INTEGRAL ECONOMICS

Stable Instability
Daniel O'Connor | Integral Ventures, LLC

Stable instability implies that recent economic trends are

unsustainable due to a sustained impairment of necessary
degrees of transparency, choice, and accountability.
Stable Instability
Daniel O'Connor | Integral Ventures, LLC
In the midst of what appears to many like a
sustainable bull market in stocks, housing, and
bonds, there are just a few market observers
expressing concerns about what appears to be a
growing instability beneath the surface. One of
them is Stephen Roach of Morgan Stanley who, in
his latest commentary,1 points to the foreboding
similarities between the market conditions of 2005
and those of 2000, both the objective indicators of
excess and the subjective indicators of denial:
On this fifth anniversary of NASDAQ 5000,
there is an eerie sense of déjà vu. Unlike
the excesses in equities five years ago,
today’s bubble is more of an interest-rate
and currency phenomenon—complete with
extraordinary compressions of interest-rate
spreads in notoriously risky asset classes
such as emerging-market debt, high-yield
securities, and a broad array of credit
instruments. In my view, these bubbles are
joined at the hip, with today’s excesses
very much an outgrowth of the post-equity-
bubble defense tactics of America’s Federal
Reserve. Excess liquidity and extra-
ordinarily low real interest rates are indeed
the “candy” of the current profusion of
carry trades.
There’s another important similarity with
the heady days of early 2000—one that
pertains more to the psyche of the
markets. Emboldened by a recent outbreak
of Goldilocks-type conditions in the macro
space—namely, new hopes of inflationless
growth—investors are becoming more and
more combative at my rebalancing
presentations. “You don’t get it,” they
increasingly lecture me, “we live in a newly
symbiotic world.” After all, they go on to
say, as long as Asian central banks and
their infinitely potent printing presses keep
financing the excesses of the American
consumer, why worry? "It’s in everyone’s
best interest that this continues,” is the
punch line I hear all too often these days.
And, of course, that’s pretty much the way
it has worked out so far, with the major
nations of the world having managed to
cope just fine with all the stresses and
strains I seem so concerned about. I am
getting challenged more and more these
days as to why I believe imbalances will
ever come to a head. Motive is not my
concern. I certainly concede that it is in
everyone’s best interests to put off the day
of reckoning. The big question is, Can they?
Page 1
With that overview, Roach then suggests that this
apparent stability in markets may be masking a
growing instability in the global economy, one that
will eventually manifest in a dramatic rebalancing of
markets:
The answer lies in what can be called the
“paradox of stability”—the possibility that a
seemingly tranquil status quo is, in fact,
masking a dangerous build-up of tensions.
That is a clear risk today, in my view. While
it is possible and, for some, even easy to
draw comfort from the appearance of a
new symbiosis between debtor (America)
and creditor nations (mainly in Asia), there
is a worrisome undercurrent of tensions
now building. Such signs are evident on the
real side of the global economy, its
financial underpinnings, and also in the
political arena. Ironically, this confluence of
forces could well be reaching a critical mass
just when investors have mistakenly
concluded that this new symbiosis—code
words for yet another New Paradigm—is
rewriting time-honored macro rules.
This paradoxical arrangement of what I call stable
instability is a normal pattern in economic cycles
that can be understood by reference to the Market
Learning theory I presented in the introductory
chapter of a book I was writing a few years ago.2
This paradoxical arrangement of
what I call stable instability is a
normal pattern in economic cycles
that can be understood by
reference to Market Learning.
Market Learning
Market learning is grounded in the novel insight
that the rules governing market exchange are
essentially identical to the rules governing social
learning. In other words, the social learning practice
that we must use to gain a shared understanding
about the state of the world is actually very similar
to the practice of market exchange we already use
to buy, sell, work, earn, borrow, spend, and invest.
Thus, by using each discipline to illuminate and
extend the other, we may increase our
understanding of both and, most importantly,
develop a practical theory of real markets that can
help us resolve our biggest economic dilemmas.
Both market theory and social theory, at least in
the practical versions I am working with, are confirms or disconfirms the value function from
empirically grounded yet ethically compelling which the exchange strategy was derived. Thus, it
theories of how people make effective decisions in is the same general model of social action and
real world situations. Understanding one can help learning based on the work of Chris Argyris and
us understand the other. And with two methods of Jürgen Habermas, but adapted to produce a general
decision making based on the same general model of market action and learning.
principles, one focused on market exchange and the
Taking this a step further, we can create yet
other on social learning, I have offered the contours
another model of market learning by reconstructing
of a viable new exemplar: market learning based on
the orthodox market exchange model of supply and
the mutual pursuit of transparency, choice, and
demand illustrated in the figure below. This requires
accountability.
that we recognize the market process implicit in the
I can begin to clarify these contours by reframing static image of market equilibrium as a process of
market exchange as a specific type of action market learning.
designed to achieve certain results in the market,
from starting a company to finding a job to
investing for retirement. In doing so, I highlight the
essential role of learning in the proper functioning
of the market. As the figure below illustrates, the
actions in this particular model are all exchanges of
property rights between two people based on the
simple rule of quid pro quo—trading this for that on
the basis of a mutual agreement.

The values refer to the specific value systems we

use to frame our market situations, determine our
desired market results, design our exchange
strategies, and learn from our market experiences.
They would certainly have to include the
preferences, expectations, heuristics, and biases
that economists have so carefully studied over the
years. But as we shall see, there is no good reason
why they should not also include the deeper
structures of cognitive, moral, and affective
development that economists have so carefully
ignored over the years. Nevertheless, for the sake
of simplicity, I will generally refer to them as values
or value functions, a concept which elevates the
In this view, the development within the market of
neoclassical utility function to a more humanistic
supply and demand curves can be thought of as the
level.
collective result of single-loop market learning by
Finally, the results include both the intended and individual market participants. The buyers and
the unintended consequences of our market sellers who participate in the market on the basis of
exchanges, each of which can generate positive their own personal value functions would bid and
feedback for more of the same or negative feedback ask various prices for various quantities of goods,
indicating the need for a change. Both positive and the most valid of which would result in the
negative feedback are incorporated into the single- consummation of actual exchanges. Over time,
loop market learning that either confirms or through their own individual yet interdependent
disconfirms the previous exchange strategy, as well processes of single-loop market learning, they
as the double-loop market learning that either would acknowledge the results of past exchanges,

Page 2
improve their own exchange strategies, and
systematically pursue the best results they can
achieve, consistent with their respective value
functions and resource constraints. However,
because of the competition between sellers for a
given buyer and between buyers for a given seller,
this individual process of single-loop market
learning may have the collective effect of moving
the market toward an equilibrium price that clears
the market, even though this would not necessarily
be the goal of any individual market participant. Of
course, we need not claim that people ever
optimize their exchange strategies or that the
market ever realizes this potential equilibrium. It is
enough to claim that there is a dynamic process of
individual yet interdependent learning that
inadvertently moves the market in this general
direction, despite all individual efforts to the
contrary.
This reconstruction reveals that
what moves the market between
the order of complete equilibrium
and the chaos of complete
disequilibrium is the dual process of
single-loop and double-loop market
learning governed by the mutual
pursuit of transparency, choice,
and accountability.
Building on that insight, we can now see that the
supply and demand curves represent the potential
results of the value functions that inform the
exchange decisions of all market participants.
Therefore, the movement of demand and supply
curves, as is often depicted in comparative statics,
is actually governed by a process of double-loop
market learning. As soon as any of the buyers or
sellers in the market changes his or her value
function, perhaps due to a dramatic technological
innovation, then that change would be reflected in
the location of the corresponding demand or supply
curve and result in a new point of potential
equilibrium for the entire market. However, the
actual manifestation of this new demand or supply
curve would be contingent upon the consummation
of actual exchanges and the systematic
improvement of these exchanges via competitive
single-loop market learning. Thus, it is double-loop
market learning that establishes the new value
functions that will guide the subsequent process of
single-loop market learning that moves the market
back toward a new equilibrium. Therefore, this
reconstruction reveals that what moves the market
between the order of complete equilibrium and the
chaos of complete disequilibrium is the dual process
of single-loop and double-loop market learning
Page 3
governed by the value functions of market
participants.
If we can avoid reading too much into these
formalized diagrams, then we can appreciate the
simple fact that market learning can be understood
in terms of the language, logic, and graphical
representations of both social learning and market
exchange. So, no, this theory of market learning is
not based on a vision of market participants as
mathematical derivatives of a presumed market
equilibrium nor as cybernetic systems of learning
and action. On the contrary, market learning is
premised on the commonsense idea that buyers
and sellers are human decision makers seeking
reasonable outcomes in a market context largely of
their own creation. As such, it promises to
illuminate some of those subtle dynamics of the
market that are obscured by the static neoclassical
theory. And as the following chapters will
demonstrate, it is based on far more than the
guidelines of a relatively obscure valuation standard
and a surprisingly similar learning theory. In fact, it
seems to be congruent with the essential insights of
libertarian, egalitarian, and authoritarian econo-
mics, although not necessarily in the most obvious
ways.
Those unfamiliar with market theory may have
some difficulty appreciating the logical mechanics of
this new integration with social theory. But for now
it is enough to know that the market process can be
thought of as a process of social learning with two
general dynamics:
(1) the selection of different exchanges based
on previously selected values; and
(2) the selection of different values that enfold
within them a host of potential exchanges.
As for the selection process itself, both market
theory and social theory suggest that it is governed
by the mutual pursuit of transparency, choice, and
accountability.
The Stable Instability of Market Learning
Based on the theory of market learning, it is
possible that what appear to be relatively stable
economic conditions may be driven in part by an
excess of positive feedback from market results
that repeatedly confirms the validity of previous
exchange strategies and encourages the continua-
tion of these same exchange strategies, thus
forming a self-reinforcing dynamic that is inherently
unstable. What negative feedback there is, is
merely used to fine-tune the existing exchange
strategies.
This is most apparent in rising asset prices that
tend to rise all the more so as people believe they
will continue to rise, and it is all the more likely
when the underlying exchange strategies being
confirmed and encouraged involve the extensive
use of increasingly-easy-to-acquire debt financing
to purchase these assets (e.g., housing and
mortgages). It is important to recognize that most
of us do not perceive the need to rethink our
exchange strategies through double-loop market
learning as long as we are getting the results we
want. Even those who might be observing some of
the excesses in various markets will find it easier to
rationalize them if they are being rewarded for
following the trends and punished for attempting to
counter them. Because most people appreciate a
certain continuity in market prices, any such
pattern, even one that may be based on continuous
growth in money and credit, can offer the illusion of
stability, for a time.
This scenario of stable instability
implies that the specific market
trends we’re observing are
unsustainable due to a sustained
impairment of market participants’
capacity for double-loop market
learning—in other words, an
absence of necessary transparency,
choice, and accountability.
Even if we are not getting the market results we
want and we recognize the need for something
new, our efforts to redesign our exchange
strategies may be limited by our capacity to
envision alternatives or by the means available to
us in pursuing alternatives. In the market, values
only count if they manifest in exchanges that
establish actual prices, which are part of the market
results that can inform the next round of market
learning for everyone. Because the capacity to set
market prices is directly proportional to the amount
of income and wealth one controls and directs, the
ability to move markets is concentrated in a very
small percentage of market participants. There are
major players in the markets who may be well
aware of the temporary nature of the current
configuration of relatively stable prices and believe
it to be in their best interest to publicly promote its
continuity, while privately betting on a hedge that
will capitalize on the eventual second-order change
in the markets. Whether by deliberate deception or
sincere mistake, even the experts will generally
promote the status quo exchange strategies right
up until the moment when it becomes obvious to a
critical mass of market participants-with-means
that the status quo must change.
Therefore, it is possible to conceive of a situation in
which the apparent stability of objective market
Page 4
results actually masks a growing instability in
subjective market values that will eventually
manifest in a dramatic shift in market exchange
strategies—a second-order change in markets
driven by double-loop market learning. This
scenario of stable instability implies that the specific
market trends we’re observing are unsustainable
due to a sustained impairment of market partici-
pants’ capacity for double-loop market learning—in
other words, an absence of necessary transparency,
choice, and accountability.
The question is, why? Why would people continue
to make market decisions that, in hindsight at least,
turn out to have been unsustainable, foolish, and in
some cases manipulative?
The major reason is to be found in that little box
labeled values in the market learning illustration—a
catch-all term used to denote the subjective
dimension of the market. Behavioral economists
and their colleagues in the fields of psychology and
neurology have identified no shortage of cognitive
biases and heuristics—from Herbert Simon's3
bounded rationality to Daniel Kahneman's and
Amos Tversky's4 framing, overconfidence, confirma-
tion bias, and risk aversion to the latest findings on
time-inconsistency,5 fairness,6 trust-building,7 and
political decision making8—that help explain why
people engage in something other than perfectly
rational behavior. Market learning incorporates all
these important ideas and extends to a deeper level
of exploration by including: Chris Argyris's9 theories
of action, which explain people’s tendencies toward
self-deceptive, self-protective, and self-defeating
actions that impair their capacities for double-loop
learning; Jürgen Habermas's10 theory of communi-
cative action, which explains the difference between
the strategic action people typically use in their
market exchanges and the communicative action
they must use to generate shared understanding;
and Ken Wilber's11 levels of consciousness, which
explain the structure of individual development and
collective evolution.
By incorporating all these ideas into the market
learning theory, I am attempting to generate a
more complete understanding of the many ways
people see the market, design their exchange
strategies, produce market results, and learn from
their market experiences. Moreover, all these
complementary theories provide insights into the
many ways people can systematically fail to learn
from their market experiences, which is surely a big
part of the reason why imbalances develop. If these
many theories of decision making, communication,
and development are valid, then what I am defining
as conscious double-Loop market learning is a rare
occurrence for the vast majority of people. When it
does occur, it is typically precipitated by a crisis
that disrupts the seeming stability of a long-running
cycle of inherently unstable positive feedback.
The Stable Instability of State Learning
That said, there is another major reason why
hundreds of millions of people may be encouraged
to settle into market exchange strategies that
generate seemingly stable market results while
secretly destabilizing the market economy. The
reason is that governments are constantly
intervening in what would otherwise be a self-
organizing market, striving to engineer market
results that would not otherwise exist because of
the natural tendency for markets to produce
negative feedback that would likely preclude these
results, even allowing for people’s inherent
tendencies to avoid double-loop market learning.
State learning can certainly be
impaired by the same subjective
factors that impair market learning,
the most dysfunctional of which
are those that systematically
reduce the transparency, choice,
and accountability in monetary
and fiscal policies.
As the following model suggests, the results that
market participants are using as the basis for their
market learning include prices for stocks, bonds,
houses, jobs, currencies, and consumer goods that
have been directly manipulated and indirectly
influenced by the policy interventions of state
actors using the techniques of monetary and fiscal
policy. In doing so, state actors are participating in
the creation of the positive feedback loops that
drive the growing economic instability, while
interrupting the negative feedback loops that might
otherwise re-establish a more sustainable balance.
State learning can certainly be impaired by the
same subjective factors that impair market
learning, the most dysfunctional of which are those
that systematically reduce the transparency, choice,
and accountability in monetary and fiscal policies.
Page 5
Nowhere is this more apparent than in the
monetary policies of our central banks, which seem
to prescribe more money and credit as the universal
elixir for whatever ails the global economy. As I
described in All Good Things, we seem to have a
vast, global positive feedback loop in which:12
The Fed's easy-money policy begets, via
foreign central bank efforts to maintain
non-market-based currency exchange
rates, asset price inflation in US Treasury
securities that manifests in much lower
interest rates than would have otherwise
occurred, which in turn facilitate excessive
growth in US government borrowing and
spending, asset price reflation in the stocks
of corporations now flush with cash and
credit lines, more asset price inflation in
mortgage-financed residential housing and,
via cash-out refinancing and consumer
credit lines, a multi-year marathon of
consumer spending that has fueled
outsized current account deficits and
continuing market pressure for dollar
devaluation that would certainly have
happened were it not for foreign central
banks' willingness to accept irrationally low
returns on their US Treasury securities in
exchange for the continuing growth of their
exports to America's increasingly indebted
but nevertheless undaunted consumers
who have unwittingly come to depend upon
central banks' profligate monetary policies
in order to maintain the modest pace of
this credit-rich, saving-poor economic
recovery... and, um, well it keeps going
round and round...
If that isn't a self-reinforcing dynamic, I don't know
what is.
The critical point is that it wouldn't happen like this
in a pure market economy. By definition, everything
the state does to move the market creates
conditions that would otherwise not exist and
tensions that may very well accumulate in the form
of the stable instability I have been writing about
since 2002. Thus, state interventions, regardless of
their normative and positive justifications, will tend
to distort single-loop and impair double-loop market
learning. Acknowledging this fact does not
necessarily have to imply a negative judgment
against all state intervention in the market. After
all, it is certainly worth considering the possibility
that centralized state learning is, in some economic
situations, superior to decentralized market
learning. For example, a few psychologically mature
people with the capacity for consistent double-loop
learning, occupying the right roles at the white
house, treasury, congress, and the federal reserve,
and with access to sound economic theory and valid
economic information, might very well design state
regulations of, and state interventions into, the
otherwise self-organizing market that produce in
concert with the market superior economic results
than we have ever before seen. Likewise, the
absence of such psychologically mature people in
those same roles can foment and exacerbate the
stable instability of the economy. If nothing else,
such an acknowledgement does highlight some
important considerations for people on both sides of
the political economic debate.
By definition, everything the state
does to move the market creates
conditions that would otherwise
not exist and tensions that may
very well accumulate in the
form of stable instability.
Because market participants are largely unaware of
the specific impacts of the state interventions into
the markets in which they participate, they have a
very difficult time with both single-loop and double-
loop market learning. No matter how mindful they
may be in their market participation, they are still
basing all their decisions on distorted information,
the specific distortions in which are unknowable at
the moment of exchange. So, to a certain extent,
it's like a well-designed computer spreadsheet
model whose outputs are nevertheless suspect due
to faulty inputs: "garbage in, garbage out." You and
I, whether we like it or not, are to some extent
unwitting participants in whatever stable instability
might be developing. It is only in hindsight that
most of us become fully aware of the stable
Page 6
instability that accumulated in the economy and our
roles in helping to create it.
Conclusion
If the recent trends in US dollar money supply,
exchange rates, interest rates, debt balances, home
prices, household income, consumption, and saving,
government deficits, and the current account
deficit—to name just a few—are being driven by a
certain more-or-less coordinated, multi-state inter-
vention policy designed, in the most general of
terms, to move the global economy away from
some other pattern of results that would reflect the
distributed intelligence of market participants, then
who is to say that the tension between what has
been and what would have been, absent the state
interventions, does not still reside in the minds of
market participants? Who is to say that market
participants will not eventually, one by one, little by
little, slowly spreading, eventually tipping, and
finally surging, turn the global economy on the axis
of double-loop market learning?
While central bankers, politicians,
and economists may successfully
justify, in the midst of a policy
dialogue, this more-or-less
coordinated, multi-state
intervention policy—this
proto-global-Keynesianism—
on both ethical and empirical
grounds, this is of little
consequence in the larger and
more powerful evolutionary
dialogue of the market itself.
While central bankers, politicians, and economists
may successfully justify, in the midst of a policy
dialogue, this more-or-less coordinated, multi-state
intervention policy—this proto-global-Keynesianism
—on both ethical and empirical grounds, this is of
little consequence in the larger and more powerful
evolutionary dialogue of the market itself. In all its
distributed intelligence and ignorance, as the case
may be, the impersonal market doesn't much care
about the political virtues of the economic
philosophy being used to control it. Nor, I suspect,
do you care much about aligning yourself with other
people's political and economic philosophies as you
struggle at the margin to buy, sell, work, earn,
borrow, spend, and invest. Whenever the moment
arrives that you decide to fundamentally change
your market strategy, perhaps by consuming less
and saving more, by investing in your education
rather than your entertainment, or by shifting your
retirement funds out of the US dollar and into
something with less downside potential, you will be
doing so to fulfill your economic objectives, not to
help the people in power fulfill theirs.
It is for these reasons that I am so concerned about
the stable instability I think I see in the global
economy and the American economy in particular.
Because as smart and powerful as the people at the
center of the dialogue are, if their political and
economic philosophies do not reflect sufficient
respect for the distributed intelligence and collective
power of the market's evolutionary forces, then
their policies are likely to lead to a very chaotic and
painful period of long-overdue market learning. If
this should happen, then we can be sure that it will
trigger a new era of state learning and social
learning with potentially ominous consequences for
libertarians and egalitarians alike.
This March 2005 work is licensed under a Creative Commons
Attribution-Noncommercial-No Derivative Works 3.0 License.
1
Stephen Roach. Market Commentary.
http://www.morganstanley.com/GEFdata/digests/20050311-
fri.html. Retrieved March 14, 2005.
2
Daniel O'Connor. (2003). “A Crisis of Vision: Toward a More
Integral Economics.” Catallaxis. http://www.catallaxis.com/
2005/02/a_crisis_of_vis_1.html. Retrieved March 14, 2005.
Daniel O'Connor is the managing director of Integral
Ventures, a strategy consultancy committed to foster-
ing more innovative and sustainable ways of doing
business. He has been a pioneer in the development of
integral praxis in business and economics, having
authored numerous articles and essays in this
emerging field.
email: daniel@integralventures.com
website: www.integralventures.com
Page 7
3
Herbert Simon. [1945] 1997. Administrative Behavior: A
Study of Decision-Making Processes in Administrative
Organizations. New York: Simon & Schuster.
4
Daniel Kahneman and Amos Tversky. (2000). Choices,
Values, and Frames. Cambridge: Cambridge University Press
and New York: Russell Sage Foundation.
5
Daniel O'Connor. (2005). “The Neuroeconomics of Time.”
Catallaxis. http://www.catallaxis.com/2005/04/
the_neuroeconom_1.html. Retrieved April 13, 2005.
http://www.catallaxis.com/2005/04/the_neuroeconom_1.html
6
Daniel O'Connor. (2005). “The Neuroeconomics of Fairness.”
Catallaxis. http://www.catallaxis.com/2005/04/
the_neuroeconom_2.html. Retrieved April 14, 2005.
7
Daniel O'Connor. (2005). “The Neuroeconomics of Trust.”
Catallaxis. http://www.catallaxis.com/2005/04/
the_neuroeconom.html. Retrieved April 15, 2006.
8
Daniel O'Connor. (2006). “Four Sides of the Same Coin.”
Catallaxis. http://www.catallaxis.com/2006/01/
four_sides_of_t.html. Retrieved January 30, 2006.
9
Chris Argyris, Robert Putnam, and Diana McLain Smith.
(1985). Action Science: Concepts, Methods and Skills for
Research and Intervention. San Francisco: Jossey-Bass
Publishers.
10
Jürgen Habermas. (1987). The Theory of Communicative
Action. Volume II: Lifeworld and System: A Critique of
Functionalist Reason. Translated by Thomas McCarthy. Boston:
Beacon Press.
11
Ken Wilber. (2000). Sex, Ecology Spirituality: The Spirit of
Evolution in The Collected Works of Ken Wilber, Vol. 6. Boston:
Shambhala.
12
Daniel O'Connor. (2005). “All Good Things…” Catallaxis.
http://www.catallaxis.com/2005/03/dollar_crisis.html.
Retrieved March 14, 2005.
Catallaxis explores the potential for a more integral
approach to the business and economic challenges of
our time. It features original articles and essays,
thoughtful reviews and commentary, and referrals to
other work in the field.
To search the archives and subscribe to future
issues, visit www.catallaxis.com.