A macro Economy as an Emergent Ecology of Plans

4. Four Illustrations of an Ecology-of-Plans Framework

Theoretical frameworks come with cost as well as benefit. The benefit is the ability of a theoretical framework to cast light on the chosen analytical territory. Theories are, of course, products of thought, and choosing one direction of thought requires renouncing some alternative direction. This renunciation of the theoretical products not pursued is the cost of choosing a particular theoretical framework (Buchanan 1969). To explore those other territories requires construction of different theoretical frameworks. A choice-theoretic macro, for instance, can deepen our understanding of the implications of presuming that the statistical constructs of what are designated as macro variables comprise a systemic equilibrium. It cannot, however, allow a theorist to plumb the implications of presuming that societies are never fully placid and peaceful because they are also arenas of conflict among the plans of the members of a society (Collins (1994) (Coser 1964) (Jacobs 1992), and where the systemic qualities of a society are emergent features of complex patterns of interaction among the members of society (Aydinonat 2008). To theorize about such emergent, systemic qualities requires some such alternative conceptual framework as an ecology of plans.

The value of any theoretical framework resides in its ability to illuminate territory that other frameworks could not illuminate or could illuminate only by embracing what are clearly analytical fictions under a presumption that the goodness of fit is sufficient to warrant use of the fiction as a substitute for seeking to penetrate more deeply into reality. This section explores briefly from an emergent-theoretic framework four topics that have currency within the choice-theoretic macro literature. The point of these examinations is not to offer definitive alternative to choice-theoretic formulations but is to illustrate some of the differences that an emergent-theoretic framework can bring to bear on macro-level phenomena. In each of these illustrations, macro or systemic observations emerge through micro-level action and interaction and are not direct products of choice.
A. Plan coordination without Say’s Law. The presumption that macro observations pertain to states of competitive equilibrium brings Say’s law in its train. To be sure, Say and the classical economists reasoned plausibly in terms of empirical tendencies and not demonstratively in terms of the logical implications of a set of theoretical presumptions, in keeping with the examination of the distinction and the difference it makes in Clower (1994, 1995). For Say, the law of markets described an empirical tendency that worked with variable speed. In contrast, a theoretical framework that postulates that macro-level observations, which it should be noted are themselves products of theoretical construction, are of states of equilibrium must incorporate Say’s law as an implication of competitive markets. When systemic reality is reduced to a representative transaction, the possibility of miscoordination vanishes inside the analytical reduction because miscoordination is meaningless between two rational actors. Miscoordination cannot be explained by starting from a presumption of systemic equilibrium because miscoordination speaks to unexploited gains from trade, which in turn implies false trading in the form of unsuccessful plans. But false trading is rendered illogical by the presumption of systemic equilibrium.

An ecology of plans holds analytical space for miscoordination among the plans of market participants. Indeed, the central analytical task becomes one of explaining the high degree of coordination we observe within societies when there is no parade marshal who organizes market participants. To explain that coordination is, of course, a different task from assuming the existence of such coordination. One reasonable presumption for explaining the generally coordinated quality of economic activity is recognition that people prefer success to failure in pursuing their plans. A second such presumption is recognition that the success of a plan is determined subsequent to making a commitment to pursue a plan. A third reasonable presumption is that the success of a plan is to a considerable extent determined by people other than the creator of the plan because it also involves the willingness of some people to supply inputs and of other people to demand outputs—and both of these in turn depend in other plans that might also be inserted into the economy and which were unknown at the time the plan in question was created.

All plans are set in motion by creating particular combinations of capital goods and capacities to execute the plan. If that plan fails to fulfill the expectations on which it was based, it will be abandoned in some fashion, typically through salvage of assets and not through destruction. Within a setting where plans sometimes fail, market participants will develop institutional arrangements for abandoning plans. Arrangements regarding bankruptcy and business reorganization are emergent phenomena of interactions among participants in a failed plan who are trying to go forward in the face of a failed plan. It’s reasonable to presume that those arrangements can vary in their systemic character. For instance, under private ordering the owners of the assets of abandoned plans choose how to dispose of those assets. In the presence of public ordering, however, political agencies are able to shape and channel that disposition. The systemic quality of different institutional arrangements for accommodating the abandonment of plans is a component of a macro ecology of plans.

Axel Leijonhufvud (1981) (1993) advances the claim that economies might be naturally stable within some zone of normalcy but lose those stability properties outside that zone. This is certainly a plausible proposition regarding the applicability of Say’s Law within an ecology of plans. The historical record shows that depressions occur and are normally short lived, but some of them last for quite some time. Within an ecology, a commercial plan typically ties together numerous people in a web of expectation. The subsequent failure of a plan will thus typically exert negative effects on numerous people. We know from historical observation that economies recover from such disruption just as we know that forests recover from fires. What we don’t know much about, though, is the speed of recovery and the impact of institutional arrangements on that speed. For instance, Robert Higgs (1997) and Jay Cochran (2004) provide grounds for thinking that policies undertaken in the presence of disruption can slow rather than hasten recovery. Regardless of the merits of those claims and the impact of policy actions on the expectational processes through which the restoration of normalcy might be facilitated or impeded, those claims can be examined only within an ecological orientation where macro-level phenomena supervene on micro-level interaction. Whatever might come from such an examination, Say’s law would not be a demonstrable quality of a postulated equilibrium but would be a plausible quality of a well-governed ecology of plans.

B. Monetary processes and central banking. Within choice-theoretic macro a central bank and a state treasury would be treated as macro-level entities. Within an ecology of plans, however, those entities, like all acting entities, operate on the micro level, with macro level results emerging through networks of micro-level interaction. This alternative assertion does nothing to deny such staple quantity-theoretic claims as the ability of economic interaction to take place equally well under different quantities of money under price flexibility. To be sure, that assertion belongs to the realm of demonstrative reasoning, and does not imply or suggest the empirical irrelevance of monetary variation, for this is the territory of plausible reasoning (Polya 1954). It is also the territory of open systems of thought in contrast to closed systems of thought suitable for demonstrative reasoning, as Sheila Dow (1996) explains in developing a contrast between Cartesian/Euclidian and Babylonian modes of thought.

The quantity theory is, of course, typically presented in aggregate terms as if it applied to the macro level, just as the equality between saving and investment is typically presented as pertaining to the macro level. Within an ecology of plans, however, macro resultants emerge out of micro-level interaction. In consequence, the interpretation of macro-level observations as involving equality between saving and investment or between money demand and money supply require similar equalities among individuals on the micro level. In the absence of such equalities, interaction on the micro level will generate turbulence at the macro level. How much turbulence will accompany the inconsistencies among plans that those inequalities point toward is a topic to be explored, and with some effort to sketch some of this in a framework of agent-based computational modeling set forth in Seagren (2011).

Within the ecology-of-plans framework, there is no direct relationship between central bank actions and macro aggregates because that relationship is intermediated by structural or connective patterns among the micro units that constitute the macro economy. To the extent those connective patterns are relatively slow to change, there will be persistence across periods in macro-level observations. Still, a statistical relationship is not a theoretical relationship, as illustrated by the effort to develop non-Walrasian approaches to macro theory illustrated by Gatti, et al. (2008) and the essays collected in Collander (2006). This is not to deny that purchase of government debt by a central bank can generate changes in such aggregate variables as prices, outputs, and employment. It is only to bring into the analytical foreground the significance of the networked structure of micro-level interaction for understanding both the causes of those central bank actions and their consequences. These phenomena cannot be captured adequately by remaining at the macro level, for a central bank resides at the micro level along with regular banks and other enterprises. A central bank operates within some networked structure of relationships, with different structures having consequences both for central bank activities and the consequences of those activities. This is a general feature of networks where knowledge is local and distributed.

With reference to Figure 1, a central bank is one of the triangles on the micro level of action. It operates through the connections it has established with other entities in the ecology: it acts as an entity inside the ecology, thereby contributing to the emergence of systemic qualities; it does not act on the ecology as if that ecology were reducible to some point-mass entity. To be sure, a central bank exemplifies what Roger Koppl (2002) calls a Big Player, which is a participant in the economic process that is not subject to the ordinary rules of private property and residual claimacy much as the political plaintiff mentioned above is a Big Player. Big Players act differently from ordinary market participants, which can be a source of uncertainty and turbulence because their actions are less predictable to other participants. Different patterns of interaction are likely to generate different macro observations, and with those observations not the province of the central bank alone because they also depend on patterns of interaction among market participants. Principles of spontaneous order thus play out within the context of macro theory. Indeed, it is at the macro level where principles of spontaneous order would be at work, for spontaneous order and unintended consequences are products of interaction as distinct from action (Schelling 1978) ( Aydinonat 2008).

The point of this alternative formulation is not to derive some alternative relationship between monetary changes and changes in outputs or prices. It is rather to pursue an alternative program of micro-foundations that reflects emergence and supervenience in micro-macro relationships. Doing this brings into the foreground relationships that are suppressed when macro entities are related directly to one another. When a central bank is conceptualized as acting within a network of connections and relationships, the establishment of those relationships and the work they do become of central analytical interest, whereas they are irrelevant when attention is focused on the macro level. For instance, much central bank activity operates to regulate credit contracting, which in turn presumably modifies the structure of production within a society from what it would otherwise have been, and with macro-level consequences emerging from that change.
C. Political economy, public debt, and Ricardian equivalence. Public debt has been mostly examined from the macro level, as illustrated by Robert Barro’s (1974) claim that public debt is not a source of wealth to a society. This feature of public debt is an implication of double-entry accounting applied to a closed system treated as a single entity. Within such a single entity, as standard macro theory conceptualizes its object, the replacement of current taxation with public debt must entail future taxation of equal present value. Much of the debate over Ricardian equivalence has concerned the stimulative impact of public debt and fiscal policy, with Ricardian equivalence implying that there would be no such impact.

Within the ecology-of-plans framework, public debt must be an emergent resultant of interaction at the micro level. Once this is recognized, it is possible both to maintain the double-entry truth of Ricardian equivalence and to recognize that public debt can have stimulative properties, only that stimulus will be directed at particular activities within the ecology and not at activity in general. The ability to recognize both properties simultaneously appears as a possibility within the ecology-of-plans framework while it is excluded by the very construction of the choice-theoretic framework. That recognition starts with realization that government is not an indebted entity but is a type of financial intermediary that operates within a transactional nexus that links bondholders and taxpayers. For a closed system, such as described by Figure 1, public debt is held by a subset of the national citizenry. There are, of course, two possible options to the creation of public debt. One is increased taxation and the other is reduced public expenditure. In comparison with increased taxation, public debt is a means by which those who buy bonds are paying taxes from those who do not buy bonds. At some later date, of course, taxpayers will pay higher taxes to amortize the debt. The government, in any event, is an intermediary in the transactional nexus that connects bondholders and taxpayers. As a matter of double-entry accounting, the sum of the debits must equal the sum of the credits, which is all that is entailed in the Ricardian proposition.

Within the ecology, however, it would be generally mistaken to treat all taxpayers as being in agreement with respect to the transaction. Bondholders, of course, willingly buy the bonds. With respect to taxpayers, some may well support the replacement of current with future taxes but others would surely favor neither debt nor expenditure. The resulting outcome might be advantageous to some while being detrimental to others. Public debt can change net worth at the individual level even if it doesn’t change net worth at the societal level. Furthermore, it is the micro level where action and interaction occurs. To be sure, there is no reason in principle why Ricardian equivalence can’t be brought to the individual level of action. This would result if public debt were assigned to particular individuals in stipulated amounts at the time of its creation, and if that debt were treated legally as ordinary debt, even passing into a decedent’s estate. In this case, sentiments about debt-financed spending would surely play out differently than when individual liabilities for public debt are not assigned but are left as a residual to be determined at some later date.

The depiction of the micro level of action in Figure 1 includes both market-based and polity-based enterprises. Polity is no more treated as a unified entity than are market-based enterprises, as illustrated by Wagner (2007). The ecology of plans entails both cooperation and competition among the enterprises that comprise the ecology. With respect to the stimulative quality of public debt, suppose the distinction between points a and c in Figure 1 is a projected outcome of some stimulus program, recognizing that such a projection would follow only from some and not all macro models. A significant implication of that macro projection is indifference about the composition of the added expenditure. Such a claim is clearly unreasonable, as primacy of interest always resides in the composition and not in the simple fact of expenditure. The source of such programs likewise resides at the micro level where action takes place; what is commonly described as macro policy emerges through interaction among entities at the micro level, leaving emergent products to be discerned at the macro level, as illustrated by Wagner (1991).

D. Population thinking and efficiency wages. When an entire economy is characterized by a production function that is linear and homogeneous, competitive equilibrium where each input receives the value of its marginal product is accompanied by exact exhaustion of the total product. From this analytical point of departure, a family of efficiency wage ideas has been advanced to give an account of involuntary unemployment, as illustrated by Akerlof (1982) and Shapiro and Stiglitz (1984). While there are several varieties of efficiency wage theory, they all involve claims that firms will be driven by efficiency considerations to pay workers a premium beyond what is thought to be consistent with the marginal productivity theory. For instance, it is costly for a firm to replace a worker, but the usual interpretation is that payment that matches marginal productivity will leave workers indifferent among firms that have the same production function. While a worker who leaves will be replaced by an equally productive worker, the firm will lose because it has to bear the cost of finding a replacement. Some wage premium can this increases the value of the firm by reducing turnover. By paying a wage in excess of marginal productivity, however, total employment by the firm will fall.

Within the choice-theoretic framework that allows reduction of macro to a representative choice or transaction, the efficiency wage theory would seem to give an account of involuntary employment. The ecology-of-plans framework, however, pursues population thinking and not representative or average thinking. Once the claim about wage premiums to reduce turnover is incorporated into a framework based on population thinking, one is led immediately to ask what happens to those workers who are presumed to become involuntarily unemployed. What results is recognition that the condition of being unemployed is a product of the theoretical framework that postulates a given set of firms all of which operate under a standard form of wage contract. Within a population-based framework, however, the types of firms and the forms of employment contract are themselves variables that emerge out of interaction among market participants.

When society is treated as an ecology of plans, efficiency wages can’t account for involuntary unemployment. They can account for a change in the organizational pattern of activity in society, but that is all. It is reasonable to think that a wage premium will reduce employment by a firm from what it would have been without the premium. It is not reasonable, however, to extend this presumption to the entire population because it is also necessary to ask what happens to the people who don’t receive the premium. Those people have options. Self-employment is one option, in which case the share of activity organized in large firms will shrink in the presence of efficiency wages. But self-employment isn’t the only option. Expansion of employment in relatively small firms is another option, an expansion in the use of various non-wage contracts is still another option, and an expansion in employment in such entities as non-profit firms and cooperatives is a further option. What efficiency wage theory explains, and all that it explains, is why the volume of employment in large organizations is less than what it would be if such wage premiums were not paid. Those premiums prevent some people from securing employment with those organizations, but it does not prevent those people from securing other forms of employment, particularly once it is recognized that the forms of employment is not given but is a emergent quality of interaction on the micro level.

Efficiency wage theory is really a theory about the limit on the size of large firms and not a theory of involuntary unemployment, under the presumption that large firms have to pay a premium to secure some semblance of loyalty that small firms can obtain in other ways. The organizational pattern of activity within the ecology of plans will depend on the costs and gains of putting together and maintaining different organizational frameworks. This is a quite unexceptional proposition once viewed ecologically. A further ecological insight the postulated advantages to large firms might not be as strong as efficiency wage proponents seem to think, and for reasons relating to emergent phenomena and spontaneous ordering. The efficiency wage premium works because of the presumption that employees can be terminated at will. Once upon a time this was true, but it no longer is as termination, especially in larger firms and bureaucracies has become a difficult, procedurally heavy process. Such changes to the operation of contractual relationships, moreover, should be expected to lead to such further changes within the ecology of plans as increased subcontracting and temporary employment, all of which would represent emergent, systemic qualities of micro-level action and interaction.

5. A Closing Note

To treat macro phenomena as emergent products of spontaneous ordering processes, and with the standard organizations associated with “policy” likewise operating on the micro and not the macro plane, is to assert neither the impotence of policy nor the universal beneficence of spontaneous ordering. Actions by political agencies can exert macro-level effects, as can actions by market-based organizations. Spontaneous ordering is not universally beneficial, as illustrated with especial cogency by Thomas Schelling (1978). Spontaneously generated orders, however, are not subject to direct and immediate control through policy, and for two reasons: (1) political policies themselves arise through competitive processes within a setting of specialized and divided knowledge where there is no such thing as a God’s-eye view and (2) people will speak back, as it were, to policy efforts, and the effects of that speaking back can play out differently depending on whether those policy efforts seem to facilitate what people are seeking otherwise to accomplish or to direct people into channels or paths they desire not to travel.

The spontaneous order orientation toward macro phenomena that has been adumbrated here connects directly with the concerns of constitutional and institutional economics by probing how different constitutive frameworks at the micro level can influence the macro level patterns we observe, perceive, or experience, as noted in Foster (1987) and Oprea and Wagner (2003). The concern with emergence and turbulence also points toward a non-equilibrium style of theorizing that avoids grounding systemic theories in a presumption of harmony represented by an equilibrium set of market-clearing prices. In this respect, conflict is an on-going feature of life in society, as a feature of natural turbulence that is mostly confined and rarely widespread, though not always, and which can have salutary macro consequences as noted by Lewis Coser (1964). Whether policy action within a particular constitutional framework acts to mitigate or intensify conflict and turbulence would be a question of central interest within a theory concerned with the properties of social life within an emergent ecology of plans. In any case, conflict and its governance and not a presumption of harmony would come to occupy the theoretical foreground, as illustrated by Bowles and Gintis (1993) and Hirshleifer (2001) and also Collins’s (1994) treatment of the conflict tradition within sociology

A theoretical framework is an organon of complementary pieces of thought that work together. The choice-theoretic framework is one such organon, the emergent-theoretic framework is another. It sometimes happens that a piece that is suitable for one theoretical framework is introduced into a different theoretical framework, and often found wanting. The framework for macro theory associated with Robert Clower and Axel Leijonhufvud across many works, both individually and separately--for instance Leijonhufvud (1993) and Clower and Leijonhufvud (1975), in addition to other works cited below and many others not cited—have often been interpreted as contributions to choice-theoretic macro. It seems eminently plausible that this mis-interpretation has set back significantly the development of an ecological framework for macro theorizing, for it is clear that the questions they address and the manner in which they sought to address them were suitable for an ecological framework. In this respect, Shackle (1974) notes the unsuitability of applying an equilibrium method to a framework that is concerned with expectation and the ex ante-ex post gap this entails. In other words, the value of any theoretical construction depends on the available of complementary pieces of intellectual capital, and the line of theorizing set forth by Clower and Leijonhufvud provide many pieces of thought that have value for bring ideas of emergence to bear on the ecology of plans that comprise the macro level of economic interaction.

Table 1: Contrasting Macro-theoretic Frameworks Choice Theoretic (DSGE) Emergent Theoretic
Equilibrium states	Emergent ecologies
Reduction of macro to micro	Supervention of macro on micro
Society as placid parade	Society as turbulent crowd
Macro as simple phenomena	Macro as complex phenomena
Separated Political Economy	Knotted Political Economy
Prediction/policy advocacy	Understanding/explanation