselaborated goods are massive produced, this type of the way of life, that is, capitalist,
becomes self-enforcing.
Once the capitalist type way of life is established, artisanship is thwarted. This isbecause the dominant part of the economy consists of low wage individuals (i.e.,
capitalist), and thus artisans, whose production goods are high quality but relatively
expensive, find great difficulty in finding their customers. Accordingly, as Trevelyan(1944) suggests 1 , rapid technological progress does not necessarily contribute toenhance the wellbeing of human beings.
One must note that artisanship survived not only in the handicraft era but also in themodern industrialized era. For example, from the end of World War II to the end of 20th
century, Japan’s reliable and sophisticated manufactured goods are instrumental insustaining its stable and rapid economic growth. The creation of these goods was basedon numerous and anonymous process innovations and rigorous quality controls thatwere supported by intrinsic artisanship. Such artisanship evaporated in conjunction
with the surge of FDI from the beginning of this century. Nominal wages are grievously
sagging and job security is heavily impaired. As Moore (1902; p.216) argues2 , theconstruction of a good present economy implies to the necessity of establishing thefoundation of a sound economy in the near future. The ultimate quest of this article is toTrevelyan (1944, p.450) warns that`` `Progress,’ as we of the Twentieth Century are better aware than our Victorianancestors, is not always change from bad to good or from good to better, and the sum
total of `progress’ associated with the Industrial Revolution has not been wholly for thegood of man.’’2 According to Moore (1902),` `If we regard all that we do from the point of view of its
rightness, that is to say as a mere means to good, we are apt to neglect one fact, at least,
which is certain; namely, that a thing that is really good in itself, if it exists now, has
precisely the same value as a thing of the same kind which may be caused to exist in the
future. Moreover moral rules, as has been said, are, in general, not directly means topositive goods but to what is necessary for the existence of positive goods; and so muchof our labor must in any case be devoted to securing the continuance of what is thus amere means---the claims of industry and attention to health determine the employmentof so large a part of our time, that, in cases where choice is open, the certain attainmentof a present good will in general have the strong claims upon us. If it were not so, thewhole of life would be spent in merely assuring its continuance; and, so far as the same
rule were continued in the future, that for the sake of which it is worth having, would
never exist at all.’’
13

examine how to regain a harmonious market economy.
This article is organized as follows. Section 2 constructs an evolutionary game model inwhich both the artisan-occupied equilibrium and the capitalist-occupied equilibrium
form an evolutionary stable set (ESS). Section 3 determines which equilibrium is
actually selected through the use of replicator dynamics methods. In Section 4, we
discuss the role of education and the importance of the fidelity of teachers to realize aself-confident society instead of a meritocratic society. Section 5 provides concluding
remarks.
2. The Model
2.1 The Structure of the ModelIn this economy, infinite individuals exist and they produce one unit of goods. The
goods are perishable and self-consumption bears no utility. Accordingly, individual isunable to enjoy consumption without mutually exchanging their goods.
It is assumed that every individual has the same utility function:

U  p  q   q  v  q  , (1)where q is the quality of goods that he/she provides. p  q  , v  q  denote the price of andthe production cost of the goods with quality q , respectively.
There are two types of individual: artisan and capitalist. An artisan maximizes quality

q while incurring the given production cost under the viability condition:p  v  q   0 . (2)The viability condition implies that the consumption level of an artisan cannot become
negative; that is, he/she solves max q  q  v  q   under the constraint (2). Let the resultof this be denoted asq H  arg max q  q  v  q   . (3)It is assumed thatp  q H   v  q H   0 , (4)and the viability condition (2) thus is satisfied as long as the production quality q isH

properly evaluated.

4

A capitalist solves for profit maximization (i.e., max q  p  q   v  q   ). As long as theprice is insensitive to the quality and 0  p '  1 is satisfied,q L  argmax  p  q   v  q    q H (5)holds. That is, the quality of goods provided by artisans is higher than that by provided
by capitalists.
In addition, it is also assumed that the following relationship is held:p  q L   v  q H   0 . (6)Equation (6) implies that if the product of an artisan is incorrectly evaluated as beingthat of a capitalist, the strategy represented by Equation (3) is no longer viable, and theviability condition (4) requires the optimal strategy moves to satisfyp  q L   v  q M   0 , q L  q M  q H . (7)What causes this classification of individuals emerges to emerge is to the limited
cognitive ability of human beings. In general, individuals do not possess the ability tomaximize fully the total utility that is represented by Equation (1). In other words, it isassumed that there is no individual who completely understands completely the
relationship between the price and the quality of the goods he/she produces. Thus, anindividual must decide his/her way of life (through the exercise of a value judgment)that is, whether to live as an artisan or a capitalist.
2.2 The Equilibrium of the Economy and Its Property
A simple evolutionary game is created by defining the equilibrium of the economy. Two
individuals match together at random, and produce and exchange their goods. By
availing the results obtained in 2.1, the payoff matrix in Table 1.1 is obtained. The left
equation in each cell represents the benefit of the player who corresponds to the row.
The right equation in each cell is that of the player corresponding to the column.
Based on the information provided by Table 1.1, the following theorem is obtained.
Theorem 1. Let the ratio of artisans occupied in the total population be  . Then,   1 isan evolutionary stable set (ESS).
Proof. Suppose that the initial ratio is   1 . Then, assume that a ratio  of artisans5converts to capitalists. It is necessary and sufficient for the proof to show that such a
conversion is not beneficial. This condition is expressed by the following inequality.

1     p  q H   q H  v  q H    q M  1    p  q H    p  q L   q L  v  q L    q H  v  q H     q L  v  q L        q H  v  q H     q L  v  q L    p  q L   q M  . (8)




Since

q H  v  q H   q L  v  q L   0 
by definition, Inequality (8) holds for any sufficiently small  . QED
Similarly, the following theorem is also obtained.
Theorem 2. If the quality difference, qM q L , is not sufficient to incentivize a shift to an

artisanship in the situation where almost all individuals are capitalists, andq L  v  q L   q M  q L (9)holds, then,   0 is also an ESS.
Proof. Assume that   0 . If the conversion from capitalists to artisans lessens
individual utility, it is necessary and sufficient that the following inequality holds:

1     p  q L   q L  v  q L    q M  1    p  q L    p  q M   q M  v  q M  .
By using Equation (7), the above inequality is transformed into

1    p  q L    q M  q L  v  q L    1    p  q L    p  q M   q M  v  q M     p  q L   v  q L     q M  q L     q M  p  q M    0.

(10)

Whenever Inequality (9) holds, Inequality(10) also holds for a sufficient small positive
value for,  . QED
Thus, once an equilibrium, which consists only of artisans (Type A equilibrium) or onlyof capitalists (Type C equilibrium), is achieved, the economy does not easily move fromthis position even when a small perturbation is added. In this sense, these modes ofindividual life become conventional once they are established.
Next, the following theorem is upheld concerning the welfare economic property ofthese equilibria.
6

Theorem 3. Type A equilibrium achieves Pareto superior allocation to that in Type C

equilibrium.
Proof. The corresponding payoffs lead us to the following inequality: p  q H   q H  v  q H    p  q L   q L  v  q L    p  q H   p  q L      q H  v  q H     q L  v  q L     0.



(11)

This completes the proof. QED
The reason why the allocation of Type A equilibrium Pareto-dominates that of Type C is
as follows. The extra labor input of artisans to produce higher quality goods brings themgreater revenues than capitalists, although this is a secondary motivation for them. In
addition, with regard to the self-confidence, which is defined by the term, q  v  q  , inEquation (1), an artisan by definition achieves a higher level than a capitalist. These
two effects generate the dominance of Type A equilibrium.
Finally, we provide an intuitive explanation as to why these two equilibria exist. The
crucial factor is the participants’ choice of their way of life. If almost all individuals
choose the artisan life-style, they work more diligently and obtain higher incomes. This
provides the sufficient purchasing power for high quality goods. Thus, the Type A
equilibrium is self-enforcing.
On the contrary, if almost all participants choose the life of capitalists and are
indifferent to the quality of their produced goods, they produce low quality goods that
incur limited costs. The low price of their goods implies lower incomes. Consequently,
there is no purchasing power for high quality but more expensive goods, and only low
quality goods circulate. This implies the self-enforceability of Type C equilibrium. The
dynamic convergent path is considered in the next section.
3. To Which Equilibrium Does the Economy Converge?
In the previous subsection, it has been established that the economy will converge toeither Type A or Type C equilibrium. The question becomes, which equilibrium isrealized? Based on replicator dynamics, we solve this problem. According to thereplicator dynamics concept, the ratio of artisans to the total population,  t , obeys thefollowing differential equation:7    u  q H   1    u  q M    u  q,    


(12)



 

where u q H is the utility when an artisan encounters the same type of individual,u  q M  is the utility if his/her trading partner happens to be a capitalist. u  q,  denotes the average utility over the participants as a whole.
These utilities are defined by the following equations:u qH   p qH   qH  v qH ,u qM   qM ,2
u  q,     2u  q H    1    q M   1     p  q M   q L  v  q L    1    u  q L  .(13)Substituting identities in (13) into Equation (12), we have   1    1   2     2  (14)where

1   p  q H   p  q M      q H  v  q H     q L  v  q L     0,

 2   p  q L   v  q L     q M  q L   0.(15)The dynamics of this economy are illustrated in Figure 1. If artisanship sufficiently
permeates at the initial point, and the ratio of artisans to the total population,  0 ,exceeds the critical value  given by2, (16)
1   2then the economy converges to Type A equilibrium. Otherwise, since too many
capitalists exists and their revenue is not sufficient to purchase the high quality goods
that artisans produce, a vicious cycle emerges and artisans gradually convert tocapitalists. Thus, if  0 is located below  , Type C equilibrium is actualized in the longrun.
4. Education Promoting the Self-confidence to Artisanship
According to Hayek (1944, p.29),
An effective competitive system needs an intelligently designed and continuously
adjusted legal framework as much as any other. Even the most essential
prerequisite of its proper functioning, the prevention of fraud and deception
8

(including exploitation of ignorance) provides a great and by no means yet fully
accomplished object of legislative activity.
Indeed, there are some fundamental requisites to prevent a market economy falls
dysfunctional. Education is of the utmost importance because it prescribes the activities
of individuals when they participate in the economy3. The previous section reveals thatthe economy falls into the Pareto inferior equilibrium (Type C equilibrium) once theratio of those who embody artisanship decrease below the threshold value  . Thissection analyzes how to regain a vigorous economy in which high quality goods are
circulated, promoted by high incomes (i.e., Type A equilibrium).
A change from education based on meritocracy is highly desirable. This is because
meritocratic education strongly directs children to concentrates on the pecuniary motive.
As shown in the above sections, such tendencies adversely affect the performance of theeconomy. The profit motive demands the production cheap low quality goods.
Nevertheless, producing cheaper goods implies lower individuals’ incomes, and thus the
economy as a whole is impoverished against the individuals’ intentions. Such asituation falls in to the category of fallacy of composition.
It is indispensable to emancipate children from such appalling conditions by reforming
the philosophy of educational, since education determines the background fitness ofchildren to the society. Concerning the close relationship between education and work,
Dewey (1915, p.260) argues
Most fundamental is the fact that the great majority of workers have no insight
into the social aim of their pursuits and no direct personal interest in them. The
results actually achieved are not the ends of their actions, but only of theiremployers. They do what they do, not freely and intelligently, but for the sake of
the wage earned. It is this fact that which makes the action illiberal, and which
will make any education designed simply to give skill in such undertaking illiberaland immoral. The activity is not free because not freely participated in.
Nevertheless, there is already an opportunity for an education which, keeping in
mind the larger features of work, will reconcile liberal nurture with training insocial seviceableness, with ability to share efficiently and happily in occupations
Akerlof (1970) provides a typical example in which the market becomes dysfunctional.
The opportunistic behavior of sellers possibly collapses the market under imperfect
information. However, he presumes that such sellers never shame themselves. While itis certain that the opportunistic behavior is rational under their constrained rationality,
he neglects the widely defined utility (virtue) of such practice as being honest.
3

9which are productive. And such an education will of itself tend to do away with theevils of the existing economic situations.
He also addresses the contents of his liberal education as follows (pp. 205-206):
Psychologically, the defining characteristic of play is not amusement nor
aimlessness. It is the fact that the aim is thought of as more activity in the sameline, without defining continuity of action in reference to results produced.
Activities as they grow more complicated gain added meaning by greater attention
to specific results achieved. Thus they pass gradually into work. Both are equally
free and intrinsically motivated, apart from false economic conditions which tend
to make play into idle excitement for the well to do and work into uncongeniallabor for the poor. Work is psychologically simply an activity which consciously
includes regard for consequences as a part of itself; it becomes constrained laborwhen the consequences are outside of the activity as an end to which activity ismerely a means. Work which remains permeated with play attitude is art---in
quality if not in conventional designation.
To summarize Dewey’s assertions:(i) Education within work, which does not pay much attention to promoting employees’
intelligent curiosity and personal interest concerning the social role of their jobs,
inevitably becomes meritocratic. This aggravates low morale among employees, andresults in stagnation in labor productivity. This dynamics correspond to the property of
our model that meritocratic education tends massively to generate the capitalist-type
individuals.
(ii) The education received in school is closely connected with the attitude towards workin the following sense. The accumulation of experiences in conjunction with reflection
thereon, of which teachers should be in charge, leads students to more complex andmore organized activities that are naturally to pass into work. This process teaches
students the pleasure of work as being akin to play because the process is free andinternally motivated. Consequently, a liberal education as such nurtures individuals
who are fully oriented towards artisanship.
The analysis that follows concentrates on this type of educational philosophy andconsiders how a liberal education contributes to regaining the Pareto superior
equilibrium (i.e., Type A equilibrium). The procedure is as follows. It is assumed that aliberal education increases the population of those who choose to be in artisanship. The
10

ratio of increase is denoted  . By using the replicator dynamics method in Section 3, weanalyze how the liberal education contributes to the stability of Type A equilibrium.
The replicator dynamics reveal that the population ratio of the artisans to the total
population can be represented by the following differential equation (see Weibull (1995)
for the derivation):   1    1   2      2  . (17)Thus, as illustrated by Figures 2 and 3, the range of  , where   0 and the economy

monotonously converges to Type A equilibrium, is widened by an increase in  . Thisimplies that the liberal education that Dewey (1915) advocates raises the probability of
the fulfillment of Type A equilibrium even though the existing population of artisans is
not so large. This property comes from the fact that a liberal education, differing fromthe meritocratic education, promotes the interest in the work in itself and enhances thejoy of achievement of young individuals, rather than focusing on making money.
One must, however, note that the background in which children grow is defined not
only by the nature of education but also by the daily behavior of adults. The social
responsibility of teachers is vital, especially as a society moves towards meritocracy.
Teachers strive to maintain fidelity to their work.
5. Concluding Remarks
This article studied how the choice of one’s way of life affects the performance of theeconomy as a whole, relying on the concept of bounded rationality and the evolutionary
game. The following results have been obtained.
1. Owing to the limits of cognition of human beings, individuals are classified into twoclasses: artisans and capitalists. Both types of individuals possess the same utility
function. However, no one can fully maximize his/her utility. An artisan maximizes thequality of goods that he/she produces by incurring the necessary costs while satisfying
the viability condition. A capitalist maximizes his/her pecuniary profits without
consideration for the resultant quality of produced goods. When artisans occupy the
major share of the economy, they can easily find other artisans as counterparts forexchange; the economy will then be eventually filled with artisans and high quality
goods will circulate sustained by high incomes or wages. That is, Type A equilibrium,
which is Pareto superior to Type C equilibrium, is self-enforcing (i.e., ESS) as long as
the existing population of artisans is large enough; that is, the ratio of artisans to thetotal population exceeds some critical value  .
2. Conversely, whenever the ratio of artisans falls below  , all individuals
11metamorphose to become capitalists. The immediate reason why artisanship vanishes
stems from the difficulty of the equivalent exchange. Even though an artisan wishes toperpetuate his/her way of life, since the market is almost occupied by low quality goods,
there is scarce opportunity for exchange that awards his/her elaborations. Accordingly,
Type C equilibrium, which is a Pareto inferior equilibrium, is also self-enforcing (i.e.,
ESS). This is an example of the fallacy of composition.
3. The prevalence of the liberal type education advocated by Dewey (1915) is one of themost important measures for obviating the abovementioned tragic fallacy ofcomposition. Such education nurtures a self-disciplined attitude towards one’s own
work. This is because students learn how to capture a subject structurally throughelaborated processes. One must note that they might not experience much displeasurein such activities since the associated trial and error is akin to play although theprocesses are structurally constructed beforehand. What is the most important in theliberal form of education is an attitude from teachers that is patient and generous
enough to wait for students’ achievement. However small these gain may be, such
exciting experiences surely encourage students to advance to more complicated subjects.
Thus, students gradually become more self-disciplined and discriminating, and realizethat there are more fascinating interests in life than the profit motive.

References[1] G. Akerlof (1970). The market for lemons: quality uncertainty and the market
mechanism. Quarterly Journal of Economics 89, pp. 488-500.
[2] J. Dewey (1916). Democracy and Education: an Introduction to the Philosophy of
Education. Reprinted by Free Press (1997), New York.
[3] F. A. Hayek (1944). The Road to Serfdom. Reprinted by Routledge (2000), London.
[4] G. E. Moore (1902). Principia Ethica. Revised Edition, Edited and with an
Introduction by T. Baldwin, Cambridge University Press (1993), Cambridge.
[5] G. M. Trevelyan (1944). English Social History: a Survey of Six Centuries: from
Chaucer to Queen Victoria. Reprinted by Book Club Associates arranged by Longman(1973), London.
[6] J. W. Weibull (1995). Evolutionary Game Theory. MIT Press, Massachusetts.

12ArtisanCapitalistAp qH   qH  v qH  , p qH   qH  v qH Cp  qM   qL  v  qL  , qM

qM , p qM   qL  v qL 

p qL   qL  v qL , p qL   qL  v qL 

Table 1: The Payoff Matrix of the Game

13

π=0

θ

π0

Type C Equilibrium

π=1Type A Equilibrium

Figure 1: Replicator Dynamics

1yy = [κ1 + κ2 ]π + βl − κ2π̇ > 0

O

−θ +

π

βl
κ1 + κ2

Figure 2: The Eﬀect of Education (β is low)2yy = [κ1 + κ2 ]π + βh − κ2π̇ > 0O−θ +βh
κ1 + κ2

Figure 3: The Eﬀect of Education (β is high)3π