Viennese Kaleidics:
Why it’s Liberty more than Policy that Calms Turbulence
Richard E. Wagner
Department of Economics, 3G4
George Mason University
Fairfax, VA 22030 USA
tel.: ++1-703-993-1132
fax: ++1-703-993-1133
rwagner@gmu.edu
http://mason.gmu.edu/~rwagner
Abstract
The idea of a kaleidic economy or society is strongly associated with George
Shackle and his vision of Keynesian kaleidics. This essay asserts that the central
thrust of the Austrian tradition in economic analysis can be described by the term
Viennese kaleidics. In either version of kaleidics, the analytical stress is placed
on treating time seriously and not just notionally. Either version of kaleidics leads
to recognition that economic processes are better treated as turbulent than as
equilibrated. While that turbulence is a natural feature of the unavoidable
incompleteness of intertemporal coordination, it is subject to mitigation. This
essay explains how it is that individual liberty and private ordering is generally
superior to state policy and public ordering in calming the turbulence that
naturally characterizes a kaleidic economy.
Keywords: kaleidic economy; George Shackle; time and economics; monetary
non-neutrality; private vs. public ordering
JEL Codes: B20, D20, D80, E30, E52, E62
Viennese Kaleidics:
Why it’s Liberty more than Policy that Calms Turbulence1
My title entails two claims that I think comport with the central insights and
intuitions that Carl Menger (1871, 1873) set forth in articulating what became the
Austrian tradition of economic theorizing. One claim is indicated by the title: the
appropriate Austrian framework for economic analysis is of a kaleidic and not an
equilibrated society. In light of the organonic quality of economic theory, this
claim ramifies throughout the corpus of economic scholarship, as Wagner (2010)
explores in his contrast between neo-Mengerian and neo-Walrasian research
programs. The other claim is indicated by the subtitle: while a kaleidic society is
naturally turbulent, the road toward calming that turbulence lies more in the
direction Liberty than in the direction of Policy. This second claim clashes sharply
with the standard presumption that collective action must be paramount in any
effort to counteract kaleidic-related turbulence. The bulk of this paper is devoted
to explaining why it is that liberty, which is the source of turbulence, is also the
primary road along which tools for the control of turbulence may be found.
Kaleidics is, of course, associated with George Shackle (1972, 1974), who
asserted that Keynes (1937) was the source of his kaleidic vision. Ludwig
Lachmann (1976) argued in turn that Mises (1966) and Shackle reflected
complementary theoretical orientations. It’s readily conceivable, moreover, that
1This
is a revised text of my presidential address to the Society for the
Development of Austrian Economics, Washington, DC, November 20, 2011. I’m
grateful to Peter Boettke for offering helpful comments on an earlier version.
2
had Keynes (1936) never been published, leaving Keynes (1937) to stand alone,
Lachmann might have extended his discussion to Keynes, for Keynes (1937)
sketches the kaleidic vision that Shackle (1974) deepens. But this is conjecture,
and my desire is to offer not conjecture but a line of analysis that explains why
Viennese kaleidics provides a sensible orientation for our tradition, and how in
turn Viennese kaleidics explains how the control of turbulence requires an
expansion of liberty relative to policy. Viennese kaleidics differs in two significant
ways from Keynesian kaleidics, both of which point to the infirmities of policy as a
tool for calming turbulence. One of those ways is a distinctly different way of
moving from micro to macro levels of theorization, where Viennese kaleidics, in
contrast to Keynesian kaleidics, recognizes that macro variables are results of
human action but are not direct objects of choice. Viennese kaleidics recognizes
that an economy is a complex ecology of plans that resembles a living organism
and is nothing like a machine that can be engineered and re-tooled. The other
point of difference is recognition that the use of Power to impose Policy impedes
the assembly of knowledge that is distributed throughout the catallaxy, thereby
generally promoting rather than calming turbulence. Turbulence is, of course, a
concomitant of liberty. Policy is commonly advocated as a type of Faustian
bargain (Ostrom 1996) wherein compulsion replaces liberty so as to calm
turbulence. Viennese kaleidics explains why the tradeoff envisioned in that
bargain is dubious, with the reality being that the compulsion of Policy often
intensifies turbulence.
3
1. Viennese Kaleidics: Reality Uncovered or Nihilism Espoused?
Ludwig Lachmann (1976) uses kaleidics to connect Ludwig von Mises and
George Shackle while arguing that Shackle extended Mises’s insights in three
directions: (1) extending subjectivism to expectations, (2) treating choice as an
act of imagination as a consequence of treating time substantively and not just
notionally, and (3) recognizing that markets, especially asset markets, reflect a
divergence and not a commonality of expectations, thereby abandoning any
presumption that the market process tends in the limit to some state of general
equilibrium. In concluding, Lachmann (p. 61) opined that kaleidics “is thus not the
natural habitat of Austrian economics, but the alien soil may prove nourishing.”
While I agree about the nourishing quality of the kaleidic soil, I also think that
kaleidics is the natural habitat of Austrian economics. Following Wagner (2010),
economic theory can be formulated within a kaleidic-Mengerian frame of
reference as well as an equilibrium-Walrasian frame of reference. In advancing
the claim that kaleidics is the natural habitat of our tradition, I would enlist
Sandye Gloria-Palermo’s (1999) examination of the Austrian tradition from
Menger to Lachmann in my support in lieu of an extended discussion of our
tradition to economize on the limited space I have for this presentation.
I should also mention that many notable Austrians regard the ShackleLachmann influence as an alien injection into our tradition, one that offers not
nourishing soil but corruption of hard-gained truths. These critics of kaleidics do
not voice foolish objections. Their objections reflect the belief that the kaleidic
vision is contrary to the Austrian effort to uncover and articulate objective claims
4
about reality. Analytical nihilism, where analysts are free to see what they choose
to see, would replace the hard-earned Austrian effort to uncover objective truths
about a societal reality that we all experience. In this respect, Murray Rothbard
(1990) speaks of the “Hermeneutical Invasion of Philosophy and Economics.”
And in his treatment of what he regards as Lachmann’s nihilism, Joseph Salerno
(2002) reports that Rothbard referred to “Lachmannia” as a disease that has
been infecting some Austrian seminar rooms. In a similar vein, Leland Yeager
(1997) counsels Austrian theorists not to be scornful of theories of general
equilibrium.2
Analytical nihilism and analytical solipsism are certainly contrary to the
Austrian tradition, for the participants in that tradition have always sought to
uncover features of the societal reality that is common to all of us. Yet that reality
is not an object that is directly accessible to an analytical observer. We can
observe directly both rainbow trout and the insects that fly near water. Having
done that, we can theorize about how the insect’s appearance when it
approaches water inspires the trout to bite. In light of that knowledge, we might
try to design artificial insects with hooks. However we might go about doing this,
our object of theoretical interest is available for our direct examination. The
situation is different for much of the material of the social sciences. An economy,
for instance, is not directly apprehensible, but is apprehensible only in light of
2
In contrast to the Austrian critics of what they perceive to be the nihilism of
kaleidics, Stephen Parsons (1993) argues that it is orthodox economics, with its
readiness to embrace fictive models that give definitive answers to questions that
is nihilistic. Warren Samuels (1993) notes that if the charge of nihilism is applied
to any system of thought that leaves the future open, nihilism is superior to the
alternative.
5
some prior act of theorization. Equilibrium-based theories take a different tack to
the construction of those objects of theoretical interest than do kaleidic-based
theories, but both sets of theories seek to create knowledge that is independent
of the theorist.
While Menger rejected Walras’s claim that both of them were working to
advance the same conceptual framework, the Walrasian idea of an orderly
system of relationships has pervaded the corpus of Austrian theorizing. Ludwig
von Mises’s (1966) formulation of an evenly rotating economy gives recognition
to this systemic quality. Friedrich Hayek’s (1932) treatment of the business cycle
as departing from a position of Walrasian equilibrium is a similar effort. Neither
theorist was working with the Walrasian apparatus, but both used that apparatus
as a stalking horse to advance their arguments. In doing this, they sought to use
their theoretical formulations to illuminate features of reality that they recognized
as existing independently of their theoretical efforts.
Kaleidics apparently seems to the critics to eliminate the prospect of
advancing claims about an objective reality, and to replace those claims with
statements that are the private property of the observer. In the presence of
kaleidics and its replacement of knowledge with unknowledge, the objective
quality of reality would seem to vanish into that fog of unknowledge. The future
becomes akin to one of those ink-blot patterns that psychologists use to elicit
responses from subjects. In this setting, there is no right or wrong answer about
what the ink-blot represents, for the examiner simply wants to know what comes
to the subject’s mind upon seeing the ink-blot. Theorizing within a kaleidic
6
framework, however, is not to deny the objective quality of reality; it is rather an
effort to explain significant aspects of that realty. The analyzing subject is not
offering reactions to ink-blots but is uncovering something real about those inkblots. In undertaking this uncovering, Viennese kaleidics offers a path to
penetrate more deeply into that reality.3
To achieve that penetration, however, requires a theoretical framework
suitable for the task. The Walrasian framework reduces society to a snapshot
and asks the theorist to give an account of the picture, and with comparative
statics used to account for changes observed over a sequence of pictures. The
evenly rotating economy replaces the snapshot with a film that continually
repeats itself. Viennese kaleidics likewise employs the image of the film, only that
film shows a continuing parade of novelty along with the continuation of a good
deal of familiarity. It is this conjunction of familiarity and novelty that comprises
the objective reality that Viennese kaleidics seeks to penetrate.
For this penetration to be achieved, however, some shift in the variables of
analytical interest is necessary. For Walrasian-based formulations of societal
equilibrium, the variables of interest must be resource allocations, for there isn’t
anything else that can be of interest when time is eliminated as a substantive
feature of the analytical effort, as O’Driscoll and Rizzo (1985) explain. For
Viennese kaleidics, however, time is treated substantively, which means in turn
that experimentation and novelty continually enter society. Kaleidic turbulence is
3
In their examination of the scholarly oeuvre of Elinor and Vincent Ostrom,
Alegica and Boettke (2009) explain that the Ostroms sought to penetrate deeply
into reality in contrast to the Walrasian-like posture of achieving separation from
reality.
7
a feature of society, though so also is a good deal of familiarity, as Koppl (2001)
explains in his effort to inject both novelty and typicality into choice. A kaleidic
society generates debris due to the collision among plans that has no place in
the Walrasian framework. Hence, Viennese kaleidics opens into questions
concerning how people deal with that debris, which brings to the foreground
questions concerning the governance of human relationships and interactions,
pushing into the analytical background questions concerning the allocation of
resources because allocations emerge out of patterns of governance.
Related to this reversal of foreground and background is recognition that
the subject matter of economics is more suitable for plausible than for
demonstrative reasoning, with this distinction being articulated mathematically by
Polya (1954) and economically by Clower (1994, 1995). By its very nature in
treating time substantively, kaleidics cannot be pursued to demonstrate societal
equilibrium. Likewise, any demonstration of societal equilibrium must neuter the
passing of time that is central to the Austrian orientation. Viennese kaleidics
operates within the framework of plausible reasoning, which is an open and not a
closed system of thought; therefore, it cannot lead to statements that must be
accepted of demonstrable necessity within the context of the framing axioms.
With respect to plausibility, we can see from observation that societies are both
orderly and turbulent, and with the mix between orderliness and turbulence
varying through time. It is a reasonable theoretical aim to seek to explain
historical variability in the mix of orderliness and turbulence, provided, however,
that the theoretical framework is able to give space to both. An equilibrium
8
framework cannot do that. Rather, a kaleidic framework is required, but not just
any kaleidic framework.
2. Viennese Kaleidics and its Keynesian Cousin
All theorizing about societal turbulence recognizes that equality of
aggregate saving and aggregate investment is a necessary condition for the
absence of turbulence. Equilibrium theories postulate this condition as denoting
equilibrium in the market for loanable funds, thus reflecting the pre-coordinated
character of this theoretical framework. Within this mechanical or hydraulic
framework, it is easy to perform comparative static exercises. Hence, a
presumed decline in private investment can be offset by increased public
spending to maintain constancy in total spending. To be sure, controversy exists
among equilibrium theorists over the coherence of this framework. Among other
things, increased spending increases public debt, and the present value of the
future taxes which that debt entails may reduce private spending.
Regardless of controversies among equilibrium theorists, a kaleidic
framework stands apart from any equilibrium framework, due to the substantive
treatment of time, which entails in turn the absence of pre-coordination as a
conceptual device. Both Viennese and Keynesian kaleidics embrace the
distinction between ex ante and ex post. Indeed, it is the operation of phenomena
related to and captured by this distinction that is the source of kaleidic
turbulence. Ex ante refers to anticipations on which plans are based. Ex post
refers to some accounting of the results of those plans at some later date. Any
9
plan spans time by creating a bridge from present when the plan is formed to
some future point, or set of points, where the outcome of the plan is appraised.
Reminiscent of the Ptolemaic astronomers, many equilibrium theorists have
sought to maintain adherence to timeless formulations by assuming that people
form expectations rationally, which in turn is treated as forming plans today
based on statistically accurate projections of economic conditions at the time the
plan reaches maturity, subject only to random variation. Within an analytical
framework based on the timelessness of pre-coordination, this is a reasonable
and even necessary theoretical construction, even though it renders change an
exogenous shock rather than an internal quality of economic interaction.
For a theoretical framework that seeks to locate change as an internallygenerated feature of an economic system, it is necessary to take time
substantively and to allow the passing of time to do significant analytical work.
This is the analytical target at which both Viennese and Keynesian kaleidics aim.
Keynesian kaleidics start with recognition that equality between saving and
investment is problematical and elusive, and not something to be imposed by
assumption simply to close a model, as illustrated by Keynes (1937),
Leijonhufvud (1968), Clower and Leijonhufvud (1975), and Shackle (1972, 1974).
The transformation of saving into investment requires intermediation between
different sets of people, and is unlikely to proceed so smoothly as theories
grounded in presumptions of pre-coordinated equilibrium would lead us to
expect. Turbulence would be a feature of this kaleidic framework, though we
might think, based both on theoretical understanding and historical observation,
10
that such turbulence would be mostly modest, perhaps as illustrated by
Leihonhufvud’s (1981) thesis that the amplitude of turbulence is generally
bounded by a corridor.
Viennese kaleidics contains two theoretical features that distinguish it from
Keynesian kaleidics, and these I will examine in the following two sections. One
difference resides in economic theory; the other difference resides in political
economy. The economic difference pertains to the relationship between micro
action and macro phenomena. Where Keynesian kaleidics treats macro
phenomena as susceptible directly to choice, Viennese kaleidics recognizes that
macro phenomena can be reached only through pathways that originate at the
micro level where all human action occurs. With regard to political economy,
Viennese kaleidics recognizes that limited and distributed knowledge pertains to
all actors in society, both public and private. There are, moreover, plausible
grounds for thinking that private ordering is generally superior to public ordering
in its ability to promote the effective creation and use of knowledge that is
necessary for the calming of kaleidic turbulence. In consequence, the control of
turbulence must to a large extent run through private ordering and not through
public ordering or interventionist policy.
3. The Micro-Macro Relationship: Indirect and not Direct
Keynesian kaleidics works with a particular type of representative agent
formulation where the prime analytical interest is placed on savers and investors
as classes that act pretty much in unison. Those actions, in turn, exert direct
11
effects on macro variables. With macro variables thought to be directly
accessible to change through policy, a policy of acting on aggregate demand
when an economy would otherwise escape its corridor of stability can thus serve
as an instrument for restraining the negative consequences of kaleidic
turbulence. This type of remedy is perhaps sensible if an economy is properly
conceptualized as a single entity or organization that can be acted upon through
policy, much as a cue ball can act upon a billiard ball. Keynesian kaleidics follows
the analytical framework of conventional macro theories in reducing macro
variables to micro variables through treating constructed aggregate variables as
direct objects of action.
Viennese kaleidics recognizes the infirmities of this conceptual framework,
due to recognition that societies are orders that contain multiple organizations,
each of which pursues its particular plans within the societal ecology of plans.
The relationship between micro and macro is one of supervenience and not one
of reduction. Macro variables are constructed objects that reflect emergent
qualities of interaction among micro entities. Investments, for instance, are
always directed at particular commercial plans, and are direct objects of action to
those who determine those plans. The construction of some measure of
aggregate investment is not an object that anyone acts on directly. Macro
variables are not truly objects of direct action, but rather are objects that can only
be influenced indirectly as actions on the micro level are projected onto the
macro level. With this alternative conceptualization, an economy is better
conceptualized as a networked ecology of enterprises. Within this ecology, all
12
action takes place at the micro level where people, businesses, and
governmental agencies operate. An increase in government spending
necessarily enters the economy at particular places within this ecology of plans.
What results thereafter depends on the state of the plans where the spending
enters. A particular commercial plan, moreover, will operate within a network of
complementary plans.
Figure 1, based on Wagner (forthcoming), illustrates this idea. The micro
level is where all action occurs. Shown there are two types of entity. The circles
denote market-based entities or enterprises; the triangles denote politicallybased entities. This distinction between types of entity will become significant in
the next section. All of these entities comprise a network that constitutes an
economy. The connections among entities denote various commercial and
regulatory interactions among the entities. What is especially notable about this
graph is its polycentric character: the economy, including political entities, is an
order and not an organization.
The three lightning bolts that run from the micro level where all action
occurs to the macro level which is the locus of a congeries of statistics,
projections, and ideologies indicate that macro phenomena emerge out of
interaction among entities operating on the micro level. In Figure 1 the macro
level is denoted by the standard framework of aggregate demand and aggregate
supply. Shown there is as increase in aggregate demand such as might
accompany some fiscal expansion under some but not all equilibrium-centered
models. That expansion, however, is not in any case the direct result of policy
13
action. Any expansion must enter at particular nodes in the micro ecology. What
happens from that point of injection depends on choices that are made at that
point and on the pattern of relationships that emanate from that node and spread
into the ecology.
The same point holds for monetary expansion as holds for fiscal
expansion. Money likewise enters at particular nodes within the micro ecology of
plans simply because there is no other way for money to enter that ecology.
Each node denotes a plan within the ecology of plans. Any expansion thus
supports particular nodes within the ecology. Whatever aggregative effects might
result will depend on the changing patterns set in motion by that expansion.
Expansion supports experimentation, and in this way exerts real effects on the
economy. This is not to say that monetary expansion would necessarily exert
detectible effects on aggregate measures of real income. Monetary expansion
can bring about structural changes in patterns of activity without affecting
standard measures of aggregate activity, as illustrated by Wagner’s (2010: 14849) illustration of how monetary expansion might influence the geographical
distribution of land rents without affecting the aggregate value of land rents.
Such expansion, whether of a monetary or fiscal nature, will promote
particular commercial activities relative to other activities that might have been
promoted with different points of injection. Viennese kaleidics offers a vantage
point for understanding the non-neutral character of monetary or fiscal activity:
real effects result from nominal injections because different points of injection
amount to selection of different plans to expand within the ecology of plans.
14
Learning accompanies plan-based activity, so that expansion channels learning
in particular directions in the vicinity of those points of injection. In turn,
commercially adjacent nodes within the ecology will learn of new opportunities,
which will cause further turbulent modification within the ecology of plans. If that
expansion arises through subsidizing credit for wind-power projects, learning will
center on various activities and technologies associated with wind-power. If,
instead, it arises through subsidizing credit for constructing bicycle paths in
metropolitan areas, learning will center on activities complementary to cycling.
With time being treated substantively, evolutionary processes of spontaneous
ordering will bring about substantive changes in the pattern of activity within the
societal catallaxy. In this manner, non-neutrality characterizes monetary and
fiscal activity; however, the presence of non-neutrality would appear in the
bottom part and not the top part of Figure 1.
4. Distributed Knowledge, Viennese Kaleidics, and Political Economy
Keynesian kaleidics construes an economy as a machine that is subject to
repair by an experienced mechanic. To be sure, the machine is construed as
being comparatively complex in contrast to the simplicity of timeless equilibrium.
Still, the problem of policy is treated as one of diagnosis followed by repair. This
formulation involves two presumptions that offer targets for reconsideration. One
target is the presumption that relevant knowledge can be assembled and
centralized. The other target is the presumption that such knowledge, if
assembled, will be used in an ameliorative manner. Both of these presumptions
15
reflect what Roy Harrod (1951) described as the “presuppositions of Harvey
Road” in his biography of Keynes. Those presuppositions were that British policy
was conducted by an enlightened few who could be counted on to do the right
thing. Relevant knowledge was capable of being assembled, and once
assembled it would be used properly.
Viennese kaleidics reveals some problematic features of this orthodox
framework for policy analysis. Aggregate variables involve reductions in
information from what operates within the ecology of plans. Those statistics might
speak to the quantity of pencils produced over some interval or to the inventory
of pencils held by producers at some date. It would even be possible to construct
a one-good model of an economy and label that good “pencils.” Despite the
possibility of modeling such a pencil economy, it is impossible for anyone to set
down orders that would lead to the production of pencils (Read 1958). In other
words, there is no singular object to which rational expectations pertains. An
index of prices, for instance, is not a reasonable object of commercial action.
What is a reasonable object of action depends on the particular commercial
situation faced by the actor. Someone interested in promoting wind power in
South Carolina will adopt different objects at which action aims than someone
interested in promoting wind power in Oregon, and with yet different objects of
action being relevant to someone exploring development of a new line of
breakfast cereals.
For policy measures to calm turbulence, they must promote the smoother
meshing of plans within the micro ecology of plans where all human action
16
occurs. Such smoother meshing would project onto the macro level as lessened
turbulence; however, the work involved in achieving that calming effect is micro
and not macro in nature. It is always particular sets of context-related variables at
which action aims, with the macro forms of those variables being nothing but
delayed accounting constructions. To the extent policy interjections impede
relationships within the ecology of plans, policy could create turbulence rather
than calm it, as illustrated by policy measures that support activities that turn out
to be commercially unprofitable. The success of policy requires that it promote
coordination among participants within the ecology, but that coordination cannot
be secured outside the nexus of transactions that is illustrated by the emergent
order depicted by the lower part of Figure 1.
Viennese kaleidics treats an economy not as a machine but as a complex
network of interacting people whose relationships are governed through a
framework of intersecting and sometimes conflicting rules and conventions. What
results is recognition that economic disruption, what are often described as
“crises” these days, are endogenous features of normal economic interaction.
While that turbulence is generally modest, it need not be. Jane Jacobs (1992)
describes society as operating through interaction between carriers of two
distinct moral syndromes, which she describes as commercial and guardian. She
attributes significance to the architecture of that interaction, claiming that
“monstrous moral hybrids” can sometimes evolve out of that interaction.
Economists typically work with a universal notion of rationality as
conveyed by the proposition that people will make consistent choices. The
17
context of choice is irrelevant for the formal notion of rationality. Yet the content
of rational action depends on the context of action, as illustrated by Pierre
Bourdieu’s (1990) treatment of the logic of practice. People who harvest oysters
of grounds held in private will harvest them differently than people who harvest
them on commonly held grounds. On privately held grounds, people will typically
return immature oysters along with cultch they dredge up, but this style of
harvesting is less likely to be found on commonly held grounds, as Angello and
Donnelley (1975) explain. Political economy entails a conjunction of actors, some
of whom operate within a framework of private property while others operate
within a framework of common or collective property, as Wagner (2007) explores.
Different contexts of action will reasonably elicit different choices, as
conveyed by Jacobs’s treatment of the two distinct syndromes of action. In a
similar vein, Alasdair MacIntyre (1988) distinguishes between rationalities of
excellence and effectiveness, a distinction that is explored with great charm by
Robert Pirsig (1974). Conflict among people and not harmony among them is a
natural accompaniment of the existence of contrasting rationalities of practical
action. The root of praxeology is praxis, which locates praxeology as the science
that studies the practice of commercial activity. Societies also contain other types
of practice, and with each practice there corresponds a logic of practical action.
With respect to political economy as a field of study, we are dealing with a
relationship between two logics of practical action. While the results aren’t always
lovely, they are unavoidable.
18
Different substantive rationalities of practice map into institutional
incongruities, as Ludwig Lachmann (1971) explains. In this respect, Maffeo
Pantaleoni (1911) treated a society as operating with two inconsistent pricing
systems, one a system of market pricing and the other a system of political
pricing. The system of political pricing, moreover, was parasitical on the system
of market pricing, which meant that the political system needed the market
system while at the same time it unavoidably degraded it, and with no
presumption of equilibrium in this predator-prey relationship. What comes out of
this line of thought is recognition that turbulence is an inherent feature of freedom
of action, though the conventions and practices of private property operate to
mitigate that turbulence.
Viennese kaleidics shows reality to be inherently turbulent, but it also
explains how a free people possess the tools to fabricate societal arrangements
that can dampen that turbulence. Conflict among plans creates commercial
debris, yet that debris is owned by someone under the conventions of private
property. Those owners have strong incentive to be realistic in abandoning plans
in an effective manner through commercial reorganization. Hence, the debris
from a failed plan will typically be distributed to those who value relatively highly
the value of that debris as inputs in their commercial plans. In the presence of
public ordering, however, the incentive to declare plans to have failed weakens
because there is no position of residual claimacy. Public ordering, moreover, can
impede the abandonment of commercial plans, as when antitrust prevents the
19
debris from abandoned plans to be sold to those who value that debris most
highly.
When economists speak of markets, regardless of whether they are
pointing to what they regard as success or failure, they tend to think in terms of
textbook examples of market adjustment to changing conditions of demand and
supply. In some models, markets adjust well and correctly while in other models
they don’t. In either case, however, the object that does the adjusting is the
market economy that is described in the textbooks. This is the economy that is
regulated by private decisions to buy and sell and to produce and to abandon
production. This is, in other words, the economic analytics of an institutional
framework of private property.
This institutional framework, however, is an ideal type of institutional order
that is used to illustrate certain properties of an imagined system of social
relationships. It is not a framework that actually governs economic transactions
and activity. Yes, private ordering plays a role in the organization of economic
activity. But in contemporary social democracies, private ordering is only partial.
Public ordering is also present. Moreover, and central to the line of analysis
pursued here, the two forms of ordering carry with them different rationalities of
practical action, just as practical rationalities differ as between harvesting oysters
on private and on common property. The requisites for practical action for
someone who operates within a framework of private ordering typically differs
from those faced by someone who operates within a framework of public
ordering. The conflict set in motion by this institutional incongruity can intensify
20
the natural turbulence that characterizes the ecology of plans that comprises an
economy.
As a purely formal matter, rationality means only that people act
consistently in seeking to replace what they value less highly with what they
value more highly. As a substantive matter, however, just what it is that provides
value and how that value can be attained can differ across settings for action. As
Buchanan (1969) explains, the cost of taking one action is represented by the
value the chooser places on the option that is rejected in favor of the option
selected. If both parties to a dispute are residual claimants to their legal
expenses, they have strong incentive to settle disputes rather than going to trial.
If one party to a dispute is a public entity, there is no residual to claim. Legal
expenses must be spent within the budgetary framework of collective property.
Those expenses can be used in different ways, as illustrated by being spread
across many smaller trials or concentrated on a smaller number of larger trials.
Furthermore, what it is those trials produce for the public agent depends on what
the relevant public agent aims to achieve. In this respect, legal expenses can
serve as investments in promoting favored causes or possibly running for public
office through selecting cases based on some publicity calculus.
When Ludwig von Mises (1966: 716-861) referred to an unhampered
market economy, he was referring to an imaginary world of wholly private
ordering. While this world might have had a good deal of descriptive accuracy in
times past, these days public ordering has a presence throughout economic life.
Indeed, the very meaning of “market economy” becomes ambiguous in the
21
presence of significant public ordering. With respect to credit transactions, for
instance, within a framework of private ordering credit contracts would be
between borrower and lender alone. The terms of a contract, including such
things as interest rates and provision for repossession, would be wholly between
the parties. Moreover, consent between the parties alone would be both
necessary and sufficient for credit contracts to be concluded. The aggregate of
such credit contracts, along with the various types of vendors engaged in this
activity, would constitute what we call the credit market that is assembled through
private ordering.
Contemporary credit markets do not operate under private ordering; they
operate through an admixture of private and public ordering. Private ordering as
reflected by agreement between borrower and lender is still necessary for credit
contracts to be concluded. But it is not sufficient because credit contracts are
also subject to public ordering in numerous ways. One such way is through
requirements that lenders must exhibit a portfolio of loans that reflects various
distributional requirements that often are rationalized on equity or distributional
grounds. In this respect, Moyo (2011) notes that in 1966 Fannie Mae and Freddie
Mac required that at least 42 percent of their mortgages were held by borrowers
with below-average incomes, and with this share increased to 52 percent in
2005. Moreover, at least 12 percent of those mortgages were to be held by
borrowers whose incomes were less than 60 percent of the average in the
relevant geographic area.
22
What results is a form of tied sale wherein the price of making loans that
would pass muster under private ordering is the acceptance of loans that would
not have been made under private ordering. In either case we can speak of a
market for loanable funds as an aggregate construction. The composition of that
aggregate, however, would differ as between wholly private ordering and an
admixture of private and public ordering. To illustrate with a simple bivariate
model, suppose potential borrowers are evaluated by lenders as either low risk or
high risk. With wholly private ordering, either type of borrower could receive loans
at terms agreed on by borrowers and lenders. The market for loanable funds
would feature a variety of contractual terms that might be reduced hedonically to
the simple aggregate constructions, but the societal work would occur at the
micro level where the various contracts are assembled.
But credit markets don’t operate through private ordering alone, which
means in turn that the composition of credit relationships will change from what it
would have been under wholly private ordering. Under private ordering, Ricardian
equivalence characterizes each and every contract at the ex ante stage. This
equivalence vanishes with public ordering, as there is now a subset of contracts
for which borrowers an increase in net worth relative to their situation under
private ordering. With respect to Figure 1, public ordering operates on the lower
part of that Figure to influence the pattern of credit contracts from what would
have emerged under wholly private ordering. Public ordering changes the
substantive operation of credit markets in numerous particular ways, one of
which entails restrictions on the ability of high risk borrowers to compete with low
23
risk borrowers by restricting the allowable terms of credit contracts and another
of which is the imposition of tied-sale requirements where the offer of pricecontrolled contracts to a stipulated number of high-risk borrowers is a condition of
doing business.
We can still describe credit markets in generic terms through the demand
and supply of loanable funds. But the composition of that market, as well as
perhaps measures of aggregate size, will vary with the forms of public ordering,
thereby yielding different particular projections onto the macro level. Besides
leading to a reduction in the overall amount of credit from what would have
resulted under wholly private ordering, there will be a shift in the pattern of credit
relationships because some volume of credit is now extended to high risk
borrowers that would have been extended to low risk borrowers under private
ordering. If a subset of credit recipients are now subsidized through regulation,
other recipients of credit must provide those subsides through higher prices than
they would have paid through wholly private ordering. This tied-sale arrangement
presents a problem of how to hold the arrangement together, reflecting what
Ikeda (1997) describes as the dynamics of the mixed economy. Collective
regulatory agencies operate within a parasitical relationship with commercial
entities: they require commercial hosts if they are to ply their regulatory craft, and
yet their activities weaken the hosts, which in turn will elicit regulatory efforts to
support the faux-market activity of contemporary social democracies. So what we
observe is not one more instance of market failure but the dynamic and systemic
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logic of an admixture of public and private ordering and the conflicting
rationalities that this admixture brings.
5. Final Remarks on Kaleidics and Liberty
The prime lesson that Viennese kaleidics offers is that a free people who
relate to and interact with one another within the institutional framework of private
ordering are able to generate a variety of commercial practices and organizations
that allow for a flourishing kaleidic society. Kaleidics is a concomitant of liberty,
but liberty also allows development of the institutional and organizational tools for
bringing kaleidics under reasonable control, as illustrated by people who have
made and lost fortunes several times in one lifetime, as well as by the
development of organizations and institutional arrangements to facilitate the
abandonment as well as the creation of plans.
I offer these remarks within the spirit of plausible and not demonstrative
reasoning. I make no effort to assert the impossibility that policy can calm
turbulence. While I do not doubt the ability of someone to construct a set of
axioms that would support such an assertion of impossibility, I doubt that any
such axioms command universal assent, any more than Arrow’s (1963) axioms
command universal assent. It is, for instance, imaginable even if unlikely that the
collection of information from all market participants would allow someone to
discern patterns that would not be discerned from the information collected by
subsets of market participants. Yet that information would be stale and mostly
backward looking, as it would pertain to actions taken yesterday and not to
25
actions contemplated tomorrow. It would also be of a wholly explicit character,
eliminating in the process the vital role played by tacit knowledge in the operation
of commercial enterprise.
Under private ordering, an enterprise that believes it has assembled
particularly valuable information must act in a contractual manner with other
participants to gain from that assembly, which lends credence to the veracity of
that assembled information. Collective entities can compel action and are not
residual claimants over the actions they compel, which gives strong reason for
doubting the veracity of those claims. We should recognize in this respect that
the qualities of information vary with how it is assembled: private ordering works
through mutual attraction, in contrast to the compulsion that accompanies public
ordering, which surely renders private ordering a higher quality source of
information than public ordering, particularly once it is recognized that those who
collect information through compulsion are not residual claimants on the actions
they might compel based on that information. In short, there is really not much
that policy can accomplish to calm the turbulence that is a natural
accompaniment of a kaleidic society, aside, that is, from helping in the
maintenance of the provisions and conventions of private ordering.
A century or so of economic thought has pushed Policy into the
foreground as the way to tame kaleidics, as a concomitant of the replacement of
what Boettke (2007) describes as the mainline of economic theory with the
mainstream. This taming, along with the associated mainstream framework, is
sensible only under two circumstances. First, society is simple in character so
26
that turbulence can be tamed by acting on a handful of macro variables. Second,
those who operate Policy have both the wisdom and the detachment to execute
what the simple models would seem to require. Neither circumstance fits the
conditions of modern life. Macro variables cannot be acted upon directly. They
can be affected only indirectly through action that is injected at particular points
within the ecology of plans, with macro-level consequences emerging through
the resulting interactions. Just because Keynes embraced the presuppositions of
Harvey Road, at least according to Harrod (1951), does not mean that this
embracement was on the mark. Whatever distance from the target it might have
been back then, it is surely farther from the target in our present times. It is not
private ordering in the governance of economic activity that we should fear in our
kaleidic society; rather it is the use of public ordering to trump and warp what
would otherwise have been the accomplishments of private ordering. Viennese
kaleidics cannot prophesy the future, for no theory can do that, but it can explain
how a constitution of liberty, as distinct from a constitution of servility, allows
through private ordering the generation of institutions and organizations that
render kaleidic reality interesting and adventuresome and not worrisome or
frightening.
27
28
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