From Shackle to Lachmann: standing in the corridor

<p>Leijonhufvud's 1973 Effective Demand Failures paper proposed that economies are self-regulating within a corridor of stability but subject to amplifying dynamics outside it. This paper derives the existence of such a corridor from first principles, combining G.L.S. Shackle's theory of kaleidic uncertainty with Lachmann's theory of heterogeneous and irreversible capital. The derived corridor differs from Leijonhufvud's — it operates through an epistemic mechanism rather than through effective demand dynamics.</p> <p>The paper proposes that in a world whose underlying nature is kaleidic, economic agents form mutually consistent plans by clustering around capital configurations with demonstrated histories of successful execution. Agents have local and tacit knowledge, in the manner put forward by Hayek, and form plans using G.L.S. Shackle’s Potential Surprise Theory. Demonstrated success reduces the potential surprise attached to continued success, making previously successful plans rational focus outcomes in Shackle's sense. Agents cluster around previously successful plans as these provide the best indication, in a kaleidic world, of whether a plan will continue to be mutually consistent amongst agents. Hayekian price coordination then operates within the interpretive framework of previously successful plans, generating intertemporal coordination of saving and investment.</p> <p>The corridor is the range within which clustering around previously successful plans maintains approximate plan consistency against perturbations. The paper identifies two distinct thresholds — intertemporal discoordination, where plans are mutually inconsistent but the authority of previously successful plans remains epistemically intact, and kaleidic plan dissolution, where simultaneous plan failures withdraw the epistemic authority of previously successful plans discontinuously. Exit from the corridor is necessarily sudden — an ejection rather than a gradual transition — because the epistemic authority of demonstrated plan histories is withdrawn when plans simultaneously fail on a sufficient scale, rather than eroding gradually.</p> <p>The paper shows that Keynes's animal spirits and his three conventions of investment behaviour are rational consequences of this micro mechanism rather than psychological phenomena, and that each of Hayek’s local and tacit knowledge, Lachmann’s irreversible capital and Shackle’s Potential Surprise Theory are necessary for this microfoundation. Several testable predictions follow, including the discontinuous character of corridor exit, the asymmetric dynamics of recovery, and the prediction that sectoral credit concentration predicts crisis severity better than aggregate credit expansion.</p>