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II. SCHELLING COORDINATION AND HAYEK COORDINATION

Before turning to urban transit, let us explore the notion of coordination. "Coordination" is a crucial term in the vocabulary of Edwin Cannan, Hayek, Michael Polanyi, William H. Hutt, Ronald Coase, Israel Kirzner, Harold Demsetz, and many others. I take Hayek to be emblematic of this tradition. I will argue that the Hayekian notion of coordination follows but one of the two understandings we have of that term.

Coordination is first and best understood as something we hope to achieve in our interaction with others. I hope to drive on the same side of the road as others, I hope to use the same semantics as do my listeners, I hope to go to the same place in Manhattan as the person I wish to meet. In these cases, we hope to coordinate our actions with the actions of others, by coordinating to some common principle or focal point. You say, "Make it Grand Central Station at noon," and I coordinate to that remark, and hope to coordinate my action with yours.

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

 

DRIVE ON THE RIGHT
DRIVE ON THE LEFT
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Figure 1: A Coordination Problem Containing Two Coordination Equilibria

 

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

Now, is this what Hayek has in mind? When Hayek speaks of our separate efforts being coordinated by the impersonal mechanism known as the price system, can we reduce this to a matter of Schelling coordination? It is true that market participants are achieving face-to-face coordination, by sharing a common language, a common measure of time, and so on. Everyone at the office arrives by nine o'clock in the morning and this coordination enhances productivity. But Hayek has more in mind. He means that when the maker of electronic components runs his shop in Korea, that activity is well coordinated to the activities of the California retailer, who some time later sells tape recorders which use the components. There is a flavor of Schelling coordination here, but only a flavor. First of all, the retailer and the components maker do not even know of each other's existence, and have no manifest sense of coordinating their action with each other. If one were to visualize a "game" which included all of their relevant strategy alternatives, it would have to be a game that also included the relevant strategies of hundreds or thousands or even millions of other players alike. Such an exercise would depart from the spirit, if not the formal structure, of noncooperative game theory, which draws up games with an understanding that that is how the game is understood by the players. This is the "common knowledge" assumption of game theory.

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

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

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

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

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

Hayek's claim is that the decentralized activity of the free economy generates a dynamic, on-going "spontaneous order" which Joy finds more pleasing than the order generated by the centrally-planned economic system. The order of the market economy is like the naturally formed crystal, where microscopic local conditions lead each element to settle into its place. Joy's pleasure would be analogous to our regarding this crystal to be more pleasing than a object fabricated, molecule by molecule, in a laboratory. Because the order is abstract and its beauty is metaphorical, and because it encompasses all of the particular plans and activities of the individuals within that order, coordination in Hayek's sense might be called metacoordination. Figure 2 draws the distinction between the two coordinations.

 

coordination
metacoordination
Schelling

Interaction that is agreeable to the interactors

Manifest from the interactor’s point of view

(From the intransitive verb)

Hayek

Arrangement of elements that is pleasing to an external viewer

Abstract from the interactor’s point of view ("invisible hand")

(From the transitive verb)

Figure 2: Two Concepts of Coordination

 

The distinction between coordination and metacoordination helps us understand why there have been communication breakdowns in intellectual debates over planning. When Hayekians declare that "the very complexity of the division of labor makes competition the only method by which co-ordination can be adequately brought about" (see p. 48), they mean metacoordination. Only the free-enterprise system can generate a pleasing arrangement. But when "coordination" is read in the Schelling sense, as a sort of teamwork to achieve a common goal, Hayek's words become wrong. A large complex system probably needs central direction or leadership to achieve Schelling coordination. A small group of musicians might sit down and spontaneously make pleasant music, but a large orchestra will certainly need a common sheet of music. Imagine the symphony performance of decentralized, competing musicians! I believe that Hayekian claims about the coordinating properties of the market system have often been misunderstood because the word "coordination" is commonly taken to mean Schelling coordination. (The distinction between the two coordinations is explored further in Klein 1997.)

It is an error to read Hayek’s "coordination" as Schelling coordination. And related to this error is another: thinking that Hayek’s proposal excludes conscious planning for Schelling coordination.

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