Background
Common knowledge is a crucial concept within various fields, notably economics and game theory. It refers to a situation where a particular piece of information is known by everyone, and everyone knows that everyone else knows this information, and so forth ad infinitum.
Historical Context
The concept of common knowledge was highlighted in some of the earlier foundational works in logic and game theory. The formal treatment began to gain prominence during the mid-20th century with the development of modern logic and formal epistemology. A notable influence came from game theory and the efforts to understand strategic interactions.
Definitions and Concepts
Common knowledge can be defined as:
- Common Knowledge: When everyone knows a piece of information, and everyone knows that everyone knows that information, and so on without limit.
This concept differs from mutual knowledge:
- Mutual Knowledge: When everyone knows a piece of information but does not necessarily know if anyone else knows it.
Major Analytical Frameworks
Classical Economics
In classical economics, common knowledge typically underpins assumptions about rational behavior and market operations. For example, the notion of ‘perfect information’ in some models presupposes common knowledge.
Neoclassical Economics
Neoclassical economics extends this model by incorporating common knowledge into agents’ expectations, leading to more structured models of market behavior, such as the Rational Expectations Hypothesis.
Keynesian Economics
Keynesian theory may not explicitly discuss common knowledge but understands the implications of shared sentiments and expectations on macroeconomic variables like consumption and investment.
Marxian Economics
Marxian analysis doesn’t typically rely on the formal concept of common knowledge but similarly examines the shared awareness and reactions of economic classes and their impact on social dynamics.
Institutional Economics
Institutions hinge on common knowledge about rules and norms; without shared understanding, institutional frameworks would lack the transparency needed for coherence.
Behavioral Economics
Behavioral economists study deviations from common knowledge assumptions to understand irrational behavior patterns, demonstrating how perceived knowledge impacts decision-making.
Post-Keynesian Economics
Post-Keynesian analysts explore how common beliefs about future macroeconomic conditions can lead to self-fulfilling prophecies through shared expectations in financial markets.
Austrian Economics
Austrian economists emphasize the role of dispersed information more than common knowledge; however, they acknowledge that certain market fundamentals require common understanding to function effectively.
Development Economics
In development economics, common knowledge about policies and rule of law can drive or hinder economic growth, impacting investor confidence and grassroots-level economic activities.
Monetarism
Monetarist perspectives may integrate common knowledge implicitly when discussing public beliefs about fiscal and monetary policy efficacy and their effects on financial stability.
Comparative Analysis
Fundamentally, common knowledge provides theoretical symmetry across varied economic schools, though its focal application, depth, and analytical frameworks differ. The relevance and incorporation of common knowledge can strongly influence outcomes projected by economic models, expectation formation, and agents’ decision-making processes.
Case Studies
Case studies in game theory often revolve around common knowledge:
- The Stag Hunt: Focuses on coordinated action depending on common knowledge.
- Coordination Problems in Market Entry: Examines if companies decide to enter or stay out of a market based on common awareness of competition entries.
Suggested Books for Further Studies
- “Games and Information” by Eric Rasmusen
- “Foundations of Social Theory” by James S. Coleman
- “Epistemic Game Theory: Reasoning and Choice” by Andrés Perea
Related Terms with Definitions
- Mutual Knowledge: When everyone knows a certain piece of information but not necessarily about others knowing it.
- Perfect Information: When all agents have access to all the relevant information, assumed to be common knowledge.
This entry synthesizes the multifaceted role of common knowledge across theoretical frontiers and practical applications, providing a thorough contextual and conceptual understanding.
