Journal or Book Title
Humane Studies Review
This paper presents a theory of the invisible hand in homogeneous spontaneous orders. It does so by answering three fundamental questions: How do spontaneous orders arise? How are they consolidated? Why do they last? Spontaneous order is conceptualized as a solution to problems of cooperation (i.e., state-of-nature and coordination problems) within variable-sum games in decentralized environments. The processes which solve such cooperation problems must be effective in overcoming various obstacles deriving from limited information, uncertainty, and transaction costs. In the emergence or origin of spontaneous order, certain rules will be selected over others because of social-psychological dispositions (i.e., focal points) among small groups that make those rules desirable as solutions to problems of strategic interdependence. When focal points exist, problems of information, transaction costs and uncertainty are mitigated as individuals can be secure that the behavioral choices they make are also shared by others in the group, thus reducing their vulnerability from exploitation or poor coordination. Focal points fundamentally condition the formation of preferences in choosing rules which facilitate cooperation. Once certain rules are chosen and perform well in facilitating cooperation within some smaller group (the first--or selection-stage), those rules will become more compelling to the greater or larger social system (the second--or consolidation--stage). The mechanism of consolidation, synergistic effects, gives the rules a self-propagating quality: i.e., the incentives encouraging individuals to adopt the rules grow in proportion to the number of people that already follow the rules. Propagation to the larger group will be influenced by the strength of the focal points, with the strongest focal points rendering the most robust propagation process. Once consolidated, a spontaneous order’s stability will be influenced both by internal as well as external factors. Internally, perceptions of the desirability of specific rules will be driven by the strength of the focal points which underlie those rules. The stronger the focal points, the greater the stability of the spontaneous order which is founded on those rules. Externally, conditions in the greater social environment play an important role in determining whether the rules remain viable solutions to the strategic problems facing the group at large. If these conditions remain fairly static and focal points remain strong, a spontaneous order can be highly stable. Conversely, dynamic conditions and weakening focal points lead to instability. The classical gold standard (1880-1914) represents a spontaneous international monetary order whose origin, consolidation, and stability very much reflect the workings of the theory developed herein. The ideology of gold created focal points which made gold attractive as a monetary standard in the latter-19th century. Consolidation of the gold bloc occurred swiftly as supply and demand conditions for precious metals imparted a robust self-propagating quality onto gold. The international monetary order founded on gold remained stable up until World War I as the ideology of gold remained strong and conditions in the greater political economy remained favorable. In providing a theory of the process by which spontaneous orders form and exploring the process in the context of an international monetary regime, this paper seeks to fill some important gaps in the study of spontaneous order. First, it offers a theory of the invisible hand in homogeneous spontaneous systems. Second, in doing so, it contributes to a theory of preference formation in social systems. Finally, in presenting a case study in spontaneous (monetary) order, it contributes a much needed historical analysis to a literature dominated by theoretical treatments.
Gallarotti, Giulio M., "The Rise of the Classical Gold Standard: The Role of Focal Points and Synergistic Effects in Spontaneous Order" (2001). Division II Faculty Publications. 70.