AI

The Coherence and Flexibility of the Institutional Order: The Role of Abstraction and Modularity

Abstract

Ludwig Lachmann, throughout his career, wrestled with the problem of intertemporal coordination in a world of heterogeneous expectations. He emphasized the unknowability of the future, yet also recognized that coordination of plans still occurs. Lachmann pointed to institutions as providing the key link between expectations and coordination. But this poses the additional problem of the coherence and flexibility of the institutional order. While Lachmann provides many tantalizing clues on how to reconcile the contrasting needs for coherence to support coordination and flexibility to accommodate unforeseen change, he fails to provide a unified theory upon which to build.

We recast Lachmann’s explanation of the institutional order in terms of the concepts of abstraction and modularity borrowed from computer programming. Economists, largely under the influence of Hebert Simon, have examined the role of modularity, but they have ignored the twin concept of abstraction. Simon emphasizes the role of modularity in decomposing complex systems, but programmers also emphasize the role of abstraction in composing them. The programmers’ challenge of composition can be viewed as analogous to economists’ problem of plan coordination. We argue that not only do the concepts of abstraction and modularity provides a better foundation for Lachmann’s theory of the institutional order, but they provide a natural link to Hayek’s work on abstract orders.