Mechanisms of Political Economy


Essay elaborates Friedrich Hayek’s theories on economics, complexity, knowledge problem and just rules of conduct within the context of Indian socio-political order. It also attempts a causal explanation for the corruption of Indian political institutions while drawing a contrasting comparison with the productive role played by markets. The topic is broad and the content is focused on succinctly explaining the underlying mechanisms. Such an approach also reveals Hayek’s powerful explanatory framework structured on spontaneous orders.


Progression of a civilization depends largely on the values embodied in its institutions, these very values tend to shape the emerging individual plans. How this interplay influences the overall institutional evolution is also crucial. Indeed, it’s a bidirectional causal relationship. For example, democratic institutions determine our conduct but in turn we also shape its role through various electoral channels or through political parties etc.

Classical liberal view elaborates a mental framework to interpret this political process, also helps us identify those benign values which tend to foster a prosperous order. Without an explanatory framework it’s impossible to properly interpret a complex phenomenon like society. Such an attempt to define a worldview eventually involves varying degrees of collectivist or individualist thoughts. Here we explore the individualist ideas associated with F. A. Hayek’s literature on economics and jurisprudence.

Private Sphere  &  Rule of Law

Classical liberalism elaborates a theoretical approach to defining, protecting and enabling individual private sphere through equal enforcement of laws. It emphasizes individual’s autonomy to employ private resources for own purposes. In Adam Smith’s terms, it’s about enabling the freedom to exhibit our “propensity to truck, barter, and exchange”. Legal and political institutions should be, in that sense, a mere facilitator. Their role should be to enable transactions to emerge by eliminating certain forms of uncertainty.

Trade mandates autonomy over material resources, and property rights are in fact the only known mechanism to reliably determine the set of resources an individual can utilize for his planning. Laws are like the rules of a game, never designed to determine the outcomes, but only to influence the employed methods.

F. A. Hayek explicated in ‘The Constitution of Liberty’, unlike a ‘command’ or an ‘order’, law is not meant to direct individual efforts to some larger collective purpose. So, more specific the overall context of the application of a law, more it tends to resemble a command. For example, a legislation introducing affirmative action is actually a command. While a general and equally applicable automobile liability insurance mandate can be termed as a law. In other words, “a specific end, a concrete result to be achieved, can never be a law“.

The reason why it’s called the ‘rule of law’ as opposed to the rule of men is because of the very fact that the law applies equally to all. No one can be above the law. So, legal clarity is immensely crucial, any ambiguity within the law would automatically introduce a scope for discretion. An obscure law can then be subjected to inconsistent interpretations, in such cases we are not being ruled by the law but by the whims of government bureaucrats and judges.

Private property rights and rule of law are the essential instruments for development of markets. They are imperative for the extensive division of labor observed within any modern market economy. Eventually, all the elaborate institutional machinery has to be structured to protect these two integral attributes. In other words, legislation and dispute resolution should enable and protect individual private sphere without enforcing collective plans.

Market Process

Even a cursory study of various political economies will reveal that those societies which adopted strong property rights prospered. Several reasons, but at the core property rights framework internalizes both negative and positive externalities. It creates the vital profit/loss incentive and a personal sphere of influence for individuals to learn, adapt and employ scarce resources for the ends valuable to their fellows.

Like any other species on this planet, we are also motivated by self-interest. Even those who claim selflessness derive value from their selfless acts. Independent of the institutional structure, our innate survival instincts are geared to adapt. Market system harnesses this self-interest into a productive force. It provides the incentives to direct our time and resources, at a market decided price, towards the needs of our fellows. Prices are constantly being shaped by real market factors related to demand, scarcity, individual preferences etc. Indeed, markets with a price system do resemble a real-time democracy.

Profit incentive and competition compels market firms to adapt and cater to even the most impoverished sections of the society. In India, it’s probably most blatantly evident in areas like telecommunication and consumer electronics. In simple terms, markets exist for us to add value to each to other, it provides a framework to compete and discover novel methods for serve one another.

Hayek succinctly stated, when we move from a relatively small society to an extended market order, our transactions are mostly with unknown individuals. We are actually unaware of most of the entities involved in delivering services and material products right to our doors. Market actually creates an impersonal network by channeling help from the best avenues possible.

When combined with compatible institutional structure of property rights and rule of law, market prices act as a signaling mechanism for coordinating plans of dispersed actors. By following such a communication channel we can add value to even the unknown members of our society. Compared to all the proposed rival orders, only market enables such a unique impersonal price signal.

With the right institutional framework, market competition can act as a powerful discovery process. Bringing about a constant improvement in methods which enables us to support a growing population, and at the same time continue to improve our standards of living. Automobiles, telecommunications and e-commerce are all pretty good illustrations of market competition. As opposed to Indian public transport system, infrastructure and other utilities which are clear disastrous illustrations of price fixing and government enforced monopoly effects.

The goal should be an environment with stable laws, market competition and property rights. Scientific process is about adopting the right methods, it’s not about noble intentions. West did not plan their progress but they did employ institutions compatible with freedom under the law.

Democracy initially emerged within the Anglosphere to protect individual from tyranny. But, in India it’s employed as the means to voluntarily elect what Adam Smith describes as the ‘man of the system’ — “wise in his own conceit; and is often so enamored with the supposed beauty of his own ideal plan of government ” . Consequence has been a complete disdain for the individual life and property.

Indian Polity

Indian democratic institutions possess numerous commendable qualities; Constitutional checks and balances, independent judiciary, bicameral legislature, federalism, fundamental rights. Almost a Madisonian like structure — “arrange the several offices in such a manner as that each may be a check on the other”. But seems like the elected politicians conveniently decided to assign to themselves a structural role completely outside of this Constitutional order.

Right from the beginning the tendency was to consistently subvert property rights to enforce grand collective plans. The very first amendment to the Constitution itself was about enabling legislations disrespecting fundamental rights — a Constitutional amendment to circumvent the Constitution itself. The full list of amendments reflect nothing short of a complete dismantling of the rule of law. It’s a step by step devolution of a federal constitutional republic into almost an authoritarian parliamentary system.

Every individual possesses subjective preferences and values. Everyone has their own plans and rather unique combination of innate and acquired skills. Executing collective plans mandate that to varying degrees we all give up our individual aspirations and be subjected to the planner.

Such a grand collective planner would never possess the detailed knowledge about the compatibility of his seemingly amazing ideas with the underlying individual preferences. So the choice is whether we allow politicians to control and divert valuable resources to their pet projects or seek individual autonomy to decide our own fate. Within a world of resource constraints, it’s logically impossible to deploy collective plans and still manage to not give up a certain degree of autonomy.

Curiously, for an ancient civilization with a history of trade, Indian democratic experience has exhibited sheer disdain for private property. Certain sociopolitical factors like paternalistic social order, collectivist culture and the general ‘rule of status’ could have contributed to the problem. We might be perceiving the political sphere by employing the value framework used within hierarchical social relationships.

To build a free society we need to take individual responsibility seriously, mere obedience is an incompatible virtue. Demanding individual freedom mandates an intellectual courage to face uncertainty. Indians are able to accomplish this within their respective areas of work. But within the political sphere this value is simply not being emphasized. Somehow along the way we failed to realize that it’s the individual ingenuity expressed through market institutions that make a great civilization, not political cult of personalities.

A  Causal Analysis

F.A. Hayek’s famous essay “Why Worst Get on Top” has an explanatory scheme, it attempts to elaborate the underlying causes which lead to the emergence of Hitler. But it’s equally applicable to the pattern of corrupt Indian politicians rising to the top. It’s our own misconceptions regarding the role of the government and the values we seek in our representatives that has led to this coercive administrative state.

To quote Hayek, “It is not who governs but what government is entitled to do that seems to me the essential problem”. Indian electorate is indeed assigning to political offices an incorrect role of mobilizing resources. After giving them the authority we should not complain about their own self-interested behavior, which is to enrich themselves and their friends. In fact, a position of power which gives ample scope to control wealth tend to attract the kind of individuals who possess no qualms utilizing it for their own gains.

Indian democracy has crafted this political value framework in which only the unscrupulous or the absolutely innocuous puppets can thrive. A principled individual will hesitate at coercing others or deciding what is good for them. But because of our incorrect views, we have inadvertently enabled an electoral process mostly geared towards attracting the authoritarian elements of our society.

There is also an intellectual side to this, anyone who thinks through the complexity of a modern social order would realize their own limitations. The lack of comprehensive information, the time constraints with regards to studying and resolving innumerable connected problems are all insurmountable hurdles. A method of personalized problem solving is viable only within small villages or communes where everyone possesses a deep contextual knowledge of circumstances.

Various centrally planned schemes and their prioritizations impact many individuals in a positive or a negative way. A person who really thinks through the implications will realize that we simply do not possess the knowledge to take a purely utilitarian stand on many such issues.

Undoubtedly, compared to political processes which are highly susceptible to corruption, market resource allocation happens through the very impersonal mechanisms of property rights and price signals.

So, as long as we support massive collective schemes, we will continue to elect unscrupulous con artists. According to Hayek, these are the men who “desire to impose upon the world a preconceived rational pattern than to provide opportunity for free growth”.

Rules and Order

Hayek’s literature on classical liberalism emphasizes the critical nature of rules of conduct. It’s eventually rules that act as the interfacing mechanism enabling us to coordinate and cooperate with each other. Even something as simple as the act of greeting someone can be termed as a rule which enables us to communicate respect. In that sense, every advanced culture has their own set of rules which fosters a peaceful coexistence.

The nature of the emerging social order depends on the rules followed on the ground. Which could be something different from the rules dictated by some distant authority. We can observe from the Indian traffic pattern that the rules followed are not the ones decided by the bureaucrats. The traffic rules in use are the ones which enable the individual to navigate poor infrastructure. For example, the excessive use of horn is a mechanism to deal with poor traffic signs.

We can probably state, the norm is to disregard all the “legal” traffic rules. But in reality, certain other rudimentary rules are followed, it’s just that they are less explicit, may be sometimes dangerous too. But they are anyway perceived as useful by the individuals who are navigating the reality of local constraints.

Important point is, rules are followed when it adds value. We could interpret rules as instruments guiding various divergent private plans. According to Hayek, rules should enable a certain coordination of contextual expectations. To draw on the previous illustration, if you greet someone, there is a good possibility that they might return the respect — cause and effect coordination.

When legally enforced rules add little or no value, then they are perceived as meaningless constraints. We can interpret certain forms of administrative corruption as a mechanism to get around such ridiculous legislations. Quite like how the emergence of a black market resolves government created scarcities, corruption is an emergent norm to circumvent such institutional problems.

Eventually, such a disrespect for bad rules can gradually turn into a complete disrespect for all the rules. Lawlessness is the consequence of incorrect legal order. Essentially, in India, we had employed poor economic theories to overwhelm an otherwise competent set of political and legal institutions. In fact, in pursuit of ‘constructing’ prosperity, all the governmental branches have now been ironically transformed into exploitative machines.

General Market Pattern

Independent of the institutional structure, innate human instincts are geared to adapt. It’s just that the protection of private decision making sphere through the rule of law encourages an overall beneficial pattern of adaptations. Equal rules and freedom to associate enables an arrangement where only positive sum exchanges emerge. We are voluntarily forming various complementary groups which enhances our own chances of survival.

In Hayek’s own terms, markets are an n-dimensional network where every individual is simultaneously playing specific roles within numerous institutions and subsystems. For example, at work we are part of a specific consciously arranged group, but visiting our regular doctor places us within another dispersed group of other patients who frequents the same clinic. Here also we are essentially forming a complex complementary whole where every individual is better off being part of the group than he otherwise would be.

Shared rules of conduct and market price signals enable formation and contingent adaptation of numerous such dependent connected groups. Individualism is in fact a view which enables the formation of purely voluntary collectives. Markets are simply more efficient because its structural formations are about one thing – adding value. Here, without any central guidance we constantly self-organize into various groups, eventually enabling a much richer life.

Signals and Systems


Markets are not exactly planned but they do exhibit certain designed arrangement like qualities. Adam Smith most famously termed the mechanism as the ‘invisible hand’. Interestingly we do inhabit an environment with numerous transient variables like changing individual preferences, resource constraints, technological breakthroughs, material and human capital turnover etc.All these changing equations and yet no noticeable dramatic disruptions.

Seems like the most critical aspect of a market system is its adaptability. Constantly restructuring itself according to changing circumstances. Almost like a dexterous off road machine with interlocked moving  parts, constantly traversing  unknown terrains.

A system theoretic view is useful because it compels us to investigate abstract market structures and its synchronization tools. Hayek emphasized that prices can act as a signalling mechanism. By monitoring prices we can constantly restructure our own private plans, and hence adapt to constantly changing external circumstances. Quite like how an engineered machine part might interact with input patterns without actually comprehending what might have caused those signals.

Without prices we will end up probing all the transient environmental variables which might impact our plans, inefficient if not impossible. Indeed these price signals are impersonal mechanisms conditioned by the very known and unknown economic factors relevant to our individual plans. Whether it’s engineered or emergent, adaptive systems can be driven only via such impersonal communication channels.


Markets do have an architecture, it’s an arrangement of material and human capital catering to a set of utilities. In fact it can be perceived as an immensely complex machine with sub-systems and numerous causal connections. We are indeed aware of the objectives of an engineered system, commonly termed as use cases, and also how these use cases translate to specific schematic structures. But market structures and its overall objectives are always evolving. Here the capital structures of production are constantly being shaped by price signals determined by numerous individual actions. How markets prioritize various services and goods will eventually depend on a set of price relations reflecting the aggregate societal preferences. Almost like a real-time democracy.

Discovery Process

Unfortunately, with some rhetoric it’s possible to convince someone that with some additional central planning we can transform markets for the better. Engineering process itself can explain why central planning is unrealistic. If we go beyond simple structures, there are numerous divergent ways for designing systems.  Even a relatively simple circuit can be crafted by organizing the same set of logic gates in several different ways.

Engineering is the process of applying a set of scientific principles to solve a particular problem. So even here the challenge is the discovery of that theoretical set relevant to devising the most optimal solution. In other words, applied science itself is a discovery process, not an algorithmic execution of givens.

Similarly, for the same set of economic objectives, several structural combinations of human and material capital are possible. Without competitive discovery process there is no scientific basis for claiming superiority of planned systems. Even here, only with market prices can we can compare the relative efficiency of various structural arrangements. Essentially the famous calculation problem elaborated by Ludwig von Mises.

P = NP Hard ?

Merely to emphasize the organizational complexity of our system let’s assume that we have a comprehensive knowledge of all the economic components, their relative values and their properties. Even then, designing the most optimal structural organization is at least an NP hard class problem. For the very same set of system objectives we can have an exhaustive number of structural organizations. In other words, the process of figuring out the most productive arrangement within polynomial time frame mandates infinite computing power.

Indeed Hayek was absolutely correct to state that any form of Socialist central planning will only confine us to a primordial state. Only relatively simple arrangements can be planned.

To propose any rational economic organization it’s critical to understand the relevant properties of both human and material capital, essentially the components. So any superior structural order would also reflect a deeper understanding of these individual components, simply because this comprehension is invaluable for crafting a better design. In that sense, we can imagine the sheer mindlessness of soviet style planning. It organized individuals without any detailed theory of mind regarding human incentives within that totalitarian context, hence the absolute disaster. Here is another illustrative analogy —  try to imagine the consequence of interfacing complex circuits without comprehending of how they respond to certain external signals.

In general, larger the scale of planning more severe this epistemological, computational and competitive discovery process related hurdles. Everything alludes to the fact that complex systems can emerge only with distributed computation on actually dispersed resources. Private property based market orders are simply more adaptive because of this very scalable structural arrangement.

Use Of Computation in Society

Market structures emerge from complementary transactions, by its very nature they are positive-sum exchanges. The private decision making autonomy allows numerous such transactions, and from that certain self-organizing structures emerge. Unlike centralized planning these market orders account for contextual information and individual requirements.

This knowledge of the local context may not be always utilized in the best manner possible. But in pure scientific terms, at least the local premise was recognized before the application of some theory, however imperfect that theory may be. Definitely this is an improvement over enforcing arbitrary plans with incomplete or no understanding  of local circumstances.

Market selection process can lead to the emergence of best practices and better organizational arrangements because it enables the incentive structure to cooperate, making us better off than we otherwise would be. And at the same time concedes ample space to compete.

Competition  is indeed the most effective mechanism to challenge the existing methods and to expand our body of knowledge. The personal sphere of influence defined by private property rights enable individuals to experiment, learn and adapt their methods. Eventually with our individual efforts being directed by price signals there is an effective systemic mechanism to add value to even unknown individuals.

Hayek quite succinctly stated — “function of prices is to tell people what they ought to do in the future.”

The protein interaction network of Treponema pallidum

Market Visualization


Based on the patterns generated by market transactions we can identify numerous self-organized groups. For example, at work we are part of a relatively determinate known group but a visit to the grocery store places us into a mostly unknown group of other individuals who frequents the same store. Within a large economy there are numerous such complementary wholes of transacting individuals, productively functioning by cooperating with many other similar self-organized sub-systems.

The ability of individuals to respect market rules of private property while pursuing divergent avenues enable formation and also a contingent structural adaptation. Causing other connected entities and sub-systems to adapt in different manners. Even without any central direction this spawns an organized structural order with abstract layers and causal feedback loops. Here individual actions always conform to known just rules of conduct. Essentially driving this emergent order and also what Hayek described as the ‘n-dimensional’ surface.

Law and the Mind

The first computational theory of mind and brain had a significant influence on theoretical computer science, especially through von Neumann. Such a shared lineage between neurophysiology and digital computers should indeed have numerous implications. An interesting one would definitely be the use of automata theory to reconstruct certain critical aspects of the chapter ‘Nomos: The Law of Liberty’ from Hayek’s magnum opus ‘Law, Legislation and Liberty’.

Turing Machine Theory

Computer science methodology definitely does not endure the same epistemological problems faced by social sciences. In other words we can access the circuit integrated into a computer but social scientists cannot claim that they comprehend the detailed mechanics of a brain. Also merely observing an individual’s action does not reveal the contents of his perception or the involved reasoning. The perceived sensory inputs and the specifics of the processing remain elusive.

Though there are some abstract common aspects involved here. Quite like an automaton humans also perceive external signals, which then gets processed via some logic and then only a plan of action is formulated. But unlike ordinary computers a human brain exhibits an immense capability to learn, so eventually those perceptions, reasons and actions are constantly undergoing a temporal change. We could claim that humans are highly complex and evolving automatons.

Our process of reasoning will always account for the present state of the mind along with the sensory inputs and our previous memories. One of the reasons why we might express divergent rationales is because of the unique memory structures within our brain, especially those which are formed as a result of our past sensory inputs. Essentially our present perception is always being shaped by our previous experiences.

In the above sense a Turing machine can be an abstract representation of human brain because it integrates state transitions, inputs and also memory. Hence it possesses the actual ability to emulate the process of learning. Such an intelligent machine can be described with a 7-tuple representation — [Q, E, T, S, q0, B, F]

  • Q = finite set of states, of which one state q0 is the initial state
  • T = finite set of allowable tape symbols
  • B = a symbol of T, as the blank
  • E = a subset of T not including B, is the set of input symbols
  • S = the next move function , a mapping function from Q x T to ->> Q x T x {L,R}, where L and R denote the directions left and right respectively
  • Q0 = in set Q as the start state
  • F ⊆ Q the set of final states

If a human mind can be modeled by a Turing automaton then our sensory inputs and memories will be analogous to the above input symbols provided through the tape.  Complex experiences might involve several input impulses and numerous processing steps. So the repeated invoking of the above transition function S with different connected and sequential inputs may result in the transformation of tape contents and hence the memory itself. We can specifically draw on the Turing machine state transition mechanism to explain how Hayek’s theory of law enables a rational social order.


State Machine

A state transition table is essentially representative of the algorithm employed by a Turing machine to process various patterns of input. Our process of reasoning employed to comprehend reality can also be represented  by such a state machine, of course it would be daunting to actually implement something that complex.

The complete set of state transitions possible for a Turing machine can be described by a table which maps specific state and input combination to the corresponding output and the new state. State transitions are basically a logical sequence of steps which takes input parameters from the tape and does step by step processing on them to eventually update the output at some particular memory location on the same tape. Example for a relatively simple machine would be the one which adds or multiplies numbers.

Each of the rows illustrated in the table below represent the specific rules enforced by the transition function S, basically it maps a tape symbol plus the present state combination with an output symbol and the new state. For example, if the present state is Q0 and the input is T1 then the output symbol would be T2, also the tape reader head would move left and the new present state would be set to Q1. Next transition would also be similarly determined by the content of the tape and the state Q1. The end state is HALT, so these transitions will go on until it arrives at that final state.

State Machine

State Machine


Adaptive Automatons

“The aim of the rules must be to facilitate that matching or tallying of the expectations on which the plans of the individuals depend for their success”

Quite similar to a human brain, subjected to various input patterns a Turing automaton will constantly evolve its state machine because of the modifications done on its tape by the past input sequences. So a coherent top-down organization is implausible for such self-modifying automatons. In that sense we need a legal process which can constantly adapt to an emergent order of automatons and their state machine determined rules of engagement.

Pure logic suggests that the most beneficial order at any instant would be the one where the machines with the most complementing set of rules and plans identify each other and self-organize. Such a productive arrangement will be similar to a modern machinery which is assembled by utilizing a set of perfectly compatible parts. Eventually a dexterous system would be the one which is capable of constantly self-organizing after comprehending various emerging contingencies. Fostering such an order should be indeed our primary goal.


Shared Values

“It is only as a result of individuals observing certain common rules that a group of men can live together in those orderly relations which we call a society”

A sustainable order mandates removal of some uncertainty with regards to the rule of conduct, productive arrangements cannot emerge from destructive rules. So there is a definite need for shared values, but then, only end-independent rules will be compatible with an open-ended structural possibility. In other words, certainty only with regards to the broad qualitative nature of the state machines but not in its exact content which is subjective to each automaton and its plans.

Every process of reasoning can be eventually broken down into a sequence of elementary state machine transitions which essentially detail the exact steps and inputs involved in that plan of action. Across multiple automatons and their contrasting state machines the existence of some shared elementary rules will be crucial, those rules will divert reasoning into those logical paths which will ensure that the overall plan conforms to generally accepted rules of conduct. For example, independent of the machine’s larger plan, if its idea involves utilizing someone else’s property then at least one of the involved  state transition rules will account for paying the fair price.

A Turing machine representative of a complex human brain would be essentially like a black box, we can never know the exact contents of its state machine. But coexistence presupposes shared values, which would mean that at least a subset of the state machine transitions of all the involved automatons should always represent those prevalent values. Easiest illustration of such a rule in the free world would be indeed the respect for private property. It’s the nature of such abstract shared rules which will determine the adaptability of the structural arrangements formed by diverse automatons


Abstract Rules 

“That human intention should concern itself with laying down rules for an unknown number of future instances presupposes a feat of conscious abstraction of which primitive people are hardly capable.”

The rules are independent of any purpose because they do not force any inputs or specify particular outputs for the transition function S, but they merely dictate that the logic behind state transitions should account for certain abstract principles. In other words, we can claim that the abstract rules do not fix prices or arbitrary percentages but merely state that the use of private property mandates some compensation or that a contractual agreement should be respected etc. Specifics of the equation will depend on the corresponding contextual inputs provided to the function S, which is eventually subjective to each plan.

“Whether a new norm fits into an existing system of norms will not be a problem solely of logic, but will usually be a problem of whether, in the existing factual circumstances, the new norm will lead an order of compatible actions.”

The abstract quality of the norms would mean that they will be employed in multiple contexts, the exact specifics of such a context would depend on the state transition sequence involved in that plan. So the compatibility of a norm with the existing system of values is an empirical problem because no one can possess all the contextual information to ascertain how and in what manner the norm will be integrated into various emergent sequences of state transitions.

“The ‘values’ which the rules of just conduct serve will thus not be particulars but abstract features of an existing factual order which men will wish to enhance because they have found them to be conditions of the effective pursuit of a multiplicity of various, divergent, and unpredictable purposes.”

While specific top down commands limit the scope of plausible plan of actions, the abstract rules only enable planning within an otherwise dynamic environment.


Mechanism at Work

“We have already seen that in the usual sense of purpose, namely the anticipation of a particular, foreseeable event, the law indeed does not serve any purpose but countless different purposes of different individuals. It provides only the means for a large number of different purposes that as a whole are not known to anybody. In the ordinary sense of purpose law is therefore not a means to any purpose, but merely a condition for successful pursuit of most purposes. Of all multi-purpose instruments it is probably the one after language which assists the greatest variety of human purposes. It certainly has not been made for any one known purpose but rather has developed because it made people who operated under it more effective in the pursuit of their purposes.”

The question is not about what could be the present structural organization which can best satisfy our needs and expectations. But it’s more about the process which can enable adaptation to changing circumstances, such a legal order should enable coordination of constantly evolving expectations.

“The contention that the judges by their decisions of particular cases gradually approach a system of rules of conduct which is most conducive to producing an efficient order of actions becomes more plausible when it is realized that this is in fact merely the same kind of process as that by which all intellectual evolution proceeds.”

The actual utility of laws will be disrupted if it fails to account for the factual circumstances, such rules tend to get discarded.  For example, in most of the developing nations the rules followed while driving are not the ones set by the government but instead are the ones which enable individuals to adapt to the ground reality of poor infrastructure. We can also consider the operation of American prison gangs or black market norms as more illustrations of how emergent laws signify its core function of coordinating expectations.

“Only when it is clearly recognized that the order of actions is a factual state of affairs distinct from the rules which contribute to its formation can it be understood that such an abstract order can be the aim of the rules of conduct.”

Legal theory as identified by Hayek enables a framework which provides certainty only with regards to certain aspects of conduct while allowing other expectations to fail. Which is a necessary requirement for sustaining a competitive order. Eventually the employment of abstract purposeless rules to innovate and adapt to various challenges depends purely on individual ingenuity.

Market Order Problem

F.A.Hayek on the nature of the data required to explain the pattern generated by the market order.

“Our task is to determine the principles on which a given stock of non-permanent resources (including, of course, any supply of consumer’s goods not needed for current consumption) can be most effectively combined with the expected flow of input in order to give that income stream which is preferred to all other possible income streams. The initial datum from which we must start is a full description of the results which are known to be obtainable from various combinations of the existing stock of non-permanent resources with the expected flow of pure input. This means that the data on the technical side which we require are not simply the quantity of some homogeneous substance, some given ‘fund’ of capital, but a complete enumeration of all the different income streams which can be obtained from given resources, and of the ways in which these income streams are affected by varying the use that is made of particular resources. In other words, the only technical data are the quantities of great variety of different resources, with full information as to how they can be used, the quantities of the product which can be derived from different ways of using them, and the dates at which the products will be obtained.”



Theory of special relativity explains how relative positions of observers can often lead to contradicting perceptions, for example two actors who are in different inertial frames can both claim to be in a state of rest, or they both can observe that the clock possessed by the other one is running slower, or dispute the length of the stick they are carrying. The vantage point matters, but thankfully with physics we have an explanatory scheme, once we prove the consequences of space and time in special relativity we can appease both the actors.

Depending on the mental state of an observer his perspective about a drunk destitute can vary from absolute empathy to an outright contempt, to a certain degree even this perception is transient. Our emotions are also relative to some reference point, try describing happiness in absolute sense, actually a sub-saharan African nomad might just be more contented than a wall-street banker. Recently watched a documentary which claimed that the slum dwellers of Kolkata are on an average happier than the residents of the United States. Ignorance can be bliss but it’s irrelevant because no matter how attractive this happiness may sound not many Americans will trade their suburbs for an Indian slum residence. Similarly ranking emotive responses of various individuals after disregarding their relative mental benchmark is quite meaningless.

“We are studying mental  and not physical events, and much that we believe to know about the external world is, in fact, knowledge about ourselves” – F.A.Hayek

In “Human Action” Ludwig von Mises elaborates on the epistemological problems of historical interpretations, and rightly so because no matter how unbiased a writer might be his narrative has to be from a vantage point determined by the particular facts he had prioritized and picked for analysis. We can logically classify information as relevant only based on our relative experience and exposure to various coherent abstract patterns, for example a person unaware of a right-angled triangle can never classify the structure nor derive its Pythagorean properties, for him it might be just another triangle. Our comprehension is indeed relative to the recognizable abstract structures developed in our mind, rest becomes incomprehensible jitters. Why do you think every time you reread a book or go back and listen to your favorite song you discover something novel?

Analytic Framework

Robert Higgs had convincingly refuted the case of military Keynesianism by interpreting the events after World War II from a different perspective, similarly a study of market reforms in India by GP.Manish provided contrasting insights to the same sequence of events. Thomas Sowell’s Economic Facts and Fallacies is quite successful at clarifying various clichés in social sciences. Here theories are closely related to the subjective mental classification of the phenomenon in question. The researchers who saw economy as represented by quantifiable aggregates (like GDP) interpreted the events differently from Robert Higgs and G.P.Manish. Scholars who disregarded the relative position of various distinct individual elements within an order of organized complexity committed fallacies which Thomas Sowell successfully clarified. When you grasp a complex problem using a separate analytic framework then different relevant details emerge for the very same phenomenon in question, hence the relative mental framework matter.


Value preferences also influence interpretation within politics, a Socialist take is relative to utopia, a progressive ideologue narrative is relative to egalitarian values and similarly conservatives have their own flavor. Opinions are formed by comprehending a group of related facts which are perceived and evaluated by employing some ethical value system, hence individuals possessing different ethical benchmarks can express conflicting views, there is no absolute hierarchical order for such values but they can be definitely arranged in an order of compatibility with regards to a particular social framework. Only those ethical preferences which encourage actions compatible with the overall scientific nature of a social order can produce the intended results in an optimal manner. For example, we cannot expect to employ ethics compatible with hunter gatherers to a market society and expect similar outcomes. In fact the scientific method to evaluate divergent ethical views would be to understand it’s contextual social relevance without engaging in claims of it’s absolute moral superiority.

Mental Contamination

Here is a paper on mental contamination and mental correction, seems our motivation, awareness and ability to correct a mental bias is essential for precise identification of problems in social sciences. Objective laboratory based proofs cannot exist so our mental constructs can play a significant role in defining how we perceive and classify a problem of highly engaging complexity. Society is built on human action driven on an immensely diverse set of causal factors, our biases can consciously or unconsciously play a significant role in defining how we look for data within this complex order, they are closely related to the specific questions and corresponding answers sought to define a problem. The same wall street crash event is interpreted from the perspective of lack of regulation to over-regulation, hence the identified causal factors vary relative to our theoretical and ethical mental biases.

Competence Without Comprehension


An organizational structure is closely related to the overall intend of a particular machinery, and modern electronic machines are essentially formed by a hierarchical interplay of simpler sub-systems. Each part intended for a specific purpose, but together they accomplish a more complex task. Such machines can be represented by a tree structure, leaf nodes being associated with input sensors detecting external signals or one of the sinks working as the output link to the external world. Intermediate nodes implement various core aspects of the machine and the relative position of various internal nodes within this hierarchy depends on its own functional significance with regards to the whole system. In the case of a vehicle, the engine will be the root node while the drive-train might represent specific parts of the intermediate nodes and the wheels and steering become part of the leaf nodes. Note that the internals of the engine on its own might form a similar tree structure, so recursively we can apply this logic to explore various abstractions or sub-systems present within an organism.

Considering that the spare parts of a car might be used with multiple makes and models, the competence of these internal nodes need not in turn depend on its awareness of the larger purpose it serves. An organism intended for catering to only a quantified set of goals can be optimally sculpted by such a hierarchical structure, because here the sub-systems and their relative positions within the tree organization will be based on how their own abstract capabilities contribute to achievement of the overall goals.

Binary Tree

Tree organization can be associated with most computer software architectures and highly integrated semiconductor hardware designs. These are complex machines which integrate generic computational modules and make them talk to each other by connecting them via various communication channels. Here also the choice and relative positioning of these modules within the organism depends on the overall larger purpose and similarly these individual modules on their own need not be aware of this fact. A persistent hierarchical structure is implausible for a machine which lacks concrete quantified set of ends and instead exist to serves an infinite number of individual wishes, so an engine like catallaxy cannot have a persistent organizational structure.


Market comprises of several individuals & institutions meshed in a web of causal relationships where every entity is connected to a large number of other active entities. A graph is one of the structural classifications capable of representing the attributes of such a complex network. Here the individuals or groups of individuals (corporations) can be symbolic of the nodes and the contractual relationships among them form the edges. Similar to a machine we can recursively explore such a graph and comprehend how its nodes might be inherently structured. How they in turn might be comprising of multiple other nodes and what their classification might be (binary treeordered tree etc). A large firm will be usually of a tree structure because quite like a machine they are optimally designed for servicing a quantified set of goals. Perhaps market order can be imagined as an infinitely large graph with islands of trees.

Wikipedia Graph

Vertexes (nodes) form edges between them by engaging in a transaction, here an exchange happens when there is a value addition for both the parties involved. Value is indeed a subjective term and monetary gains are merely a subset here, for example an individual might prefer to transact with a locally owned business than a big corporation even though that might involve a relatively less monetary gain. Catallaxy is constantly engaging in creation and destruction of millions of such connections among its nodes, only those nodes who offer transactions which constantly accrue value for sufficiently large number of other nodes remain attractive while those which stagnate or worsen are culled.

Agile Organization

Resources are always scarce, in fact only time will tell whether it was prudent for me to invest time on this post instead of doing something else. Attributes like human preferences, climate conditions and natural resources are all evolving continuously and so are our challenges. We are indeed attempting to solve a problem with an uncertain premise. Only ideal we can attempt is value addition while remaining within the margins of various resource and circumstantial constrains. An evolving environment mandates a constant alteration in our methods and such an evolving premise seek an equally adaptive solution.

A catallaxy does not possess a constant prioritized set of aggregate ends, hence the resource allocation cannot be predetermined or predicted. Scope is open-ended and limited only by the resources at our disposal. Hence it is incompatible with a rigid tree organization. Unlike applied sciences the challenge in economics is not about prioritizing requirements and then designing an optimal structural arrangement of resources but it is to solve an abstract coordination problem.


Markets exist for individuals to seek value addition, some might value giving charitable donations, others might be seeking a specific productivity tool or all they might want is freshly brewed cup of coffee. Information is dispersed and the primary problem is about discovering the best plausible alternatives for the employment of our limited resources. An unemployed individual needs to discover the ideal job or that training program best suited for his particular talents or financial constraints. In other words he needs to discover how and to whom he can add value. Abstract problem is indeed about discovering the most productive return for our investments. In some cases this investment might be just time, it’s about coordinating such investments with opportunities within a evolving order. It’s about solving the Hayekian knowledge problem.

Institutions should aid in the resolution of the abstract knowledge problem, aiming at specific ends will influence structural arrangement of material resources. Every resource arbitrarily diverted via institutional means will at the same time inhibit its employment for alternative productive ends and impedes with our ability for adapting to constantly changing circumstances. Enforcing a particular set of material goals will translate to structural rigidity which is incompatible with an evolving premise, in other words, constraints placed on edge formations between various nodes will only exacerbate knowledge problem by aligning us closer to the tree structure and further away from the agile and adaptable graphs.

— Title of this post borrowed from here
— Images from Wikipedia Image1Image2