by

Daniel B. Klein, Department of Economics,
Santa Clara University, Santa Clara, CA 95053, dklein@scu.edu

Abstract: The word "coordination" has two meanings, and these meanings are often conflated. One meaning, associated with Thomas Schelling, is seen in situations like choosing whether to drive on the left or the right; the drivers must coordinate to each other's behavior. The other meaning, associated with Friedrich Hayek, means that a concatenation of activities is arranged so as to produce good results. Along with the Schelling sense of coordination comes the notion of convention, such as driving on the right. Some conventions are consciously designed; others emerge without design (or are "emergent"). Along with the Hayek sense of coordination comes the notion of social order. Some social orders, such as the skeleton of activities within the firm or within the hypothetical socialist economy, are consciously planned. Other social orders, such as the catallaxy of the free society, function without central planning (or are "spontaneous"). Distinguishing between the two coordinations (and, in parallel fashion, between convention and social order) clarifies thinking and resolves some confusions that have arisen in discussions of "coordination" and "spontaneous order." The key distinctions are discussed in the context of the thought of, on the one hand, Menger, Schelling, David Lewis, and the recent path-dependence theorists, and, on the other hand, Smith, Hayek, Polanyi, Coase, and the modern Austrian economists. The paper concludes with a typology that encompasses the several distinctions.

JEL classification: A1

1. Introduction

The central themes of Thomas Schelling's Micromotives and Macrobehavior (1978) are that a manifest, macro-level pattern may emerge, even though the process is without macro-level design, and that such an undesigned pattern is sometimes regarded as unsatisfactory by the very people who collectively generated it (19). "People can be trapped into self-enforcing rules that misdirect behavior" (120). One example is language: "in collective laziness we let inappropriate terminology into our language by default" (39).

Schelling is careful to distinguish the undesigned orders studied in Micromotives from the undesigned order of the free economy. He notes that the free-market order is not manifest: he writes of "the enormous complexity of the entire collective system of behavior, a system that the individuals who comprise the system needn't know anything about or even be aware of" (22). Schelling says that the free market "does remarkably well in coordinating or harmonizing or integrating the efforts of myriads of self-serving individuals and organizations" (23). His discussion of the free economy is brief, and ladened with reservations, but it projects a vision along the lines of Smith or Hayek. He explains that the market order consists chiefly of activities that do not have major or systematic effects on nonparticipants (28). In constrast, the activities studied in Micromotives do have such effects, and the mechanisms underlying those activities often do poorly in harmonizing or integrating individual efforts.

The main ideas of Micromotives have recently flowered in the economics literature. Schelling writes of self-fulfilling prophecy, chain reaction, uniformity, complementarity, tipping points, critical mass, and sufficiency. The new literature writes of path dependence, network externalities, agglomeration effects, nonergodicity, positive feedback, and lock-in. The basic lessons remain the same, but the ideas are refined and many of the applications new. The new literature focuses especially on technological systems, such as the VHS system versus the Beta system in video cassette recording, and the hazard that an inferior standard may become "locked-in" (David 1985; Arthur 1994; Liebowitz and Margolis 1990, 1995).

While Schelling has been careful to distinguish between the market order and the manifest patterns that he studies, the new literature has sometimes conflated the two. In a magazine article on complexity and social order, Brian Arthur, a leading path-dependence theorist, is quoted as follows:

Right after we published our first findings, we started getting letters from all over the country saying, 'You know, all you guys have done is rediscovered Austrian economics ... I admit I wasn't familiar with Hayek and von Mises at the time. But now that I've read them, I can see that this is essentially true (as quoted in Tucker 1996: 38).

Hayek is cited in a similar way by Arthur DeVany (1996). In his computer simulation, agents choose between one of two technological standards, again like VHS versus Beta. The choice process is decentralized and agents have myopic knowledge, but random experimentation is injected into the process. Under certain parameter values the agents finally adopt the better technological standard, achieving higher network efficiency. DeVany writes: "Even though this is computer science, it is precisely the message of Smith, Hayek, and Alchian" (1996: 433). In describing the system's adoption of the better technological standard, DeVany uses the term "emergent order," a term that he seems to equate with Hayek's term "spontaneous order" (see p. 427).

Robert Sugden, again in a similar manner, writes in his article "Spontaneous Order" (1989) exclusively of the emergence of customs and conventions. Sugden describes a convention for the appropriation of driftwood as "an example of what Friedrich Hayek calls 'spontaneous order'" (85). The article makes no mention of the complex market system of myriad individual efforts.

All of the authors that I have mentioned study social affairs that are undesigned from a macro viewpoint. But undesigned social affairs come in different kinds. In this paper I use the distinction between the following two ideas: (a) social order, and (b) the rules and conventions within which that order functions (see Barry 1982: 11, 35). Also, I introduce a parallel distinction between two meanings of the word coordination. I distinguish between emergent conventions, which I associate with Menger, Schelling, and the recent path-dependence theorists, and spontaneous order, which I associate with Smith, Hayek, and Polanyi.

In an excellent article entitled, "The Tradition of Spontaneous Order," Norman Barry (1982) reviews the development of ideas of undesigned social order. He discusses the work of many thinkers. I begin with some exploration of the most prominent three: Smith, Menger, and Hayek.⁽²⁾

2. Of Woolen Coats and Tin Trading: Smith and Hayek

In the opening pages of The Wealth of Nations, Smith (1937 [1776]: 11) expounds on the division of labor by describing the efforts combined in the making of the common woolen coat: "The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their arts." Thus his description begins. He goes on to describe all the trades involved in producing the necessary equipment, in shipping the goods, in producing the ships, and providing all the necessary materials in turn -- his description of concatenated activities running an entire page of text. The first sentence of the ensuing chapter states that this division of labor "is not originally the effect of any human wisdom, which forsees and intends that general opulence to which it gives occasion" (13). The undesigned social order that concerns Smith is "invisible": It remains unknown not only in its details, but -- except perhaps to the most assiduous students of national input-output tables -- even in its more general patterns.

Hayek uses as an example a sudden elimination of a source of supply of tin. He describes how by decentralized action tin would be economized by users, and connected channels of industry would in turn make adjustments. "The whole acts as one market, not because any of its members survey the whole field, but because their limited fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all" (1945: 86, italics added). The spontaneous market order, which Hayek often calls a "catallaxy," cannot "be perceived by our senses but can only be traced by our intellect" (Hayek 1964: 3). Whereas the emergence of a writing convention or the adoption of the VHS standard is manifest to participants, the spontaneous, complex market order described by Smith and Hayek is "invisible."⁽³⁾ The aspect of "invisibility" is noted in the title of David Friedman's recent book, Hidden Order: The Economics of Everyday Life (1996).

3. Of Money, Language, Law, and Localities: Hayek and Menger

Hayek explained that the market system, like other spontaneous orders, depends upon the participants acting in accordance with social rules. Unlike the spontaneous order itself, the rules -- of language, of law, of manners, of money, of technological standards -- very often are recognizable to the participants. These rules, nonetheless, might "manifest themselves only in their being obeyed" (1964: 7). Thus, the undesigned catallaxy depends on rules or conventions which in turn may be undesigned. Are these rules (or conventions or institutions or customs), when undesigned, also to be called examples of "spontaneous order"?

Carl Menger's 1883 work, translated most recently as Investigations Into the Method of the Social Sciences, argues that, in Norman Barry's words (1982: 31), "while it is meaningful to talk of social 'aggregates,' the behavior of such aggregates is explicable only in individualist terms." Thus the theme of Menger's Investigations is essentially that of Schelling's Micromotives. Menger discusses at considerable length the evolution of money, the common law, the state, localities, language, market customs, and other social institutions that are often highly beneficial yet "organic," or undesigned. Menger (1883: 146) poses the following question as "perhaps the most noteworthy" problem of the social sciences: "How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?" (Italics and bold in original.)

The notion of macro-patterns emerging out of microbehavior puts Menger in the company of Schelling and the recent path-dependence theorists. That connection is strengthened by two additional common features. First, as Barry (1982: 32) notes, Menger "does not emphasize the value of undesigned institutions in quite the same way as other thinkers in the same tradition and does not assume that they are necessarily superior to pragmatic [or designed] ones." In Menger's discussion of what is today called agglomeration economies, he explains how a place will emerge organically as a locality, but he adds that "the common will ... is more likely to produce ... [its] perfection" (1883: 156). In discussing the evolution of the common law, Menger (233) declares that it is "erroneous in every conceivable respect" to suppose that the common law always performs better than any positive legislation could. Thus Menger (233) notes the possibility of lock-in and the need for deliberate remedy: "[The] common law has also proved harmful to the common good often enough, and ... legislation has just as often changed common law in a way benefiting the common good." Louis Schneider (1963: 12) sums up the point as follows: "If there are institutions that may in a sense be regarded as 'storing' human wisdom ... there is ... nothing in Menger to suggest that there may not be institutions which 'store' foolishness or ineptitudes."

A second feature that Menger shares with Schelling and the path-dependence theorists is a focus on the undesigned emergence of conventions. He says very little along the lines of Smith or Hayek about the catallaxy at large. Menger studies the organic basis of the conventions within which the catallaxy works, but does not make a fuss over the catallaxy itself (see Menger 1883: 146-47).

4. Hayek Encompasses Menger and Smith

In the matter of undesigned human affairs, there is a nearly perfect disjointness between Menger and Smith. Menger focuses on emergent conventions and neglects spontaneous order. Smith focuses on spontaneous order and neglects emergent conventions. This fact might help us understand a rather remarkable passage in the Investigations where Menger denounces Smith:

What Adam Smith and even those of his followers who have most successfully developed political economy can actually be charged with is ... [a] defective understanding of the unintentionally created social institutions and their significance for economy. It is the opinion appearing chiefly in their writings that the institutions of economy are always the intended product of the common will of society as such, results of expressed agreement of members of society or of positive legislation. In this one-sidedly pragmatic view of the nature of social institutions, the sphere of ideas of A. Smith and his closest followers comes into contact with that of the writers of the French Age of Enlightenment in general and of the French physiocrats in particular. Adam Smith, also, and his school predominantly strive for the pragmatic understanding of the economy, even where such understanding is not adequate for the objective state of affairs. The result is that the broad realm of unintentionally created social structures remains closed to their theoretical comprehension. (Menger 1883: 172; see also 176).

As Lawrence White (1985: xvi) points out in his Introduction to the Investigations, perhaps Menger's real target here is Jeremy Bentham, and he used Smith's name carelessly. I submit, however, that once we distinguish between undesigned conventions or institutions and undesigned social concatenations in the sense of the catallaxy, Menger's passage, though unfair to Smith,⁽⁴⁾ becomes less puzzling.

If Menger is disjoint with Smith, he certainly is not with Hayek. Indeed, Hayek (1994: 147) reports that the "conception of the spontaneous generation of institutions is worked out more beautifully there [in Menger's Investigations] than in any other book I know." Hayek's writings pay much attention to both the Mengerian and the Smithian, both emergent conventions (and even lock-in!)⁽⁵⁾

and the catallaxy which functions as though guided by an invisible hand.

The term "spontaneous order" is found in the work of Auguste Comte (1896: Book VI, chap. V) and the word "spontaneous" is used in corresponding fashion by Herbert Spencer (1884/1892: 135, 196, 274, 301, 326) and by Emile Durkheim (1964: 360 and elsewhere).⁽⁶⁾

But it was Michael Polanyi (1951) who used the term "spontaneous order" in a consistent way to mean polycentric order, or an undesigned concatenation of affairs. Hayek uses it in the same way (Polanyi is quoted at Hayek 1960: 160). Hayek uses it primarily to mean the catallaxy and other undesigned concatenations of social activities. He generally did not mean by it undesigned conventions or rules; for that he generally used the word "rules," although he did occasionally use the term "spontaneous order" to mean undesigned conventions or rules (e.g., Hayek 1964: 5-6). On the whole, I would say the lately quoted words of Brian Arthur, Arthur DeVany, and Robert Sugden, who speak exclusively of undesigned conventions, are at least somewhat misguided in linking, without qualification, their own work to Hayek's work on spontaneous order.

5. The Two Coordinations

Ambiguity in the meaning of "spontaneous order" closely parallels ambiguity in usage of the word coordination. A fine example of Hayek's usage is the following: In the market economy we depend "on that division of knowledge between individuals whose separate efforts are co-ordinated by the impersonal mechanism for transmitting the relevant information known by us as the price system" (Hayek 1944: 49-50). Michael Polanyi writes in the same idiom in The Logic of Liberty (1951: 115): "[In] spontaneously ordered systems ... persons mutually adjust their full-time activities over a prolonged period, resulting in a complex and yet highly adaptable co-ordination of these actions." Ronald Coase (1937: 37) uses the word in the exact same way when he explains his central aim in his famous essay on the firm:

In view of the fact that, while economists treat the price mechanism as a co-ordinating instrument, they also admit the co-ordinating function of the "entrepreneur," it is surely important to enquire why co-ordination is the work of the price mechanism in one case and of the entrepreneur in another.

Also in his Nobel lecture, Coase (1992: 6) consistently refers to "the pricing mechanism" as a "method of co-ordination."

Coordination is a crucial term in the vocabulary of Hayek, Polanyi, Coase and their intellectual progeny. I will argue that the Hayek/Polanyi/Coase notion of coordination follows but one of the two meanings we have of that word. Consider now a meaning of "coordination" that does not coincide with what Hayek, Polanyi, and Coase mean.

Coordination is first and best understood as something we hope to achieve in our interaction with others. I hope to drive on the same side of the road as others, I hope to use the same semantics as do my listeners, I hope to go to the same place in Manhattan as the person I wish to meet. In these cases, we hope to coordinate our actions with the actions of others, by coordinating to some common principle or focal point.

The features of this type of coordination are explored by Thomas Schelling in The Strategy of Conflict (1960). I will sometimes refer to it here as Schelling coordination. Schelling coordination has been given more formal structure by the philosopher David K. Lewis in his book Convention: A Philosophical Study (1969). Lewis uses formal game models to characterize situations. Figure 1 shows a road game of whether to drive on the Right or the Left. (Suppose that cars are built in the American fashion, so Right is better than Left.) A set of strategies -- such as, for you: drive on the Left, and for me: drive on the Left -- constitutes a coordination equilibrium when two distinct kinds of requirements are satisfied. The first is the Nash requirement, namely, given that you are choosing Left, my choosing Left is best for me (and likewise for the statement that reverses you and me). The second goes beyond Nash; it requires that, given that I am choosing Left, your choosing Left is best for me (and likewise for the statement that reverses you and me). Coordination equilibrium is Nash equilibrium plus this second requirement (suitably generalized). Both of us driving on the Left is a coordination equilibrium, as is both of us driving on the Right.

Figure 1. A coordination problem containing two coordination equilbiria

In a situation with at least two coordination equilibria, we face, in Lewis's terminology, a coordination problem, because we may have difficulty coordinating with each other. We need a common principle or focal point to get us to a coordination equilibrium. Individuals make a conscious effort to coordinate with each other, or at least to coordinate to a focal point. They strive for and see a meshing of action in their own activities. Schelling coordination is manifest.

Now, is this what Hayek has in mind? When Hayek speaks of our separate efforts being coordinated by the impersonal mechanism known as the price system, can we reduce this to an issue of Schelling coordination? It is true that market participants are achieving face-to-face coordination, by sharing a common language, a common measure of time, and so on. Everyone at the office arrives by nine o'clock in the morning and this coordination enhances productivity. But Hayek has more in mind. He means that when the blacksmith forges a pair of clipping shears, that activity is well coordinated to the activities of the weaver, who some time later works with the wool that was clipped from sheep with those shears. There is a flavor of Schelling coordination here, but only a flavor. First of all, the blacksmith and the weaver do not even know of each other's existence, and have no manifest sense of coordinating their actions with the actions of the other. If one were to visualize a "game" which included all of their relevant strategy alternatives, it would have to be a game that also included the relevant strategies of hundreds or thousands or even millions of other players alike. One might venture to call it the "catallaxy game." Such an exercise would depart from noncooperative game theory, which draws up games with an understanding that that is how the game is understood by the players. This is the common-knowledge assumption of game theory.

Hayek emphasizes that the context understood by the individual is local and very limited. The weaver sees only the manufacturer, not the blacksmith. The individual uses common cultural focal points to carry out interaction with others, but this is like the baton pass between members of a relay team. The individual confronts problems that do not lie in achieving manifest coordination, but in activities analogous to running alone with baton in hand. He is responding to price signals and local opportunities; he is trying to gain lucrative insights; he is working hard to keep his promises, and to see that his trading partners keep theirs. He does not perceive himself to be playing a coordination game with myriad distant people. As Adam Smith (1776: 423) put it, each promotes "an end which was no part of his intention" -- nor even of his knowledge.

And there is another important point which suggests that Hayek coordination is not Schelling coordination. Hayek coordination must involve myriad individuals. Now, shall the "catallaxy game" include the retailer's competitors? If we include the competitors -- and doing so would seem essential to a Hayekian framework -- it becomes plain that market outcomes are not coordination outcomes. Whether we think of coordination equilibrium in formal games or of resolutions in Schelling's parables, the outcome in which the two retailers compete is not an instance of coordination. Retailer A, given his own action, is not best satisfied by the rivalrous actions taken by retailer B. Retailer A is not best satisfied when the distributor supplies articles not only to him, but also to retailer B. Most fundamentally, Retailer A is not best satisfied when the distributor raises his price, or when the customer departs without having made a purchase!

The point is not that Hayek, Polanyi, and Coase erred in choosing their words, but that coordination has two meanings. Merriam-Webster's Collegiate Dictionary (10th ed.) offers a definition for coordinate as an intransitive verb, "to be or become coordinate esp. so as to act together in a smooth concerted way" (italics added). This is Schelling coordination; I coordinate with my friend to meet this afternoon. As is the case for any intransitive verb, there can be a direct object only of a reflexive kind: I coordinate my doings, or our doing, or our plans, to meet this afternoon. In this fashion we could make the intransitive verb to walk superficially (and only superficially) transitive: I walk my body down the street. For the transitive verb, Merrian Webster's offers, "to put in the same order or rank ... to bring into common action, movement, or condition..." The etymology for coordination shows the Latin roots co- (a prefix for "joint") + ordinare, which means to arrange. Thus, for example, we say that in decorating one's living room one has achieved a lovely color coordination. One has arranged the colors in a pleasing manner. Similarly, looking with Coase's eye, we see the manager-entrepreneur coordinate factors within the firm to achieve a pleasing outcome. Clearly these two example are not Schelling coordination. The colors did not coordinate themselves with one another, nor did the factors within the firm.

In somewhat of a paradox, then, we may say that, when Hayek, Polanyi, and Coase spoke of coordination in economic systems, the dedicated opponents to any conscious effort to arrange society as a whole meant, in fact, pleasing arrangement. The arrangement is abstract, and the pleasure is allegorical, but that is what they meant. In the Hayek meaning, the concatenation of affairs in cases like the catallaxy is not actually coordinated by a Great Arranger, but, as Smith's famous metaphor demonstrates, their idea of coordination is clarified by an allegory of the affairs being "led by an invisible hand."

The allegory goes as follows: There is a superior being named Joy who is invisible and who beholds the vast economic order. We cannot spell out what she values for society and hopes to witness, but it is not hard for us to understand. In her humanitarianism she is basically like you and me, a genuine liberal, in the broad sense. Her pleasure increases when human society exhibits widespread prosperity, comfort, personal fulfillment, excellence, irony, and affection. In this regard she is like John Stuart Mill or Isaiah Berlin or Hayek or Schelling. In the road game of Figure 1 she prefers the (Right, Right) outcome, and in that sense the arrangement of activities at (Right, Right) is better coordinated than the arrangement of activities at (Left, Left). In the allegorical sense in which Joy exists within us and acts by mysteriously stirring our doings, Joy coordinates our doings in achieving (Right, Right), the way we coordinate colors in decorating our home. This is the allegory behind the meaning of "coordination" from the transitive verb.

Hayek's claim is that the decentralized activity of the free catallaxy generates a dynamic, complex "spontaneous order" which Joy finds more pleasing than the order generated by the centrally-planned economic system. The order of the catallaxy is like the naturally formed crystal, where microscopic local conditions lead each element to settle into its place. Joy's pleasure would be analogous to our regarding this crystal to be more pleasing than an object fabricated, molecule by molecule, in a laboratory.

But we ought not speak of a "catallaxy game." The order is abstract and its beauty is metaphorical. It encompasses all of the particular plans and activities of the individuals within that order. I propose (with much apprehension) that coordination in the Hayek/Polanyi/Coase sense be called metacoordination. Figure 2 draws the distinction between the two coordinations.

Figure 2. Two concepts of coordination

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