45shape and cocreate hierarchies all the way from transactions to firms to polycentric governance systems and even states. In sum, the effectual process can cocreate both markets and hierarchies, reshaping socio-political environments and states. In designing markets, effectuation can result S. D. Sarasvathy

46in new goals worth pursuing. At the same time, in designing hierarchies, effectuation may result in goal alignment of the kind that may hinder innovation. To the extent that effectuators seek to avoid quick goal coagulation and strive to keep both entry and exit of stakeholders open even as they build stable organizational structures, they can nurture markets as well as enduring ventures.

It is interesting to ask whether the above analysis can go in the opposite direction, namely, can states effectuate?

4

States in Effectuation

Experienced effectuators, including those who have built and are running large companies, will tell you that it gets harder and harder to effectuate as organizations grow. The very success and endurance of organizations develops a stiffening of the arteries through a creeping bias toward a belief in the predictability of the future, as well as an exaggerated estimate of one’s own ability to predict. Even isotropy, inevitable in areas such as new product development, begins to be tackled through pretensions of predictability rather than with an explicit acknowledgment of the pervasive persistence of uncertainty and the various forms it can take. As illusions of predictability grow, nonpredictive techniques and processes that foster them get neglected and wither away due to disuse. Instead, leaders begin to tout strategies such as the need to see around the corner and skating to where the puck will be as the ideal path to innovation. This clogging of arteries can take on an aspect of rigor mortis when it comes to states. It is not easy for states to act without clearly stated goals, budgets, and targeted stakeholders. Here the analogy of venture capitalists is much more appropriate to states than any allusions to entrepreneurs. People routinely confound investing, especially private equity investment involving other people’s money (OPM), with entrepreneurial behavior. Yet it is easy to see why venture capitalists almost always are totally ineffectual, or rather, causal.

In actual fact, investors face multiple uncertainties, just as entrepreneurs do. Yet they embrace complex predictive approaches, confounding risk-taking with uncertainty-bearing. One reason for this misapplication of prediction to circumstances of Knightian uncertainty could be due to the fact that they invest OPM. This sets up high expectations of return from their (institutional) investors, who may