 Okay, let me begin by voicing my agreement with Oscar Morgenstern, who in a 1972 Kyclos article said the following, economic theory is unending because we are confronted with an open system. The idea that we could have a closed system of economic theory say of the Valerian type is a feudal one, end quote. So I think it's important to recognize that much of what I'm going to say mirrors my conception of what the economic system is like. If the economic system is truly open, then I think our economic theory is going to have to be open and it's going to have to reflect that. This philosophy I think is in sharp contrast with what I will call the quote unquote comfort school of Austrian economics. Now the comfort school believes that all basic propositions of economics have been solved and that Austrians are in possession of the whole truth and nothing but the truth and that our only mission is to spread the word. Now this comfort school and my view of what Austrian economics is all about are not compatible. In discussing a better concept of coordination, I obviously believe that some really basic work still needs to be done in economic theory. Let me say at the outset that the better concept is one that portrays coordination as imperfect, as plans which do not mesh completely, arising from an incompletely specified process. In other words, I'm elevating to a level of almost principle here the virtues of a certain degree of vagueness. Why do we need a new perhaps looser concept of coordination or equilibrium? We need it because we need first a concept of coordination that makes sense as an idealized or ideal typical result of a process. It does not make sense to use a concept of equilibrium that is inconsistent with our characterization of the dynamic process that generates it and this is the point which Jerry and I made in our book. But earlier than our book in 1977, Malinvaux justified the same claim in a different way. He said to rely on a general equilibrium formalization is to accept a shortcut, that is the consideration of only those equilibrium states that would result from dynamic adjustments. So the idea that Malinvaux proposes is different than ours, but nevertheless I think compatible. If we're going to deal with equilibrium theory at all, then we ought to deal with equilibrium theory in a way that pays its respect to the fact that equilibria are generated by processes. So we shouldn't talk really about equilibria that no conceivable process could ever generate. The second reason that we need a new concept or a better concept of equilibrium is that we need a concept that makes learning processes possible. In a way that the concept of disequilibrium cannot. Austrians often say that disequilibrium in a certain sense generates learning, but I think that's not quite right because disequilibrium does not have enough structure or order for learning to take place. In other words, what I'm claiming is that learning can only take place with an intermediate degree of order. So dichotomizing the world into equilibrium and disequilibrium doesn't take account of the fact that the so-called disequilibrium that's supposed to generate this learning must itself have a certain amount of order, a certain amount of structure in order to generate the learning that is requisite. So for these two reasons I think we need a better concept of coordination. Now let me throw light on each one of these reasons by referring to some previous theoretical developments which I think are consistent with the ideas that I'm trying to elaborate here. The first again, equilibrium as an idealized outcome of a process. Now this has roots in some of the work of Hayek, but let me first start out by showing the way in which Hayek argues for a concept of exact coordination, that is to say a concept which is at variance with the looser concept of coordination that I'm trying to promote. The idea of exact coordination, that is to say the idea that there's perfect coordination of plans, requires I think a rigid distinction between equilibrating and disequilibrating movements because only then can we freeze the disequilibrating shocks and allow at least notionally for complete adjustment. So the idea is that we have a shock, a disequilibrating movement, and that once we had that shock we can take it as a separate factor separate from what comes next, namely the adjustment, the equilibrating adjustment to that disequilibrating shock and allow then for all the equilibration to take place resulting in a perfect adjustment, a perfect coordination. Now as you can see the analysis requires that on the one hand we can say this is disequilibrating, on the other hand this is equilibrating and the two concepts don't get mixed together, there isn't any question of ambiguity of one or the other. So it requires this idea of exact coordination as a useful analytical tool, requires the cooperating idea of the complete separation of equilibrating from disequilibrating movements. Now Hayek clearly recognized that disequilibrating shocks would continually occur, but as we saw he carefully segregated disequilibrating shocks from equilibrating adjustments. In his article competition as a discovery procedure Hayek calls discovery what is essentially discovery of adaptive means that is to say discovery of equilibrating adjustments and he uses the word discovery only in that context and anything else in other words any other kinds of discovery in the colloquial use of the word are called quote-unquote unforeseen change. That's very interesting because I think that Kersner follows that same tradition. For Kersner, Kersner has used the word discovery countless times and sometimes you think he's getting at the idea of a completely open system in the way that I would mean and the way that a number of other people would mean but it becomes very clear that what he means is really what Hayek meant. Discovery is discovery of adaptive means. Discovery is discovery of equilibrating adjustments and it is rooted in a use of the term that Hayek I think initiated but I think it's illegitimate to separate these two kinds of change and the reason for that can be found in Hayek's work itself and this is exhibit a certain tension in Hayek in economics and knowledge which is earlier than competition of discovery procedure Hayek says the following quote, the tendency toward equilibrium is only toward an equilibrium relative to that knowledge which people will acquire in the course of their economic activity relative to that knowledge which people will acquire in the course of their economic activity end quote. Now what is going to cause people to acquire knowledge in the course of their economic activity? Well one thing that Professor Kersner has emphasized very much in his work is the attraction or the lure of profit opportunities. Profit opportunities will cause us to make discoveries but these discoveries I suggest will disrupt any implicit equilibrium toward which the system might move. Just as an existing technology might be disseminated by this discovery procedure by the lure of profit opportunities and this of course is what one of the things that Hayek and Kersner have in mind that there may be knowledge of a technology that somebody has somewhere in the system and that gets disseminated by the fact that other actors in the system want to make profits but at the same time as this dissemination discovery takes place it's also the case that the very lure of profit opportunities will cause people to discover entirely new technologies that nobody in the system knows and these are by definition disruptive of any implicit equilibrium toward which the system might be at any point in time moving. Now this distinction between what I would call dissemination discovery and truly originative discovery has also been made by Ulrich Witt in his own work using another terminology. Moreover, Franklin Fisher in a 1982 book called Disequilibrium Foundations of Equilibrium Economics saw something of the same problem but his perspective was a little different perhaps a lot different but still he saw the same problem. He says the following in an ongoing economy what constitutes an exogenous shock he asks how is such an original shock to be distinguished from the endogenous shock brought about by adjustment to the original shock and quote uses the word shock a little too often here but basically what he's arguing is two things one is you're dealing with a chain of interconnected events you have an exogenous shock and then you have adjustments but they're really in a basic sense interconnected so separating them out is a bit artificial but secondly the very idea of an adjustment could be looked at as a shock to the system because people don't expect those adjustments in competition as a discovery procedure Hayek makes the entirely valid and very important point that if we knew the outcome of competition we wouldn't need competition in the first place in our chapter whatever it was cool on competition I don't remember the numbers of the chapter was chapter 6 maybe I don't know we make the point this very point starting out with this example of a sports game and all that I mean why would you need to play the game if you knew the outcome to begin with right and also the idea is that if you knew that the results of competition why would you need it in the first place precisely because you don't know the results well part of the results of competition are the adjustments that are going to take place to these exogenous shocks if you knew what the adjustments were going to be in the first place right you wouldn't need the method of competition to arrive at the best adjustments so that these adjustments are necessarily a surprise to many people within the system and as a surprise they are shocking I mean if we want to use that terminology right they are shocking just as much as the change in tastes which is considered the change in the data the exogenous shock is shocking so that adjustments are every bit as much a shock to people as original shocks to the system exogenous shocks, the changes in the data are and the only reason that people don't generally recognize this the only reason that people don't generally recognize this I think is because in neoclassical economics the idea that adjustment might be have surprising elements that adjustment might not be something which could be known before a process takes place doesn't really figure in very well because first of all there aren't any processes most of the time and secondly because there isn't a conception that competition discovers anything really new now there are always exceptions to my generalizations about neoclassical economics and it's interesting even back in 85 when we wrote our book I think there's a chapter somewhere in which it said that one of the difficulties in arguing against neoclassical economics is it's so spongy it's so flexible that almost anything is going to have some exceptions, any generalization but nevertheless I think that's still the basic idea inherent in neoclassical economics is that adjustment isn't anything isn't much of a surprise and therefore the distinction between exogenous and endogenous can proceed extremely rigidly most of the time now Hayek as I say did understand this feature of competition and that competition discovers things that otherwise people don't know but of course that's at variance with his view that you can keep a strict separation between exogenous and endogenous but there are other ways in which Hayek sees that the loosening of a concept of coordination is important in the very same article competition's discovery procedure he developed a concept of order his words, his word, order which quote can be preserved throughout a process of change end quote now this looser concept of coordination came out of a recognition that adjustment processes involve the disappointment of some expectations and this is where he seems to see that the concept of equilibrium as he has previously used it has limitations because in competition's discovery procedure he says quote a high degree of coincidence of expectations is brought about by the systematic disappointment of some kinds of expectations so what is he saying? equilibrium or equilibration is brought about by disequilibration it's kind of paradoxical I have a few other paradoxical statements to make here and I'm kind of embarrassed by them because I don't want to be people to go away from this saying that Rizzo has developed this sort of eastern philosophy way of talking that equilibration is brought about by disequilibration is only the first one I can treat you with but it's true I mean it is true that the degree of coordination that we in fact do enjoy and let me keep that open or bracket that in terms of what degree that is but the degree that we do enjoy is brought about by the systematic disappointment of some expectations by a certain amount of disequilibration a certain amount of shocking of the individuals within the system okay so I think this begins to tell us some thing about the background to why it's important for a concept of equilibrium that makes room for a concept of equilibrium that is consistent with processes of equilibration be developed because if the very process of equilibration as we generally call it involves a certain disordering a certain disequilibration then it is inconceivable that the equilibrium that could be brought about the equilibrium as an ideal type that could be brought about would be a perfect coordination would be a perfect dovetailing of plans because the very process that brings about whatever dovetailing that does exist is fraught with uncertainties and shocks and disappointments okay now remember the second reason I gave for why we need a looser concept of equilibrium is that we need a concept of equilibrium as a precondition for discovery driven processes remember that I said that disequilibrium doesn't have enough structure for there to be learning as far as the concept of disequilibrium tells us it could be totally chaotic I mean there is no limits placed on what a disequilibrium is but I think limits have to be placed in order to talk meaningfully about the discovery that takes place in markets so the learning that we are all concerned about requires then this intermediate degree of structure let me talk a little bit about that what this intermediate degree of structure can be first maybe we can begin with the level of the individual because I think here it's very commonsensical to see why we need structure in order to learn an individual we know from the philosophy of science can learn only if certain things are taken for granted or treated as given there's something called the Duhem quine thesis and all that really says is that we can never test a single hypothesis but only sets of hypotheses in other words not everything can be tested simultaneously everything that we believe can't be tested simultaneously there's background knowledge there's auxiliary hypotheses for example in the natural scientific context one auxiliary hypothesis might be a hypothesis or a hypothesis about the observational instruments that we use we're looking up at Jupiter and we have a hypothesis about the rings of Jupiter or there are rings of Jupiter now not only Saturn but there are rings of Jupiter we might have a hypothesis about the moons of a certain planet and we're testing that hypothesis but the observations that we use go through this telescope well there are hypotheses about telescopes and whether they show us things that are really there and the time lapse and various factors like that so there are auxiliary hypotheses that we have to take for granted in order to test the main hypothesis there are also initial conditions that we're presupposing so there are all these factors that we are in a way simultaneously testing so in order to test any single hypothesis we have to take a lot of other things for granted and the things we take for granted are in a way the order that we're presupposing it's that set that knowledge that we take is given that constitutes a context in which continual learning can take place additional learning can take place so at the level of the individual the individual scientist in this case but we can go beyond science into everyday learning in the sense that in our everyday perception of the world we're taking a lot about the world for granted in an attempt to learn some additional or marginal factors it's very much consistent with the marginalist approach in economics small changes of what we're concerned about so the point that I'm making here is that order is necessary at the level of the individual in order for learning to take place it's also necessary at the level of society and here I want to give an example which has been discussed by Brian Loseby in a very important book called Equilibrium and Evolution unfortunately it's a book which did not remain in print very long but I think it's one of the most important books for people to read in order to get insights as to as to what might be the future development of ideas within the Austrian tradition Loseby does not consider himself an Austrian but I think his ideas are extraordinarily important for Austrians to take account of and the example that Loseby gives takes off from the dictum that we all recall from Adam Smith Adam Smith said as we all know the division of labor is limited by the extent of the market and even George Stigler wrote an article with that title so it's very important Loseby says that we could in effect says that we could easily read extent of the market as degree of coordination so we could rewrite this the division of labor is limited by the degree of coordination of markets now why is that well if you think about it highly divided labor and specialization can't take place unless there's trade and trade isn't going to take place it's discoordinated if I can't be sure that I can go out there and buy clothes when I want them then I'm going to wind up making my own clothes same thing with other products so the degree of coordination is extraordinarily important for the division of labor and specialization to take place now one of the consequences of the division of labor according to Smith and I guess it's the fourth reason that's generally not paid much attention to is the idea that division of labor promotes increase in technological knowledge as people concentrate on specific tasks they learn more about the elements that go into those tasks and therefore they learn more about the possible ways that Smith argued of mechanizing the tasks so that technological developments are more technological advances are more likely to occur in a context where people have much more precise knowledge of the elements constituting a productive process now this has a very very important implications because first of all it immediately throws out a whack the whole idea that the division of labor could be viewed in a purely static context which is of course a thing which we're often taught in economics that we talk about the division of labor and still maintain all of these nice what are called marshallian curves that allow for a existence of a competitive equilibrium now we also know that Marshall had certain problems with all that but one of the reasons that Marshall had problems with this is because Marshall understood better than the neoclassical descendants of Marshall Smith's point that the division of knowledge the division of labor leads to an increase in technological knowledge so there are a couple of things that we need to recognize we need to know that for knowledge to grow there must be a certain amount of coordination both of the individual and the social level coordination of ideas at the individual level is most especially what I'm getting at at the social level a certain coordination of individual actions and that secondly that this degree of coordination is itself unstable because changes in knowledge that the coordination makes possible constitute changes in the data and therefore disequilibrating ok so now let me get more specifically to the point what concept of coordination I've been vague about that and I'm going to try to be more precise but I don't know how precise I'm going to get because I'm not sure how precise it is in my own mind go back to the Hayekian idea of order Hayek says in competition as a discovery procedure once again the expectations of transactions to be affected with other members of society and on which all the plans economic subjects are based can be mostly realized mostly realized now the interesting thing about this is that he's obviously developing another word other than equilibrium for a concept of coordination because here he's trying to separate out the concept of coordination from the concept of order because in one hand he used a concept of coordination as a purely mental construct in this case he's using a concept of coordination as what is called an ideal typical construct that is to say a construct which is he believes as he says later in the same passage the real world to a certain extent approximates so being driven by the need by the recognition that these processes themselves create disorder he says well look the real world can't look like what my mental construct looked like that is perfect coordination the real world is going to look like a world in which well most of the time people can affect their plans but he's getting I'm not saying he has developed an idea which is equivalent to what I'm trying to convey but what I'm saying to you is that in Hayek there are the roots of this idea of a looser concept the roots are made necessary by his concern about describing at least in approximate terms the real world in another article called principles of a liberal social order which is about normative issues again an attempt to get at the real world but here in a normative way and here he gives a definition of abstract order which is very much consistent with the basic theme I'm trying to convey to you he says that abstract order he says that we ought to try to achieve an abstract order which as a whole provides the best chance for any member of society selected at random successfully to use his knowledge for his purposes for any member of society selected at random successfully to use his knowledge for his purposes but it's only the best chance so that means that a lot of people will be frustrated even in this ideal world of the rule of law that he advocates so once again a concept of imperfect coordination now what's unsatisfactory or at least not entirely satisfactory about where Hayek goes with all of this is that this is entirely the concept of order or equilibrium as an end state or a result of some process but nowhere in the discussion does he provide the kind of basic structure necessary to get the process going so what I'm saying is that a concept of order that is that is loose is not only to be conceived of as the end state of a process but also to be conceived of as a generator of that process now they may not be exactly the same structure may not be exactly the same structure or order that does both jobs but nevertheless I think that's what we've got to be headed for so let me talk a little bit now about something that I've briefly raised throughout this talk and that is the idea of the or at least briefly alluded to the idea of the scientific research program and learning Brian Loseby again makes a big deal about this the importance of the scientific research program he puts it in a Lakotosian framework what I'll say will follow that a little bit although I don't think we need to take that all that seriously because really all he's talking about is this structure of learning which is not completely deterministic but before we get to the scientific research program let me talk a little bit about learning in Austrian economics at this point the major theory about learning that we have in the sort of Austrian economics proper that's sort of narrowly conceived is Kirzner's theory of entrepreneurial learning I suggest that Kirzner's theory of entrepreneurial learning is instantaneous learning and therefore it's out of time now I have I have perceived that for a long time but just the other day I went into his office one of the virtues of working with Kirzner as you can sort of ask him directly and usually he gives you a straight answer and he says here yes I believe that entrepreneurial learning is instantaneous it's a flash of insight those of you who have seen him lecture notice that sometimes he does sort of snap his finger when he talks about the entrepreneurial alertness so it is instantaneous the familiar arbitrage examples that he gives illustrate that right? Apples here at ten cents, apples there at five cents you arbitrage the difference at a point in time right? There's no time elapsing but even the inter-temporal exchanges apples five cents today apples ten cents tomorrow even allowing for time preference and all that stuff there's a difference and but the insight that there is this difference this arbitrage inter-temporally is again instantaneous so learning in Kirzner's system has many of the attributes of neoclassical economics namely it's out of time and that accounts for the sort of deus ex machina version of attribute of it that is it is a alertness to the rescue right? Alertness to the rescue of what? Alertness to the rescue of movement toward equilibrium I don't think that's adequate I think what's happened is this view has replaced one error with another error the Bergson the philosopher Bergson makes a distinction between two errors in dealing with these issues relating to time the first error is radical mechanism now we Austrians have beat radical mechanism to death as far as Austrian economics is concerned and that's a big as far as radical mechanism is dead it can't recover and that's it the stake has been driven in the heart alright? but there's something else called radical finalism radical finalism is the view that the end state implicit equilibrium and the current data sort of exercises a kind of pull on the system so that at any point in time there's an implicit equilibrium and at that point in time all the adjustments sort of pull toward or a pull toward that implicit equilibrium right? that's the idea that Kersner has expressed as entrepreneurial alertness is equilibrating right? meaning it's drawn toward the data implicit in the equilibrium at that moment in time that's radical finalism now the reason it's inadequate from my perspective it's precisely because it ignores the whole problem in clearly distinguishing and or rigidly distinguishing between equilibrating and disequilibrating behavior by its nature because competition is a discovery procedure because we can't predict the results of markets equilibrium adjustments so to speak are shocking they surprise people and therefore they're disequilibrating Hayek says what coordination we do enjoy is the result or is brought about by the disappointment of expectations of some people because they can't predict the results of the market process so I think the radical finalism ought to be avoided as well as the radical mechanism helps us to a certain extent because it is a it is the concept of research program is an order but it's an incompletely specified or incompletely determined order let me give you a basic idea of what I mean a research program and this is consistent with our colloquial understanding of what the words mean you don't have to be an expert on Lakatos to get this idea a research program tells us among other things what we can and can't do to acquire new knowledge it gives us the rules of the game Lakatos calls it the negative and positive heuristics but it just gives us the rules of the game of acquiring new knowledge but it doesn't tell us what the new knowledge is going to be it doesn't determine it to say there are certain rules of the acquisition of new knowledge doesn't prejudge the outcomes otherwise it wouldn't really involve the growth of knowledge at all it would just be you know saying what you already know in different words so a research program doesn't determine exactly what it will be learned but provides contours, provides certain order, provides certain hypotheses which you don't for the time being challenge you know the hard core Lakatos calls it I once wrote an article trying to compare mesas with Lakatos in this respect and probably I wasn't quite right in a number of respects but nevertheless there are certain things that we as Austrians at least for the time being are not willing to challenge and maybe we'll never be willing to challenge it they're really so basic about our understanding of human beings but then there are other things we will be willing to challenge well that's the order that that sort of hierarchy of things that are unchallenged or for the time being unchallenged things that we do challenge things that we protect by more elaborate hypotheses ideas about what we can do in the search of knowledge or what we can't do this provides an order but an incompletely specified order but the learning that occurs in a research program is not only in that sense partly orderly and partly surprising but also in a very basic and important sense for me anyway who worries a lot about time and as I get older even more about time in a different way but it is learning in time this is learning in real time it's learning in the extended present that is that by the extended present I mean a present which takes account of what we know in the past memory and takes account of memory and takes account of anticipation memory a research program's memory in effect is the past knowledge perhaps the hard core of irrefutable propositions what we're left with by previous investigations the expectation is the filter the filtering of our new experience that the negative and positive heuristics provide it's the limits that it sets to our learning but these limits as I say are incompletely determined so this is a way I think of grounding learning in real time not making it a deus ex machina not making it a sort of spontaneous something to the rescue but making it grounded in what has gone on before and what we expect to happen in the future and in a way that I think is much more consistent with the reality of how people learn the empirical reality of how people learn research programs could be viewed as islands of coordinated learning we could talk about firms for example as embodying a research program VIT has done work in this respect and I don't believe he's used the term research program but nevertheless I think that's one of the ideas that's embodying in this the entrepreneur conveying his sense of the mission of the program to other workers is a critical idea the community of scholars and researchers are obviously involved in research programs to some lesser extent we might consider an economic system has having a common framework to the extent that there is a common framework of law a common framework of other institutions ok in the final analysis then there really are two concepts of coordination that we must use there really should have been titled better concepts plural of coordination the first is that of an outcome of the market process the ideal type people can mostly achieve their goals can mostly implement their plans they are mostly coordinated with those of others but mostly leaves room for a lot of messes second a shared mental model or structure of learning that's also an order a kind of coordination but that's one that generates learning and generates the process that leads to this result of we can mostly implement our plans so the imperfect machine of plans is the state of affairs the state of coordination the research program or the activity of coordination of coordination the coordinating activity is rooted in something like the research program and again I don't want to be any of us to be hung up on the Lakatosian framework here but this is just one way of conceiving it let me end up by according from you from a book on the natural sciences called science order and creativity David Bohm and F David Pete 1987 and it's about structure but when they use the word structure we can we can read things like order coordination those are the words that we have been using in this talk he says that they say structure is often treated as being static and more or less complete in itself but a much deeper question is that of how this structure originates and grows how it is sustained how it is finally dissolved structure is basically dynamic and should perhaps be better called structuring while relatively stable products of this process are structures so structuring creates structures but even these later ladder structures should not be considered as basically static for they are the results of processes which sustain them for a time more or less within certain limits so the structures are not deterministic but more or less just what I was getting at more or less coordination as a result as with order so which structure there can be no complete definition rather to put it again now this is another one of the eastern things I'm invoking whatever we say whatever we say structure is it isn't alright there is always something more than what we say and something different well that's the research program right you can't exactly define the research program take something that's neoclassical economics can you exactly define what it is the problems that Jerry and I were having I think just go to validate our theories how's that for seed your views at everything but I think it's true because the research program couldn't give rise to new knowledge unless it were incompletely determined so this so this structure or this structuring whenever we say structuring whatever we say structuring is the way he's using the word structure here is in the sense of structuring whatever we say structuring is it isn't there is always something more than what we say and something different at every given stage it is possible to abstract a certain structure as relevant and appropriate but later as the context is made broader the limits of validity of this abstraction are seen and new notions developed a research program right as certain limits are seen you make adjustments you change what you what your goal is you change your technique it happens all the time you can't for once and for all lay down the absolute rules of learning otherwise you never really will learn anything so structuring has to be incompletely determined well back to what we said the process of coordinating is incompletely determined so the equilibrium the order that generates learning is incompletely determined and what it results in is an order as an end state or an ideal type that is incomplete in the sense that it doesn't work fully because the very process is a messy process involving shocks and disequilibration so it's really two concepts of order but I think both are really necessary for us to have a better handle on the issues of spontaneous order that we are all concerned about today thank you