Borderlands of Economics: Essays in Honour of Daniel R.Fusfeld (Routledge Frontiers of Political Economy, 11)

BORDERLANDS OF ECONOMICS

In recent years there has been increasing discontent with the abstract nature of mainstream economics. Not only does this make the subject less relevant to the real world, it drives a wedge between economics and other disciplines ostensibly addressing the same issues. Borderlands of Economics explores the ways in which economics might be reconnected, both with the real world and with other disciplines. Daniel R.Fusfeld—Emeritus Professor of Economics at the University of Michigan, Ann Arbor—is renowned for his passion in extending the borderlands of economics, both to better the discipline itself and to improve the welfare of his fellow human beings. In this volume friends, former students and colleagues recognize Fusfeld’s extraordinary role as an educator, scholar and social activist. As the title of the volume suggests, most of the essays (although they vary widely in focus, content and worldview) share Fusfeld’s vision: they assume a critical standpoint toward orthodox economics in areas such as methodology, history of economic thought, development economics, economic theory, or political economy. Borderlands of Economics represents cutting-edge work in economics. Its contributors include Daniel Fusfeld, A.W.Coats, Warren Samuels and Tom Weisskopf. The book is critical for all those interested in the present and future development of economics. Nahid Aslanbeigui is Associate Professor of Economics at Monmouth University. She is the co-editor of Women in the Age of Economic Transformation (Routledge, 1994) and Rethinking Economic Principles (1996). Young Back Choi is Associate Professor at St John’s University, New York. His publications include Paradigms and Conventions: Uncertainty, Decision Making and Entrepreneurship. The contributors: Nahid Aslanbeigui, Nancy Bertaux, Barry Bluestone, Cynthia Browning, Young Back Choi, A.W.Coats, Daniel R.Fusfeld, Shlomo Maital, E.Wayne Nafziger, Michele I.Naples, Michael Perelman, Wallace C.Peterson, Warren J.Samuels, A.Allan Schmid, Shosh Sharabani, Mary Huff Stevenson, Gale Summerfield, Thomas E. Weisskopf.

ROUTLEDGE FRONTIERS OF POLITICAL ECONOMY 1. EQUILIBRIUM VERSUS UNDERSTANDING Towards the Rehumanization of Economics within Social Theory Mark Addleson 2. EVOLUTION, ORDER AND COMPLEXITY Edited by Elias L.Khalil and Kenneth E.Boulding 3. INTERACTIONS IN POLITICAL ECONOMY Malvern After Ten Years Edited by Steven Pressman 4. THE END OF ECONOMICS Michael Perelman 5. PROBABILITY IN ECONOMICS Omar F.Hamouda and Robin Rowley 6. CAPITAL CONTROVERSY, POST-KEYNESIAN ECONOMICS AND THE HISTORY OF ECONOMIC THEORY Essays in Honour of Geoff Harcourt, Volume One Edited by Philip Arestis, Gabriel Palma and Malcolm Sawyer 7. MARKETS, UNEMPLOYMENT AND ECONOMIC POLICY Essays in Honour of Geoff Harcourt, Volume Two Edited by Gabriel Palma and Malcolm Sawyer 8. SOCIAL ECONOMY The Logic of Capitalist Development Clark Everling 9. NEW KEYNESIAN ECONOMICS/POST-KEYNESIAN ALTERNATIVES Edited by Roy J.Rotheim 10. THE REPRESENTATIVE AGENT IN MACROECONOMICS James E.Hartley 11. BORDERLANDS OF ECONOMICS Essays in Honor of Daniel R.Fusfeld Edited by Nahid Aslanbeigui and Young Back Choi

BORDERLANDS OF ECONOMICS Essays in Honor of Daniel R.Fusfeld

Edited by Nahid Aslanbeigui and Young Back Choi

London and New York

First published 1997 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2005. “To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.” Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 Selection and editorial matter © 1997 Nahid Aslanbeigui and Young Back Choi Individual chapters © 1997 individual contributors All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library. Library of Congress Cataloging in Publication Data Borderlands of economics: essays in honor of Daniel R.Fusfeld/ edited by Nahid Aslanbeigui and Young Back Choi. p. cm. Includes bibliographical references and index. 1. Economics. 2. Fusfeld, Daniel Roland, 1922– . I. Fusfeld, Daniel Roland, 1922– . II. Aslanbeigui, Nahid, 1954– . III. Choi, Young Back, 1949– . HB71.B63 1997 330–dc21 97–12940 CIP ISBN 0-203-98276-2 Master e-book ISBN

ISBN 0-415-14830-8 (Print Edition)

CONTENTS

List of figures and tables

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Contributors

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Foreword

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Part I Introduction 1

AN INTELLECTUAL JOURNEY Daniel R.Fusfeld

2

2

DAN FUSFELD: TEACHER AND MENTOR Nahid Aslanbeigui and Young Back Choi

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3

FUSFELD AND ECONOMIC METHODOLOGY A.W.Coats

30

4

THE CONTRIBUTIONS OF DANIEL R.FUSFELD, ECONOMIST Nancy E.Bertaux

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Part II History of economic thought 5

CONDITIONAL SUPPORT OF LAISSEZ-FAIRE: SOME CASE STUDIES IN THE HISTORY OF ECONOMIC THOUGHT Michael Perelman

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6

THE DEVELOPMENT OF ECONOMIC DEVELOPMENT, 1980–95 Gale Summerfield

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7

GENDER IN ECONOMICS AND THE GENDER OF ECONOMISTS: AN HISTORICAL PERSPECTIVE Nancy E.Bertaux

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8

THE CHANGING STATUS OF THE HISTORY OF THOUGHT IN ECONOMICS CURRICULA Nahid Aslanbeigui and Michele I.Naples

125

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Part III Alternative approaches to neoclassical modeling 9

COSTS AND POWER Warren J.Samuels and A.Allan Schmid

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10

CULTURE AS A GROWTH RESOURCE Shlomo Maital and Shosh Sharabani

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11

AN EVOLUTIONARY ANALYSIS OF BEHAVIORAL VARIATION Cynthia M.Browning

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12

DECISION-MAKING AS LEARNING PROCESS Young Back Choi

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Part IV Political economy 13

LABOR MARKET OUTCOMES FOR YOUNGER BOSTON AREA WORKERS IN THE 1990s: THE CONTINUING IMPACT OF RACE: Barry Bluestone and Mary Huff Stevenson

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14

INSTITUTIONS AND INSTITUTIONALISM: CRISIS AND OPPORTUNITY Wallace C.Peterson

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15

LIBERALISM, STRUCTURAL ADJUSTMENT, AND THE WASHINGTON CONSENSUS: THE DEBT CRISIS IN AFRICA E.Wayne Nafziger

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16

ECONOMICS WITHOUT HISTORY: THE EFFORTS TO WESTERNIZE THE EAST Thomas E.Weisskopf

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Index

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FIGURES AND TABLES

FIGURES 8.1 When the history of economic thought requirement was cancelled 8.2 When the history of economic thought elective was cancelled 10.1 Annual average growth rate versus per capita GDP for a crosssection of countries

129 129 168

TABLES 4.1 6.1 7.1 8.1 8.2 8.3 8.4 8.5 8.6 10.1 13.1 13.2 13.3 13.4 13.5 13.6 13.7 13.8

Selected writings of Daniel R.Fusfeld International comparisons of HDI Proportion of women among economists in Ph.D.-granting departments History of economic thought as a required course History of economic thought as an elective course Share of history of economic thought/methodology in total number of academic jobs, October-November Share of history of economic thought/methodology in total number of academic jobs, February-June Relative frequency of dissertations in history of economic thought/ methology Relative frequency of dissertations in history of economic thought/ methology from the top graduate programs Average number of countries in each of four cells, for the seven individual versus collective dilemmas Variable list for labor market simulation model Means for dependent variables used in the analysis Means for independent variables used in the analysis Labor market simulation model: education Labor market simulation model: labor force participation Labor market simulation model: unemployment Labor market simulation model: hours worked per week Labor market simulation model: use of computer on the job

47 96 106 126 127 131 131 132 133 174 229 229 229 233 234 235 235 236

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13.9 Labor market simulation model: use of ‘tight networks’ in job search 13.10 Labor market simulation model: hourly wages 13.11 Labor market outcome ratios by race and ethnicity: men 13.12 Labor market outcome ratios by race and ethnicity: women 13.13 Factors contributing to wage differences, men: baseline simulation 13.14 Factors contributing to wage differences, men: white male education mean substituted for blacks and Hispanics 13.15 Factors contributing to wage differences, men: white male human capital means 13.16 Factors contributing to wage differences, men: all white male means 13.17 Factors contributing to wage differences, women: baseline simulation 13.18 Factors contributing to wage differences, women: white female education mean substituted for blacks and Hispanics 13.19 Factors contributing to wage differences, women: white female human capital means 13.20 Factors contributing to wage differences, women: all white female means 15.1 Economic indicators

237 237 241 243 245 246 247 249 250 251 252 254 274

CONTRIBUTORS

Nahid Aslanbeigui is Associate Professor of Economics and Finance at Monmouth University. Her main areas of research are history of economic thought, economics education, and women in development. Her publications on these topics have appeared in such journals as the Cambridge Journal of Economics, the European Journal of History of Economic Thought, History of Political Economy, Journal of History of Economic Thought, Southern Economic Journal, and World Development. She is co-editor of Women in the Age of Economic Transformation (1994) and Rethinking Economic Principles: Critical Essays on Introductory Textbooks (1996). She is writing a book on A.C.Pigou for Macmillan’s series on Famous Contemporary Economists. Nancy E.Bertaux is Professor of Economics and Human Resources at Xavier University—Cincinnati, where she teaches economic history, history of economic thought, and topics in work-force diversity. She has authored numerous articles on gender and racial diversity in labor markets, including: ‘Exploring the Connections among Gender, Race and Ethnicity in the Public Schools of Nineteenth Century Cincinnati, Ohio’ (Humanity and Society 1994), ‘Structural Economic Change and Occupational Decline among Black Workers in Nineteenth Century Cincinnati’ (in H.L.Taylor, Jr’s 1993 edited volume Race and the City: Work, Community and Protest in Cincinnati, 1820– 1970), and ‘The Roots of Today’s “Women’s Jobs” and “Men’s Jobs”: Using the Index of Dissimilarity to Measure Occupational Segregation by Gender’ (Explorations in Economic History 1991). Barry Bluestone is the Frank L.Boyden Professor of Political Economy at the University of Massachusetts—Boston and Senior Fellow at the University’s John W.McCormack Institute for Public Affairs. He is co-author of Low Wages and the Working Poor (with Mary Huff Stevenson) and author of Negotiating the Future: A Labor Perspective on American Business (1992). Cynthia M.Browning is Assistant Professor at Smith College. She received her B.A. in Social Sciences from Bennington College and her Ph.D. in Economics from the University of Michigan. She has taught at Bates College and is interested in the concept and practical possibilities of sustainable development. She has published in Methodus.

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Young Back Choi is Associate Professor of Economics and Finance at St John’s University in New York. His areas of research are decision-making processes, entrepreneurship, the market process, and the evolution of institutions. He is author of Paradigms and Conventions: Uncertainty, Decision Making, and Entrepreneurship (1993) and has co-edited two books on economic and financial issues in Asia. His articles have appeared in History of Political Economy, Review of Social Economy, Human Systems Management, Constitutional Political Economy, and Advances in Austrian Economics. A.W.Coats is Emeritus Professor of Economic and Social History at the University of Nottingham, and former President and Distinguished Fellow of the History of Economics Society. His articles have appeared in the History of Political Economy, Journal of Economic Literature, Kyklos, Journal of Law and Economics, Economic Journal, Journal of Political Economy, American Economic Review, and Oxford Economic Papers among others. Shlomo Maital is Professor of Economics and Management and Head of the M.B.A. Program at the Faculty of Industrial Engineering and Management, Technion-Israel Institute of Technology. He has written or edited eight books, including Executive Economics: Ten Essential Tools for Managers (1994), translated into Russian, Portuguese, Spanish and Italian, and over sixty articles. He is co-founder of the MIT Enterprise Forum in Israel. During 1987– 88 he served as Director of the National and Economic Planning Authority, Ministry of Economics, in Israel. He is a co-founder of the Society for the Advancement of Behavioral Economics. Professor Maital is married to Dr Sharone Levow Maital, with whom he has co-authored Economic Games People Play (1984). E.Wayne Nafziger is Professor of Economics at Kansas State University, Manhattan. He has authored many books including The Economics of Developing Countries (1984, 1990, 1996) The Debt Crisis in Africa (1993) and Inequality in Africa: Political Elites, Proletariat, Peasants, and the Poor (Cambridge University Press, cited by Choice as an Outstanding Academic Book for 1989–90). His articles have been published in the American Economic Review, Economic Development and Cultural Change, Journal of Development Studies, World Development, and Journal of Economic Issues. He has been visiting professor/scholar/fellow at numerous institutions, including the International University of Japan, Cambridge University, the East-West Center, and the University of Nigeria. Nafziger has served on the editorial board of Journal of Economics and International Relations, Comparative Entrepreneurship Research Annual, African Studies Review, and the University Press of Kansas. Michele I.Naples is Associate Professor of Economics at the College of New Jersey. Her main research interests are economics education, business failures, the profit rate, labor productivity, and coal miners. She is co-editor of The

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Imperiled Economy, Books I and II, and of Rethinking Economic Principles: Critical Essays on Introductory Textbooks (1996). She was the recipient of the 1991 Otto Eckstein Prize from the Eastern Economic Journal and is on the board of directors of the Eastern Economic Association. She has also published in the American Economic Review, Industrial Relations, Cambridge Journal of Economics, Journal of Post-Keynesian Economics, and the New York Times. Michele Naples is past coordinator of the women’s studies program at Monmouth University. Michael Perelman received his undergraduate degree from the University of Michigan and his doctorate from the University of California—Berkeley. Since then he has taught economics at California State University—Chico. His books include The End of Economics (1996), The Pathology of the U.S. Economy: The Costs of a Low Wage System (1993), Information, Social Relations, and the Economics of High Technology (1991), Keynes, Investment Theory and the Economic Slowdown: The Role of Replacement Investment and q-Ratios (1989), Karl Marx’s Crisis Theory: Labor, Scarcity and Fictitious Capital (1987), Classical Political Economy, Primitive Accumulation, and the Social Division of Labor (1984), and Farming for Profit in a Hungry World: Capital and the Crisis in Agriculture (1977). Wallace C.Peterson is George Holmes Professor of Economics at the University of Nebraska—Lincoln. He has authored over fifty scholarly articles, several monographs and seven books, including The Welfare State in France (1960), Elements of Economics (1973), Our Overloaded Economy: Inflation, Unemployment, and the Crisis in American Capitalism (1982), Silent Depression: The Fate of the American Economy (1994), and Income, Employment and Economic Growth (eighth edition, 1996). He is a past president of the Midwest Economic Association, the Association for Evolutionary Economics, the Association for Social Economics, and the Missouri Valley Economics Association. He has won numerous awards and distinctions, including Distinguished Teacher of the College of Business Administration at UNL (1984–85), the Veblen-Commons Award (AFEE 1992), and the Devine Award (ASE 1994). He ran for the Democratic nomination for the US Senate in both 1970 and 1972 and was a member of the State Central Committee of the Democratic Party from 1968 to 1976. Warren J.Samuels is Professor of Economics at Michigan State University. He specializes in the history of economic thought, methodology, and law and economics. He is the author of The Classical Theory of Economic Policy and Pareto on Policy and co-author of Gardiner C.Means: Institutionalist and Post-Keynesian. He is founding editor of the annual Research in the History of Economic Thought and Methodology. Five volumes of his collected papers have been published by Macmillan Press Ltd. A.Allan Schmid is Professor of Agricultural Economics and of Resource Development at Michigan State University, working in law and economics,

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public choice, and benefit-cost analysis. He is the author of Property, Power, and Public Choice and Benefit-Cost Analysis: A Political Economy Approach and co-author of Law and Economics: An Institutional Perspective. Shosh Sharabani was born in Haifa, Israel. She completed her B.A. in Economics at Haifa University, and her M.Sc. and D.Sc. at Technion-Israel Institute of Technology. Her doctoral dissertation was on ‘Optimal Search for Investment Opportunities and Economic Growth’. She is a lecturer in introductory economics (micro and macro), and has also taught the economics of uncertainty. Mary Huff Stevenson is Associate Professor of Economics at the University of Massachusett—Boston, and Senior fellow at the University’s John W.McCormack Institute for Public Affairs. She is the author of The Determinants of Low Wages for Women Workers and co-author (with Barry Bluestone) of Low Wages and the Working Poor. Gale Summerfield is Associate Professor of Economics at the Monterey Institute of International Studies. She received her doctorate in economics from the University of Michigan in Ann Arbor with fields in economic development and international economics. She has written extensively on the impact of economic reforms on women in developing countries, particularly in China. Her recent articles have appeared in Journal of Economic Issues, Review of Social Economy, Review of Political Economy, Development, and World Development. She is co-editor of Women in the Age of Economic Transformation: Gender Impact of Economic Reforms in Post-Socialist Countries (1994). Currently a trustee for the Association of Social Economics, she also serves on the board of the Equity Policy Center (EPOC), where she is coordinating collaborative work on the gender impacts of the transition to market-oriented economies in China, Vietnam, and Laos. She is co-editor (with Irene Tinker) of a symposium based on work at the NGO Forum in the Fourth World Conference on Women in Beijing, 1995 (Review of Social Economy, Summer 1997). Summerfield was the 1994 recipient of the Helen Potter Award from the Association for Social Economics. Thomas E.Weisskopf holds a Ph.D. in Economics from MIT and is Professor of Economics at the University of Michigan, where he teaches also in the Social Science Program of the Residential College. He is a long-time member of the Union for Radical Political Economics and the Democratic Socialists of America. His most recent book (co-authored with Samuel Bowles and David Gordon) is After the Waste Land: A Democratic Economics for the Year 2000 (1991). He is working with Neva Goodwin on a textbook, Microeconomics in Context, for use in the former Soviet Union.

FOREWORD

Honoring Professor Daniel R.Fusfeld with this festschrift has been a project long in the making. The idea was born in 1992 when we (the editors) were driving back from a conference and exchanging information about the sessions we had attended. Our discussion digressed to how deeply indebted we were to Dan Fusfeld for our intellectual development while in the Ph.D. program at the University of Michigan. We thought a festschrift could repay a small part of this debt. When Dan gave us his blessing, we embarked on our long journey that has resulted in this book. As a step toward the festschrift, we initially planned to organize a conference in Ann Arbor, the proceedings of which would be the basis for the volume. In May 1993, we contacted some of Dan’s friends and former students with the tentative plan for a meeting in Ann Arbor in 1994. We had very enthusiastic responses from many, including some of the present authors. Our thanks go to those who initially agreed to either contribute or attend the conference. Among them we should name John F.Burton, Jr, A.W.Coats, John Davis, Zohreh Emami, Eric Helt, Warren Samuels, Howard Wachtel, John Weeks, and Michael Zweig. We also thank Professor Deardorff, then chair of the Department of Economics at the University of Michigan, for offering to help. The conference, however, did not materialize given the participants’ conflicting schedules and the lack of funding. We regrouped in the summer of 1994. To get around the difficulty of attending an extra conference, we organized two sessions at the Eastern Economic Association meeting (Boston, March 1996). Our thanks go to Nancy Bertaux, Barry Bluestone, Larry Moss, Michele I.Naples, Michael Perelman, Steven Pressman, Mary Huff Stevenson, Gale Summerfield, and especially Dan and Harriet Fusfeld, who contributed to this get-together in various capacities (presenting, discussing, and/or participating in the sessions or joining us as dinner partners). The papers presented at these sessions as well as others are now before you. The contributions to this volume are reflective of Dan Fusfeld’s broad teaching and research interests in history of economic thought and methodology, modeling at the micro and macro levels, gender and development issues, poverty, labor, macroeconomic policy, economic development, and transition of

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the previously socialist economies to capitalism. Part I introduces Dan Fusfeld to the audience. In an autobiographical piece (Chapter 1), Dan records his intellectual development and the indelible marks left on him by his remarkable parents, growing up during the Great Depression, and serving in the army during World War II. After reading this chapter, we better appreciate why he assigned certain readings to his students, why he allowed them freedom in choosing and developing their dissertations, and why he fought for them when they were persecuted for deviating from mainstream economics. In Chapter 2, the editors use their own experience and the reminiscences of many of the contributors to reveal Fusfeld’s role as an educator of high integrity and moral conviction. Dan has been a social activist for most of his life, promoting freedom of speech and fighting for students whose worldviews diverged from the convention of the day. It is this legacy that Dan’s students cherish the most. Although not regarded as a methodologist, Dan Fusfeld has been key in founding and promoting the thriving International Network for Economic Method. In this spirit, A.W.Coats (Chapter 3) focuses on Fusfeld’s ‘Conceptual Foundations of Modern Economics’, a methodology article published in the early 1980s. Coats assesses Fusfeld’s contributions, emphasizing his recommendation that pattern (Gestalt, holistic) models be used in economic theorizing. In the process of his evaluation, Coats also reviews the monumental literature on economic methodology which has developed since the publication of the ‘Conceptual Foundations’, prescribing appropriate changes that Dan may have to adopt before publishing his promised book on economic methodology. In Chapter 4, Nancy Bertaux provides a general overview of Fusfeld’s work as an economist. The striking breadth of Dan’s work—in the fields of economic theory, economic methodology, history of economic thought, economic history, labor history, political economy, labor economics, economic pedagogy, and applied economics—runs counter to the current norm of limiting the subject matter to an exceedingly narrow spectrum. Bertaux shows that in addition to breadth, Fusfeld’s work is marked with a consistent focus on the economic status of groups our discipline tends to ignore, namely the poor, minorities (especially African-Americans), and the working class in general. Bertaux’s chapter goes on to summarize and assess a selected subset of Fusfeld’s contributions. Part II contains four chapters in the field of history of economic thought and economics as a profession. In Chapter 5, Michael Perelman follows Dan Fusfeld’s lead to look at works outside of the central canon of the literature. He focuses on the British classical political economists as well as the US economists of the late nineteenth century, especially John Bates Clark. Perelman finds the laissez-faire rhetoric of these economists hollow since in both cases their policy recommendations ran counter to the ideology of laissez-faire. In Chapter 6, Gale Summerfield focuses on two paradigms—growth and human development—that have competed for the main stage in development analysis since 1980. The first part of the chapter reviews the initial studies that

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established the growth paradigm, from Rostow and Harrod-Domar to Arthur Lewis and Solow. In the 1980s, Summerfield argues, the structural adjustment policies of the developing nations and the transition policies of the post-socialist countries caused a resurgence in neoclassical growth theory. Simultaneous with a plethora of articles examining endogenous growth, however, the human development paradigm was born which emphasizes not only growth but also life expectancy, literacy and education, gender gaps and an array of factors that affect human capabilities, well-being and agency. Summerfield argues that, while these paradigms compete, they are also complementary. Neither would deny the validity of the other’s concerns, and both focus on some of the same factors such as human capital. The main difference lies in what each paradigm treats as fundamental in development. Nancy Bertaux (Chapter 7) distinguishes between ‘gender in economics’ and ‘the gender of economists’. The first concentrates on gender-related issues within the discipline, ranging from theories of discrimination in the labor market and consideration of so-called ‘women’s’ concerns such as housework and child care to analysis of the rhetoric or methodology of economics for evidence of male dominance. The second refers to gender issues within the economics profession, including the relative status, influence, and interests of women and men economists, now and in the past. Bertaux focuses on the intersection of the two topics, i.e. questions such as ‘Does the gender balance in the economics profession affect whether and how gender issues are raised and analyzed within the discipline of economics?’ Bertaux begins with a brief survey of the contemporary status of women economists. She then provides an historical perspective on gender and economics in two parts: ‘the early years’ (early nineteenth century to the 1860s), and ‘the suffrage era’ (1860s-1920s). She concludes with some thoughts on recent feminist challenges to mainstream economics models and methodology. In Chapter 8, Nahid Aslanbeigui and Michele Naples find that, despite a rising (relative and absolute) interest in scholarship in history of economic thought, the course is increasingly eliminated from economics curricula at both the undergraduate and the graduate curricula. They report this decline by analyzing the results of their winter 1996 survey of economics departments in the United States, by recording the number of job opportunities in the field, and by looking at the number of dissertations written in history of economic thought/ methodology. They then argue that the history of economic thought is a course where students get exposure to the knowledge of institutions, history, alternative paradigms, and a holistic view of economics as a discipline. An increased role for this and similar courses, the authors argue, can promote critical thinking, communication skills, realism, and creativity, the educational goals advocated by the Commission on Graduate Education in Economics (COGEE). In Part III, four chapters model various aspects of economic behavior using alternative, non-neoclassical approaches. In Chapter 9, Warren J. Samuels and Allan A.Schmid argue that mainstream theories of cost are incomplete with

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regard to whose interests count as costs to others. They present a supplementary theory of costs as a function, in part, of power (and thereby of legal rights). They show costs not to be absolute but problematic in regard to their registration and valuation in markets. In Chapter 10, Shlomo Maital and Shosh Sharabani probe into the reasons for differential rates of long-run growth across countries. They argue that, until recently, economists either focused on (exogenous) technical change or on the accumulation of physical capital, with heated debates over the partitioning of growth between the two. Recently, a revolutionary new explanation of growth has been suggested, viz. endogenous innovation and human capital. Maital and Sharabani argue that underlying both the traditional and revolutionary views of long-run growth is ‘culture’—the basic ‘personality’ and values of a nation, that underpin innovation, saving, investment, entrepreneurship, motivation, and drive. The authors propose to integrate the physical capital/technology and human capital/innovation models, by interpreting ‘culture’ as a basic growth resource that underlies both the accumulation of physical and human capital and the effectiveness with which they are used. They use empirical measures of cultural dimensions to test empirically the relationship between culture and growth. While testing the empirical link between two key dimensions of culture and long-run growth, the authors find that growth is positively correlated with cultures that emphasize cooperative values as opposed to competitive ones. Cynthia Browning holds that the three basic processes of evolution are variation, competition, and selection. In Chapter 11, she develops an analysis of behavioral variation. Her objective is to explain when economic entities will choose new activities or choose to alter their own structure and capacities. Browning’s framework is based on a realistic conception of time and change. Economic activities are viewed as knowledge-directed interactions of energy and matter occurring within an organizing social structure. Agents choose the activities that look best within a frame of rules and capacities that evolve according to the principle of creative reliability. This analysis predicts patterns of behavior in which economic entities tend to innovate when they are forced to by declining performance or when the accumulation of substantial capacities allows them to overcome the uncertainties inherent in novelty. Browning’s approach has the capacity to address endogenous changes in tastes, technology, and institutions that are taken as exogenously fixed in the orthodox approach. In addition, the behavioral implications call into question the achievement of an optimal and efficient equilibrium emerging from market competition. Instead, her analysis leads to an evolutionary market process in which forces for equilibrium and disequilibrium alternate and interact. A period of stability can be followed by endogenous innovation or creative responses to exogenous changes which then lead to periods of instability, uncertainty, learning, and discovery. Standard economic theory, Young Back Choi argues in Chapter 12, is often mistakenly viewed as providing a theory of individual decision-making. The core of the neoclassical model, the assumption of maximization, is a shorthand for the

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perceived tendency of the market process justified on the ground of ‘as if’ (Friedman), evolutionary process (Alchian), or representative agent (Marshall). Choi argues that, even if the maximization assumption is largely valid at the aggregate level, there would still be a need for an explanation of why this might be the case for a better understanding of individual decision-making process. To understand the essential features of this process, Choi proposes to investigate decision-making under uncertainty where the individual cannot rely on established routines. He derives the behavioral (learning) patterns of decisionmaking by imagining hypothetical individuals in several simplified situations— isolation, groups without interaction, and groups with interaction—and by determining the likely manner of resolving uncertainty. A number of implications are derived, including people’s tendency to generate a set of conventions and institutions to reduce uncertainty and facilitate coordination and cooperation. This perspective is especially useful in understanding the role of the entrepreneur who exploits opportunities that other people fail to notice, given their conventional blinders. Choi’s perspective views the market as a dynamic process driven by endogenous forces. In Part IV, four chapter address a wider range of issues in political economy from a local level to the international scene. In Chapter 13, Barry Bluestone and Mary Huff Stevenson analyze a new sample of younger workers (ages 21–34) in the Greater Boston Metropolitan Area in order to explain variations in labor force participation, unemployment, hours worked per week, and hourly wages. From this, they simulate expected annual earnings in an attempt to better understand what factors—including race and ethnic background—contribute to persistent earnings gaps among workers who appear to share similar humancapital characteristics. They find that convergence in the human-capital characteristics of young Hispanics to the mean levels for young whites closes 45 percent of the Hispanic/white annual earnings differential for young men and virtually all of the wage gap between young Hispanic and white women. In contrast, convergence between black and white workers is minuscule, indicating that human capital investment alone will do little to close the racial earnings gap. In Chapter 14, Wallace C.Peterson examines the contemporary crisis in big government, market capitalism from an institutionalist perspective. At the heart of the crisis, Peterson argues, is the failure of the unrestrained and unregulated market system to provide full employment, jobs for large numbers of workers at wages sufficient to support a family, an equitable distribution of income, and adequate health care for many persons and families. The author places special emphasis upon the role of government, the military-industrial complex, and the money and financial system in these failures. Peterson argues that mainstream economics has shamefully opted out of any acknowledgment of these problems, or of a serious effort to deal with them; it accepts the new classical conclusion that no policy action can be effective in the modern economy. The opportunity and challenge, therefore, exist for institutionalists and other dissidents from the mainstream to come up with creative answers to this crisis. The challenge is not

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just to persuade fellow economists, but to persuade a public which has become wholly cynical about government and its effectiveness. E.Wayne Nafziger (Chapter 15) shifts the focus to the developing nations of Africa. He examines the strategies of the International Monetary Fund, the World Bank, and high-income countries of the Organization for Economic Cooperation and Development toward developing countries in sub-Saharan Africa. Major institutions, mostly based in Washington, comprise what John Williamson calls the Washington consensus. Nafziger analyzes the major ingredients of this consensus, shows how these are manifested in the Bank/Fund policies, and then examines the impact of these policies on Africa. The author argues that the policies of the Washington consensus have exacerbated Africa’s economic crisis in the 1980s and early 1990s. The concluding section recommends changes in policies offered by Washington institutions and by African governments. The volume ends with Thomas E.Weisskopf’s intriguing essay on the transition of Eastern Europe and the former Soviet Union from administrativesocialist to market-capitalist economies. These regions have become the favorite testing ground for orthodox Western economic theory. A striking feature of the economic-reform policies being pushed by Western economic advisers and Eastern economic policy-makers is the extent to which they are grounded in neoclassical economic theory and divorced from the historical legacies, and the associated political and social realities, of the societies involved. Weisskopf explores the kinds of problems that have arisen in the former Soviet Union as a consequence of the hegemony of economic theory over history. He outlines the program of restructuring advocated by most Western theorists for formerly administrative-socialist economies, shows how this program fails to come to grips with the historical legacy of these societies, and discusses the nature of the consequent policy failures. In this volume, Daniel R.Fusfeld’s friends and former students recognize him as an extraordinary human being, educator, and scholar. Their contributions may vary widely in focus, content, and worldview but they all share his desire to push the borderlands of economics to either better their discipline or improve the welfare of their fellow human beings.

Part I INTRODUCTION

1 AN INTELLECTUAL JOURNEY Daniel R.Fusfeld

My birth certificate tells me I was born on 23 May 1922, at Washington, DC. My parents were listed as Irving and Celia Fusfeld. My father was born in 1896 in Brooklyn, NY, and was originally named Isadore. He took the name Irving at the time he entered college because Isadore seemed ‘too Jewish’ in the rampant antisemitism of pre-World War I New York. He went on to a distinguished career in education of the deaf at Gallaudet College: Professor, Dean and Vice-President. He was a co-author of A Survey of American Schools for the Deaf (1928), a book that set in motion a large-scale modernization of education of the deaf in this country. He also was editor of the American Annals of the Deaf, the scholarly journal in the field, for over twentyfive years. A building at Gallaudet College was named in his honor a few years ago. My mother was also born in 1896, in Romania, Shlima, daughter of Tidon. Jews did not have surnames in Romania in the 1890s. The family emigrated to England when she was a child and took the surname Liebowitz, the family that sponsored them. Her given name was anglicized to Celia in England. A few years later the family emigrated to the United States, but the father was shortly deported as an undesirable alien. He died on the ship back to England. I was never able to get a consistent account of that episode from anyone in the family. When they were teenagers my mother and her sisters decided to use Leban as their surname—Liebowitz was ‘too Jewish’—but my mother’s name on her marriage license was Celia Liebowitz. Later in the 1930s, when she applied for admission to medical school, she used the name Cecile Leban Fusfeld: Cecile because it might be mistaken for Cecil, a man’s name, and Leban because it sounded French; Fusfeld, a German name, was OK. None of these name changes was ever officially registered, so when my mother retired and applied for social security benefits she had to prove that Shlima, daughter of Tidon, Celia Liebowitz and Cecile Leban Fusfeld were the same person. Her M.D. degree was the only diploma she ever received. She had only a few years of elementary school, never went to high school, and took only the pre-med classes in college. She practiced medicine in Washington for many years. One year she won a prize awarded by the American Medical Association for the best

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research paper by a general practitioner. In many ways she was a quite remarkable woman. The family lived on the campus at Gallaudet College, which was unfortunate in a way. The campus was isolated from the largely lower middle income neighborhood to the east, from which most of the pupils in my elementary school came, so I was never part of the gang. In addition, my parents pushed me to do well in school, which did not endear me to the other boys. I hated fighting, but I got to be pretty good at it. Early on I learned to distrust authority. This came in the fourth grade in elementary school. Each pupil was to choose a poem to memorize and recite to the class, which would vote on the best presentation. The winner from each class was to recite at a school assembly, with parents invited. I chose Rudyard Kipling’s ‘Fuzzy Wuzzy’, in which he praised the fighting ability of the Sudanese warriors who fought the British. The class voted me best. But a few days later I was told that the faculty and school principal decided I could not recite it at the assembly. It had the word ‘damn’ in it, and some parents might be offended. The runner-up would take my place. Even an 8-year-old could understand that they changed the rules after the game was over to protect themselves from criticism. When push came to shove their primary concern was themselves. Perhaps the memory of this incident affected my thinking about fairness to students when I later became a member of a college faculty. Distrust of authority was reinforced in my high school history classes, which preached nationalism and what I learned later was the conservative Republican line. The narrative was built around America’s wars and its war heroes while we learned that Jefferson bought Louisiana, Jackson introduced the spoils system, Lincoln fought the Civil War and freed the slaves, Theodore Roosevelt built the Panama Canal, and Woodrow Wilson fought the World War. There was only one at that time. Then in college I learned about Jeffersonian and Jacksonian democracy, Abraham Lincoln’s ideas on the moral basis of society, Theodore Roosevelt’s Square Deal and Woodrow Wilson’s New Freedom. If my highschool history classes and textbooks were right, the New Deal was an aberration. (I would argue in my doctoral dissertation that it was deeply rooted in American traditions.) I learned to take what I was taught cum grano salis. I was in high school and college in the nation’s capital during the 1930s. The world was in turmoil. Great ideologies were in conflict. The old order was everywhere under attack. The Great Depression gripped the United States. These were the years of Franklin D.Roosevelt and the New Deal, of militant labor and open warfare between capital and labor—John L. Lewis and the CIO, the Republic Steel ‘massacre’, the battle of the overpass at the Ford River Rouge plant, the bonus march on Washington, the grass-roots farmer revolts against farm auctions, the sharecroppers’ union in the South, farm worker strikes in California, the Dust Bowl and John Steinbeck’s The Grapes of Wrath. Ordinary people seemed to be rising up to gain their rights and seize political power. Even the Supreme Court, bastion of conservatism and the status quo, gave way to the

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new wave of political and economic action. Without really knowing much about it all, I was on the side of Roosevelt and the New Deal, of John L.Lewis, Walter Reuther, the CIO and UAW, and the grass-root revolts. Terrible events were going on in the rest of the world. The Russian Revolution was less than twenty years in the past, and economic planning there was creating a new industrial giant. But there also was fascism in Italy, Nazi power in Germany, military nationalism in Japan, the civil war in Spain, the triumph of Franco, and the conquest of Ethiopia by Italian armies. The European democracies of France and Britain were torn by conflicts between right and left. Revolutionary movements were developing everywhere and reactionaries were in the ascendant. By the late 1930s, when still in high school, I began reading analyses of these basic changes taking place here and abroad, a reading program that continued into college. I think I started with Oswald Spengler’s The Decline of the West some time in 1936. I never did fully grasp the argument of this turgid and diffuse book, but I was able to understand its basic critique of modern life as largely materialistic and amoral and its theme that Western civilization was in decline as a result. This gloomy assessment seemed to make sense to me in the turmoil of the 1930s. I went from Spengler to more readily understood writings on revolution. Brooks Adams, The Law of Civilization and Decay, echoed Spengler’s theme of historical cycles, and his Theory of Social Revolutions added insights into what was going on in the United States of the 1930s. Crane Brinton’s Anatomy of Revolution seemed to be merely a series of chronological accounts of the American, French, Russian and Fascist revolutions, without much analysis of deeper causes or effects. On the other hand, The Natural History of Revolution by Lyford Edwards (a doctoral dissertation, by the way) provided a keen analysis of the causes of revolutions, the displacement of reformers by authoritarian radicals, and the ultimate reaction and shift to a new dominant politicaleconomic class. Revolutions destroyed one ruling class and replaced it with another. James Burnham’s The Managerial Revolution seemed relevant also. He argued that the giant corporation was moving to political dominance based on its economic power throughout the industrial world—in Germany, Italy, Japan, and the United States—while in the USSR the authoritarian bureaucrats had taken over. At that time Burnham was an anti-Stalinist follower of Leon Trotsky, prior to his transformation into a right-wing anti-Communist. I saw the possibility of an American fascism dominated by big business in a reaction against the New Deal and militant labor. In college I dipped into Marxist writings on revolution: Engels, Kautsky, Trotsky and Lenin. Their quarrels seemed to have little relevance to the situation in this country. Ideas of ‘permanent revolution’ and ‘dictatorship of the proletariat’ seemed far removed from events, ill-defined and theoretical rather than practical. I had not yet read Marx, other than the Manifesto. There were a few Marxist radicals among my acquaintances in college, but they were too

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committed to one line of argument to engage in meaningful discussion. One older friend had fought with the Abraham Lincoln Brigade in the Spanish Civil War—I admired his anti-fascist activism—but he seldom spoke about his experiences. I entered George Washington University in 1938, on the eve of World War II, at the age of 16. I took the usual introductory courses with emphasis on the social sciences. History, economics, sociology, and social psychology occupied my time. I decided to major in economics, largely because that department had an excellent faculty, with a number of economists from the federal government teaching evening classes. Several undergraduate courses in economics had an important impact on my thinking. The one-year Introductory Economics course had an institutionalist emphasis. It focused on economic problems and issues in which the problem was first described and defined and the issues explored. Then came an analysis using theoretical tools. This was followed by a policy discussion that focused on current policy and its alternatives. In each case the politics of the matter were an integral part of the treatment. I’ll never forget the only two questions on the final exam at the end of the second semester: ‘Discuss Labor’ and ‘Discuss Agriculture’. The first semester of the undergraduate course in economic theory was little more than a rehash of Marshallian partial equilibrium theory. But the second semester was an intellectual blockbuster. It started with Lionel Robbins’s Nature and Significance of Economic Science and Jacob Viner’s essay on ‘The Long View and the Short in Economic Theory and Policy’. Then we tackled Joan Robinson’s Theory of Imperfect Competition and Edward Chamberlin’s Theory of Monopolistic Competition. We ended the semester studying John R.Hicks’s Value and Capital, which had just been published. It was a marvelous menu of recent classics, in the original. Edward Acheson, brother of Dean Acheson, taught the class in money and banking. It combined economic history with monetary theory and policy, starting with John Law and the Mississippi Bubble, the South Sea Bubble and the founding of the Bank of England in the early eighteenth century, and ending with the Federal Reserve System and the financial collapse of 1929–33 in the world financial system. We read Jacob Viner’s essays on the Bullionist Controversies of 1797–1821, and Walter Bagehot’s Lombard Street with its marvelous discussion of the role of the central bank in dampening overexpansion of bank credit and acting as a lender of last resort in times of crisis—functions the Federal Reserve System failed to perform in the late 1920s and early 1930s. The course had an underlying theme: the private sector continually creates new forms of money and credit that evade the efforts of the monetary authorities to control the monetary system, which leads to periodic overexpansion, speculation and crisis. Then I took what was probably the first undergraduate course in macroeconomics taught in this country. It started with the TNEC monograph on Savings and Investment, which was largely empirical. Then came Keynes

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himself. We spent the rest of the semester working through The General Theory of Employment, Interest and Money chapter by chapter to the very end. The professor, Arthur E.Burns, was sometimes just as puzzled as his students, but he introduced us to the fundamentals of Keynesian macroeconomics when it was completely new, including the flexible price analysis in the later chapters of The General Theory. I never accepted Samuelson’s fixed price model, which Joan Robinson so aptly labeled ‘bastard Keynesianism’. I remain an advocate of Keynesian stabilization policy to this day. I also had a course in government and business, which gave the usual account of antitrust policy. But we also read the National Planning Association monograph on corporate interest groups (written by the young Paul Sweezy), Adolf Berle and Gardner Means on The Modern Corporation and Private Property, and Means’s paper on administered prices, which were hot topics at the time. The writings of Thorstein Veblen were popular in the intellectual environment of Washington in the 1930s. I devoured The Theory of the Leisure Class and The Theory of Business Enterprise, along with his essays criticizing neoclassical economic theory. Veblen started me on a chain of reasoning that developed, piece by piece, throughout my professional life. The behavioral assumptions of economic theory —consumers seek to maximize satisfactions and producers to maximize profits— define the parameters of economic problems in ways that permit determinate solutions. Unfortunately, however, the problem is simplified—which is one of the functions of theory—and the complexities of the real-world economy are lost. One needs to know more about how consumers and producers act in the complex environment of changing markets, developing economies, the social and political forces that affect them, and the social institutions of which the economy is a part. Economic theory could be, at best, only the beginning of an effort to understand the economy. These ideas were further stimulated by my college course in psychology. It began with an emphasis on empirical data on actual behavior. But the instructor then moved to dynamic psychology and Gestalt psychology, investigating individual behavior in its social context and patterns of learning. This led in graduate school to further study of Gestalt psychology in the writings of Kafka, Köhler and Wertheimer, and the related concept of pattern models. A second semester of psychology was taught by a behaviorist. I was not enchanted. Stimulus and response seemed far too simple to explain the complexities of human behavior, despite the empirical laboratory results. Mice in a maze were far different from complex people in a highly complex social environment, as the Gestalt psychologists had pointed out. Veblen reinforced this judgment. History provided another input to my thinking. Undergraduate courses in economic history and the history of economic thought reinforced my skepticism about the uses of theory. For example, Adam Smith argued that mercantilism

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was an obviously fallacious theory, in opposition to the obviously valid theory of free trade. I wondered how intelligent men—the mercantilists—could be so stupid? They weren’t. As Eli Heckscher demonstrated, mercantilism was the economic policy of nation-building in the circumstances of its era. Its demise came as the structure of power shifted from rulers to parliaments and from large merchant companies to small business. Then, while still an undergraduate, I picked up a copy of Wesley Mitchell’s mimeographed ‘Lecture Notes on Types of Economic Theory’. His discussion of the political, social and philosophical parameters of classical economics provided a pattern of analysis widely applicable to any school of economic thought. Mitchell presented economic thought as a child of its times, which changed as the times changed. I learned that high theory in economics, including the Keynesian theories and policies I had absorbed, carried a heavy load of political and ideological baggage. My history classes led me into the controversy on the origins of capitalism, starting with Max Weber’s The Protestant Ethic and the Spirit of Capitalism. I read the bulk of the literature on the controversy that followed (Sombart, Ferrari, etc.), ending with Richard H.Tawney’s Religion and the Rise of Capitalism, a classic example of a pattern model. Tawney’s indictment of the moral and ethical problems of modern capitalism was reinforced by Reinhold Niebuhr’s Moral Man and Immoral Society, and strengthened my growing feeling that economics had to go far beyond analysis of the allocation of scarce resources. Finally, my course in sociology introduced me to the ideas of Lester F. Ward, a now largely forgotten polymath who argued quite convincingly against the social Darwinism of Herbert Spencer and William Graham Sumner. Ward believed that progress in society resulted more from cooperation than from competition and that competition and acquisitiveness tended to disrupt both communities and families. On the other hand, group action through government could foster social and economic progress. Ward pointed to cooperative behavior in the animal and insect worlds that contributed to survival of the species, to counteract crude individualist ideas of survival of the fittest. He gave numerous examples of cooperative behavior on the part of people—the wagon trains of the American westward migrations, for example—and government action that promoted economic progress. Ward’s emphasis on cooperation and government as instruments of progress fitted into the other ideas I was absorbing. I took no mathematics courses in college. Advanced algebra and plane and spherical trigonometry were as far as I went in the formal study of mathematics, although I studied some calculus on my own after graduate school. Pearl Harbor brought the United States into World War II just as I was finishing college. After graduation I found a job as a statistical clerk and then as a junior economist with the War Production Board. I also took a few graduate courses at George Washington, the most interesting being a seminar in public finance taught by Gerhard Colm. Colm was a senior economist in the Bureau of the Budget and a confirmed Keynesian. He had also served as budget director of the Weimar government in Germany during the great inflation of the 1920s.

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Inflation was the subject of the seminar. I learned a lifetime of macroeconomic theory and policy from Gerhard Colm, and wrote a seminar paper arguing that Federal Reserve policies helped bring on speculation in securities and real estate in the late 1920s. Then I was drafted into the army. After basic training at Fort Bragg and a short spell in an armored artillery battalion at Fort Jackson (wiped out almost to a man at the Anzio beachhead in Italy), I was sent back to Fort Bragg to a brand-new heavy artillery battalion. After learning how to shoot the big guns (240 mm howitzers firing 425 pound shells) we shipped out from Seattle for more practice in Hawaii, then off to the Philippines at Leyte Gulf and the Philippines campaign. War experience was one of the defining events of my life. I learned how to act in new and strange circumstances, how to keep fear from immobilizing action, and how to act decisively in uncertain situations. In short, I matured very quickly. One of the things I learned was that commanders took the credit, but the jobs were done by enlisted men. We hated self-promoters like Douglas MacArthur. I wasn’t a good soldier—busted three times from sergeant to private—but I learned that there wasn’t much that people in authority could do to you that was worse than losing your self-respect. I had learned early in life not to trust people in authority. In the army I learned not to fear them. At any rate, the war ended, I was demobbed and my personal war with the US Army came to a close. I could have got my government job back, but I wasn’t interested. I decided instead to go to graduate school in economics and see where that might lead. Because my undergraduate economics program had an institutional emphasis I applied to Columbia and was accepted for the fall of 1946. I needed retooling so I went to Wisconsin for summer courses, partly because of its institutional tradition and partly because I knew that lots of young women teachers went there during the summer session. I took an economic theory course from James Early. It was an inquiry into types of competitive markets, using the tools of partial equilibrium theory to examine specific markets that differed from the perfectly competitive model in a variety of ways. It was institutionalist economic theory. I also took a course in creative writing, because I knew economists had to know how to write, and a course in statistics because I knew economists had to use data. But the course that interested me most was one in medieval economic history taught by Robert Reynolds. The Middle Ages, as presented by Reynolds, gave the appearance of stable continuity over almost a thousand years. Nevertheless, there was continuous change in the medieval economy and society along with conflict at all levels. In the early Middle Ages the rural manorial economy was established, which remained the basic economic unit until early modern times, despite continuous conflict between lord and peasant over control of the economic surplus. Then came the revival of trade and the rise of cities, with new social classes; merchant law versus manorial law and church law; conflict in the cities between guild masters, journeymen and wage earners; conflict between towns and countryside;

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and towns versus rural lords—and shifting political alliances between the contesting parties. I saw a paradigm for the modern economy: the feudal manor replaced by the business firm as the basic economic unit, and continuous conflict over the economic surplus and political power. Modern industrial society exhibited the same stable continuity, with continuous change and ongoing conflict, as did the medieval world. This conceptual framework stayed with me throughout my intellectual development. Graduate school at Columbia University built on what I had learned as an undergraduate, but with a heavy emphasis on economic theory. I took classes in microeconomics from William Vickrey and George Stigler. Stigler’s reduced version of the Walrasian system seemed to lead nowhere—the fact that there were enough equations to solve a general equilibrium system didn’t indicate how to get there—but I liked his demolition of marginal productivity theory. I was stimulated, however, to further investigate general equilibrium models on my own after Vickrey went through the Walrasian model in detail. I realized that this was an attempt to summarize the entire economy in a relatively simple context, so I read Cournot, Walras, Cassel and Bowley to see how it was done. Too simple: the economy was far more complex than perfect competition and simple exchange between seller and buyer. Even the limited dynamics of Marshall’s Principles was more interesting. Macroeconomics was more interesting to me, particularly after reading Keynes as an undergraduate. Classes with James W.Angell and Albert G.Hart emphasized macroeconomic and monetary policy rather than pure theory, and always within the context of limits imposed by institutional and political constraints. Practical rather than theoretic stabilization policy was the center of their interests. Arthur F.Burns’s seminar on business cycles emphasized models based on empirical studies, but Burns also had us read Schumpeter on business cycles so he could demolish Schumpeter’s conceptual framework of long cycles. I liked Schumpeter better, particularly his broad historical view of long waves as part of the process of economic change and development. Karl Polanyi, however, was the professor at Columbia who most influenced my thinking. His lectures on general economic history traced the development of the modern market economy from the earliest tribal societies through the ancient empires and feudalism to modern times. In the process economic institutions embedded in the larger fabric of the social order developed into the modern market system that dominated the rest of society. Reciprocity and redistribution, which were based on social and political relationships, gave way to pure market relationships based on individual acquisitiveness. Economic motives that had focused on the preservation and continuity of family and community were replaced by economic motives devoted to individual gain. In some ways Polanyi echoed the concepts of Gemeinschaft (a society characterized by community, family and personal relationships, and generally accepted moral values and social norms) and Gesellschaft (a society characterized by formal organization, impersonal relations, and absence of generally held values and norms) of

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nineteenth century German sociology. Although he never used those terms, Polanyi’s distinction between substantive and formal economics was related to those two categories. Substantive economics centered on meeting needs within a social context and a generally accepted set of moral values. The formal economics of competitive markets, however, was independent of other social institutions and of moral and ethical values other than individual gain. ‘All men are brothers’ characterized the one; ‘let the buyer beware’ the other. These themes gave added depth to similar ideas expressed by Thorstein Veblen, Richard Tawney, Reinhold Niebuhr, and even Oswald Spengler and Richard Wagner. More than ever I came to reject the underlying value system of the modern economy and the economic theory of the market that supported it. Perhaps that was one reason why I was drawn to Abram Bergson’s class on the Soviet economy and its analysis of the economics of planning. It was an alternative to be explored, particularly in view of the importance of the Soviet Union in the post-war world. And, as Bergson said, we study the Soviet economy to understand our own. I was later to explore worker-managed enterprise in Yugoslavia, the Israeli kibbutz, the Mondragon enterprises in Spain, and related movements in the United States, as another alternative. Graduate school also strengthened my commitment to research based on empirical studies and to study of the relationship between politics and economics —what later came to be labeled ‘political economy’. My master’s essay on aspects of New Deal economic policies was supervised—and I mean supervised—by Joseph Dorfman. He insisted that every statement be proven, that every paragraph be documented. No unsupported propositions. I hated it, of course, but I learned the empirical model from him: start with demonstrable facts, put them together with related facts, and draw conclusions from the pattern that emerges. This approach turned out to be extremely valuable when working on my doctoral dissertation on the economic thought of Franklin D.Roosevelt. The original outline for the study had to be discarded when I began looking at the documentary evidence, and an entirely new approach emerged. I painstakingly reconstructed Roosevelt’s practical political economy from the documentary evidence. John Maurice Clark, who supervised the dissertation, gave me a free hand, but Dorfman, who was also on the committee, applied his eagle eye to everything. Then, at the defense, I had to face a committee member who was an extreme right-wing Roosevelt hater. He went on a long tirade against Roosevelt and my dissertation, arguing that Roosevelt had no economic thought whatsoever. I was able to answer that everything in the dissertation was carefully footnoted. Every statement was empirically verifiable. The dissertation was accepted, thanks to Joseph Dorfman. Another of the defining events of my life came during those years at Columbia. I had come back from the war an angry and hostile person, obsessed with the killing I had participated in and the things I had seen. I was unable to talk to anyone about my experience. Some twenty years after the war, around 1965 or so, my hidden fears that had been suppressed in some dark corner of my

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mind began to emerge in a series of recurring nightmares. This ‘post-traumatic shock syndrome’ lasted with decreasing intensity for some twelve years, ending in the late 1970s. I recount this to indicate something of my psychological state when the war ended and I entered graduate school. At that point I met my future wife, Harriet, at a Valentine’s Day dance in 1947 at the graduate women’s residence hall at Columbia. She was a student at New York School of Social Work, then a Columbia affiliate. We were married that August and will celebrate our fiftieth wedding anniversary on 30 August 1997. Harriet’s love and affection made a human being of me once again. I gradually filled in the humane portions of my personality that had been lost. Our marriage had some difficult times in the early years, but we worked things out until I was myself again. Our three children, as they grew up, also helped my psychic revival, until my temporary relapse during my delayed traumatic shock episode. Nevertheless, anger and hostility remained an essential element in my character. I began teaching at Hofstra College in 1947, while I was finishing my graduate courses and writing my dissertation at Columbia. It was a small department of only four faculty members at that time, but all four of us went on to better things. Henry Villard moved to City University and became chairman of the Economics Department there. Al Oxenfeldt moved to the Business School at Columbia. I went on first to Michigan State and then to Michigan. Harold Wattel stayed at Hofstra and moved up to be dean of its School of Business. The four of us had lively discussions of what to teach and how to teach it—just what a novice economist needed. The teaching load was heavy: four classes with three preparations each semester. We all taught the introductory course and a variety of upper-level courses. In my eight years there I taught micro and macro theory, business cycles, economic history, history of economic thought and comparative economic systems, all of which I had studied either at the graduate or undergraduate level, as well as labor economics, government and business, and economic development, fields in which I had no training whatsoever. I had to learn economics as a broad and varied field. Salaries were low, so I supplemented my income by writing a weekly column for a local business newspaper, teaching in summer and weekend programs for high-schoolers sponsored by the Joint Council on Economic Education, and research for the Regional Plan Association. My dissertation was published and was very favorably reviewed (except by The Chicago Tribune). This, together with several minor papers and two others accepted for publication, enabled me to move up from Hofstra to Michigan State. The mid-1950s was an era of great expansion at colleges and universities all over the country. Michigan State was one of those growing the most—those were the great days of ‘Dynamic Detroit’ and rapid increases in automobile production. In 1956 the Economics Department at Michigan State hired twentyone new assistant professors! I was one of that crew. They were interested in me because of my broad teaching experience in the field, my weekly column for the business newspaper, and my teaching in the summer program for high-schoolers.

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They wanted me for two purposes: to give the big lectures in the principles course, and to teach in the labor education program of the Institute of Labor and Industrial Relations. I went to Michigan State as Assistant Professor of Economics and Labor and Industrial Relations. I spent four years at Michigan State, made some lifelong friends there, and, without realizing it, set the stage for a move to the University of Michigan. I reorganized the introductory economics course around a series of economic issues—economic stability, efficient use of resources, distribution of income and wealth, labor and capital, government and business, free trade and protection, capitalism and socialism. Economics was seen as analysis of conflict, not creation of harmony. Students liked it and the number of economics majors grew. Teaching for the Institute of Labor and Industrial Relations took me all over the state, from Solidarity House in Detroit to Saginaw, Traverse City, Muskegon, Grand Rapids, Battle Creek and Kalamazoo. Most of the workers were from the automobile and communications workers’ unions. Very few had any college experience, but I was impressed with how smart they were and how much they understood about the economy from their experiences in it. They were eager to learn the theories that tied everything together but skeptical of ideas that strayed from the reality they knew. One thing they knew was that, without the union, they were at the mercy of the bosses. I learned from them that economics at the grass roots was quite different from economics at the level of high theory. Theories didn’t make sense to them unless they could understand how they affected their lives. A new dimension was added to my education in economics. I had a lucky break at Michigan State. One afternoon I was working late, the only member of the department there, and was about to leave when a man came walking into my office. He was from Governor G. Mennen Williams’s office, who had ambitions for the presidency. The governor needed an economist to provide him with position papers on current economic issues. No pay. We talked a bit about the work to be done, including a series of discussion papers for a conference on economic problems at Mackinac Island the following summer, to be attended by several other governors and a group of nationally known economists. We also talked about my previous experience, my views on economic policy and my political leanings. I took the job. Thus began a long working relationship with G.Mennen Williams and later with Philip Hart, then lieutenant-governor and later a distinguished US senator. I wrote a variety of papers for Governor Williams and his successor, John Swainson, dealing with such issues as economic stability and growth, inflation, taxes and problems of the Michigan economy. The purpose was to provide background material for comprehensive economic policies for the nation (for Governor Williams) and the state (for Governor Swainson). It was practical political economy, which added another dimension to my education in economics. A big pay-off came at the Mackinac conference. William Haber was there from the Economics Department of the University of Michigan, which was

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looking for someone to replace Shorey Peterson in the Principles of Economics course. Shortly after the close of the conference, I got an inquiry from Ann Arbor which culminated in a move there in the fall of 1960. I sometimes wonder what might have happened had I not been working late that day in East Lansing. While at Michigan State, I published two papers originally written for Polanyi’s seminar at Columbia, plus a paper on ‘Neoclassical Economics and the Ideology of Capitalism’, and a study of joint subsidiaries in the steel industry. The joint subsidiaries paper was purely empirical, listing which steel companies had interests in which iron ore companies, but it showed that all of the integrated steel companies were part of three groups defined by joint ownership of iron ore companies. The industry was not simply an oligopoly of twelve companies dominated by US Steel, but was composed of three groups in a very tight oligopoly. Control of iron ore resources was used to impose higher costs and lower profits on smaller non-integrated steel companies, which were being driven into bankruptcy or into buy-outs by the big boys. This paper won first prize in a competition for submitted papers sponsored by the American Economic Association and was presented at the 1958 annual meeting and published in the American Economic Review. It was reprinted twenty-seven years later in the Journal of Reprints for Antitrust Law and Economics. I have always felt that the papers published while I was at Michigan State, in a variety of fields, helped me get the offer from Ann Arbor. My interest in practical economics continued after I left Michigan State for the Big U in Ann Arbor. In 1970 Joseph Kowalski of Wayne State University and I co-authored a study of property tax assessment in Michigan. It was a purely empirical study showing how the law was used to provide favoritism for some, graft for a few, and big payoffs from land speculation for others. The study triggered a legislative investigation, public hearings and major revisions in the law. A less successful venture was membership of the Michigan Farm Labor Panel, appointed by the US Department of Labor in 1966 to look into problems of migrant labor in Michigan. Our very practical recommendations were ignored by the powers in Washington, who wanted to replace Mexican migrant labor with unemployed black youth from inner city ghettos. Chaos followed. There were other ventures of this sort. Nineteen-sixty-four was spent in Washington setting up a unit to evaluate the new worker training programs of the Kennedy-Johnson administrations. There I learned how difficult it was to change entrenched procedures. But I developed great respect for the integrity and competence of career civil service administrators, and little respect for politicians who played political football with the training programs. More education in practical political economy. Shortly after leaving Michigan State I began work on my short book on the history of economic thought, The Age of the Economist, at the urging of Walter Adams, one of the friends I made at MSU. It was written in opposition to the usual treatment of economics as a developing science that has moved step by

14 DANIEL R.FUSFELD

step toward a more accurate and fuller understanding of the modern economy. Perhaps the best statement of that view is Schumpeter’s History of Economic Analysis. My view was different, nurtured on Thorstein Veblen, Wesley Mitchell, Leo Rogin’s The Meaning and Validity of Economic Theory, Eric Roll’s History of Economic Thought, and my own reading of the classics in their historical context. Economics as a discipline has developed around ideological debates, practical problems and the policy debates they engendered, and around arguments over social policy. The basic ideas of the great economists, like Smith, Marx and Keynes, were important largely because of the social philosophies they advocated rather than the theoretic concepts they developed in support of those social philosophies. A second concept in the book was that the economy is continually changing and economic thought has to change as well. The economics of 1790 was hardly relevant to the economics of 1890 because the economic institutions, problems and social issues had changed. The same is true of the economics of 1990 when compared to 100 years earlier. The theoretic tools of a bygone era are of little relevance today. What are important are the ideological debates over social policy and their implications for similar debates today. Economic thought as an inquiry into social policy was the subject of The Age of the Economist. Economics was seen as a normative discipline, not as a scientific inquiry. The Age of the Economist was never a bestseller, but it is still in print in its seventh edition a quarter of a century later. It has been translated into five foreign languages—Spanish, Italian, German, Japanese, and Thai. I’m planning an eighth edition. When I came to Ann Arbor I was still a Keynesian liberal with prolabor and anti-big business attitudes. I felt that an understanding of how the economy functions required knowledge of economic institutions and the history of their origins and development, as well as the economics of markets. I felt that an understanding of economic theory required knowledge of the history of economic thought and the relationship between the economy and the larger political, social and ideological environment. I rejected marginal productivity theory as an explanation for income distribution, and thought that most of what was valuable in microeconomics did not need to go much beyond partial equilibrium analysis. I felt that analysis of oligopoly, mark-up pricing, and target pricing was more important than the usual emphasis on competitive markets. I didn’t see much equilibrium in the actual functioning of the day-to-day economy and certainly not in the passage of the economy over time. I was not at home with the reduced version of Keynesian economics then in vogue, or with the growing reduction of economic theory to mathematical models. Nevertheless, my thinking at that time was well within the mainstream, but with a broad institutional and historical emphasis. This intellectual framework began to change during the 1960s. That decade, like the 1930s, was a period of turmoil. The Vietnam War and its protests, the civil rights movement, urban riots, the killings at Jackson State and Kent State,

AN INTELLECTUAL JOURNEY 15

warfare between the Black Panthers and city police in Oakland, the police riot at the Democratic Party national convention in 1968, radical student movements at major universities, including Michigan, the counter-culture and use of LSD and marijuana, not to mention heroin and cocaine, the women’s movement and the drive for an equal rights amendment to the constitution—there was demand for change and demand for its repression. American society and politics were seriously polarized, despite or perhaps because of economic prosperity. Changes nevertheless came. The war on poverty, the Voting Rights Act of 1965, and the beginnings of desegregation of schools, housing and employment were outcomes of the turmoil. The white middle class responded by fleeing the central cities for the suburbs, leaving the cities poor and largely black and Hispanic, adding to the nation’s social polarization. The Cold War was in full swing, as the United States and the USSR contested for world hegemony. The nuclear arms race wasted the resources of both countries. American policy favored support for authoritarian dictatorships and oligarchies in the Third World, as long as they supported the US side. The Cold War was fought at the ideological level as well, and high theory in economics (and the other social sciences) responded. General equilibrium theory, Milton Friedman’s version of the quantity theory of money, LucasSargent macroeconomics, and equilibrium growth theory pictured an ideal free market economy that was exactly what the ideologues needed to combat the bastard Marxism of the Soviet Union. The ideological wars needed celebration of the superiority of capitalism, and high theory in economics supplied just what the ideological Cold Warriors required. I was radicalized by events. I was an early supporter and member of the Union for Radical Political Economics. Several of my papers were published by URPE. One, with the deliberately provocative title of ‘Fascist Democracy in the United States’, analyzed factors in American society, economy, politics, and ideology that brought us into the Vietnam War. More than policy ‘mistakes’, it was the outcome of basic forces deep within America. This paper was widely reprinted, and I revised it several times to strengthen the argument, which is what happens with pattern models. The final version was titled ‘The Rise of the Corporate State in America’. My second URPE paper was ‘The Basic Economics of the Urban and Racial Crisis’. It came about largely by chance. Fred Hoehler, who was running labor education programs for MSU at the time, asked me to give a lecture to an automobile workers group on the economic costs of the urban riots. I agreed, expecting to find data in the library, string it together with some chronology and anecdotes, and have an appropriate talk. But to my chagrin, I found no data. Lots of anecdotes, but no empirical foundations. So I put a notice on the departmental bulletin board:

16 DANIEL R.FUSFELD

WANTED: ONE GRADUATE STUDENT TO WRITE A DOCTORAL DISSERTATION ON THE ECONOMIC COSTS OF THE URBAN RIOTS. SEE PROF. FUSFELD. Twelve graduate students applied. I had a seminar. It was outside the department’s regular program, so no course credit was given, and it was over and above my regular teaching load. Nevertheless we met in my living room at home for the next five years or so. Some four or five doctoral dissertations related directly to the work of the seminar, or influenced by it, came out of the group. So did my URPE paper, which was chiefly a synthesis and summary of the work of the seminar. I went on to publish a number of other papers on the ghetto economy and two books, one with the same title as my URPE paper, and the other The Political Economy of the Urban Ghetto, co-authored with Timothy Bates. My work on the urban ghetto focused on the forces that created and sustain today’s inner city economy, the flow of resources into and out of the ghetto, and how government transfer payments and services sustain a povertyridden enclave that provides low-wage labor to the economy outside the ghetto. If you want more—and there is much more—you will have to read my writings on the subject. All this was triggered by a phone call from a former colleague at MSU. During the 1960s I began an intensive study of Marx and his followers. Up to then I had only dipped briefly into the first volume of Capital. By the late 1960s I had studied most of Marx’s writings available in English, including the Economic and Philosophical Manuscripts of 1844, and most of the important works of the Marxists who followed him, as well as the critics. I began teaching a course in Marxist economic theory. Three chief ideas emerged. First, the three volumes of Capital and much else that Marx wrote contained a highly sophisticated analysis of modern capitalism. Some of it was conjectural, some of it ended in valuable but unproven insights, all of it was carefully reasoned, and there was much empirical verification. Second, those who followed Marx—Engels, Lenin and the Stalinists in particular—narrowed Marxism into an apologetic for a particular line of authoritarian politics. The bastard Marxism of the Soviet Union was a different animal from the democratic emphasis on wide dispersal of political power found in Marx’s own writings. Not that Marx was clear on these issues, for one had to separate Marx the vitriolic revolutionary from Marx the social and economic theorist. Finally, I was amazed by the sophomoric criticisms of Marx by economists, historians and political theorists in the West. Most of them seem not to have read anything more than the Communist Manifesto, which was at best a political tract. A few seemed to have dipped into the first volume of Capital and, confused by the polemics, misunderstood the analysis. The one exception was Joseph Schumpeter, who rejected Marx’s analysis of capitalism on the ground that capitalism always regenerated itself through innovation, new technologies, geographical expansion, and entrepreneurship. My own studies of history and

AN INTELLECTUAL JOURNEY 17

economic change accepted his capitalist dynamic, but with a qualification: each new era of capitalist regeneration followed the same pattern as Marx’s analysis of growing concentration of ownership and wealth, isolation of workers from increased benefits, slowdown of growth, and growing indications of stagnation. Schumpeter was right, but so was Marx. This interpretation fitted neatly with the paradigm of conflict and continuity that emerged from my course in medieval economic history at Wisconsin. I used this theme in my classes in Marxist economic theory and development of economic institutions, the one representing my radicalism, and the other my institutionalist background. I continue to be surprised by the disregard shown by most mainstream economists for Marx’s analysis of competitive markets and prices. Although Marx starts with inputs of productive resources and considers capital to be embodied labor, he concludes that in the long run prices in competitive markets tend to equal the full costs of production. That is exactly the same conclusion reached by Adam Smith, David Ricardo, Stanley Jevons, Leon Walras, Carl Menger, Alfred Marshall, and contemporary mainstream theorists. If the labor theory of value is wrong, why does it lead to the correct conclusion? Of course, the labor theory of value was rejected in the 1870s when Marx used it to attack capitalism and private property in the means of production, as I had pointed out in my 1952 paper on ‘Neoclassical Economics and the Ideology of Capitalism’, at a time when my own knowledge of Marxism was still quite rudimentary. Economists turned to utility theory, which was at least as old as Aristotle and the medieval Schoolmen, as an antidote. Just as in the Cold War, in the 1870s ideology masqueraded as high theory. I had read Thomas Kuhn’s Structure of Scientific Revolutions as early as 1950. But in applying his analysis to economics I realized that moves from one paradigm to another came about in large part for ideological reasons rather than because of anomalies in the old paradigm. One product of my radicalization was several papers on the history of radical movements in the United States, which culminated in a short paperback, The Rise and Repression of Radical Labor in the United States, 1876–1918. It was written in opposition to the then generally accepted theory among labor historians that labor radicalism in this country was a foreign import rejected by job-oriented American workers because it was unrelated to the realities of working life in this country. My research indicated that radicalism in the American labor movement was not a foreign import. It developed out of the reallife experience of workers in the industrial economy. A growing force prior to World War I, it was destroyed in a concerted attack by big business and the federal government. The monograph was published by Charles F.Kerr Publishers, the original American publisher of Marx’s Capital back in the 1890s. I asked no royalties, as my contribution to the radical movement of the 1970s and 1980s. The book was hardly reviewed by the academic journals, but it went into three editions and sold some 50,000 copies. Only my textbook has done better.

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During this period Kenneth Boulding and I jointly taught a graduate course on ‘The Heterodox Economists’, featuring Henry George, Karl Marx, Thorstein Veblen, and the ‘monetary cranks’ of the 1920s. We alternated in responsibility for the sessions. One of us would make a presentation, the other would comment, and then the class was open for comments, questions and argument. The discussions were invariably exciting, and ideas flew like a torrent from Boulding. The basic theme was that there was a great deal to be learned from economists who were outside the mainstream. I have always felt that those were exceptional years for Michigan graduate students. My principles course had an institutionalist, problemoriented, policy emphasis. Dan Suits, who taught the other half of the principles course, had great respect for data and not much for theory. The graduate students all put in time as teaching assistants in the principles course, and had to fit the theory they learned into those emphases. And Ken Boulding, the highly respected theorist who didn’t even have a Ph.D., ideated all over the field without ever referring to the mainstream theoretic framework. It was an intellectual environment bubbling with concepts and ideas to be worked through by the students. Compare this with a question on this year’s final exam in the upper level undergraduate macroeconomic theory course: ‘What would be the effect of an increase in investment in each of the following five models…’. The early 1970s saw the first edition of my introductory Economics textbook. It went through five editions with two different publishers, the last being in 1988 with the subtitle Principles of Political Economy. It gained and maintained a niche in the market to the left of the big-selling mainstream textbooks, differing from them in some important respects. The preface to the first edition stated the wide coverage of the book. This is a time of turmoil in the social sciences. Contemporary events are forcing a reconsideration of approaches and emphases that until very recently was taken for granted… We are only dimly aware of the reasons: the march of technology, the brutality of power politics, the burgeoning numbers of the human family, the conflict between races, the persistence of poverty, the clash of values, the rapid pace of change…. The old confidence that we can resolve our conflicts and solve our problems as mankind moves toward a better world has eroded. The book itself was an amalgam of theoretic analysis and empirical and descriptive reality directed toward large questions of policy and social goals. The theoretic foundations were flexible price Keynesian macroeconomics, postKeynesian monetary theory, and partial equilibrium microeconomics. Economic growth was given equal emphasis with resource allocation, monopolistic markets with competitive markets. Where traditional texts usually had a short chapter on socialism tucked in at the end almost as an afterthought, this book had three chapters on socialism, including one on Soviet planning and one on market

AN INTELLECTUAL JOURNEY 19

socialism. Where the usual text had one chapter on marginal productivity theory and one on labor unions, this book had five chapters on the distribution of income and wealth. Five chapters on the public economy shifted the emphasis from taxes and spending to discussion of large public policy issues, including war and defense, cities and the urban ghetto, and the natural environment. These chapters focused not on theoretic analysis but on the political and institutional factors involved. The earlier chapters presented economic theory as a way of thinking about basic issues and problems, while the later chapters applied that way of thinking, but not necessarily the theory itself. The book changed somewhat over the years, moving more to the left ideologically, but retaining its institutionalist and problem-solving emphasis. My views on the uses of economic theory and the nature of economic inquiry were expressed in the preface to the 1988 edition: Theory is…an instrument by which the student can move from the empirical facts and institutional arrangements of a real-world economy to considerations of economic policy and social philosophy. Theory is used to generate informed and objective responses to questions like ‘What should be done about this problem?’ ‘What kind of a world would we like to have?’ and ‘How can we get there?’ Theory is presented not as an end in itself, but as part of a normative analysis of economic issues. In 1976 I went on a sabbatical leave to Cambridge University in England. I wanted to learn more about Sraffa and neo-Ricardian economics, even though it was well after the capital controversy of the 1960s. I had read Piero Sraffa’s Production of Commodities by Means of Commodities and most of the papers in the argument over the role of capital. I felt that Sraffa, Joan Robinson, Luigi Pasinetti and Pierangelo Garegnani had driven a huge wedge into the heart of neoclassical economics by reviving analysis of the production side of microeconomic theory and developing the surplus approach to value and distribution. I didn’t like the purely logical-mathematical aspect of their theorizing and its lack of historical and institutional parameters, but I felt it should be explored in depth. I also felt a need to study more mathematics. I didn’t have trouble translating mathematical models into real economic phenomena, despite my lack of mathematical sophistication, but I needed to become more familiar with the terminology and to understand the worldview—the Gestalt—of mathematical logic. Mathematical general equilibrium theory was becoming the heart of mainstream economic theory and I wanted to be able to evaluate its underlying concepts more effectively. Discussions and readings at Cambridge led me to give far more emphasis to forces of production in understanding how the economy functions. I gained a great appreciation of how accumulation of physical and human capital, technological change, specialization and large-scale production, and the

20 DANIEL R.FUSFELD

organization and control of production affected economic growth and the distribution of income and wealth. I wasn’t converted to the neo-Ricardian program, but I gained a greater appreciation of the classical economists’ emphasis on the economic surplus and its disposition. In later editions of my textbook I tried to meld this new appreciation of classical economics with partial equilibrium analysis of markets, Keynesian macroeconomics and post-Keynesian monetary theory. I moved toward a broader synthesis in my normative discussion of economic problems and social policy, with more attention to longer time horizons. In studying mathematics at Cambridge I quickly came to an important insight. The mathematical tools available to economists are too simple to capture the intricate complexities of the real-world economy. Mathematical models require simplifying assumptions that move away from reality into metaphysics. (I use ‘metaphysics’ in its Aristotelian sense: apart from the physical world.) I also realized that the larger and more complex the mathematical model, such as the Arrow-Hahn and Debreu general equilibrium models—the longer the chain of logical-deductive reasoning—the less reliable it is in terms of logical consistency. That conclusion came from studying mathematical logic. I started with some textbooks in the field, which pointed out that mathematical logic was simply a language that sought to eliminate the ambiguities of ordinary language. Well and good. Then I began reading the classics of mathematical logic: Boule and Fregel were particularly impressive and I dabbled in Cantor and Hilbert before I got to Whitehead and Russell. I realized that mathematical logic was more than simply a language. Principia Mathematica by Alfred North Whitehead and Bertrand Russell argued that all of arithmetic could be formalized into a single system, starting from a few simple but clearly defined concepts, by means of mathematical logic. By implication this would be true of any phenomenon. It was as if God the creator had been a mathematician and the entire universe and everything in it could be understood as a system of pure logic. I must confess that the three volumes of Principia Mathematica were too much for me to grasp fully. I had to rely on Bertrand Russell’s Introduction to Mathematical Logic, which was written for mere mortals like myself. Then I discovered Kurt Gödel’s incompleteness theorems. The most important is that any system of formalized logic, like that of Principia Mathematica, must contain propositions that could not be either proven or disproven within the system itself. Such undecidable propositions had to rely on something outside the system, such as assumption or casual empiricism or faith. God the mathematician had left room for both doubt and faith. The world could not be understood in terms of pure logic. Interestingly, the lesser of Gödel’s theorems is that incompleteness need not exist in short sequences of logical deduction. There is a place for theory, but don’t push it too far. Score one for partial equilibrium theory.

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I left Cambridge with an understanding of the worldview underlying contemporary mathematical economics: that mathematical models were the path to understanding reality. I didn’t believe it. Returning from Cambridge with a renewed interest in methodology, I began writing in that field. A 1980 paper on ‘The Conceptual Framework of Modern Economics’ has been expanded to a book-length manuscript, now about threefourths complete, that I hope to finish when several shorter projects are finished —I always have two or three projects going at once. A 1985 paper on ‘Keynes and the Keynesian Cross’ led to a controversy with Don Patinkin over the relative merits of the flexible price and fixed price Keynesian models. A 1990 paper on ‘The Single Price Theorem’ was motivated by the well-known empirical fact that competitive markets have multiple prices while monopolized markets have single prices. It was also motivated by a colleague’s testimony in an antitrust suit that the single price that prevailed in the plywood market was evidence of competition. He was paid a large fee for that prevarication. I found no valid logical proof in the entire literature of economic theory of the idea that a single price prevails in perfectly competitive markets—a clear example of assumption to compensate for incompleteness. There is clear proof that a perfectly competitive equilibrium price would be a single price, but that is quite different from the proposition that a perfectly competitive market would generate a single price. I went on to show that in competitive markets a single price will degenerate into a range of prices and a range of prices will not be transformed into a single price. Now I’m working on a paper inquiring into the relationship between the Cold War ideology and high theory in economics after World War II. I also helped organize the International Network for Economic Method (INEM) and served as its director for some five years. It is now a thriving organization with over 300 members worldwide and sponsor of a scholarly journal. INEM was chiefly the idea of Henry Wu, a successful Hong Kong entrepreneur, who had a strong interest in economic theory. He felt that the current infatuation with mathematical models was the wrong way to go and had written a treatise on economic theory and its methodological foundations which he distributed to members of the profession. I responded favorably, and when we met in Hong Kong we decided to start INEM, with me as chairman and a secretariat in Hong Kong at Wu’s office. The idea took hold, we soon had a long list of founding members, and then a larger list of dues-paying members on every continent except Antarctica. Our original Newsletter is now the juried Journal of Economic Methodology, and our sessions are features of numerous professional meetings. The study of methodological problems in economics is now an established topic of inquiry. In the meantime I retired from the Big U in Ann Arbor. The mundane reason was that my retirement income would be greater than my salary, which indicates more about my salary than about my retirement income. But the chief reason was that teaching the introductory economics course was no fun any more. The TAs

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were being immersed in mathematical models and general equilibrium theory and that is what they wanted to teach. I wanted them to teach about the economy. The problem was worse with the Asian foreign students, who now made up a sizable portion of the TA crew. They knew mathematics but little about how the American economy functions. There was a growing gap between my lectures oriented toward policy issues in an institutional framework and the theoretical abstractions taught by the TAs. The time had come to quit. My only regret is that I can no longer learn from those extremely bright graduate students and younger faculty at the Big U. When I came back from my sabbatical at Cambridge in 1976, I felt that I finally grasped what economics was all about. Eleven years later I retired. At least that was a little better than the fate of Urbain Grandier, the doubting Catholic priest in John Whiting’s play, The Devils, who is condemned for heresy on the very day he discovers God.

2 DAN FUSFELD: TEACHER AND MENTOR Nahid Aslanbeigui and Young Back Choi

I deserve credit for letting him try what I thought was a rather illplanned experiment, on the general principle that I am not omniscient… (J.B.S.Haldane, quoted in Merton 1988) Dan Fusfeld was largely unknown to first-year graduate students at Michigan. Later on in the program, however, there were several ways that they came in contact with him as teaching assistants for his introductory courses or participants in the political economy seminar. Some went on to take his History of Economic Thought as a field in the Ph.D. program or wrote dissertations outside the mainstream under his chairmanship. In these, Dan Fusfeld proved himself to be a true educator and mentor. One of Dan’s major responsibilities at the University of Michigan was the instruction of large introductory economics courses. The experience of both the students and the teaching assistants in these courses was different from that of their peers. Fusfeld taught the course from a critical and historical point of view, The Age of the Economist and the Principles serving as perfect tools for such an approach. (For the majority of the graduate students who assisted him in teaching the course, this was their only exposure to the ideas of economists’ forebears.) His examinations required critical and creative thinking; ‘rote answers earned at most a C’. In place of multiple-choice questions, students were required to write essays; although it took the teaching assistants many long hours to grade exams, the questions forced students to think. Fusfeld showed ‘a genuine interest in his students’, even, or especially, in those who were struggling academically. ‘He was the only professor I knew in the department,’ remembers one of his former assistants, ‘who devoted hours of his own time to students…struggling with the course; for those who received poor marks on the first exam, he held a special weekly section that he taught himself for the rest of the semester.’ For Fusfeld, it was enough that the student showed some interest. A former student reminisces that when he—‘an undereducated, over confident’ undergraduate senior—asked to take Dan’s graduate history of economic thought, he was granted the opportunity, his

24 NAHID ASLANBEIGUI AND YOUNG BACK CHOI

‘undistinguished transcript embellished with a full complement of gentlemanly Cs’ notwithstanding. The graduate history of economic thought was a two-course sequence which Fusfeld conducted on an independent-study basis, without formal lectures. The history of this Ph.D. field at Michigan is telling of Dan’s and his neoclassical colleagues’ disparate beliefs in the importance of such courses. When Fusfeld moved to the University of Michigan in 1960, the department still paid attention to economic thought to the extent that one question on the qualifying exam in economic theory would be dedicated to the subject. The interest was waning, however. Upon his return from a government post during the 1962–63 academic year, Dan found out that the department had voted to eliminate the economic thought question in his absence and without his consultation. Believing in the importance of the field, Fusfeld began to offer it as two reading courses and continued to do so until the beginning of the 1980s. In addition to a long term-paper, in each course he assigned over ten two-page essays, asking penetrating questions about the original works of past economists. Students never knew that Fusfeld was teaching them the art of writing and critical thinking without any compensation. In 1983, Dan’s history lectures were resurrected, thanks to Nancy Bertaux, one of the contributors to this volume. Having chosen Michigan for the ‘breadth of course offerings’, Nancy asked the department to explain the absence of regular lecture courses in history of economic thought. Dissatisfied with the answer that there was not enough interest, Nancy circulated a petition. Thirty-five signatures later, the courses began running with healthy enrollment during the 1983–84 academic year. Fusfeld retired shortly thereafter, however. The department has been unwilling to hire a replacement and the courses have not been offered since. A great loss to the incoming graduate students at Michigan. Dan was an active participant in the political economy seminar, which focused on issues from a Marxian perspective but was also host to other non-mainstream topics. Political economy became a Ph.D. field, supported by regular seminars, soon after Tom Weisskopf’s arrival in 1972. With Dan’s and some graduate students’ help and the department’s approval—‘those days our colleagues were a good deal more open-minded, and there was a much larger number of graduate students interested in political economy’—the courses began running regularly from the 1973–74 academic year. Dan and Tom team taught the courses at first; later on, they each taught one course separately. By the late 1970s, Locke Anderson had joined the political economy faculty and had taken over the teaching of the second course. Fusfeld continued to attend the political economy seminar. He, Tom, and Locke taught, debated, and guided generations of students who actively participated in the seminar and took an interest in economic, political, as well as departmental affairs. With Dan’s retirement, Locke’s departure to take over the editorship of the Monthly Review, Tom’s association with the Social Science Program of the Residential College at

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Michigan, and the department’s unwillingness to replace the faculty, a unique era in the history of the department came to an end. The less than enthusiastic attitude toward political economy, history of thought, and the faculty and students associated with these fields is easily explained. The unorthodox students tended to question ‘the meaning and significance’ of neoclassical economics, chose ‘unimportant’ dissertation topics, and at times questioned the departmental decisions regarding hiring, teaching, or curriculum. In 1988, for example, the Michigan Daily published a petition signed by twenty-eight students, twenty-six of whom remained anonymous for fear of reprisals. The article, which brought counter-attacks from at least one member of the department, focused on various issues. We quote one paragraph which is more pertinent to our discussion here. In the last several years the department has lost two professors in Economic History, two professors in Political Economy, the only professor in History of Economic Thought, as well as several faculty members in more mainstream fields who were less prone to accept the existing orthodoxy. Furthermore, graduate students are actively discouraged from taking alternative fields, or from pursuing their dissertation topics outside the mainstream of the discipline. Pursuing such alternative approaches is generally viewed as a sign of limited intellectual capacities. This crackdown on alternative approaches is not unique to the University; but may be more evident here because there has been a conscious and concerted effort in recent years to take what had been a relatively broad program and turn it into one of the more narrowly structured ones. (Baker and Greer 1988:4) In the same vein, Dan Fusfeld’s belief in fairness, justice, and academic freedom was problematic for the university and the department. A colleague remembers his eloquent speech in the late 1970s, in a public meeting with the university regents, recommending divestment from South Africa. (Years later, Dan’s negative portrayal of some of the regents led to the withholding of his emeritus professor status for a time. The regents backed off only when their action became front-page news in the local paper.) In departmental meetings, Dan ‘would hold firmly to his own view, even though it was often not shared by most of his colleagues and indeed frequently elicited strong criticism from some of them’. As students, we were not aware of what Dan Fusfeld did behind closed doors. But those of us who were fortunate enough to have him as the chair (or a member) of our thesis committee experienced first hand, and benefited tremendously from, his attitude to safeguarding academic freedom. He allowed us to pursue ideas of all manner and shape. The Ph.D. dissertations or Master’s theses written under his chairmanship covered fields such as theory, economic development, history of economic thought and methodology, labor, and economic history. In politics, the tone of these dissertations ranged from pro-

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market to radical left. He would give us direction, raise objections, suggest changes, and recommend moderation. But we were allowed to pursue what we wanted. It was Dan’s belief that it was our work and ideas, not his. This resembles the attitude of J.B.Haldane, the renowned geneticist and biochemist. Speaking of S.K.Roy, his talented Indian student who had conducted important experiments designed to improve strains of rice, Haldane observed that ‘Roy himself deserves about 95 per cent of the credit… The other 5 percent may be divided between the Indian Statistical Institute and myself…. I deserve credit for letting him try what I thought was a rather ill-planned experiment, on the general principle that I am not omniscient… (Quoted in Merton 1988:608) When the department persecuted students for their views, Fusfeld stood firm in defending their right to academic freedom. In this he was not partisan; he protected even those whose beliefs were diametrically opposed to his own. It is appropriate to recount one such instance. The vice-president of a major Mid-western steel company—a vocal, rightwing M.B.A. from Harvard—was on leave from his job to get a Ph.D. at Michigan. His ideas were not digested well by a largely Keynesian department at the time. When he failed his doctorate exams by a fraction of a point, the faculty voted to expel him from the program. However, they had recommended to pass another student who had failed his exams before and had scored lower than the steel executive this time. The second student had been ‘awfully nice, agreeable’ and accepting of his teachers’ views. Sensing a double standard, Dan Fusfeld asked his colleagues to reconsider; the faculty voted sixteen to one ‘not to’. Only after he threatened to ‘take up the matter with the Dean of the Graduate School’ did the department accept to give both students ‘oral examinations’. The rightwing conservative had been defended and rescued by the radical Dan Fusfeld! Whether we wrote on decision-making under uncertainty, the development of modern welfare economics, or the Mennonite economic ethic in Max Weber’s framework, Dan Fusfeld told us to choose the members of our committees in a manner that would represent the opposing points of view. We were encouraged to deal ‘fairly with the best possible case, rather than with a straw man’. Invariably, then, we were sent to Dan’s neoclassical colleagues to recruit other members. The result was not, however, always happy, as they did not share Dan’s openness. We were often turned down on various grounds: our topics were not ‘within the domain’ of economics, they were not ‘rigorous’ enough due to insufficient mathematics—in some cases, it was hard to include math in a primarily historical thesis—or they were simply ‘wrong’ because they did not share the neoclassical vision or methodology. Even when we would find members for our committees, the defense would be a tough hurdle to jump over. Two such examples are given below.

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In the early 1980s, one of Fusfeld’s students decided to do his dissertation on ‘A Theory of Decision Making under Uncertainty’, adopting an interdisciplinary perspective that rendered a new interpretation of how the market system works. Knowing of Dan, he approached him to supervise the dissertation. A doubtful Fusfeld—the subject was not easily treatable in one dissertation—asked for a prospectus; within a month, the student came back with a good bulk of the thesis done. Fusfeld was satisfied (despite the fact that the thesis had strong implications in favor of free markets) and the student approached other professors in an attempt to form a dissertation committee. One of the (mainstream) professors who specialized in microeconomics, and who had written a book in a related field himself, agreed to serve and the dissertation was well on its way. The thesis was presented in both the political economy and the theory seminars. The first went smoothly; the second was a stormy session. The student’s critical comments on the foundations of neoclassical theory infuriated the audience to the extent that he did not get far beyond the introductory statement. One theory professor left in anger; the other—the thesis committee member—inexplicably began to find problems with the thesis thereafter. On the day of defense he excused himself and sent in as replacement a mathematical economist. The defense proved as unhappy as the seminar. The substitute member ‘went into a long and emotional diatribe against the dissertation, interspersed with personal attack’ on the student, who ‘responded with calm and logic, to no avail’. Fusfeld, who saw no rational resolution to the conflict, adjourned the meeting. The student’s later attempt to prove some forty of his propositions using symbolic logic did not soften this member. It was then that Dan approached the dean of the Graduate School for permission to bring the first professor back on board instead of his replacement. This also failed; the original member was uncooperative as well. Giving up on the department’s theorists, Fusfeld asked a political economy professor, who agreed to serve. He then approached the dean —‘a classical scholar’ and a strong supporter of ‘the right of graduate students to disagree with the conventional wisdom in their fields and the importance of free inquiry’—who approved the replacement. A few days later, the thesis was successfully defended. To add an ironic point, the University of Michigan Press published a revised version of the thesis under the title of Paradigms and Conventions: Uncertainty, Decision Making, and Entrepreneurship (1993). The book has received many favorable reviews and comments from renowned economists, including two Nobel laureates. A doctoral student in the School of Public Health at Michigan (1969–73) was another beneficiary of Dan’s remarkable support. A political activist—speaking out on the Vietnam War and human rights issues—he had taken many economics courses, including political economy. For his thesis he had chosen to work on ‘Economic Determinism: A Model of the Political Economy of Medical Care’ and had asked Fusfeld to serve on his committee as the outside member. His

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conclusion that ‘what the medical care system did was determined by the economic benefits to its various elites and had almost nothing to do with health’ did not mesh well with the views of the dissertation supervisor, who ‘was angling for a position in the Nixon administration’. The chair rejected the ‘dissertation and refused to even submit it to the committee’. In 1973, the student left ‘to be the Director of Health Planning for the State of Vermont with little hope of ever getting’ his degree; later he quit health care and became a ‘dairy farmer in East Montpelier’, Vt. For a few years, Dan Fusfeld agonized over the injustice but was apprehensive about interfering ‘with the internal operations of a department’. After coming back from his sabbatical in England, and agonizing ‘some more’, he finally called another member of the dissertation committee, ‘An old friend who had been a member of [the] dissertation committee…and was then chairman’ of the student’s department. The two reconstituted the committee, the student was called in 1977, and the thesis was reconsidered and defended shortly after with no changes. In his own words, the student owes Fusfeld his ‘degree and much more’. Today, he is the president of a managed care organization in Columbus, Oh. He and his colleagues are ‘on the leading edge of the development and application of managed care technologies and systems’. These and other examples show Fusfeld’s integrity as a principled fighter against injustice in all forms, which has made a lasting impression on his students. On the day of defense, not only did Fusfeld’s students finish the requirements for the Ph.D. but they also earned their complete independence. Contrary to the profession’s current norm, Fusfeld did not use our ‘research as an input into his own’, nor did he ask us to joint-author our work. Our relationship changed to that of colleagues. He remains interested in our careers. He reads our work, uses his mastery of ‘the historical and theoretical literature’ to guide our research, and when appropriate sends us unsolicited letters, praising our efforts along with detailed suggestions for improvement. Dan Fusfeld, our teacher and mentor, is above all our ‘good friend’. REFERENCES Baker, D., and Greer, M. (1988) ‘Department Teaches Status Quo’, Michigan Daily, (March 15): 4. Merton, R.K. (1988) ‘The Matthew Effect in Science’, II, Isis 79:606–23.

ACKNOWLEDGEMENTS We are indebted to the following people who sent us information or reminiscences on which this essay is based: Nancy Bertaux, Cynthia Browning, Bob Coats, Dan Fusfeld, Eric Helt, Wayne Nafziger, Michael Perelman, Wallace

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Peterson, Warren Samuels, Gale Summerfield, Mark Weisbrod, and Tom Weisskopf.

3 FUSFELD AND ECONOMIC METHODOLOGY A.W.Coats

In the present era of excessive intellectual specialization, Dan Fusfeld stands out as an unusually versatile, wide-ranging and erudite economist. His work cannot be neatly compartmentalized, for an incomplete list of his writings and interests includes: the history of economic ideas and policy, economic history (from primitive societies to the modern corporation), labor economics, urban problems, race and the ghetto, and economics education. Like his successful introductory textbook, Economics (1972, 1976),1 his research publications reveal his strong sense of values, and his conception of economics as a normative discipline with a distinctive ideological background and clear policy implications. Never just a cloistered academic, Fusfeld has participated actively in public affairs at the national, state and local levels; and he is an old-fashioned economist in the best sense of that term, since he regards his subject as a means to the improvement of the human condition, rather than simply a ‘good game’, to cite John Hicks’s expression (1979: viii). In this respect, he is at odds with the main thrust of contemporary academic economics.2 Judging by his own fourfold classification of radical economists, Fusfeld is first and foremost an intellectual and secondarily an activist; he is neither a lifestyle nor a utopian radical (Fusfeld 1973). And as a persistent and penetrating but undoctrinaire critic of economic orthodoxy and contemporary society he is centrally located in that amorphous and ill-defined but vigorous movement known as American institutionalism. His election as president of the Association for Evolutionary Economics in 1971 testifies to his standing in that community. Given his broad intellectual predilections, it is hardly surprising that Fusfeld cannot be regarded as a specialist in economic methodology—a subdiscipline latterly so vigorous and so narcissistic as to be virtually self-sustaining. Yet, although he is not usually regarded as a methodologist, Fusfeld was the inaugural chairman (from 1989) of the newly founded and now flourishing International Network for Economic Method. In a short paper published in Methodus, the network’s bulletin, he linked ‘Economics, Science and Society’ in a manner explaining why he could not contemplate treating methodology (and perhaps anything else!) in splendid isolation (1990b). A few brief passages will make the point:

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We cannot achieve a pure science independent of the social order and the preferences of the scholar [or, for that matter, the scholarly/ scientific community]. (ibid.: 32) Scientific inquiry is a mixture of objective analysis (the logic and verifiability of theories), subjective judgment, and the relative position of the scholar in the spacetime continuum. (ibid.) Beyond this, however, there is the radical corollary that scientific inquiry is fundamentally subversive of things as they are… [The extension of knowledge] enables everyone to act in the new ways that would not be open to them in the absence of increased knowledge. (ibid.: 30) Whether the resulting changes will in fact have subversive or radical consequences is, of course, open to question. But one could hardly have a clearer example of the institutionalist-instrumentalist (i.e. Deweyite) conception of the relationship of knowledge to action. In this chapter attention will be focused on Fusfeld’s long essay ‘The Conceptual Framework of Modern Economics’ (1980), not only because of its intrinsic interest but also because he has announced his intention of producing a further, and presumably extended, treatment of the same subject (see Fusfeld 1990a: 355). This will be no easy undertaking, for the literature of economic methodology has expanded at a dizzy pace since 1980, with an estimated thirtyone books (in English) during the 1980–91 period, and heaven knows how many journal articles (Redman 1991:91).3 Nor is this merely a question of numbers. There has also been a startling proliferation of contending viewpoints, approaches and philosophies applied to economics.4 ‘THE CONCEPTUAL FRAMEWORK’ After a brief introduction, Fusfeld’s article (1980) is subdivided into three major parts: 1 Scientific Method—mainly a critique of logical empiricism, with discussion of mathematical models and symbolic logic, and the question of a value-free science. 2 The breakup of General Equilibrium Theory—its logical structure; the problem of production theory; market imperfections; chance and

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indeterminacy; the theory of the second best; behavioral assumptions; and the present dilemma. 3 New Approaches—pattern models and formal models; open and closed models; processes of change; verification, objectivity, and worldview. It is obviously impossible to comment on all these topics in detail. Instead, attention will be focused on those features of Fusfeld’s argument that seem especially effective, or amenable to constructive elaboration or improvement. Section 2 demonstrates how the old world metaphysical viewpoint embodied in general equilibrium theory has been virtually destroyed from within, mainly by criticisms from thoughtful orthodox (neoclassical) economists working on the frontiers of theory with the aim of strengthening its defenses or modifying it to make it more plausible, or more relevant to real world economic problems. As Fusfeld himself puts it (1980:27): Space, time, information, chance, and market imperfections cause determinate results to fade into indeterminacy, orderly adjustment to become disorderly, and equilibrium nonequilibrium. As the limiting assumptions that lead to determinate equilibrium are dropped, we move not merely into a more complex world with a larger number of variables, but into a qualitatively different world in which the very nature of the outcomes is changed from the Panglossian rationalism of the eighteenth century to the existential dilemmas of the twentieth. Characteristically, while demonstrating his grasp of the significance of recent theoretical developments, Fusfeld is not content with exploring the inherent weaknesses of recent fashionable so-called good games. Any social theory that interprets events as the outcome of a social process of rational individual behavior leading to a social optimum clearly does not make sense of the events of our time. In some respects the foremost problem of social philosophy in this century is why and how purposive and presumably rational human behavior can lead to massively irrational outcomes. Its vision of the world is one of order, determinate results, and social good. (ibid.: 26)5 Section 3 is the most stimulating and challenging part, since it contains Fusfeld’s proffered solution for economic theory’s present discontents. It must be emphasized at the outset, however, that his proposals are neither dogmatic nor overconfident. Moreover, they are somewhat lacking in specificity, and become more promising when set against some recent methodological trends that were not clearly apparent when the paper was written. According to Fusfeld’s summary formulation:

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Methods that were more intuitive than systematic twenty years ago are now undergoing careful development and analysis. Briefly, the new methods involve pattern (Gestalt, holistic) models that remain open and changing… and are therefore able to deal with such phenomena as chance, historical development, wide varieties of individual and social behavior, and indeterminacy as integral parts of the analysis. They lead to explanations that might be termed ‘understanding’ rather than ‘knowledge’, although this difference is often murky. Prediction is a secondary goal, while policy guidelines are emphasized. There is no assumption that normative conclusions are unscientific or that the social sciences should have a positive emphasis. (ibid.: 28)6 In his account of ‘new approaches’ Fusfeld attaches special importance to the role of pattern (Gestalt, holistic) models, which, he contends, constitute ‘the [sic] appropriate method for economic and social theory’ (ibid.: 43), although he acknowledges their limitations and flaws. Unlike the formal models employed by orthodox economists, which proceed in an essentially linear fashion from premises to conclusions (utilizing a chain of logical deductions based on mathematical formulations), pattern models move ‘by logical analysis from one element to another, backward, sideways, up and down, until a general pattern or framework is brought together by logical connections’ (ibid.: 29). In one sense a pattern model is ‘analogous to a jigsaw puzzle: It involves putting pieces together to form a meaningful whole’ (ibid.).7 A more ‘descriptive’ term that Fusfeld evidently prefers is Gestalt model, derived from Gestalt psychology, according which learning takes place by a process of integrating new ideas and information with other ideas and information in a pattern of relationships meaningful to the individual. Each part of the pattern is understood not as an isolated unit but as part of the whole. This emphasis on ‘wholes’ has sometimes led to use of the phrase ‘holistic’ to characterize these models. Gestalt psychologists argue that even [sic] perception of facts is colored by the Gestalt within which perception occurs: For example, a coin resting on a table and seen from an angle is perceived as round, even though it is actually seen as an ellipse, and an artist drawing it would draw it as an ellipse. (ibid.: 29; emphasis added) This passage has been cited at length because it gives some indication of the bewildering variety of terms employed by authors seeking to specify the distinctive methodology employed by institutionalist economists, and it draws attention to Fusfeld’s unusual emphasis on the Gestalt approach. Alternative terms used by economists, not all of them heterodox, include: ‘storytelling’, ‘appreciative theory’, ‘process theories’ and ‘path-dependent analysis’, and

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‘orientation theories’ or ‘pattern predictions’.8 In Fusfeld’s paper, however, the subjective element in pattern and/or Gestalt models is emphasized because ‘some people are able to perceive and understand larger and more complex patterns than others’ (ibid.: 31). Gestalt psychology demonstrates that the interpretation of a pattern depends on the background, experiences, and state of mind of the observer. Differences in those influences on the individual—position in the space-time continuum, place in the social order, previous psychological influences, and so forth—result in differences in perception and understanding… The general principle is that different individuals, observing the same data, will derive different understandings and identify different relationships within the whole. (ibid.) However, unless there are significant elements in common in these understandings and perceptions of relationships, intersubjective agreements among observers will be unattainable. Turning away from exposition, at least for the time being, Fusfeld’s essay raises two immediate questions. Do pattern (Gestalt, holistic) models constitute the identifiable core of a distinctive institutionalist economic methodology? Does the subjectivity inherent in these models, especially the Gestalt version, render them ‘unscientific’ in some sense of that weasel word? Conflicting answers to both these questions can easily be found in the literature. Wilbur and Harrison, for example, argue somewhat equivocally that pattern models constitute ‘the methodology implicit in’ institutional economics; they form its ‘methodological basis’; but this does not necessarily mean that pattern models should be the methodology of institutionalism (1978:61–2).9 Warren Samuels is similarly cautious, maintaining that institutionalists lack ‘a shared body of theory’ but nevertheless have ‘a common model of explanation’. They have only a way of investigating with some important guides to inquiry… I think that institutional economics does involve more than this but am prepared to recognize that substantively it may be closer to an investigatory mode than a corpus of knowledge comparable to other schools of thought. (Samuels, quoted in Wilbur and Harrison 1978:72–3) Fusfeld, too, does not commit himself unequivocally. Yet this seems to be implied in his essay, and at one point he asserts that pattern modeling based on twentieth century Gestalt psychology is ‘the appropriate method for economic and social theory’ (1980:43; emphasis added). By contrast, according to Mark Blaug, one of the foremost contemporary economic methodologists, there is no essential difference between the processes of validating storytelling (or pattern models) and the hypothetico-deductive

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explanations employed in orthodox economics. ‘Storytelling lacks rigor, or a definitive logical structure. It is all too easy to verify, and virtually impossible to falsify. It is or can be persuasive because it never runs the risk of being wrong’ (1980:127).10 Yet he concludes with a major concession: ‘Perhaps economic problems are so intractable that storytelling is the best we can do’.11 A somewhat similar admission was made by Johannes Klant, an austere, unusually clearheaded Dutch methodologist, who argued that in economics ‘proof must usually be furnished in rational discussions of the plausibility of hypotheses’ (1984:184; emphasis added).12 But while plausible general themes were not unattainable in principle, in practice the prospects of attaining them were not great. The rapid historical changeability in the domain of research and the instability of many human behavioral patterns lead one to suspect, however, that we shall never succeed and that numerical constants will never be discovered. As a rule, theories are therefore more in the nature of explanation sketches. (ibid.: 186) This comment is significant, for the concept of ‘explanation sketches’ was introduced by Carl Hempel, who distinguished between this looser type of explanation employed by historians and the genuine ‘Nomological HypotheticoDeductive’ explanations produced by natural scientists. Whether or not this distinction is accepted, Klant’s conclusion points, once again, to the underlying similarities between explanations in history and in economics (see Coats 1989, 1993/4). Bruce Caldwell, another leading economic methodologist, is more favorably disposed than Blaug towards pattern models (treating them as equivalent to ‘holistic explanations’). Such models embody a grand and ambitious vision. Indeed, by comparison standard economic analysis seems terribly restrictive, static, narrow, even pedestrian… That their program has independent support from a growing research tradition within the philosophy of science also counts favorably —an argument reinforced by developments in economic methodology in the decade or so since Caldwell’s book was published (1982: 203).13 However, few institutionalists have tried to construct concatenated models—‘of the type linking validated hypotheses or themes in a network or pattern’ (as contrasted with ‘the hierarchical, formal models employed by positivist philosophers and economists’) (ibid.: 202). This is partly because of the difficulties involved. The institutionalists’ lack of an explicit theoretical base, like their rejection of a general theoretical structure,

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rules out theory choice on non-empirical grounds, that is, criteria like theoretical connectedness, logical consistency, elegance, and the like cannot be applied. Yet, on their own admission, empirical criteria are not well-suited for deciding among competing paradigms. (ibid.: 203)14 Turning to the question whether the subjectivity inherent in pattern or Gestalt models renders them unscientific, Fusfeld argues that, while there are subjective elements both in pattern models and in formal models of the kind employed by orthodox economists, in the former category these elements ‘are often [but not invariably?] readily apparent and identifiable’, whereas in the latter they are ‘often [but not always?] hidden under the camouflage of seemingly value-free logic’ (1980:32). Such concealment is apparently much more difficult with pattern models. This, however, does not go far enough. In order to achieve a reasonable degree of consensus within the relevant part of the scientific community systematic intersubjective comparisons or tests are required, a point Fusfeld does not consider. Matters are made more complex by his admission that all the components of pattern models, and the phenomena under investigation, change over time, including the parameters as well as the variables. ‘The subjectmatter, its component parts, and the relationships among them change as the analysis develops’ (ibid.: 37). Hence, if a degree of intersubjective consensus is achieved it is likely to be only transitory.15 This recalls the early, caustic characterization of institutionalism as ‘an ever-changing description of an everchanging environment’. Fusfeld does, in fact, acknowledge that there are relatively static or slowly changing elements in any social system, but does not explain how to combine the analysis of these with the analysis of more volatile elements. The ‘wholes’ that pattern modelers choose to study may be large or small scale, but Fusfeld does not discuss the latter species.16 As examples of ‘wholes’ he instances Marx’s analysis of capitalism, the totality of Galbraith’s oeuvre, and his own analysis of the American corporate state.17 Indeed, pattern models represent ‘the [sic] style of inquiry adopted by the great thinkers of the past’ (Fusfeld 1984:684), surely a sweeping and controversial statement. In these configurations the part-whole relationships can be extraordinarily complex. ‘The theory of pattern models tells us that the functioning of the social system at any one time is affected by all of its history’ (Fusfeld 1980:37), hence changes in parameters must be taken into account as well as changes in variables. However, as Malcolm Rutherford, a sympathetic critic, has pointed out (though without specific reference to Fusfeld), if the advocates of pattern models mean simply that the part should always be analyzed within its broader context, and that those factors that create the organization, structure and evolution of the whole should be objects of study, then the claim is not objectionable, but also not necessarily inconsistent with the use of abstract or formal techniques. Alternatively, the statements can be interpreted as the

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argument that the social scientist should be trying to capture the whole in its total complexity. (1994:19; emphasis added) That, however, is impossible. Fusfeld does not explicitly consider the role of history in pattern modeling, and he does not use the term ‘storytelling’, which has been more widely adopted since his essay was published. He does, however, observe that in the notorious late nineteenth century Methodenstreit Schmoller’s recommended procedures for an historical economics constituted ‘an early version of the Gestalt method and the use of pattern models’ (Fusfeld 1987:454–5).18 Like the Austrian economists, pattern modelers are more concerned with ‘understanding’ (verstehen) than with explanation according to the hypotheticodeductive model. According to Fusfeld, understanding involves ‘a subjective weighting of the various elements’ in the model. While each part of the pattern may be verified in the sense that is consistent with historical fact and empirical evidence, and the subsidiary causal explanations do not lead to falsified hypotheses, the overall configuration is validated by the judgment of the investigator. (1980:40–1) This reference to judgment is interesting, given Hayek’s recognition of the problem of analyzing very complex phenomena. In such cases the recognition of the conditions to which the theory applies may often require the ready perceptions of patterns or configurations which demand a special skill which few acquire. The selection and application of the appropriate scheme thus becomes something of an art where success or failure cannot be ascertained by any mechanical test… [and] this constitutes no more than a distinction of degree from the physical sciences. (Hayek 1967:18)19 This paragraph reveals a certain eclecticism in Fusfeld’s methodological and epistemological views. Consistency with ‘historical fact and empirical evidence’, and references to ‘falsified hypotheses’ and ‘validation’, clearly distance him from some of the more extreme forms of anti-empiricist post-positivism to be found in current methodological writings in economics. These are complex and controversial matters, to be approached with caution in analyzing Fusfeld’s methodology. Fusfeld can certainly be exonerated from the charge recently leveled at some exponents of the ‘old’ institutionalist economists, namely their

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almost total rejection of any and all formal techniques, even where these could play an illuminating role (as in the case of game theory), and in the overly empiricist view of the way in which pattern models should be developed and constructed. (Rutherford 1994:19) But while he does not reject formal methods, Fusfeld does not provide a satisfactory account of the interaction between formal and informal elements in pattern models, and the relationship between causal explanations and understanding in their formation. FUSFELD’S TREATMENT OF CHANGE Viewed retrospectively, the least satisfactory aspect of Fusfeld’s ‘Conceptual Framework’ essay is his treatment of change, in the section concerned with new approaches. This contention may at first sight seem strange, even perverse, given his work as an economic historian and historian of economic ideas, and his manifest interest in the long-run development of large-scale socio-economic systems. Yet it is a measure of the extent to which economic methodology has advanced since 1980, both among orthodox and heterodox economists. Of course Fusfeld’s essay does not ignore intertemporal relationships, the role of ‘real’ historical (as against analytical) time, and the interaction of rapid as against slowly changing (e.g. institutional inertial) elements in society; and his concept of a ‘cone of causation’ is vivid, albeit presented only in very general terms (1980: 35). His attempt to distinguish between dialectical change—resulting from ‘the interaction of opposing or contradictory forces, which creates a new situation’— and evolutionary change, is unclear, for the latter is depicted as ‘also dialectical in nature, resulting from some form of conflict, contradiction, or disparity within existing configurations of social processes and institutional structures’. Indeed, he maintains that from the standpoint of ‘the pure theory of pattern models, the distinction between dialectical and evolutionary change does not appear to be a fruitful one’ (ibid.: 38, 39). During the past decade and a half there has been a tremendous growth of interest in, and literature on, processes of change in economic and social systems, together with a concomitant deepening of understanding and analytical sophistication. This has been manifested among American institutionalists, their European counterparts in the recently founded European Association for Evolutionary Economics, among supporters of the revival of interest in Schumpeter’s economics, and among orthodox economists sensitive to the problems Fusfeld exposed in Section 2 of his essay. Needless to say, this extensive and complex intellectual terrain cannot be examined in detail here, but an indication of the intellectual possibilities and excitement of much of this work can be conveyed by reference to Paul David’s article on ‘Path Dependency’, mentioned earlier (1993).

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According to David, an American economic historian at one time associated with the so-called ‘new’ economic history, there is currently a highly promising reemphasis on the character of economics as an historical social science. Mainstream economics, he argues, has had a restrictive effect by ignoring events, causal explanations involving sequential actions, and ‘the disequilibrium foundations that must underlie any predictively useful theories’. And this has contributed directly to the disjuncture between theoretical and empirical research programs (ibid.: 36–7).20 More recently, however, there has been an alteration in the general climate of thought, which has accorded new significance to details of historical sequence—a development associated with the growth of interest in non-linear dynamics across many disciplines and the consequent emergence of the so-called ‘sciences of complexity’. This intellectual ferment may be eroding the basis of the former stability of the ahistorical path on which our discipline has remained trapped (all too self-contentedly, it should be said) for well over a century. But equally, if not more, decisive will be the attainment of a ‘critical mass’ among the subset working on problems of positive feedback within the discipline of economics. (ibid.: 36–7) Of particular interest to the historian of economics is David’s enigmatic comment that our altered ability to discern positive feedback mechanisms at work in the world about us may have as much to do with the internal social dynamics of our science, and the external intellectual environment formed by developments in other disciplines, as it does with the technological and institutional and transactional phenomena we are seeing. (ibid.: 31) CONCLUSION Obviously no single article, however perceptive and broad in scope, can convey the variety, depth and range of current research and discussion of the processes of economic and social change. But in an essay dedicated to Dan Fusfeld it seems especially appropriate to cite the work of a thoughtful, analytically sophisticated economic historian that is in harmony with the general tone of his ‘Conceptual Framework’. Other, among many, possible examples of developments since that essay are the partly parallel, but in certain respects fundamentally different characteristics and trends in the so-called ‘old’ and ‘new’ institutional economics,21 and the intensive exploration of evolutionary theories of economic and social change, especially those linking economic and biological processes. It is to be hoped, and indeed it is highly likely, that when

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Fusfeld publishes his prospective methodological volume he will draw upon, and modify and extend this literature.22 NOTES 1 For interesting comments on Fusfeld’s teaching style see Brazier (1962:242–3, 248– 9). 2 For a powerful critique of the current state of affairs in academic economics see, for example, Hutchison (1992), especially chapter 2. 3 Redman (1991) estimates that more than fifty books on economic methodology were published in the 1970s and 1980s, and the flood has not yet abated. No wonder Hutchison observed that ‘this last decade of the century probably should be, and just conceivably might be, the methodological decade’ (Hutchison 1992:x). 4 The following list, which extends back beyond 1980, includes: anarchism, antifoundationalism, causal holism, confirmationism, constructivism, conventionalism, critical rationalism, critical realism, deconstruction, descriptivism, discourse analysis, empiricism, fallibilism, falsificationism (naive or sophisticated), growth of knowledge theories, hermeneutics, holism, instrumentalism, logical empiricism, logical positivism, methodology of scientific research programs, modernism, naturalism, positivism, postpositivism, postmodernism, pragmatism, predictivism, realism, and rhetorical analysis. Needless to say, these categories overlap, and I do not intend to repeat Redman’s mistake by claiming ‘to represent as many methodological positions as possible’ (1991: vii). Fortunately, as will appear later, many of the more recent variants are inapplicable to Fusfeld’s eminently sensible approach. His ‘Conceptual Framework’ is not treated here merely as a standpoint from which to view the current Babel of economic methodology. 5 The fundamentally normative character of orthodox economic theory is widely recognized, especially by institutionalist and radical economists. For a cogent statement of the same broad conclusion by a ‘hard-nosed’ philosopher of economics see Rosenberg (1992:216–27), who argues that general equilibrium theory can be interpreted as a species of contractarian political philosophy. 6 A number of statements in this passage are certainly contestable; but to examine them in detail would not be fruitful, given the broader objective of this chapter. Exposition rather than dissection is appropriate at this point. 7 However, this analogy seems unfortunate, given that the individual parts of a jigsaw puzzle are rigid, unlike the elements in a pattern model, and the size and shape of the completed ‘whole’ are predetermined, before the exercise begins. 8 On storytelling, see Ward (1972: chapter 12) and McCloskey (1990). On ‘appreciative theory’ see Nelson and Winter (1982). Process or ‘processual’ theories are widely discussed in the old and new institutionalist literature, for example in Langlois (1986:7 n). For a perceptive discussion of ‘path-dependent economic analysis’ see David (1993); also Hodgson (1993:203–210). Hayek employs the terms ‘orientation theories’ and ‘pattern predictions’ in his essays ‘Degrees of Explanation’ and ‘The Theory of Complex Phenomena’ (1967: 3–21, 22–42). For the advocacy of ‘pattern models’ in economics see the widely quoted article by Wilbur and Harrison (1978). Earlier discussions of pattern models occur

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9

10

11

12 13

14

15

16

17

in Kaplan (1964) and Diesing (1971). The philosophy of holism derives from the philosopher-statesman Smuts (1926). For its application to economics see Gruchy (1947:18–28). Gruchy also provides extensive discussion of the concept of process. In this account I have drawn on my earlier papers; see Coats (1989, 1993/4). However, at one point they come close to saying that Diesing’s participant observer approach is the methodology of institutionalist economics. One recent author, after analyzing a series of articles in the leading institutionalist journal, has concluded that there is no such thing as a special set of institutionalist methods (Lind 1993). Ramstadt endorses this view (1986). ‘How does one validate a particular piece of storytelling? One asks, of course, if the facts are correctly stated; if other facts are omitted; if the lower-level generalizations are subject to counter examples; and if we can find competing stories that will fit the facts. In short, we go through a process that is identical to the one that we regularly employ to validate the hypothetico-deductive explanations of orthodox economics’ (Blaug 1980:127). Blaug immediately adds, however: ‘But if such is the case, it is odd that we should actually recommend the safe method of storytelling and deplore the risky methodology of falsificationism. Surely the more falsificationism, the better?’ (1980:127). In the decade and a half since the first edition of Blaug’s book appeared the case for and against falsificationism has been vigorously debated, with the current balance of expert opinion against. For a careful examination of the concept of plausibility see Nooteboom (1986). Caldwell’s entire account of institutionalist methodology is valuable (1982: 200– 5). Recent developments in economic methodology and the philosophy of science discussed in the Journal of Economic Issues include hermeneutics, critical theory, rhetoric, methodological pluralism and postmodernism. No wonder there are said to be ‘competing paradigms’ in institutionalist economics. On concatenated theories see Wilbur and Harrison (1978:80–1); these authors treat the concatenated structure of holistic theories as equivalent to pattern models (ibid.: 71–83). Fusfeld’s concept of pattern models seems more complex than Kaplan’s (1964) concept of concatenated structures, since he refers to logical analysis in these models moving ‘backwards, sideways, up and down’ (Fusfeld 1980:29). In the case of Gestalt psychology this is an especially significant problem, for the perception of patterns differs not merely between individuals but at different times, possibly even frequently, for a given individual. This is true, for example, of the well-known figure-ground example in which the relationship between an object and its background appears to vary according to the observer’s perception. Small-scale wholes form the basis of Diesing’s analysis, which emphasizes the role of the participant observer, who must ‘allow himself to be socialized and accept the point of view and ideology of his hosts’. How this is possible when ‘studying a whole human system in its natural setting’ is unclear. He also argues that the concepts employed in the pattern model must be ‘relatively concrete and particularized, close to the real system being described’, a point Fusfeld would doubtless accept (quoted in Rutherford’s excellent discussion in 1994:16–14). See Fusfeld (1980:28), where he provides a more extended list of ‘grand schemes’ or ‘great integrative configurations’, and ‘smaller constructs’. See also Fusfeld (1984:684).

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18 The question of the historicity of pattern models, Gestalt models, and story-telling cannot be fully explored here. According to McCloskey (1990:64) ‘most economics is saturated with narration’. Fusfeld recognizes that pattern models embody an amalgam of ‘logical relations and historical reality: real types rather than ideal types’. But while ‘ideal types are constructs of pure logic…real types have a historical aspect as well’ (1980:36). 19 The role of pattern recognition in the natural sciences is perceptively discussed by an eminent physicist in Ziman (1978). The role of tacit knowledge, a form of ‘art’, is examined extensively in Polanyi (1957, 1967). 20 As examples, reflecting his main interests as an economic historian, he cites the comparatively recent recognition of local or global positive feedbacks, endogenous technical progress through learning-by-doing and learning by using, habituation affecting tastes and behaviors, and adaptive cognitive processes (such as Bayesian information processing) affecting the formation of expectations. 21 For an authoritative review of the literature see Rutherford (1994). A selective list of articles on the process of change from the Journal of Economic Issues includes the following: Carrier (1992); Dopfer (1986, 1988, 1991a,b); Poirot (1993); Radzicki (1988, 1990); and Setterfield (1993). There is, of course, a very large and highly technical orthodox literature on non-linear dynamics and disequilibrium systems. 22 See, for example, the comprehensive treatment of recent work in Hodgson (1993). Also see Witt (1993).

REFERENCES Blaug, M. (1980) The Methodology of Economics, or how Economists Explain, Cambridge: Cambridge University Press. Brazier, M.C. (1982) ‘The Economics Department at the University of Michigan: A Centennial Retrospective’, in S.H.Hymans (ed.) Economics and the World around It, Ann Arbor: University of Michigan Press. Caldwell, B. (1982) Beyond Positivism. Economic Methodology in the Twentieth Century, London: Allen & Unwin. Carrier, D. (1992) ‘A Methodology for Pattern Modeling: Nonlinear Macroeconomic Dynamics’, Journal of Economic Issues, 26:221–42. Coats, A.W. (1989) ‘Explanations in History and Economics’, Social Research, 56: 331– 60. —— (1993/4) ‘What Can we accomplish with Historical Approaches in an Advanced Discipline such as Economics?’, History of Economic Ideas, II: 227–65. David, P. (1993) ‘Historical Economics in the Long Run: Some Implications of Path Dependence’, in G.D.Snooks (ed.) Historical Analysis in Economics, London: Routledge. Diesing, P. (1971) Patterns of Discovery in the Social Sciences, Chicago: Aldine Atherton. Dopfer, K. (1986) ‘The Histonomic Approach to Economics: Beyond Pure Theory and Experience’, Journal of Economic Issues, 20:989–1010. —— (1988) ‘Classical Mechanics with an Ethical Dimension: Professor Tinbergen’s Economics’, Journal of Economic Issues, 22:675–706.

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—— (1991a) ‘The Complexity of Economic Phenomena’, Journal of Economic Issues, 25:39–76. —— (1991b) ‘Toward a Theory of Economic Institutions, Synergy and Path Dependency’, Journal of Economic Issues, 25:535–50. Fusfeld, D.R. (1972) Economics, Boston, MA: D.C.Heath. —— (1973) ‘Types of Radicalism in American Economics’, American Economic Review, 63:145–6. —— (1976) Economics, 2nd edn, Boston: D.C.Heath. —— (1980) ‘The Conceptual Framework of Modern Economics’, Journal of Economic Issues, 14:1–52. —— (1984) ‘John Kenneth Galbraith’, in H.W.Spiegel and W.J.Samuels (eds) Contemporary Economists in Perspective, Vol. I, Part III B, Greenwich, CT: JAI Press. —— (1987) ‘Methodenstreit’, in J.Eatwell, M.Milgate, and P.Newman (eds) The New Palgrave Dictionary of Economics, Vol. 3, London: Macmillan. —— (1990a) ‘Economics and the Determinate World View’, Journal of Economic Issues, 24:355–9. —— (1990b) ‘Economics, Science and Society’, Methodus, 2:30–2. Gruchy, A.G. (1947) Modern Economic Thought: The American Contribution, New York: Prentice Hall. Hayek, F. (1967) Studies in Philosophy, Politics and Economics, Chicago: University of Chicago Press. Hicks, J.R. (1979) Causality in Economics, Oxford: Basil Blackwell. Hodgson, G.M. (1993) Economics and Evolution: Bringing Life Back into Economics, Cambridge: Polity Press (Blackwell). Hutchison, T.W. (1992) Changing Aims in Economics, Oxford: Basil Blackwell. Kaplan, A. (1964) The Conduct of Inquiry: Methodology for Behavioral Science, San Francisco: Chandler Publishing Co. Klant, J. (1984) The Rules of the Game: The Logical Structure of Economic Theories, Cambridge: Cambridge University Press. Langlois, R. (ed.) (1986) Economics as a Process, Cambridge: Cambridge University Press. Lind, H. (1993) ‘The Myth of Institutionalist Method’, Journal of Economic Issues, 27:1– 17. McCloskey, D.N. (1990) ‘Storytelling in Economics’, in D.Lavoie (ed.) Economics and Hermeneutics, London: Routledge, 61–72. Nelson, R. and Winter, S. (1982) An Evolutionary Theory of Economic Change, Cambridge, MA: Belknap Press of Harvard University Press. Nooteboom, B. (1986) ‘Plausibility in Economics’, Economics and Philosophy, 2: 197– 224. Poirot, C.S., Jr (1993) ‘Institutions and Economic Evolution’, Journal of Economic Issues, 27:887–907. Polanyi, M. (1957) Personal Knowledge: Towards a Post-critical Philosophy, London: Routledge. —— (1967) The Tacit Dimension, London: Routledge. Radzicki, M. (1988) ‘Institutional Dynamics: An Extension of the Institutionalist Approach to Socioeconomic Analysis’, Journal of Economic Issues, 22:633–65.

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—— (1990) ‘Institutional Dynamics, Deterministic Chaos, and Self-organizing Systems’, Journal of Economic Issues, 24:57–102. Ramstadt, Y. (1986) ‘A Pragmatist’s Quest for Holistic Knowledge: The Scientific Methodology of John R.Commons’, Journal of Economic Issues, 20:1067–105. Redman, D. (1991) Economics and the Philosophy of Science, Oxford: Oxford University Press. Rosenberg, A. (1992) Economics—Mathematical Politics or Science of Diminishing Returns?, Chicago: University of Chicago Press. Rutherford, M. (1994) Institutions in Economics: The Old and the New Institutionalism, Cambridge: Cambridge University Press. Setterfield, M. (1993) ‘A Model of Institutional Hysteresis’, Journal of Economic Issues, 27:755–74. Smuts, J.C. (1926) Holism and Evolution, New York: Macmillan. Ward, B. (1972) What’s Wrong with Economics?, London: Macmillan. Wilbur, C.K. and Harrison, R.S. (1978) ‘The Methodological Basis of Institutional Economics: Pattern Model, Storytelling, and Holism’, Journal of Economic Issues, 12:61–98. Wise, G. (1980) American Historical Explanations: A Strategy for Grounded Enquiry, Minneapolis: University of Minnesota Press. Witt, U. (ed.) (1993) Evolutionary Economics, Cheltenham: Edward Elgar. Ziman, J. (1978) Reliable Knowledge: An Exploration of the Grounds for the Belief in Science, Cambridge: Cambridge University Press.

4 THE CONTRIBUTIONS OF DANIEL R.FUSFELD, ECONOMIST Nancy E.Bertaux

We live in an era of overspecialization. According to the current norm, economists, and academics in general, limit themselves to an exceedingly narrow spectrum of subject matter, and this frequently leads to serious neglect of the broader issues and trends in our discipline and in society at large. Professor Fusfeld has made contributions to the fields of economic theory, economic methodology, history of economic thought, economic history, labor history, political economy, labor economics, economic pedagogy, and applied economics. It is clear from this list alone that he is a welcome exception in our era of overspecialization. The wide range of his interests, knowledge and expertise in economics is a contribution in and of itself.1 The price that he has paid is, not surprisingly, a notable lack of recognition for his efforts in some of the fields in which he has published, since his publications in any one field have tended not to be as numerous or consistent over time as those who have concentrated all their research in that field. The wide scope of Fusfeld’s work has thus limited his impact in particular fields (although I hope this essay, and this volume as a whole, will help to remedy this). In addition to the sheer breadth of Fusfeld’s work, within his individual writings, he consistently focuses on the broader significance and meaning of the subject at hand. Within his work, there is also a continuing emphasis on the economic status of groups our discipline tends to ignore: namely, the poor, minorities (especially African-Americans), and the working class in general. This focus has not been particularly popular in the era in which Fusfeld lives. It is impossible to thoroughly and critically assess Fusfeld’s forty-odd years’ worth of research in a single essay. The purpose of this chapter is therefore more modest. It seeks to identify and briefly outline his major contributions to economics. It begins with a broad overview of Professor Fusfeld’s works, and goes on to summarize and assess a selected subset of his contributions in each of the following four areas: economic thought in historical perspective, economic theory and method, political economy and labor, and the pedagogy of economics. The chapter ends with some brief, closing thoughts.

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AN OVERVIEW OF THE WORKS OF DANIEL R.FUSFELD The research for this chapter was very enjoyable. For months, nearly all of my reading consisted of Professor Fusfeld’s articles and books; it was a pleasurable and intellectually stimulating time. This calls attention to one of the key features of his work, its eminent readability, which is due to a combination of factors: excellent prose, penetrating insights, attention to empirical foundations, and a wide perspective on subjects that are of crucial importance to the discipline and to society. Fusfeld remains active in writing and publishing, so this will be a review of his work as of this date (May 1996).2 The bibliography contains a fairly comprehensive list of his publications as of 1996, while the chapter itself discusses only a small subset of those works, owing to limitations of time and space. Fusfeld has published in a much broader arena of fields than is typical for an economist. Table 4.1 groups selected writings by Fusfeld according to fields within the discipline of economics; about one-fourth of his approximately sixty published articles appear here. The breadth of Fusfeld’s work is clear from the distribution of writings across the seven fields represented. Furthermore, many of his individual works made contributions in two or more fields, showing the fundamentally integrative nature of his approach. In fact, in recognition of his integrative approach, I will often depart from the categories implied by these traditional fields of study in the course of this discussion. Economic thought In Fusfeld’s writings, the history of economic thought is inextricably entwined with economic history. This approach was evident in his first book (based on his Ph.D. dissertation), The Economic Thought of Franklin D.Roosevelt and the Origins of the New Deal, published in 1956. In this work, Fusfeld showed how F.D.R.’s economic philosophy was rooted in his family background and progressivism, developed under the influence of the economic problems of his day, and led to his advocacy of specific political programs. Recognized for its careful grounding in primary sources, the book is still prominently cited in studies of the New Deal (Halsted 1983:400). It illustrates his lasting commitment to empiricism, to grounding one’s theories and analyses in the best data one can uncover or develop. Fusfeld tells the story of his thesis adviser at Columbia, Joseph Dorfman, and his constant question, ‘How do you know that?’ as the root of his own appreciation of empirical foundations.3 One of Fusfeld’s best-known works is his fascinating history of economic thought, The Age of the Economist, originally published in 1966 (the seventh edition appeared in 1994). To date, this elegant, relatively small volume has sold some 175,000–200,000 copies over a quarter of a century, and has been published in Spanish, Italian, German, Japanese and Thai editions (the US

Table 4.1 Selected writings of Daniel R.Fusfeld, by field

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Note a When there has been more than one edition, the dates of the first and the latest editions are given.

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Information Service even distributed a simplified English edition in 1970). The book is a masterpiece of the blending of economic history and the history of economic ideas, as it focuses on the manner in which political economy (later known as economics) both influenced and was influenced by historical events, trends, and political, social and economic institutions, from the Middles Ages to the Clinton administration. It is replete with analysis of concrete historical events; a random opening of the book to three different pages resulted in my finding references to the Napoleonic Wars ending in 1815, the 1970s politics of Peruvian priest Gustavo Gutierrez, and military expenditures in the United States during the Cold War era. At this point, I depart from the text and refer from memory to Professor Fusfeld’s lectures on the history of economic thought, where he drew a distinction between ‘historical time’ and ‘analytic time’. The former is real-life time, where nothing ever stays the same, and the latter is the fictional space between events in formal economic models, where all other factors are forever held constant. In The Age of the Economist, economics as a field of study is shown to change and evolve in true historical time. Another notable feature of Fusfeld’s analysis in the book is its attention to the way in which ‘economic doctrines move with the tides of politics and provide the intellectual letters of credit that justify specific political strategies’ (1994: 171). His philosophy of economic thought is decidedly not in the ‘absolutist’ mold, which sees economic theory as progressing from incorrect to correct, and the history of economic thought as the ‘wrong ideas of dead economists’. The Age of the Economist masterfully shows economic theory at any point in history as a child of its times, with particular relevance to those times. In fact, due to the influence of powerful social and economic institutions, ideas will often be selected as ‘important’ precisely because they support the aims of those in power. In his lectures, this was succinctly stated as his ‘Second Law of Intellectual History’: an idea is considered ‘important’ when it is useful to those in power. (The First Law was: there are no new ideas—if you have a good idea, be assured that someone else thought of it first.)4 The Age of the Economist does not focus on the details of the economic models it describes, and would be unsatisfying for anyone who comprehends economics only through a mathematical lens. By my count, the entire book contains one equation, no graphs, and one schematic diagram. It does not resolve the debates or issues related to the inner mechanics of economic models, especially mathematically based models. However, it is still informative on the overall structure, purpose and assumptions of such models. Another notable contribution of Fusfeld to the field of history of economic thought is his ‘oral history report of a Keynesian-cross diagram that may have reflected Keynes’ view of the matter in 1941’. This contribution was based on Fusfeld’s attendance at the lectures of Arthur E. Burns at George Washington University (Fusfeld 1985, 1989). After Burns reported to his class that he had recently conferred with Keynes (who was in town consulting with the Treasury Department), on the matter of the shape of the aggregate supply function, Burns

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drew a diagram where the function was not a 45° line from the origin, but was upward-sloping and increasing in slope, beginning at a point above and to the right of the origin, and intersected from above by the (also upward-sloping and increasing in slope) aggregate demand function. Among other advantages, this diagram shows changes in aggregate demand as having both price and output effects, with the size of the output effect dependent on the slope of the aggregate supply function at that point (at near full employment the effect would be small, but in the depression case it would be large), so that the illustration of prices rising simultaneously with unemployment is not a problem. The diagram can also accommodate interdependence of aggregate supply and demand (e.g. a shift in aggregate supply resulting in a shift in aggregate demand due to the change in income to factors of production). Fusfeld’s account of this Keynesian-cross diagram was vigorously questioned by Patinkin (1989), who discounted the extent and significance of Burns’s probable contact with Keynes. Fusfeld published a spirited reply (1989). All of this occurred in the pages of the History of Political Economy, and makes for lively reading. Economic theory and method In the area of economic theory, Fusfeld has been called one of the main formulators of contemporary institutionalist thought, along with economists such as Kenneth Boulding, Warren Samuels, and John Kenneth Galbraith (Screpanti and Zamagni 1993:419). Beginning in the late 1970s, Fusfeld published a series of three important theoretical articles in the Journal of Economic Issues, which is viewed as the major journal of institutionalist thought.5 This series of articles exhibit an artful blending of the fields we normally keep in separate boxes: economic theory and method, economic history, political economy, and the history of economic thought. These articles, ‘The Rise of the Corporate State in America’ (1972), The Development of Economic Institutions’ (1977), and ‘The Conceptual Framework of Modern Economics’ (1980b), taken as a group, constitute a broadly drawn perspective on the economy that places markets under the same umbrella as social and political institutions. When combined with a later publication, ‘The Single Price Theorem’ (1990), what emerges is nothing less than a major critique of modern economic theory and method. While some of his observations are similar to those of John Kenneth Galbraith and other critics of modern economics, key elements in Fusfeld’s critique are unique contributions. The first article in the series, ‘The Rise of the Corporate State in America’, described the major twentieth century trends that produced the modern corporate state in the United States.6 These included the concentration of economic power in a relatively small number of supercorporations, the increasing international dominance of these supercorporations, a shift of political power in the direction of the federal government, creating the interventionist ‘positive state’, and symbiosis between economic and political power, which led to the ‘merging of

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public and private power’. In the corporate state, ‘individual interests are subordinated to the common good, which is determined by representatives of the chief economic interests affected, and the decisions are enforced by the state’ (Fusfeld 1972:10). The corporate state uses psychological appeals to obtain the acquiescence of the majority of individuals who are not part of the power elite, and who go along with this state of affairs so long as the economic system is seen as stable and as providing sufficient rewards. The nature of economic systems as a whole and the manner in which such systems develop and change over time were analyzed in the second article, ‘The Development of Economic Institutions’. Fusfeld traced the treatment (and sometimes neglect) of this subject in the following strands of economic thought: (1) orthodox economics (in which he included classical and neoclassical authors from Adam Smith to Douglas North), which most often simply assumed the capitalist system of markets as a given, (2) the nineteenth-century German and English historical institutionalists, such as Henry Sumner Maine and Ferdinand Tonnies, (3) the American institutionalists, especially Thorstein Veblen, John R.Commons, and Clarence Ayres, (4) Karl Marx, (5) the historical analyses of Max Weber and Karl Polanyi, and (6) analysis of the interaction of the economic with the political and ideological by Richard Tawney, Barrington Moore, Jr. and Immanuel Wallerstein. In assessing these disparate strands of thought, Fusfeld concluded that economic institutions are part of the larger social structure, and cannot be meaningfully analyzed without reference to that larger structure. This implies the need for a general theory of social structure, which must include the dynamics of change (encompassing both gradual, evolutionary change as well as sudden, revolutionary change) as an integral element. Further, such a theory must balance sufficient generality to cover all known forms of social organization (such as tribal society, feudalism, capitalism, and socialism) with the specificity necessary for the analysis of concrete historical situations. Fusfeld acknowledged that this was a tall order. He argued that Marx had come closest to a workable theory of social structure, but he critiqued Marx’s theory on a number of grounds, especially the conclusion that economic abundance will end the process of social change, by questioning the assumptions about human behavior upon which it is based. Fusfeld concluded the article with the observation that the very concept of economic institutions was the result of ‘an historical process in which the economic activities of the social order are institutionalized separately from other aspects of human activity’ (1977:778), which has not been the case throughout most of human history. In the third article of the series, ‘The Conceptual Framework of Modern Economics’, Fusfeld offered a systematic critique of the methodology of mainstream economics in the twentieth century,7 which he summarized as consisting of four basic principles: logical empiricism, mathematical models, general equilibrium theory, and econometric methods. Carefully documenting fundamental challenges to the first three principles, Fusfeld argued that ‘the

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claims of modern economics to scientific validity are now highly questionable’ (1980b: 1). He described the epistemological issues regarding logical empiricism, noting that logical propositions cannot be proven either correct or false by empirical tests of hypotheses, since such propositions are fundamentally metaphysical, and detailed the further problems of conflicting hypotheses and competing theories. He then noted that [i]n practice, this strict interpretation of the method is seldom applied. The general laws derived by deduction are interpreted as congruent with reality because hypotheses derived from them are not falsified. Hypotheses are accepted not only because they are not falsified, but also because they are derived from logical propositions…. Logical deduction of general laws and empirical testing of hypotheses are joined together in a mutually supporting relationship. (ibid.: 5) He went on to critique the use of mathematical models, citing Gödel’s theorem that all large systems of mathematical logic must contain one or more propositions that are neither provable nor disprovable, and are thus incomplete. Economists have traditionally used the ceteris paribus assumption to close their models, but this only created an ‘illusion of completeness. The model may be complete as an exercise in logic, but it is not complete as an explanation of the phenomenon under inquiry’. He noted the inherent subjectivity of the actual manner in which the methods of logical empiricism and mathematical models are used, criticizing modern economics not so much for that subjectivity as for its refusal to admit that it is subjective: ‘The idea of value-free science dies hard’, especially among economists (Fusfeld 1980b: 8). According to Fusfeld, there are a number of problems with general equilibrium theory, including its logical structure. It is improper, in fact, to link multiple partial equilibria, when each is based on a ceteris paribus assumption, ‘under the assumption that the determinate results of the partial equilibria continue to hold in the new general equilibrium within which they are now placed’. The IS-LM model is one such example, where shifts in one of the curves are typically presumed not to result in a shift of the other, on the questionable assumption that the underlying psychological variables do not change. If this assumption is dropped, indeterminacy arises, and ‘both the IS and LM curves persist in jumping about on the page, like the croquet mallets in Alice in Wonderland that kept turning into flamingos’ (ibid.: 13). Other problems with general equilibrium analysis include its weak production theory; Joan Robinson was ‘the first to show that the emperor had no clothes’ (ibid.: 17). Marginal productivity theory was shown to be restricted to the special case of constant returns in the long run, and the assumption of perfect substitutability between labor and capital was shown to imply that capital is a fund of value rather than concrete goods, which reduces the model to one of pure exchange.

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Fusfeld added two other elements to his critique of general equilibrium theory: the existence of market imperfections such as imperfect information and mobility, chance and indeterminacy (even in the theory of the second best), and the impact of such imperfections on rational human behavior—i.e. if I know from past experience that optimizing is impossible, I will rationally base my behavior on other principles.8 The use of highly restrictive assumptions in modern economics is akin to a situation where ‘the tail is allowed to wag the dog: the subject matter of the discipline is defined by the theory, rather than the theory being used to analyze a previously identified subject’: As the limiting assumptions that lead to determinate equilibria are dropped, we move not merely into a more complex world with a larger number of variables, but into a qualitatively different world in which the very nature of the outcomes is changed, from the Panglossian rationalism of the eighteenth century to the existential dilemmas of the twentieth. (ibid.: 27) In the final section of ‘The Conceptual Framework of Modern Economics’, Fusfeld offered the alternative framework of pattern (or Gestalt) models, where the goal is an understanding of economic phenomena, and the emphasis is more on developing policy guidelines than on predictions. He described the work of authors such as Adam Smith, Karl Marx, Joseph Schumpeter, and Karl Polanyi as essentially pattern models. Pattern models begin with empirical data from the real world: The observed data are then linked together to form a group of unifying concepts, which together form a conceptual framework. The conceptual framework has two parts. One part explains the institutional structure of the phenomenon under investigation; the other explains the processes operating within the institutional structure and its connection with other structures. The conceptual framework can then be modified or amended as further empirical data are obtained, as conditions change, and as the perspective widens. (Fusfeld 1993b: 43) Pattern models are open, informal models that do not lay claim to universality, they incorporate change over time as people learn and change, and they include both deductive and intuitive logic, as causation is seen not as simple and linear but as complex, multidirectional and three-dimensional. In his important theoretical essay ‘The Single Price Theorem’ (1990), Fusfeld extended his critique of modern economics to the ‘law of one price’.9 Acknowledging others’ findings that various market imperfections result in a distribution of prices rather than a single price, Fusfeld challenged ‘the validity of the single price theorem in its stronghold, the perfectly competitive market’

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(1990:37). He carefully reviewed the literature from Cournot to the present, revealing the circular reasoning and pseudo-proofs typically used to ‘prove’ the existence of a single price in a competitive market. Theorists often assert that, if there were more than one price, buyers would only buy at the lowest price, forcing other sellers to lower their price to this level. But, Fusfeld asked, ‘If buyers are unwilling to buy at the higher price, why would not sellers be unwilling to sell at the lower price?’ He pointed out a further error in logic: This argument assumes, however, that the low-price seller is able to supply the entire market demand. If that is not the case, other sellers can charge higher prices and still make sales… The logical problem is that no seller is large enough to affect prices in the market, by assumption. (ibid.: 42–3) Even in the course of this highly theoretical essay, Fusfeld’s empirical bent is evident, as he observed that even the markets economists typically cite as closest to perfectly competitive, such as securities and foreign exchange markets, do not exhibit single prices in the real world, but instead fluctuate on any given day, so that the reported single price for the day is simply the last. ‘The idea that these price movements degenerate to a single price…is imposed on the date by the observer looking for that conclusion. It does not follow from observation’ (Fusfeld 1990:44). In the next section of the essay, Fusfeld demonstrated two propositions—that an initial distribution of prices will not degenerate to a single price, and that a non-equilibrium single price tends to lead to a price distribution—by reasoning from the following four premises: price formation takes place over time, there is interaction between the decisions of buyers and sellers, buyers and sellers exhibit varying abilities and preferences, and these preferences can change over the price formation process. He concluded with a discussion of the implications of the debunking of the single price theorem, including difficulties in defining equilibrium, whether results will be efficient or optimal, and the effects of the indeterminacy introduced. In short, since the single price theorem is a ‘fundamental building block’ of modern general equilibrium theory, this implies the need to rethink the whole body of theory (Fusfeld 1990:58–9). The series of four theoretical essays discussed above presented, then, both a description and a critique of modern economics (and the modern economic system), as well as an alternative vision of economic inquiry. Political economy and labor Fusfeld’s work is also well known in the field of political economy. In typical Fusfeld fashion, his writings on political economy intersect with other fields of inquiry. One of his first published articles was an empirically based paper, which had appeared on the program of the American Economic Association, on the

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subject of joint subsidiaries in the iron and steel industry (Fusfeld 1958c). This paper was competitively selected in 1956, in the first blind reviewing process, as the best paper submitted to the program committee of the American Economic Association, and was subsequently published in the American Economic Review. It must be mentioned that Fusfeld had previously published an article in this journal (1956c) criticizing the American Economic Association for allowing faculty at a few major universities (and their students) to monopolize the annual meetings, and the institution of a blind and competitive selection process was a response to this criticism. In this article, Fusfeld described the complicated organizational structure of the iron and steel industry and its fifty-three intra-industry and seventeen interindustry subsidiaries and documented patterns of interlocking ownerships, based on primary research. Through this careful empirical work, he showed the pattern of market power that emerged from the complex web of subsidiaries, pointing out that the lack of reporting requirements in this area allowed companies to conceal the extent of their market dominance, and raising larger questions about antitrust policy and the role of big business in the US economy. Fusfeld’s essay ‘Types of Radicalism in American Economics’ (1973c) appeared in the American Economic Review, and sought to define various streams of American radical economics, from the perspective of the history of economic thought, by its approaches (life style, utopian, intellectual, and activist) and its functional elements (value system, alternative future, critical analysis, and strategy for change). He used the economic thought of Henry David Thoreau, Edward Bellamy, Thorstein Veblen, and Daniel DeLeon to illustrate variations in American radical economics in terms of these approaches and functional elements, and asserted that all of the types are useful contributions. Further, he emphasized the importance of different types of radicals working together. For example, isolation of the intellectual radical from the activist radical is detrimental to both. The intellectual radical is cut off from those who might well use his ideas and he gives up the opportunity to subject his concepts to the critical test of political reality. And the activist radical may find himself without the type of critical social analysis that is needed if a radical movement is to be strong. (ibid.: 150) Thus, no one approach by itself was sufficient to advance the cause of radical economics: ‘whatever mode of radical thought that one may adopt, whether it be life-style, utopian, intellectual, or activist radicalism, each has its place and each can make a significant contribution’ (ibid.: 151). He does not, however, address the actual mechanisms for cooperation between the various types of radicals. Professor Fusfeld has also contributed a study, The Rise and Repression of Radical Labor in the United States, 1877–1918, that reviews events in labor

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history to show how the power of the state was used to crush incipient radical labor movements in the late nineteenth and early twentieth centuries. He showed how the response of business and government to radical workers’ movements such as the Knights of Labor, the Western Federation of Miners, the American Railway Union and the Industrial Workers of the World ultimately led to their failure. He concluded his study by noting that the question in labor history, ‘Why didn’t radical labor develop in America?’—usually answered with stories about different choices made by workers due to the different opportunities in the American economy—should really be answered, ‘It did!’ and another question, ‘Why did radical labor lose its momentum in America?’ should be answered, ‘It was viciously and successfully attacked using the power of the state’ (Fusfeld 1980a: 63). Two of his important articles in the area of political economy, ‘The Basic Economics of the Urban and Racial Crisis’ (1968c, later revised and expanded: Fusfeld 1973a, Fusfeld and Bates 1984d, Fusfeld 1993b) and ‘Fascist Democracy in the United States’ (1968d), were originally given as papers at the first meeting of the Union of Radical Political Economics (URPE) in 1968, and were published in the conference proceedings. The article on fascist democracy was ‘toned down’ (to use Fusfeld’s own phrase) into ‘The Rise of the Corporate State in America’ (Fusfeld 1972) and was discussed above in the theoretical section of this essay. The article on the urban and racial crisis became the foundation of Fusfeld’s subsequent work on the ghetto economy, which Fusfeld has described as the ‘product of a liberal economist who had been radicalized by events’ of the 1960s, including the civil rights movement, the Vietnam War and the urban riots. This essay places Fusfeld as one of the earliest formulators of structured (or segmented) labor market theory, as well as of the theory of institutionalized racism.10 Fusfeld has described his model of the ghetto economy as a pattern model (Fusfeld 1993b). Based on a review of empirical studies, Fusfeld argued that the ghetto economy constituted a ‘world apart’ from the mainstream economy, that did not ‘share in the affluence and technical progress of the mainstream’. The ghetto exhibits depression levels of unemployment and poverty even when the mainstream economy flourishes. A key concept in his theory of the exploitation of the ghetto population was the net outflows of capital from the ghetto, including deterioration of physical capital, flight of human capital, and the outward migration of financial capital through retail sales and savings institutions, balanced by government services and transfer payments. Fusfeld’s analysis suffers from a lack of attention to gender issues, especially since welfare payments (primarily paid to women) are a key element in his model. I believe his analysis of the ghetto economy would be enhanced by more explicit discussion of the role of women in the ghetto, as well as of the relations between women and men. Incorporating ideas from Gunnar Myrdal, Barbara Bergmann, Charles Killingsworth, Karl Marx and others, Fusfeld made the radical arguments that

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the ghetto ‘is an economic subsystem that preserves the inferior position of the minorities in our midst’ and that the ghetto economy was indeed functional to the overall economic order: [I]ndividual acts of exploitation or overt discrimination are seldom necessary. The whole structure of the economic system crowds minorities into low-wage menial occupations and segregates them in urban ghettos. The ghetto then becomes a source of low-wage labor…and…a dumping ground for the human residuals created by economic change. These economic conditions are stabilized by transfer payments that preserve the ghetto in a poverty that recreates itself from generation to generation. (1973a: 1, 106) In later extensions of this theory, he discussed the criminal justice system as a companion to welfare payments in the stabilization of the ghetto (Fusfeld and Bates 1984d). Finally, Fusfeld asserted that any solutions to the problems of poverty and the ghetto economy must involve fundamental changes, since they ‘will have to break up the economic relationships on which exploitation is based. An underclass of low-wage workers will have to be readmitted to the relative affluence of the rest of society’ (1973a: 1, 106). While this is certainly possible, it would involve the majority giving up economic benefits, since middle-income families are the chief purchasers of the products and services made with lowwage labor. Fusfeld has recently observed: ‘By the early 1990’s it became clear that the United States had a permanent marginal population embedded in the inner cities… We bemoan its existence but do little to mitigate its worsening condition. When will it next explode?’ (1993b: 50) In sum, Fusfeld has consistently written on the economic problems of his own times. Using empirical studies as a foundation, and always analyzing economic issues from the viewpoint of fairness to all, he has taken strong positions on specific policy matters such as antitrust (we should consider the effects of subsidiaries in the pattern of market power within an industry; Fusfeld 1958c), the minimum wage (should be raised dramatically, but in a gradual fashion; Fusfeld 1968c, 1973a, Fusfeld and Bates 1984d), earned income tax credits (not desirable, since they are indirect subsidies of low-wage employers—i.e. they allow employers to keep wages lower than they would otherwise be; Fusfeld 1991), government training programs (should not encourage racial segregation in occupations; Fusfeld 1968a), and workers’ self-management (it should be encouraged as long as it is substantive; Fusfeld 1979d). He has been an honest, but never cynical, skeptic about the prospects of structural economic and political changes needed to make our society truly fair and open.

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Pedagogy At the University of Michigan, Fusfeld was known as an excellent and conscientious teacher, both graduate and undergraduate. His teaching assistants at the undergraduate principles courses believed that he never ‘wrote off students who did poorly in the course. On the contrary, after the first mid term, he began holding extra sessions for those students who wanted to improve their understanding. Fusfeld was in fact hired at Michigan in part for his experience and creativity in teaching the large principles courses. When he took over responsibility for managing the principles course, he increased the role of the graduate students who were teaching fellows. Fusfeld gave weekly lectures to large numbers of students, while the teaching fellows conducted three discussion sessions per week. Marjorie Brazer has quoted him as follows: ‘My position has always been that these people are instructors in the department, and… that I have to treat them as I would a full professor colleague, who might be teaching a section of that course’ (Brazer 1982:243). Brazer also cited Fusfeld’s ‘relaxed style and infinite patience with teaching fellows’ as crucial in dealing with tensions on campus during the late 1960s and early 1970s.11 Fusfeld supported many of the aims of the radical student movements at the time, but was often successful in challenging what he considered unreasonable methods, such as graduate students withholding student grades and threats of violence. Fusfeld was also supportive to the Michigan graduate students who helped found URPE and in general was instrumental in integrating radical approaches into the economics curriculum at Michigan (ibid.: 249–51). This interest in teaching was reflected in Fusfeld’s publications as well. His article ‘Economic Education—or Indoctrination’ (1963) urges teachers of economics to challenge their students’ simplistic myths about the free enterprise economic system. His article co-authored with Gregory Jump, ‘An Experiment with Programmed Instruction in Economics’ (1966a), described an experiment carried out with the principles course at Michigan, which showed that students working independently with structured materials on supply and demand exhibited the same levels of learning as those taught with the traditional instructor-plus-text method. His article, co-authored with William Mann, on ‘Attitude Sophistication and Effective Teaching in Economics’ (1970c) also summarized results of experiments done with Michigan students and concluded that course grade and attitude sophistication (‘becoming worldly-wise in the ways of the accepted values of an academic discipline’) were quite different measures of student achievement and that more attention should be paid to attitude sophistication in assessing teaching effectiveness. Course grades tended to reflect gains in knowledge which disappear rapidly unless they are somehow reinforced, and not improvements in attitude sophistication, which are more permanent. The highest gains in knowledge were found when ‘success-oriented’ students were taught by ‘subject-matter-oriented’ teachers, but the biggest

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increases in attitude sophistication occurred when ‘subject-matter-oriented’ students were taught by ‘student-oriented’ teachers. Such teachers were defined as having good rapport with students, encouraging them to question their existing beliefs, and examining the value implications of economic issues. Fusfeld’s main pedagogical work was his principles book Economics: Principles of Political Economy (1988a), which went through five editions (two different publishers), placing it among a select number of principles texts that are successful enough to merit multiple editions. This is an especially impressive accomplishment when we consider the fact that the book is unconventional and certainly not a ‘copycat Samuelson’. Indeed, this may be the reason it did not go beyond the fifth edition. Fusfeld used Gestalt psychology in his method of presentation: each concept is introduced with an explanation and example, and then the definition, the reverse of the usual order. Similarly, the book is arranged with an overview of the economy in the first four chapters (‘The Market Economy’, ‘Forces of Production’, ‘Social Relations of Production’, and ‘The World Economy’—the Gestalt), followed by chapters that elaborate on the economic system. He used a flexible price, post-Keynesian model, presented institutional feedbacks between aggregate demand and the money supply, paid as much attention to monopolistic markets as to competitive markets, devoted several chapters to socialism, and included substantive chapters on the political economy of defense, the environment and energy. Its outstanding prose was certainly a boon to students, as was its emphasis on the real (as opposed to the theoretical) economy. CLOSING THOUGHTS After reading Fusfeld’s articles and books, I listed some key words and phrases in his publications: historical time, institutional power, empiricism/ data, fairness, and rational behavior. Remembering an anecdote I once heard about how medical students use phrases made up of the first letters of words in order to memorize anatomical terms, I noticed in passing that the first letters of data, rationality and fairness spelled out his initials, ‘DRF’, leaving ‘I’ and ‘t’ for institutional power and time. I then wrote down the phrase ‘DRF it’, where ‘DRF’ functioned as a verb, meaning to look at an issue as Fusfeld would—using empirical data as a foundation, fairness as a moral imperative, setting the analysis in real, historical time that allows people to act according to true rationality (not the caricature rationality of optimization theory), and being ever mindful of the power of political, social and economic institutions. The economics discipline, and the social sciences in general, would greatly benefit if more practitioners would follow Fusfeld’s approach.12 The significance of this approach can be illustrated with a quote from his preface to The Age of the Economist: The emphasis is on the larger conceptual framework of economic ideas, to show how economics is related to the great issues that have troubled

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people in every age—order versus freedom, riches and poverty, privilege and equality, power and its control, human welfare, and material and moral values, among others. It is easy to get so involved in the intricacies of economics that we lose sight of these larger issues. Here they are pushed to the front of the stage, for economics has always been an instrument through which we may achieve a better understanding of some of the great problems that have troubled humankind. (Fusfeld 1994: viii) Fusfeld’s work may have its shortcomings;13 he is, however, a true economist. Our discipline currently has many theorists, econometricians, labor economists, economic historians, and so on, but how many of us can really lay claim to the label of ‘economist’, defined as one who has a clear vision of the whole discipline, how its parts fit together, and how it influences the society it studies? Those of us who aspire to the title are fortunate to have Dan Fusfeld as our role model. NOTES 1 This made him fascinating in the classroom, and invaluable as a dissertation adviser; in my experience, he can come up with insightful ideas and helpful citations on virtually any subject imaginable. 2 A major book on economic theory and methodology and a significant revision of his book on the urban ghetto are forthcoming at this time, and other projects are in process. 3 Interview with Daniel R.Fusfeld, Boston, 17 March 1996. 4 Most recently, Fusfeld has taken on the interesting topic of economic theory and the Cold War, arguing that high theory in economics (both macro and micro) was an integral part of the ideology constructed to legitimize the US position. He has also pointed out where flaws in the theory were ignored, suggested that this was connected with the fact that it would have undermined the overall Cold War ideology. He thus continues his focus on the complex relationship between economic ideas and political, social and economic institutions. 5 Fusfeld served on the editorial board of this journal from 1973 to 1985. 6 This was an extension of ideas originally expressed in a paper delivered to the first meeting of the Union for Radical Political Economists, ‘Fascist Democracy in the United States’ (1968d). 7 See the essay by Coats in this volume (Chapter 3) for a more detailed critique of this article, particularly the article’s third section, on pattern models. 8 A more extended discussion of this enlightening concept of rational behavior can be found in Fusfeld (1992). 9 Fusfeld quotes W.Stanley Jevons’s statement of this law: ‘There cannot, in the same market, at the same moment, be two different prices for the same uniform commodity’ (1990:39). 10 Fusfeld is adamant about the fact that the members of a graduate seminar, which he organized at the University of Michigan in 1967 (participants included Barry

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Bluestone, Mary Huff Stevenson, and Howard Wachtel, among others), deserve credit for this achievement, and that he merely ‘wrote it up’ from their discussions (Fusfeld 1993b: 38). 11 Brazer recounted Fusfeld’s story of one occasion in 1970 when he quietly persuaded a student activist from BAM (Black Action Movement), who was carrying a club, to decamp from his position at the entrance to the department office in the economics building (Brazer 1982:254). 12 I now have the phrase tacked up on my office wall. When I think of ‘passing the torch’ to my own students of economics, it is Fusfeld’s approach that comes to my mind first and foremost. 13 For instance, while his careful attention to empirical foundations and his predecessors in the history of economic thought are valuable, it would be useful to see more of Fusfeld’s own vision of humanity’s social and economic systems, past, present, and future.

REFERENCES Bornstein, M. and Fusfeld, D.R. (eds) (1962) The Soviet Economy: A Book of Readings, Homewood, IL: Irwin. Brazer, M.C. (1982) ‘The Economics Department of the University of Michigan: A Centennial Perspective’ in S.H.Hymans (ed.) Economics and the World Around It, Ann Arbor: University of Michigan Press. Fusfeld, D.R. (1955) ‘The Source of New Deal Reformism: A Note’, Ethics, 65 (3): 218– 19. —— (1956a) The Economic Thought of Franklin D.Roosevelt and the Origins of the New Deal, New York: Columbia University Press. —— (1956b) ‘Heterogeneity of Entrepreneurial Goals’, Explorations in Entrepreneurial History, 9 (1): 8–18. —— (1956c) ‘The Program of the American Economic Association Meetings’, American Economic Review, 46 (4): 642–4. —— (1957a) ‘Economic Theory and Anthropology’ (mimeo), Columbia University Interdisciplinary Project on Economic Aspects of Institutional Growth Memo 21. —— (1957b) ‘Economic Theory Misplaced: Livelihood in Primitive Society’, in K. Polanyi, C.M.Arensberg and H.W.Pearson (eds) Trade and Marketing in the Early Empires, Glencoe, IL: Free Press. —— (1958a, revised 1959, 1969) Don’t Get Garnisheed, East Lansing, MI: Labor and Industrial Relations Center: Michigan State University, pamphlet/ monograph: 3–22. —— (1958b) ‘Neoclassical Economics and the Ideology of Capitalism’, Papers of the Michigan Academy of Science, Arts and Letters, 43, Ann Arbor: University of Michigan Press. —— (1958c) ‘Joint Subsidiaries in the Iron and Steel Industry’, American Economic Review, 58 (2): 578–87. —— (1959) ‘The New Deal in Retrospect’, Challenge, 7 (9). —— (ed.) (1962) The Michigan Economy: Prospects and Problems, Kalamazoo, MI: Upjohn Institute for Employment Research, pamphlet/monograph. —— (1963) ‘Economic Education—or Indoctrination’, Challenge, 12 (3): 15–17.

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—— (1965) ‘Discussion: Economic Education’, American Economic Review, 55 (2): 574– 6. —— and Jump, G. (1966a) ‘An Experiment with Programmed Instruction in Economics’, Southern Economic Journal, 32 (3): 353–6. —— (1966b) ‘The Manpower Revolution’, Michigan Business Review, 17 (4): 13–18. —— (1966c) ‘Education and the Problem of Capital Investment’, in E.Morphet and C.Ryan (eds) Prospective Changes in Society by 1980, Denver: Designing Education for the Future. —— (1967a) ‘On the Authorship and Dating of For the Understanding of the Exchange’, Economic History Review, 2nd series, 20 (1): 145–53. —— (1967b) ‘Big Corporations Can Have their own CIA’, New Republic, February 13. —— (1968a) ‘Training for Minority Groups: Problems of Racial Imbalance and Segregation’, in L.Ferman, J.L.Kornbluh, and J.A.Miller (eds) Negroes and Jobs, Ann Arbor: University of Michigan Press. —— (1968b) ‘Population Growth and Employment in Service Industries’, Southern Economic Journal, 35 (1): 73–7. —— (1968c) ‘The Basic Economics of the Urban and Racial Crisis’, Papers of the Philadelphia Convention, Union for Radical Political Economics (December), 55–84. —— (1968d) ‘Fascist Democracy in the United States’, Papers of the Philadelphia Convention, Union for Radical Political Economics (December). Reprinted and distributed as a pamphlet by URPE. —— (1969) ‘Anatomy of the Ghetto Economy’, New Generation, 51 (2): 2–6. —— (1970a) ‘The Ghetto Economy’, in J.Crecine (ed.) Financing the Metropolis, Beverly Hills, CA: Sage Publications. —— and Kowalski, J. (1970b) ‘Reforming the Michigan Property Tax’, Michigan State Bar Journal, 44 (7). —— and Mann, W. (1970c) ‘Attitude Sophistication and Effective Teaching in Economics’, Journal of Economic Education, 1 (2): 111–29. —— (1971a) ‘Bibliographical Note: M.J.Tugan-Baranovsky’, History of Political Economy, 3 (2): 432. —— (1971b) ‘Post-post-Keynes: The Shattered Synthesis’, Saturday Review, 22 January. —— (1972) ‘The Rise of the Corporate State in America’, Journal of Economic Issues, 6 (1): 1–22. Reprinted in W.Samuels (ed.) (1979) The Economy as a System of Power, New Brunswick, NJ: Transaction Books, 1–22. —— (1973a) The Basic Economics of the Urban-Racial Crisis, New York: Holt, Rinehart & Winston. —— (1973b) ‘Welfare Payments and the Ghetto Economy’, in K.Boulding, M.Pfaff, and A.Pfaff (eds) Transfers in an Urbanized Economy, Belmont, CA: Wadsworth. —— (1973c) ‘Types of Radicalism in American Economics’, American Economic Review, 63 (2): 145–51. —— (1973d) ‘A Living Wage’, 1973 Annals of the American Academy of Political and Social Science, 409. —— (1975) ‘The Economics of the Inner City Ghetto’, in W.Owen and H. Ulveling (eds) Selected Readings from the Economic Institute’s Special Lecture Series, Boulder, CO: Economics Institute, University of Colorado. —— (1976) ‘Introduction’ to A.S.Miller, The Modern Corporate State, Westport, CT: Greenwood Press.

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—— (1977) ‘The Development of Economic Institutions’, Journal of Economic Issues, 11 (4): 743–84. —— (1978) ‘A Note on Generalizing Gottheils’ Theory of Colonial Revolts’, Journal of Economic Issues, 12 (4): 907–11. —— (1979a) ‘Next Steps in Land Policy’, in R.Andrews (ed.), Land in America: Commodity or Natural Resource?, Lexington, MA: Lexington Books. —— (1979b) ‘The Next Great Depression’, Nebraska Journal of Economics and Business, 18 (2): 3–13. —— (1979c) ‘The Centennial of Mathematical Logic: A Bibliographic Note with a Message’, History of Economics Society Bulletin, 1 (2). —— (1979d) ‘Workers’ Management and the Transition to Socialism: Some Issues and Problems’, Economic Analysis and Workers’ Management, 13 (4): 463–72. —— (1980a) The Rise and Repression of Radical Labor, USA., 1877–1918, Chicago: Charles F.Kerr; 3rd edn, 1985, pamphlet/monograph. —— (1980b) ‘The Conceptual Framework of Modern Economics’, Journal of Economic Issues, 14 (1): 1–52. —— (1980c) ‘Some Notes on the Opposition to Regulation’, Journal of Post-Keynesian Economics, 2 (3): 364–6. —— (1980d) ‘Capitalist Exploitation and Black Labor: An Extended Conceptual Framework’, Review of Black Political Economy, 10 (3): 244–6. —— (1980e) ‘The Next Great Depression’ II: ‘The Impending Financial Collapse’, Journal of Economic Issues, 14 (2): 493–503. —— (1980f) ‘Response to Professor Curley’, Journal of Economics Issues, 14 (4): 775– 80. —— (1983) ‘Labor-managed and Participatory Firms: A Review Article’, Journal of Economic Issues, 17 (3): 769–89. —— (1984a) ‘John Kenneth Galbraith’, in W.Samuels (ed.) Contemporary Economists in Perspective, Greenwich, CT: JAI Press. —— (1984b) ‘Government and the Suppression of Radical Labor’, in S.Harding and C.Bright (eds) Statemaking and Social Movement, Ann Arbor: University of Michigan Press. —— (1984c) ‘Labor-managed and Participatory Firms: Reply’, Journal of Economic Issues, 18 (4): 1195–8. —— and Bates, T. (1984d) The Political Economy of the Urban Ghetto, Carbondale, IL: Southern Illinois University Press. —— (1985) ‘Keynes and the Keynesian Cross: A Note’, History of Political Economy, 17 (3): 385–9. Reprinted in M.Blaug (ed.) (1991) John Maynard Keynes (1883–1946), Vol. II, Aldershot: Edward Elgar, 228–32. —— (1987a) ‘The New Deal and the Corporate State’, in H.Rosenbaum and E. Bartelme (eds) Franklin D.Roosevelt: The Man, The Myth, The Era, New York: Greenwood Press, 137–52. —— (1987b) Methodenstreit and ‘Taylor, Frank Manville’, in J.Eatwell, M.Milgate and P.Newman (eds) The New Palgrave, London and New York: Macmillan. —— (1988a) Economics: Principles of Political Economy, 3rd edn, Glenville, IL: Scott Foresman; first edition Indianapolis: D.C.Heath, 1972. —— (1988b) ‘Karl Polanyi’s General Economic History’, Journal of Economic Issues, 22 (1): 264–8.

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—— (1989) ‘Keynes and the Keynesian Cross: Reply to Don Patinkin’, History of Political Economy, 21 (3): 545–7. —— (1990) ‘The Single Price Theorem’, in W.Samuels (ed.) Research in the History of Economic Thought and Methodology, Greenwich, CT: JAI Press, 37–62. —— (1991) ‘High Wages, Low Wages and Poverty’, The World and I, October: 545–55. —— (1992) ‘Rationality and Economic Behavior’, Methodus, 4 (2): 63–8. —— (1993a) ‘Karl Polanyi’s Lectures on General Economic History’, in K. McRobbie (ed.) Humanity, Society and Commitment: On Karl Polanyi, Montreal: Black Rose Books, 1–6. Reprinted 1993 as ‘The Market in History’, Monthly Review 45 (1): 1– 8. —— (1993b) ‘Studying the Ghetto Economy’, in J.Stanfield II (ed.) A History of Race Relations Research: First Generation Reflections, Newbury Park: Sage, 37–51. —— (1994) The Age of the Economist, 7th edn, Glenville, IL: Harper Collins. First edition by Glenville, IL: Scott Foresman, 1966; translated into Spanish, Italian, German, Thai and Japanese. Simplified English edition published and distributed by US Information Service, 1970. Halsted, A.L. (1983) ‘Franklin D.Roosevelt and the New Deal: A Bibliography’, Social Education, 47 (6): 400–9. Patinkin, D. (1989) ‘Keynes and the Keynesian Cross: A Further Note’, History of Political Economy, 21 (3): 537–44. Screpanti, E. and Zamagni, S. (1993) An Outline of the History of Economic Thought, Oxford: Oxford University Press.

Part II HISTORY OF ECONOMIC THOUGHT

5 CONDITIONAL SUPPORT OF LAISSEZFAIRE Some case studies in the history of economic thought Michael Perelman

Although economists typically advocate the merits of laissez-faire, they often support policies diametrically opposed to its values. In this chapter, I illustrate this point by referring to different case studies in the history of economic thought. I will begin by showing how classical political economists commonly associated with laissez-faire, such as David Ricardo, actually advocated policies designed to accelerate the process of primitive accumulation—the stripping of (partially) self-sufficient people of their means of production. Second, I will demonstrate that, in the late nineteenth and early twentieth centuries, a good number of prominent economists, including some of the most vigorous defenders of capitalism, came to the conclusion, based on their analysis of the railroad industry, that competitive markets were incapable of functioning successfully. Even John Bates Clark, the doyen of laissez-faire economists, counted himself among these opponents of competitive capitalism. CLASSICAL POLITICAL ECONOMY Classical political economists often expressed positions diametrically opposed to the theories credited to them. Although in principle they preferred laissez-faire policies, some of these economists called for the application of non-market forces when the market would not lead to the desired result. Others, who were more discreet, merely let such efforts pass without comment, even though they tended to become unhinged at violations of laissez-faire that inconvenienced economic elites. Such was the openly expressedconcern with promoting policies that would undermine self-sufficiency in the countryside in order to ensure a satisfactory flow of labor into capitalist enterprises. Classical political economists discussed this matter quite clearly in diaries, letters, and more practical writings about contemporary affairs. Classical political economists generally maintained their silence regarding the disabling of the subsistence sector when discussing matters of pure economic theory, although they were not absolutely consistent in this regard. Because of the novelty of their subject, these writers were not entirely in control of their own ideas. In unguarded moments, their intuition led them to express important

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insights which they may have been only vaguely aware of, if at all. In particular, I suspect that classical political economists themselves had a very imperfect comprehension of the more general subject of the social division of labor—the partitioning of the economy into separate industries. Even so, the idea of a social division of labor also surfaced from time to time in the more theoretical works. Typically, the subject of the social division of labor cropped up when the classical political economists were acknowledging that the market seemed incapable of engaging the rural population fast enough to suit them. Much of this discussion touched on what we now call ‘primitive accumulation’, the stripping of self-sufficient or partially self-sufficient people of their means of production. These slips considerably deepen understanding of classical political economy. Indeed, if classical political economy were nothing more than a conscious attempt to come to grips with and to justify the emerging forces of capitalism, it would have far less interest today. Just as a psychologist may detect an important revelation in a seemingly offhand remark of a patient, from time to time classical political economy discloses to us conclusions that it would not consciously welcome. These insights will reinforce the conclusions that we can draw from the diaries, letters and more practical writings of the classical political economists. The Corn Laws and classical political economy We start with the famous British Corn Laws, which imposed duties on imported grain. The duties rose with the fall in the price of domestic grain. Grains use relatively little labor compared with most crops. In addition, grain farming requires much more seasonal labor than most small-scale farming does, especially since the typical small-scale farmer adopted a system that included several crops in order to spread labor over as long a period as possible. Consequently, although the Corn Laws may have increased employment in grain production, a complete measure of the impact of the Corn Laws must include the consequences for more labor-intensive crops as well as grain. Labor-intensive agriculture was important in the early days of classical political economy. By the early eighteenth century, England had developed an advanced system of labor-intensive farming and gardening. English public houses served vegetables, such as broccoli, at a time when they were rare in France (George 1953:80). During the early Corn Law debates, market gardening —the labor-intensive production of vegetables for market—usually was a smallscale, but often successful, enterprise. Although France has a reputation as the leader in market gardening, England seems to have been ahead of France in such techniques as forcing cauliflowers and asparagus under bell glasses. Most observers understood at the time that small-scale farmers had a competitive advantage in such vegetables and dairy products, whereas larger farms tended to be more competitive in the production of grain (Levy 1966:6–7). The imposition of duties made grain far more lucrative relative to fruits,

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vegetables, and livestock (Kautsky 1899:149; Marshall 1927:162; Senior 1928 I: 243). Consequently, the tariff on grain shifted production toward grain and away from meat, dairy products, fruits and vegetables (Athar and Tribe 1981:40). The decline in the production of specialty crops occurred even though the English climate was particularly well suited to activities such as dairy and vegetable production (see Senior 1928 I: 243). Conversely, with the later fall in grain prices after the abolition of the Corn Laws, England witnessed an acceleration in the rate at which resources were channeled into the marketgardening industry (Bearington 1975:39). However, this later English market gardening differed from the earlier variant. It tended to operate on a rather large scale. It also relied heavily on migrant labor (Bearington 1975; Samuel 1973). The Corn Laws affected small-scale production in various ways. First, they directly encouraged grain production, contributing to economies of scale in farming. Second, they increased the price of grain the farmers had to purchase for consumption. Third, by raising the cost of hiring labor during the harvest or planting season, the Corn Laws had either reduced the profits of farmers, or forced them to adopt labor-saving technologies.1 British agriculture was far less labor-intensive than that of the Low Lands of Europe.2 We can see this dependence of small-scale agriculture on cheap grain in France, where wine growers often rioted over the high price of grain (see Rudé 1980:64). Flanders offers an even more striking example. There, purchases of grain allowed farmers to devote a maximum of land and time to the higher-priced crops. Slicher van Bath estimates that a nineteenth century Flemish family could sustain itself with a mere one and a half acres of flax (Slicher van Bath 1960:136– 7). The output of such a farm was not insignificant. For example, Alexander Hamilton once observed that, in a good year, one-half acre of flax land could supply the needs of the entire state of Connecticut at the time that the greatest quantity of flax was being used (Cole 1968; see also Tyron 1917:207). None the less, such enterprises required cheap grain in order to make ends meet. In conclusion, the higher grain prices worked against many parts of the English agricultural system. In this regard, Athar and Tribe wrote: That the benefits for grain duty were very unevenly distributed was widely recognized and not just by agronomists. For instance Count H’oehenlohe stated in 1895 that holdings under 12 hectares (i.e. 87 per cent of holdings according to the 1895 agricultural census) had no corn to sell, and in a large number of cases they were even net buyers of corn. (Athar and Tribe 1981:32; referring to Ashley 1920:62) Except for a brief comment by Marx, in which he noted that the effect of the Corn Laws was ‘to convert the peasants into the very poorest proletarians through high rents and factory methods of exploiting landed property’ (Marx 1845:289), economists seemed to be oblivious to the connection between the

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Corn Laws and the scale of farming. Instead, they treated agriculture as if it produced a homogeneous output of wheat. Similarly, they failed to recognize the different economies of large- and small-scale agriculture. As far as I am aware, Robert Torrens was the only classical political economist to even mention the importance of the terms of trade within agriculture. He wrote: The moors of Lancashire could not have originally been made to grow corn, because the quantity of corn consumed by the labourers reclaiming and cultivating them, would have exceeded the quantity they were capable of producing. But cheap corn was brought from Ireland and other places; increasing wealth and population created an intense and extensive demand for these agricultural luxuries, which, not entering into the subsistence of farm labourers, are not expended in reproducing themselves; and the consequence has been that what was the barren moor, now bears crops of great value, and pays higher rents than the most fertile corn lands in England. (Torrens 1835:279; cited in Robbins 1958:47) Torrens was evidently satisfied with his own theoretical advance beyond Ricardianism. He repeated it word for word in his Three Letters to the Marquis of Chandos on the Effects of the Corn Law on the Budget (1839) and in The Budget (1842) (see Robbins 1958:47). A somewhat similar line of reasoning is found in a letter he wrote to the Bolton Chronicle in 1833 (Torrens 1833:33). However, neither Torrens nor any of his colleagues bothered to take it any further. In conclusion, we could interpret the Corn Laws as a measure primarily designed to help the larger farmers who marketed the majority of their produce at the expense of small ones. As a result, the shift to grain production probably meant a fall in aggregate agricultural employment. More darkly, we could view the Corn Laws as a measure to channel part of the rural population into manufacturing. Indeed, the hobbling of the small farm sector seemed to be a preoccupation of classical political economists. Ricardo’s provisional opposition to the Corn Laws Someone familiar with the literature of classical political economy might be tempted to interject here, ‘Wait a minute! Didn’t the classical political economists oppose the Corn Laws?’ I would have to respond, ‘Not exactly.’ In reality, Ricardo was far from doctrinaire in his opposition to the Corn Laws (see Hollander 1979: chapter 2). He merely recommended that they be gradually eliminated over a decade (Ricardo 1951–73; 4: 243–4, 263–4). Ricardo was not unique in this respect. In fact, none of the major figures of classical political economy called for outright repeal (see Grampp 1960: chapter 2). None the less, the eventual elimination of the Corn Laws would have been slight consolation

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for those small producers without the means to wait until repeal made cheaper food available. This analysis of the Corn Laws runs counter to the common discussion of the legislation, which generally depicts it in terms of a struggle between business and landed interests. Certainly, more was involved than a simple question of large versus small-scale farming; None the less, we still need to address the relationship between Ricardo and the state of the largely self-sufficient household or petty-commodity producer. In this respect, Barry Gordon correctly observed that Ricardian political economy was a continuation of the policies that ‘favored those agriculturalists who had access to capital without the need to mortgage estates’ (Gordon 1976: 231; see also Johnson 1909:122–3). Ricardo’s alliance with this class of farmers went deeper than the Corn Laws. According to Gordon, Ricardo’s deflationist policies generally favored ‘the interest of the rentier…which included the wealthier landowning aristocrats but took little cognizance of the needs of the entrepreneur’ (ibid.: 153) and, one should add, the small-scale farmer. Given his importance in framing the attitude of classical political economy toward agriculture, Ricardo should be counted among the foremost influences in the development of primitive accumulation at the time. Ricardo’s silence about the differential impact of the Corn Laws was far from unique. Classical political economists never discussed the Corn Laws in terms of their impact on the small farmer. Given the level of economic sophistication found in the better works of English political economy, we can only ascribe the almost universal absence of comment on this effect of the Corn Laws either to insensitivity to the conditions of the small producer or to a practice of obscuring the nature of their mission. Only after the Corn Laws had served their purpose in manipulating the domestic labor market did the British economists abandon them in the name of freedom of the market. Two strategic concerns caused this shift. First, now that British manufacturing had taken hold, they thought that the acceptance of imported grain would help to induce other nations to accept British manufactured goods, creating a more favorable international social division of labor. Second, they thought that manufacturing would benefit from cheap food. However, as we shall see in the case of David Ricardo, this interest in cheap food was conditional. Ricardo on Ireland Since David Ricardo is often taken as the purest exponent of the abolition of the Corn Laws, let us take a closer look at his attitude toward small farming. Ricardo’s hostility toward small-scale agriculture was especially evident in his private correspondence, but this hostility was not universal. Although he recommended large farms and cheap food for England, he advocated small farms

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and expensive food for Ireland. We can only resolve this apparent contradiction if we read Ricardo in terms of primitive accumulation. In response to the suggestion of his friend, Trower, that ‘no permanent or substantial good [in Ireland] can be done until all small farms and small tenancies are got rid of’ (Ricardo 1951–73 IX:145), Ricardo agreed with the ultimate goal of eliminating small-scale agriculture in Ireland (ibid.: 153); however, he believed small farms were an effect rather than a cause of conditions in Ireland. Ricardo added that he understood that small farms reduced the cost of food in Ireland. In words almost indistinguishable from those of Malthus, he wrote to Francis Place: The evil of which the Irish ought to complain is the small value of food of the people compared with the value of other objects of their consumption, and the small desire they have of possessing other objects. Cheap food is not an evil, but a good, if it not be accompanied by an insensibility to the comforts and decencies of life. (ibid.: 56; emphasis added) Ricardo’s fear of cheap food in Ireland was so great that he suggested: The evil they [the Irish] experience proceeds from the indolence and vice of the people, not from their inability to procure necessaries. By reducing their population, you reduce food in perhaps a larger proportion, and rather aggravate rather than remove their misery. (Ricardo 1951–73 VII:48) In the first edition of his Principles, he repeated the idea that the population of Ireland might be insufficiently large to encourage the people to work enough: The facility with which the wants of the Irish are supplied permits that people to pass a greater part of their time in indolence; if the population were diminished, this evil would increase, because wages would rise, and therefore the labourer would be enabled in exchange for a still less portion of his labour, to obtain all that his moderate wants require. (Ricardo 1951–73 I:100; see also 7:334) This section is worth examining in more detail. The relevant portion began: In those countries where there is abundance of fertile land, but where from ignorance, indolence, and barbarism of the inhabitants, they are exposed to all the evils of want and famine, and where it has been said that the population presses against the means of subsistence, a very different remedy should be applied from that which is necessary in longly settled

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countries, where from the diminishing rate of the supply of raw produce, all the evils of a crowded population are experienced. (Ricardo 1951–73 I:99) The first edition continued, ‘In the one case, misery proceeds from the inactivity of the people. To be made happier, they need only to be stimulated to exertion’ (ibid.). This passage reads much like something from the mercantilist literature. Ricardo continued: In some countries of Europe, and many of Asia, as well as in the islands in the South Seas, the people are miserable, either from a vicious government or from habits of indolence, which make them prefer present ease and inactivity, though without security against want… By diminishing their population, no relief would be afforded, for production would diminish in as great, or even in a greater proportion. The remedy for the evils under which Poland and Ireland suffer, which are similar to those experienced in the South Seas, is to stimulate exertion, to create new wants, and to implant new tastes….The facility with which the wants of the Irish are supplied, permits that people to pass a great part of their time in idleness: if the population were diminished, this evil would increase, because wages would rise, and therefore the labourer would be enabled, in exchange for a still less portion of his labour, to obtain all that his moderate wants require. Give to the Irish labourer a taste for the comforts and enjoyments which habit has made essential to the English labourer, and he would be content to devote a further portion of his time to industry, that he might be enabled to obtain them. Not only would all the food now produced be obtained, but a vast additional value in those other commodities, to the production of which the now unemployed labour of the country might be directed. (ibid.: 100) George Ensor roundly attacked Ricardo for these words. Pointing out that the English labourer ‘is no object of admiration’, he asked: ‘How are these tastes to be excited in Irish labourers? Is it supposed that they are not like other human creatures? but that they make choice of privations?’ (Ensor 1818:106; cited in ibid.: 100 n.). After this section had come under the critical scrutiny of Ensor, Ricardo changed its tone, but not its meaning. He wrote: To be made happier, they require only to be better governed and instructed, as the augmentation of capital, beyond the augmentation of people would be the inevitable result. (ibid.)

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Although food was cheap in Ireland, so too was life. For all the talk of indolence, the people had to go to great lengths to survive. The Irish collected and dried seaweed for manure. Irish children had to search horse droppings on the roads in an effort to coax a few more crops from the soil (McGregor 1992:479). Classical political economy and the Game Laws Although the Corn Laws had some economic impact, the classical political economists gave this legislation an inordinate amount of attention relative to the Game Laws, which prohibited all but a small minority of the population from hunting. In a sense, however, the two sets of legislation were related. To the extent that the Corn Laws increased the price of food, recourse to poaching became more attractive. We hear very little about the Game Laws today, but they were an extraordinarily intrusive form of legislation. The Waltham Black Acts of 1722 were devised at a time when venison had become a prized delicacy, perhaps because of the great expanse of land required for raising a deer (see Thompson 1975:30). More and more, poachers began to see the quarry as a commodity rather than as an object of direct consumption. A century later, a journalist lamented in 1826 that it was ‘difficult to make an uneducated man appreciate the sanctity of private property in game [when]…the produce of a single night’s poach was often more than the wages for several weeks’ work’ (cited in Shaw 1966:156). Initially the penalties for taking small game were less severe than for poaching deer, until landowners began to take measures to increase the quantity of their deer. In response, the scope of the Game Laws expanded rapidly. For example, during the first six decades of the eighteenth century, only six Acts were directed against poachers of small game. During the next fifty-six years, thirty-three such laws were passed. As a result, ‘[m]eat virtually disappeared from the tables of the rural poor’ (Deane and Cole 1965:41). Poaching was taken so seriously that it was, upon occasion, even equated with treason. The courts enforced these laws with a shocking ferocity. Several poachers were actually executed under the famous Black Acts (Thompson 1975:68). The imposition of draconian penalties for infractions of the supposedly feudal Game Laws at such a late date might seem anomalous for an advancing capitalist economy. However, the Game Laws were an important part of the intensification of class struggle that was occurring in the countryside during the age of classical political economy. One pamphleteer exclaimed that ‘the article of game [is] productive of more disquiet, popular discontent and local animosity than any other law ever established in this kingdom’ (Taplin 1792:168). The conviction rates for infractions of the Game Laws indicate the sharpening of this conflict. In 1816, the first year for which national figures are available, 868 persons were imprisoned for game offenses; by 1820 the number had risen to 1,467. In Wiltshire, the winter of 1812–13 saw eight committals under Game

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Laws. By the winter of 1817–18, the number had risen to eighty-five. In Bedfordshire, seven people were imprisoned in 1813; seventy-seven in 1819. By the first half of the 1820s, sixty-five persons annually were imprisoned for infractions of the Game Laws (Munsche 1980:138). In Wiltshire, the average had risen to ninety-two. Between 1820 and 1827, nearly a quarter of those committed to prison were convicted of poaching (Shaw 1966:155). In Wiltshire alone, more than 1,300 persons were imprisoned under Game Laws in the fifteen years after Waterloo, more than twice the number for the previous fifty years (Munsche 1980:138). Despite the reform of the Game Laws in 1831, the numbers of convictions for poaching still continued their dramatic increase (Munsche 1980: 157). During the 1840s, in some rural counties, 30 percent and even 40 percent of all male convictions were still for infractions of the Game Laws (Horn 1980:179–80). The Duke of Richmond told the House of Lords on September 19, 1831, that oneseventh of all criminal convictions in England were for violations of the Game Acts (Hammond and Hammond 1927:167). The majority of convicts that Britain transported to Australia supposedly were convicted of poaching. Robert Hughes disputes that view, suggesting that many of the poachers got off lightly. None the less, a substantial number of poachers suffered transportation (Hughes 1987:170; Munsche 1980:103). In addition, the state convicted a good number of poachers of other crimes that grew out of their poaching, such as resisting arrest. Even Hughes, who tried to make the case that the majority of transported convicts were guilty of more serious crimes than poaching, shows how the Game Laws were used to rid the labor market of people whom the authorities deemed undesirable (Hughes 1987: 170). Economic events of the time rather than feudal history explained the upswing in the conviction rates. Just as the people’s means of providing for themselves was diminishing, the cost of purchasing food on the market was rising substantially, catching the workers in a cruel scissors (Hammond and Hammond 1927:86 n.). Poaching became more intensive when unemployment was high (ibid.: 167). Many unemployed workers poached only when they had no other option for survival. After the Napoleonic Wars, some 250,000–400,000 men were demobilized. During the war, threshing machines had taken many of the traditional jobs in the countryside (see Munsche 1980:136). Even if capital had no immediate need for the labor of these demobilized soldiers, discipline had to be maintained in the labor force. As an early writer from the United States warned his readers, ‘once hunters, farewell to the plough’ (Crèvecoeur 1782:51). Blackstone agreed that we should view the Game Laws in terms of maintaining discipline among the labor force: ‘the only rational footing, upon which we can consider it a crime [to violate the Game Laws], is, that in low and indigent persons it promotes idleness and takes them away from their proper

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employments and callings’ (Blackstone 1775 IV:174–5). Pitt concurred (cited in Cobbett 1806–20 XXXII:851). As a result, the Game Laws went beyond promoting primitive accumulation; they became an important tool in maintaining labor discipline. We cannot know how well they succeeded in this respect, since we have little opportunity to hear from both sides in the struggle. In at least one instance, the Game Laws seem to have stiffened the resolve of one of the participants. William Cobbett wrote in the Political Register of 29 March 1823 that a gentleman in Surrey asked a young man how he could live on a half a crown per week. ‘I don’t live upon it,’ said he. ‘How do you live then?’ ‘Why,’ said he, ‘I poach; it is better to be hanged than to be starved to death’ (cited in Hammond and Hammond 1927: 167). Even more importantly, by making self-provisioning more difficult the Game Laws helped to channel rural people into wage labor. The destructive nature of the Game Laws The Game Laws had another dimension. Some animals, which were protected by the laws, ravaged the nation’s crops. Others, which were zealously hunted, such as the little foxes and martens, were valuable predators that prevented the population of rodents from becoming excessive (Kautsky 1899:393). Even worse, hunters and their horses trampled much of what the game left growing in the fields. A letter to the editor of the London Magazine in 1757 claimed: The present scarcity is owing to an evil, felt by the industrious husbandman, who has in many places in this kingdom, seen all his care, labour, and industry sacrificed to the caprice and humors of those who have set their affections so much on game. Numberless are the places and parishes of the kingdom which have had at least one third part of their wheat crop devoured and eat[en] up by hares. (Anon. 1757a: 87) A modern student of the Game Laws observed, ‘Pheasants, if anything, were more destructive’ (Munsche 1980:46). The destruction of crop by game was a very important phenomenon. In France, for example, on the eve of the revolution, the people were given the chance to express their concerns. In almost every case, the people of the countryside demonstrated their exasperation at the devastation caused by game and hunters (see Philipponeau 1956:29; Young 1794:9). Given the resentment against the Game Laws in France, we should not be surprised that one of the first acts of the revolutionary government was to repeal them. The grievances of the English peasants were no doubt just as strong as those of the French. A single hunt could cause enormous destruction. One foxhunt carried its riders twenty-eight miles through the countryside (Thomas 1936:43). A recent study noted other costs besides the trampled grain:

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Sportsmen, it was said, continually broke fences, beat down unharvested corn, trampled turnips, disturbed sheep ‘big with lamb’ and generally pursued game with little concern for the damage they caused. The quantity and volume of these complaints suggest that such conduct was common and deeply resented. (Munsche 1980:45; see also anon. 1757b: 14) The upper classes were generally insensitive to the destruction of crops by hunting. Anthony Trollope’s discussion of this matter, first published in the Pall Mall Gazette in 1865, is worth citing in detail in this regard: [I]n England two or three hundred men claim the right of access to every man’s land during the whole period of the winter months!… Now and then, in every hunt, some man comes up, who is indeed, more frequently a small proprietor new to the glories of ownership, than a tenant farmer who determines to vindicate his rights and oppose the field. He puts up a wirefence round his domain…and defies the world around him. It is wonderful how great is the annoyance which one such man may give, and how thoroughly he may destroy the comfort of the coverts in his neighborhood… (Trollope 1929:56–8) Trollope explained why the farmers were not overly concerned about their grain: Farmers as a rule do not think very much of their wheat. When such riding is practicable, of course they like to see men take the headlands and furrows; but their hearts are not broken by the tracks of horses across their wheat fields. I doubt, indeed, whether wheat is ever much injured by such usage. (ibid.: 59–60) Perhaps the owners of some large farms were not aggravated by the loss of their wheat. For, the larger the farm, the swath of destruction caused by a group of horses would represent a smaller share of the total crop. Of course, Trollope wrote long after the controversies about the Game Laws had subsided, but he reflected a mentality that had been common in earlier years. One anonymous writer despaired of any communication with people who were of this persuasion: It is in vain to argue with a man who will maintain, that the wealth of his country, and the advancement of cultivation, is of no concern, when compared with the pleasure of fox-hunting; or, that the farmers and tenants, instead of following the plough, are much better employed when after the hounds, and while neglecting the culture of their own grounds,

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laying waste and ravaging the improvements of their industrious neighbours. (Anon. 1752:33) In the 1840s, an estimated quarter of the crops of Buckinghamshire were destroyed by game (Horn 1981:179). Parliament indicated an interest in the problem on only one occasion: [F]or most sportsmen, the season began with partridge shooting on the first of September…but following the bad harvest in 1795… [e]arly in 1796, Parliament voted to postpone the start of partridge shooting until the fourteenth of September. (Munsche 1980:46) This provision was repealed the next year. The consequent loss of grain continued without comment from the ranks of political economists, whose keen vision rarely let any opportunity for increased productivity pass unnoticed. Adam Smith seemed to take some notice of the dissipation of resources associated with hunting. He complained that the ‘large tracts of land which belong to the crown…[were] a mere waste and loss of country with respect both of population and produce’ (Smith 1776 V.ii.a.18:824). His recommendation that such land be sold seems to have been based on the assumption that private land would be ‘well-improved and well-cultivated’ (ibid.). He did not mention that much of this land would likely go into private hunting reserves. None the less, Smith deserves some credit for broaching the subject, since all other political economists failed to make any mention of it whatsoever. Despite the widespread injuries inflicted by the Game Laws and crop losses, classical political economy generally ignored the implications of the legislation. For example, on the subject of transportation, a common punishment inflicted on poachers, Frank Fetter, after noting the attendance and voting patterns of political economists in Parliament, observed, ‘transportation was not an issue in which many political economists were concerned’ (1980:192). Keep in mind that the most intense application of the Game Laws falls between 1776, when the Wealth of Nations was published, and the 1840s, an interval often used to mark the age of classical political economy. Political economists took a lively interest in all matters pertaining to the functioning of the economy while remaining oblivious to the monstrous impact of the Game Laws. Here was legislation which created a substantial hardship for an enormous number of people. It allowed many workers to be incarcerated or transported. It condoned the destruction of valuable crops. In short, political economy all but completely ignored the Game Laws. It remained silent about the human costs. It never even broached the subject of the trampling of the grain or the crops lost to the protected grain. This omission in no way absolves it of any responsibility for the repression and destruction associated

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with the operation of the Game Laws. Silence in the face of such conditions amounted to an effective form of support. JOHN BATES CLARK I now turn to a more modern case study. In the nineteenth century United States railroads were the leading industry. When these capital-intensive operations faced competitive pressures, prices drifted down. Reported revenue per ton mile fell from 1.88 cents in 1870 to 1.22 cents in 1880. In 1890, it had reached 0.94 cents. By 1900 it had fallen to 0.73 (Kolko 1965:7). Unable to meet their fixed costs, the railroads frequently found themselves bankrupt. Ultimately, half of all the track constructed in the United States before 1900 fell into receivership, despite the best efforts of the foreign accountants (Chatfield 1977:95). The capital structure of more and more industries began to resemble that of the railroads. Competitive forces played themselves out in much the same way as they had in the case of the railroads. The hardships that these industries faced convinced many of the leading US economists that competition is a destructive force that must be controlled. As an alternative, they recommended a system of trusts, cartels, and monopolies. These same economists wrote textbooks telling their students that perfect competition offered the best of all possible worlds. Several past presidents of the American Economic Association fell into this mold, but no one illustrates this sort of contradictory behavior as well as John Bates Clark. Today, most economists familiar with John Bates Clark would associate his name with his elaboration of neoclassical economics, especially his sophisticated defense of perfect competition. Every economics student learns about the great insights of Clark concerning economic justice, even if they never hear his name. According to Clark, the market pays all agents an amount equal to their marginal product. As a result, the total product divides itself in such a way that all agents get exactly what they deserve.3 Clark had another side to his career that went far beyond conventional economics. Few may be aware that Clark began as a rather enthusiastic populist of a sort, as well as a Christian socialist, although his commitment to either camp was rather modest (Henry 1982; 1974; 1994; Dorfman 1946–9:194; Ross 1991). Still fewer may realize that Clark ended his career as one of the most influential proto-Marxists, calling for a regime of trusts, cartels and monopolies. Whether in his populist or in his socialist incarnation, the early Clark was ‘critical of the injustice that an unregulated capitalist industrial system produced’ (Furner 1975:91). Here is an example of his outrage: Nothing could be wilder or fiercer than an unrestricted struggle of millions of men for gain, and nothing more irrational than to present unrestricted struggle as a scientific ideal… If competition were supreme, it would be

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supremely immoral; if it existed otherwise than by sufferance, it would be a demon. (Clark 1887:219) Clark protested that competition resulted in abominable conditions for workers: [We] do not enslave men now-a-days… We offer a man a pittance, and tell him to take it…but we do not coerce him… We do not eat men—precisely. We consume the product of their labor; and they may have virtually worked body and soul into it; but we do it by such indirect and refined methods that it does not generally occur to us that we are cannibals. We kill men, it is true; but not with cudgels in open fight. We do it slowly, and frequently take the precaution to kill the soul first; and we do it in an orderly and systematic manner. (Clark 1878:540, cited in Henry 1994:122) At the time, Clark maintained that socialism offered a remedy to such inequities. Socialism, as he saw it, could ‘secure a distribution of wealth founded on justice, instead of one determined by the actual results of the struggle of competition’. The transition to socialism seemed to be virtually inevitable. ‘The beauty of the socialist ideal is enough to captivate the intellect that fairly grasps it’ (Clark 1879:580). ‘The way for true socialism has been preparing for a hundred years… as a general development, dictated by the Providence’ (Clark 1879:572, cited in Henry 1994:112; see also Ross 1991). Immediately after the Haymarket unrest, Clark’s critical eye rapidly dimmed. Within a few years after he published a series of radical articles, he reworked all but one of them into his book, The Philosophy of Wealth (1886). Although most people familiar with Clark take this book as a manifesto of his radical beliefs, John Henry has recently shown how Clark had already begun to dull his radical edges in his editing of the articles (Henry 1994). When Arthur Twining Hadley criticized Clark’s book as exhibiting the ‘crudest socialistic fallacies’, the former socialist was quick to defend himself from the charge (Hadley 1887; Dorfman 1946–9 III:195). Thereafter, Clark continued to shed any remaining vestiges of radicalism, recommending instead that industry be permitted to organize itself into trusts, cartels, or monopolies. Like many economists of his day, Clark drew his inspiration for this rejection of laissez-faire from the railroads, observing: Sometimes, as in railroad operations, competition works sluggishly, interruptedly, or not at all; sometimes, as in the transactions of labor and capital, it works for a time, one-sidedly and cruelly, and then almost ceases to do its work. (Clark 1887:207)

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Clark seems to have believed that something like perfect competition had once existed prior to the rise of large-scale industry. In that earlier environment, buyers and sellers were more or less equals (Clark 1878). Over time, huge industrial enterprises arose. The powers of an individual worker or individual consumer became insignificant compared with the social, political, and economic forces that the great corporations could muster. Clark recognized that much of the modern industry was becoming more and more like the railroads. In his words, ‘competition of the individualistic type is rapidly passing out of existence’ and giving way to consolidation and monopoly. ‘The principle which is at the basis of Ricardian economics is ceasing to have any general application to the system under which we live’ (ibid.: 147). He continued: Competition is no longer adequate to account for the phenomena of social industry. Economic science needs modernizing; it was a half-century after the Wealth of Nations that the earlier railroads were built, and it was a century after its publication that the great railway and telegraph monopolies were effected. (ibid.: 202) Later, Clark added: ‘It would be easy to name a hundred staple articles…of which the supply and the market value are fixed by agreement of strong associations of producers’ (Clark 1888:10). Clark considered this new state of affairs to be natural: Combinations have their roots in the nature of social industry and are normal in their origin, their development, and their practical working. They are neither to be depreciated by scientists nor suppressed by legislators. They are a result of an evolution, and are the happy outcome of a competition so abnormal that the continuance of it would have meant widespread ruin. A successful attempt to suppress them by law would involve the reversion of industrial systems to a cast-off type, the renewal of abuses from which society has escaped by a step in development. (ibid.: 11) Clark was enthusiastic about the spread of this new form of economic organization. He proclaimed, ‘Individual competition, the great regulator of the former era, has, in important fields, practically disappeared. It ought to disappear; it was, in its later days, incapable of working justice’. He proposed that ‘The alternative regulator is moral force’ (ibid.: 148).

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The competitive world of John Bates Clark None the less, by 1899 in The Distribution of Wealth: A Theory of Wages, Interest, and Profits, Clark was effusive in his praise for competitive forces. There he observed, ‘The indictment that hangs over society is exploited labor.’ He set out to prove that this indictment is unwarranted because ‘the natural effect of competition is to give each producer the amount of wealth that he specifically brings into existence’ (Clark 1899:4–5). In making this case, Clark developed the most sophisticated defense of laissez-faire ever devised. In this new incarnation, Clark proclaimed that competition is ‘a wonderful social mechanism’ that rewards each agent according to its productivity (Clark 1899:207). He even went so far as to maintain that competition was ‘the social guarantor of progress’ (Clark 1896:8, cited in Fine 1964:292). Clark never acknowledged that his strong defense of anti-competitive practices clearly violated the principles of his neoclassical theory. In 1937, Gabriel Hauge asked Clark’s son, John Maurice Clark, a distinguished economist in his own right, how his father could embrace such contradictory theories. Clark replied: Your inquiry raises the question of a change in my father’s attitude in The Philosophy of Wealth to a defense of it as a morally justifiable system in The Distribution of Wealth…. I do not think my father was conscious of any change in his basic attitude…. I… recall the earlier book…as a recognition of evils and a plea for moral elements, with hopes of developing cooperative institutions which should themselves make their way by the competitive route; competing with competitive business. (Letter of 16 December 1937, cited in Dorfman 1971:13) In a sense, J.M.Clark’s response was appropriate. His father was not entirely inconsistent so long as we recognize that Clark’s competition was not ‘individual competition, the great regulator of the former era’. Instead, his competition was Schumpeterian competition. If the railroads ceased to compete with each other, then water transportation might provide competition (Clark 1907:437). Modern economists unfamiliar with Clark’s policy preferences seem to read him as a theorist of perfect competition. Clark himself seemed to have encouraged that reading. Those who studied him more closely have come to a very different conclusion. Let George Stigler have the final word in this regard. It is sobering to reflect on the attitudes of professional economists of the period toward the merger movement. Economists as wise as Taussig, as incisive as Fisher, as fond of competition as Clark and Fetter, insisted upon discussing the movement largely or exclusively in terms of industrial evolution and the economies of scale. They found no difficulty in treating the unregulated corporation as a natural phenomenon, nor were they

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bothered that the economy of scale should spring forth suddenly and simultaneously in an enormous variety of industries—and yet pass over the minor firms that characteristically persisted and indeed flourished in these industries. One must regretfully record that in this period Ira Tarbell and Henry Demarest Lloyd [muckraking antitrust journalists] did more than the American Economic Association to foster the policy of competition. (Stigler 1950:30) CONCLUSION The above case studies indicate how economists’ reverence for the rules of laissez-faire is provisional. When policy-makers act in ways that do not favor economic elites, economists are quick to display their laissez-faire orthodoxy. Policies that favor business interests over those of the common people pass in silence even though they violate the most sacred tenets of laissez-faire. Clark, along with a good number of other US economists, was more than willing to cast aside his economic theory when competitive forces were leading to outcomes that he wished to avoid. Similarly, the classical political economists were willing to look the other way when the government structured the economy in ways that violated their theory. NOTES 1 Even with the Corn Laws, British agriculture did remain labor-intensive enough that many British farmers continued to use sickles instead of the scythe, though the sickle required much more labor (Collins 1969). 2 Students of southern agriculture in the United States after the Civil War discovered a similar phenomenon. As the average size of farms began to shrink, small farmers had no choice but to grow cotton instead of corn. Although cotton production entailed much more risk, farmers could hope to survive only by adopting a strategy of buying corn in order to have more resources to devote to their cash crop (see Wright 1978:69). Consequently, higher corn prices would tend to work to the disadvantage of those farms that were too small to market grain. 3 In celebration of Clark’s contributions to conventional economic theory, the American Economic Association awards the John Bates Clark Medal once every two years to ‘that American economist under forty who is adjudged to have made a significant contribution to economic thought and knowledge’.

REFERENCES Anon (1757a) ‘Letter to the Editor’, London Magazine, 26 (February): 87. —— (1757b) An Alarm to the People of England, London: J.Scott, Krebs-Goldsmith, Reel 698: Item 9215.

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—— (1772) Consideration on the Game Law, Edinburgh: Krebs-Goldsmith, Reel 1010: Item 10847. Ashley, P. (1920) Modern Tariff History: Germany, United States and France, London: Murray. Athar, H. and Tribe, K. (1981) Marxism and the Agrarian Question, vol. 1 German Social Democracy and the Peasantry, 1890–1907, Atlantic Highlands, NJ: Humanities Press. Bearington, F. (1975) ‘The Development of Market Gardening in Bedfordshire, 1799– 1939’, Agricultural History Review, 23:23–47. Blackstone, W. (1775) Commentaries on the Laws of England, 6th edn, 4 vols, Dublin: Company of Booksellers. Chatfield, M. (1977) A History of Accounting Thought, Huntington, NY: Robert E.Krieger. Clark, J.B. (1878) ‘How to Deal with Communism’, New Englander, 37:533–42. —— (1879) ‘The Nature and Progress of True Socialism’, New Englander, 38 (4): 565– 81. —— (1887) The Philosophy of Wealth, 2nd edn, New York: Augustus M.Kelley (1967). —— (1888) ‘The Limits of Competition’, Political Science Quarterly, 2; reprinted in J.B.Clark and F.H.Giddings (1988) The Modern Distributive Process: Studies of Competition and its Limits, Boston: Ginn, 1–17. —— (1896) ‘The Theory of Economic Progress’, American Economic Association Economic Studies, vol. 1. —— (1899) The Distribution of Wealth: A Theory of Wages, Interest, and Profits, New York: Augustus M.Kelley (1965). —— (1907) Essentials of Economic Theory as Applied to Modern Problems of Industry and Public Policy, New York: Macmillan; Augustus M.Kelley (1968). Cobbett, W. (1806–20) The Parliamentary History of England, 36 vols, New York: Johnson Reprint Co. (1966). Cole, A.H. (ed.) (1968) Industrial and Commercial Correspondence of Alexander Hamilton, Anticipating his Report on Manufactures, New York: Augustus M. Kelley. Collins, E.J.T. (1969) ‘Harvest Technology and Labour Supply in Britain, 1790–1870’, Economic History Review, 2nd series, 32 (3): 453–73. De Crèvecoeur, J.HectorSt John (1782) Letters from an American Farmer, New York: Dutton (1972). Deane, P. and Cole, W.A. (1967) British Economic Growth, 1688–1959, 2nd edn, Cambridge: Cambridge University Press. Dorfman, J. (1946–49) The Economic Mind in American Civilization, 1606–1865, 3 vols, New York: Viking. —— (1971) ‘Introduction’, in J.B.Clark and J.M.Clark (1912) The Control of Trusts, enlarged edn, New York: Augustus M.Kelley. Ensor, G. (1818) Inquiry Concerning the Population of Nations, New York: Augustus M.Kelley (1967). Fetter, F.W. (1980) The Economist in Parliament, 1780–1868, Durham, NC: Duke University Press. Fine, S. (1964) Laissez Faire and the General-Welfare State: A Study of Conflict in American Thought, 1865–1905, Ann Arbor: University of Michigan Press.

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Furner, M.O. (1975) Advocacy and Objectivity: A Crisis in the Professionalization of American Social Science, 1865–1905, Lexington: University Press of Kentucky. George, M.D. (1953) England in Transition, Baltimore: Penguin Books. Gordon, B. (1976) Political Economy in Parliament, 1819–1823, New York: Barnes & Noble. Grampp, W. (1960) The Manchester School of Economics, Stanford: Stanford University Press. Hadley, A.T. (1887) ‘Recent Works on Economic Theory’, The Independent, 10 February. Hammond, J.L. and Hammond, B. (1927) The Village Labourer, 1760–1832, London: Longmans. Henry, J.F. (1974) ‘John Bates Clark and the Origins of Neoclassical Economics’, Ph.D. dissertation, Department of Economics, McGill University. —— (1982) ‘The Transformation of John B.Clark: An Essay in Interpretation’, History of Political Economy, 14 (2): 166–77. —— (1994) ‘John Bates Clark’s Transformation’, Journal of History of Economic Thought, 16 (1): 106–25. Hollander, S. (1979) The Economics of David Ricardo, Toronto: University of Toronto Press. Horn, P. (1981) The Rural World, 1750: Social Change in the English Countryside, New York: St Martin’s Press. Hughes, R. (1987) The Fatal Shore: The Epic of Australia’s Founding, New York: Knopf. Johnson, A. (1909) The Disappearance of the Small Landowner, London: Oxford University Press (1963). Kautsky, K. (1899) The Agrarian Question, translated by Pete Burgess, London: Zwan (1988). Kolko, G. (1965) Railroads and Regulation, 1877–1916, Princeton: Princeton University Press. Levy, H. (1966) Large and Small Holdings, translated by Ruth Kenyon, New York: Augustus M.Kelley. Marshall, A. (1927) Principles of Economics: An Introductory Volume, 8th edn, London: Macmillan. Marx, K. (1845) ‘On Friedrich List’s Book, Das Nationale System der Politischen Oekonomie’, in K.Marx and F.Engels, Collected Works, vol. 5, Marx and Engels, 1844–1845, New York: International Publishers (1975), 265–94. McGregor, P. (1992) ‘The Labor Market and the Distribution of Landholdings in preFamine Ireland’, Explorations in Economic History, 29 (4): 477–93. Munsche, P.B. (1980) Gentlemen and Poachers: The English Game Laws, 1671–1831, Cambridge: Cambridge University Press. Phillipponeau, M. (1956) La Vie rurale de la banlieu parisienne: Etude de géographie humaine, Paris: Librairie Armand Colin. Ricardo, D. (1951–73) The Works and Correspondence of David Ricardo, 11 vols, ed. Piero Sraffa, Cambridge: Cambridge University Press. Robbins, L.C. (1958) Robert Torrens and the Evolution of Classical Economics, London: Macmillan. Ross, D. (1991) The Origins of American Social Science, Cambridge: Cambridge University Press.

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Rudé, G. (1980) Ideology and Popular Protest, New York: Pantheon Books. Samuel, R. (1973) ‘Comers and Goers’, in H.J.Dyos and M.Wolff (eds) The Victorian City, vol. 1, London: Routledge, 123–63. Senior, N. (1928) Industrial Efficiency and Social Economy, 2 vols, ed. S.Leon Levy, New York: Holt. Shaw, A.G. (1966) Convicts and the Colonies, London: Faber. Slicher van Bath, H. (1960) ‘The Rise of Intensive Husbandry in the Low Countries’, in J.S.Bromley and E.H.Kossman (eds) Britain and the Netherlands: Papers Delivered at the Oxford-Netherlands Historical Conference, 1959, London: Chatto & Windus, 130–53. Smith, A. (1776) The Nature and Causes of the Wealth of Nations, Oxford: Oxford University Press (1976). Stigler, G.J. (1950) ‘Monopoly and Oligopoly by Merger’, American Economic Review, 4 (2): 23–34; reprinted in F.M.Scherer (ed.) Monopoly and Competition Policy, vol. 2, Aldershot: Edward Elgar. Taplin, W. (1792) An Appeal to the Representative on the Part of the People Respecting the Present Destructive State of the Game and Operative Spirit of Laws Erroneously Said to be Framed for its Increase and Preservation, London: Krebs-Goldsmith Collection, Reel 1500, Item 15143. Thomas, Sir William Beach (1936) Hunting England: A Survey of the Sport, and of its Chief Grounds, London: Batsford. Thompson, E.P. (1975) Whigs and Hunters: The Origin of the Black Act, New York: Pantheon. Torrens, R. (1833) Letters on Commercial Policy, London: London School of Economics and Political Science (1958). —— (1835) Colonization of South Australia, London: Longman. Trollope, A. (1929) Hunting Sketches, Hartford, CT: Edwin Valentine Mitchell. Tyron, R.M. (1917) Household Manufacturers in the United States, 1640–1860, New York: Augustus M.Kelley (1966). Young, A. (1774) Political Arithmetic, Part I, London. —— (1794) Travelers in France during the Years 1787–1788–1789, repr. Garden City, NY: Anchor Books (1969). Wright, G. (1978) The Political Economy of the Cotton South: Households, Markets and Wealth in the Nineteenth Century, New York: W.W.Norton.

6 THE DEVELOPMENT OF ECONOMIC DEVELOPMENT, 1980–95 Gale Summerfield

Most of the world’s 5.5 billion people live in countries classified as developing because of low per capita income. Although a few small East Asian nations are rich enough to be in the process of moving into the more-developed category, the ranks of what are considered developing have expanded with the addition of the former socialist countries in transition, where per capita income has dropped an average of one-third since the mid 1980s (UNDP 1996:2). As the number of developing countries increases, the links between developing and more developed countries have become increasingly obvious. Over the past fifteen years, the East Asian nations nurtured their economies on trade with the West. During the worst years of the debt crisis that stalled development in much of the world, the more developed economies found themselves also threatened with potential collapse because of financial ties to Latin America and Asia. The debt crisis in the 1980s ignited a wave of reforms in the developing world; many found themselves compelled to undertake structural adjustment in order to receive needed funds from the World Bank and International Monetary Fund. The socialist countries of Latin America, Asia and Eastern Europe undertook similar reforms in the move toward greater reliance on markets. The impact of these reforms has varied from the success of countries like China to the uncertain performance of Mexico to the disappointment of Zambia. The results of the policies are assessed quite differently by analysts approaching the problem from different perspectives—growth or human development— reflecting the two main paradigms competing for center stage in the field.1 On the one hand, some economists have been so impressed with growth indicators and market reforms that they have questioned whether development should be a separate field of study. On the other hand, the human impact of the adjustment process, even for the stellar performers, and the uneven distribution of costs and benefits have been criticized by writers who claim that a narrow focus on growth rates and per capita income as indicators of development glosses over serious problems in the process. This chapter examines the role of these paradigms in the subdiscipline of development economics, emphasizing the period since 1980. It uses a policy focus to consider the different variables, indicators, and policy implications

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associated with each paradigm, presented in the first section below. The chapter then reviews the literature that established the growth paradigm: Rostow’s linear stages assessment of historical growth; the mathematical, one-sector models of Harrod-Domar and Solow; and Lewis’s two-sector model. A lull in growth theory until the mid 1980s overlapped the introduction of structural adjustment and transition policies that marked a global resurgence in neoclassical economic analysis. The lull ended with a plethora of articles now termed the new growth theory, which examine types of endogenous growth. Simultaneously, other development specialists (Sen, Dasgupta, ul Haq, and Boserup among them) were establishing the human development paradigm as they expressed concern for the costs borne by the poor, in general, and women, in particular, during the process of development and restructuring. Their work focused not only on growth but on life expectancy, literacy and education and an array of other factors that affect human capabilities, well-being and agency. This chapter supports the thesis that the paradigm in development economics is shifting from growth to human development. Yet, while these paradigms compete, they are also complementary. Neither would deny the validity of the other’s concerns, and both focus on some of the same factors, such as human capital, but they differ in what they see as fundamental in development analysis and its policy implications. TWO PARADIGMS: GROWTH OR HUMAN DEVELOPMENT? Following World War II and the independence of many former colonies, development economics emerged as a distinct field in economics (Meier 1995: 86). Neoclassical theory was criticized as inappropriate in developing countries where rural underemployment and the lateness of industrialization appeared to require more state planning, the promotion of industrialization and capital accumulation, and different employment policies (Hirschman 1981; Sen 1984). Most of the early development economists focused on growth issues and considered higher growth rates the goal of economic development. The human development paradigm, in contrast, has its roots in the 1970s, when calls for a New International Economic Order and the concern with basic needs and gender issues came on to the development agenda. The goal of development, according to this view, is to improve people’s well-being and to increase their agency through expanding capabilities; growth is a means, not an end (Sen 1984; UNDP 1990). The focus of analysis in the growth paradigm is on growth rates of per capita GDP and GNP; in the human development paradigm, analysis centers on impacts of policies on well-being and strategies people are using as agents at the individual, household, and broader social levels. Those advocating the emphasis on growth expect welfare improvement to accompany faster growth. The human development proponents are less optimistic about the automatic spread of

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benefits (the trickle-down effect) or the prerequisite of growth for welfare improvement. The players in the growth-centered perspective are viewed as abstract factors of production; within the human development perspective, the players are clearly people, and the analytical view of these people, especially of the poor, is changing from treatment as patients or victims of policies to focus on their role as ‘actors’ or agents of change and development. The critical difference in the role of agents is that they are active decision-makers, who may act in the interest of others even if it, at times, conflicts with their own well-being.2 Transformation policies, with their emphasis on trade liberalization and reduction in government spending, can be considered part of the growth paradigm using indicators of growth rates, internal and external deficits and measures of efficiency.3 Calls for a social safety net in the process, and for government support of areas that protect and expand capabilities, such as education and health care, are obviously associated with the human development paradigm. THE GROWTH PARADIGM: INITIAL STUDIES IN ECONOMIC DEVELOPMENT In his ‘linear stages of growth’ model Rostow (1960) provides an expansive view of the historical process of growth, with a linear perspective. All countries would go through five distinct phases: (1) the traditional society, (2) the conditions for take-off into self-sustaining growth, (3) the take-off, (4) the drive to maturity, and (5) the age of high mass consumption. Development policies associated with Rostow’s linear stages are those focused on savings and capital accumulation to propel a country toward the ‘take-off’ and are eventually expected to lead to the high massconsumption stage. Developing countries: must seek ways to tap off into the modern sector income above consumption levels hitherto sterilized by the arrangements controlling traditional agriculture. They must seek to shift men of enterprise from trade and money-lending to industry. And to these ends patterns of fiscal, monetary, and other policies (including education policies) must be applied, similar to those developed and applied in the past. (Rostow 1960:139; quoted in Meier 1995:81) The concept of stages that all countries must pass through has been heavily criticized because it is relatively easy to find exceptions: countries that skip stages, ones with mixed elements, and those that change direction, exemplified by the recent experience of Argentina, Pakistan and Iran (Wilber 1988; Gillis et al. 1996:26). To view the present conditions in developing countries as analogous to earlier times in developed ones is indicative of a simplistic concept of development and the idea (shown to be erroneous in numerous cases) that the policies used then will suffice for development now (see Meier 1995). Still, a

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certain linearity permeates much of the discussion of development; even the rhetoric of ‘developing’ versus ‘developed’ countries implies a progression (and this terminology has been cleaned of more overtly derogatory tones associated with terms commonly used in the past, such as labeling the developing countries ‘backward’). The emphasis on savings and capital accumulation is a consistent theme of the growth paradigm and central to the mathematical growth models. The HarrodDomar model (see Harrod 1939; Domar 1946) in the 1940s became the simple prototype for discussion; based on the identity between savings and investment, assuming a constant capital-output ratio and non-substitutable factors of production, it related growth to an increase in savings: g=s*a where g is the growth rate of GNP, s is the national savings ratio, and a is the national outputcapital ratio (Todaro 1994:72; Solow 1994:46). If, for whatever reasons, labor productivity is rising at rate m and the labor force is growing at the rate n, total output must increase at the rate m+n on average or else the economy will fall off its ‘razor’s edge’ path; unemployment will sky-rocket or the economy will face a labor shortage; to avoid such disastrous results, s*a must equal m+n. ‘But there is no reason why this should ever happen, because the four parameters come from four wholly unrelated sources’ (Solow 1994:46). The model implies wide swings which are not supported by empirical observation, but it can provide some insights into country performance. Sen, for example, points out that the Harrod-Domar model would indicate that a country such as Ghana with a low saving rate (and thus a low rate of capital accumulation) and fairly rapid population growth would be expected to have low or negative growth rates, and indeed it did (Sen 1984:492). The policy prescriptions based on the Harrod-Domar model involve a heavy dose of government planning trying to relate the two sides of the equation, especially in attempting to increase saving. Again, development has proved harder than this simple approach. One of the main uses of the Harrod-Domar model in the 1990s is to provide some theoretical underpinning to the five-year plans that developing countries, such as Gabon, draw up in applying for investment funds from the World Bank and other lenders. Solow introduced the neoclassical model in 1956 in which he made the outputcapital ratio a endogenous and thus allowed factor substitution; labor productivity growth m also became partly endogenous with changes in capital intensity, and the model accommodated more variety in outcomes. Capital and labor were each assumed to exhibit diminishing returns individually but constant returns together, and technological change was treated as exogenous (Solow 1956, 1994; Meier 1995:102). Factor price adjustments could bring the model into balance if, for example s*a• m>n, which indicates labor scarcity; wage rates would increase and capital would be substituted for labor. The reverse would also hold unless high unemployment resulted in such weak product markets that lower wages made things worse (such as the Great Depression scenario). Overall, the model accords with the neoclassical reliance on the market

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mechanism for adjustments and the spirit of structural adjustment, with its stress on ‘getting factor prices right’. At approximately the same time that Solow introduced the neoclassical model, Lewis (1954) modified classical growth analysis to address the duality of developing countries’ economies, viz. a traditional agricultural sector languishing around a modern, urban, industrial sector. In his two-sector approach, Lewis focused on the role of rural-urban migrants in providing a steady stream of labor at low wages for the industrial sector. Because of surplus labor in agriculture, Lewis argued, the marginal product of labor in rural areas is at or near zero, and rural workers eke out a subsistence wage. In the city, opportunities in modern industry are assumed to exist, and the marginal product of labor is positive. This high productivity area is viewed as the hope for development. The model suggests that profits which accrue to the capitalists are good for the economy because they will be funneled back into domestic investment. Industry can avoid having its profits drained off to pay higher wages by hiring rural migrants; if wages are just a little above subsistence, they will be attractive enough to motivate the move from the countryside. A key policy implication of the model is that rural-urban migration should be promoted, and, to this end, planners should make cities as attractive for rural workers as possible. Funds should not be directed toward the agricultural sector because that would delay migration and development of the industrial sector. In a rather unusual view for the time, Lewis suggested that women could also be brought into the labor force to provide those workers needed for industry and keep wages from rising so quickly that they would reduce the profits needed for investment. In practice, of course, countries have not found a need to promote rural-urban migration; the phenomenon has been overwhelming and continues at such a rapid pace that half the world’s people are expected to live in urban areas by the year 2000. Many of those who move to the city in search of industrial jobs never find them; open unemployment and homelessness plague the cities, and the informal sector is the main recourse of most of the migrants. Another problem with the model is that the profits that go to the capitalists have often left the country as part of capital flight rather than being reinvested, and those that are so invested often go to capital-intensive industry that creates few jobs. Although the two-sector approach provides some insights into the development process, the model has not been practical. Economic transformation policies and the challenge to development economics During the 1970s and early 1980s, growth theory coasted along, but the influence of the growth goal was still strong. The period brought a resurgence of neoclassical economic analysis that was implemented in policies of structural adjustment and transition from socialist planning to greater use of the market. The debt crisis, slow rates of growth associated with import substitution

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industrialization, changes in leadership and disappointing economic performance in socialist countries, and the striking successes of the export-oriented economies in East Asia propelled the changes. The reform policies emphasized reducing government spending, privatizing industry, getting prices ‘right’, and liberalizing trade. Increasingly, the structure of the economy in many countries resembles the world of individual agents referred to by Adam Smith, as micro-enterprises and the informal sector provide standard types of employment.4 This neoclassical revival exhibited the merging of ideology, methodology and theory that led mainstream economists to stress the numerous examples of failed policies, wasted resources and corruption associated with the performance of developing countries without noting that there were also successes (Weisbrot 1993). The East Asian countries, for example, had achieved their high growth rates with a heavy dose of state planning as well as export-oriented policies; some countries with low levels of per capita income, such as China and Sri Lanka, had made substantial improvements in life expectancy and education levels. The emphasis on the problems in development experience and the focus on market solutions led some economists to assert that a separate field was not necessary for the study of economic development (see Meier 1995; Weisbrot 1993; Hirschman 1981). Sen led the defense of the field by illustrating that development theory was associated with positive contributions in at least four controversial, policy-related areas: (1) industrialization, (2) rapid capital accumulation, (3) mobilization of underemployed labor power, and (4) planning (Sen 1984:486–7; also see Meier 1995:88–9). Examining the performance of developing countries between 1960 and 1980, Sen showed that those with high growth rates tended to have a large share of industrial output in GDP and rapid rates of capital accumulation; those with poor growth performance often had the opposite characteristics (although he noted various reasons for slow growth). Furthermore, countries with high growth rates had ‘distinguished records of labour-using economic growth’ (Sen 1984: 493). In assessing the contribution of planning and state activism, Sen found South Korea to be a stellar performer. The pattern of South Korean economic expansion has been carefully planned by a powerful government. If this is a free market, then Walras’ auctioneer can surely be seen as going around with a government white paper in one hand and a whip in the other. (ibid.: 494) The evidence, though not conclusive, was more consistent with the success than with the failure of growth-related development policies. Sen faulted the early development economists, however, for focusing too much on growth rates as an end rather than as a means. This critique is central to the emergence of the human development paradigm, addressed below.

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Over a decade after Sen’s article defending the field, development economics still sits uncomfortably in mainstream economics; in the Journal of Economic Literature categories, it has been moved from subject area D to almost the end of the list at O. Yet, with a focus on the daily lives of most of the world’s people, with an expanding list of countries classified as developing, and with an active group of researchers, practitioners, and advocates, the field ignores the gloomy forecasts of its departure.5 Two trends have revitalized the field: what Solow (1994) described as a ‘wild-fire revival of interest in growth theory’ (which has revived the interest of the mainstream) and the maturing of the human development paradigm (which is becoming the central paradigm in the field). The growth paradigm: endogenous growth theory The growth paradigm has been invigorated by the blossoming of new growth theory in the mid 1980s. Lucas (1988), Romer (1994), Barro (1991), Barro and Sala-i-Martin (1992), and Grossman and Helpman (1994) are just a few of the well-known writers addressing new growth theory.6 Romer’s work was initially motivated by the observation that the classical economists, such as Malthus and Ricardo, had incorrectly predicted that growth rates would fall over time when in fact they increased. Lucas noted that people with human capital migrate from places where it is scarce to where it is abundant. If technology were the same everywhere, then the returns to a factor should be higher where this factor is scarce, but the same skilled worker can receive a higher wage in the humancapital-abundant United States than in the Philippines (Romer 1994:11, 20). The models that emerged have challenged earlier growth models in two main areas: the lack of convergence of growth rates between developing and developed countries and market imperfections at the aggregate level.7 With so many economists writing on the topic, it is inevitable that a variety of models have been developed, but they share a common focus: in contrast to the exogenous role played by technological change in the neoclassical model, the new growth theory permits human action, endogenous to the model, to affect technological change and the rate of growth (Kurz and Salvadori 1995:2). In some of the new models human capital becomes the critical factor in the growth equation; others center more on investment in research and development, spillover effects or entrepreneurship, all of which are related to human capital at least indirectly. Even in the greatly abstracted area of growth theory, the field of economic development is becoming more people-centered. ‘The new growth theories thus confirm the human development position that the driving force of all economic growth is people’ (UNDP 1996:51). While the new growth models focus on some types of human action such as investment in education, they still downplay the role of labor, ignore much of the range of people’s capabilities, and omit any discussion of how present and future workers are prepared for productive employment (see Romer 1994:7; UNDP 1996:50–1). Romer, for example, acknowledges (with some regret) that

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perceived pressure from the main-stream to stress physical capital led him to deviate from the role of human capital for a few years in the late 1980s (Romer 1994:20). The treatment of capital in the models has also been criticized for retaining the ‘fairy-tale assumption’ of the neoclassical model that capital is in effect ‘a homogeneous capital jelly’ (Kurz and Salvadori 1995:23). The ‘newness’ of the new growth models has itself been questioned; Kurz and Salvadori point out that dynamic change or growth was a central issue for Adam Smith, Ricardo and other classical economists. Furthermore, small changes in the neoclassical model, such as adjusting labor to account for human capital, lead to results quite similar to some aspects of the new growth models, especially in the convergence controversy (Meier 1995:103; Romer 1994).8 ‘So it often proves in economics: the mainstream first takes affront at new ideas, then reluctantly draws on them, and eventually claims to have thought of them first’ (Economist 1996:24). In Chapter 10 of this volume, Maital and Sharabani discuss the endogenous growth models in detail. For our purpose, it is sufficient to say that these models have different policy implications from the older models. Since they stress the acquisition of human capital even more than physical capital, they imply social policies to promote education, which overlaps, at least in part, with the broader human development focus discussed below. Policies that draw on the new growth theories can play a role in altering private incentives for education and for research and development by firms. THE HUMAN DEVELOPMENT PARADIGM Entitlements, capabilities and agency Although the mainstream fascination with growth rates as the definitive measure of successful development is still represented by various politicians, journalists, and academics, paradigms in development economics are becoming more centered on people, and, increasingly, development specialists view growth as a means rather than as a goal (see UNDP, various years; Sen 1984; Dreze and Sen 1995; Wilber 1988). While growth models are accepted as one potentially fruitful area of study, they are not viewed as the main concern of development. The debates of the field in the last fifteen years have focused more on how to include human well-being and security (including basic needs and protection of the environment) in the analysis. Since development policies have benefited or hurt women and men differentially, more work has focused on the impact on women and the strategies they use. The concepts of entitlements, capabilities and agency are the main contenders for an alternative to reliance on growth as the focus of analysis and policy (Sen 1984, 1995). Entitlements represent a person’s control over commodity bundles influenced by endowment and the traditions and institutional arrangements of the area.

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Entitlements have been useful in famine analysis and intrahousehold allocation of labor and income, but they still have a rather narrow focus on commodities. Capabilities, in contrast, represent the opportunities available to a person (rather than innate abilities); they are positively related to entitlements but better capture the complexity of influences on a person’s well-being, which includes the capability of being adequately nourished, of getting an education, and of ‘participating fully in society’ (Sen 1984:497–8). Because of this complexity, capabilities defy expression by a simple, quantitative indicator; a changing group of indicators related to the specific problem being studied is usually a more appropriate approach (Sen 1993a: 32–3). The actual outcomes of people’s opportunities are termed functionings. Although the concepts of entitlements and capabilities had been presented earlier, they have had a greater impact on the field over the last fifteen years through Sen’s own writings, those done jointly with colleagues, and increasingly through their influence on other work (see, for example, Nussbaum and Glover 1995). The annual Human Development Reports first published in 1990 by the UNDP clearly incorporate these concepts in their analysis and in the construction of the Human Development Indicator (HDI): Human advance is conditioned by our conception of progress. The Human Development Report series has been dedicated, since its inception in 1990, to ending the mismeasure of human progress by economic growth alone. The paradigm shift in favour of sustainable human development is still in the making. But more and more policy-makers, in many countries are reaching the unavoidable conclusion that, to be valuable and legitimate, development progress—both nationally and internationally—must be people-centered, equitably distributed and environmentally and socially sustainable. (UNDP 1996:iii) The HDI, which is an average of components based on purchasing power, literacy and education, and life expectancy, is becoming a common summary measure of development. Although the HDI is an aggregate measure that cannot substitute for the detailed analysis of the factors that influence a topic, it serves to focus the discussion on the broader aspects of human development at the same time that it acknowledges the importance of growth by including a measure of purchasing power. Table 6.1 illustrates that the ranking by HDI deviates from that based on growth for more than a few countries. Agency and strategy are concepts that capture the current interest of development specialists in focusing on actions and solutions to problems. The strategies of a person as agent represent an active role in transforming the world rather than in being a patient or a victim whose well-being is the object of policies made by others (Sen 1995). The agent may act in her/his own interest or in the perceived interest of others, such as to better conditions for children.

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Table 6.1 International comparisons of HDI (Human Development Index), selected developing countries, 1992

Source: UNDP (1994:94). Notes a Highest HDI value for a developing country in 1994. (Hong Kong had the second highest.) b Lowest HDI value in 1994.

Analysis of strategies used during economic reforms is becoming especially common in the gender and development literature discussed below. Gender and development or women in development? Another major area of contribution to development analysis has been made by the work on issues related to gender bias. Although the field began in the early 1970s, it has grown substantially in the 1980s. Women comprise almost threefourths of the world’s poor. During the tumultuous changes in the last fifteen years associated with structural adjustment programs and transition from socialist planning to market-oriented economies, women have usually gained less and lost more than men. Several collections have documented the consistency of gender bias in the reforms (see Aslanbeigui et al. 1994; Beneria and Feldman 1992; Sparr 1994; World Development 1995). Whether or not women’s role is included in policy formation and implementation can affect the success of the policy and has implications for the well-being of men as well as women (see Haddad et al. 1994; Sen 1995). Research efforts focus on making gender an integral part of both microeconomic and, more recently, macroeconomic analysis. Now that impacts have been addressed, researchers are focusing more on strategies or actions that women take in dealing with the reform process. In addressing changes in the strategies of women, especially in developing countries, several researchers have begun to stress the importance of considering both the individual woman and her family, since that is the context in which she lives and functions (see Jaquette 1993; Tinker and Summerfield 1997). Analysis

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is moving from concentrating only on women to examining how both women and men are participating in development and are being affected by the process; this change is reflected in the use of gender and development (GAD) rather than women in development (WID) as the topic for this area of study (see Folbre 1995). The gender and development approach contrasts with the household as the basic unit of analysis as commonly used in microeconomics. When determining how family decisions are made, the ‘black box’ approach of neoclassical economics typically ends up with some manipulation that represents full cooperation of the single-minded family, such as Becker’s ‘altruistic dictator’. The family as ‘cooperative conflict’, in contrast, can accommodate a fully cooperative family or a more representative one where members, who may love and care for each other, have both interests in common and interests that conflict with those of other members. Households that do not pool income, where family violence occurs, or even where there are arguments about who will do the dishes, are better represented by a model of cooperative-conflict (Sen 1990; Haddad et al. 1994). The intrahousehold allocation of labor and income are key areas of contention. Whether or not a woman has her own income, how independent of her husband (or father and brother) that income is and how much decision-making power she has in the course of earning it can all influence her bargaining power within the household. Both the amount and the source of income affect the outcome. Many researchers have discussed the contribution that income in the woman’s own name can make to her well-being and that of the children (both girls and boys), especially in terms of education and nutrition (see Blumberg et al. 1995; Beneria and Roldan 1987). The effect of the source of income is not yet sufficiently understood; only a few scholars have addressed issues of the changing source of income, and they do not fully agree at this point (see Sen 1990; Tinker 1996; Aslanbeigui and Summerfield 1989; Dwyer and Bruce 1988). While much of the discussion of the impact of the source of income has focused on whether it is earned in a family-run business, in home-based work, or in outside employment, the impact on bargaining power may have more to do with the power to make decisions in the process of generating the income. While this decision-making power may well be associated with the ability to work outside the home, there are counter-examples. Thus, a woman who sells noodles on the street may have more control in her household than one who works as a domestic laborer in someone else’s house. The benefit of being able to supervise her own children and issues of child labor are frequently overlooked in the discussions.9 The move toward more self-employment, especially in micro-enterprises in the informal sector, in the process of economic transformation has raised related questions that are being addressed in the literature. The credit constraint has been severe for women, and micro-credit programs patterned after the success of the Grameen Bank have been discussed as one of the main strategies that permit them to take advantage of available opportunities.10 Remittances from relatives

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in the city or abroad provide supplementary funds but are not available to women in general. Women tend to use any surplus from their micro-enterprises to feed, clothe, and educate their children rather than to expand the business. Whether this is a cost to society from lost investment or a benefit through better allocation to the next generation is a topic of contention (Tinker 1996). The role of the informal sector is a topic of debate in itself, since it is often viewed as marginalizing people, but, given the trend in the restructuring countries, and the fact that some people do better in the informal sector than in formal-sector work, much analysis is focused on how women can take advantage of existing opportunities. In addition to credit programs, the other strategy most frequently discussed is increasing educational opportunities for girls and adult women. THE PARADIGM SHIFTS Since the 1980s, the field of economic development has responded to the challenge from mainstream economics with one of its own: it questions whether the neoclassical emphasis on growth rates has missed the point of economic development. While growth theory has turned toward considering some aspects of human action, such as the acquisition of human capital and entrepreneurship, the field has expanded its focus beyond growth to human development related to the real opportunities or capabilities of people. The focus on growth as a means to, rather than as the end product of, development has led to a boom in articles analyzing the human impact of structural adjustment policies and has had some impact on policy decisions, as is seen, for example, in the actions of the major lenders (the World Bank, for example, has begun to include a social conditionality measure for loans as well as requiring gender and environmental analyses for its projects). Poverty is not just a problem in developing countries, though it is more extensive there. The artificial boundary between studies of more developed and developing countries on some issues is reasonably challenged and more discussion could benefit analysis overall.11 Acknowledgment of areas of overlap is, however, not a concession to those who claim that development should not be a separate field of economic analysis. Institutionalist analysis provides one indication of the need to maintain a separate field in the foreseeable future so that the traditions and institutions that influence the effectiveness of policies will be given the attention they merit. It took years before the IMF’s adjustment policies, during the debt crisis of the 1980s, considered the specific characteristics of the countries where they were being implemented; the tangible effect was that the poor paid a high price for adjustment, some of which could have been avoided (see Cornia et al. 1987). Institutionalists and those associated with other heterodox areas, such as feminist economics and social economics, have opened a debate about appropriate tools of analysis that is especially relevant to development economics. Data are often unavailable for the econometric studies that

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mainstream proponents would like to see; the heterodox discussion reminds the field that there are alternative methods of analysis. The dialog with development specialists is still in its incipient stages but increasingly the institutionalist, feminist, and social economic journals are including analyses of developingcountry problems. Writers associated with the field of history of thought also raise questions about the ‘lessons’ of economic transformation or the neoclassical resurgence. In addition to pointing out the roots of endogenous-growth theory in the classical literature, they remind us that there has always been a combination of state and market policies rather than a necessarily hostile view toward state intervention; it is the degree of state involvement that is open to debate (Aslanbeigui and Medema 1996; Fusfeld 1984). The role of the market has become more appreciated by those who previously advocated planning, but the success of some forms of planning and intervention has been overlooked by the mainstream. Thus, the two paradigms—growth and human development—are complementary as well as competitive. Neither would deny the importance of the concerns of the other paradigm, but, while they coexist, each has quite different implications for analysis and policy. The momentum as we approach the twentyfirst century appears to be in favor of the human development paradigm which means that growth is viewed as an indirect indicator of capabilities, and that other indicators, such as life expectancy, access to health care and education, and political participation, are treated with more respect (and more depth) in the field. CONCLUSION The field of economic development, rather than breathing its last gasp, has continued to develop during the 1980s and 1990s. Drawing on work begun in the 1970s, key contributions have been made over this period in turning the focus of analysis to the impact of development on people, its differential impacts on women and men, and on viewing people not just as victims but as agents of change who act at individual, community, national, and international levels to create and implement the strategies that comprise the process called development. NOTES 1 Although other paradigms exist, this chapter focuses on two that are central to the current debate in economic development. (Marxism, for example, provides a different paradigm, but in the 1990s it is less influential in the debate.) 2 This analysis is based on Sen (1993a, 1995) as well as on discussions with participants at the NGO Forum of the fourth World Conference on Women, Beijing/Huairou, 1995. 3 Ironically, the neoclassical approach has infiltrated the break-away development economics through the focus on growth, since the neoclassical growth model of

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4 5

6

7

8

9

10

Solow discussed below has gained so much dominance in this area and has also been shown to be consistent with some of the new growth models. This history has many elements in common with other stories about the development of economics. The story starts with the emergence of new data. These present anomalies that lead to new theoretical models, some of which differ markedly from previous, wellaccepted models. Then a more conservative interpretation emerges that accommodates the new evidence and preserves much of the structure of the old body of theory. In the end, we have refined the set of alternatives somewhat, but seem to be left in about the same position where we started, with too many theories that are consistent with the same small number of facts. (Romer 1994:11) This observation was made by Professor Fusfeld at the Eastern Economic Association Conference in March 1996. A chapter on development is fitting for a volume in honor of Daniel R.Fusfeld because, although he is not a development specialist himself, his work has often addressed the problems of the poor, and his concern for human well-being is always apparent in his writings and teaching. The apparent interest of economics journal editors in this type of scholarship facilitates the large number of published articles on the topic. Even the Human Development Report, which from its inception in 1990 has sought to provide an alternative to the sole reliance on growth indicators in the assessment of development, takes growth as its focus in 1996, although it does include a thorough dose of the importance of other aspects of human development. The convergence controversy revolves around whether developing countries have faster growth rates than more developed ones; and, if so, whether the growth rates of the rich and poor countries would eventually converge. New-growth theorists dispute convergence as an implication of classical and neoclassical models and offer explanations for what keeps the gap large; some of the new-growth theorists (e.g., Romer) acknowledge that the neoclassical model, buoyed by some additional assumptions, can also account for the lack of convergence (Romer 1994; Meier 1995). Recent theorists have criticized the exogenous technological change and the constant returns to scale assumption in the original neoclassical growth model; but, while accepting some of the critique, Solow claims that the model was never dependent upon constant returns and was easily compatible with the acquisition of human capital (1994:48). Of course, the noodle maker will probably have business contact with people outside the family, and in this way it is a type of ‘outside work’. An individual woman may decide she is best-off being a homemaker and doing unpaid work, and this freedom of choice represents a valued capability for her. In general, however, women must hold a variety of jobs for the ability to do such work to exist. The Grameen Bank was set up in 1976 in Bangladesh to grant small loans to poor people. Within a few years, the bank began to focus on poor women as its main clients, since they seldom had alternative sources of credit, and loans to women had impressive benefits for families. The high repayment rates and the usefulness of micro-credit in a period of structural adjustment marked by the growth of microenterprise has made the Grameen Bank a model for institutions throughout the world, even for the inner cities of the United States. Despite its success, the bank

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has been criticized for dependence on outside sources of funding and for charging market interest rates. 11 For examples of discussions of the overlap of issues between developing and more developed countries, see Sen (1993b), which includes comparison of conditions in Bangladesh and Harlem. Also relevant are such writings as Fusfeld (1973, 1984) on poverty in the inner city. In his campaign for President in 1992, Clinton made frequent references to the applicability of the small-loan programs of the Grameen Bank in Bangladesh to the inner cities of the United States. In addition, the links between the developing and more developed countries are obvious in many works on the debt crisis and export-oriented industrialization.

REFERENCES Aslanbeigui, N., Pressman, S. and Summerfield, G. (eds) (1994) Women in the Age of Economic Transformation, London: Routledge. —— and Medema, S. (1996) ‘Beyond the Dark Clouds: Pigou and Coase on Social Cost’, unpublished, Monmouth University and University of Colorado in Denver. —— and Summerfield, G. (1989) ‘Impact of the Responsibility System on Women in Rural China: An Application of Sen’s Theory of Entitlements’, World Development, 17 (3): 343–50. Barro, R.J. (1991) ‘Economic Growth in a Cross-section of Countries’, Quarterly Journal of Economics, 106:223–51. —— and Sala-i-Martin, X. (1992) ‘Convergence’, Journal of Political Economy, 100 (2): 223–51. Beneria, L. and Feldman, S. (eds) (1992) Unequal Burden: Economic Crises, Persistent Poverty, and Women’s Work, Boulder, CO: Westview Press. —— and Roldan, M. (1987) The Crossroads of Class and Gender: Industrial Homework, Subcontracting, and Household Dynamics in Mexico, Chicago: University of Chicago Press. Blumberg, R.L., Rakowski, C.A., Tinker, I. and Monteón, M. (eds) (1995), Engendering Wealth and Well-being: Empowerment for Global Change, Boulder, CO: Westview. Cornia, G., Jolly, R. and Stewart, F. (eds) (1987) Adjustment with a Human Face, New York: Oxford University Press. Domar, E. (1946) ‘Capital Expansion, Rate of Growth, and Employment’, Econometrica: 137–47. Dreze, J. and Sen, A.K. (1995) India: Economic Development and Social Opportunity, Delhi: Oxford University Press. Dwyer, D. and Bruce, J. (eds) (1988) A Home Divided: Women and Income in the Third World, Stanford: Stanford University Press. Economist (1996) ‘Economic Growth: The Poor and the Rich’, 25 May, 23–5. Folbre, N. (1995) ‘Engendering Economics: New Perspectives on Women, Work, and Demographic Change’, Washington, D.C.: World Bank, paper presented at the Annual Bank Conference on Development Economics. Fusfeld, D.R. (1973) The Basic Economics of the Urban-Racial Crisis, New York: Holt Rinehart & Winston. —— (1984) The Political Economy of the Urban Ghetto, Carbondale: Southern Illinois University Press.

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Gillis, M., Perkins, D.H., Roemer, M. and Snodgrass, D.R. (1996) Economics of Development, 4th edn, New York: W.W.Norton. Grossman, G. and Helpman, E. (1994) ‘Endogenous Innovation in the Theory of Growth’, Journal of Economic Perspectives, 8 (1): 23–44. Haddad, L., Hoddinott, J. and Alderman, H. (1994) ‘Intrahousehold Resource Allocation: An Overview’, Policy Research Working Paper 1255, Washington, DC: World Bank. Harrod, R.F. (1939) ‘An Essay in Dynamic Theory’, Economic Journal: 14–33. Hirschman, A.O. (1981) ‘Rise and Decline of Development Economics’, in Essays in Trespassing, Cambridge: Cambridge University Press. Jaquette, J.S. (1993) ‘The Family as a Development Issue’, in G.Young, V. Samarasinghe, and K.Kusterer, Women at the Center: Development Issues and Practices for the 1990s, West Hartford, CT: Kumarian Press, 45–62. Kurz, H.D. and Salvadori, N. (1995) ‘The “New” Growth Theory: Old Wine in New Goatskins’, presented at the ninth Malvin Political Economy Conference. Lewis, W.A. (1954) ‘Economic Development with Unlimited Supplies of Labor’, The Manchester School, 22 (2): 139–91. Lucas, R.E. (1988) ‘On the Mechanisms of Economic Development’, Journal of Monetary Economics, 22 (1): 3–42. Meier, G.M. (ed.) (1995) Leading Issues in Economic Development, 6th edn, New York: Oxford University Press. —— and Seers, D. (eds) (1984) Pioneers in Development, New York: Oxford University Press. Myrdal, G. (1956) An International Economy: Problems and Prospects, New York: Harper & Row. Nussbaum, M. and Glover, J. (eds) (1995) Women, Culture and Development: A Study of Human Capabilities, Oxford: Clarendon Press. Romer, P.M. (1994) ‘The Origins of Endogenous Growth’, Journal of Economic Perspectives, 8 (1): 3–22. Rostow, W.W. (1960) The Stages of Economic Growth: A non-Communist Manifesto, London: Cambridge University Press. Sen, A.K. (1984) ‘Development: Which Way Now?’ in A.K.Sen (ed.) Resources, Values and Development, Cambridge, MA: Harvard University Press. —— (1990) ‘Gender and Cooperative Conflicts’, in I.Tinker (ed.) Persistent Inequalities, Oxford: Oxford University Press. —— (1993a) ‘Capability and Well-being’, in M.Nussbaum and A.K.Sen (eds) The Quality of Life, Oxford: Clarendon Press. —— (1993b) ‘The Economics of Life and Death’, Scientific American, (May): 40–7. —— (1995) ‘Agency and Well-being: The Development Agenda’, in N.Heyzer (ed.) A Commitment to the World’s Women: Perspectives on Development for Beijing and Beyond, New York: Unifem. Solow, R. (1956) ‘A Contribution to the Theory of Economic Growth’, Quarterly Journal of Economics, 70 (1): 65–94. —— (1994) ‘Perspectives on Growth Theory’, Journal of Economic Perspectives, 8 (1): 45–54. Sparr, P. (ed.) (1994) Mortgaging Women’s Lives: Feminist Critiques of Structural Adjustment, London: Zed Books. Tinker, I. (1996) Street Foods, New York: Oxford University Press.

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—— and Summerfield, G. (eds) (1997) ‘The Family and Economic Transformation in Developing Countries: Impacts and Strategies. A Symposium Based on Issues Raised at the NGO Forum of the United Nations’ Fourth World Conference on Women’, Review of Social Economy, forthcoming. Todaro, M.P. (1994) Economic Development, 5th edn, New York: Longman. UNDP (various years) The Human Development Report, New York: Oxford University Press. Weisbrot, M.A. (1993) ‘Ideology and Method in the History of Development Economics’, Dissertation in Economics, Ann Arbor: University of Michigan. Wilber, C.K. (ed.) (1988) The Political Economy of Development and Underdevelopment, 4th edn, New York: Random House. World Development (1995), special issue on Gender and Structural Adjustment, 23 (11).

7 GENDER IN ECONOMICS AND THE GENDER OF ECONOMISTS An historical perspective Nancy E.Bertaux

There is a wonderful flowering of interest and research on the topic of gender and economics currently under way, particularly evident in the formation and activities of the International Association for Feminist Economics, including the founding of the journal Feminist Economics, all of which have occurred in the 1990s (Aerni and Nelson 1995). Feminist concerns have been especially visible in economics since the 1970s (when the Committee on the Status of Women in the Economics Profession was formed), but in the 1990s there has been a notable intensification, internationalization, and general broadening of these concerns, so that they have now reached the very heart of the discipline: its models, methods, and purposes. Further, there is a vitality, an excitement, a feeling of being on the ‘cutting edge’ at meetings and sessions on gender and economics that seems lacking in most other areas of the discipline. As I imply with the title of this chapter, the area of gender and economics can be separated into topics on ‘gender in economics’ and topics on ‘the gender of economists’. ‘Gender in economics’ refers to gender-related issues within the discipline of economics, ranging from theories of gender-based discrimination in the labor market (Blau and Ferber 1992) and consideration of so-called ‘women’s’ concerns such as housework and child care (Folbre 1994) to the analysis of the rhetoric or methodology of economics for evidence of male dominance (Ferber and Nelson 1993). ‘The gender of economists’ refers to gender issues within the economics profession, including the relative status, influence, and interests of women and men economists, now and in the past (McMillen and Singell 1994; Hammond 1993; R.W.Dimand et al. 1995). There are also interesting issues at the intersection of gender in economics and the gender of economists, i.e. questions such as ‘Does the gender balance in the economics profession affect whether and how gender issues are raised and analyzed within the discipline of economics?’ The primary purpose of this chapter is to sketch an historical perspective on gender and economics up to about 1920,1 including gender in economics, the gender of economists, and especially their intersection. Along the way, I also address historical connections with the feminist movement. Happily, the literature on gender and economics has grown to the point where I must issue the declaimer that my sources are selective, not exhaustive. As to my perspective, I

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come to this topic as an eclectic but definitely feminist economist, who sees much wisdom in many varieties of economic analysis, including institutional, radical, Marxist, and—yes—even neoclassical. (As the mother of three young children I try to throw out the bathwater but not the babies, even on those especially trying evenings.) The chapter begins with a brief survey of the contemporary status of women economists. I then give a (non-exhaustive) historical perspective on gender and economics in two parts: what I call ‘the early years’, from the early nineteenth century to the 1860s, and ‘the suffrage era’, from the 1860s to the 1920s. I conclude with some thoughts on recent feminist challenges to mainstream economics’ models and methodology. RECENT TRENDS IN THE GENDER OF ECONOMISTS The non-historians among us would probably expect to see a virtual absence of women from the ranks of economists, and, perhaps timed with the success of feminist movements, gradual progress up to the current day. Indeed, if the reports of the Committee on the Status of Women in the Economics Profession (CSWEP) are followed over the past twenty years, this is more or less what we find. The CSWEP report for 1995 shows that 23–6 percent of economics ABD students were women in 1994–5, and that some 27–8 percent of new Ph.D.s granted in economics in 1993–94 went to women. The first survey in this series was done by CSWEP over twenty years ago, and resulted in Carolyn Shaw Bell’s report (1974) that about 12 percent of full-time (and 9 percent of part-time) Ph.D. candidates in economics in 1973–74 were women. The preceding two decades have thus witnessed at least a doubling in the percentage of women in Ph.D. programs. Bell also cited US Department of Education data to show that 5 percent of the Ph.D.s awarded in economics in 1970 went to women, and the figure for 1992–93 is 23 percent (1995:261), showing a more than fourfold increase in women Ph.D.s in twenty-three years. None the less, women remain a minority of economics Ph.D.s.2 Inequalities persist after the degree: the higher the academic rank, and the more prestigious the academic institution, the lower the percentage of women. CSWEP surveys clearly show women being weeded out as they go up the academic ladder, since the percentage of women promoted to a given rank is consistently below their percentage in the pool of candidates in the rank below. The latest CSWEP report (1996:2) tells us that ‘over the past five years, the female share of new hires or promotions at the associate level has averaged 4.2 percentage points below women’s representation at the assistant professor level’.3 The CSWEP report notes that, over the same five years, women’s ‘share of new full professor hires has averaged 2.7 percentage points below the share of female associates’. The report (ibid.: 1) also documents the continuing gap between women’s representation overall versus ‘Top Twenty’ departments; for example, 4 percent of ‘Top Twenty’ full professors are women, while 6 percent

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Table 7.1 Proportion of women among economists in Ph.D.-granting departments, by rank, 1973–74 and 1994–95 (%)

Source: CSWEP, Newsletter and Annual Reports, 1974, 1995.

is the figure for the overall sample. The highest ranks and the most prestigious departments in economics remain male bastions. In discussing the small percentage of women receiving advanced degrees in economics, Ferber and Nelson (1993) reject lack of training in mathematics as an explanation, noting that women math majors are plentiful relative to women economists. These authors explore various possible reasons for the inequalities in academia, including direct discrimination, as well as lesser scholarly productivity among women due to indirect discrimination, such as partiality in reviewing articles for publication, in citations and in election to offices in professional societies.4 Diana Strassman (1993b) has suggested that the economics profession does not preside over a ‘free market’ with respect to the market place of ideas, and that dissenters from a narrowly defined vision of economics (who are frequently women) are devalued or excluded altogether; this could also result in fewer women at the ‘top’ of the profession. The CSWEP data in Table 7.1 do show progress in the proportion of women among academic economists in Ph.D.-granting departments, as we see at least a doubling in the share of women, at each rank, from the 1970s to the 1990s. From my perspective, these data represent real, hardwon progress, but I would be hard pressed to call it blindingly rapid! Recently I leafed through the listings of economics faculty, by school and by rank, in The 1996 Prentice Hall Guide to Economics Faculty (Hasselback 1996). The paucity and even complete absence of women’s names, particularly at higher ranks and in the more prestigious institutions, had a chilling effect. I had meant to simply look up one name, but I began to turn one page after another, looking for an exception, for a single school with a healthy proportion of women. I never found one. THE HISTORY OF THE GENDER OF ECONOMISTS: THE EARLY YEARS While economics, born as political economy, has always been dominated by males, increasing attention is being focused on the women who have made contributions to the discipline. Contrary to what many would expect, the historical record does not show gradual and steady improvement on this score. If

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we look back far enough, we find a more complicated story to tell—namely, one of advances for women, followed by setbacks, followed by recovery. In the earliest years of political economy, before it was an established field of study, the very lack of an institution-based identity probably worked to the advantage of the handful of women writers on the topic. The earliest women economists to surface are the contemporaries Jane Marcet (1769–1858) and Harriet Martineau (1802–76), both of whom have been labeled as ‘popularizers’ of classical political economy in the early nineteenth century (Thomson 1973; Polkinghorn 1995). Marcet’s work was in the form of ‘conversations’ or dialogues, while Martineau’s ‘illustrations’ of political economy were fictional stories. Martineau explained, ‘We cannot see why the truth and its application should not go together—why an explanation…should not be made more clear and interesting at the same time by pictures of what those principles are actually doing in communities’ (1832 I:xii). Bette Polkinghorn’s work on Marcet and Martineau challenges us to consider the importance of their economic education achievements, documenting the impressive readerships they developed as well as the positive reviews they received from diverse quarters. Martineau’s Illustrations made her financially independent; her first volume alone sold four to five times as many copies as a typical Dickens novel. It is useful to link the timing of these first women writers on economics with the birth of the feminist movement in the English-speaking world. The very act of writing on a serious subject such as political economy in their day can be interpreted as a feminist act. The first wave of feminism is generally associated with the writings of Mary Wollstonecraft (1759–97), especially A Vindication of the Rights of Woman (1792; see Todd 1977). After an unconventional childhood, Wollstonecraft left home at the age of nineteen and ‘tried almost all the positions open to respectable but impoverished middle-class women’, including companion to a wealthy woman, housekeeper, schoolteacher, governess, and finally writer. Against great obstacles, she managed to support herself and, at times, various family and friends, including a daughter, with the income from her writings. Her work on the rights of women appears as a natural outgrowth of her own economic struggle. In A Vindication of the Rights of Woman she spoke ‘against the custom of confining girls to their needle, and shutting them out from all political and civil employments’. A persistent theme in Wollstonecraft’s writings was the often trivial nature of the sphere to which women were confined and the desirability of education as a means of elevating women: ‘Make [women] free, and they will quickly become wise and virtuous.’ She also claimed women’s fundamental right to reason in a more revolutionary manner: ‘From the tyranny of man, I firmly believe, the greater number of female follies proceed’ (Todd 1977: 2–3, 108, 109, 114). Dorothy Thomson found evidence that Marcet was directly inspired to write her Conversations (which take place, incidentally, between a woman instructor and her female student) by Wollstonecraft’s curricular recommendations that ‘the elements of religion, history…and politics, might also be taught in the

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Socratic form’. While Marcet did not leave any confirmation of this as the source of her approach, she and Wollstonecraft were London contemporaries at a time when the latter’s work was well known, and they certainly shared in the spirit of the times, ‘an era when there was a growing interest in the movement for economic independence and educational equality of women’ (Thomson 1973:11–13; Flexner 1972). Martineau was clearly associated with a number of early feminist causes, and, like Wollstonecraft, supported herself with income from her writings.5 Wollstonecraft, Marcet and Martineau all shared a liberal, economic individualist outlook, in which it seemed logical that women deserved most, if not all, of the rights of men. Mary Wollstonecraft’s Vindication of the Rights of Woman continued to influence the next generation of feminists, as it ‘nourished [American feminists] Frances Wright and Margaret Fuller, Lucretia Mott and Elizabeth Cady Stanton and [British feminist and economist] Millicent Fawcett’ (Flexner 1972:265).6 Mott and Cady Stanton helped to organize the 1848 Seneca Falls convention that launched the American feminist movement (Dubois 1978:23). Directly inspired by the feminists in America, Harriet Taylor (1807–58, later married to J.S.Mill) wrote in Enfranchisement of Women (1851) in favor of women’s ‘complete liberty of choice’: The speakers at the Convention in America have therefore done wisely and right, in refusing to entertain the question of the peculiar aptitudes either of women or of men… Let every occupation be open to all, without favour or discouragement to any, and employments will fall into the hands of those men or women who are found by experience to be most capable. (Mill 1970:100–1) Michele Pujol has dismissed the previous debate among male economists over the extent of Taylor’s influence over J.S.Mill. She has insightfully argued that Harriet Taylor was more advanced in her feminist position than Mill, both in her recognition of patriarchy and in her analysis of women’s ‘false consciousness’, as in Taylor’s observation that ‘the alleged preference of women for their dependent state is merely apparent, and arises from their being allowed no choice’ (Pujol 1995:97). Very shortly after Taylor’s essay was published, British economist Barbara Leigh Smith (1827–91, later Bodichon) created a ‘sensation’ with her 1854 publication A Brief Summary, in Plain Language, of the Most Important Laws Concerning Women, which initiated the legislative fight for married women’s property rights (finally won in 1893, after her death). She toured America in the late 1850s, meeting with leaders of the women’s rights and abolition movements (which were closely linked at this time), and returned to help found the suffrage movement in England. In this pursuit, she enlisted the enthusiastic support of John Stuart Mill, who was unsuccessful though ‘brilliant’ in his efforts to get women’s suffrage through Parliament in 1865.7 (This was not achieved until

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1919.) It was in this context that J.S.Mill wrote his feminist work, The Subjection of Women (Sockwell 1995; M.A.Dimand 1995a: 51–2; Lacey 1987:21). In 1857 Bodichon published another essay, entitled Women and Work, a work that is considered the first statement of the crowding hypothesis as an explanation of women’s low wages relative to men. She began the essay by quoting the New Testament—‘We are all the children of God by faith in Christ Jesus;…there is neither male nor female, for ye are all one in Christ Jesus’—and Elizabeth Barrett Browning: ‘The honest, earnest man must stand and work;/The woman also; otherwise she drops/At once below the dignity of man,/Accepting serfdom’. Bodichon declared that ‘one great corresponding cry rises from a suffering multitude of women, saying, “We want work”’. She analyzed the problem, noting, ‘there are fewer paths open to [women], and these are choke full’, and concluded that the solution was ‘opening more ways of gaining livelihoods for women’. William Sockwell has described the activities of Bodichon and the ‘Langham Place group’, her network of women activists, with regard to their efforts for the economic independence of women. The lasting nature of these relationships is notable, as they ‘remained a loosely connected circle for decades, meeting one another in a variety of new feminist committees’ (Lacey 1987:36–7, 44; Sockwell 1995:120; Pujol 1992). Taylor and Bodichon mark an important juncture in the history of women economists, as they creatively analyzed women’s economic, social and political status. The work of Taylor and Bodichon thus stands apart from the economic education efforts by Marcet and Martineau, in its focus on women, and in the originality of the analysis. The emphasis on equal rights for women by Taylor and Bodichon led to what I will call the suffrage era, which lasted many decades on both sides of the Atlantic. THE HISTORY OF THE GENDER OF ECONOMISTS: THE SUFFRAGE YEARS Millicent Garrett Fawcett (1847–1929) represents a transition from the early years to the suffrage era, as her published work in economics spans the period from 1870 to World War I. Like her female predecessors, and most of the male writers on economics at this time, she had no formal training in economics. At age 19, she married the Liberal politician and political economist Henry Fawcett, who was blind, and assisted him on many projects. She was also a member of Bodichon’s early suffrage society, which Henry supported as well. Robert Dimand has noted that her publications on voting theory in the early 1870s ‘would now be considered part of the economic theory of public choice’ (1995: 1). In 1870, she authored an introductory textbook, Political Economy for Beginners (‘it went through ten editions in forty-one years, a pre-Samuelson record’) and in 1874 a set of Tales in Political Economy, with due acknowledgment to Martineau. Both her pedagogical works followed the

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doctrines of John Stuart Mill, who was a close friend of the Fawcetts (Thomson 1973:45). Later in her career, Fawcett took over leadership of the suffrage movement in Britain. She served as president of the National Union of Women Suffrage Societies and was ‘damned’ by Eleanor Marx (Karl’s daughter) as a ‘fine-lady suffragist’ (M.A.Dimand 1995a:52). Fawcett also made several contributions to the British ‘equal pay’ debates, conducted largely in the pages of The Economic Journal during the 1890s and early twentieth century (Pujol 1992; Henderson 1995). These were complex and interesting debates, in which the participants ranged from Sidney Webb to Fawcett to Francis Edgeworth. Fawcett recognized the agenda of anti-feminists who supported equal pay for women and men only because they believed it would drive women out of the labor market, but she refused to accept second-class status for women. In her articles on the subject of women’s pay relative to men’s, she consistently supported equal pay for women and noted the discriminatory role that trade unions played when they denied jobs and training to women. She also formulated a hypothesis of labor markets segmented by gender, or ‘non-competing groups’ where ‘the equalizing effect of competition in wages only operates within each of these groups’ (Pujol 1992: 58). In this era, women consistently pressed for wider admittance to education, employment and politics. The most conservative of these efforts, but still considered controversial, was the fight for education. As women won access to higher education, and finally graduate education, beginning in the late nineteenth century and continuing into the early twentieth century, the story of women economists took an interesting turn. Non-historians will be surprised to learn that there was a time when the proportion of women Ph.D.s in economics was nearly as high as it is today. Evelyn Forget (1995) estimated that, in 1920, 19 percent of American Ph.D. dissertations in economics were written by women. This figure had risen quite steadily from 6 percent in 1912; after 1920, it fluctuated around a downward trend, reaching 7 percent in 1940. US Department of Education data cited by Bell (1974) show that 9 percent of Ph.D.s in economics went to women in 1948. Recall from earlier in this chapter that the figure for 1970 was 5 percent, and 23 percent for 1993. Mary Paley (1850–1944, later married to Alfred Marshall) was a trailblazer in the early struggle for higher education for women in general, and women economists in particular. She studied at Cambridge in the early 1870s, at a time when women were not formally admitted or given degrees but were sometimes accommodated with various special arrangements. Paley attended ‘Lectures for Women’ intended to prepare women for the ‘Cambridge Higher Local Examination for Women’, including lectures on political economy by Alfred Marshall, who gave limited support to higher education for women. She passed with distinction. Marshall assisted Paley in another set of special arrangements, including admittance to lectures for male students, so that she could sit for the graduate-level examinations in political economy, which she also passed with

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distinction. News of her achievement was received with delight by those active in the cause of higher education for women. Rita McWilliams-Tullberg has called our attention to the importance of Paley’s contribution to economics as a role model for women students. One of these female students summed it up by declaring that Paley had ‘shown that her brains were equal to those of the men’ (1995:156). It bears remembering that Paley was not awarded a degree for her efforts. After her studies ended in 1874, she began a career as a lecturer, on an independent basis and then at the women’s college, Newnham, Cambridge (to which she had also given early financial support). Upon accepting an invitation to write a textbook in economics, she began work on The Economics of Industry (published with Alfred as co-author in 1879, but in all likelihood it remained primarily her work). She became engaged to Marshall in 1876, and they married the next year. Particularly during the early years of her marriage, she pursued an active career as a lecturer and tutor to women students of economics. McWilliamsTullberg (ibid.) has skillfully and poignantly told the story of the Marshalls’ lopsided collaboration. It is not clear exactly how Marshall became the co-author of The Economics of Industry but he publicly condemned it for years, while John Maynard Keynes called it ‘an extremely good book’, noted that ‘nothing more serviceable for its purpose was produced for many years, if ever’ and recalled that his father John Neville Keynes ‘always felt that there was something ungenerous in Marshall’s distaste for this book, which was originally hers’ (McWilliams-Tullberg 1995:165). McWilliams-Tullberg has subtly analyzed Mary Paley Marshall’s later articles on working women and women’s education, mostly published in The Economic Journal, for evidence of dissent from Alfred on the subject of women. It is clear that Marshall was deliberate in limiting the extent of his wife’s career and ensuring that she remained primarily his professional and household helpmeet. By the turn of the century, she had thus lost some of her inspirational value for her women students at Newnham, who now encountered ‘a new breed of women teachers who had gone through… Cambridge’ and ‘were actively… publishing their own research’ (McWilliams-Tullberg 1995:162). Indeed, scholars who have recently studied women’s publications in economics in the early twentieth century ‘were led to ask, “How so Many?” rather than “Why so Few?”, given the enormous barriers that existed to women doing academic research in economics over this period’ (quoted in Forget 1995:25). In her article on women economic historians in England, Maxine Berg (1992) observed that a number of ‘the great classics of economic and social history’ were written by women such as Alice Clark, Lilian Knowles and Eileen Power ‘in the early years of the profession just before the First World War and during the interwar years’. Berg observed that ‘the numbers and the significance of women scholars in the field during these years stand in stark contrast to their position in the field now, and indeed to their position at any time after the Second World War’. She cited the important influence of the London School of

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Economics, the location of the well-known economic historians Knowles (1968) and Power (1922, 1924, 1975). Using Berg’s figures, I calculate that 22 percent of the LSE teaching staff between 1895 and 1932 were women, as compared with 17 percent in 1990. Berg documented these women’s involvement in social causes such as feminism, Fabian socialism, anti-fascism and world peace and linked the decline in the number of women economic historians to ‘a narrowing of the discipline’ and ‘a loss of political and social commitment’ (Berg: 308, 318, 327). The London School of Economics was founded in 1895 by Beatrice (Potter) and Sidney Webb. Dorothy Thomson (1973) has noted that Beatrice Potter (1858–1943), self-educated in her wealthy family of origin and without benefit of formal studies, was established as an activist social economist before she met Sidney. She went ‘undercover’ in working-class communities and sweatshops to investigate the plight of the destitute, assisted Charles Booth in his massive study of the poor in London,8 coined the term ‘war on poverty’ in her diary, and wrote essays on ‘The Economic Theory of Karl Marx’ and ‘The History of English Economics’,9 in which she expressed her view that political economy should not be abstract and separate from the study of social institutions and its problems. In 1891 she produced a study entitled The Co-operative Movement in Great Britain that effectively set the agenda for her future collaboration with Sidney. Thomson reported that she undertook this study against the advice of Charles Booth and Alfred Marshall, who both wanted her to do a study on women’s work, in which she had ‘no interest’. The Webbs’ marriage partnership appears to have been completely mutual, in contrast to their contemporaries and friends, the Marshalls. Together the Webbs wrote literally volumes, including The History of Trade Unionism (1894) and Industrial Democracy (1913), led the Labour Party and Fabian socialist movement in England, and founded and nurtured the London School of Economics, an especially welcoming institution for women economists (Thomson 1973; Berg 1992; M.A.Dimand 1995a). In America during the same era, many women economists also focused on issues related to poverty. They produced statistical inquiries into socioeconomic conditions and supported reform movements, including those that focused specifically on the labor of women and children. In this context, US Commissioner of Labor Carroll D.Wright and economist Helen Sumner published their studies of women’s work, the Women’s Bureau of the Department of Labor was founded, and the stage was set for the split in the American women’s movement over the issue of protective labor legislation for women vis-à-vis an equal rights amendment.10 As with the ongoing suffrage movement, there was important cross-fertilization between the anti-poverty movements on both sides of the Atlantic. American Ph.D. economist Edith Abbott, author of Women in Industry (1918) met with Booth and went to the London School of Economics on a fellowship. Jane Addams, founder of the famous settlement house, Hull House, also met Booth and hosted a visit from Beatrice Webb (M.A. Dimand 1995a).

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Addams was a close associate of economist Sophonisba Breckinridge (her Ph.D. was in political science), who was Abbott’s mentor and head of the Department of Household Administration at the University of Chicago. Abbott later taught at Chicago and ultimately headed the Graduate School of Social Service Administration. Breckinridge was also very active in the suffrage movement, serving as vice-president of the American Women’s Suffrage Association in 1911. This was a risky move for an academic economist, as we shall see below (M.A.Dimand 1995a: 52). Another American economist who paid visits both to the Webbs and to Hull House was the remarkable radical feminist Charlotte Perkins Gilman (1860–1935).11 Gilman thus had associations with the social service movement and with Fabian socialism; she also had connections with Bellamy socialism, Darwinism, the suffrage movement and the Women’s Trade Union League, speaking at meetings and publishing in the journals and newsletters attached to these causes. However, she always brought her own brand of feminism to her associations. She warned suffragists that the franchise was only the beginning, and that women would not be free until they achieved economic independence. She attempted to mold socialist ideas to the feminist cause, and often advocated combining socialism with reliance on efficient markets. Gilman was educated ‘informally’ and in her career she produced a wide-ranging collection of work, including poetry, short stories, utopian novels, and the 1898 book Women and Economics, and she independently published her periodical The Forerunner from 1909 to 1917 (M.A.Dimand 1995b; Ceplair 1991). In all these works, her strong feminist perspective is revealed, although her use of Darwinist reasoning to support her feminist analysis has brought her under fire for her racist, anti-ethnic tendencies (see Bederman 1995). The economic theories of Gilman have been assessed in a thoughtful article by Mary Ann Dimand, who concluded that Gilman contributed ‘an analytical framework encompassing exploitation and surplus value’, and noted that she was ‘unusual in recommending an increased number of active markets to prevent such exploitation, as well as to curb monopoly’ (M.A.Dimand, 1995b). In Women and Economics, Gilman analyzed the economic position of women and declared that, unlike any other animal species, ‘the female of genus homo is economically dependent on the male. He is her food supply’ (Gilman 1966:22). She mercilessly attacked the argument that women’s livings were ‘earned’ through household or child-rearing services, and brought home her central point, the urgent necessity of economic independence for women. She managed to make this point without devaluing women’s traditional tasks; in fact, she remained deeply committed to the importance of motherhood and child-rearing, as is evidenced by the following dialogue from her utopian feminist novel Herland, which describes an isolated society of women: ‘The children in this country are the one center and focus of all our thoughts. Every step of our advance is always considered in its effect on

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them—on the race. You see, we are Mothers,’ she [Moadine] repeated, as if in that she had said it all. (Gilman 1915/1979:66) In her fictional and non-fictional writings, she paid much attention to how women’s traditional household work could be reorganized in more efficient ways that also freed women from confinement to the home. The following are also from Herland: Each mother had her year of glory; the time to love and to learn, living closely with her child, nursing it proudly, often for two years or more. This perhaps was one reason for their wonderful vigor… But after the babyyear the mother was not so constantly in attendance, unless, indeed, her work was among the little ones. She was never far off, however, and her attitude toward the co-mothers, whose proud child-service was direct and continuous, was lovely to see. (ibid: 103) For food either we went to any convenient eating-house, ordered a meal brought in, or took it with us to the woods, always and equally good. (ibid.: 125) Above all, Gilman was a unique and independent feminist whose work was far from the mainstream of economics. Women and Economics ends by predicting that our progress ‘will flow on smoothly and rapidly when both men and women stand equal in economic relation. When the mother of the race is free, we shall have a better world’ (1966:340). Even farther from the mainstream was Rosa Luxemburg (1870–1919), none the less one of the better-known women economists in history. A socialist in the Marxist tradition, she was ‘one of the leaders of Polish and German Social Democracy’, spent years in prison for her political activities, and was finally murdered during the Russian Revolution. She held a Ph.D. in law and economics from the University of Zurich, and lectured on Marxist theory at the training school for the German Social Democratic party from 1907 to 1912. It was during this period that she wrote her best-known work, The Accumulation of Capital, which focused on unresolved questions in Marx’s theory of capital accumulation. She analyzed the crucial role of imperialism (as well as the militarism that invariably accompanied it) and maintained that ‘capitalism needs non-capitalist social strata as a market for its surplus value, as a source of supply for its means of production and as a reservoir of labour power for its wage system’ (Luxemburg 1968:368; Thomson 1973). Luxemburg thus departed from the mainstream in her radicalism and in her political involvement. In a study of the ‘professionalization’ of American economics, Claire Hammond has asserted that, even by 1900, the profile of a truly ‘professional’

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economist ‘included having the Ph.D., membership in the AEA, and an academic job; publishing in the scholarly journals, not the public press; and exercising care over one’s reform activities’. Thus, for an economist, ‘direct social activism was problematic’ (1993:357). Hammond also described the general academic patterns of gender segregation at this time as ‘of two types: hierarchical and territorial. The hierarchical form involved men in academic positions and women in subordinate, quasiacademic roles… The territorial form involved women doing all the work in a field, such as home economics’ (ibid.: 351). She concluded that ‘when the discipline developed a bias in favor of academic over nonacademic economists, when it overlooked colleagues in home economics and domestic science, when it repudiated direct reform activity, it placed women outside the accepted bounds of the profession’ (ibid.: 368). Barbara Libby (1987) found that in the early years of the twentieth century, 1900–40, women economists most often specialized in the areas of economic history and social problems. For women economists, the factors associated with high academic rank, such as employment at a women’s college, administrative work experience and publications in economic history and social problems, were also the factors that kept them out of the mainstream of their discipline. With respect to field of specialization, the profession moved away from social issues, especially after 1925; ‘women did not leave economics, economics left women’ (Libby 1987:185). Evelyn Forget (1995) has studied the dissertation specializations of women and men in the same period, 1900–40, and found that while women specialized in economic history, labor and social problems in this era, so did men. The difference emerged later: ‘Women continued to focus on these same fields until very late into the twentieth century while men (and, given the gender balance, therefore the discipline) turned their attention to other areas’ (1995:30). Indeed, Myra Strober’s study in 1975 showed that women were more likely than men to specialize in the fields of labor and welfare economics, and possibly in the category including general economics, theory and history (1975; see also Strober and Reagan 1975). The notion of a peak around 1920–30 for women’s participation in graduate education and academia is borne out by data from fields other than economics. Berg (1992) noted a decline of American women historians after 1920, when they made up 19 percent of the American Historical Association. Susan Carter (1981:675) cited census data on the occupation category including college and university presidents, professors and instructors (in all disciplines): ‘the proportion of women in this occupation rose from 6.4 percent in 1900 to 32.5 percent in 1930, fell to 23.9 percent by 1960 and rose again to 31.7 percent by 1977’. Carter explained much of these trends by the institutional mix within the higher education system (e.g. women’s colleges and coeducational land grant institutions that grew rapidly in the early twentieth century were particularly open to women). Carter also linked these trends with the relative remuneration for college teaching versus other occupations (e.g. when this rose dramatically in the 1950s, men increasingly chose college teaching relative to other occupations,

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pushing women out). Both of these explanations suggest to me a fluid, but still discriminatory environment. In other words, the patterns of discrimination ebbed, flowed and changed direction as the overall social and economic environment changed. In later work, I hope to extend the above discussion to women economists after the 1920s, especially focusing on the 1960s and 1970s. The feminist movement of this era will be sketched and linked with the resumed growth in the proportion of women economists, along with the founding of the Committee on the Status of Women in the Economics Profession. REFLECTING ON THE INTERSECTION: WOMEN ECONOMISTS AND GENDER ISSUES How to choose the Chair of your Dissertation Committee

(Scene: the University of Michigan Economics Department, 1984.) Nancy.

I want to choose a dissertation topic related to the economic history of women. Anonymous, trusted Oh, no! Don’t do your dissertation on anything to do with faculty adviser. women! Nancy. Why not? Anonymous, trusted You’ll be stereotyped as an economist who just deals with faculty adviser. women’s issues! You won’t be taken seriously! (Later that day.) Nancy. I want to choose a dissertation topic related to the economic history of women. Professor Daniel Great! I have some ideas for you. But, first, let me hear yours! Fusfeld. The women economists discussed in this chapter (1800–1920) frequently wrote on topics that directly concerned women. Harriet Taylor Mill, Barbara Leigh Smith Bodichon, Millicent Fawcett, Alice Clark, Eileen Power, Helen Sumner, Edith Abbott, Sophonisba Breckinridge, Helen Campbell and Charlotte Perkins Gilman have all been at least mentioned here. There are others that I haven’t managed to work in.12 On the other hand, I have discussed women economists who did not have any special interest in gender topics. Jane Marcet, Harriet Martineau, Mary Paley Marshall, Lilian Knowles, Beatrice Potter Webb and Rosa Luxemburg all fit into this category, and there are many more of these that I have left out.13 While I have been more diligent about discussing women economists who wrote on women, the fact of the matter is that most women economists did not have research interests in the area of gender. Evelyn Forget found that, from 1900 to 1940, ‘the percentage of women writing on “women’s

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issues” was very low—less than 20 per cent over the entire period’ (Forget 1995: 20). Does this mean that the gender balance within the economics profession doesn’t impact the extent to which gender issues are analyzed within the discipline of economics? Decidedly not. For, while most women economists wrote on topics outside the range of ‘women’s issues’, women were very nearly the only ones to write on such issues. In other words, without the contributions of women writers, consideration of gender issues in economics would have been nil. The general reasons for this fact are obvious. Women have historically been, and still are, socially and economically subordinate; there have been women in all eras who feel this injustice and seek to document, explain and remedy it. Since men do not personally experience the injustice, and since they may derive various benefits from women’s subordination, men are less likely to be feminists. However, men of vision and fairness have often joined in feminist efforts. Certainly, many men economists have inspired and stimulated the thinking of women economists, and have served as role models for women students of economics. My own love for the history of economic thought and economic history was sparked by two exceptional men teachers, Professors Jon Wisman at American University (undergraduate) and Daniel R. Fusfeld at Michigan (graduate).14 This brings me to another aspect of the intersection between gender in economics and the gender of economists. Robert Dimand has studied the neglect of women’s historical contributions to the economics discipline, citing numerous historical reviews by men economists that left out all or most of the relevant women writers. He further finds that ‘to the extent that most women’s contributions to economics were remembered, they were usually remembered by other women’ (1995:11).15 To summarize, the continued growth of women in the economics profession (which history shows us is not a forgone conclusion) would most probably result in more consideration of gender issues, even as most women economists would be expected to concentrate on other issues. In addition, we would probably develop an increasingly accurate collective memory of contributions to the discipline. I resented professors at Michigan who tried to talk me out of writing my dissertation on a women’s topic. I also resent Alfred Marshall for trying to talk Beatrice Potter into studying women at the expense of another topic about which she was passionate. The point is not that women economists are necessarily drawn to gender-related topics, but that they should have, in the words of Harriet Taylor, ‘complete liberty of choice’.

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CONCLUSION: THE FUTURE OF FEMINIST ECONOMICS The notion that one can prove or disprove a great social truth by standing at a blackboard is a peculiarly masculine delusion. The women can do the math, of course. But they are less inclined to accept it as all there is… (McCloskey 1993:86) In his essay on ‘Conjective Economics’, Donald McCloskey described economic man as ‘a cross between Rambo and an investment banker’ and neoclassicals as ‘a motorcycle gang among economists, strutting about the camp with clattering matrices and rigorously fixed points, sheathed in leather, repelling affection’ (1993:76, 79). McCloskey’s observations certainly struck a familiar chord with me. There are certain well-known theory professors at Michigan who may actually still remember me as a graduate student, constantly interrupting their lectures with questions about basic assumptions, methodology and applicability to the real world. Typically, they were surprised at the questions and appeared to have not given such matters much consideration. Rebecca Blank has summed up similar graduate school experiences: ‘The analytical cleanliness and mathematical manipulability of the economic model, while enormously attractive intellectually, was never convincing enough to overcome my intuitive reaction, “This model should never be confused with reality”’ (1993:133). Neoclassical economics is not the only strand of economic thought to be challenged for its gender bias and lack of realism. The work of Nancy Folbre and Heidi Hartmann has extended a feminist critique to Marxist economics. Hartmann and Ann Markusen observed that Marxists tend to see feminist demands as a diversion from the true revolution, class struggle. Hartmann and Markusen declared that ‘just as Marx pierced the veil…of commodity exchange… so must we pierce the veil of seemingly equal exchange within the family (my housework for your wage) to reveal the exploitation of women’s labor by men’ (1980:90–1). Similarly, Folbre and Hartmann noted that while neoclassical economics assumes joint utility functions for households, and Marxist economics assumes primary importance for class interests, ‘contemporary feminist economists have documented considerable economic conflict between men and women’ (1988:185). Scholars are thus examining the question of whether and to what extent the very definition, core assumptions, methodologies and rhetoric of various schools of economics exclude, devalue, and marginalize women. Paying heed to feminist work in other disciplines, these scholars seek to vision what economics would be like without this ‘androcentric’ perspective. In other words, they ask, and are beginning to answer the question, what is different about ‘feminist economics’? In 1979, Gerda Lerner predicted three phases for women’s history: finding the forgotten women in history, recognizing their contributions to historical events

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defined as ‘important’ by men, and, finally, recognizing women’s contributions, using their own definitions of ‘importance’. Women’s historians have been doing all three of these since Lerner’s seminal essay. In economics, we are also following these three paths as we explore the topics of gender in economics, the gender of economists, and their intersection. We are finding the lost women in economic history,16 and recently we have begun to find the lost women economists in history (Pujol 1992; M.A.Dimand et al. 1995). We are assessing the role and contributions of women in general and women economists in particular, in terms of established, ‘important’ theories and trends (Thomson 1973; R.W.Dimand 1995). We are also searching for new, feminist theories, adjusting existing paradigms to meet feminist concerns (Ferber and Nelson 1993), rethinking the standard economics curriculum for its gender (and racial) bias (Bartlett and Feiner 1995; Feiner 1994; Strober 1987), and looking for lost feminist approaches in history (Pujol 1992; M.A.Dimand et al. 1995). In this vein, the International Association for Feminist Economics was founded (Aerni and Nelson 1995) and the first few issues of its new journal, Feminist Economics, have already appeared. Following these paths, alas, is as yet unlikely to land us endowed professorships in Top Twenty economics departments. For the foreseeable future, the women who make progress in those quarters will probably be those who stick with established ‘truths’ and mainstream methodologies. Perhaps there is a silver lining to the cloud of women’s inferior status in the economics profession, since the less prestigious institutions are less rigid about what outlets their faculty publish in, allowing more freedom for feminist economists to explore new territory and expand the borders of our discipline. NOTES 1 The cut-off date is loosely tied to the achievement of women’s suffrage in the United States and England, but is also somewhat arbitrary. As a practical matter, it served to limit the source material to that which could be reasonably discussed in a chapter of this length. I hope to write a second essay on the post-1920 period, which would of course include the remarkable work of Joan Robinson, as well as other, lesser-known women economists. 2 There is a role-model issue here that is obvious. Women professors can be important role models for potential female Ph.D.s, and few (or no!) women economists in a department can be a real discouragement to female students. I consider the early influence of economist Nancy Smith Barrett (then a professor at American University, now Provost at Michigan State University) to have been crucial in my own decision to earn an economics Ph.D. 3 The CSWEP sample contains only Ph.D.-granting departments, so I am assuming the same general phenomenon is exhibited in non-Ph.D.-granting departments, probably a reasonable assumption. Since so many women are indeed outside Ph.D.granting departments, it is curious that CSWEP has not expanded the sample.

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4 See McMillen and Singell (1994) for an account of how women are underrewarded for top-rated Ph.D.s in their first jobs after the degree, although other measures explored in the study found no significant discrimination against women. 5 Mary Ann Dimand’s fascinating article on early networks of women economists (1995a) documented Martineau’s connections with Harriet Taylor, John Stuart Mill, and Barbara (Leigh Smith) Bodichon, as well as her support for the British precursor to the Women’s Trade Union League and for Bodichon’s Married Women’s Property Bill; see the discussion of Bodichon below. 6 Cady Stanton and Susan B.Anthony published Wollstonecraft’s writings in their periodical, the Revolution (Dubois 1978:104). 7 William Sockwell (1995:119) reported that Bodichon and her associates ‘campaigned vigorously’ for J.S.Mill’s parliamentary election. 8 Another of Booth’s assistants on this project was Clara Collet, who was also a Fabian and wrote several economic works on women’s labor (M.A.Dimand et al. 1995). 9 Published later as an appendix to her 1926 autobiography, My Apprenticeship. 10 This was also the tradition out of which Frances Perkins, a career social worker and the personal choice of the key women in F.D.R.’s campaign, was later chosen by F.D.R. to be his Secretary of Labor, becoming the first female Cabinet member in the United States (Martin 1976:457). 11 Gilman was taken with Hull House and convinced fellow economist Helen Campbell (author of the 1887 study Prisoners of Poverty: Women Wage Earners, Their Trades and Their Lives) to help her establish and live in a settlement house in Chicago, but Gilman disliked living among the poor and soon left (Hill 1980:280). 12 For example, Bessie Leigh Hutchins, Clementina Black and Victoria Woodhull. 13 Some examples, with areas of specialization, would include Katharine Coman (economic history), Emily Clark Brown (labor), Margaret Myers (monetary), Mabel Newcomer (public finance), Hazel Kyrk (consumption), and Hannah Sewall (economic thought). 14 Professor Nancy Smith Barrett was crucial as living proof of a woman economist, and for her example in studying gender and economics, but Fusfeld and Wisman showed me that the sheer love of ideas and history is compatible with being an economist! They all encouraged me to study those ideas in which I was interested. I should also record here that I first heard of economists Millicent Fawcett and Charlotte Perkins Gilman from Professor Fusfeld. 15 Luckily for me, Professor Fusfeld proved an exception to that rule. 16 For the American context, see Matthaei (1982), Goldin (1990), and Amott and Matthaei (1991).

REFERENCES Abbott, E. (1918) Women in Industry, New York: Appleton. Aerni, A. and Nelson, J. (1995) ‘A brief history of IAFFE’, I.A.F.F.E. Newsletter, 5 (1): 1– 5. Amott, T. and Matthaei, J. (1991) Race, Gender, and Work, Boston: South End Press. Barrett, N.S. (1975) The Theory of Macroeconomic Policy, Englewood Cliffs, NJ: Prentice-Hall.

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—— (1981) ‘How the study of women has restructured the discipline of economics’, in Langland, E. and Gove, W. (eds), A Feminist Perspective in the Academy: The Difference, Chicago: University of Chicago Press. Bartlett, R.L. (1994) ‘Two early Ohio economists: Katharine Coman (1857–1915) and Victoria C.Woodhull (1838–1927)’, unpublished manuscript presented at the Midwest Economic Association meetings (March), Chicago. Bartlett, R.L. and Feiner, S. (1995) ‘Balancing the economics curriculum: Content, method, and pedagogy’, AER Papers and Proceedings, 85 (2): 559–64. Bederman, G. (1995) Manliness and Civilization, Chicago: University of Chicago Press. Bell, C.S. (1974) ‘Economics, sex, and gender’, Social Science Quarterly, 55 (3): 615–31. Berg, M. (1992) ‘The first women economic historians’, Economic History Review, 45 (2): 308–29. Bergmann, B.R. The Economic Emergence of Women, New York: Basic Books. —— (1987) ‘The task of feminist economics: A more equitable future’, in C. Farnham (ed.) The Impact of Feminist Research in the Academy, Bloomington: Indiana University Press. Blank, R. (1993) ‘What should Mainstream Economists learn from Feminist Theory?’, in M.A.Ferber and J.A.Nelson (eds) Beyond Economic Man: Feminist Theory and Economic, Chicago: University of Chicago Press. Blau, F.D. (1981) ‘On the role of values in feminist scholarship’, Signs: Journal of Women in Culture and Society, 6 (3): 538–40. Blau, F.D. and Ferber, M.A. (1992) The Economics of Women, Men, and Work, Englewood Cliffs, NJ: Prentice Hall. Carter, S. (1981) ‘Academic women revisited: An empirical study of changing patterns in women’s employment as college and university faculty, 1890–1963’, Journal of Social History, 14 (2): 675–99. Ceplair, L. (ed.) (1991) Charlotte Perkins Gilman: A Nonfiction Reader, New York: Columbia University Press. Clark, A. (1992) Working Life of Women in the Seventeenth Century, New York: Routledge. CSWEP (Committee on the Status of Women in the Economics Profession) (1974–96) Newsletter and Annual Reports. Dimand, M.A. (1995a) ‘Networks of women economists before 1940’, in M.A. Dimand, R.W.Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. —— (1995b) ‘The economics of Charlotte Perkins Gilman’, in M.A.Dimand, R.W. Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Dimand, R.W. (1995) ‘The neglect of women’s contributions to economics’, in M.A.Dimand, R.W.Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Dimand, M.A., Dimand, R.W. and Forget, E.L. (eds) (1995) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Dubois, E.C. (1978) Feminism and Suffrage: The Emergence of an Independent Women’s Movement in America 1848–69, New York: Cornell University Press. Edgeworth, F.Y. (1922) ‘Equal pay to men and women for equal work’, Economic Journal, 32:431–57.

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Farnham, C. (ed.) (1987) The Impact of Feminist Research in the Academy, Bloomington: Indiana University Press. Fawcett, M.G. (1917) ‘The position of women in economic life’, in W.H.Dawson (ed.) After-war Problems, New York: Macmillan, 191–215. —— (1918) ‘Equal pay for equal work’, Economic Journal 28:1–6. Feiner, S.F. (ed.) (1994) Race and Gender in the American Economy: Views from across the Spectrum, Englewood Cliffs, NJ: Prentice Hall. Feiner, S. and Roberts, B. (1995) ‘Using alternative paradigms to teach about race and gender: A critical thinking approach to introductory economics’, AER Papers and Proceedings 85 (2): 367–71. Ferber, M.A. (1988) ‘Citations and networking’, Gender and Society, 2 (1): 82–9. Ferber, M.A. and Nelson, J.A. (1993) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. Flexner, E. (1972) Mary Wollstonecraft: A Biography, New York: Coward McCann & Geoghegan. Folbre, N. (1991) ‘The Unproductive housewife: Her evolution in nineteenth-century economic thought’, Signs: Journal of Women in Culture and Society, 16 (3): 463–84. —— (1993a) ‘How does she know? Feminist theories of gender bias in economics’, History of Political Economy, 25 (1): 167–84. —— (1993b) ‘Socialism, Feminist and Scientific’, in M.A.Ferber, and J.A.Nelson (eds) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. —— (1994) Who Pays for the Kids? Gender and the Structures of Constraint, New York: Routledge. Folbre, N. and Hartmann, H. (1988) ‘The rhetoric of self-interest: ideology and gender in economic theory’, in A.Klamer, D.McCloskey, and R.Solow (eds) The Consequences of Economic Rhetoric, Cambridge: Cambridge University Press. Forget, E.L. (1995) ‘American women economists, 1900–40: doctoral dissertations and research specialization’, in M.A.Dimand, R.W.Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Gilman, C.P. (1966) Women and Economics, New York: Harper & Row. —— (1972) The Living of Charlotte Perkins Gilman, New York: Arno Press. —— (1979) Herland, New York: Pantheon. Goldin, C. (1990) Understanding the Gender Gap: An Economic History of American Women, New York: Oxford University Press. Hammond, C.H. (1993) ‘American women and the professionalization of economics’, Review of Social Economics, 51 (3): 347–70. Hartmann, H.I. and Markusen, A.R. (1980) ‘Contemporary Marxist theory and practice: A feminist critique’, Review of Radical Political Economy, 12 (2): 87–94. Hasselback, J.R. (1996) The 1996 Prentice Hall Guide to Economics Faculty, Upper Saddle River, NJ: Prentice Hall. Henderson, J.P. (1995) ‘Women’s wage rates and total earnings: two early “scientific” studies’, in M.A.Dimand, R.W.Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Hill, M.A. (1980) Charlotte Perkins Gilman: The Making of a Radical Feminist, 1860– 96, Philadelphia: Temple University Press.

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Jennings, A.L. (1993) ‘Public or private? Institutional economics and feminism’, in M.A.Ferber and J.A.Nelson (eds) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. Knowles, L.C.A. (1968) The Industrial and Commercial Revolutions in Great Britain during the Nineteenth Century, New York: Augustus M.Kelley. Lacey, C.A. (ed.) (1987) Barbara Leigh Smith Bodichon and the Langham Place Group, New York: Routledge. Langland, E. and Gove, W. (eds) (1981) A Feminist Perspective in the Academy: The Difference it Makes, Chicago: University of Chicago Press. Lerner, G. (1979) ‘Placing Women in History: Definitions and Challenges’, in G. Lerner, (ed.) The Majority Finds its Past: Placing Women in History, New York: Oxford University Press. Libby, B. (1987) ‘A statistical analysis of women in the economics profession, 1900–40’, Essays in Economic and Business History, 5:179–89. Longino, H.E. (1993) ‘Economics for whom?’, in M.A.Ferber and J.A.Nelson (eds) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. Luxemburg, R. (1968) The Accumulation of Capital, New York: Monthly Review Press. Madden, J.F. (1972) ‘The development of economic thought on the “woman problem”’, Review of Radical Political Economics 4 (3): 21–38. Marcet, J. (1816) Conversations on Political Economy, London: Moses Thomas. Martin, G. (1976) Madam Secretary Frances Perkins, Boston: Houghton Mifflin. Martineau, H. (1832) Illustrations of Political Economy, vols 1–9, London: Charles Fox. Matthaei, J.A. (1982) An Economic History of Women in America: Women’s Work, the Sexual Division of Labor, and the Development of Capitalism, New York: Schocken Books. McCloskey, D.N. (1993) ‘Some consequences of a conjective economics’, in M.A. Ferber and J.A.Nelson (eds) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. McMillen, D.P. and Singell, L.D. (1994) ‘Gender differences in first jobs for economists’, Southern Economic Journal, 60 (1): 701–14. McWilliams-Tullberg, R. (1995) ‘Mary Paley Marshall, 1850–1944’, in M.A. Dimand, R.W.Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Mill, H.T. (1970) Essays on Sex Equality, Chicago: University of Chicago Press. Nelson, J.A. (1993) ‘Value-free or valueless? Notes on the pursuit of detachment in economics’, History of Political Economy, 25 (1): 121–45. —— (1993) ‘The study of choice or the study of provisioning? Gender and the definition of economics’, in M.A.Ferber and J.A.Nelson (eds) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. Polkinghorn, B. (1995) ‘Janet Marcet and Harriet Martineau: motive, market experience and reception of their works popularizing classical political economy’, in M.A.Dimand, R.W.Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Power, E. (1922) Medieval English Nunneries c.1275 to 1535, Cambridge: University Press. —— (1924/1954) Medieval People, New York: Doubleday. —— (1975) Medieval Women, New York: Cambridge University Press.

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Pujol, M.A. (1992) Feminism and Anti-feminism in Early Economic Thought, Brookfield, VT: Ashgate Publishing. —— (1995) ‘The feminist economic thought of Harriet Taylor (1807–58)’, in M.A. Dimand, R.W.Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Scharnhorst, G. (1985) Charlotte Perkins Gilman, Boston: Twayne Publishers. Seiz, J. (1993) ‘Feminism and the history of economic thought’, History of Political Economy, 25 (1): 185–201. Smith, R.E. (1979) The Subtle Revolution: Women at Work, Washington, DC: Urban Institute. Sockwell, W.D. (1995) ‘Barbara Bodichon and the women of Langham Place’, in M.A.Dimand, R.W.Dimand and E.L.Forget (eds) Women of Value: Feminists Essays on the History of Women in Economics, Aldershot: Edward Elgar. Solow, R.M. (1993) ‘Feminist theory, women’s experience, and economics’, in M.A.Ferber and J.A.Nelson (eds) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. Strassman, D. (1993a) ‘The stories of economics and the power of the storyteller’, History of Political Economy, 25 (1): 147–65. —— (1993b) ‘Not a free market: the rhetoric of disciplinary authority in economics’, in M.A.Ferber and J.A.Nelson (eds) Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press. Strober, M.H. (1975) ‘Women economists: Career aspirations, education, and training’, American Economic Review, 65 (2): 92–9. —— (1987) ‘The scope of microeconomics: Implications for economic education’, Journal of Economic Education, 18 (2): 135–49. Strober, M.H. and Reagan, B.B. (1976) ‘Sex differences in economists’ fields of specialization’, Signs: Journal of Women in Culture and Society, 3 (2): 303–17. Thomson, D.L. (1973) Adam Smith’s Daughters, New York: Exposition Press. Todd, J.M. (1977) Wollstonecraft, Bloomington: Indiana University Press. Underhill, L.B. (1995) The Women who Ran for President, Bridgehampton, NY: Bridge Works. US Department of Education (1995) Digest of Education Statistics, Washington, DC: Department of Education. Williams, R.M. (1993) ‘Race, deconstruction, and the emergent agenda of feminist economic theory’, in M.A.Ferber and J.A.Nelson Beyond Economic Man: Feminist Theory and Economics, Chicago: University of Chicago Press.

8 THE CHANGING STATUS OF THE HISTORY OF THOUGHT IN ECONOMICS CURRICULA Nahid Aslanbeigui and Michele I.Naples

Scholarship in history of economic thought and methodology (HET/M) has been rising at a healthy rate in the past quarter of the century. Since 1969, the number of refereed articles in the field has more than tripled, the share having grown from 2.9 percent to 4.1 percent (Fogarty and Naples 1996).1 Since the number of articles in HET/M in the orthodox, generalist journals has been stable (Patinkin 1992), most of the rising interest in such scholarship has been reflected in new journals dedicated to HET/M or to heterodox economics.2 Societies in the history of economic thought have also multiplied (Cardoso 1995:197). Membership in the History of Economics Society, housed in the United States and Canada, has grown from 210 in 1974 to 500 in 1993 (Vaughn 1993:175). Similar societies exist in Japan (with over 800 members; Negishi 1992:227), Australia, France, Italy, and Germany, to name a few. The most recent is the European Society for the History of Economic Thought. Despite the rise in interest in HET/M indicated by the above positive trends, there is a general feeling among its practitioners that the field has faced a declining status in American economics education.3 Since Professor Fusfeld has been a successful teacher and scholar in the field (see, for example, Fusfeld 1980, 1990) as well as a commentator on the quality of economics education (see Fusfeld 1965; Fusfeld and Jump 1966; Mann and Fusfeld 1970), we dedicate this chapter to the study of the changing status of the HET course in graduate and undergraduate curricula. We first confirm the decline in the role of the history of thought in economics education by reporting the results of our survey of economics departments and by examining the trends in the number of job openings and of dissertations in the field. We then examine the sources of this trend. Next, we assess the benefits of counteracting the decline for economics graduates. In conclusion, we propose strategies for enabling the course to survive in an era of declining enrollments. THE HET COURSE AND ITS STATUS IN UNIVERSITY CURRICULA Not much is known about the history of HET as a course in undergraduate and graduate curricula. According to Schabas, the first HET course in the United

Sources: Brasfield et al. (1996); Thornton and Innes (1988:175); Siegfried and Wilkinson (1982:131); Bowen (1953:105); Taylor (1950: 107).

Table 8.1 History of economic thought as a required course (%)

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Table 8.2 History of economic thought as an elective course

Sources: Siegfried and Wilkinson (1982:131); Taylor (1950:99) Note a Taylor reported the percent of schools offering HET; Siegfried and Wilkinson collected data over a two-year period, 1978–79, and 1979–80. Our number summarizes the schools reporting that they offered an HET elective, not the share of schools actually offering the course. See discussion in text.

States was offered by Harvard University in 1883. By the turn of the century, thirty more American universities and colleges had offerings in the subject (1992: 190).4 In the 1930s, such luminaries as Jacob Viner (Chicago), Edwin Seligman (Columbia) and Jacob Hollander (Johns Hopkins) taught the course (Samuelson 1987:51); however, Samuelson argues that the birth of new fields in economics had begun to put pressure on HET as a requirement in graduate curricula. In 1953, Bowen found that 76 percent of twenty-seven Ph.D. programs responding offered HET courses, 49 percent requiring the course at this level. At the Master’s level, 25 percent of fifty-nine schools responding had similar requirements (Bowen 1953:105). In 1965, 42 percent of ninety-eight Ph.D.granting institutions in the United States offered HET as a field of specialization; this had declined to 35 percent of 126 such schools by 1984 (Bethune 1996:6–7). Two studies (Taylor 1950; Siegfried and Wilkinson 1982) provide some background information about the HET course at the undergraduate level. In 1950, 15 percent of economics programs required HET; 60.5 percent of undergraduate programs were offering the course and HET was the seventh most frequently taught course across different colleges and universities (see Tables 8.1 and 8.2). In 1980, the number had grown to 65 percent, with an estimated national enrollment of 11,982 (Siegfried and Wilkinson 1982:133).

Current status To collect information on the current status of the HET course at both the undergraduate and graduate levels, we conducted a national survey (see the appendix for the questionnaire), using the list of economics departments published in the American Economics Association’s 1993 directory. Fully 242 of the 320 schools we contacted returned our questionnaire, implying a 76 percent

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response rate; in addition we obtained data from nine other schools at the Eastern Economic Association Conference in Boston, March 1996. Table 8.1 summarizes our results on HET as a required course, and compares our findings with those of Taylor (1950), Bowen (1953), Siegfried and Wilkinson (1982), Thornton and Innes (1988), and a recent study in progress by Brasfield et al. (1996). Our findings indicate that, coincidentally, 17.9 percent of all undergraduate and of all graduate programs require HET.5 Colleges are more likely than universities to require the undergraduate course (20.5 percent versus 16.8 percent). Our undergraduate results are similar to those found sixteen years ago by Siegfried and Wilkinson, although lower than the numbers recently reported by Brasfield et al.6 Our finding that undergraduate economics departments housed in business schools are somewhat more likely to require the history of thought (19.4 percent versus 17.3 percent) dovetails with Brasfield et al.’s evidence. Table 8.2 indicates that in 66.1 percent of undergraduate and 42.1 percent of the graduate programs, while HET is not required, it remains an elective. At first glance it appears that these numbers have changed little since Taylor’s 1950 report.7 Combining Tables 8.1 and 8.2, we may infer that for the vast majority of economics programs, graduate and undergraduate, HET is either a requirement or an elective. However, only 139 schools affirmed that the HET course had been offered within the last two years.8 This suggests that while HET is still on the books as an elective (requirement) at 166 (sixty-one) programs in 203 schools, it is not currently an active course at 31.5 percent of these schools. Of the programs requiring HET, 73.3 percent of the undergraduate and 82.4 percent of the graduate programs have offered it in the past two years, suggesting that many students have to pursue the course on an independent-study basis. Where HET is an elective, 73.5 percent of undergraduate but only 51.9 percent of graduate programs have offered it in the past two years. We may conclude that the share of all undergraduate programs with an active HET elective is only 45 percent. This gives a very different impression from the stable status of HET suggested by Table 8.2, since it suggests a recent accelerated decline in its de facto availability.9 We also found that schools have recently eliminated the HET requirement or the elective. Eight (10.5) percent of undergraduate (graduate) programs report that they used to require the course but no longer do. Unfortunately, institutional memory is not very long; several respondents noted that the course had ceased to be required some time before ‘the last 8–15 years’; in the absence of a point estimate, we treated the course as never having been required. Thus our numbers understate the extent to which HET was previously required in the more distant past.10 We asked respondents to identify when they had eliminated the requirement; the results are tabulated in Figure 8.1, which uses reverse chronological order, and captures how recently the changes were made. Several programs reported having eliminated even the HET elective (9.6 percent of undergraduate and 8.4

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Figure 8.1 When the history of economic thought requirement was cancelled. Reverse chronological order; thirty-five schools reporting

Figure 8.2 When the history of economic thought elective was cancelled. Reverse chronological order; forty-three schools reporting

percent of graduate programs)—Figure 8.2 shows the clear bunching of changes in the early 1990s. The declining presence of HET in undergraduate and graduate curricula necessarily affects the number of job openings in the field as well as the number of students who choose to specialize in the area. We address the two issues in sequence, looking at the trends in the job market as well as in the number of dissertations written in HET/M.

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The academic job market for historians of economic thought In our survey, we found no strong evidence that the decline in HET requirements and electives has meant a shift away from full-time instructors. Seventy-three percent of the schools reported that HET is taught by full-time faculty, 6 percent by part-timers only, and 3 percent by both. However, this result is ambiguous. It could be that the full-time faculty, the result of past hiring, are tenured; given the shrinking role of HET in the curricula, one would expect the faculty in this field to be less mobile than others. The real question is whether those who retire are replaced and whether there are new jobs created in the field. Anecdotal evidence suggests that retirees are not replaced: the University of Michigan has not hired anyone to fill Professor Fusfeld’s shoes; five schools in our survey mentioned that the course had been taught by a faculty member who had now retired or left; at two the retired professor continues to teach the course. To look at trends for job opportunities, we examined the available issues of Job Openings for Economists (JOE 1974–95) to find HET/M jobs as a share of the total number of academic jobs each year.11 The difficulty that we faced was that the American Economic Association does not keep complete track of the job market data on a long-term basis. The report of the editor of JOE, published in the Proceedings issue of the American Economic Review each year, summarizes job openings for the year but has only recently listed them by specific fields. Moreover, like the Association, many libraries discard the back issues of JOE. Data availability was therefore restricted by the holdings of the libraries in our vicinity. Given the above constraints, we have been able to construct two tables tracing job openings in HET/M over the period 1978–95, one for the October-November listings, and another for the February-June ones. Table 8.3 shows the trends for job openings announced in October and November for various years. Most of the jobs in these issues are tenure-track at colleges and universities that are ranked higher academically and/or with graduate programs. Advertisers in these issues and their applicants participate in the job market at the ASSA meetings. Table 8.4 reflects data collected from the February, April and June issues. The jobs listed here are more likely temporary positions, tenure-track positions at smaller schools or positions contingent on budgetary approval. Our findings can be summarized as follows. First, despite annual fluctuations in the shares, the evidence is that HET/M’s share of jobs offered by smaller schools and/or temporary jobs (February-June) is higher than that of larger schools and/or tenure-track jobs (November-October). Second, data indicate that the number and share of jobs in HET/M were at a peak in the mid to late 1970s. The share of total jobs calculated for 1976 and 1978 (3.43 and 2.62 percent, see Table 8.3) reflects the high number of openings in the field and the low number of total jobs. The number and the proportion seem to have bounced back from the 1980 low. However, since 1993 there has

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Table 8.3 Share of history of economic thought/methodology in total number of academic jobs, October-November, available years

Source: Job Openings for Economists, various years. Notes a The numbers are corrected for overlap between months. b In 1976 there was no November issue; we therefore used the December data instead.

been an absolute and a relative decline in job openings in HET/M (the 1995 percentage is one-fourth as large as that of 1976). Table 8.4 shows a similar trend for job openings advertised in the February-June period. Third, the relative decline of job opportunities in HET/M is more serious than the data indicate. In the 1990s, foreign universities such as Fukuoka University of Japan and the National University of Singapore have advertised more frequently in JOE. The elimination of these openings from our numbers exposes a drastic reduction in the share of domestic jobs in the field. It is also interesting to know that the only top schools that have announced a position in HET/M in recent years have been Stanford and Harvard, each advertising the same position for a few years. Correcting for such repetition further reinforces the downward trend in HET/M job availability. Ph.D. dissertations in HET/M It was our premise that the recent decline in the number and relative share of HET/M jobs would reduce the number of students who choose to write their dissertations in the field. To verify this hypothesis, we went through the dissertation lists published annually in the American Economic Review (1964–86) and in the Journal of Economic Literature (1987–95).12 These lists record those dissertations completed in the United States and Canada for each academic year (June-July), but reporting has been voluntary. Since the Journal of Economic

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Table 8.4 Share of history of economic thought/methodology in total number of academic jobs, February-June, available years

Source: Job Openings for Economists, various years. Note a The numbers are corrected for overlap between months. Table 8.5 Relative frequency of dissertations in HET/M, 1964–94

Sources: Dissertation Lists, American Economic Review (1964–87); Journal of Economic Literature (1987–95). Note a Percentage of total dissertations in economics in the United States and Canada.

Literature took over the publication, there has been an effort to follow up with the schools that fail to report. Therefore, the pre-1987 numbers underestimate the number of dissertations in HET/M as well as the total number of theses completed. Table 8.5 summarizes our results by annual averages over five-year periods (there are significant fluctuations in the numbers from year to year). The number of dissertations completed in HET/M, although below ten each year, has been on the rise. The share was also on the rise (except for the 1969–74 period) until the beginning of the 1990s. It has significantly declined in the 1990s, however, standing below its 1964 level. The relative decline in job opportunities seems to have affected the number of dissertations in the field. We have mentioned before that high-ranking Ph.D.-granting institutions have been less active in recruiting faculty who specialize in HET/M. It is therefore not

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Table 8.6 Relative frequency of dissertations in HET/M from the top graduate programs, 1964–94

Sources: Dissertation lists, The American Economic Review (1964–87); Journal of Economic Literature (1987–95). Notes a The top two tiers include the following schools: Chicago, Harvard, MIT, Princeton, Stanford, Yale, Columbia, Michigan, Minnesota, Northwestern, Pennsylvania, Rochester, UC Berkeley, UCLA, and Wisconsin. b Percentage of total dissertations in HET/M.

surprising to see that the share of dissertations written in HET/M by students of these institutions has also declined over the years. In the 1964–69 period, for example, almost 35 percent of the dissertations in the field came from schools ranked in the top two tiers.13 In the 1990s, that share has dropped to 10 percent (see Table 8.6). In fact, the majority of the theses in HET/M come out of a handful of programs that have historically had an emphasis on the subject— among them are Duke, Notre Dame, Simon Fraser, and University of Massachusetts in Amherst. Analysis of the contraction of HET in undergraduate and graduate curricula Various reasons have been entertained to explain the declining status of the HET course. Samuelson has argued that four revolutions in the 1930s—‘the monopolistic competition revolution, the Keynesian macro revolution, the mathematicization revolution, and the econometric inference revolution’—left no time for graduate students to study history of thought, economic history, or foreign languages (1987:52). Others have singled out the ‘increasing emphasis on formal techniques in the subject as a whole’ as the cause of the decline for the HET course (Schabas 1992:197; also see Coats 1987a). Bowen confirmed this view in 1953; his survey reported that while 76 percent of the twenty-seven schools responding offered HET at the Ph.D. level, only 37 percent of the fiftynine faculty responding recommended that course for students. This was not, argued Bowen, due to ‘the opinion that it is not worthwhile, but to the fact that in

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competition with other new and more technical fields it is being partially replaced’ (1953:105, 115). This result was verified by Colander and Klamer in 1987. They showed that 69 percent of graduate students obtaining their Ph.D.s in leading economics programs in the United States have expressed a strong to moderate interest in history of economic thought (Colander and Klamer 1987:99). Preliminary results from Aslanbeigui’s and Montecinos’s survey of foreign students in many first to third tier economics Ph.D. programs indicate a like interest in the subject (1996).14 That they choose not to specialize in HET is due to the incentive structure of the profession; one can argue that the profession has come to attach little value to the expected marginal product of studying HET (Stigler 1982).15 Stigler’s point is that the value is low; our point is that the profession’s perception of the field significantly impacts people’s valuation of HET. Second, and not unrelated to the first, modern economists have come to view economics ‘as a rapidly maturing science patterned on physics’ which need not study its antecedents (Whitaker 1985:12). Whitaker suggested that economics should instead be viewed as having elements of both physics and philosophy; the latter ‘involves a host of alternative view-points—sometimes conflicting, sometimes incommensurable—which can coexist and retain interest’ without any single view ‘driving out the others decisively’ (ibid.: 12–13). The decline in HET can then be linked with the prevalence of a narrowing view of what constitutes economics.16 Third, the recent elimination of HET requirements/electives (see Figures 8.1 and 8.2) may reflect enrollment problems nationwide. Estimates of the decline in the number of economics majors range from 18.4 percent (Willis and Pieper 1996) to 20 percent (Siegfried 1995) for the 1992–94 period. Corporate downsizing and layoffs of white-collar professionals and managers have made students increasingly career conscious. Many pursue health and education degrees in lieu of economics and business (where enrollments have also dropped). Others, unconvinced by economists’ claim of special foresight in an increasingly uncertain world, choose political science or policy studies as a step toward jobs in the policy realm. Those pursuing economics enroll in courses deemed marketable. Faced with declining resources, economics departments reduce the number of course options they provide, including HET. Fourth, another factor at work may be the increasingly conservative tone of national politics. The political dominance of policies based on classical macroeconomics and perfect competition (deficit reduction, inflation reduction, deregulation, reduced transfers) has forced even Keynesian economists to speak in a classical paradigm in their efforts to frame macro-policy.17 The break-up of the socialist bloc has further reinforced the hegemony of the perfectly competitive model. In so far as the HET course addresses the development of such alternative economic paradigms as Marxian and Keynesian economics, departments may be less interested in offering such a course in the present environment.18

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IMPROVING THE QUALITY OF ECONOMICS EDUCATION: THE NEED FOR MORE HET In December 1993, The American Economic Review published a petition signed by 463 professors who teach economics to undergraduates. The petition expressed dissatisfaction with the graduate training that economics departments instilled in recent graduates. The signatories warned that they ‘will work toward structuring [their] hiring practices to favor [Ph.D.] students who have been trained in those areas and skills that are most useful in teaching graduates’ (ibid.: ii). The skills required of ‘good teachers of undergraduates’ were listed as follows: 1 A background in the economic debates and literature of the past twenty years and how those debates have shaped what we as a profession believe. 2 A solid training in the models which they will be teaching to undergraduates. 3 A knowledge of economic institutions and the role institutions play in the economy. 4 An ability to communicate orally, and in prose, the central ideas conveyed in introductory and intermediate micro and macro. 5 Knowledge of the alternative approaches in economics and an ability to compare and contrast different approaches. 6 A knowledge of econometrics, but also of the limits of econometric testing. The declining presence of HET in graduate programs undermines training in skill 5 and arguably in 3 and 4. Similar complaints have been recorded by non-academic employers. According to the American Economic Association’s Commission on Graduate Education in Economics (the COGEE), ‘nonacademic employers generally revealed fairly deep dissatisfaction with the training of new economics Ph.D.’s employed by them’ (Krueger et al 1991:1039) as not equipping them to solve today’s problems. Graduate economics education ‘may have become too removed from real economic problems’ (ibid.: 1039). Others have complained that fresh Ph.D.s in economics have not acquired communication skills sufficient ‘to explain economic phenomena in language that laypeople could understand’ (Woolf 1992:203).19 The economics education preferred by the economics profession has also been rejected by potential majors, who have increasingly voted against it with their feet in recent years. The profession has engaged in some soul-searching (Krueger et al. 1991; Kasper et al. 1991) about possible deficiencies in economics education, but like similar exercises in the past (see Coats 1992), the proposed remedies are to do more of the same,20 not to rethink economics education. A 1996 ASSA session entitled ‘Where Have All the Majors Gone?’ was attended by about 180 economists. Yet panelists typically concluded that there was nothing to worry about. One pair of authors reported that such cycles have been seen before, and in twenty years we can expect to have returned to our trend line

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(Margo and Siegfried 1996); a discussant insisted that things are not so bad as to produce downsizing; economists will merely be reallocated to teaching rhetoric classes. Obviously this only applies to tenured faculty; others face the prospect of job loss. As we have argued elsewhere (Aslanbeigui and Naples 1996), the absolute and relative decline in enrollments signals the need for the profession to reexamine the content of the major. Economics underpins policy debates. If we teach students to think critically about different economic theories we will develop a much more engaging and relevant major. History of economic thought is typical of what is necessary to produce good analytical economists capable of handling their jobs. In it, students learn to communicate better. They learn to read economics texts (Stigler, cited in Vaughn 1993) and practise writing: Professor Fusfeld taught many of the University of Michigan Ph.D. candidates how to write. It was no easy task to explain the importance of Adam Smith’s division of labor or Keynes’s theory of saving in two pages. Twenty-some short and two long papers over a two-semester course sequence were great training for nonmathematical exposition of economic ideas. History of economic thought, if taught properly, instructs students to place the thinkers and their theories in their historical as well as their intellectual contexts. ‘Obviously, such an exercise cannot help but be more interdisciplinary and will of necessity acquaint the student with adjacent fields such as history, philosophy, political theory, and the history of science’ (Vaughn 1993:178). As Barber has argued, those who ‘probe deeply into the nature of economics from an historical perspective find it difficult to be swayed by “absolutists” who make claims for the universal applicability of their models throughout time and space’ (1990: 111). If reinforced, the historical perspective offered by HET also teaches students to consider alternative approaches to studying the same problem (Keyssar 1992: 216). Students who are trained to disbelieve in a single Truth learn to compare and contrast alternative approaches and develop a ‘critical view’ (Menard 1992: 219). They also learn to communicate across paradigms, as called for in point 5 of the above cited petition.21 HET prepares students to be generalists, helping to counteract the tendency of the discipline to produce narrow technicians (Aslanbeigui and Naples 1996a: 1; Krueger et al. 1991:1038). This training equips them for life after college, for policy analysis, undergraduate teaching, and for knowledgeable citizenry in a polity where elections often hinge on the ‘vision of the economy’ candidates embrace.22 Don Walker has argued that history of economic thought is useful in helping us gain a ‘knowledge of past mistakes’ (1992:244; see also Vaughn 1993:176). We would add that a knowledge of history prevents us from repeating those mistakes. Our own background in HET made us dissatisfied with the textbook presentation of many economic ideas. For instance, we knew that Sraffa had challenged increasing and decreasing returns to scale under perfect competition. Others had shown that constant returns meant indeterminate firm size, and that even

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decreasing returns would be consistent with horizontal industry supply. Yet textbooks continue to assert rising long-run marginal costs, and upward-sloping industry supply, without acknowledging the unsettled debate (Aslanbeigui and Naples 1997).23 As Karen Vaughn observed, by studying HET we ‘lose our naivete about current certainties’ (1993:179). CONCLUSION AND PROPOSALS FOR CHANGE We have documented the accelerating decline of the history of thought in economics curricula. Arguably this change is costly for the discipline, given that HET is the only course dedicated to teaching students how to assess the evolution of economic ideas. As Mann and Fusfeld have argued (1970), what stays with students after graduation is the knowledge they have gained about scholarly attitude, how to address economic problems, and how to think about different options. Presently, our students graduate with an arsenal of techniques that are not used on their jobs, except for the few who do mathematical research. With time, their skills atrophy and their economics education proves to have been evanescent. Advocates of a bigger role for HET in economics curricula may fear deaf ears. The American Economic Association has had a long history of being closed to HET/M (see, for example, Fusfeld 1956), forwarding sessions on those topics to the History of Economics Society. The Society’s allotment of four panels at the ASSA meetings, however, has remained unchanged over the years despite the increasing interest in the field. The Journal of Economic Literature and the Journal of Economic Perspectives, which have regular review articles or articles in HET/M, have commissioned their contributions from inception. The AEA’s 1985 directory (AER December 1985) included several short articles on the history of economic thought; however, the invited authors were AEA insiders, not economists known for their research in history of thought (Coats 1987b). In the area of scholarship, historians of economic thought did not wait for an invitation from the mainstream of the discipline; they founded their own journals and pursued their own research agendas. Similarly, educators should not wait for the profession to recognize the importance of reorienting economics education, and strengthening the status of HET in the curriculum. We suggest the following strategies. First, as professors of economics, chairs of departments, and officers involved in tenure and promotion processes, we should follow the example of signatories on the aforementioned petition and promote those colleagues who are aware of the history of their discipline. While most academics implicitly respect the professional hierarchy which ranks Ph.D.s from the top programs as ‘the best’, private undergraduate institutions concerned about enrollments have increasingly insisted that new hires demonstrate their ability to communicate well. Historians are likely to fare well in these quests because of their training in how to do

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economics across different paradigms, and therefore their skill in explaining economic ideas to non-initiates without jargon. Second, the curricular revisions brought on by enrollment declines need not force the elimination of HET owing to small classes. Rather, the strategy of small departments has to be to modify upper-level courses so that they will attract non-majors. At Monmouth University, the honors program is using HET as a capstone seminar course for the honors business students. At the College of New Jersey, the history department enthusiastically embraced the idea of students substituting a 200-level HET course for microeconomics principles, a course students dread. They voted to require HET for history-education majors, and to list it as an economics option for other history majors. The HET course is uniquely adaptable to an interdisciplinary approach. From canceling the course for insufficient enrollment, we may have to offer multiple sections every year. Having history majors in the course will be a boon for the instructor, who can promote a more substantial conversation about the relationship between economic development, world political events, and the development of economic theory. The present juncture opens up the possibility of a ‘paradigm shift’ in economics education. Historians have an opportunity to be at the forefront of a reformulation that involves teaching economics majors more comparative theorizing, more about economic structure, and more history of ideas even in the core curriculum. We would argue that such a revised curriculum will actually be more competitive in attracting majors, especially those interested in public policy debates. And if undergraduate institutions turn out to be in the forefront of change, this time the graduate programs can emulate their example. APPENDIX 8.1 SURVEY ON THE HISTORY OF THOUGHT IN ECONOMICS CURRICULA Where no blank is provided, please circle the appropriate response. 1 Name of College/University ________________________________ 2 Is the economics major housed in: A. School of Business B. Arts and Sciences C. Other (please specify) ___________ 3 Do you require history of economic thought for your majors? A. Yes B. No If so, at what level? A. Undergraduate B. Graduate C. Both 4 Did you require history of economic thought for your majors in the past? A. Yes B. No If so, at what level? A. Undergraduate B. Graduate C. Both

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When did you stop requiring history of economic thought for your majors? A. Exact Year ____ B. Approximate Year ____ 5 Do you offer History of economic thought as an elective for your majors? A. Yes B. No If so, at what level? A. Undergraduate B. Graduate C. Both Has the course been offered in the past two years? A. Yes B. No 6 Did you offer history of economic thought as an elective in the past? A. Yes B. No If so, at what level? A. Undergraduate B. Graduate C. Both When did you stop offering history of economic thought as an elective course? A. Exact Year _____ B. Approximate Year _____ 7 Is (Are) the faculty teaching history of economic thought: A. Full-time B. Part-time/adjunct C. Both Please check here if you would like to receive the results of our survey. _____ NOTES 1 William Barber has predicted an increased effective demand for scholarship in HET owing to the break-up of the Soviet bloc and the openness of the newly formed countries to ‘alternative modes of economic organization’ (1990:111). 2 The first journal dedicated to HET, History of Political Economy, was published in 1969. Since then, the number of outlets in the field has mushroomed. Among them are: Journal of the History of Economic Thought, History of Economics Review, History of Economic Ideas, European Journal of History of Economic Thought, Research in the History of Economic Thought and Methodology, and Economic Methodology. The new heterodox journals—Journal of Economic Issues, Review of Political Economy, International Journal of Social Economics, Journal of Institutional and Theoretical Economics, Journal of Post-Keynesian Economics, Cambridge Journal of Economics, American Journal of Economics and Sociology, Science and Society, Review of Social Economy, Critical Review, Review of Radical Political Economics, Journal of Economic Studies, Review of Austrian Economics, and Journal of Evolutionary Economics—account for 28 percent of all HET articles published between 1969 and 1995 inclusive, despite the fact that many of them only began publication in the 1970s (three), 1980s (one), or 1990s (five) (see Fogarty and Naples 1996). 3 Europeans put different emphasis on the HET course; see Backhaus (1986) and Hébert (1982). 4 Schabas identifies Schumpeter’s path-breaking History of Economic Analysis (1954) as the standard textbook for over twenty years (1992:190). Today, there are other textbooks with varying degrees of success at the undergraduate and graduate

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5

6 7

8

9

10

11 12

13

14

15

levels (see, for example, Blaug 1978; Landreth and Colander 1989; Oser and Brue 1988; Rima 1991; Staley 1989). For a survey of undergraduate textbooks in the field see Bethune 1992. Only sixty-two (27 percent) respondents explicitly mentioned a graduate economics program in any of their answers to the questions in our survey. To complete our count, we used a list provided by the Institute of International Education’s Statistical Research Division which identifies graduate programs in economics by state; this added twenty-five graduate programs. We included an additional five schools which we know to have graduate programs (Tulane, Pennsylvania State, Rice, La Salle, and Johns Hopkins). At the time of writing, Brasfield et al.’s data were preliminary, to be finalized by summer 1996. Many respondents identified their HET course as both a requirement and an elective. We modified the data so that only those schools without a requirement would be counted as having the HET elective. Unfortunately, very few answered the question which enquired whether the course was offered at the undergraduate or graduate level, so no breakdown can be provided. At the University of Michigan, HET was a Ph.D. field. However, the two-course sequence was rarely offered. Professor Fusfeld worked with interested students on an independent basis. It should be noted that nine schools reported having moved HET from an elective to a requirement, one for graduate students. Two undergraduate schools reported that they have recently instituted an HET requirement. JOE follows the Journal of Economic Literature’s method of classifying history of economic thought and methodology in the same category. Only in the 1990s has the Association started to break up the theses by specific fields. We therefore went through the lists individually, including those dissertations that in our judgment were written in HET/M. There were some ambiguous cases which we chose not to include; however, such inclusions would not affect the trends reported in this chapter. Spellman and Gabriel (1978:185) reported that eight of the top graduate programs (Harvard, Berkeley, Columbia, Wisconsin, Chicago, New York University, Texas, Illinois) accounted for 37.7 percent of all dissertations completed over the 1940–74 period. José Luís Cardoso’s study of 300 historians of economic thought in twentyfive countries indicates that 76.5 percent of students taking the HET course rate the course good to excellent (1995:207). Anderson and Tollison have argued that the relative decline in research in HET can be explained using the concept of property rights, viz. that it is harder to define/ enforce such rights for HET compared with other fields in economics. As a result, ‘the existence of uninternalized positive externalities implies that research in the history of thought is likely to be undersupplied’ (ibid.: 65). This analysis is flawed in two respects. First, empirical evidence does not show a decline in research in HET (see De Marchi and Lodewijks 1983; Patinkin 1992; and Fogarty and Naples 1996). Second, ill-defined/ enforced property rights can explain the low status but do not explain the decline over time.

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16 Cardoso attributes the decline to ‘the triumph of methodological positivism’ (1995: 198). 17 At the 1996 ASSA meetings, Alan Meltzer observed that even Laura Tyson, recent past chair of the Council of Economic Advisers, was not publicly advocating Keynesian views, although there is some evidence that she held such views within administration policy circles. 18 We do not argue that the HET course is mainly about Marx and Keynes but that the unpopularity of these subjects in the discipline may make the course less desirable. HET is in fact tapped for much more; see, for example, Laurence Moss (1995) on issues relevant to contemporary economic theory. 19 The tendency of graduate economics education to produce ‘idiots savants’ has been recorded as dangerous by many economists over the past few decades (see Bowen 1953; Colander and Klamer 1987; Coats 1992). 20 For example, to make the transition of undergraduates to graduate school smoother, the Committee of College Faculty and the Oberlin Conference have suggested that advanced theory courses be offered in lieu of such courses as HET or economic history (Kasper et al. 1991:1106). In our view the elimination of these courses from curricula will have the opposite effect. 21 Warren Samuels credits his training in HET with teaching him to ‘think within the paradigm and terms of different schools of thought, thereby to understand the economy and the doing of economics in the different ways more or less specific to each school of thought’ (Samuels 1996:49). 22 The quote is from Newt Gingrich when he accepted election as Speaker of the House in the aftermath of the Republican Congressional landslide in 1992. 23 See also Naples and Aslanbeigui 1996a on contradictions in the macroeconomics aggregate supply-aggregate demand model and Naples and Aslanbeigui 1996b on inconsistencies in textbook treatment of capital and profit-rate determination in light of the capital controversy.

REFERENCES American Economic Review (1993) ‘Petition to Reform Graduate Education’, 83 (5): iiiii. American Economic Review (1993), 83 (6). American Economic Review (1964–87). Anderson, G.M. and Tollison, R.D. (1986) ‘Dead Men Tell No Tales’, History of Economics Society Bulletin, 8 (1): 59–68. Aslanbeigui, N. and Montecinos, V. (1996) ‘Survey of Foreign Students Studying in the US Ph.D. Programs in Economics’, in progress. Aslanbeigui, N. and Naples, M.I. (eds) (1996) Rethinking Economic Principles: Critical Essays on Introductory Textbooks. Chicago: Irwin. —— (1997) ‘Scissors or Horizon: Neoclassical Debates about Returns to Scale, Costs, and Long-run Supply Curves, 1926–42’, Southern Economic Journal, 64 (2), forthcoming. Backhaus, J. (1986) ‘History of Economic Thought—What for? Empirical Observations from German Universities’, History of Economics Society Bulletin, 7 (winter): 60–6.

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Barber, W.J. (1990) ‘Does Scholarship in the History of Economics Have a Useful Future?’, Journal of the History of Economic Thought, 12 (2): 110–23. Bethune, J.J. (1992) ‘The History of Economic Thought: A Survey of Undergraduate Textbooks’, Journal of Economic Education 23 (2): 153–61. —— (1996) ‘The Popularity of the History of Economic Thought Field over Recent Decades’, working paper, Bellarmine College, Kentucky. Blaug, M. (1978) Economic Theory in Retrospect, 3rd edn, Cambridge: Cambridge University Press. Bowen, H.R. (1953) ‘Graduate Education in Economics’, American Economic Review Supplement 43 (Part 2): 1–223. Brasfield, D., Haverson, D., McCoy, J., and Milkman, M. (1996) ‘Why Have some Schools not Experienced a Decrease in the Percentage of Students Majoring in Economics?’ working paper, Murray State University. Cardoso, J.L. (1995) ‘Teaching the History of Economic Thought’, European Journal of History of Economic Thought, 2 (1): 197–214. Coats, A.W. (1987a) ‘Economics, History and HOPE’, History of Economics Society Bulletin, 8 (2): 1–20. —— (1987b) ‘Review Essay: History of Political Economy: The AEA and the History of Economics’, History of Economics Society Bulletin, 9 (1): 61–6. —— (1992) ‘Changing Perceptions of American Graduate Education in Economics, 1953–91’, Journal of Economic Education, 23 (4): 341–52. Colander, D. and Klamer, A. (1987) ‘The Making of an Economist’, Journal of Economic Perspectives, 1 (2): 95–111. De Marchi, N. and Lodewijks, J. (1983) ‘HOPE and the Journal Literature in the History of Economic Thought’, History of Political Economy, 15 (3): 321–43. Fogarty, E. and Naples, M.I. (1996) ‘The Presence of History: A Survey of History of Economic Thought and Methodology Articles in the Economic Literature Index, 1969–95’, working paper, College of New Jersey. Fusfeld, D.R. (1956) ‘The Program of the American Economic Association Meetings’, American Economic Review, 46 (4): 642–4. —— (1965) ‘Discussion: Economics Education’, American Economic Review, 55 (2): 574–6. —— (1980) ‘The Conceptual Framework of Modern Economics’, Journal of Economic Issues, 24 (1): 1–52. —— (1990) The Age of the Economist, 6th edn, Glenview, IL: Scott Foresman. Fusfeld, D.R. and Jump, G. (1966) ‘An Experiment with Programmed Instruction in Economics’, Southern Economic Journal, 32 (3): 353–6. Hébert, R.F. (1982) ‘History of Economic Thought at the Sorbonne’, History of Economics Society Bulletin, 5 (7): 31–2. Job Openings for Economists (various years). Journal of Economic Literature (1987–95). Kasper, H. et al. (1991) ‘The Education of Economists: From Undergraduate to Graduate Study’, Journal of Economic Literature, 29 (3): 1088–109. Keyssar, A. (1992) ‘Comment’, History of Political Economy, 24 (1): 215–17. Krueger, A.O. et al. (1991) ‘Report of the Commission on Graduate Education in Economics’, Journal of Economic Literature, 29 (3): 1035–53. Landreth, H. and Colander, D.C. (1989) History of Economic Theory, 2nd edn, Boston: Houghton Mifflin.

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Mann, W.R. and Fusfeld, D.R. (1970) ‘Attitude Sophistication and Effective Teaching in Economics’, Journal of Economic Education, 1 (2): 111–29. Margo, R.A. and Siegfried, J.J. (1996) ‘Long-run Trends in Economics Bachelor’s Degrees’, working paper, Vanderbilt University. Menard, C. (1992) ‘Comment’, History of Political Economy, 24 (1): 218–20. Moss, L.S. (1995) ‘Finding New Wine in Old Bottles: What Historians must Do when Leontief Coefficients are no longer the Designated Drivers of Economics’, Journal of the History of Economic Thought, 17 (2): 179–204. Naples, M.I. and Aslanbeigui, N. (1996a) ‘Is there a Theory of Involuntary Unemployment in Introductory Textbooks?’ in N.Aslanbeigui and M.I.Naples (eds) Rethinking Economic Principles: Critical Essays on Introductory Textbooks, Chicago: Irwin, 109–26. —— (1996b) ‘What does Determine the Profit Rate? The Neoclassical Answers Presented by Introductory Textbooks’, Cambridge Journal of Economics, 20 (2): 53–71. Negishi, T. (1992) ‘Comment’, History of Political Economy, 24 (1): 227–9. Oser, J. and Brue, S.L. (1988) The Evolution of Economic Thought, 4th edn, New York: Harcourt Brace Jovanovich. Patinkin, D. (1992) ‘Comment’, History of Political Economy, 24 (1): 230–3. Rima, I.H. (1991) Development of Economic Analysis, 5th edn, Homewood, IL: Irwin. Samuels, Warren (1996) ‘My Work as a Historian of Economic Thought’, Journal of the History of Economic Thought, 18 (1): 37–75. Samuelson, P.A. (1987) ‘Out of the Closet: A Program for the Whig History of Economic Science’, History of Economics Society Bulletin, 9 (1): 51–60. Schabas, M. (1992) ‘Breaking Away: History of Economics as History of Science’, History of Political Economy, 24 (1): 187–203. Schumpeter, J.A. (1954) History of Economic Analysis, New York: Oxford University Press. Siegfried, J.J. (1995) ‘Trends in Undergraduate Economics Degrees: A 1993–94 Update’, Journal of Economic Education, 26 (3): 282–7. Siegfried, J.J. and Wilkinson, J.T. (1982) ‘The Economics Curriculum in the United States: 1980’, American Economic Review—Papers and Proceedings, 72 (2): 125– 38. Spellman, W.E. and Gabriel, D.B. (1978) ‘Graduate Students in Economics, 1940–74’, American Economic Review, 68 (1): 182–7. Staley, C.E. (1989) A History of Economic Thought: From Aristotle to Arrow, Oxford: Basil Blackwell. Stigler, G.J. (1982) The Economist as Preacher and Other Essays, Chicago: University of Chicago Press. Taylor, H. (ed.) (1950) ‘The Teaching of Undergraduate Economics: Report of the Committee on the Undergraduate Teaching of Economics and Training of Economists’, American Economic Review, supplement (December), 40. Thornton, R.J. and Innes, J.T. (1988) ‘The Status of Master’s Programs in Economics’, Journal of Economic Perspectives, 2 (1): 171–8. Vaughn, K.I. (1993) ‘Why Teach the History of Economics?’, Journal of the History of Economic Thought, 15 (2): 174–83. Walker, D.A. (1992) ‘Comment’, History of Political Economy, 24 (1): 243–5. Whitaker, J.K. (1985) ‘Must Historians of Economics Apologize?’, History of Economics Society Bulletin, 6 (2): 9–15.

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Willis, R.A. and Pieper, P.J. (1996) ‘The Economics Major: Where from, Where to, and Why’, working paper. Woolf, A.G. (1992) ‘The Skills Economists Need in Government’, in D.Colander and R.Brenner (eds) Educating Economists, Ann Arbor: University of Michigan Press, 201–10.

ACKNOWLEDGEMENT The authors would like to thank José Luís Cardoso, Avi Cohen, David Colander, Larry Moss, and Margaret Schabas for insightful comments. The usual disclaimer applies.

Part III ALTERNATIVE APPROACHES TO NEOCLASSICAL MODELING

9 COSTS AND POWER Warren J.Samuels and A.Allan Schmid

Scarcity implies costs but what governs the genesis, existence, and magnitude of costs in any particular situation? Neoclassical economics is dominated by a partial-equilibrium approach in which costs are for the most part taken as given by technology or reckoned in term of forgone opportunities. But technology is only one factor governing costs. What other factors make a cost a cost? What governs which costs, out of a range of possibilities, become the socially significant or registered costs? Whose interests become a cost to someone else? Who bears what opportunity costs? The purpose of this chapter is to present a theory of costs, using a general model of choice and power. The first section summarizes and critiques the neoclassical treatment of costs. The second section explores costs as a function of power. Next, we present some examples illustrating and applying the idea of costs as a function of power. The last section concludes the chapter. THE NEOCLASSICAL THEORY OF COSTS IN PERSPECTIVE Private costs, so-called The neoclassical theory of costs is severely incomplete in two ways. First, it is in part based upon a partial-equilibrium theory of the firm centering on adjustment to market conditions driven by technology. The analysis is in part a cost-curve approach to cost, based on an input approach to cost curves; it directs attention to technical conditions such as production functions, decreasing returns, and inputoutput coefficients. This approach to costs is articulated in terms of a physicalist and absolutist model. Costs are in terms of physical inputs (or inputs analogous to physical inputs) needed to produce and are absolutist in terms of being given by technology, treated as an exogenous variable. Second, the neoclassical approach to costs is also an opportunity-cost approach. Costs are seen to be relative to preferences and technology as

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registered in the market (an approach congenial to that taken in this chapter). Opportunity cost implies the importance of opportunity sets and thereby the total structure of opportunity sets. Opportunity cost is a function of the opportunity set and is opportunity-set specific; it is therefore specific to the factors that govern opportunity-set structure and composition, a function of power.1 Who does the forgoing is determined by power, typically through legal rights. The neoclassical theory of costs is thus incomplete. It emphasizes costs as a function of scarcity but it fails to account for the social decision-making process whereby the solution to the problem of who is to bear scarcity, who does the forgoing, or the structure of the disaggregation of scarcity, is worked out in so far as it is done through the cost-determining rights-formation processes of law, custom, and morality. The partial-equilibrium, physicalist approach to costs fails to delve into the questions of which and whose costs, out of a range of possibilities, actually are registered and valorized in markets as costs; whose interests count as costs, and to whom, and how much; and the factors and forces governing whose interests are given effect as rights and thus count as costs. The problem is not merely whether physical inputs will enter into the calculation of production costs but whose interests are given legal or other status so that they count for (must be paid) more than if they were not given such status. Factor prices are a function of demand and supply, which in turn are partially a function of power structure (rights structure). Registered costs are in part a function of rights. There are no absolute costs, only different patterns of the registration, valorization and distribution or disaggregation of scarcity taking the form of different patterns of costs and governed in part by whose interests are given legal or other status of economic significance. Opportunity cost is always opportunity-set specific, in regard to both the composition of the individual’s opportunity set from which choice is made and the total structure of opportunity sets. Opportunity cost is related to the alternatives and the cost of alternatives (opportunity set) is a function of the power (rights) structure, which in turn is a function of the legal process’s determination of which interests will have to be reckoned with in the market and thus become a cost to others. Costs are not independent of income and wealth distribution. Opportunity cost has linkages to income and wealth distribution (a key factor in power structure), since opportunity cost in the market is a function of value to others, which is a function of income and wealth distribution, which in turn is a partial function of legal rights. There are no absolute or given costs, only a cost-price structure which is a function of the interplay of demand and supply, which in turn is a function of the opportunity set structure, which in its turn is a function of the power (rights) structure. Cost is a function of distribution, and distribution is a function of costs, and both are governed by differential legal protection of interests. By taking legally based costs as given, the neoclassical theory gives effect to and reinforces—and its conclusions are substantively tautological with—

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whatever happens to be the status quo power (rights) structure, all the while seeming to ground decisions on objective and independent ‘costs’. If legal rights are so identified and assigned as to make some economic giants and others economic pygmies, then decisions made on the basis of the cost-price structure emanating therefrom will serve, ceteris paribus, to give effect to and replicate that power structure. The real issue is whose interests are chosen to be costs to whom, and to reach decisions by reference to costs is to presume some antecedently determined rights (power) structure and a narrow recognition of it and thereby to give effect to it. Social costs Neoclassical microeconomics and welfare economics would seem to provide a more adequate handling of costs through the concept of social costs. But they have not. Because of a relatively narrow focus upon private versus social, a narrow recognition of evidence of injury (Samuels 1972a: 90 n. and passim), and other reasons, the analysis of social cost has come close to the argument of this chapter but has not really gotten to the heart of the question as to whose interests are to count as a cost to others and to the proposition that costs are a function of rights. The problem of which (whose) interests are seen as costs transcends the social cost concept, which tends to presume absolute and/or physical costs some of which happen not to become registered in the market and thereby are not borne as private costs. The present analysis gets to the ubiquity of external costs (adverse impact upon others’ opportunity sets) and the phenomena and consequences of certain interests, and not other interests, being given legal effect as rights and thereby as costs to others. Apropos the relation of the present analysis to the Coase theorem (Samuels 1974), Ronald Coase came close to the argument advanced here when he concluded his well-known article with the statement that If factors of production are thought of as rights, it becomes easier to understand that the right to do something which has a harmful effect…is also a factor of production… The cost of exercising a right (of using a factor of production) is always the loss which is suffered elsewhere in consequence of the exercise of that right. (1960:44) But the subsequent elaboration and defense of the Coase theorem by others (not by Coase himself, who has rejected the theorem’s relevance to the real world)2 has tended to take rights as given. Thus Demsetz has written that ‘The rule of liability that is chosen can have no effect on his decisions because the owner of such a firm must bear the interaction cost whichever legal rule is adopted. The cost interdependence is a technical-economic interdependence, not a legal one’ (Demsetz 1972:19). Whatever the applicability of the Coase theorem, such

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reasoning is at worst wrong and at best incomplete, for costs are themselves a partial function of rights. The law helps determine which interests, out of a range of possibilities, become operative as costs through legal rights. Thus Demsetz earlier has acknowledged that property rights convey the right to benefit or harm oneself or others.… It is clear, then, that property rights specify how persons may be benefitted and harmed, and, therefore, who must pay whom to modify the actions taken by persons. The recognition of this leads easily to the close relationship between property rights and externalities. (Demsetz 1967:347) The point is that consideration of ‘social costs’ is both not enough and presumptive; analysis has to be extended to the fact that all market-registered and valorized costs are a function of rights, giving weight to whose interest counts and the social processes whereby who counts is determined, which is one source of the ‘cost’ treated by economists. Costs and utility: the ubiquity and inevitability of power Market preferences are a function of the weighing of personal utility functions, with the weighing done by the power structure, i.e. by income and wealth distribution, rights, position, and so on. Rather than a single possible market demand curve (or a single possible social welfare function) there are many, each expressing the evaluations of different groups of people with different weightings. Which one becomes operative in the market at any point in time and over time depends upon, inter alia, the institutional framework and power structure which decide the weighting scheme3—as part of a general equilibrium process. Income distribution influences the allocation of resources by affecting relative opportunity costs via helping govern value in alternative uses through marginal utilities and prices.4 Market demand functions are a function of the power structure governing whose preferences count. Supply functions are a function of whose interests count as a cost to others. Both demand and supply are influenced by the same general set of institutional factors which focus on power: rights, position, etc. The neoclassical theory is methodologically individualist in so far as it concentrates upon choice from within individual opportunity sets. It is methodologically collectivist in so far as it concentrates upon the market as the process of socioeconomic integration and choice.5 But it is incomplete in so far as it fails to take explicit cognizance of the role of the identification and assignment of rights in determining both whose preferences will count over others on the demand side and whose interests will count as costs to others on the supply side.

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COSTS AND POWER Costs in a general interdependence paradigm of choice and power6 The economy is a decision-making or choice process. Given the conditions of scarcity and interdependence, social-economic choice involves the disaggregation of scarcity and decision-making among the actors comprising the economic decision-making process. Such a system can be characterized in a paradigm with the following elements and relations. 1 Opportunity set: available alternative lines of action or choices, open to an individual, each with a relative opportunity cost in terms of forgone alternatives. Overall economic performance results from the aggregate interaction of individuals making choices from within their relevant opportunity sets. Each opportunity set, at any point in time and over time, is a function of the structure of power, the exercise of choice from within opportunity sets, and the resultant process of interaction. 2 Power: (a) effective participation in decision-making to make one’s interests count when they conflict with those of others; (b) the means or capacity with which to exercise choice, i.e. to participate in the economic decision-making process—for example, property, position, rights in general, working rules, skills, knowledge. Participation requires the means, and the means enables participation. Power is used here primarily with the second connotation, but usually to the effect of the first. 3 Coercion (constraint): impact of the behavior and choices of others upon the content of one’s opportunity set; is mutual or reciprocal (though typically asymmetrical), ergo a system of mutual coercion or mutual constraint; includes both injuries and benefits visited through action (or inaction) and choices of others. 4 Externalities: the substance of mutual coercion, in the form of injuries and benefits visited upon others. 5 Working rules: the rules of law, custom, morality, etc., governing access to and use of power. 6 Cost: an adverse impact on someone’s opportunity set of a choice from within another’s opportunity set or from the aggregate of others’ choices. The composition of both the whole social opportunity set and the individual opportunity sets is a function of scarcity not only in a physical sense but in a broader sense involving conflicts of interests of all sorts, including conflicts over resources and the use of technology. The more conventionally recognized connotation of scarcity is physical scarcity in respect to technology and resource limitations. The second is an interest scarcity arising because not all interests can be satisfied at the same time and/or to their fullest extent in so far as the interests

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of Alpha directly conflict with those of Beta.7 Costs thus arise not only because of the scarcity represented by limited technology and resources but because satisfaction of Alpha’s interest(s) will adversely affect Beta’s opportunity set, and vice versa; the cost of Alpha having a right (power), when both Alpha and Beta are in the same field of action, is the opportunity cost visited on Beta. Interests, as with resources, are made a cost to others largely through the recognition, assignment, enforcement and protection of rights or position, namely power. When a person has such a right he has a claim upon others; he has something which he can withhold from others, thereby enabling him to make a claim for payment should others want what he has, normally either his physical property or his consent. His interest is thereby made a cost to others. If persons do not have a right to (i.e. own) something that others want for use in production —including an interest which must be satisfied by others—then their interests will not count as a cost to the others. Without such rights, and the claims upon others based thereon, the individual does not participate in the economy and his interests do not represent a cost to others. Costs (prices) generated in the market reflect the commingling of both types of factors—physical inputs costs and rights-based costs—as both influence the opportunity-set array of alternatives available at any point in time and over time to actual or potential economic actors. Further development of the argument and some examples will be given below but the ideas of several economists may be noted here who have, one way or another, traced resource allocation and income distribution, i.e. costs, back to the allocation of property and equivalent rights. Alfred Marshall, in a discussion of the market position of unskilled workers, wrote that ‘There is no more urgent social need than that labour of this kind should be made scarce and therefore dear’ (1920:558), the relevant meaning of which is found in the statement by James Meade that If citizen A owns nothing except a factor (e.g. his own unskilled labour) whose price is low and needs for his family’s welfare goods whose price is high, he will be very poor, as compared with citizen B who happens to own a factor (e.g. a scarce natural resource) whose price is high and who happens to need for his family’s enjoyment goods which are very cheap. (1965:11) And in Schmid’s statements that Efficiency depends on the relevant input-output categories and it is collective judgment expressed in property rights which determines relevancy. (Schmid 1967:163) And

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[of]…the plight of the poor man—he just does not count because he owns very little that is a cost to other people. (ibid.: 162) In static partial equilibrium terms, if costs are defined as opportunity costs (from within, and in the context of, an individual’s opportunity set), as is conventional, then where an individual has few or no alternatives open to him there is, by inference, little or no cost. But the thrust of this chapter is that cost is a function of the composition and total structure of everyone’s opportunity sets and in turn a function of power structure and mutual coercion, with a relevant consideration being not the opportunity cost from within an otherwise given opportunity set but the factors and forces governing which costs are given effect in the very content and structure of opportunity sets. Thus, the poor man has few opportunity costs, given his restricted opportunity set, but this is, at least in part, because he has little that has come to be a cost to other people. A person has interests, then, which represent a cost to others when his power (e.g. based on legal rights), subject to mutual coercion, yields him an opportunity set inclusive of something which must be paid for by others. The individual may have something which no one wants, or the impact of others’ choices—say, mutual coercion through demand and supply— may yield him very little. The possession of a right or position is not sufficient, though it is necessary. Each right has to be seen in the context of the total structure of power, the total process of choice, and the total process of mutual coercion and relative scarcity. But costs to Beta result form those elements of Alpha’s opportunity set which represent the interests of Alpha for which Beta must pay, ergo representing exposure of and adverse impact upon Beta’s opportunity set. The existence of these costs, i.e. the specific registered costs, based upon interest scarcity, depends upon who has what rights. No rights, no registration of interests in the market; no imposition of costs on others. The size and composition of Alpha’s opportunity set govern his relative exposure to the impact of choices made form within others’ opportunity sets. That relative structure depends in part upon whose interests are made, through rights and/or position, a cost to others. Costs are generated within and on the basis of interdependence of pairs of variables. Neither variable in each pair is independent and self-subsistent with regard to the other; both rise within a common nexus. These dual relationships are characterized by evolutionary cumulative causation: 1 The working rules of law and morals govern the distribution and exercise of power and the distribution and exercise of power governs the development of the working rules. 2 Values depend upon the decision-making process and the decision-making process depends upon values.

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3 Tastes and preferences depend in part upon the institutional/cultural structure and the institutional/cultural structure depends in part upon tastes and preferences. 4 The opportunity set of an individual depends upon the total structure of power and the total structure of power depends upon the decisions made by individuals from within their opportunity sets at any point in time and over time. 5 The power structure is a function of power play and power play is a function of the power structure. 6 Decisions are a function of power structure and power structure is a function of decisions. 7 The distribution of income and wealth depends upon the use made of government and the use made of government depends upon income and wealth distribution. 8 Legal rights are a function of the power structure and the power structure is a function of legal rights. and with respect specifically to costs, 9 Costs are a function of the power structure and the power structure is a function of costs. 10 The structure of costs is a function of the opportunity-set structure and the opportunity-set structure is a function of the structure of costs. 11 Costs are a function of rights and rights are a function of costs. There is a vast, complicated, and subtle system of relations between legal (and other social) processes and market processes (Samuels 1971, 1989; Schmid 1987: ch. 2), and the determination of costs is both a dependent and an independent variable therein. The costs that become operative are always from a range of possible costs, i.e. the extant cost-price structure is one from a range of possible cost-price structures. The substance of the evolving equilibrium conditions mark a temporary equilibrium of the dynamic interplay of these processes and interrelations. The central problem of cost Costs and prices (costs being the obverse of prices, as it were) are both contingent phenomena, episodic resting places of the interplay of the demand and supply forces governing them.8 There is a wide range of possible cost-price structures, depending, for example, on choice of technology, choice of technological research, distribution of preferences for final output, and, of importance here, the choice of whose interests are given effect through rights, or who is in the position to make the choices. The costs actually registered in the market are a partial function of the rights’ structure and the working rules

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governing the acquisition and use of rights (or power). The actual structure of costs is only one from a range of possibilities. Any cost-price structure is specific to an opportunity-set structure between individuals and to the choices made from within their opportunity sets by individuals; and the opportunity-set structure (including the content of individual opportunity sets) is a function of the power (rights) structure and of mutual coercion; so that the costs registered through the market by a firm or other economic actor are a partial function of the rights or power structure. Rights establish costs to others, all other things being equal. In other words, Power Structure A generates Price Structure A, Resource Allocation A, and Cost Structure A; and similarly with Power Structure B, Price Structure B, Resource Allocation B, and Cost Structure B; and so on. Cost, then, is a partial function of power. Power, within the total power structure, governs what counts as a cost, how much, and to whom and for whom. Cost functions shift in response to changes in technology, preferences, and power. A change in rights means a change in whose interests are to count as a cost to others, and therefore also means a change in cost structure. The central problem of cost, in the context of this chapter, is: whose interests are to be made a cost to someone else. Decisions as to the structure of power— through, for example, legal decisions as to relative rights or other decisions as to position—pro tanto govern the structure of costs. Inasmuch as some set of legal rights must underlie market exchange, and therefore the distribution of costs, the relevant question is not whether government will be present but to whose interests it will be giving its support. SOME EXAMPLES The following are examples of some of the ways in which the identification and assignment of rights and/or position, i.e. power, governs the existence, registration, and distribution of costs in the economy. 1. The most general example is the identification and assignment of particular property rights either in physical resources or in intangibles (such as patents). The legal recognition and protection of the right in question (it could be ownership per se or an incident of ownership) gives effect to certain interests, at the same time denying effect to the conflicting interests of others, most importantly creating bases on which claims for payment may be made, thus generating costs to others. Property rights count: the assignment of property rights—including their identification—gives recipients a particular locus of participation in the economic decision-making process not enjoyed by others such that their interests are a factor in economic decision-making and are perforce a cost to others. 2. Given a population of two groups (say, economic classes or classes based on color, religion, country of origin or legal status), a distribution of wealth through, say, differential ownership assignments and prohibitions by legal action will result in a different structure of costs (incomes, prices and so on) than a

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distribution not so skewed. In addition to different spending patterns given effect through the different wealth and income distributions, the difference in ownership assignments and prohibitions (whether by fee simple, regulation, etc.) represents different interests given effect. The example of a culturally heterogeneous population with some degree of legal discrimination may seem an analytically extreme case but it is rather widely found, as is informal social discrimination; in any case it illustrates the principle at issue. The more interesting case, perhaps, and certainly the more ubiquitous one, is where dominant ideology accommodates the granting of legal or customary protection through rights to certain interests and not to others. 3. The cost structure—the cost situation of the masters—is different as between the case of what we normally think of as free labor and that of slaves, serfs or peons, and as between the case of labor under protective labor legislation and that of no such protection. Legal position and enforcement result in rather different opportunity sets as between the groups and accordingly rather different cost structures. 4. In cases where, and to the extent that, workers receive property (or propertyequivalent) rights in their job, the relative opportunity sets between employees and employers (labor owners and capital owners) are rather different from cases where no such labor rights exist. With that difference come different costs, the workers’ interest in security (whether empirically correct or not, as a matter of fact) now having an impact on business costs which did not exist or did not so much exist prior to their having rights with which employers have to reckon. 5. Consider the hypothetical pairs of consumption alternatives of yachts versus picnics and golf versus street football. In so far as the differential wealth positions of different socioeconomic groups are a function of legal action (rights’ grants, other grants), the allocation of resources, and with it market-registered costs, as between picnic, yacht, golf and street football materials will depend upon the legal action operating through demand and supply and the social preferenceformation processes. 6. Consider an island called Smithiana in which all land is private property (for present purposes the distribution of ownership among citizens or natives is irrelevant) and where all work and employment is a function of specialization operating through demand and supply. Now assume the arrival of the shipwrecked Robinson Crusoe. If he is not needed by any employer (assume a pre-existing equilibrium at full employment—recession or depression is another relevant case—and that potential employers do not perceive that his earned income will be spent), then, unable to find work, and in the absence of charity or relief (which would satisfy the lower consumption bound assumption of welfare economics; see Samuels 1972a: 73, 1980, passim), he will starve to death. If he is hired, and assuming diminishing returns, if his marginal productivity is low, his cost to others is low and his income is low. If his marginal product vis-à-vis the wage rate at which he can work is above the minimum of subsistence, he can survive; otherwise he dies. Alternatively, consider a different working rule which

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leaves him at less of an economic disadvantage—say, a rule which amounts to a capital levy which gives him some land if he remains in his new-found haven. The difference in legal rules (and the resulting difference in property assignments) results in a difference in opportunity set structures, a difference, that is, in the disaggregation of scarcity, and a difference in cost structure, however incremental, as well as, of course, in a difference in Crusoe’s personal condition. Often the workers dismissed in a recession do not have significantly different marginal products from those retained. With one set of rules the cost of these laid-off workers to the firm is zero, with required unemployment insurance it is another cost, and in a worker-owned co-op it is still another. The same can be said of social security, pensions and medical care (see also No. 13, below). Competition in labor markets operates within and tends both to give effect to and to modify the operation of the rules and other conditions. This is nicely illustrated by Lionel Robbins’s critique of productivity theory as both explanation and justification of distributional results: In this connection, I would like to go out of my way, here and now, to repudiate certain uses to which this analysis has been put. It has sometimes been argued—J.B.Clark is perhaps the chief culprit— that a proof that, under competitive conditions, productive agents are paid according to the value of their marginal physical product is a proof that such a system is just. This of course is a complete non sequitur, and one which is a temptation to tendentious usage. Before we can begin to discuss distributive justice in this connection, we must investigate the arrangements —the distribution of property, the accessibility to appropriate training, the availability of appropriate information and so on—which bring it about that a man’s marginal product is what it is and not otherwise; and that involves many considerations quite outside the range of the kind of analysis I am discussing. It is to be noted, however, that the leading exponents of this idea, with the exception of von Thunen, have made no such claims. If we take Marshall as providing the locus classicus of its prudent application, we find that he definitely goes out of his way to deny that it affords a complete theory of distribution, even in the narrow sense, and throughout puts it in its proper place as a partial explanation of derived demand and as an essential ingredient of the idea of substitution. (1970:19–20) Unfortunately, such considerations have not become part of neoclassical theory. 7. Consider the legal definition of products—say, ice cream (butterfat content) and frankfurters (fat and other content). Quite aside from the desideratum of allowing producers to market ice cream with different butterfat content, and similarly with frankfurters, with adequate and proper labeling of contents so consumers can make knowledgeable choices (which would satisfy the

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knowledge assumption of microeconomics), different legal definitions of products will have their differential cost impacts (including the case of allowing similar products with different but identified contents and the case of allowing caveat emptor among the alternatives). Without labeling requirements, the allocative and cost impacts will be further different. Rights can shift the cost of the inevitable mistakes associated with production and fundamental uncertainty among any of the transacting parties. A world of implied product warranties or of strict manufacturer liability—a world, that is, of caveat venditor—would result in a different array of costs than a world of caveat emptor or even of limited warranties. 8. Consider the problem of whether copyright owners (publishers, authors) should have the right to a fee, nominal as it may be, per copy, for the reproduction or (electrostatic or other machine or photographic) copying of their copyrighted material; or whether researchers should be able to copy materials, in whatever quantity (as to different items) is required for their own research purposes, without having to pay a fee. A conflict of private interests is present here (and of social considerations as well) in which many authors have a stake on both sides. At issue is the coverage of copyright protection, for present purposes an instance of ownership. In any event, whatever the legal process decides as to the relative rights of the parties-in-interest, the cost structures of publishing and of research (which overlap) will vary with different assignments of rights, and the difference in cost structure will be a function of the legal creation or noncreation of particular alternative intangible rights. 9. The limited-liability corporation, so much taken for granted in Western legaleconomic life, results in a different realization and distribution of risk and other cost factors than would exist if corporations had unlimited or differently limited liability. 10. Where welfare-state provisions—such as unemployment and accident compensation and pensions, including old age and survivorship, and sickness and pregnancy pay—apply, either through governmentally administered systems or as legally required privately administered systems, worker interests are given market effect and enter into costs and cost functions, which are then different from the situation in which the provisions are absent. 11. If welfare is paid for by local taxes, it is a cost to different people than if paid for by national taxes, in part because the welfare population is not uniformly distributed throughout the country. 12. The imposition of a severance tax on the mining of natural resources, the equivalent of a kind of property right vested in all citizens in the resources, would allow certain interests to be given legal effect that would not be in the absence of such a tax. Thus, as a particular example, the price of aluminum depends, inter alia, upon the conditions under which bauxite is mined, including the effective rights of workers and of citizens in the raw-material-supplying regions or countries to their natural resources. A whole complex of legal

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positions governs the acquisition costs of natural resources, whether they are mined domestically or in another country. 13. A similar case involves the granting of licenses for the use of the radio spectrum: a property right from government, it enables the grantee to receive payments from users of air time and the capitalization of a monopoly income through sale of the license. Whatever the market for air time, whatever the technology of spectrum use, and whatever control over license sales is exercised by the political authority involved, different legal rules (e.g. with or without some charge—say, through an auction or some recapture clause) will yield different opportunity set structures and costs in the market for radio and television stations, etc. Similarly for Homestead laws. 14. Given the introduction of manpower retraining programs, the cost functions consequent to relative labor supplies in particular occupations will change—with one cost visited upon the prospective income of those who entered earlier (say, without any expectation of such manpower retraining programs) upon the promise of high(er) incomes because of the relatively high scarcity of labor therein. 15. The presence or absence of (effective or any) rights to an education— leaving (in its absence) education to be a function of wealth distribution (the effective right of the rich, and ignorance the condition of the poor)—will have an effect upon the market registration of costs—and, indeed, upon the size and composition of the social opportunity set. 16. Similarly, home-buyer settlement costs are partially a function of fees for services required by virtue of existing legal arrangements governing registration and/or transfer, a change in which would generate different costs, and income, distributions.9 17. Costs are a function of the vesting or non-vesting of a right (and in whatever specific terms the right is stipulated) not to be injured by new technology, by competition, or by legal change: for example, rezoning, the banning of cyclamates, a tariff change (as above), the banning of billboards, the banning of for-sale signs on residential property, and the famous Charles River Bridge case.10 18. Costs are a function of what is regarded by law as reasonable behavior, for the interruption of reasonable behavior is subject to compensation in tort actions. Guido Calabresi illustrates the point with reference to the belief of a female orthodox Jew who jumped from a stalled ski lift to avoid being with a man after sundown. The subsequent injury was much worse than if the woman had remained a while longer in the lift chair. The cost of running a ski lift then depends on whether her behavior is deemed reasonable. Calabresi argues that ‘who is the cheapest avoider of a cost, depends on the valuations put on acts, activities, and scientific notion’. He further argues that

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what is efficient, or passes a cost-benefit test, is not a ‘scientific’ notion separated from beliefs and attitudes, and always must respond to the question of whom we wish to make richer or poorer. (1985:69) The forgoing are all examples of the proposition that costs are a partial function of rights or position and therefore of power. While any legal right may or may not be subject to market adjustment through trade or exchange (itself influenced by the distribution of wealth and liquidity), the very existence and distribution of these rights and their consequent market-registered costs are a function of law, ceteris paribus resource limitations and preferences (which are themselves influenced by legal arrangements). Every actual market-registered cost is a function of a multiplicity of incremental effects of such phenomena. Any costprice structure is specific to an opportunity-set structure and to choice from within that opportunity-set structure, and the opportunity-set structure is a partial function of the power (rights) structure and mutual coercion. Costs registered through the market or otherwise by a firm are a partial function of the rights governing whose interests count. The neoclassical treatment of costs, as will be seen further below, in taking costs as given by technology and preferences, appears to be grounding analytical and policy decisions upon objective and independent ‘cost’ variables when as a matter of fact they are, pro tanto, building in and giving effect to and reinforcing the existing structure of power (rights) which underlies those costs and to which they are, again pro tanto, specific.11 CONCLUSION The factors and forces governing the attainment and distribution of welfare, through cost and utility functions, are of the nature of power relations. These forces are present and operative even if neoclassical theory is silent about them. Neoclassical theory has dealt with costs specific to some power structure (and technology and preferences, however weighted). Economists need to explore and analyze costs as a function of power and power as a function of cost, both driven by differential legal protection of interests.12 A real determinant—the critical determinant from the point of view of social policy—of resource allocation is the rights structure to which the market gives effect. To say that certain legal changes would disturb existing market arrangements is only to say that the law would be used to give effect to different interests than before (Samuels 1971). The new set of costs is no less economically grounded than the old set. One can have Pareto-optimal (or Paretoequilibrium) results both before and after the change (see Baumol 1972:321; Samuels 1972a: 75 and passim).13 Costs are not an objective benchmark to use in evaluating policies which may lead to adjustments in relative rights, because costs are not given, absolute and objective but rather depend upon the existing rights structure so that all

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inferences in regard to rights made on the basis of costs are circular in that they are based upon, and give effect to, and reinforce, the rights on which costs are based. The use of the extant cost-price structure will reinforce and give effect to the status quo power structure. Where an analyst suggests a change of rights (supposedly taking costs as given) either the analyst is superimposing his own preferred structure of interest protection and rights or allowing the asymmetry of the existing system to generate further asymmetry. In all cases the power (rights) structure governs the allocation of resources; and both the power structure and the allocation of resources center on the social answer to the social problem of who counts, on both the demand and the supply sides. There is, then, no such thing as a free lunch—but who foots the bill, as well as what is ordered, what is likely to be on the menu, and who is rewarded for providing it, are a function of relative power, which is a partial function of relative rights, which is a function of the relative use of government by interested parties to get their interests to count. All parties attempt (with more or less success) to influence the law in order to accrue gains to themselves and to impose costs upon others.14 Costs in economics reflect the results of a vast amount of the intentional and the unintentional development of legal and moral systems in such ways as necessarily to give particular interests an advantage in the market. Whatever one thinks of a particular use of government, costs are a partial function of rights. Costs are a partial function of the operation of factors and forces governing whose interests are to count as costs to others. Costs are a partial function of power. NOTES 1 James M.Buchanan’s ‘choice-related notion of cost’ (1969:34) is primarily, if not only, from within the context of the individual’s opportunity set. It neglects the forces and factors governing the size and composition thereof and the aggregate structure of opportunity sets (see also Noller 1972:113–15). 2 Coase’s own analysis, especially as more recently presented, is much more sophisticated than the dominant zero transaction cost interpretation of the so-called Coase theorem; see Coase (1994) and Samuels and Medema (1997). 3 The text partially paraphrases Henderson and Quandt (1958:223). 4 ‘Market prices, therefore, depend upon the amounts of each good in existence, the preference patterns of individuals, and the distribution of wealth’ (Alchian and Allen 1967:179). 5 Methodological individualism means that meaningful socioeconomic or socialscience knowledge is best or more appropriately derived through the study of individuals as individuals. Methodological collectivism means that meaningful social-science knowledge is best or more appropriately derived through the study of group organization, forces, processes, and/or problems. 6 The analysis in this section is based upon Samuels (1972a). 7 An interest may be defined as something in which an individual or group has a recognized or unrecognized advantage, something which is important or

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8

9 10

11

12

consequential to the individual or group, something in which they participate, whether as an initiator or recipient of action. The something in question may be subjective. Prices are only ‘incidental manifestations of these activities, symptoms of an economic equilibrium between the economies of individuals’ (Menger 1950: 19). Although the thought may be discomforting, the economy is a grand game of change in regard to cost registration and counting. See the articles by Johnstone and Payne in Wunderlich and Gibson cited in Samuels (1972a: 187–95, 196–201) and American Enterprise Institute (1972:8). Proprietors of the Charles River Bridge v. Proprietors of the Warren Bridge, 11 Peters 420 (1837), on which see Kutler (1971). Consider the schmoo of comics fame. It represented generalized non-scarcity, instantaneous transformation and reproduction without input cost of any kind, and without any organizational or managerial function. If appropriation of schmoos is introduced, it would mean the creation of a legally based interest scarcity and costs generated thereby. Notice that in the absence of appropriation no ‘Austrian case’—inelastic supply—holds; and that, with appropriation, the scheme of property-right assignments will govern relative costs through structuring opportunity sets. That is to say, limitations on supply, whether produced by nature or by legislation or by subsequent acts of ownership, will yield the ‘Austrian case’ and values (say, proportional to marginal utilities in equilibrium) specific to the power structure involved. A number of what may be called opportunity-set reversals or transformations exist and are indicative of the transitory and dependent status of opportunity sets and the highly relative or contingent nature of ‘costs’. (1) An output may be a cost factor, although costs are usually thought of as inputs; for example, waste products. (2) A cost factor may become a revenue factor for some decision-making economic unit, for example, waste products, involving a radical switch in the unit’s opportunity set, and depending in part upon the technology of recovery and markets for the particular resource. (3) A cost to one economic unit is a revenue to another, for example, the dual nature of factor prices; so that what is a cost to a unit may become a revenue should it shift its position in the relevant market. (4) A perquisite of office may be considered either a cost (input) or a utility output, depending upon whose opportunity set is considered: the beautiful secretary or commodious and well appointed office, etc., may be part of the price of the executive necessary for profitable production and a cost of production for the firm, and/or it may be an output of the firm if the maximizing principle is no longer (or not solely) the economic welfare of the stockholders but the net lifetime welfare of the managers. (5) Finally, as an example of a different genre, a damaged interest may or may not be effectively registered, depending (at least in part) upon whether the courts (or legislation) hold it to be a major or minute tort. Costs are, then, a partial function of power (rights) and of the interplay of opportunity sets—itself a partial function of power (rights)—as well as technology, resources, and performance. For the views of Frank H.Knight, A.B.Wolfe, and Clarence E.Ayres on the institutional content of market forces see the discussion in Samuels (1972b: 253). For the views of Friedrich Wieser—for example, that ‘price does not take its standard from the marginal utility as such, but from a stratified marginal utility’, and that ‘price is also an outgrowth of power’—see the discussion in ibid.: 265.

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13 A change in social structure, as Mishan (1967) has pointed out, may produce a change in the social opportunity set and therefore a change in the set of possible Pareto-optimal solutions. Pro tanto, therefore, the range of optimal solutions is a function of the legal rights structure. ‘Someone will still be exposed to costs of interdependence (after internationalization of externalities) (and scarcity), and theory suggests nothing as to who this someone should be.… Design of social institutions is not just to ensure that competition over whether agriculture or fishermen get to use resources is reflective of relative demand schedules, but also what affects these demand curves. Before people instruct public representatives on institutional choice, economists must trace out how distribution affects demand and productivity’—and supply and costs (Schmid 1971:863). 14 See the paper by Jean Marchal and the related discussion in Hague (1961:278 n., 397 n.).

REFERENCES Alchian, A.A., and Allen, W.R. (1967) University Economics, 2nd edn, Belmont: Wadsworth. American Enterprise Institute (1972) Proposals to Reduce Home Buyers’ Settlement Costs, Washington, DC. Baumol, W.J. (1972) ‘On Taxation and the Control of Externalities’, American Economic Review, 62 (3): 307–22. Buchanan, J.M. (1969) Cost and Choice, Chicago: Markham. Calabresi, G. (1985) Ideals, Beliefs, Attitudes and the Law, Syracuse, NY: Syracuse University Press. Coase, R.H. (1960) ‘The Problem of Social Cost’, Journal of Law and Economics, 3:1–44. —— (1994) ‘The Institutional Structure of Production’, in R.H.Coase, Essays on Economics and Economists, Chicago: University of Chicago Press, 3–14. Demsetz, H. (1967) ‘Toward a Theory of Property Rights’, American Economic Review, Papers and Proceedings, 57 (2): 347–59. —— (1972) ‘When Does the Rule of Liability Matter?’, Journal of Legal Studies, 1 (1): 13–28. Hague, D.C. (ed.) (1961) The Theory of Capital, New York: St Martin’s Press. Henderson, J.M., and Quandt, R.E. (1958) Microeconomic Theory, New York: McGrawHill. Kutler, S.I. (1971) Privilege and Creative Destruction, Philadelphia: Lippincott. Marchal, J. (1961) ‘Categories of Capitalists in the Theory of Distribution of the National Income’, in D.C.Hague (ed.) The Theory of Capital, New York: St Martin’s Press, 269–85. Marshall, A. (1920) Principles of Economics, 8th edn, New York: Macmillan. Meade, J.E. (1965) Efficiency, Equality and the Ownership of Property, Cambridge, MA: Harvard University Press. Menger, C. (1950) Principles of Economics, Glencoe, IL: Free Press. Mishan, E.J. (1967) ‘Pareto-optimality and the Law’, Oxford Economic Papers, 19 (3): 255–87.

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Myrdal, G. (1958) ‘The Role of the Price Mechanism in Planning for Economic Development of Underdeveloped Countries’, in Festschrift til Frederick Zeuthen, Copenhagen: Nationalokonomisk Forening. Noller, C. (1972) ‘Jevons on Cost’, Southern Economic Journal, 39 (1): 113–15. Robbins, L. (1970) The Evolution of Modern Economic Theory, Chicago: Aldine. Samuels, W.J. (1971) ‘Interrelations between Legal and Economic Processes’, Journal of Law and Economics, 14 (2): 435–50. —— (1972a) ‘Welfare Economics, Power, and Property’, in G.Wunderlich and W.L.Gibson, Jr (eds) Perspectives of Property, University Park: Institute for Research on Land and Water Resources, Pennsylvania State University, 61–127. —— (1972b) ‘The Scope of Economics Historically Considered’, Land Economics, 48 (3): 248–68. —— (1974) ‘The Coase Theorem and the Study of Law and Economics’, Natural Resources Journal, 14 (3): 1–33. —— (1980) ‘Survival and Pareto Optimality in Public Utility Rate Making’, Journal of Post-Keynesian Economics, 2 (4): 528–40. —— (1989) ‘The Legal-Economic Nexus’, George Washington Law Review, 57 (6): 1556–78. Samuels, W.J., and Medema, S.G. (1997) ‘Ronald Coase and Coasean Economics: Some Questions, Conjectures and Implications’, in W.J.Samuels, S.G.Medema, and A.A.Schmid, The Economy as a Process of Valuation, Brookfield, VT: Edward Elgar. Schmid, A.A. (1967) ‘Nonmarket Values and Efficiency of Public Investments in Water Resources’, American Economic Review, Papers and Proceedings, 57 (2): 158–68. —— (1971) ‘Approaches to Solutions: Discussion’, American Journal of Agricultural Economics, 53 (5): 863–4. —— (1987) Property, Power and Public Choice, 2nd edn, New York: Praeger.

10 CULTURE AS A GROWTH RESOURCE Shlomo Maital and Shosh Sharabani

Poverty, as we know it in modern urban, economically advanced nations, is more than a condition. The condition itself is the product of a complex and interrelated series of social processes that are an integral part of the modern economy, its political processes, and its social norms. (Fusfeld 1995) In this chapter, we provide a critical survey of the literature on economic growth with a focus on the issue of ‘convergence’: why do countries with lower GDP per capita grow faster than, and hence converge toward, countries with higher GDP per capital We also provide empirical results exploring the link between quantitative measures of ‘culture’ and economic growth. We will argue that ‘culture’ mediates the link between technological change and physical and human capital, and economic growth, albeit in rather complex ways. We hope to illuminate Dan Fusfeld’s perceptive insight that the origins of poverty (and wealth) lie in complex social processes. The process we focus on is the degree to which society is collective in nature, emphasizing group well-being. We posit a negative link between growth and individualism, defined as a system that places the well-being of the individual above that of the community. The structure of the chapter is as follows. The first section surveys the literature on endogenous growth theory. Next, we construct a rudimentary model in which ‘country-specific’ variables such as culture are linked to growth. The third section outlines research aimed at measuring dimensions of culture across nations. The last section explores empirically the links between cultural dimensions and growth.

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ECONOMIC GROWTH AND ‘CONVERGENCE’ The ‘endogenous growth’ literature Modern neoclassical growth theory originated with Solow’s seminal (1956) paper, leading to other important papers (Swan 1956; Cass 1965; Uzawa 1965). One of the main contributions of this literature was its crucial distinction between ‘growth effects’—changes in parameters that alter growth rates along balanced paths—and ‘level effects’—changes that raise or lower entire balanced growth paths without affecting their slope. In Solow’s model the production function exhibits constant returns to scale in capital and in labor jointly, but assumes diminishing returns to capital. As a result, the only possible steady-state growth rate is zero. In order to explain longrun growth, neoclassical theorists assumed that the economy becomes more productive (exogenously) over time. Hence, their main conclusion is that, along a balanced path, the rate of growth of income per capita, capital per capita, and investment per capita are proportional to the exogenously given rate of technical change. The rate of time preference and the degree of risk aversion have no bearing on this outcome. Low time preference and low risk aversion induce a high savings rate which is associated, in turn, with high output levels on the balanced path; however, the economy does not grow faster. Time preference and risk aversion are ‘level effects’ but not ‘growth effects’. The main criticism of the neoclassical models is that, in the absence of differences in pure technology and preferences, such models predict a strong tendency toward income equality within countries and equality in growth rates across countries. These two empirical predictions arise from the same mechanism: diminishing returns to capital, which lower the return wealthy individuals (or countries) receive, compared with that earned by low-capital individuals (countries). Empirically, we observe increasing degrees of income inequality within countries, and, in particular, do not observe convergence of growth rates across countries; in fact, the opposite is the case. The seeming inconsistency between the convergence hypothesis and crosscountry evidence led to the emergence of an interesting theoretical and empirical line of research named ‘endogenous growth’ in the 1980s. This literature differs from the neoclassical growth theory in its emphasis on endogenous forces as the ‘engine of growth’, as opposed to exogenous forces (e.g. technological change). In other words, in endogenous-growth models, the economic growth is determined by the parameters within the model. In this literature there are several groups of models, each one emphasizing a different force or factor as the key to growth. In the endogenous-innovation models (Grossman and Helpman 1989), R&D is the crucial factor. In the humancapital models (Romer 1986, Lucas 1988), investment in knowledge is critical. These models amplify J.M.Clark’s observation that knowledge is the only

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resource not subject to diminishing returns. Romer (1987) and others focus on ‘knowledge spillovers’. The simplest endogenous growth model is Rebelo’s linear model (1990). Rebelo assumed that the production function is linear in the only input, capital, broadly defined so as to include physical and also human capital. Hence, the production function is characterized by constant returns to scale and constant returns to capital. So here the key to endogenous growth is non-diminishing returns to inputs that can be accumulated. In this framework, all variables in steady state grow at the same constant rate. This model does not predict convergence: if countries have the same parameters (preferences and technology) but they differ in their initial stock of capital, then they all grow at the same constant rate; the poor countries will always be poorer. If countries also differ in their productivity parameters, then low-growth countries will remain low-growth for ever, independently of their initial income. This conclusion contradicts the convergence hypothesis of neoclassical models. Empirical research According to Maddison’s (1987) data, the OECD countries exhibit sustained growth rates in real GDP per capita since 1870. Maddison’s data show that for sixteen OECD countries the level of GDP per capita (measured in 1970 US prices) has grown by a factor of 8, during the period 1870–1979, or an approximate 2 percent average annual growth rate. In cross-section and time-series data, national and regional growth rates are correlated with a variety of economic, social and political variables. For example, Barro (1991) shows that for ninety-eight countries in the 1960–85 period, real per capita GDP growth rate is positively related to initial human capital (proxied by 1960 school enrollment rates). Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. According to Barro, measures of political instability (proxied by figures on revolutions, coups, and political assassinations) are inversely related to growth and investment. According to the convergence hypothesis, poor countries tend to grow faster than rich countries; thus there is a force that promotes convergence in levels of per capita income across countries. Baumol (1986) found that poorer countries such as Japan closed the gap with the rich countries like the United States in the years 1870 to 1979. He also discovered a significant negative correlation between growth rates and levels of GDP per capita for the 1870–1985 period among the rich countries. According to Baumol, there is a strong tendency to convergence. Baumol’s data, however, suffer from sample-selection bias. He used Maddison’s data set, which included only those economies that had successfully industrialized by the end of the sample period. DeLong (1988) repeated the same ‘convergence test’ by taking a sample of countries that were rich in 1870. This time no tendency to convergence was revealed.

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Other economists have also shown that the convergence hypothesis is inconsistent with cross-country evidence. Barro (1991) used the Summers and Heston data (1988) to show that the average growth rate of per capita GDP from 1960 to 1985 is not related significantly to the 1960 value of real per capita GDP. Quah (1991) argued that previous tests for the convergence hypothesis were flawed, since analysis was motivated by incomes converging deterministically. He developed a new econometric test, applied it to Summers and Heston’s data, and found that income disparities have stochastic components that persist. In other words, income levels display no tendency to converge but income growth rates do. Another way to look at the cross-section, time-series data of Summers and Heston is by focusing on the connection between growth rates and countries’ levels of real GDP per capita. Sharabani (1991) created groups of levels of real GDP per capita (i.e. $5,000–$5,500, $5,500–$6,000, etc.), each containing a set of countries in different years (between 1960 and 1985). Then, for each group, the expected annual growth rate, E(GR), and standard error, SD(GR), were calculated, conditioned on the real GDP per capita. The results showed that E(GR) is very low for the less developed countries, low for the very rich countries, but high for the middle-range groups. Figure 10.1, based on data in Sharabani (1991), shows the hump-shaped graph which indicates that the conditioned E(GR) tends to rise with the level of GDP per capita, up to about $5,000. Beyond that point, E(GR) tends to fall. These results show that poorer countries (such as Ethiopia and Kenya in the lowest group) do not show signs of ‘catching up’; there is no convergence tendency for these groups. However, for the middle group of countries, there is a possibility that a convergence tendency does exist. Since Summers and Heston’s data end in 1988, they do not take into account the rapid growth of Asian nations like China, Taiwan, Indonesia, Malaysia, Hong Kong and Singapore, which would, if considered, further strengthen the empirical case for ‘convergence’. An inverted parabola fits the data well, with the level of real GDP per capita explaining over half the variance in growth rates in Summers and Heston’s sample. Barro (1991) has provided theory and evidence on convergence. Given the level of initial per capita GDP, the growth rate is substantially positively related to the starting amount of human capital. Thus, poor countries tend to catch up with rich countries if they have high human capital per person in relation to their level of per capita GDP, but not otherwise. Barro’s results indicate that the specific nature of individual countries needs to be taken into account, if we are to fully understand the convergence process. In the next section, we offer a simple model in which country-specific variables may play a role in growth. The particular country-specific variables we will employ are aspects of human capital related to cultural values.

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Figure 10.1 Annual average growth rate, GDP 1950–85, versus per capita GDP 1960, for a cross-section of countries

A RUDIMENTARY MODEL OF GROWTH WITH COUNTRY-SPECIFIC VARIABLES Since cross-country regressions point to the special role that human capital plays in the growth process (Barro 1991; Romer 1989), a subset of endogenous growth models has emerged that deal with human capital accumulation as the ‘engine of growth’. However, human capital has been interpreted in different ways. Humancapital accumulation, as described by Lucas (1988:19), is: a social activity, involving groups of people in a way that has no counterpart in the accumulation of physical capital. Human capital has been used to account for a large number of phenomena involving the way people allocate their time, the way individuals’ earnings evolve over their lifetimes, maintenance and dissolution of relationships within families, firms and other organizations, and so on. Lucas introduces human capital by assuming that individuals will choose how much time they invest in their studies, and hence accumulate knowledge. The overall production function exhibits constant returns to scale, and the ‘production of knowledge technology’ has non-diminishing returns; the economy can exhibit a sustained positive growth rate. In other words, in order to generate continuous growth it is necessary to assume that the incentive to invest in human capital is non-decreasing. More formally, in Lucas’s model: let u be the fraction of non-leisure time individuals spend working (producing), h a measure of the average quality of

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workers and L the number of workers. Now uhL is the total effective labor used to produce Y (called human capital). The production function is given by: (10.1) This function can be used to show the feasibility of generating endogenous sustained growth in the economy through human-capital accumulation. Supporting this theory is evidence showing consistently high social rates of return on investment in education.1 Lucas (1988) emphasizes the external effects of human capital, viz, influences people have on the productivity of others. The scope of such effects depends on the ways various groups of people interact, which may be affected by political boundaries or cultures. Each country produces goods to which its human capital endowment is suited. Given a learning technology, countries accumulate skills by doing what they are already good at doing, intensifying whatever comparative advantage they begin with. Lucas’s conclusions are: (1) economies that are initially poor will remain relatively poor, although their long-run rate of income growth will be the same as that of initially wealthier economies; (2) economies will exhibit uniform rates of growth and will maintain a stable distribution of income and wealth over time. Mankiw et al. (1992) also argue that this evidence of the international disparity in levels of per capita income and rates of growth is consistent with a model that includes human capital as an accumulatable factor. They explain the observable evidence through a Solow-like model allowing for cross-country differences in savings rates that may reflect differences in tastes or culture.2 This model is a useful foundation for our later empirical work on cultural variables. Formally, the path of per capita income is given by: (10.2) where yi(t) is per capita income in country i at time t, ai, the exponent of capital in the production function (and also capital’s share of income), si the country saving rate, ni the population growth rate, gi labor-augmenting technological progress, and di capital depreciation. Ai is a multiplicative factor on the production function which is given by Ai=a +e, where a is constant and e is a country-specific component reflecting idiosyncratic national characteristics such as natural-resource endowments or climate. Equation 10.2 states that a country will have a higher per capita income at a point in time the higher its savings rate, the more productive its workers initially, and the faster its technological progress. However, this model is based on a critical, implausible assumption that all countries have experienced the same rate of technological progress. This contradicts empirical evidence; less developed countries have different rates of technological acquisition than the OECD countries, for example. Moreover, Wolff (1992) provides evidence of different rates of total factor productivity growth in just the OECD countries alone over the last twenty years.

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In the next section, we make the empirical case that the country-specific component e is an important factor in endogenous growth, and is related to empirically measurable dimensions of culture. We identify specific components or dimensions of culture that support high growth. THE DIMENSIONS OF CULTURE AND THEIR EFFECT ON GROWTH In contrast to Dan Fusfeld, neoclassical economists have consistently disputed the importance of culture in explaining economic growth. This is true, in particular, of the University of Chicago free-enterprise advocates. Nobel Laureate Merton Miller (1995:1) expressed their view recently: Translation may indeed be necessary for cultural achievements in literature, in the arts or in films. But not in economics. No uniquely Japanese (or American) economics exists, any more than a Japanese physics or a Japanese chemistry. The fundamental laws of economics apply everywhere… To properly test culture as a growth-mediating variable, we must first define it in an operational manner, and then test empirically for links between cultural dimensions and growth. Accompanying the conventional literature on economic growth and development was a small literature linking behavioral variables with development (Maital 1982; Maital and Maital 1985; Hofstede 1980, 1991; Hampden-Turner and Trompenaars 1993). These studies suggested that countries grow rapidly not solely because they save and invest in physical and human capital, but also because of what the late Arthur Lewis called ‘national energy’— aspects of national personality and culture that create conditions conducive to economic growth. Maital (1982:54) stressed the importance of ‘willingness to defer gratification’, a psychological variable related to what economists call ‘time preference’ (subjective interest rates, a measure of the importance of the future compared with the present). Hofstede’s world-embracing study of IBM middle managers in forty countries revealed four empirical dimensions of culture, through factor analysis of questionnaire data: power distance, masculinity, individualism, and uncertainty avoidance. The definitions for these variables are as follows. First, the major themes of individualism are: distinctness and separateness from the group; less concern and emotional attachment to in-groups, and emphasis on personal goals. Collectivism stresses subordination of personal goals to group goals, and concern for the integrity of the group. Workers in individualistic cultures act according to their self-interest; in collectivist cultures, according to the interest of their group. Second, power distance reflects the degree of inequality in society. High levels of power distance imply hierarchical organizations, fear of expressing opinions openly, and the expectation by subordinates that they will be told what to do.

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Third, masculinity pertains to societies in which gender roles are clearly distinct. Men are supposed to be assertive, tough, and focused on material success; females are expected to be modest, tender, and concerned with the quality of life. Fourth, uncertainty avoidance reflects the degree to which members of a culture feel threatened by uncertain or unknown situations.3 Hoffstede provides empirical measures for each of these variables. Hampden-Turner and Trompenaars (1993:8) stress the importance of team behavior and cooperation in wealth creation, i.e. collectivist values. They argue: it is an underlying condition of the success of an enterprise that the individual’s initiative, drive and energy be harnessed to the purposes of the organization…[and] depends in part on how well the individualism of employees, shareholders and customers is reconciled with the communitarianism of the larger system. These disparate approaches are all united by a single theme. Underlying both exogenous and endogenous growth models—which focus on physical and human capital formation—are even more basic behavioral variables that determine when, how, how much and why countries set aside resources for the future (i.e. for growth), and how well parts of society work together to achieve common goals (growth). These variables are related to what may be broadly termed ‘culture’—the basic values of a country. Apart from a very brief passage in Hofstede (1980) in which he relates his four cultural dimensions to GDP per capita—note: not to growth in GDP per capita —very little empirical research has been done linking quantitative measures of culture with indicators of economic growth. In what follows, we use both Hoffstede’s four quantitative measures of cultural dimensions, and sixteen somewhat different dimensions measured by Hampden-Turner and Trompenaars (1993) to empirically test the link between culture and growth. We found the latter’s data especially useful. Hampden-Turner and Trompenaars note: We have identified seven fundamental valuing processes without which wealth-creating organizations could not exist: 1. Making rules and discovering exceptions. 2. Constructing and deconstructing. 3. Managing communities of individuals. 4. Internalizing the outside world. 5. Synchronizing fast processes. 6. Choosing among achievers. 7. Sponsoring equal opportunities to excel (i.e. the degree to which cultures stress creating equal opportunities for all). (ibid.: 6–9) They study these seven values, by presenting subjects with moral dilemmas. Polarized choices reveal the individual’s values: ‘The methodology of our research involves posing to managers of different countries dilemmas which

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oblige them to take sides.’ Here, for instance, is dilemma 3, which measures an aspect of culture related to individualism: emphasis on individual well-being versus group well-being. Suppose you, as a manager, are in the process of hiring a new employee to work in your department. Which of the two following considerations are more important to you? (a) The new employee must fit into the group or team in which he/she is to work. (b) The new employee must have the skills, the knowledge, and a success record in a previous job. The authors report that responses to their dilemmas ‘explained and predicted how managers from different countries would react to conflict, why they excelled at certain jobs rather than others, and the managerial philosophies and concepts they favored’ (ibid.: 13–14). We propose to use sixteen of these ‘value dilemmas’ for ten or eleven countries (all of those for which data are given in Hampden-Turner and Trompenaars) in order to better understand the values prevailing in each of those countries, and to relate those values to economic growth. There are five broad classes of value dilemmas: universalism, individualism, functionality, internal versus external control, and egalitarianism. The specific hypothesis we seek to test is one stressed by Hampden-Turner and Trompenaars: that wealth is created not by unbridled individual competition (firms, workers, managers), but rather by cooperation; the ability of firms to cooperate with customers by supplying them with precisely the products they want and need, and the ability of workers within firms to cooperate with one another to achieve common goals. To the extent this is true, then societies where collective values predominate will do better in long-run growth than societies where individualistic values dominate. CULTURAL DIMENSIONS AND GROWTH Methodology We propose a simple methodology, dictated in part by our small sample, a dozen or fewer countries that preclude adequate statistical hypothesistesting. For each of the sixteen cultural dimensions measured in Hampden-Turner and Trompenaars, we split countries into two groups: those that score ‘high’ on the dimension, and those that score ‘low’, where the mean score is the dividing line. We also divide the countries in our sample into ‘high growth’ and ‘low growth’, again according to the mean rate of economic growth for the 1960–85 period. For each of the

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sixteen cultural dimensions, a 2×2 table is constructed, with ‘growth’ and ‘culture’ as row and column variables, respectively. We hypothesize that most countries will fall in the opposite diagonal—with high growth associated with low individualism, and low growth associated with high individualism. Empirical results We began by exploring the links between Hofstede’s (1980) four cultural dimensions and economic performance for forty countries. Only one of the dimensions, individualism, was significantly correlated with GNP per capita (1985) and the correlation was positive.4 This seems to refute our basic hypothesis stated above. It indicates that greater individualism fosters higher GNP. Specifically, the United States is one of the world’s largest and wealthiest countries. It is also the world’s most individualistic country, according to Hoffstede. American capitalist ideology stresses personal freedom, privacy, and the key role individuals play in creating wealth. It does this to an extreme degree, absent from virtually any other country.5 However, when each of Hoffstede’s four cultural dimensions are correlated with economic growth no significant relationship is found for any of the cultural dimensions. This suggests that, if individualism drove economic growth in the past, it may not be doing so in the present—or Hoffstede’s method of measuring individualism may be flawed. It also suggests that many countries that are copying the American free-market capitalist system (like Russia), including its individualistic elements, may be embracing cultural elements that in fact are not growth-inducing. Countries cannot easily alter their culture. But they may adopt the institutions of another country that sprang from that country’s own culture. To the extent that the individualistic free-market institutions of America are partly inconsistent with Russia’s collectivist values, Russia may be adopting growth-impairing institutions rather than growth-enhancing ones—an error China seems to have avoided so far. To explore this issue further, we decided to examine the relation between growth and culture, using Hampsted-Turner and Trompenaar’s cultural dilemmas. Seven of the sixteen dilemmas we examined measure different aspects of individualism versus collectivism: Nos. 3, 6, 8, 10, 12, 15, 16.6 Their sample included ten to twelve countries. We added Israel to the sample by presenting the choice dilemmas to a sample of Israeli managers. However, with only around a dozen countries in the sample, formal statistical analysis was difficult. We therefore chose to construct 2×2 tables, dividing the countries into those which had experienced low growth or high growth during the period 1960–85 and those which scored above average in the dilemma choice or below average.7 By sorting countries into four different cells, we could identify general relationships and directions between cultural values and growth. In each case, ‘low’ indicates the percentage of respondents who chose alternative (a) in the choice dilemma. Results for the sixteen dilemmas are summarized in Table 10.1.

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Table 10.1 Average number of countries in each of four cells, for the seven individual versus collective dilemmas

For the seven dilemmas that measure individualism versus collectivism, a pronounced tendency exists for countries to sort themselves along the reverse diagonal—that is, highly individualistic countries grow more slowly than average. The United States, Canada, the United Kingdom, and the Netherlands are individualistic but grow below average. Belgium, Israel, Italy, Germany, Japan, and Singapore are collectivist and grow faster than average. Had other Asian Tiger countries been added, this tendency would have been even more pronounced. We freely admit that collectivism and individualism are not perfectly orthogonal. As Hampden-Turner and Trompenaars note: ‘We have plenty of evidence that those who put individualism first also care about groups and organizations, and those who put collectivism first also care about its individual members’ (1993:13). Like all cultural values, collectivism is a matter of degree and priority. Sweden, a low-growth country, is the glaring exception to our ‘collectivism is a growth resource’ theory. But it may be the exception that strengthens the rule. Sweden’s collectivism and the resulting welfare state became intolerable burdens on Sweden’s resources and destroyed incentives to efficiency, productivity, innovation, and hard work. In recent years, Sweden’s economy has performed vastly better, partly because those collectivist excesses were moderated, without entirely embracing the individualist ethic. Universalism—the overriding importance of a principle over a particular relationship or context—also seems to be related to economic growth. ‘The cultural drive to universalize has many good effects on a nation’s capacity to create wealth,’ hypothesize Hampden-Turner and Trompenaars (ibid.: 22). This result is supported by our 2×2 tables. Dilemmas 1, 2, 9, and 11 that measure universalism all show to a greater or lesser degree that countries with high scores on particularism (emphasizing the individual, unique, exceptional and mysterious aspects of the world) tend to score low on economic growth. Hence, both dimensions of culture that relate to the value placed on individuals and individual freedom appear to be negatively correlated with economic growth. The complete set of 2×2 tables for the sixteen value dilemmas are shown in Appendix 10.1.

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CONCLUSION Inductive analysis of economic growth tends to support a ‘different strokes for different folks’ perspective on economic growth. Consider, for example, Hong Kong and Singapore. It is hard to find two countries more dissimilar. Hong Kong is entrepreneurial, individualistic, with little government intervention, and with a culture that fosters individual initiative and wealth creation. Singapore is regulated, collectivist, with a high rate of compulsory saving and a high degree of planning. The two countries each have high sustained growth rates and reasonably high levels of GDP per capita (Maital 1993). Yet, to the extent that generalizations are possible, our evidence does suggest that cultural values supporting collective effort, universalism and cooperation are more consistent with sustained high economic growth than individualistic values. We suggest that culture may be a mediating variable that moderates the effect of human and physical capital and technology on economic output and wealth. In global markets, countries—like companies—may compete best by cooperating, and cultures that foster such cooperation will generate greater wealth and growth than those focusing on individual freedoms. Perhaps the United States attained its great wealth in spite of, rather than because of, its extreme individualism. Or, more likely, perhaps the path to wealth in the nineteenth and early twentieth centuries was indeed illuminated by individualistic entrepreneurial values—but changing times now make collectivist values far more functional for high growth. Robert Lucas, 1995 Nobel Laureate in Economics, recently observed: ‘Most economists (certainly including myself) are skeptical of theories that depend on large numbers of people acting in concert in ways that may serve their joint “class” interests but not their interests as individuals’ (1996:22). Our preliminary results suggest that the secret of national energy may be precisely that: people working together in harmony to attain collective growth goals. Over the long run, when group well-being is given top priority, individual interests may be best served as well. APPENDIX 10.1 SIXTEEN VALUE DILEMMAS VERSUS ECONOMIC GROWTH In the following 2×2 tables, where unspecified, the rows represent growth and the columns represent the percent choosing option (a) over other options.

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1 Universalism

While you are talking and sharing a bottle of beer with a friend who is officially on duty as a safety controller in the company you both work for, an accident occurs, injuring a shift worker. An investigation is launched by the national safety commission and you are asked for your evidence. There are no other witnesses. What right does your friend have to expect you to protect him? (a) A definite right. (b) Some right. (c) No right. 2 Universalism

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You run a department of a division of a large company. One of your subordinates, whom you know has trouble at home, is frequently coming in to work significantly late. What right does this colleague have to be protected by you from others in the department? (a) A definite right. (b) Some right. (c) No right.

3 Individualism

Suppose you, as a manager, are in the process of hiring a new employee to work in your department. Which of the two following considerations is more important to you? (a) The new employee must fit into the group or team in which he/she is to work. (b) The new employee must have the skills, knowledge, and a success record in a previous job.

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4 Functionality

Choose (a) or (b). (a) The only real goal of a company is making profit. (b) A company, besides making profit, has a goal of attaining the well-being of various stakeholders, such as employees, customers, etc. 5 Functionality

Choose (a) or (b). (a) A company is a system designed to perform functions and tasks in an efficient way. People are hired to fulfill these functions with the help of machines and other equipment. They are paid for the tasks they perform. (b) A company is a group of people working together. The people have social relations

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with other people and with the organization. The functioning is dependent on these relations. 6 Individualism

If I apply for a job in a company: (a) I will most certainly work there for the rest of my life. (b) I am almost sure that the relationship will have a limited duration. 7 Internal versus external control

Choose (a) or (b). (a) Most people don’t realize the extent to which their lives are controlled by accidental happenings. (b) There is really no such thing as ‘luck’.

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8 Individualism

Choose (a) or (b). (a) ‘If you allow businesses to cooperate with each other, they will usually collude against consumers and the larger society by agreeing together to raise prices and/or restrain trade’. (b) ‘If you allow businesses to cooperate with each other, they will usually pass on to their customers any enhanced effectiveness and economies of operations in the form of expanded trade.’ 9 Universalism

Some people think that a boss is usually characterized by the fact that he can do the job more skillfully than others. Some people think that having power is what characterizes a boss. Which do you think is better? (a) Skill. (b) Power.

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10 Individualism

A man had a fire in his shop and lost most of his merchandise. His store was also partly destroyed by fire. He and his family had to have some help from someone to rebuild the shop as fast as possible. There are different ways of getting help. (a) It would be best if he depended mostly on his brothers and sisters or other relatives to help him. (b) It would be best to borrow some money on his own in order to get some construction people to rebuild his store. 11 Universalism

You have just come from a secret meeting of the board of directors of a certain company. You have a close friend who will be ruined unless he can get out of the market before the board’s decision becomes known. You happen to be having dinner at your friend’s house that evening. What right does your friend have to expect you to tip him off? (a) No right at all. (b) Every right in the world.

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12 Individualism

There are two ways in which people can work; which do you think is usually better? (a) To work as an individual on one’s own. In this case a person is pretty well his/her own boss, deciding things personally as he/she gets along in the business. Such a person can look out for himself/herself and does not expect others to look out for him/her. (b) To work in a group in which all work together. Everyone has something to say about the decisions that are made and everyone can count on everyone else. 13 Egalitarianism

Choose (a) or (b) .(a) The work of a department can best be performed if the individual members and the company agree on objectives and it is left to the individuals to decide how to attain those goals (consensus). (b) The work of a department can best be performed if the manager sets the objectives and also directs the members of the department in completing the various necessary tasks (direction).

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14 Functionality

Here are four general types of people. Which one would you most like to resemble? (a) One who is esteemed by others and who takes a continuous interest in human welfare in general. (b) One who is enjoyed by others and takes his joys and sorrows as they come, from day to day. (c) One who is loved by others, and takes a continuous interest in the personal welfare of all those who are dear to him (d) One who is approved by others and attends to his affairs conscientiously from day to day. 15 Individualism

Choose (a) or (b). (a) It is better that all people meet and discuss things until almost everyone agrees. (b) It is better that all people meet, and take a vote, and then have a decision made on the basis of the majority.

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16 Individualism

Two people were discussing contrasting ways to improve the quality of life. Choose (a) or (b). (a) One said: ‘It is obvious that if one has as much freedom as possible and the maximum possibility to develop oneself, the quality of one’s life will improve as a result’ (As much freedom as possible.) (b) Another said: ‘If the individual is continually taking care of his fellow men, then the quality of life for all of us will improve, even if it obstructs individual freedom and individual development.’ (Take care of fellow humans.) NOTES 1 A recent study shows that returns to human-capital investment in various countries are, in many cases, probably higher than average rates of return on physical capital (World Bank, cited in The Economist, 26 March 1994:87). 2 Mankiw has recently (1995) argued strongly that Solow’s neoclassical model can explain all we need to know about growth processes, provided capital (including human capital) is properly defined and measured. 3 These definitions are cited in Erez (1993). 4 GDP85=1.28+0.10365 INDIVID, R2 (adj)=0.50, the t-value for the slope coefficient is 6.2, p<0.000, and N=40. 5 Because of America’s powerful global influence on technology, trade and culture, the United States is often presented as the world benchmark, rather than as a very large ‘outlier’. 6 The values and the number of the dilemmas that measure them are: Universalism, 1, 2, 9, 11; Individualism, 3, 6, 8, 10, 12, 15, 16; Functionality, 4, 5, 14; Internal versus External Control, 7; Egalitarianism, 13. See Appendix 10.1 for the value dilemmas themselves.

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7 Average is defined as the mean of the average annual growth rate of GDP during the 1960–85 period, for the twelve countries in our sample.

REFERENCES Barro, R. (1991) ‘Economic growth in a cross-section of countries’, Quarterly Journal of Economics, 106 (9): 407–44. Baumol, W. (1986) ‘Productivity growth, convergence and welfare: what the long-run data show’, American Economic Review, 76 (5): 1072–85. Cass, D. (1965) ‘Optimum growth in an aggregative model of capital accumulation’, Review of Economic Studies, 32 (3): 233–40. DeLong, B.J. (1988) ‘Productivity growth, convergence and welfare: comment’, American Economic Review, 78 (5): 1138–54. Economist (1994), 26 March: 87. Erez, M. (1993) ‘Toward a Model of Cross Cultural I/O Psychology’, in M.D. Dunnette and L.Hough (eds) Handbook of Industrial and Organizational Psychology, vol. 4, Palo Alto, CA: Consulting Psychologists Press. Fusfeld, D.R. (1995) ‘Poverty as a Social Process’, paper presented to the annual conference of the Society for Behavioral Economics (SABE), Woodsworth College, University of Toronto, July 1995. Grossman, G. and Helpman, E. (1989) ‘Quality ladders and product cycles’, NBER Working Paper 3201, Cambridge, MA: National Bureau of Economic Research. —— (1994) ‘Endogenous innovation in the theory of growth’, Journal of Economic Perspectives, 8 (1): 23–44. Hampden-Turner, C. and Trompenaars, A. (1993) The Seven Cultures of Capitalism, New York: Doubleday. Hofstede, G. (1980) Culture’s Consequences, Newbury Park, CA: Sage. —— (1991) Culture and Organizations: Software of the Mind, London: McGraw-Hill. Lucas, R. (1988) ‘On the mechanics of economic development’, Journal of Monetary Economics, 22 (1): 3–42. —— (1996) ‘Ricardian Equilibrium: A Neoclassical Exposition’, paper presented at Technion Economics Workshop, June. Maddison, A. (1987) ‘Growth and slowdown in advanced capitalist economies: techniques of quantitative assessment’, Journal of Economic Literature, 25 (2): 649– 98. Maital, S. (1982) Minds, Markets and Money; Psychological Foundations of Economic Behavior, New York: Basic Books. —— (1993) ‘A Tale of Two Cities’, Across the Board, July-August: 50–1. —— (1994) Executive Economics: Ten Essential Tools for Managers New York: Free Press. —— and Maital, S.L. (1985) Economic Games People Play, New York: Basic Books. Mankiw, G. ‘The growth of nations’, Brookings Papers on Economic Activity, September. —— Romer, P. and Weil, D. (1992) ‘A contribution to the empirics of economic growth’, Quarterly Journal of Economics, 107 (2): 407–38. Miller, M.H. (1995) ‘Do the Laws of Economics Apply to Japan?’, address at the Symposium on Translating Culture, Japan, November.

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Quah, D. (1991) ‘International patterns of growth’ I. ‘Persistence in cross-country disparities’, Cambridge: MA: MIT Economics Department, working paper, March. Rebelo, S. (1990) ‘Long run policy analysis and long run growth’, NBER Working Paper 3325, Cambridge, MA: National Bureau of Economic Research. Romer, P. (1986) ‘Increasing returns and long run growth’, Journal of Political Economy, 94 (5): 1002–37. —— (1987) ‘Growth based on increasing returns due to specialization’, American Economic Review, 77 (2): 56–62. —— (1989) ‘Human Capital and Growth: Theory and Evidence’, Working Paper, 3173, Cambridge, MA: National Bureau of Economic Research. —— (1990) ‘Endogenous technological change’, Journal of Political Economy, 98 (5): 71–102. —— (1994) ‘Origins of endogenous growth’, Journal of Economic Perspectives, 8 (1): 3– 22. Sharabani, S. (1991) ‘Optimal Search for Investment Opportunities and Economic Growth’, doctoral dissertation, Haifa, Israel: Technion Institute of Technology. Solow, R. (1956) ‘A contribution to the theory of economic growth’, Quarterly Journal of Economics, 70 (1): 65–94. —— (1970) Growth Theory: An Exposition, London: Oxford University Press. Summers, R. and Heston, A. (1988) ‘A new set of international comparisons of real product and prices: estimates for 130 countries 1950–85’, Review of Income and Wealth, 34 (1): 1–26. Swan, T. (1956) ‘Economic growth and capital accumulation’, Economic Record, 32:334– 61. Uzawa, H. (1965) ‘Optimum technical change in an aggregative model of economic growth’, International Economic Review, 6:18–31. Wolff, E.N. (1992) ‘Productivity Growth and Capital Intensity on the Sector and Industry Level: Specialization among OECD Countries, 1970–88’, paper presented at the Merit conference on ‘Convergence and Divergence in Economic Growth and Technical Change’, Maastricht, Netherlands.

ACKNOWLEDGEMENTS We wish to thank the Technion (Research) Vice-president’s Fund for partial support. We are indebted to Gilad Paz for his highly efficient research assistance. Above all, we express our admiration and affection for Dan Fusfeld, who, in this as in many other topics, blazed the trail.

11 AN EVOLUTIONARY ANALYSIS OF BEHAVIORAL VARIATION Cynthia M.Browning

TIME AND CHANGE Of the three evolutionary processes of variation, competition, and selection, the analysis of the first is the least developed in economic theory. In this chapter I will formulate an evolutionary analysis of behavioral variation. This analysis requires an explanation for such strategic changes in behavior as innovation, technological change, institutional change, and other behavioral variations in which economic agents change not only their activities but also their structure and capacities. Although the examples that I will use will be drawn largely from contemporary capitalism, I intend the framework to be useful in application to behavior in other systems. The approach taken here is evolutionary in that process, time, and change are central to the analysis (Fusfeld 1980; Hodgson and Screpanti 1991; Witt 1991, 1992). The fundamental premise is that the passage of real, historical time is an important aspect of economic activities. Agents and systems are located in a particular historical time and place. All of their activities are processes that occur over time. All activities, whether producing, learning, or deciding, take time. This passage of time is irreversible. A realistic concept of time brings with it a realistic concept of change. Conditions can change over time. Multiple, simultaneous, and continuing changes are possible, from both endogenous and exogenous sources. No part of the agents or their larger systems is held fixed artificially. Institutions, tastes, technology, and resource endowments will be allowed to change through operation over time. The agents must determine behavior under such potentially uncertain conditions. The challenge is to formulate an abstract framework that captures the complexities of such interactive processes while functioning as a useful and tractable analytical tool. This attempt is in part a reaction against the restrictive treatment of time and change in the basic orthodox model of optimization and equilibrium. In this chapter I will first develop a representation of economic agents and systems operating over time. I will then formulate a characterization of what economic systems and behavior consist of and how they can change. Finally, I

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will briefly explore the possible implications of this micro model of strategic change for collective interactions. ECONOMIC ENTITIES: OPERATION In this context I will use the general term ‘economic entity’ to mean an individual or an organized group of individuals engaged in some economic activity. An entity consists of certain internal resources and capacities, certain activities, a certain external environment, and a certain decision-maker or decision-makers. I am using this term as a general and abstract expression that can encompass an individual agent or an organization, and that does not have any system-specific meaning. An example of an individual economic entity would be a person controlling certain capacities: physical and mental labor capacities and skills, financial capacities, machines and tools, raw materials, buildings, land, and so forth. These capacities are allocated and reallocated to various activities over time. A subsistence farmer would control such capacities for agriculture. He would put different fields under various crops, switching his own labor from planting to cultivation to harvest to machine repair across time and changing seasons. At the same time his savings might be invested in livestock, or lent out at interest. The individual farmer provides all the labor involved in activities and is also the decision-maker. An organizational entity would control the skilled labor of many individual entities, along with land, raw materials, machines, buildings, and financial resources. A family farm is an example of an organizational entity. The labor capacities of several individuals would be available so that more simultaneous activities were feasible, and some person or persons among them must be the designated decision-maker. A manufacturing company would be another example of an organizational entity: the labor capacities of its entity employees and its physical and financial capacities would be allocated to the activities involved in producing and selling some product. The managers are the decisionmakers. The general concept of an entity, its components, and its operations is intended to apply to different levels of aggregation and different structures of interaction. Individual entities interact with each other and with organizational entities. The activities of individual entities are organized within organizational entities, and the latter interact with other organizational entities. All of this activity and interaction will likely be occurring within the context of a larger system, for instance a nation-state, which can itself be analyzed as an economic entity. The central concern of this chapter is the determination and variation of an entity’s economic behavior. This behavior is determined as the decision-maker (or decision-makers) allocates internal capacities to activities that involve interaction with external conditions. The decision-maker switches among activities as performance and conditions change. All activities and processes take

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place over time. For instance, during time period 1 the decision-maker allocates internal capacities to certain activities under certain conditions. As time passes these operations will have certain results in terms of performance and certain effects both internally and externally. These changes will then be taken into account as capacities are allocated to activities during time period 2. Clearly there are several possible sources of change that could lead to variation in behavior. As time passes any aspect of the process can be subject to change. Internal capacities could change, external conditions could change, the performance criteria used by the decision-maker could change, or the identity of the decision-maker could change. Chains of interactive feedback changes could occur, e.g. changes in external conditions could alter the results of activities, triggering changes in those activities, which in turn cause changes in external conditions. To return to our examples, the subsistence farmer could deplete his land’s fertility through operations over time, leading to poorer results. Alternatively, as he farms he may accumulate knowledge and expertise that allow him to achieve better results in the same activities. Either of these would be a change in internal capacity occuring as a result of operations over time. Changes in external conditions like weather could lead to favorable or unfavorable results from the same activities. The farmer could switch to new crops or decide to produce for the market. In terms of a manufacturing company there would also be the possibility of changing managers. Regulatory changes would be changes in external conditions. Resources devoted to research and development could lead to innovations that transform operations. The responses of competitors and customers to such innovations could then lead to more changes in behavior. In terms of the determination of behavioral variation in this analysis, the key step in the interactive process of operations is when the decision-maker allocates capacities to activities. At a particular point in time the structure, capacities, and activities of an entity are the historically produced outcomes of past operations. A particular decision-maker or decision-makers will be in control, using particular performance criteria to make allocational decisions. The entity’s current behavior emerges from this allocation. The decision-maker switches among activities as conditions warrant, monitoring processes, performance, and conditions. This actual selection of activities will be represented as the decisionmaker choosing the activity or activities that ‘look best’ at the time. This is, of course, the usual ‘maximize expected performance’ criterion. However, which activities ‘look best’ will be strongly influenced by the historical frame of past activities and accumulated capacities within which the decision-maker evaluates and selects. What ‘looks best’ will depend on who the decision-maker is, what performance criteria are used, what internal decision-making and operational capacities are available, which activities have historically been engaged in by the entity, plus the nature of external conditions (or the subjective interpretation thereof). And, most important, which activities ‘look best’ will

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depend upon which activities are even considered for selection by the decisionmaker. This set of possible activities can be called the strategic set. The determination of behavior is therefore represented here as a two-stage process. At the first stage the historically produced frame of the entity (its past activities and accumulated capacities) focus the attention of the decision-maker upon a restricted set of possible activities. At the second stage the decisionmaker evaluates this strategic set in the light of operating conditions, and selects those activities that appear to promise the highest performance, allocating operational capacities to them. Routine behavioral variation would be when the decision-maker switches among familiar activities in the strategic set as conditions and performance warrant. No new activities are added, and no activities that result in major changes in the structure and capacities of the entity are undertaken. Strategic behavioral variation would be when new activities are added to the strategic set and undertaken, and when activities result in major changes in the entity itself. To analyze this strategic behavioral variation it is necessary to analyze how the historical frame of the entity determines the strategic set and when that set will change. Routine behavioral variation is switching among known activities. The farmer switches from haying one field to cultivating another, then moves through the sequence of actions involved in milking the cows before repairing his tools. As the seasons change the farmer will switch among plowing, planting, cultivating, and harvesting his crops. An individual who works for a company will switch among the activities that make up his job and then switch to private or domestic activities when he returns home. The employees of the manufacturing company will switch among the activities involved in different stages of the production process. They may alter the mix of products produced as market conditions change. These routine variations in behavior occur as the decision-maker monitors, manages, and allocates within a continuing familiar strategic set. Strategic behavioral variation occurs when the decision-maker considers and selects a new activity. Such activity can require or lead to changes in internal capacities or interaction with different external conditions. Strategic variation for the farmer would be buying new land, changing to a new crop, purchasing new equipment or livestock, marrying, or selling out and heading west. For a company employee strategic variation could be returning to school, changing jobs, moving, starting a small business, and so forth. For the company strategic variation could involve developing and producing a new product and constructing the necessary new facilities. It could involve mergers or acquisitions or divestments. Changes in leadership, reorganization in bankruptcy, or entering a new industry would all be strategic changes. In more orthodox terms, routine variation would be when an individual consumer with particular tastes and a certain budget constraint selects among different commodities. A company decides upon a level of production for a particular product, given certain labor, technology, and physical capital. Such decisions are modelled as optimization: selecting the best option from a restricted

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set. In the approach to be developed here the selection decision is also represented as optimization but the set of possible actions is allowed to change endogenously. In other words, strategic behavioral variation will emerge when the entity decides to change aspects of itself that orthodox approaches take as exogenously given. Another distinction is that, although I do intend to represent the selection decision as the maximization of expected performance, I am not using the usual terms of utility or profits because different entities may be using different performance criteria. In this approach performance criteria might be a multidimensional list of various goals and standards that the decision-maker applies in evaluations. The performance criteria are rules or sets of rules that are formed through experiences even as they are used to guide behavior. Changing the performance criteria would be a strategic change. In this framework the determination of behavior is presented as a two-stage process. An implicit strategic decision precedes the explicit selection decision. Although the latter is represented as the maximization of expected results, the former is not. This is due to the implications of the conception of time and change that frames this analysis for the nature of decision-making. Recall that in this context all activities, including the process of decision-making, take time. Internal and external conditions can change over time, so that opportunities can be temporary. The rules that govern all activities function to transmit knowledge across time, organizing interactions the same way repeatedly. Such rules form part of the internal capacities that entities accumulate and create through operation over time. For my purposes I divide these into operational capacities and decision-making capacities. Both would involve mental and physical labor, skills, machinery, and other resources. But decision-making capacities concern gathering and processing information in determining behavior, while operational capacities concern implementing activities. Both kinds of capacities will be seen here as finite and specialized. At any given point in time the entity has a certain amount of capacities under its control. These capacities are specialized because they have been created and formed through use in particular operations. They have become specially adapted for such uses. If decision-making capacities are specialized and finite, then they must be allocated to searching for and evaluating particular kinds of activities before the selection of activities allocates operational capacities. The strategic set based on the inherited frame of the entity performs this prior allocation of attention. This prior decision is not to be modeled here as a maximization decision. It would be contradictory to assume that decision-making capacities are specialized and finite but then represent their allocation as maximization, a decision rule requiring extraordinary capacities. In this framework the strategic stage will tend to focus the entity’s operations upon familiar activities where its specialized decision-making abilities will be most accurate, owing to accumulated information and expertise. However, in fact sometimes new activities are added to the strategic set and then selected. Therefore it is necessary to formulate a representation of how the framework of

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rules and capacities that constitute the entity determines the strategic set, and how the strategic set could be changed. But in order to do this it is necessary to understand what the entity and its rules and capacities are made up of, and this is the topic of the next section. DIMENSIONS AND TRANSFORMATIONS In this context economic entities, their framework of rules and capacities, and the larger systems of which they are a part, will be seen as made up of four dimensions: physical, cultural, social, and temporal. These four dimensions are interwoven to constitute the entity in operation, interacting with its external conditions, which are also composed of the same dimensions. Within this dimensional frame the entity’s behavior is determined. Through operation over time this behavior can transform the entity. The dynamic force of behavior at its most abstract is the application of energy across time, guided by cultural knowledge. Therefore changes in behavior will involve changes in this cultural dimension. The physical dimension contains the ordered patterns of relationships among matter and energy that form the biological, chemical, geological, and climatological context. The internal physical dimension of an entity would be the individual person or people belonging to it, any other living things controlled by it, plus any land, raw materials, fuel, or machinery at its disposal. The external physical dimension would be the other people and living things with which the entity interacts, plus the geographical, geological, and climatological surroundings. Living things are biological systems of rules formed according to DNA, physical matter has molecular rules of composition, and geological and weather systems operate according to rules. The internal and external physical dimension of any entity contains ordered arrangements of matter and energy. The cultural dimension consists of rules that organize relationships of meaning. Language, knowledge, technology, science, religion, and ideology are all cultural systems of meaning. An entity will have an internal cultural dimension of language, skills, experience, knowledge, ideas, religion, and so forth. It will also share and interact with a larger external cultural dimension with other entities within its system. The social dimension consists of systems of rules which organize relationships between entities and resources and capacities and among entities. The social dimension contains orderings of power and control. These orderings are rights, obligations, institutions, laws, contracts, organizations, and policies. An entity has internal social rules that define the boundaries of the entity by determining which resources and capacities it controls. It has a structure that determines who controls decision-making or managerial power and how activities are organized. A particular entity will also be operating within a larger external social structure of rules and institutions, which will organize interactions among entities, determining degrees of competition, cooperation, conflict, and coercion.

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This concept of the three dimensions of socio-economic systems is drawn from works of Karl Polanyi (1977) and Rhoda Halperin (1977a, b) in economic anthropology. I am using these dimensions to describe the composition of an economic entity. The subsistence farmer referred to earlier can be seen in this way. His internal physical dimension contains himself, animals, plant stuffs, land, raw materials, fuel, and machinery under his control. His external physical dimension would include the natural physical environment of weather and geology, plus the physical aspects of his neighbors’ farms or other activities. His internal cultural dimension contains all his knowledge and skill, the technologies of farming and handicrafts that he possesses, along with his religion or philosophy and all the personal customs and habits and preferences that he has developed to guide his choices and behavior. He would share a common cultural context with his neighbors, learning of new ideas and practices from them and communicating his own improvements. The farmer’s social dimension divides his entity from the external environment: it determines the land and other resources and capacities that he owns or rents. If he does not hire anyone to work for him and has no family, the internal social dimension is not developed, since there is no need for an extensive system of organization. Although all of its dimensions will be more complex, the manufacturing company can also be seen as composed of physical, cultural, and social dimensions. Its social rules determine the structure of internal management and control, the use of various resources and capacities, and the assignment of tasks and rewards. The cultural dimension would again contain all the knowledge, skills, expertise, and technology available to the company and its employees. The physical dimension would be the raw materials, machinery, fuel, products, and physical labor capacity of the employees. These three dimensions form interwoven systems of rules that can only be separated analytically. For instance, the performance criteria (preference function or tastes) of an individual decision-maker will have a physical aspect in the need to meet biological requirements of survival: water, food, shelter. But there will also be desires or goals related to cultural meaning and social power; how those basic biological needs are met will be modified by the cultural and social dimension, and desires for physical objects that have nothing to do with biology can arise, owing to their cultural meaning and social status. The decisionmaker’s performance criteria or tastes have interwoven physical, cultural, and social dimensions. Similarly, a tool or a machine has a physical form and structure, plus a composition of matter and stored energy. This physical dimension has interacted with a cultural design of intended use in some activity, so that the physical substance has been reordered. The tool has a social dimension in that it belongs to or is used by certain people. The physical, cultural, and social dimensions (PCS) depict the interwoven relationships of matter, energy, meaning, and power that the economic entity is made up of. The fourth dimension is time. Even in a static description of PCS characteristics an entity has a temporal dimension in that it is located at a

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particular point in time. The entity and all its component rules and capacities at such a point in time are the historical results of previous operations. The entity’s skills, its tastes, its tools, its structure are all developed through operations over time. The PCS dimensions are defined by the fact that they establish rules and relationships that hold across time, creating and re-creating the same patterns of interaction repeatedly. But entity activities can result in changes in the three constituent dimensions. An entity’s operation consists of interwoven PCS orderings that structure relationships of power and control, flows of meaning, and forms of matter and energy, into patterns and interactions through time. An activity involves a physical dimension of resources of matter and energy that are transformed according to cultural systems of meaning in the forms of knowledge and technology, and these processes are organized by a system of social rights and obligations. As operations occur, and entities interact with each other and their larger contexts, the internal and external PCS dimensions can be transformed. The transformation of the entity that is possible through operations can be analyzed using Joseph Weissmahr’s concept of the evolutionary factors of production (Weissmahr 1992). He suggests that knowledge, energy, and time are the fundamental factors of production in economic activity. He excludes physical matter, since it can be recycled and reused, and he does not mention social aspects much at all. For him, knowledge, energy, and time are the basic driving forces without which production cannot occur. I will take this view of human economic activities as knowledge-directed energy across time and combine it with the PCS descriptive framework. Cultural knowledge guides energy into interactions and transformations of physical matter, with the entire process structured by the social dimension. This approach gives primacy to the cultural dimension as a dynamic force and a factor in behavioral variation. When the decision-maker of an entity accumulates new knowledge or develops new ideas, the energy that fuels activities may be differently organized, with changed results in terms of both internal and external PCS dimensions. Given this dimensional view of the entity in operation, the next question is how such transformations may occur. Most particularly, how the dynamic cultural dimension of knowledge can change will be a key component of the representation of behavioral variation to be developed here. These questions must be placed within the larger context of short-term economic evolution, or even long-term biological evolution. The interwoven PCS orderings can be seen as the adaptive and creative mechanisms responsible for the success of the human species. Genetic evolution forms the physical basis for this success—humans are social animals, they have the physical capacity for oral communication and for using tools, and their brains have developed cognitive abilities. The cultural and social systems developed over time store knowledge and organize cooperation and contribute greatly to evolutionary success. The social and cultural inheritance of a person or a society determines the success of operations as well as the genetic inheritance. An individual person

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is born into a family that functions as an economic entity of some sort. The person has a genetic inheritance but also a social context of institutions and rules, and a cultural context of language, traditions, and knowledge. His or her own behavior and experiences over time result in the formation of particular PCS dimensions. For any individual or organizational entity the PCS orderings function to transmit or reproduce certain patterns of interactions or relationships across time. In a very basic sense all three dimensions contain information about relationships that have been successful in the past: successful by definition since the pattern has survived into the present. PCS orderings transmit information and instructions from the past into the present and the future. For the purposes of this analysis I will treat the rules governing inanimate matter and energy as either fixed or changing so slowly as to be as good as fixed from the human perspective. The biological rules, however, are subject to genetic evolution. Genes store instructions for the development of an organism. Successful organisms transmit this information from accumulated past success to future organisms. Genes change through random mutations due to mistakes in replication and reproduction or due to exposure to mutation-inducing external conditions. This source of biological variation in organisms is then subjected to the forces of competition and selection that result in the survival of certain mutations under prevailing conditions. Cultural and social (CS) orderings also function to transmit information and instructions based on past successes. Technology that has been used with certain results in the past can be used to organize an activity again. An institution that has structured an entity’s operations in the past will persist over time to organize them again in the future. But while these cultural and social orderings last over time they can change much more easily and quickly than the physical genetic orderings. Genetic changes are limited by the physical elements and processes involved, and they are random rather than intentional. But cultural and social orderings are human creations. They influence physical conditions through their direction of human activities, but they are not themselves formed of physical bonds or governed by physical rules. These orderings of meaning and power can be altered through the actions of the people who use them. Repetition forms the orderings; it can reinforce them or differentiate and articulate them. In a sense these CS rules can be seen as changing through replication and mutation, like genes, but with the added possibility of intentional creativity. CS orderings can change when those using them make mistakes in applying them. CS orderings can change when users are forced by operating conditions to adjust them. And CS orderings can be intentionally redesigned: new ones can be created to solve problems. It is as if people or their systems can generate customdesigned mutations in CS orderings when they are perceived to be needed. But where will such changes in CS rules come from? Within the framework developed here, an entity is made up of PCS dimensions. Its activities are energy, guided by knowledge, interacting with physical matter over time, organized by social structures. Engaging in new activities requires new

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knowledge to guide the new interactions. This means that changes in the cultural dimension are a primary way in which changes in behavior and the changes in the entity that can result will be generated. Changes in the cultural dimension will govern changes in activities and resulting transformations in the internal and external PCS dimensions of an entity. The cultural dimension contains orderings of meaning. It can be seen as a hierarchy or layered network of rules. A body of knowledge about a certain topic will contain a system of theories about relationships, based on accumulated data and experience, and all expressed in written language and/or mathematical symbols. As new knowledge is developed, new theories are formulated, and new words are often invented to express them. For the purposes of this representation of economic activity, I will simply refer to having new ideas as changing the cultural dimension. These new ideas will emerge from experience and operation. As an individual engages in an activity, he or she learns about it and can develop ways to alter and improve it. New ideas can be discovered through accidents and mistakes in operations. Individuals combine and recombine existing ideas to come up with new ones (Witt 1991). Such learning and innovation may occur as a byproduct of operations, or an entity may deliberately devote resources and capacities and time to the development of ideas and innovations. New ideas can thus emerge from experience and operations. But the extent to which they do will vary greatly with the PCS characteristics of the entity and its socioeconomic environment. An entity that is isolated will be dependent upon his or her own learning, experience, and creativity. An entity that is in contact with others, that has access to books, experts, and news media (all part of the surrounding and shared cultural dimension) will be exposed to the ideas of others as well. Some individuals will be more skilled at creative problem-solving than others, and some may devote more resources to it. In addition, the surrounding system may be structured to either discourage or reward the development of new ideas. Changes in the cultural dimension through new ideas and knowledge can result in changes in entity behavior that then transform the PCS dimensions of the entity itself and perhaps also its environment. The next question becomes: when and why will the new ideas be put into practice? When will an entity consciously decide to engage in major novelty, to engage in behavioral variation, to engage in auto-evolution? CREATIVE RELIABILITY An entity can be viewed in operation over time, obtaining resources through interaction with external conditions. The economic entity is the historically produced result of past operations. Its basic elements include specialized internal capacities, activities, decision-makers with particular performance criteria, and certain external conditions. These elements in turn can be seen as made up of physical, cultural, and social dimensions.

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This conceptual framework has been developed in order to address the question of behavioral variation. At a given point in time, the decision-maker of an entity chooses activities that promise the best performance from a restricted set of possibilities. This strategic set of activities is defined by the specialized capacities and past operations of the entity. Routine behavioral variation is when the decision-maker switches among familiar activities according to established rules and sequences as internal performance and external conditions change. Strategic behavioral variation is when the decision-maker chooses to search for, develop, evaluate, and then select a new activity. Such a new activity could involve changing the specialized internal capacities, changing the internal structure, changing the performance criteria, changing the identity of the decision-maker, and changing the external conditions or location, as well as merely engaging in new actions with existing capacities. The purpose has been to formulate a rule that governs when such strategic change in entity behavior is likely to occur. Since the entity is seen as an interwoven network of different kinds of rules, what is needed is a rule for changing rules. And since these rules contain instructions about operations successful in the past, under what circumstances will changing them prove to be successful? It is important to recall that the basis of this approach is a realistic conception of time and change. The passage of time is irreversible, all activities, including the process of decision-making, take time, and conditions change over time. There may be multiple, simultaneous, and continuous changes, with both endogenous and exogenous sources. Under such conditions, the inherited frame of the entity functions to allocate its scarce decision-making capacities to the familiar activities of the past unless or until the inherent uncertainty of novelty can be overcome. Behavioral rules operate to economize on specialized and finite decision-making capacities (or bounded rationality) as they are confronted with evolving operating conditions. I suggest that competition under such conditions will select entities whose behavioral variation is governed by what I will call the Principle of Creative Reliability (PCR).This means that during any period of time an entity will engage in those activities that have the best expected performance selected from a set of possible activities that satisfy the principle of creative reliability. Strategic behavioral variation will therefore occur when a new activity meets both the criterion of creative reliability and the criterion of best expected performance. Reliable behavior means operations that generate the same performance results for the entity across time and changing conditions. Achieving reliable behavior requires having specialized decision-making capacities that can accurately identify when to engage in the activity and successfully administer it. Creative behavior means operations that constitute new solutions to problems. Such new activities can improve performance and alter the entity itself, but, since novelty involves activities for which there may be less knowledge and no direct experience, a certain level of uncertainty is associated with it. Uncertainty means

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that the decision-maker does not have confidence in the accuracy of his interpretations of operating conditions and his estimations as to which activities will give the best performance. The Principle of Creative Reliability resolves this tension between continuity and change in the following way. According to the PCR an entity should continue to engage in familiar activities unless and until one of three things occurs. First, if the performance of existing activities declines, new activities will look more attractive despite the uncertainty associated with novelty. This is a satisficing pattern of behavior: engage in new activities when the old ones don’t meet the historical performance standard. Second, engage in new activities when the uncertainty associated with them declines, owing to changes in internal capacities. If the entity develops knowledge and expertise with respect to the new activity, its decision-making capacities will be more accurate in selecting and administering it. There is less uncertainty associated with it, and behavior that implements it will be more reliable. Third, these effects could also emerge from changes in external conditions that make them simpler, more stable, and more familiar. Under such low-uncertainty operating conditions it will be easier to administer all activities more reliably, including new ones. The instructions above require, of course, that the entity in fact has or can develop an idea for a new activity. In this context ideas are viewed as part of the cultural dimension, and new ones can be created by accident, through learning and experience, or through intentional creativity. The new ideas could be generated by the entity itself, or they could be learnt of through communication with others, or even just copied. In some cases an idea may be really new— globally new, as it were—while in other cases it is new only to a particular entity. As mentioned earlier, such a concept of novelty emerging through operations is to some extent based on a discussion by Ulrich Witt (1991). The availability of such new ideas will vary greatly, depending on the characteristics of the internal and external cultural dimensions of an entity. It should be noted that instructions contained in the Principle of Creative Reliability are substantially drawn from the model of choice under uncertainty developed by Ronald A.Heiner (1983, 1986). He offers an analytical framework within which he derives a quantitative criterion for such decisions called the Reliability Condition. I am using my interpretations of his analysis, which have been developed in application to this context and elsewhere (Browning 1989, 1992). This Principle of Creative Reliability dictates that strategic behavioral variation emerges when the entity has an idea for a new activity while it is experiencing low performance of its existing activities, or when the new activity has low uncertainty associated with it. Some examples serve to illustrate predicted behavior patterns. As long as an entity’s performance meets past levels, it will continue to do what it has been doing. The subsistence farmer will continue to farm, the employee will continue to go to work, perhaps without even searching for a new job, and the company will continue to produce and sell its product.

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If performance drops, search for, development of, and selection of new activities will be triggered. The decline in performance may be due to changes in either internal capacities or external conditions. An example of a change in internal capacities would be if the farmer wears out the fertility of his land: the decline in performance could trigger the search for and use of activities that would rebuild productive capacity, or he would buy more land. A change in external conditions could be a drought that triggers investment in irrigation systems. If the employee has to take a pay cut, he may search for additional parttime work, or another job entirely. If the sales of a company’s product drop, it will develop new products. An entity will be most likely to engage in novelty that is related to its existing operations: activities that are improvements upon or extensions of familiar activities. In such cases of related novelty the entity will have specialized decision-making capacities that will help to ensure reliability of performance. In other words, novelty is most likely when it is not really that new: it is similar to existing activities, the entity has already done it on a smaller scale, others have done it so that there is information available, and so forth. For instance, the farmer has always repaired his own farm equipment and his neighbors begin to hire him to repair theirs. This is really just a new form of a familiar activity. Pretty soon his income from repairs might be so good that he drops farming for full-time repair work: a major strategic change, but reliable, since he has developed expertise through operations over time. A manufacturer of power tools may branch out into kitchen appliances—there would be transferable expertise. But what about some activity that really is new? When will an entity engage in using a technology or producing a product that is truly novel? In this framework such innovation would be most likely to be undertaken by the entity that developed the new technology or product, since those who did so would understand it best. The level of uncertainty would be lower. But, aside from the likelihood of innovators’ expertise, the entity may be innovating out of either strength or weakness. If performance is low from existing activities the innovation will be undertaken despite the inevitable uncertainty. Alternatively, if the entity’s existing performance is very high it will have accumulated control of a lot of resources and capacities. It may see the innovation as sufficiently reliable, since it will be able to influence operating conditions with its power. When an entity engages in these new activities it changes its decision-making and operational capacities, whether initially through direct investment or gradually through operation over time. But strategic behavioral variation could involve changing other aspects of the entity as well. Although limitations of time and space will prevent a full exploration of these applications, it is important to at least sketch the implications. Changes in an entity’s performance criteria, in its decision-maker, or in its institutional structure can also emerge from strategic behavioral variation.

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The performance criteria of an entity consist of its needs, wants, and the goals of its activities. Some elements of the desired results of performance may be essentially built into the nature of the individual or entity in question, but other elements can be determined by the activities in use or the external conditions or the identity of the decision-maker. The subsistence farmer seeks to meet his basic survival needs plus any culturally determined desires above the biological minimum. A company that is privately held may have different performance criteria than a publicly owned corporation. An individual’s personal tastes and preferences are rules developed through experience over time that are used to guide decisions. They are endogenously produced with the individual, formed through interaction with the larger physical, cultural, and social context. To change the performance criteria is a choice under uncertainty: it is changing a rule to be used repeatedly into the future for decision-making. The Principle of Creative Reliability will therefore again apply. An entity will be most likely to alter its performance criteria or add new goals when the results of the existing criteria are seen as lacking or when enough knowledge is available about how the new goals would work to lower the level of uncertainty. The Principle of Creative Reliability can also be applied to institutional changes and changes in the identity of the decision-maker of an entity. Like the performance criteria, institutional structures within an entity are designed to carry forward successful patterns of organization from the past into the future (where ‘successful’ is determined by the identity of the decision-maker currently in power). There is a lot of uncertainty associated with changing such rules, so that they tend to change adaptively. Performance has to drop to trigger institutional change in many cases. An example would be a corporate reorganization following years of losses. Institutional change can also form part of an activity change: if a company enters a new industry it may need to alter its institutional structure in order to deal with problems of management and control. Changes in the identity of the decision-maker can be most easily illustrated with a corporation or a political unit. If the company’s performance drops far enough the CEO could be voted out of office by the board or by the shareholders. In other words, other members of the entity find that the manager’s performance does not meet their personal performance criteria, and they choose to engage in strategic behavioral variation by implementing the activity of changing decision-makers. Political elections can have some of the same characteristics. All of these kinds of intentional changes in the substance of an entity can be called strategic behavioral variation because they involve some degree of major novelty. These are not minor alterations like a firm hiring a new worker or a consumer trying a new brand of product. These are changes in aspects of the entity whose entire function is to economize on scarce decision-making resources by focusing the entity’s activities on familiar activities, using familiar technologies, judged by familiar performance standards, within a familiar organizational framework. They are intended to hold across time and changing

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conditions, generating reliable performance results. When they are altered it will take time to see the effects of the change on performance, because all activities take time. If the results are undesirable, the changes cannot easily be reversed and the time that has been used up can never be recovered. For an entity like a company, it may be possible to sell off machinery and fire workers, but the lost time, especially the scarce decision-making time, can never be recovered. An entity will not undertake such irreversible activities unless the high level of uncertainty is somehow overcome or a low performance forces the changes upon them. Before turning to a fuller discussion of the implications of this analysis of the process of behavioral variation for the evolutionary processes of competition and selection several comments are in order. One important aspect is that the predictions for patterns of innovative behavior are based on ascertainable characteristics of an entity and its operations. In other words, it is not necessary to know a decision-maker’s expectations or psychological state in order to predict likely patterns of strategic variation. We would need to know how the entity’s current performance compares with its past performance. We need to know the activities in which it has engaged and for which it therefore will have developed specialized decision-making and operational capacities. And we would need to know whether its external conditions are particularly unstable, complex, or unfamiliar. With such information it would be possible to predict whether innovation is likely and in what general area, although of course the exact nature of the novelty would still be unpredictable. The predictions of strategic behavior implied by the analysis are generally consistent with the strategic behavior of corporations with respect to diversification, innovation, and so forth, although no empirical tests have been undertaken (Browning 1989:62–77) It is also important to note that the patterns of strategic behavior implied by the Principle of Creative Reliability can also be generated by a model that uses the maximization of expected value alone, or that uses the maximization of expected value for the prior search decision. Any pattern of behavior can emerge from such a decision criterion if the appropriate structure of costs is assumed. For example, companies stay within their existing areas of operation because it is too costly to search for and process information about opportunities elsewhere. One problem with this is that it implies that a continual global search for opportunities is in fact ongoing, so that should any opportunity with returns higher enough to overcome these costs arise outside the current activities it will be identified and selected. If it is assumed that decision-makers have infinite and perfect decision-making capacities (or rationality) this is possible. But a basic assumption here is that entities have finite and specialized decision-making capacities, due to the realistic conception of time and change and the fact that all activities take time. In this approach it is the presence or absence of specialized decision-making capacities, not their costs, that is one of the deciding factors in the search decision guided by the Principle of Creative Reliability. However, it should also be noted that the decision rule of maximizing performance is still

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used here in actually selecting behavior. It is just that the set of possible activities for evaluation and selection is determined through creative reliability rather than optimization. A final point is to note that this framework does address types of behavioral variation that are not addressed very successfully within the orthodox maximization or expected value approach. Orthodox analyses of investment, technological change, innovation, and entrepreneurial behavior have not been particularly successful. Individual tastes and institutions are generally held fixed in optimization analysis. The evolutionary approach suggested here can be applied to the endogenous formation and change of these aspects of an entity. These rules structure the entity and its behavior. The Principle of Creative Reliability functions as a rule for changing rules. In the context of this kind of ‘organizational genetics’ it can generate a ‘burst of mutations when they are needed’ (Winter 1971:245) CONCLUSION: EVOLUTIONARY POSSIBILITIES In this chapter I have attempted to develop an evolutionary analysis of behavioral variation that has several characteristics. One is that it is based on a realistic conception of time and change. A second is that it uses a concept of how economic behavior changes that is based on a concept of what entities are made up of. I will now suggest some of the possible applications and implications of this approach. In this framework economic behavior consists of culturally directed interactions of physical energy and matter that take place over time within a social structure that establishes relationships of use and control. Behavior is determined in a two-stage process. An entity decision-maker will choose activities that promise the best performance within the historically generated frame of the entity. The accumulated specialized decision-making and operational capacities tend to restrict consideration of possible activities to those familiar from the past. This strategic set will change according to the Principle of Creative Reliability: the strategic set functions to allocate decision-making capacities before selection allocates operational capacities. Strategic behavioral variation will be strongly influenced by the entity’s performance levels and by the level of uncertainty associated with a particular activity. Entities will tend to try new things when they are forced to innovate owing to declining performance or when they have accumulated sufficient knowledge and resources to be able to lower the uncertainty inherent in novelty. Economic evolution over time will involve the processes of variation, competition, and selection. Although this framework is intended to apply to any kind of economic system, the particular story of variation developed here promises to have significant implications for the conclusions about competition and selection within contemporary orthodox economics. In the basic orthodox model of optimization and equilibrium market competition will lead to an

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optimal and efficient allocation of resources given an initial distribution of endowments, tastes, technologies, and institutions. The characterization of the results of competition will be different when realistic conceptions of time and change transform the analysis and render all of the factors listed above endogenously determined through the operation of the system and the choices of its participant. In this evolutionary approach the entities and their behavior are determined according to this Principle of Creative Reliability. The resulting allocation of resources could be characterized as optimal and efficient, given the creatively reliable frame, but then it isn’t really optimal or efficient at all. It’s creatively reliable. Competition under realistic time and change is a self-referential process. Entities decide on behavior using performance criteria endogenously formed within the system. They influence the set of technologies available to them rather than choosing from an exogenously given set. This means that success of activities and survival of entities do not necessarily possess the normative characteristics often assigned. Success and survival within this story mean only that. Normative characterization would have to come from the application of some criterion other than the mere emergence from market competition. In addition to this problem of the endogeneity of the frame of the entities and their system, the nature of competition will be different among creatively reliable firms. According to Sidney Winter (1971), competition depends on the trial of all possible techniques and entry in response to profit opportunities. Neither trial nor entry can be ensured among creatively reliable firms, since novelty and innovation are restricted. An orthodox competitive equilibrium cannot be achieved. In fact, the question of the existence and qualities of an equilibrium loses much of its importance in this evolutionary framework. An industry or market will evolve through operation over time, and any tendency toward coordinated equilibrium will be overcome by endogenous or exogenous changes. Innovation will emerge from operations or exogenous changes will stimulate creative responses which then generate more changes. A period of stability could lower uncertainty and trigger innovations, which then raise the level of uncertainty, requiring a period of learning and discovery. Such a competitive process of alternating equilibrium and disequilibrium has been called ‘viable coordination’ by Witt (1991:98). Behavior governed by creative reliability may also serve as a kind of microfoundation for Minsky’s business cycle analysis of financial instability. In his analysis a period of macroeconomic stability leads to lower uncertainty and therefore more risky and innovative financing structures and investment projects. The fragile structure eventually crashes, leading to conditions of high uncertainty during which financing and investment behavior become very restricted (Minsky 1982, 1986). The concept of creative reliability and its role in endogenous innovation may also find useful application in Schumpeterian approaches to innovation, entrepreneurship, and business cycles (Schumpeter 1934).

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In this analysis I do not intend to be rejecting the orthodox theory based on optimization and equilibrium; rather, I am attempting to place it within a satisficing and evolutionary context that transforms it. But I also hope that the framework developed here will prove useful in application to problems other than those of orthodox theory as well. This framework is based on the general characteristics of human socioeconomic systems. It can be applied to any such system: fill in the specific physical, cultural, and social dimensions and other characteristics, and explore how the general behavioral principles might play out in this particular permutation. For instance, the analysis could be applied to a traditional, lownovelty system like an isolated peasant village or to a high-novelty system like the computer/internet industry. Since this analysis takes an inclusive approach to economic entities, it can also address topics related to ecological or political factors that tend to be excluded from conventional approaches. I see it as potentially complementary to material like Hesse’s analysis of economic growth (1992) and Hodgson’s discussion of sociopolitical change (1991). If nothing else, I hope that the analysis of behavioral variation formulated here serves as a useful contribution to the ongoing struggle to understand the complex processes of innovation and change. The importance of this topic grows greater and greater in a contemporary system characterized by very high rates of change in all parameters. REFERENCES Browning, C.M. (1989) ‘Investment Decisions as Choice under Uncertainty: Micro, Market, and Macro Analysis’, Ph.D. dissertation, University of Michigan. —— (1992) ‘Investment decisions as choice under uncertainty’, Methodus, 4 (2): 76–87. Fusfeld, D.R. (1980) ‘The conceptual framework of modern economics’, Journal of Economic Issues, 14 (1): 1–52. Halperin, R. (1977a) ‘Introduction: the substantive economy in peasant societies’, in R.Halperin and J.Dow (eds) Peasant Livelihood: Studies in Economic Anthropology and Cultural Ecology, New York: St Martin’s Press, 1–16. —— (1977b) ‘Conclusion: a substantive approach to peasant livelihood’, in R. Halperin and J.Dow (eds) Peasant Livelihood: Studies in Economic Anthropology and Cultural Ecology, New York: St Martin’s Press, 269–97. Heiner, R.A. (1983) ‘The origin of predictable behavior’, American Economic Review, 73 (4): 560–95. —— (1986) ‘Uncertainty, signal detection experiments, and modeling behavior’, in R.N.Langlois (ed.) Economics as a Process: Essays in the New Institutional Economics, New York: Cambridge University Press, 59–117. Hesse, G. (1992) ‘A new theory of modern economic growth’, in U.Witt (ed.) Explaining Process and Change: Approaches to Evolutionary Economics, Ann Arbor: University of Michigan Press, 81–104.

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Hodgson, G.M. (1991) ‘Socio-political disruption and economic development’, in G.M.Hodgson and E.Screpanti (eds) Rethinking Economics: Markets, Technology, and Economic Evolution, Aldershot: Edward Elgar, 153–71. Hodgson, G.M. and Screpanti, E. (1991) ‘Introduction’, in G.M.Hodgson and E.Screpanti (eds) Rethinking Economics: Markets, Technology, and Economic Evolution, Aldershot: Edward Elgar, 1–18. Minsky, H.P. (1982) Can ‘It’ Happen Again? Essays on Instability and Finance, New York: M.E.Sharpe. —— (1986) Stabilizing an Unstable Economy, New Haven, CT: Yale University Press. Polanyi, K. (1977) The Livelihood of Man, ed. H.M.Pearson, New York: Academic Press. Schumpeter, J.A. (1934) The Theory of Economic Development, Cambridge, MA: Harvard University Press. Weissmahr, J.A. (1992) ‘The factors of production of evolutionary economics’, in U.Witt (ed.) Explaining Process and Change: Approaches to Evolutionary Economics, Ann Arbor: University of Michigan Press, 67–80. Winter, S.G. (1971) ‘Satisficing, selection, and the innovating remnant’, Quarterly Journal of Economics, 85:237–61. Witt, U. (1991) ‘Reflections on the present state of evolutionary economic theory’, in G.M.Hodgson and E.Screpanti (eds) Rethinking Economics: Markets, Technology, and Economic Evolution, Aldershot: Edward Elgar, 83–102. —— (1992) ‘Evolution as the theme of a new heterodoxy in economics’, in U. Witt (ed.) Explaining Process and Change: Approaches to Evolutionary Economics, Ann Arbor: University of Michigan Press, 3–22.

12 DECISION-MAKING AS LEARNING PROCESS Young Back Choi

I From the perspective of explaining social phenomena as the outcomes of actions and interactions of individuals, who try to pursue their best interest, given their understanding of the world, there is much to be gained from a better understanding of the decision-making process of individuals. Neoclassical economics, often described as the science of choice, lacks a theory of decisionmaking. The main reason for this shortcoming is the economists’ difficulty in explaining certain phenomena such as institutions (North 1990; Vanberg 1995), entrepreneurship (Schumpeter 1934; Kirzner 1979), and X-inefficiency (Leibenstein 1966). In this chapter, I will first substantiate my claim that neoclassical economics lacks a theory of decision making as a way of justifying my attempt to try something new. Then, I will suggest a perspective on individual decision-making; this is at least a good beginning in explaining some of the social phenomena that are puzzling from the perspective of traditional economics. The chapter proceeds as follows. First, I introduce the paradigm perspective as a means of dealing with uncertainty. Then, I suggest deriving behavioral implications of decision-making in the face of uncertainty by exploring the ramifications of paradigm-seeking in successively more complicated settings of isolation, group settings without interaction, and with interaction. Conventions and institutions will be shown to be products human beings generate through interaction. The evolutionary process of social life will be seen as the product of the interplay between statusquo-preserving conventions and institutions on the one hand and entrepreneurial innovations and social learning on the other. II That neoclassical economics has little to say about the individual decisionmaking process may sound outrageous. Surely, the common claim that economics is the science of choice, or that its theory of choice provides the microfoundation for various aggregate phenomena, gives the impression that

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economics does have a theory of individual decision making. But the deeply held belief that maximization is a theory of individual decision-making is a product of methodological confusion (Buchanan 1979:34–63). In neoclassical economics, the agent is portrayed as maximizing objectives, i.e. choosing a course of action from which he/she expects a higher level of satisfaction than from any alternative. The concept of maximization is applied to all sorts of incongruent entities—individuals, organizations such as firms, and aggregate entities such as the national economy. At the level of individual decision-making, maximization is an idealization of the logic of choice. Given the individual’s awareness of preferences, resource availability and information, the individual motivated to obtain the greatest happiness will arrange his choices in such a way that there is no way to attain a higher level of satisfaction by a different course of action. What is impounded under the givens, however, concerns precisely the most crucial issues to be settled in decision-making, viz. the very assessment of a given situation. For, once we decide what the nature of a given situation we are faced with is, the course of action becomes rather obvious: do things in such a way as to get the highest level of satisfaction. The real problem of decision-making is how to formulate the problem that is to be solved. Frank Knight describes the gist of the problem as follows: ‘With uncertainty present doing things, the actual execution of activity becomes in a real sense a secondary part of life; the primary problem or function is deciding what to do and how to do it’ (Knight 1921:267). Maximization, conceived as a model of individual decision-making, therefore, overlooks this crucial aspect of decision-making under uncertainty, and focuses on the obvious. The same can be said about expected utility maximization. Here the agent maximizes expected utility, given the probability distribution of all the possible outcomes and their values. This formulation still evades the issue of how the agent arrives at the expectation base on which he/she maximizes (Binmore 1987: 211). The clearest evidence of economics not having a theory of decision-making is the oft-cited justification of the maximization approach on the ground of as if. Milton Friedman (1953) argues that a person applying the formula s=(1/2) gt2 to calculate the distance traveled by a falling object is adopting an ‘as if’ approach, i.e. treating the body as if it were falling in a vacuum. He goes on to illustrate how an ‘as if’ approach may be adopted to explain the positions of leaves on a tree, or to predict the shots made by a billiard player. The agent behaves as if he maximized his objective. It does not matter how each and every individual makes a decision and acts; all that matters is that the hypothesis of maximization parsimoniously generates predictions that are empirically verified (or at least not falsified), and are superior to those of any alternative approach. But in this case, maximization is not a model of decision-making. Maximization, as an ‘as if’ proposition, is on a different level of abstraction from actual maximization.

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When economists claim that economics is the science of choice and then, in the same breath, justify the core of its theory on ‘as if’ grounds we detect confusion. Of course, Friedman’s conception of maximization as an empirical proposition about the market has a long tradition in economics in Marshall’s representative man or in Alchian’s justification of maximization on the ground of the survival of the fittest. But we cannot be content with maximization as an empirical proposition about the competitive market. While it has been in general useful as a quick way of seeing the trends, there is still the need for a theory of decisionmaking to better understand how the observed aggregate outcomes are brought about through the interactions of individuals. This need is due not merely to curiosity but also to the difficulty of empirical testing in economics, given the complexity of factors contributing to the phenomena to be explained. Indeed, mistakes have been made, some of which might have been prevented if one had been mindful of individual decision-making. Moreover, there are certain phenomena that the maximization framework is unfit to address, e.g. institutions and entrepreneurship. This is due to the fact that maximization by construction leaves no room for them. They can be comprehended only if we see them as direct implications of individual decision-making. III Every decision which precedes human action must involve two elements in its structure: (1) an understanding of the situation one is faced with; and (2) the choice of the most desirable course of action, given that understanding. The latter is precisely the logic of choice. As far as decision-making is concerned, the logic of choice should be treated as non-problematic; once an understanding of a given situation is obtained, the course of action becomes rather obvious. The choice for a wealth maximizer faced with alternatives paying $1.00, $5.00, or $10.00 is obvious. The situation, however, is vastly different if an individual faces a situation in which the alternatives and their values are not clear. To deal with the situation, one must somehow estimate the values, in monetary terms or otherwise. If he decides that the values are say, $1.00, $5.00, and $10.00, respectively, the choice becomes obvious. He will act on the belief that the values are $1.00, $5.00, and $10.00, respectively. The essence of decision-making, therefore, lies in making up one’s mind about the ‘reality’ of the situation, or in choosing an idea about the situation out of many possible and competing ones. We are seldom aware of the essential feature of decision-making, largely owing to the fact that for most of our daily decisions we rely on the routines with which we have grown accustomed. To highlight the essential features of decision-making, we must consider decision-making in an unfamiliar situation, in which the agent is uncertain as to which, if any, of the rules of action he/she is familiar with may be applicable. Decision-making under uncertainty is, as it

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were, a pathological case which may be helpful in analyzing the decision-making process in general. Uncertainty is a state of doubt. An individual is uncertain when he or she does not have a definite idea of the course of action to take in a given situation, a situation that can be characterized as unfamiliar, obscure, conflicting and confusing. Therefore, the state of uncertainty presupposes a need for judgment and necessarily decision-making. If the essence of decision-making lies in making up one’s mind about the ‘reality’ of the situation, the problem of decision-making under uncertainty is the problem of inference. Now, one of the central problems of inference is the logical status of generalization based on known facts: no inference follows by logical necessity (Popper 1979:4). If this view is correct, which I think it is, then an attempt to establish a normative theory of inference is an attempt to construct a master key to knowledge. As such it is doomed to failure. So must be the attempt to offer a specific model of decision-making under uncertainty. The Bayesian approach is usually offered as the optimal rule of inference. Accordingly, it is optimal to revise existing expectations about the state of nature, i.e. existing probabilities, in light of new experiences in a specific way (Kahneman et al. 1982:361). The validity of this approach as a general rule of inference can be questioned on philosophical grounds, as I already mentioned above. Many experimental psychologists can attest to this (Nisbett and Ross 1980:144); their findings seems to indicate that human inference deviates systematically from what the Bayesian approach would dictate. Kahneman et al. conclude, after evaluating the evidence, ‘that man…is not Bayesian at all’ (1982: 46). Instead, psychologists have gone on to study the descriptive patterns of human inference (ibid.). They have discovered many judgmental heuristics: representatives, availability, anchoring, adjusting, causality, covariation, etc. While judgmental heuristics throw much light on the actual patterns of inference, they are still controversial. And even if they were all valid, a decision-maker would be at a loss as to which ones to apply, and in what order, under the given situation. This is the nature of uncertainty. Therefore, the approach of adopting a normative or descriptive model of inference does not seem viable in studying the behavioral patterns of individuals. Therefore, I rule out the possibility of discovering a prescriptive descriptive rule of inference for decision-making under uncertainty. This radical conclusion is based on the recognition that the very word uncertainty stands for the absence of a universally valid rule of inference. We seem to be in a very difficult situation: how can we study the behavioral implications of decision-making under uncertainty if we doubt the possibility of a general theory of inference, i.e. of decision-making under uncertainty? Indeed, some economists have decided that it is not possible to investigate the decisionmaking process. But, in what follows, I will suggest that more can be said about

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individual behavior and social tendencies by systematically exploring the formal structure of decision-making. IV In a state of uncertainty an individual cannot act. For, under uncertainty, one does not understand what the situation really is. But life demands constant action. Therefore, the state of uncertainty is intolerable. The individual must endeavor to resolve uncertainty by seeking to understand the situation and identifying an appropriate guide for action. In her search, our individual will handle the situation by stretching some existing knowledge, a process resembling that by which one understands metaphors, or analogies. In the end, the individual will have added something new to her stock of knowledge. Since she now knows what to do in a given situation, a situation that used to baffle her, she must understand the situation in a way that she did not before. This process is learning. Learning, therefore, is the other side of the decision-making coin. To prevent sentences from becoming needlessly cumbersome, let us call the things that underlie the understanding we are seeking paradigm to signify that our understanding rests on (hierarchically organized) rules the origins of which are in our experiences.1 From now on, the process of decision-making under uncertainty will be seen as paradigm-seeking. V My strategy of finding behavioral implications of decision-making is to place a hypothetical individual in different situations and to discern what kinds of behavior an individual, who is faced with uncertainty, will tend to exhibit in the process of paradigm-seeking. To the extent that I equate the paradigm-seeking with learning, I will be exploring the learning patterns of individuals in different environments. 1. Let us first turn to the simplest case, that of an individual in isolation, playing a solitary game against nature. If the individual is faced with a novel situation in which he must act and suffer the consequences, how will he act? When faced with uncertainty, an individual will find a paradigm, deemed suitable for the given situation, by trial or experimentation. He will first try the most promising paradigm. If it brings him the expected results, the search terminates. If it fails, he will try another promising one, and so on, until he succeeds. But how is the most promising paradigm determined? While there is not much that can be said about the process by which a suitable hypothesis is identified,2 the process is not likely to be a totally random process. For one can still rely on some sort of mental experiment or hunch. Though there is potentially an infinite number of ways to look at any given situation, people tend to start out with only a small subset of possible variations as potentially worthwhile candidates. The

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‘choice’ of an initial set of competing hypotheses is much like the way a chess player might consider the few worthwhile strategies out of the infinite possible variations. The identification of the initial field of the candidates worth considering is based on one’s previous experiences. Even then, an individual has to choose among the candidates. By experimentation I mean not only the initial choice of candidates but also the choice among the initially chosen. The most promising one will be tried. If it succeeds, it will be retained. If not, another hypothesis will be selected by reiterating the process described above. After a series of trials, the consequences of which one must suffer along the way, the individual may indeed stumble on a viable practice (otherwise he will perish). With the successful identification of a paradigm, the process of search, or rather the experimentation, will be terminated. From then on life becomes relatively easy. If the setting is stable enough, one may have found a practice that ensures one’s survival. That practice will become habitual. 2. In a group context the individual can observe what others do, what happens to them, what they get, how they are treated, and so on. In short, he can discover a serviceable paradigm through vicarious experimentation. A homogeneous group is an ideal setting for such experiments, in that, if others are sufficiently similar in relevant attributes, one can be assured of replicating the outcomes that others obtain by taking similar action (similar causes, similar effects). Therefore, individuals tend to imitate the successful examples of others in a group setting. The tendency to imitate is easily observed. Children exhibit a strong tendency to imitate. Adults act no differently when faced with an unfamiliar situation. In Kenneth Arrow’s example of low-cost flood insurance, the most salient characteristic of the behavior of those who took out the flood insurance was that they knew someone else who had taken out the insurance.3 The behavior of the majority of investors in the stock market is usually explained in terms such as ‘herd instinct’, ‘mass psychology’, and the like. But explanations of herd behavior vary. For instance, Scharfstein and Stein argue that the reason why managers tend to imitate others is that the board of directors tend to evaluate the performance of their managers through comparisons with other managers and that this leads managers to imitate others, in the hope of avoiding seeming an oddball (1990:465–7). But why do the directors assess their managers’ performance in relative terms, instead of absolute terms? And why do managers imitate others, instead of relying on their own judgment? A better explanation of the imitative behavior of investors is provided when the situation is seen as decision-making in a group setting. Here people behave imitatively as a means of identifying a paradigm. A vicarious experiment is more difficult in a heterogeneous group. It will be more difficult to learn a lesson if other people are different. Vicarious experimentation must be controlled for individual differences through interpersonal comparisons. Interpersonal comparisons are made with respect to relevant attributes and qualities—for example, ability, appearance and qualification. When someone resembles one’s own self closely enough, one can

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reasonably expect similar results by imitation. If the attributes of the case were somewhat different from one’s own attributes and circumstances, in the absence of a better example, one could still ‘guesstimate’ the value of the alternative course of action by allowing for variations in the attributes. If the case hardly resembles one’s own, one should ignore it, for there is no usable information there. VI The perspective of decision-making process as a learning process through experimentation can be applied to a social setting where individuals interact. In a social setting, paradigm-seeking individuals are faced with two distinct sorts of decisions: one concerning their own actions, which may affect other people, and the other involving their reaction to other people’s actions, which may in turn invite their reactions. 1. In the company of other people, individuals will seek approval and avoid disapproval. Paradigm-seeking individuals come to feel themselves in the assembly of fellow human beings, as it were. They respond as if the approval of others, for whatever reason, vindicates their action, or rather the underlying paradigms, while disapproval is seen as the verdict of the assembly that the decision has been found wanting. The trouble with approval-seeking, however, is that both approbation and disapprobation tend to follow actions, while decisionmaking must precede them. To arrive at a decision with reference to public opinion and reaction is somewhat like putting the cart before the horse. How can we, as paradigm-seeking creatures, deal with this problem? In order to choose a course of action likely to meet the approval of others, decision-makers may conduct mental experiments by imagining an assembly of spectators. Initially, the most promising paradigm will be brought to the assembly for a trial. If this candidate meets the approval of this assembly, it will become the paradigm of choice. If, on the contrary, it fails to meet approval, the paradigm will be discarded and a different candidate brought to a trial. In acting in accordance with the imaginary judges, we shall feel proud for having behaved properly, or prudently, depending on the case. Going against the imaginary jury, on the other hand, would make us feel shame and guilt for having acted improperly. The imagined spectators are, in brief, our conscience. 2. How are we to judge another’s action and respond appropriately? Our mental experiment may take the form of empathy. Recreating in our own minds that person’s circumstances as closely as possible, we may try to identify an appropriate paradigm that would have been identified if we had been in the individual’s shoes. Though we cannot hope to replicate exactly another’s circumstances, including his or her knowledge and feelings, we try our best. If we conclude, based on this mental experiment, that we would have behaved similarly, we tend to approve of the individual’s action and respond favorably.

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Otherwise, we tend to disapprove and respond unfavorably. To do otherwise is to disapprove of our own conscience. VII We live in a society full of interactions and interdependences. If society is defined as a system of human interaction over time, the efficacy of a paradigm as a means of survival depends, in large measure, upon its ability to induce others to behave in certain ways. In other words, the viability of a paradigm hinges upon whether or not the other parties fulfill their anticipated roles. The expected actions, in turn, will be forthcoming only if our actions prompt the proper responses from others according to their own paradigm choices, and so on ad infinitum. For any stable and ongoing relationship, the expectations implied by the paradigms each individual has chosen for the situation (which now includes all the other individuals in the society) must somehow be made mutually consistent. The absence of this sort of consistency would cause much uncertainty, chaos, and poverty. Paradigm-seeking individuals, therefore, will endeavor to find individually a set of paradigms so that their lives become more manageable. The process of mutual search for a set of consistent paradigms is a spontaneous process. There is no guarantee that the process of groping will reach a successful conclusion. But only if a group arrives at a set of paradigms that works will its members be able to manage a living. The evolutionary process may result in a state where the majority have their own paradigms adjusted to elicit the necessary cooperation of others in many recurrent situations. Individuals in such a state can therefore expect considerable regularity in other people’s behavior, and the problem of dealing with uncertainty has, in good measure, been resolved by the generation of social paradigms, or conventions. Let us call social relations regulated by the conventions the regime of convention. Conventions are the social analogue of individual paradigms, and they are prevalent in any ongoing relationship. If family, school, or work groups are tight, their shared paradigms must be many. Much as an individual has a panoply of paradigms, each useful for different occasions, so does society have a constellation of social paradigms, with varying degrees of normative implications, and suitable for different groups of individuals and different sets of circumstances. Because of the importance of the identity of the interdependent actors to situational variation, different conventional practices come to be associated with distinct sets of partners; some are applicable in certain groups but not in others.4 Hence, we see one set of norms among workers in a factory, a different set for them and their managers, and yet another to articulate relations with their families. What is polite in one culture may be rude in another; the acceptability and viability of a conventional practice is quite contextual and far from universal.

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Nor is conventional practice restricted to labor relations. Speaking from personal experience, Keynes observed that the pricing of equities depended upon conventional decisions on what should be factored into their value and what should be excluded from consideration (1936: 149–58). In tracking the top economic forecasters’ performances of late, Stephen McNees, vice-president of the Federal Reserve Bank of Boston, concluded that they have erred greatly in projecting every major recent turning point, and erred alike (quoted in Linden 1991:68). The view that conventions are pervasive in economic life is a venerable one, going all the way back to Adam Smith. He observed that the social division of labor, which results in so much good, is less the product of rational calculation than the evolutionary outcome of human propensities (1976:25). Alfred Marshall remains firmly in Smith’s tradition when he says that ‘the influence of custom… over the forms of production and the general economic arrangement of society has been underrated…. [Its] effects are not obvious, but they are cumulative’ (1961:728). Conventions are pervasive indeed. VIII As conventions are solutions to problems of uncertainty, they entail certain behavioral implications, including the tendency to conform and to ostracize deviants, both of which contribute to the stability of the regime of conventions. People tend to conform to conventions. Individual conformity to conventions develops in any of four ways: adoption of paradigms compatible with convention, imitation, utilitarian calculation, and attrition. We shall briefly consider each in turn. (1) People may behave conventionally because conformity accords with the individual paradigms they have identified and used to support successful actions; they have internalized the convention, as it were. (2) Newcomers to the community may find imitation a parsimonious form of decision-making under all the uncertainty they face in their new setting, and they are more likely to imitate a general practice than conjure up one that is highly idiosyncratic. (3) We may also conform through utilitarian calculation. In that case, we choose to act like the others in our group in order to meet with their approval and improve our lot even though we may privately believe that an alternative mode of behavior is more suitable or appropriate to the occasion. But this is an unstable situation. To act knowingly in an inappropriate fashion is to profess false faith. This is the sort of conformity that leads to mental disorder. (4) In order to avoid the unstable, we tend either to change our behavior, given our views (paradigms), or to change our views, given our behavior. Conventions have normative implications. When we act conventionally, we often act in the belief that the action is appropriate and just, as judged by the imaginary spectators, and we tend to judge the actions of those who do not conform, who instead thwart our designs and expectations, as inappropriate and unfair. Indeed, our very perceptions of equity depend upon roles and relationships

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implicitly defined by the customary practice of the community in its regime of convention. In David Hume’s words, ‘we have no real or universal motive for observing laws of equity, but the very equity and merit of that observance….The sense of justice and injustice is not derived from nature, but arises artificially, tho’ necessarily from…human conventions’ (1965:483). A system of conventional justice that upholds conformity as just and punishes deviation as unjust is essential in maintaining the viability of the regime of convention in any context, particularly in situations where the temptation for expedient violation of the rules can be quite strong. Not everyone will, however, conform; there are always deviants. This proposition might, at first glance, appear to contradict the idea of conformity. But actually, we should be far more surprised to find total and complete obeisance to conventions than to observe divergent undercurrents manifested as occasional ripples or deviations, since conventions are designations for discernible patterns of behavior that are evolutionary outcomes of disparate individuals’ independently motivated behavior. It is highly improbable that so many minds become exactly alike in all dimensions. Divergent undercurrents beneath placid conformism provide the source of deviance. Society may be stable, but it is far from stagnant. Community populations change in composition as some members exit through death or emigration, while others enter through birth or immigration. The constant inflow of people provides an important source of deviation. Although the majority of new members will tend over time to buy into existing conventions, their purchase will be neither immediate nor perfect. Proficiency in following convention requires practice and conditioning in specific contexts. Since conventions are largely implicit, some of the newcomers are bound to make mistakes. Conventions are a useful way to reduce uncertainty and promote coordination and cooperation only if individuals predictably follow them and confidently believe that everyone else will as well. By definition, deviations frustrate not only the reliability of the conformists’ actions but also their sense of propriety and justice. Conformists will, accordingly, go out of their way to punish and even banish deviants. Conformists ostracize deviants. The fact that a regime of convention is largely populated by individuals who conform to conventions—nonconformists will certainly not prosper, and perhaps not even survive, because conventional actors will not permit deviants the cooperation they require—tends to make the regime of convention stable. IX If the regime of convention is stable in the face of intermittent deviation, it will be stable over time as well. Traditions and customs are simply conventions that have survived the test of time. Such stability brings not only the benefit of reduced uncertainty in social interaction, but also inflexibility and inadaptability.

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The status quo in relations of production and distribution tends to be upheld as rational and just even after the real justification for it has disappeared. The inertia of conventions is a direct implication of their stability. Stable conventions adapt poorly to improvements in the state of knowledge. The majority continue to adhere to the existing conventions. They ignore opportunities almost at hand and tend to punish the nonconformists, even when the deviants are simply trying to take advantage of opportunities the majority ignore because of their conventional blinders, and might in the process have introduced and implemented superior practices. The opportunity for material gain is therefore likely to remain unexploited in a stable regime of convention. I do not deny the possibility that people can improve their lives within the context of existing conventions. What economists call ‘learning by doing’ falls in this category. But this type of improvement tends to be made at the cost of ignoring another kind of improvement that could be had if people adopted another set of possible conventions. Howard Margolis calls these two sorts of improvements ‘hill climbing’ and ‘hill jumping’ respectively (1987:33). In a stable regime of conventions, people are likely to ignore the possibility of improvement by hill jumping, since it represents abandoning the existing conventions and adopting a new one. Opportunities remain untapped because people conform to current conventions rather than adopting new practices. But constant revision of expectations and behavior is consistent neither with the assumptions of the paradigmatic approach nor with the nature of convention itself. Conventions have been devised to reduce uncertainty, and do so only to the degree that they are stable. Hence, the very factor that makes them beneficial generally precludes their being perpetually optimal. James Buchanan would agree with us: ‘The institutions…that survive and prosper need not be those which are “best” (1975:x). Consider, for example, a firm whose production method has proved viable for workers and customers alike. As far as the management is concerned, it is the way to do business, and the firm is committed to this successful convention. Suppose now that individual workers, engineers, or outside advisers suggest an innovation, that is, a new technology with improved efficiency or quality. It takes a lot to overthrow a convention. The management must be convinced not only of the probity of the new action but also of the strong possibility of convincing employees and consumers to change their ways and to support it. The status quo is likely to reign longer than it ‘should’. Decision-makers in firms do have more discretionary power to reorganize than many traditional authorities. But the influence of firm conventions and ‘corporate cultures’ implies that they are neither so free nor so rational as neoclassical economic theory would suggest. Decision-makers are thus liable to err, whether they are the Fortune 500 CEOs or fishermen by the sea. The mistakes, far from being calculated risks (or the result of ‘trembling hands’), are often the systematic sort that derive from a certain mind-set, or paradigm. The

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employees most likely to be promoted to posts of decision-making are those who seem most successful according to the firm’s established standards or criteria, that is, the conventions prevalent in the firm. Corporate decision-makers are therefore perhaps least likely to deviate from the very conventions that have been the benchmarks of their success. Moreover, if decision-makers are open-minded enough to recognize an innovative idea, the success of its execution will depend upon how much cooperation can be garnered from subordinates, suppliers, and consumers, and these groups are themselves accustomed and loyal to existing conventions. The status quo, in brief, is likely to be very thoroughly entrenched, especially in firms with a good track record where the corporate culture is strong. Stability and inertia, in sum, will characterize this group as well as other social entities. The flip side of inertia is, therefore, Leibenstein’s X-inefficiency. The implied existence of unexploited opportunities is in direct conflict with the ‘neoclassical spirit’ that Arrow defines as follows: ‘[T]he true neoclassical spirit… [insists] that when a market could be created, it will be.… If an opportunity for a Pareto improvement exists, then there will be an effort to achieve it through some social device or another’ (1974c: 7–8). Within the neoclassical framework of competitive equilibrium, no opportunity remains unexploited. But in the absence of opportunities that lure people to deviate from conventional practices and to undertake innovative activities, how can we account for the process of social change? Only when we acknowledge the existence of unexploited opportunities, that is, of ignorance and mistakes, can we begin to appreciate the dynamism of social process. The impetus for social dynamism is given by individuals intending to exploit the opportunities others ignore. Change presupposes room for change, the source of which may be either exogenous or endogenous. Traditional economics often examines how economic systems respond to the former. The presumptively somewhat passive and mechanistic response of the economy then conveys the impression of precise predictability. But this is misleading, because the timing and manner of social change, in fact, remain largely unpredictable and uncertain. Neglected, meantime, is the study of the nature of social processes that permit the possibility of change through endogenous forces. How is social change at all possible? The magnitude of unexploited opportunity, or the potential for material gain, tends to increase over time. We have already argued that unexploited opportunities are likely to exist in a regime of convention. If everything always stays the same, the opportunities will remain unexploited. Something always changes, however, and that something is knowledge. In a regime of convention, disparate individuals carry on with their daily doings. The majority live happily in conformity with their shared paradigms. But some people are bound to discover (or think they have discovered) a better way of doing things as they learn from experience and from mistakes they and other people make, that is, opportunities that other people ignore. But deviants motivated to capture the opportunities through innovation, or deviations from the routine, are often punished. And the majority in the community may conform to the existing

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conventions despite some discomfort in order to avoid the greater distress of ostracism. The magnitude of these unexploited opportunities therefore tends to grow with time until people generate a new set of conventions that will permit the exploitation of some of the hitherto ignored opportunities. Other things being equal, the probability of some deviants identifying a paradigm that could be the basis of successful exploitation of ignored opportunities should increase with time as well. At issue here is the discovery of opportunities ignored by others; the claim here is that it is more and more difficult not to notice what is growing larger and more distinct over time. Whether or not the deviants can successfully actualize potentially superior paradigms is another question—one of innovation. The process of innovation and progress consists of taking advantage of unexploited opportunities—opportunities that grow over time yet remain unnoticed, or noticed but ignored, by the majority of conformists. Once enterprising individuals achieve outstanding success by exploiting these possibilities through innovative—and therefore unconventional—practices, they may become role models. In due course, the innovative practices will become routine and conventional. Thus society changes and progresses. Even strong loyalty must eventually yield to persistent forces of change, however. Institutional inertia may hold these forces at bay for a while, but, as the gap between actual and potential social outcomes widens, it will eventually play an important role in the process of social change. X A stable regime of conventions tends to leave possibilities for gain unexploited and, therefore, opens up a window of opportunity for the enterprising. In a regime of convention, the majority behave predictably. But there is no economic profit—out of ordinary advantage—in doing what is expected, so the majority will earn the customary return, no more and no less, day in and day out. If someone believes that he can gain over and above the customary expectations, he must see what others do not. That is, he must discover a way of doing things (a paradigm), which, he is convinced, will lead to superior results. Such a person, who discovers opportunities that others fail to notice because of their conventional blinders, and who audaciously exploits them as others do not because of their conventional inhibitions, is the entrepreneur. He (or she) breaks from the pack. He claims to know more than we do, perhaps not in words, but in actions that speak louder than words. He has the conviction that he can expose our ignorance, parochialism, and undue inhibitions. How do entrepreneurs presume to gain? There are many ways. One approach may be the path of innovation: reducing the costs of producing old products by novel technological or organizational means or introducing new products or services that satisfy latent demand (Schumpeter 1934). Another may be simply

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betting against the crowd, who fail to notice opportunities because they adhere so tightly to conventional wisdom. Of course, many will fail—consider the countless start-up firms that go bankrupt each year. But sooner or later, some will succeed. Entrepreneurial success will be met by emulation, and soon innovation becomes convention. Establishing an innovation follows a sequence quite like that involving the extension of agriculture. First, a method of extensive cultivation is applied to newly discovered virgin soil. Others imitate the innovation, or follow the discovery. The ‘soil’ is soon exhausted and production shifts from extensive to intensive cultivation as people try to make marginal improvements. The innovation is now rationalized. Propagation is complete as the innovation becomes a routine. The areas of potential routinization include production methods, labormanagement relations, sources of input supplies, and targeted customers. Innovative practices that disrupt routines in each of these areas are likely themselves to settle into routine. In due course, new practices become conventional, not necessarily because they tend to degenerate over time but rather because they tend to become so accepted that followers conform to them automatically. Acquiring another set of conventional blinders, they ignore new information that crops up over the years. Again, the potential gains grow, thus preparing the ground for the next round of innovations and changes. The process by which we come to acquire paradigms to deal with novel situations—or to improve our dealings with old situations—is called learning. The market allows entrepreneurial learning, or the discovery of opportunities and innovations, to become commonplace knowledge in society. We can view this process as one of social learning. People learn from one another, though few are intent on teaching. The competitive urge to exploit opportunities ignored, or at least not yet captured by others, is a stronger incentive to keep our information up-to-date and handy than even the best-meaning of teachers can provide. The prospect of becoming extinct unless we learn the lesson can fix our attention more closely than the sternest of taskmasters. This market process of learning may appear lamentably chaotic and undisciplined. But the market process of social learning involves contributions from everywhere and everyone. A more ‘disciplined’ process would require a plan, which is at best the product of a few brains in a few places. Han Feitzu’s observation of some two millennia ago remains true today: ‘As one man in physical strength cannot rival a multitude of people and in wisdom cannot comprehend everything, using one man’s strength and wisdom cannot be compared with using the strength and wisdom of the whole’ (Han 1939:259–60). Hayek’s idea of market as discovery procedure is very similar in spirit (Hayek 1978, 1945). Innovation is possible under any system—no system completely exhausts opportunities. But not all systems are equal in encouraging innovation. In a market system the pace of innovation is much quicker. By removing the

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impediments and inhibitions that tradition attaches to opportunism, through the protection of private property rights, it encourages innovators and arbitrageurs to exploit opportunities as far as they are able. Surely here lies the explanation for the higher rates of innovation and rapid economic development observed under capitalism than under such institutions as feudalism or socialism. XI I thus find the neoclassical economists’ description of the market tendency toward maximization as one that reflects fundamentally sound insight. But I consider this insight distorted. Economists do not say that the market is good at discovering unexploited opportunities. Instead, they say it is optimal. But, by assuming the limiting case as the given case, economists lose sight of the very market process that makes maximization a sound insight in the first place. Hard as individual entrepreneurs endeavor to exhaust opportunities and enrich themselves, new opportunities will continually arise. People learn from their experiences. Change is constant, and the battle is never ending. We can see from this point of view that the story of modern economic and social development is but a process in which the market has successfully expanded and invaded the domain once exclusively ruled by conventions—that is, the feudal sphere. The market has been truly dynamic, its consequences farreaching, and this process of expansion continues before our very eyes. What used to be almost exclusively non-market household production, for example, is evermore part of the market, on both the input and the output sides of the equation. How and why do markets expand? And what are the effects of this expansion? These are some of the basic questions about the nature of market processes that neoclassical economists do not and cannot ask. This is so whether the approach be one of ‘market failure’ (using the perfectly competitive market as the standard for judging the observed outcomes in the market) (Pigou 1932) or one of ‘transaction costs’ (assuming that, in the absence of transaction costs, the market outcome would be efficient) (Coase 1960) or ‘new institutionalist’ (studying the business organizations and other institutional arrangements with the perfectly competitive market as the benchmark) (Williamson 1975). None of these approaches allows one to inquire about the process by which the market expands, since a well-functioning market is assumed to exist in the first place. Only by taking a different approach, an approach of analyzing the market from the perspective of conventions as general social tendencies generated by disparate paradigm-seeking individuals, can one begin to appreciate the multifaceted dynamism of the market processes.

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NOTES 1 For a fuller discussion of this issue see Choi (1993). This view is broadly consistent with Hayek’s idea of the primacy of the abstract and human perception as classificatory (1976), Michael Polanyi’s idea of tacit knowledge (1962), Margolis’s pattern recognition (1987), and Brian Arthur’s inductive reasoning (1994). See also Holland et al. (1986). 2 Even psychologists have given up the hope of predicting individual behavior (Nisbett and Ross 1991:6). 3 Arrow (1982) himself recognizes that people’s behavior with respect to lowpremium flood insurance is an anomaly for the expected utility maximization framework. People failed to take out government-subsidized flood insurance even though there were no significant costs of information; moreover, many of those who took out the insurance only did so upon learning that someone they knew had already taken out the insurance. 4 Perhaps in some instances the group instead of the individual should be the unit of analysis in economics and other branches of the social sciences.

REFERENCES Arrow, K. (1974) ‘Limited Knowledge and Economic Analysis’, American Economic Review, 64 (1): 1–10. —— (1982) ‘Risk Perception in Psychology and Economics’, Economic Inquiry, 20 (1): 1–9. Arthur, W.B. (1994) ‘Inductive Reasoning and Bounded Rationality’, AER Papers and Proceedings, 84 (2): 406–11. Binmore, K. (1987) ‘Modeling Rational Player’ II, Economics and Philosophy, 4 (1): 9– 55. Buchanan, J.M. (1979) What Should Economists Do?, Indianapolis, IN: Liberty Press. —— (1975) The Limit of Liberty, Chicago: University of Chicago Press. Choi, Y.B. (1993) Paradigms and Conventions: Uncertainty, Decision Making, and Entrepreneurship, Ann Arbor: University of Michigan Press. Coase, R.H. (1960) ‘The Problem of Social Cost’, Journal of Law and Economics, 3 (1): 1–44. Friedman, M. (1953) Essays in Positive Economics, Chicago: University of Chicago Press. Han, F. (1939) Han Feitzu, vol 2. Translated by W.K.Liao, London: Probsthain. Hayek, F.A. (1945) ‘The Use of Knowledge in Society’, American Economic Review, 35 (4): 519–30. —— (1976) The Sensory Order, Chicago: University of Chicago Press. —— (1978) New Studies, Chicago: University of Chicago Press. Holland, J.H., Holyoak, K.J., Nisbett, R. and Thagard, P. (1986) Induction: Process of Inference, Learning, and Discovery, Cambridge, MA: MIT Press. Hume, D. (1965) A Treatise on Human Nature, Oxford: Clarendon Press. Kahneman, D., Tverskey, A., and Slovic, P. (eds) (1982) Judgment under Uncertainty, New York: Cambridge University Press.

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Keynes, J.M. (1936) The General Theory of Employment, Interest, and Money, New York: Harcourt Brace. Kirzner, I. (1979) Perception, Opportunity, and Profit, Chicago: University of Chicago Press. Knight, F. (1921) Risk, Uncertainty, and Profit, Boston: Houghton Mifflin. Leibenstein, H. (1966) ‘Allocative Efficiency versus X-efficiency’, American Economic Review, 56 (3): 392–415. Linden, D.W. (1991) ‘Dreary Days in the Dismal Science’, Forbes, 21 January: 68–71. Margolis, H. (1987) Patterns, Thinking, and Cognito, Chicago: University of Chicago Press. Marshall, A. (1961) Principles of Political Economy, 9th edn, London: Macmillan. Nisbett, R. and Ross, L. (1980) Human Inference: Strategies and Shortcomings of Social Judgement, Englewood Cliffs, NJ: Prentice Hall. —— (1991) The Person and the Situation: Perspectives of Social Psychology, Philadelphia: Temple University Press. North, D.C. (1990) Institutions, Institutional Change and Economic Performance, New York: Cambridge University Press. Pigou, A. (1932) Economics of Welfare, 4th edn, London: Macmillan. Polanyi, M. (1962) Personal Knowledge: Towards a Post-critical Philosophy, Chicago: University of Chicago Press. Popper, K. (1979) Objective Knowledge, Oxford: Clarendon Press. Scharfstein, D. and Stein, J.C. (1990) ‘Herd Behavior and Investment’, American Economic Review, 80 (3): 465–79. Schumpeter, J.A. (1934) The Theory of Economic Development, Cambridge, MA: Harvard University Press. Smith, A. (1976) The Theory of Moral Sentiments, Oxford: Oxford University Press. Stigler, G. (1976) ‘The Existence of X-Efficiency’, American Economic Review, 66 (1): 213–16. Vanberg, V. (1995) Rules and Choices in Economics, London: Routledge. Williamson, O. (1975) Markets and Hierarchies, New York: Free Press.

Part IV POLITICAL ECONOMY

13 LABOR MARKET OUTCOMES FOR YOUNGER BOSTON AREA WORKERS IN THE 1990s The continuing impact of race Barry Bluestone and Mary Huff Stevenson Today’s urban and racial crisis has its roots in three long-range problems: the changing nature of American cities, the persistence of poverty, and the failure of the American social system to make an equal place for black people. These three problems have been with us for a long time, and they will remain indefinitely into the future. (Fusfeld 1968) The three issues that were the focus of Dan Fusfeld’s 1968 essay—the economic and social erosion of inner city neighborhoods, the persistence of poverty, and the intractability of racial discrimination—are sadly as relevant today as ever. Indeed, the problems that Dan Fusfeld grappled with in a series of papers and seminars more than a quarter of a century ago have grown even more intractable over time. In retrospect, we know that wage and income inequality were actually reaching historic lows in the late 1960s. Since then both have increased dramatically, driving an ever larger wedge between the living standards of the ‘haves’ and the ‘have nots’, particularly in urban America. In the 1950s and 1960s, a rising tide seemed to be lifting most boats. The income growth of families in the bottom quintile of the income distribution actually rose a bit faster than the incomes of everyone else, including those in the top fifth. Since the late 1970s, rising GDP has not translated into higher incomes for those in the bottom 40 percent of the income distribution. Benefits from rising productivity and GDP growth have gone disproportionately to the top 20 percent. In the face of declining real wages, some among the remaining 80 percent of households have maintained their living standards only by increasing their households’ hours of work (through additional members entering the workforce and/or through additional hours of those already at work). Households that do not increase their work effort to compensate for declining real wages continue to fall further and further behind (Mishel and Bernstein 1994). As graduate students of Dan Fusfeld’s at the University of Michigan in the late 1960s we began to grapple with the economic and social forces which would ultimately lead to the trends we have witnessed over the past twenty-five years.

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In a wide-ranging seminar on urban problems that Fusfeld organized, and hosted in his living room, we studied the forces which would ultimately result in the economic stress and political estrangement which mark the current era. That seminar has served us amazingly well. Today, there is an urgent need to understand the forces by which earnings are generated, in order to understand the underlying sources of inequality between workers. Toward that end, we examine in this chapter a population of young workers (ages 21–34) in the Greater Boston Metropolitan Area in order to explain variation in labor force participation, unemployment, hours worked per week, and hourly wages. From this, we simulate expected annual earnings in an attempt to better understand what factors —including race and ethnic background—contribute to persistent earnings gaps among workers who appear to share similar human capital characteristics. THE MODEL: JOB COMPETITION VERSUS NEOCLASSICAL THEORY In the standard labor economics textbook presentation of the neoclassical model of employment outcomes, emphasis is placed on the interaction of forces on the supply side and those on the demand side which, combined, produce a marketclearing equilibrium (see, for example, the presentation in Wachtel 1992). Labor force participation, a standard measure of household labor supply, is seen as responsive to wage changes as a consequence of income and substitution effects. Unemployment is assumed to be largely voluntary, the result of a reservation wage higher than what is being offered on the market. Only recently has the neoclassical model allowed unemployment to exist because of employers’ decisions: the notion that employers will pay an efficiency wage above the equilibrium level in order to deter shirking on the part of their employees. Working part-time is similarly assumed to be a matter of choice on the part of the worker. Wages, too, are seen as largely a matter of choices individuals make about how much human capital to acquire, and how to deploy it. Thus, wage differences reflect differences in productivity that result from the choices individuals make. In contrast to the neoclassical model, we use for present purposes a job competition model originally derived from the early work of Thurow (1975), as well as Doeringer and Piore (1971). In the job competition model, workers compete for job slots. Wages do not play a market-clearing role. Employers choose workers on the basis of ascriptive and acquired characteristics that they believe are related to desirable performance. Wages are set administratively and are attached to specific job slots. In such a model, workers less desirable to the employers cannot compete simply by offering themselves at a lower wage. Thus, in this model, there can be involuntary unemployment which will not automatically disappear over time. Those at the end of the hiring queue will find themselves without jobs, much like the unlucky players in a game of musical chairs. Unlike musical chairs, however, the ‘unlucky’ players in the labor market

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are not generally randomly selected. Instead, the losers may share attributes that make them less desirable to employers: a skills mismatch, a spatial mismatch, or membership in a particular demographic group based on age, race, ethnicity, or gender which employers take as a signal of lower average productivity. In the job competition model, given the persistence of involuntary unemployment and its disproportional impact on those at the end of the hiring queue, labor force participation is no longer purely a matter of income and substitution effects. The lack of a sufficient number of job slots to accommodate all willing workers means that those able and willing to work at the going wage, but unable to find work, may become discouraged, and suspend their active search for work. These discouraged workers do not meet official criteria for inclusion in the labor force, but their exit does not reflect a pure labor supply decision: it is a response to insufficient labor demand. Similarly, in the job competition model, weekly hours of work are not purely a matter of individual worker choice but may also be conditioned on the availability of full-time work. Those working part-time hours voluntarily are joined by another group of workers, those who are involuntarily working parttime because they are unable to secure full-time jobs. In a job competition model, where wages are attached to specific job slots, the process by which workers are assigned to specific occupations, industries, and firms is crucial to understanding variations in their individual wages. In another paper using the same data set as we do here, we focus on the process of wage determination. A more detailed exposition of the job competition model is also available there (Bluestone et al. 1996). In this chapter, although we estimate a wage equation for the purpose of calculating expected annual earnings, we also estimate equations for labor force attachment, unemployment, and hours of work. FACTORS INFLUENCING LABOR FORCE ATTACHMENT AND UNEMPLOYMENT: HUMAN CAPITAL, CULTURAL CAPITAL, AND SOCIAL CAPITAL There are a number of hypotheses regarding individual worker success and failure in the labor market which can be tested in a job competition model. To provide a simplified taxonomy of hypotheses, we group these under three general headings, all related to investments that individuals make in themselves or investments that are made in the individual by the person’s family, friends, or other actors in the individual’s web of social institutions. We refer to these three as (1) human capital, (2) cultural capital, and (3) social capital. Human capital refers to any investment an individual makes to enhance his or her own value in the labor market. In empirical research, this normally includes education (e.g. years of schooling completed), employment experience (e.g.

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years in the labor force, years in the occupation, years with employer), amount of vocational training, health status, and investments in job search. Cultural capital refers to such family background variables as parents’ education, their income, and/or occupational status. While the concept is associated today with conservative writers such as Lawrence Mead (1986, 1992) and Edward Banfield (1970), who perceive a high incidence of character deficiencies and deviant values in poor inner city neighborhoods, it also derives from the work of liberal sociologists who have studied the intergenerational transmission of social class or socioeconomic status (Blau and Duncan 1967; Jencks 1972; Sewell and Hauser 1975; Featherman and Hauser 1978). In the broader definition of cultural capital/socioeconomic status used here, inclusive of the behavior patterns of individuals and their family background characteristics, labor market success is affected at several points in the chain between an individual’s childhood and that individual’s later position in the labor market queue. Cultural capital/ socioeconomic status can affect educational attainment, which contributes to determining the types of occupation open to the individual. It can then affect how well an individual performs within a particular job within a specific firm. In a typical human capital model, education is exogenous. In a cultural capital/socioeconomic status model, education is endogenous. A relatively new approach to understanding labor market outcomes, under the rubric of social capital theory, focuses attention on how the social or institutional networks within which individuals are embedded constrain or expand labor market opportunities (Coleman 1988; Granovetter 1974, 1982). Social capital exists within families, neighborhoods, and communities. In terms of the labor market, social capital takes a number of forms. An important one is worker job referrals. Networks, as a form of social capital, can be either an asset or a liability. Some networks lead to increased human capital investment; others to dropping out of school. Some networks provide job leads that promote regular employment at decent wages; others socialize individuals to shun work in the regular labor market. In either case, social capital may play a significant role in explaining differences in individual employment and earnings outcomes. OPERATIONALIZING THE JOB COMPETITION MODEL Ultimately, the goal of this chapter is to better understand the major sources of labor market ‘success’ for individuals who belong to particular race/ethnic groups and to simulate expected hourly and annual earnings for a set of archetypal individuals. To that end, we calculate expected annual earnings as the product of the probability of being in the labor force, the probability of being employed, the expected number of hours worked per week, and the predicted hourly wage (multiplied by 52, to annualize). This requires that we estimate equations for the probability of labor force participation, the probability of unemployment, weekly hours, and hourly wages. In addition, we have made

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several sources of variation among individuals endogenous to the model. Thus, we estimate separate equations for education, the probability of using computers on the job, and the probability of searching for a job using ‘tight networks’ of family and friends. We then incorporate these seven equations in a simulation model to estimate annual earnings. This permits us to simulate earnings for individual groups of workers (e.g. black men; Hispanic women) under different assumptions regarding human, social, and cultural capital and compare these simulated earnings with those of white workers. Table 13.1 presents a list of variables used in this analysis. Table 13.2 presents the mean values and significance levels by gender and race/ ethnicity for the dependent variables estimated in this analysis. Table 13.3 presents the mean values by gender and race/ethnicity of the independent variables used in the overall model. A descriptive profile of our sample follows the next section, which explains our data source. The data set: the Greater Boston social survey The data used to implement this model come from a large sample survey of the resident adult population of the Greater Boston area. Respondents were queried about their racial attitudes, opinions about residential segregation, and labor market experience. The survey includes 1,820 face-to-face interviews with randomly selected respondents in selected households in Boston and surrounding cities and towns in eastern Massachusetts (the Boston Consolidated Metropolitan Statistical Area, Massachusetts portion). Larger samples of poor and minority households were included in the survey by disproportionately sampling from census blocks with more than 50 percent non-white populations. This permits a more detailed comparison of the experience of these groups with that of whites. A more detailed set of questions regarding high school experience was asked of the younger respondents, aged 21 to 34. Our analysis in this chapter is limited to this set of younger respondents. A description of younger Boston area workers As Table 13.2 shows, patterns across the race-gender-ethnicity groups differ for each of the dependent variables. With regard to education, among the women, whites score highest, followed by blacks and Hispanics. The typical white woman in our sample has completed nearly two years of college; the typical black woman is a high school graduate; the typical Hispanic woman did not complete high school. Non-Hispanic white and African-American men in our sample have completed more education than their female counterparts. This is not true of Hispanic men, who trail slightly the education level of Hispanic women. Indeed, in our sample, black men have a good deal of education, averaging nearly two years of college and trailing white men by less than a year, a

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Table 13.1 Variable list for labor market simulation model

difference which is not statistically significant even at the 0.10 level. This unexpectedly high level of education among black men in our sample may not be representative of the entire Greater Boston population. As is true of the US census, it is likely that many of the most disadvantaged black men in the region were not found, despite a survey design which oversampled in poverty neighborhoods. Essentially, our sample appears to represent a young black male population with more schooling, more skills, and better overall human capital than the young black male population at large. Although labor force participation rates vary, relatively high proportions of each race-gender-ethnicity group are in the workforce and none of the betweenrace/ethnic group differences is statistically significant. Differences in unemployment rates are also not statistically significant among the men. For women, however, blacks have substantially higher unemployment. The estimated unemployment rate for black women in our sample is over 23 percent. The unemployment rates for Hispanic and non-Hispanic white women are 13 and 7.5 percent respectively. The extremely high unemployment rates for black and Hispanic women are surprising and we searched for possible coding errors,

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Table 13.2 Means for dependent variables used in the analysis: Boston area workers, ages 21–34

Notes *** Significantly different from white mean at 0.01 level. ** Significantly different from white mean at 0.05 level.

peculiarities in the questions used to determine labor force status, and possible outliers with high sample weights. None of our efforts produced an explanation for these unexpectedly high jobless rates. Variation in hours worked per week among the women in our sample is relatively small, but variation among the men is substantial, with white men working, on average, over eleven hours per week more than black men. That white men report an average forty-eight hours of work a week reflects both a high level of multiple job holding and a high proportion of self employment. There are also sharp differences in the use of computers on the job. For both men and women, whites are nearly twice as likely as blacks to use computers on the job and nearly four times as likely as Hispanics. This differential access to jobs requiring computer use does not, however, appear to reflect differences in access to computer training in high school. While fewer Hispanics used computers in high school than whites, blacks appear to have had at least as much, if not more, access to computers while in school. Hence, if employers, when hiring workers or assigning particular jobs, ask employees whether they are familiar with the use of computers, the information does not appear to translate into job opportunities for blacks anywhere near as often as for whites.

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Table 13.3 Means for independent variables used in the analysis: Boston area workers, ages 21–34

Job search behavior also differs across the race/ethnic groups. Hispanics are far more likely to search for a job using tight networks of family and friends. Black women are more likely to use this method than white women. Finally, with respect to hourly wages, among women, whites earn higher wages; black and Hispanic women have similar wage rates. For the men, whites earn the highest, followed by blacks and then Hispanics. Table 13.3 provides the means of the independent variables used in our analysis. On the cultural capital variables, whites score the highest on most dimensions. Hispanics had mothers with very little schooling, and 45 percent of Hispanic women married when they were 18 or younger, compared with 6 percent or less for whites and blacks. Over 80 percent of white men and women lived in intact families for the most part at least up to age 16. For young black men and women, only 55 percent lived in such mother/father households. With regard to the human capital variables (other than education), whites are slightly older than either blacks or Hispanics. Variation in health status is greater among the men than among the women, with Hispanic men having the highest reported incidence of health limitations. Occupational experience varies more

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among the women than the men, with Hispanic women having the longest occupational experience of all groups and black women the least. With regard to social capital, whites had far greater access to cars while they were engaged in job search. Hispanics were most reliant on tight networks of family and friends to find jobs. On other dimensions, Hispanics lived in households with more children under 18, and were more likely to have a child under the age of 7. Blacks were more likely to be enrolled in school at the time of our survey. Indeed, more than a third of black women and more than 40 percent of black men reported that they were enrolled in school, at least part-time, at the time of the survey. This is still another indication that our sample of young blacks is less disadvantaged than the overall population of young blacks in the Greater Boston region. All in all, then, the young blacks in our sample trail whites by relatively small margins when it comes to basic human capital investments. Hispanics are at greater disadvantage. How these differences affect labor market success is the focus of the remaining sections of this chapter. Regression results Regression equations were run separately for men and women. For each of the seven equations in our model, we present our regression results below. For later simulation purposes, we include only those variables whose coefficients were statistically significant at least at the 0.10 level.1 Education (Table 13.4) Having a more highly educated mother had a greater impact on years of education for women than for men. Jewish women, ceteris paribus, have about two and a half additional years of education than other women, while Jewish men appear to have four and a half more years of schooling relative to other men.2 Those who received some of their education outside the United States were also more likely to have more education, reflecting no doubt that a significant number of immigrants to Boston came to take advantage of the region’s vast array of colleges and universities. Women who married young had about two and a half years less education than those who did not. Men who came from intact families had over one and three-quarters years more than those who did not. After accounting for these cultural capital variables, race remains a significant variable among women but not among men; Hispanic ethnic background is a significant determinant of education among men, but not among women. These equations explained 34 percent of the variance among women and 41 percent of the variance in education among men.

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Table 13.4 Labor market simulation model: education equation (dependent variable: Years of Schooling Completed)

Notes t-statistics in ( ). Significance level: *** <0.01, ** <0.05, * <0.10.

Labor force participation (Table 13.5) The men in this population had very high labor force participation rates. Our logit equation for men suggests that those with health limitations and those enrolled in school were, as expected, less likely to be members of the labor force. For women, the presence of a young child and the total number of children in the household reduced labor force participation, also as expected. Willingness to spend a longer time commuting to work increased labor force participation rates among the women, but not among the men. After accounting for these factors, race remained a statistically significant factor explaining labor force participation among women. Neither race nor Hispanic ethnicity makes a significant difference with regard to male labor force participation. Unemployment (Table 13.6) For both men and women, the probability of being unemployed declines with more education. Using a tight network of family and friends to search for a job also lowers the probability of unemployment for both groups. After controlling for education and search technique, we still found a statistically significant positive impact of Hispanic ethnicity on male unemployment. There appeared to be no remaining racial dimension, however. Among women, neither race nor ethnicity helps to explain variation in unemployment. The probability of being

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Table 13.5 Labor market simulation model: labor force participation equation (dependent variable: Labor Force Participation), logistic regression

Notes Standard errors in ( ). Significance level: *** <0.01, ** <0.05, * <0.10.

unemployed is lower for those who had access to a car while they searched for a job. Hours worked per week (Table 13.7) Among men, those who were married worked ten hours more per week on average, and each additional child in the household added about two hours to the total worked per week. On the other hand, being in school and having a young child reduced weekly work hours by five and a half hours and nine hours, respectively. Controlling for these variables, black men still worked about eight and a half fewer hours per week than whites, while Hispanic men worked about seven fewer hours per week than whites. For women, weekly work time is influenced by their health condition. Those reporting a health limitation work some four and a quarter hours less per week than those who report no such limitation. Those caring for a young child (under age 7) work, on average, nearly four hours less per week, and there is a reduction of two and a half hours per week to care for each child under 18. After accounting for these factors, married women worked an additional three hours, and, surprisingly, those in school worked about six and two-thirds additional hours a week—presumably working while attending school on a part-time basis. Hispanic women worked six and a half hours more than whites; black-white differences were not significant among women. These equations explained about 14 percent of the variance for women, and about 20 percent for the men.

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Table 13.6 Labor market simulation model: unemployment rate equation (dependent variable: Unemployment Rate), logistic regression

Notes Standard errors in ( ). Significance level: *** <0.01, ** <0.05, * <0.10. Table 13.7 Labor market simulation model: hours per week equation (dependent variable: Hours Worked per Week)

Notes t-statistics in ( ). Significance level: *** <0.01, ** <0.05, * <0.10.

Use of computer on the job (Table 13.8) According to our logit regression, workers with more education are more likely to be working at jobs requiring computers. In addition, among men the likelihood of employment-related computer use varies inversely with age. Controlling for both of these factors, race and ethnicity remain statistically significant, with both blacks and Hispanics much less likely to find jobs that require computer use.

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Table 13.8 Labor market simulation model: computer use on job (dependent variable: Use Computer on the Job Daily or Weekly), logistic regression

Notes Standard errors in ( ). Significance level: *** <0.01, ** <0.05, * <0.10.

Job search using family and friends (Table 13.9) Among women, those who are somewhat younger are more likely to use tight networks when searching for employment. Among men, the less educated were more likely to use this method. The race/ethnicity variables were significant only for the women. Black and Hispanic women were both more likely than whites to use this search method. Hourly wages (Table 13.10) The dependent variable we use is the natural logarithm of the hourly wage. For women, we find that wages vary positively with education, occupational experience, age, use of computers in high school, and use of tight networks in job search. Hourly wages, on the other hand, are lower for women who use a computer on the job, presumably because they are doing routine data entry work. After accounting for all of these variables, hourly wages still remain lower for black and Hispanic women relative to white. For men, factors associated with higher hourly wages are age, computer study in high school, and (in contrast to women) use of computers on the job. Also unlike the women in our study, using family and friends to search for a job reduced hourly wages for the men. After controlling for these factors, both race and Hispanic ethnicity remain statistically significant factors in wage determination. Our equations explained about 34 percent of the variation for women, and 60 percent of the variation for men. For each of these OLS and logit regressions, we tried a good number of possible regressors from the wide array of variables available in the survey file. On theoretical grounds, it would be possible to include literally dozens of variables existing on the file. However, because these regressions are only an intermediate step in the final simulation analysis, we chose to drop all variables which did not

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Table 13.9 Labor market simulation model: use of ‘tight networks’ in job search (dependent variable: SFAMFRND (Search through Families/Friends), logistic regression

Notes Standard errors in ( ). Significance level: *** <0.01, ** <0.05, * <0.10.

meet our 0.10 test of statistical significance. In a larger sample, it is possible that some of the variables which failed to meet our 0.10 test would indeed pass statistical muster, but for present purposes we chose this conservative approach to our estimation procedure. The simulation methodology In the final step of our analysis, we simulate expected annual earnings for white, African-American, and Hispanic workers based on the entire set of estimated OLS and logistic regression parameters. The equation for expected annual earnings is: (13.1) where Y=expected annualized earnings, pr (LFP)=probability of participating in the labor force, (1– pr (UR))=1– probability of being unemployed, H/ Wk=expected hours worked per week and W=expected hourly wage. By inserting appropriate simulation values for particular exogenous variables in the model and thereby simulating expected annual earnings under various economic scenarios, it is possible to gain insight into the factors responsible for differences in earnings within and across race/ethnic groups. We report a series of four

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Table 13.10 Labor market simulation model: In hourly wage (dependent variable: Natural Log of Hourly Wage)

Notes t-statistics in ( ). Significance level: *** <0.01, ** <0.05, * <0.10.

simulations: (1) a baseline scenario in which all exogenous and intermediate variables are set to their own mean values across race/ethnic groups; (2) a whitemean education scenario in which blacks and Hispanics are given white mean education levels, but retain their own means for other variables; (3) a whitehuman capital scenario, in which white means are used for all human capital variables, including education, age, health limitations, and studied computers in high school; and (4) a scenario in which white means are substituted for all independent variables. Our baseline simulations for young men are presented in Appendix Table 13.13. This baseline simulation represents a scenario in which all exogenous and intermediate variables are set to their mean values.3 This provides initial values for each of the components of the model for whites, AfricanAmericans, and Hispanics as well as an estimate of annual earnings based on equation (13.1). The ‘predicted values’ for each component follow directly from this procedure. To bring the baseline model estimates back to the actual group means for each race/ethnic group as an initial point for simulation purposes, we adjusted the predicted baseline values by the difference between the actual mean and the predicted mean for each race/ethnic group. Thus, the initial race-ethnic

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ratios in the simulation model reflect the actual race/ethnic ratios in the data. In most cases, the cross-race/ethnic OLS and logistic regression models fit reasonably well, so that the adjustment factors are small.4 Appendix Table 13.14 presents the simulation in which the white male education mean is substituted for black and Hispanic young men. Appendix Table 13.15 includes the white male ‘human capital’ means, while Appendix Table 13.16 presents the simulation including all white male means. Appendix Tables 13.17–20 provide analogous simulations for young women. The simulation results—men As noted above in our description of the data set, the young black men in our sample have nearly as much formal education as young white men (BM/WM=0. 94) while young Hispanic men trail significantly behind (HM/WM=0.74). There is little difference in the probability of being in the labor force across the three groups, although again Hispanic men trail the other two groups (BM/WM=1. 049; HM/WM=0.947). In contrast, however, Hispanic men have a lower probability of being unemployed than either blacks or whites (HM/WM=0.58). Combining the probabilities of being out of the labor force and being unemployed provides an estimate of the ‘jobless rate’ for each group—the proportion of the total group not presently working. The results suggest nearly equal rates across the three groups: 15 percent for white and black men; 16.5 percent for Hispanic men. Therefore, any differences that we find in annual earnings by race/ethnic group cannot be explained by race/ethnic differences in the jobless rate. There are significant differences, however, in the mean hours worked per week for the three groups (even after controlling for INSCHOOL). On average, black men work only 80 percent as many hours per week as white men (BM/ WM=0.801), while Hispanic men have a work week about 90 percent as long (HM/WM=0.898). Hence, differences in annual hours between the three race/ ethnic groups have little to do with labor force participation or unemployment rates, but do reflect differences in the probability of working part-time versus full-time work weeks. As for hourly wages, the mean natural log hourly wage for black men is about 90 percent of that of white men (BM/WM=0.895), while the Hispanic wage is approximately 84 percent (HM/WM=0.843). Translated into actual hourly wages by taking antilogs, the typical young black male worker in the Greater Boston labor market earns 78 percent as much as the typical white male worker; the typical Hispanic male worker only about two-thirds (HM/WM=0.672). Using equation 13.1 provides estimates of predicted annual wages for each group. The combination of lower weekly hours and lower hourly wage rates yields a predicted annual wage for young black men of $18,304–65 percent of the predicted annual wage for young white men in the sample. Young Hispanic

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males have a predicted annual wage of $16,677–59 percent of the white male wage. Various simulations can be used to help determine the source of these race/ ethnic wage differentials. In the first simulation, found in Appendix Table 13.14, we substitute the mean education level of white men (14.8 years) into simulations for black and Hispanic workers where all other exogenous variables are set at their respective black and Hispanic means. According to the model, education levels affect the probability of unemployment, computer use on the job, and the probability of using tight networks in job search. The higher education level reduces the predicted black male unemployment rate from 9.1 percent to 6.8 percent while reducing the Hispanic rate from 4.6 percent to only 2.8 percent. Access to jobs utilizing computers increases from 37 percent to 47 percent for blacks; from only 17 percent to 53 percent for Hispanics. In addition, use of tight networks declines from 37 percent for blacks to 29 percent, while it plummets for Hispanics from 73 percent to 38 percent. Both increased computer access and broader job search contribute to slightly higher hourly wages for blacks (the BM/WM ratio increases from 78.4 percent to 81.9 percent) and substantially higher wage rates for Hispanics (the HM/WM ratio increases from 67.2 percent to 79.2 percent). Finally, expected annual wages increase for both groups as a result of lower unemployment rates as well as the higher hourly wage rates corresponding to a simulated education level equal to the average white male level. What is clear from the simulation, however, is that, after controlling for education alone, the BM/WM ratio hardly improves, while there is substantial improvement in the HM/WM ratio. Overall, the BM/WM ratio increases from 0. 650 to 0.697—an increase of less than 5 percentage points—while the HM/WM ratio increases from 0.593 to 0.711—an increase of 12 percentage points. Closing the larger Hispanic/white education differential significantly improves Latino annual earnings. Substituting white male means for all variables into simulations for black and Hispanic workers provides an indication of remaining ‘unexplained’ wage differentials. Essentially, this analysis provides all three groups of young male workers with identical levels of formal education, the same probability of health limitations, similar family demographics, and similar use of job search networks. The BM/WM annual earnings ratio actually falls to 0.653, while the HM/WM ratio increases further to 0.773 beyond the ‘equal education’ scenario. A summary of these results is shown in Table 13.11. It is clear from these simulations that virtually none of the hourly or annual wage differential between young black men and young white men can be explained by differences in human capital or family demographics beyond the small impact emanating from the difference in education levels. Indeed, along some dimensions, young black men in our sample have characteristics that give them a slight edge over white men (e.g. fewer health limitations, more occupational experience, and greater access to computers in high school). The impact of race itself simply

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Table 13.11 Labor market outcome ratios by race and ethnicity: men (age 21–34)

overshadows these factors, leaving the typical young black male worker with an hourly wage only four-fifths as high as the typical young white male and an annual wage less than two-thirds as high as his white male counterpart. Of the 35 percentage point annual wage differential, approximately 20 percentage points are due to lower hourly wages, while the remaining 15 percentage points are due to a higher incidence of part-time employment. In contrast to our findings for black men, raising Hispanic male education levels could play an important role in raising relative earnings ratios. Simply substituting the white male mean education level into a simulation of Hispanic hourly and annual wages boosts the Hispanic hourly wage from 67 percent to 79 percent of the white level and raises the annual wage level ratio from 59 percent to 71 percent. Substituting other white male characteristics into the Hispanic simulation further raises relative wage ratios to 86 percent on an hourly basis and 77 percent on a yearly basis. Therefore, nearly 60 percent of the original hourly wage differential and 45 percent of the annual wage differential between young Hispanic and white men can be explained by differences in the human capital and demographic characteristics of the two groups. Ultimately, a substantial portion of the earnings gap between Hispanic and white men, but virtually none of the difference in earnings between black and white men, is attributable to differences in the mean values of the independent variables. This strongly suggests that race plays a much more important role in wage determination in the Greater Boston area than Hispanic ethnicity. Hispanics can substantially improve their earnings ability by investing in more human capital. The potential benefit from such investments for African-Americans is limited by what appears to be race per se. Substituting white characteristics into the model leaves the black annual wage essentially unchanged from the current mean value.

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The simulation results—women Analogous simulations were produced for young women. Both black and Hispanic women have lower labor force participation rates than white women (BF/WF=0.86; HF/W=0.90), holding INSCHOOL equal to zero. They also have significantly higher unemployment rates (BF/WF=3.45; HF/WF=1.87) and lower weekly hours (BF/WF=0.89; and HF/WF=0.96). Combined, these produce sharp differences in the ‘jobless rate’ for the three groups. Nearly half (49 percent) of the black sample of women are either out of the labor force or unemployed. This compares with only 38 percent for young Hispanic women and 27 percent for young white women. Therefore, unlike the case for men, there are large differences in annual wages among the three race/ethnic groups due to differences in jobless rates. On the other hand, the race/ethnic differences in hours worked per week are quite small relative to those for men. Young black women work nearly 90 percent as many hours per week as young white women (BF/WF =0.89), while young Hispanic women work 96 percent as many hours. For women, therefore, differences in annual wages are much more influenced by race/ethnic differences in joblessness than in hours worked per week. The opposite is true for men. The mean natural log hourly wage for black women is 86 percent of that of white women (BF/WF=0.864). This is virtually the same ratio as that between Hispanic and white women (HF/WF=0.866). Translated into actual hourly wages by taking antilogs, the typical young black or Hispanic female worker in the Greater Boston labor market earns 73 percent of the typical white female worker. According to equation 13.1, the combination of lower weekly hours and lower hourly wage rates yields a predicted annual wage for young black women of $7, 608—only 45 percent of the predicted annual wage for young white women in the sample. Young hispanic women have a predicted annual wage of $9,894–58 percent of the white female wage. The higher Hispanic annual wage is almost entirely due to this group’s lower probability of unemployment and its longer work week. Additional simulations in the appendix tables provide information on the source of these large race/ethnic wage differentials. In the first simulation, found in Appendix Table 13.18, we substitute the mean education level of white women (13.75 years) into simulations for black and Hispanic workers where all other exogenous variables are set at their respective black and Hispanic means. According to the model, education levels affect the probability of unemployment, computer use on the job, and the hourly wage. The higher education level reduces the predicted black female unemployment rate from 23.5 percent to 16.7 percent while reducing the Hispanic rate from 13.1 percent to only 3.3 percent. Access to jobs utilizing computers increases from 39 percent to 49 percent for blacks; from only 18 percent to 31 percent for Hispanics. Ironically, however, higher use of computers on the job adversely affects the wages of women, as we noted earlier. The net effect of greater

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Table 13.12 Labor market outcome ratios by race and ethnicity: women (age 21–34)

education operating directly on the hourly wage (positive) and indirectly through computers on the job (negative) leads nevertheless to a net improvement in the race/ethnic hourly wage ratios. The black/white female ratio increases from 0. 726 to 0.796; the Hispanic/white ratio increases from 0.724 to 0.858. Annual wage rate differences close to 0.551 for blacks from 0.448 and for Hispanics to 0. 775 from 0.582. Hence, black women as well as Hispanic women see improved hourly and annual earnings as a result of increased education. Substituting white female means for all variables into simulations of black and Hispanic workers provides an indication of remaining ‘unexplained’ wage differentials. The BF/WF annual earnings ratio does not improve beyond the increase due to education alone. In contrast, substituting white means into the Hispanic simulation closes the entire remaining gap in annual wages between young Hispanic and white women, allowing them to achieve wage parity with their white counterparts. A summary of these results is shown in Table 13.12. It is clear from the simulations that a reasonable fraction of the hourly and annual wage differential between young black women and young white women can be explained by differences in human capital. However, differences in demographics between black and white women have no effect on the wage differential. After controlling for these differences, the gaps in both hourly and annual wages remain large. In contrast, both human capital and demographic differences between Hispanic and white women explain all the difference in annual wages. Thus, for women, race still matters in explaining earnings; Hispanic ethnicity does not.

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CONCLUSION Several observations flow from the results we have presented here. First, race continues to be a critical dimension of differences in labor market success. Whites and blacks with similar characteristics do not receive similar annual earnings. Daniel R.Fusfeld was correct when he specified not just an urban crisis but an urban and racial crisis. Second, the potential pay-off to investments in human capital is different for blacks and Hispanics. Young Hispanics in the Greater Boston area currently have much lower human capital stocks than whites. Our simulations demonstrate that their relative earnings can be improved substantially through additional human capital investment. On the other hand, blacks have less of an initial deficit in human capital relative to whites than do Hispanics, and further increases in human capital investment do not have much of an impact in closing the relative earnings gap. Third, Fusfeld was also correct in emphasizing the importance of access to good jobs. Today, however, there are new dimensions to such access. Unlike the 1960s, higher-paying jobs today require the use of computers in non-routine applications. It is not computer use per se but use beyond menial data entry purposes that yields higher wages. It is clear that, at least in the Greater Boston labor market, neither blacks nor Hispanics have anywhere near the same access to such jobs as whites. Fourth, it is important to remember that this analysis ignores the most disadvantaged of young workers. The youngest workers in our sample are at least 21 years old. Moreover, our sample does not include the most marginal people in the area, many of whom are likely to be young black males. If this group were represented, our results would almost surely suggest an even greater gap in labor market success along racial lines. After three decades, the urban and racial crisis is, unfortunately, still with us. Dan Fusfeld was right when he peered into his crystal ball and suggested that poverty and race would remain serious problems for urban America ‘indefinitely into the future’. APPENDIX 13.1 SIMULATION MODEL RESULTS

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Table 13.13 Factors contributing to wage differences, men: baseline simulation

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NOTES 1 In developing these regression equations, we initially prepared two sets of estimates —one using the unweighted survey data, the second using weights designed to adjust for the sampling frame, which purposefully oversampled poverty tracts. Analysis of our initial regression runs suggested that the estimates from the weighted equations produced more plausible results despite some loss in efficiency. Hence, all of the OLS and logit regressions presented here have been run with sample weights. These have been adjusted to maintain the original sample sizes for the purpose of calculating standard errors. 2 A recent article in the Boston Globe about why rabbis elsewhere are particulary eager to move to the Boston area refers to the unusually high levels of education within the Boston Jewish community. See Diego Ribadeneira, ‘A Time of Change’, 27 January 1996. 3 The one exception is the variable INSCHOOL. This is set to zero in all simulations in order to restrict our scenarios to those who have completed their schooling and therefore are not restricted in their labor force participation or hours worked by reason of current school responsibilities. 4 The main exception was found in the unemployment logistic regression, where the model underestimates the mean unemployment rates for all three race/ethnic groups. While we are not certain as to the reason for this error, it is likely to be caused by parameter instability in logistic regression when only a few cases diverge from 0.

REFERENCES Banfield, E. (1970) The Unheavenly City, Boston: Little Brown. Blau, P. and Duncan, O.D. (1967) The American Occupational Structure, New York: John Wiley. Bluestone, B., Massagli, M. and Stevenson, M.H. (1996) ‘A Job Competition Model of Wage Determination: Applications to Blacks, Hispanics, and Whites in the Greater Boston Labor Market’, paper prepared for Russell Sage Foundation Conference on the Multi-city Study of Urban Inequality, February.

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Coleman, J. (1988) ‘Social Capital in the Creation of Human Capital’, American Journal of Sociology, 94 (Supplement P.S. 96): F95–120. Doeringer, P.B. and Piore, M.J. (1971) Internal Labor Markets and Manpower Analysis, Lexington, MA: D.C.Heath. Featherman, D.L. and Hauser, R.M. (1978) Opportunity and Change, New York: Academic Press. Fusfeld, D.R. (1968) ‘The Basic Economics of the Urban and Racial Crisis’, Report No. 1, Conference Papers of the Union for Radical Political Economics, December. Granovetter, M. (1974) Getting a Job: A Study of Contracts and Careers, Cambridge, MA: Harvard University Press. —— (1982) ‘The Strength of Weak Ties: A Network Theory Revisited’, in P.V. Marsden and N.Lin (eds) Social Structure and Network Analysis, Beverly Hills: Sage Publications. Jencks, C. (1972) Inequality: A Reassessment of the Effect of Family and Schooling in America, New York: Basic Books. Mead, L. (1986) Beyond Entitlement: The Social Obligations of Citizenship, New York: Basic Books. —— (1992) The New Politics of Poverty: The Nonworking Poor in America, New York: Basic Books. Mishel, L. and Bernstein, J. (1994) The State of Working America 1994–95, Armonk, NY: Sharpe. Sewell, W.H. and Hauser, R.M. (1975) Education, Occupation, and Earnings, New York: Academic Press. Thurow, L. (1975) Generating Inequality: Mechanisms of Distribution in the US Economy, New York: Basic Books. Wachtel, H.M. (1992) Labor and the Economy, 3rd edn, Fort Worth: Harcourt Brace Jovanovich.

ACKNOWLEDGEMENT The survey was designed through the efforts of the Research Coordinating Committee of the Multi-city Study of Urban Inequality (MCSUI), a consortium of researchers based at Emory University, the University of Georgia, Georgia State University, University of Massachusetts at Boston and at Lowell, the University of Michigan, and UCLA. Funding for the survey was provided by the Russell Sage Foundation and the Ford Foundation in their efforts to provide data that can be used to focus on improving our understanding of labor market dynamics and its relationship to racial attitudes and patterns of residential location. Parallel surveys have been conducted in Boston, Atlanta, Detroit, and Los Angeles. For additional detail, see Bluestone et al. (1996).

14 INSTITUTIONS AND INSTITUTIONALISM Crisis and opportunity Wallace C.Peterson

In the last chapter of his masterwork, The General Theory of Employment, Interest and Money, John Maynard Keynes said, ‘The outstanding faults of the economic society in which we live are its failure to provide full employment and its arbitrary and inequitable distribution of income’ (1936:372). Sixty-one years later, not only are Keynes’s words still true of our economy, but they also reflect Dan Fusfeld’s major concern throughout his long and creative academic career— achieving a just and humane economic order. No such order is possible without productive jobs for all persons seeking work, and far less concentration in the distribution of both income and wealth in our society than now exists. Unfortunately, decent jobs and a fair share of income and wealth not only continue to elude far too many Americans, but the nation’s economy has fallen into a long-term state of semi-stagnation, what I call a ‘silent depression’ (Peterson 1994). Primary evidence for the argument that the economy is in a depressed state is the decline in real income for 80 percent of American workers, the stagnation of family income, and a drastic slowdown in the growth of productivity, all of which date from the early 1970s.1 These long-term trends, which contrast sharply with the buoyant growth and rising expectations that characterized the quarter-century after World War II, described as the ‘Age of Keynes’ (Hicks 1974:1), gave rise to what a recent issue of Business Week described as ‘The New Populism’ (13 March 1995:72 n.). The torrent of discontent which fueled the Republican ballot-box ‘revolution’ of November 1994 involved a mixed bundle of anger, fear, and anxiety. While its roots lie in economic decline, it burst on to the public stage in a variety of forms —hostility to foreign trade (the anti-NAFTA sentiment), fear of illegal and even legal immigration, anger over corporate ‘downsizing’ and lost jobs, a resurgence of racism and hostility to affirmative action, militant demands by the religious right for strong action to shore up the nation’s morals, and, overall, growing animosity toward government and all its works. When we probe beyond the economic numbers and daily anecdotal events through which the media chronicle the nation and its discontents, we find there is a serious crisis in modern America—more elusive and subtle than the economic crisis of the 1930s, but a crisis none the less. The crisis confronting our system of market-based, big-government, democratic capitalism is essentially

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institutional in nature. Hence the title of this chapter. It involves both economic and social institutions. Among the latter are included the family, the Church, the agencies of protection and social harmony (police and the courts), the forces shaping our popular culture, especially Hollywood, television, talk radio, the print media, and, finally, the community itself. Important as they are, these institutions are mentioned only in passing. The focus is primarily on economic institutions. The perspective is that of institutionalism, which may be characterized as follows. First, institutionalism sees the economic process as organic and not mechanical; a process that is rooted in real, historical time. Second, economic forces work through a relative handful of institutions. Third, within the economy and beyond purely economic factors, forces of conflict, coercion, power, and competition are relentlessly at work, changing and shaping the institutions that influence economic behavior. Most institutionalists are liberal democrats in the modern sense, which is to say they believe that government has an obligation to soften and tame the excesses and injustices that are the frequent result of uncontrolled market activity. They are firmly committed to democracy, believing that the end purpose of economic activity is to help individuals reach their maximum potential. Society through government creates and shapes the institutions that contribute to this end, but the institutions so created also influence government and how it works. It is a two-way process, Although the ultimate focus in institutionalism is on the freedom and potential of the individual, this is much different from how the individual is seen in neoclassical economics. In the neoclassical view, all economic activity starts and ends with the individual, whereas in institutionalism the individual cannot be separated from the economic and social institutions which shape and influence behavior and attainments. The institutionalist perspective raises the following crucial questions. What are the major forces that shape our economic lives? What institutions are critical to the economic process? What, precisely, is the nature of the crisis we now confront? These are the questions this chapter addresses. The main economic forces that shape our daily lives center around capital formation, both public and private, technology, labor and its skills, human needs, and the process of want creation. Wants and needs are not the same thing. Having enough income to live above the poverty level is a necessary human need, but it is not a ‘want’ in the usual economic textbook sense. The market responds to wants, as they are money-driven, but it does not necessarily respond to needs, because the money may not be there. Thus government and some private entities—e.g. the Salvation Army, the Red Cross—must often step in and supply money if essential needs are to be transformed into wants to which the market will respond. The key institutional arrangements through which these forces operate include the private market, government, the military arm of government, and money and finance. The list is not exhaustive, but these institutions are strategic.

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A modern ‘general theory’—a grand economic design—should identify and explain the relationship between economic forces and the institutions through which they work. Further, the theory should explain why the economic process proceeds as it does, and how we can influence its behavior when desirable. Classical general equilibrium theory purports to be such a theory, although it is simply not up to the task of explaining how the modern economic world really works.2 The comments in this chapter do not constitute such a theory, but they underscore some of the elements that must enter into a modern theory. THE PRIVATE MARKET Let us start with the private market. There are two reasons. First, the market is clearly a dominant institution in our complex economy, accounting for— depending upon how one measures—from 66 to 83 percent of all economic activity. Second, in the contemporary ideological climate, the private market is pushed as a solution to practically all of our economic ills. ‘Privatize’ is the buzz word used to describe this approach to solving our problems. Milton Friedman went so far in a full-page article in The Pittsburgh Star Gazette (1995: F1) to say, now is the time to privatize the entire public school system, from grades K through 12.3 The private market is efficient in many ways, but its failures—sometimes described rather innocuously as ‘externalities’ by mainstream economics4—are growing, not decreasing. When thinking about the private market, we must not forget it is a creature of society, brought into existence by government. Without the framework of property law, contract law, and a reliable system of money, created and enforced by government, the kind of smoothly operating, moneybased markets we all know would collapse, throwing us into a crude and clumsy market system based upon barter. Which market failures bear upon our current situation? First, there is the failure to reach and sustain full employment, a major source of the discontent and anxiety pervading today’s economic climate. At the very least, full employment means that persons seeking work can find work related to their education and skills at a wage or salary that provides a decent standard of life. The only time we came close to genuine full employment was during World War II, when unemployment as a percent of the civilian labor force dropped to 1.2 percent. The Kennedy-Johnson administration set a 4.0 percent unemployment rate as a tentative full employment target, a goal exceeded over the 1966–69 period, when unemployment averaged 3.7 percent of the civilian labor force (Economic Report of the President 1996:324). Unhappily, it was the Vietnam War that brought such low unemployment. From 1948 through 1973, unemployment averaged at 4.7 percent of the civilian labor force, but from 1974 through 1994 the average rose to 7.0 percent, well in excess of even the modest target posed by Presidents Kennedy and Johnson (ibid.). If discouraged and part-time workers are factored in, the real

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unemployment rate is 10 percent or more. The 1978 Full Employment and Balanced Growth Act (the Humphrey-Hawkins Bill) established a 3 percent unemployment rate for workers over 20 and a 3 percent inflation rate, goals that were supposed to be reached by 1983. Although this act remains on the federal books, it has been totally ignored. The truth is that this nation has not had a full employment policy since the 1960s, even though the Employment Act of 1946 states that it is the responsibility of the federal government to ‘promote maximum employment, production, and purchasing power’. Why have we turned our backs on the goal of full employment for the American economy? Part of the answer is found in politics, as conservative administrations—Nixon, Ford, Reagan, and Bush—simply were not interested in pursuing a full employment policy, believing that employment is a matter best left to the ‘magic of the market place’. Since World War II, the Democratic Party has been the nominal champion of the idea of full employment, but this has not been a high priority item in the Clinton administration. Politics aside, a large share of the blame must rest with mainstream economics, which has promoted the concept of a ‘non-accelerating inflation rate of unemployment’, NAIRU for short. In practice, NAIRU, also defined as the ‘natural rate of unemployment,’ turns out to be around 5 or 6 percent, close to the average actual official rate that prevailed after 1973. To put it somewhat more crassly, whatever rate of unemployment actually exists is deemed ‘natural’. William Vickery of Columbia University, a former president of the American Economic Association, says that NAIRU is one ‘of the most vicious euphemisms ever coined’ (1993:2). A 5–6 percent overall unemployment rate, he asserts, means ‘unemployment rates of 10, 20, or even 40 percent among disadvantaged groups, with resulting increases in poverty, homelessness, poor health, drug addiction, and crime’ (ibid.). A second major market failure involves the quality of jobs and the incomes they provide for American workers and their families. In the last twenty-plus years the quality of work as reflected in the incomes received by workers deteriorated drastically. This is of major importance because 75 percent of Americans depend directly upon work for their livelihood. The extent of the deterioration can be documented in several ways. First, there is family income as measured in real dollars. Between 1947 and 1973 (the Age of Keynes), median family income rose at the healthy pace of 2.5 percent a year, a rate of gain that brought millions of blue-collar workers into the ranks of the middle class. After 1973, however, family income stagnated, rising, on average, by only 0.9 percent a year. Actually, median family income in 1993 was only 0.2 percent higher than in 1973 —$36,959 versus $36,893 (in 1993 dollars) (Economic Report of the President 1995:310). Behind these figures lies a severe decline in the purchasing power of the average hourly and weekly wage for workers in the private sector. From 1973 through 1995, real weekly wages dropped by 18.9 percent, and real hourly wages by 13.1 percent. During this period the growth rate of real weekly wages was • 0.

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94 percent and for real hourly wages • 0.63 percent (Economic Report of the President 1996:330). On an annual basis, real wages and salaries per employed worker without fringe benefits grew a minuscule 0.3 percent. In contrast, from 1947 through 1972, the rate of growth of real wages was a robust 4.8 percent! Some critics of these figures argue that the reason for the decline in real weekly and hourly wages was that workers in the 1973–93 period elected to take more of their income as fringe benefits than as take-home wages. To a certain extent, this is true, but the trend has been under way since immediately after World War II. From 1973 through 1994, fringe benefits as a percent of total labor compensation (wages and salaries plus fringe benefits) rose from 12.8 percent to 18.1 percent, a 41.4 percent relative increase. None the less, fringe benefits as a percent of total compensation rose even faster from 1947 through 1972, going from 5.4 percent in the former year to 11.5 percent in the latter year, a relative change of 112.8 percent (Economic Report of the President 1995:302; 1987: 270). These aggregate figures make it clear that workers choosing to take more of their pay in income supplements (fringe benefits) were not the cause of the sharp drop in take-home pay after 1973. Another dismal aspect of the employment picture is the rise in the number of year-round, full-time wage and salary workers with what the Department of Commerce calls ‘low annual earnings’—the working poor, in other words. According to the Department of Commerce, workers have ‘low earnings’ if their annual earnings are less than the poverty level for a four-person family. In 1964 —the first year for which the data are available—20.5 percent of all full-time wage and salary workers had low annual earnings, but by 1974 the percentage had dropped to 10.1. After 1974 it rose steadily, reaching 16.8 percent by 1990. For male workers, the percentage fell from 12.9 in 1964 to 5.5 in 1974, then climbed back to 12.6 percent in 1990 (US Department of Commerce 1992:3). Here is a partial explanation for the emergence on the political scene of the so-called ‘angry white males’ who presumably played such a pivotal role in the 1994 Congressional elections. Another explanation for the worsening wage situation is the loss of wellpaying manufacturing jobs, the traditional ‘ticket’ for blue collar entry into the middle class. Since 1980, when manufacturing employment peaked, 1.9 million manufacturing jobs have disappeared from the American economy. Where did those workers go? Many dropped out of the labor force altogether, while those who did not mostly went to lowerpaying jobs in the service sector. In 1973, average weekly wages in manufacturing were 72.6 percent higher than jobs in retail trade, but by 1994 the differential had risen to 134.0 percent (Economic Report of the President 1995:326). A third major failure of private markets is a worsening distribution of income. Department of Commerce studies on the distribution of family income show a significant and measurable increase in income inequality, especially in the share of income going to the top fifth of families. In 1974 the top 20 percent of families received 41.0 percent of family income, their lowest percentage since

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1969. By 1992 their share of families at the top has jumped to 44.6 percent, a relative increase of 8.8 percent. For families in the top 5 percent their relative gain was 14.3 percent; they saw their share rise from 15.4 percent in 1974 to 17.6 percent in 1992 (US Department of Commerce 1993a: B13). The foregoing developments reverse a trend toward greater equality in income distribution in the United States that had been under way since the mid 1930s. From 1936 through 1973 inequality in the distribution of family income as measured by the Gini coefficient dropped by 20.5 percent. Specifically, the share of the top 5 percent of families dropped from 26.5 in 1936 to 15.5 in 1973, while the share of the lowest 20 percent rose 4.1 to 5.5 percent in the same period (US Department of Commerce 1975:293, 301; 1993a: B13). In the 1920s, the extent of income inequality was even more extreme, a factor that undoubtedly contributed to the Crash of 1929 and the Great Depression. Income distribution and poverty are closely linked. Normally, a worsening in the distribution of income will lead to an increase in poverty in an absolute sense —that is, the percentage of persons or families living below the family line. If income distribution becomes less equal, there is normally an increase in relative poverty, the proportion of persons or families in the lower income ranges. It is possible, of course, that absolute poverty might decrease even though the distribution of income becomes less unequal. A period of high and rapid growth might bring this about. This, however, is not what has happened; after 1973 both absolute and relative poverty increased. From 1973 through 1992 the poverty rate for families rose from 9.7 to 13.0 percent, an increase of 34.0 percent. In contrast, between 1969—the first year for which relatable poverty figures are available—and 1972, the poverty rate for families dropped from 20.8 to 10.3 percent, a decline of 50.5 percent! It is hardly a coincidence that these same years saw a significant decline in income inequality (US Department of Commerce 1992:3). Just how badly the market distributes income is shown in a pioneer Department of Commerce study which measured the effect of taxes and transfer payments on the distribution of income to households. In 1986, the top 20 percent of households received 52.5 percent of market-based income and the poorest 20 percent received a mere 1.0 percent of income derived from the market. ‘Marketbased’ income was defined by the Commerce Department as money income prior to taxes, less all government cash and in kind transfers. After taking into account both taxes and transfers, the share of the top fifth fell to 45.5 percent and the lowest fifth climbed to 4.9 percent. In this study, the Commerce Department found that transfers, both in cash and in kind, were far more effective in reducing inequality than were taxes (US Department of Commerce 1988:5). Finally, brief mention should be made of health care, a fourth major failure of the market system. Except for senior citizens and the poor, the financing of health care is left to market forces. The result is a health care system that not only is excessively costly—the United States devotes a higher proportion of its GDP to health care than other advanced nations—but leaves 35 million or more

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without medical insurance. The uninsured make up about 20 percent of the nonelderly population. Who are these people? According to the Committee on Ways and Means of the US House of Representatives, the majority of people who are uninsured for a year or longer are among the poor or near poor (1992:321). This is to be expected, for persons in poverty or in the ranks of the working poor are not able to afford private insurance. Many of the remainder are young and not covered by insurance plans through employment. For the poor there is Medicare, but comprehensive data on all the economic and demographic characteristics of the uninsured don’t exist. Because of the failure of the Clinton administration’s health care initiative, the prognosis for any substantial and immediate change in the system is poor. THE ROLE OF GOVERNMENT Let us now turn to government, the second of the key institutions which are a part of the nation’s institutional crisis. Essentially, the crisis is one involving a loss of confidence in all government, but especially in the federal government. In a recent poll conducted by Business Week magazine (23 January 1995:41), only 8 percent of the respondents expressed a ‘great deal’ of confidence in the federal government. State and local government fared only slightly better, with a 9 percent confidence vote. Further, an overwhelming 73 percent blamed increased government spending for the nation’s economic woes, while 61 percent put the blame on high taxes (20 November 1995:138). In the 1994 congressional elections, the Republicans brilliantly exploited the nation’s economic stagnation, turning the frustration and hostility of the voters against government at all levels. Unlike the situation in the private market, where we have hard statistical evidence of its failings (job and income distribution data), the matter is more subjective when it comes to government. To the extent possible, we need to separate fact from myth. A part of the myth about the federal government that fuels the crisis is the belief that both the size of the federal government and its spending are out of control. The facts tell a different story. The government’s size —measured by total federal spending as a proportion of the gross domestic product (GDP), both in constant dollars—has declined slightly since the 1950s, for which there is much nostalgia these days. In the 1950s, real federal spending averaged at 22.9 percent of the GDP, compared with 21.6 percent in the 1960s, 20.1 percent in the 1970s, 21.3 percent in the 1980s, and 21.3 percent in the 1990s (Economic Report of the President 1987:246–9, 335; 1996:282–5, 367). The remarkable fact is the near stability of federal spending measured in relation to total output over ten presidencies, from Truman to Clinton. More interesting numbers are the numbers relating federal spending for goods and services to the GDP, also in constant dollars. This spending uses resources and represents the proportion of the nation’s output originating in the national government. The difference between this figure and total federal spending consists of federal transfer payments. From this perspective the share of the nation’s total

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output ‘pie’—the GDP—originating in the federal government has steadily declined, averaging at 15.2 percent in the 1950s, 14.7 percent in the 1960s, 9.9 percent in the 1970s, 9.1 percent in the 1980s, and 8 percent to date in the 1990s (ibid.). Between the 1950s and now there has been a drastic increase in transfer spending as a proportion of total federal spending, so much so that now transfer payments account for two-thirds of all federal spending as compared with onethird in the 1950s (Peterson 1991:25). A more important reason for the collapse of confidence in government is psychological rather than economic. The largest population bloc in the nation consists of the ‘baby-boomers’, many of whom came of working and voting age during the Johnson, Nixon and Carter administrations, presidencies widely conceived as having failed. For other ‘boomers,’ their early career and household formation years roughly coincide with the years when Ronald Reagan was in the White House. During his eight years in office, President Reagan consistently hammered away at the theme, ‘government is not the solution to the problem; it is the problem’. As President, George Bush did little or nothing to change this climate of opinion, even though he spent practically his entire working life in government. Clinton, too, played the anti-Washington theme—read antigovernment—in his campaign, which, no doubt, is one reason why he has found it difficult to muster popular support for a more activist-government stance after taking office. Two more sources for the crisis in confidence affecting government in America must be mentioned, both of which stem largely from ‘sins of omission’ by economists. The first involves governments and economic value. Governments create economic value, because in a democracy, at least, what governments do is what people want. A difficulty in calculating the value of government output is that it is not measured directly in the market place by price, as is the case with most things we buy and use. At base, the question is philosophical. Surely, one would not want to argue that production of cancerproducing cigarettes is of greater economic or social value than production of education through schools? Another difficulty is that the value inherent in government activity is collective, not individual. Economic value that originates in the public sphere has not received adequate attention in the teaching of mainstream economics, which accepts uncritically those ‘values’ inherent in individual decisions stemming from the market place. If the profession had paid more attention to this issue, it would not have been so easy for politicians routinely to picture governmental activity as a net drain on the private economy. Most of the Republican ‘Contract with America’ rests implicitly on the assumption that the only ‘real’ economic value is that which originates in the market place. A second ‘sin of omission’ is the failure of most macroeconomic analysis to include public capital in its analysis of investment spending, even though public capital is equal to about one-third of the nation’s total stock of fixed capital. This is partly a legacy of Keynes because of his emphasis upon private investment and

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its volatility as a source of economic instability. It is also a consequence of the way national income accounting developed in this country, because in the past no distinction was made in our national accounts between capital and current spending by governments—federal, state, and local. This is changing, for the Council of Economic Advisers in its most recent annual report (Economic Report of the President 1996:280) has revised the times series on government spending for goods and services to distinguish between government consumption and government investment. This is a welcome step. Economists—especially institutional economists—should take the lead in urging that the federal government adopt a capital budget, something that many states have, as do nearly all business firms of significant size. THE INSTITUTION OF THE MILITARY Let us now turn to the military. Some may wonder why the military establishment is viewed as an institution in its own right. Should it not simply be regarded as a part of the federal government—a troublesome branch, but a branch nevertheless? No. Forty years of Cold War rhetoric and spending have led to a complete institutionalization of the national security state and its industrial and CIA appendages. The economic and political power of the Military-IndustrialCIA combination is enormous, rivaling or exceeding in scope the power exercised by most other pressure groups. A few simple statistics underscore this conclusion. Since 1947, on average, slightly more that 75 percent of the federal government’s purchase of goods and services has been to nourish the military. When three-quarters of the output of our national government is devoted to military purposes, it is reasonable to conclude that ‘Military Keynesianism’ is in the saddle.5 The more than $5.5 trillion spent on troops and hardware since World War II has been a major prop (a modern-day PWA) for the American economy, especially for well-paying jobs in the defense industries. That is the positive side of Military Keynesianism. The negative side is the continued diversion of a significant proportion of the nation’s scarce scientific and engineering resources to the design and production of military hardware. It is a major factor in the slowdown in productivity growth. The adverse linkage between military spending and the economy’s technological progress is thoroughly analyzed by Lloyd Dumas, Professor of Political Economy and Economics at the University of Texas at Dallas. In his book The Overburdened Economy, Dumas estimates that since 1974 roughly 60 percent of federal R&D money has been spent for what he calls ‘distractive research’, which is direct military-related research or space research tied to the military. Further, he finds that about one-third of engineering and scientific R&D research is militaryoriented (1986:208–12). Between 1947 and 1973, productivity (output per person in the non-farm business sector) in the American economy grew at an annual average rate of 2.5

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percent. This rate was about equal to the nation’s long-term historical average for productivity growth. From 1973 through 1995, the annual rate of growth dropped to 1.3 percent (Economic Report of the President 1987:294; 1996:332). As MIT economist Paul Krugman has said, ‘Productivity isn’t everything, but in the long run it is almost everything’ (1990:9). At one time, Cold War military spending—aside from being a shield against a feared military threat from the Soviet ‘Evil Empire’—was rationalized because of the many spinoffs from the military to the civilian economy—jet aircraft, microchips, satellites, and computers come to mind. This is no longer the case. As early as 1974, a committee of the National Academy of Engineering reported: With a few exceptions, the vast technology developed by federally funded programs since World War II has not resulted in widespread ‘spinoffs’ of secondary or additional applications of practical products, processes and services that have made an impact upon the nation’s economic growth, industrial productivity, employment gains, and foreign trade. (1947:17) Since 1974, modern weaponry has become so increasingly esoteric that hardly any spinoffs still exist (Kaldor 1981:20–2, 55). Further, any fiscal stimulus that came from military spending is long gone, more than offset by the deflationary consequences of interest payments on the federal debt. This is so because initial increases in military spending, to the extent that they are financed by deficit spending, do have an expansive effect, but their consequences in the form of higher debt and larger interest payments linger on long after the initial stimulus is gone. In fiscal year 1995, interest on the debt ($232.2 billion) was nearly equal to military outlays ($259.6 billion) (Current Economic Indicators 1996:33). MONEY AND FINANCE Finally there is the realm of money and finance, where some of the most farreaching, if not awesome, institutional changes of our era are taking place. From the time of Veblen, institutionalism has stressed the dichotomy between ‘making money’ and ‘making goods’. The objective of business in a market economy is to make money. If this can be done by making things, well and good. If it can be done by speculation in the value of things that already exist, that too is legitimate. Fortunately for our real standard of life, most business people must make money by producing things that are useful. But not always. Since the early 1970s, there has been an explosion in financial transactions, one that not only dwarfs the production economy nearly everywhere, but also has spread to every corner of the globe. Kevin Phillips describes this as the ‘financialization’ of both the domestic and the global economy, a process that characterized Spain, Holland, and Great Britain in the late stages of their empires (1993:193 n.). Excessive growth of debt, a flourishing rentier class, and financial

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speculation are, in Phillips’s view, are the key characteristics of this ‘financialization’ process. Does America fit this description? More, probably, than most Americans want to admit. Between 1970 and 1994, private debt grew at an annual average rate of 20.0 percent, as compared with 8.4 percent annual growth rate for personal income and 7.32 percent for per capita income. In the same period, the federal government’s total debt grew annually at a 10.8 percent rate, compared with 8.5 percent for its income (Economic Report of the President 1996:311, 364, 366, 367). Of course, debt supports capital investment, but the bulk of the public debt amassed in the 1970s and 1980s was for consumption in the form of military outlays. Consumers acquired capital in the form of new houses, but they were also continuously exhorted by the financial industries to use their equity in their homes for boats, vacations, and other consumption. One of the things that Keynes looked forward to was the euthanasia of the rentier, arguing that ‘Interest today rewards no genuine sacrifice, any more than does the rent of land’ (1936:376). Quite the reverse has been happening. In 1970, interest accounted for 8.3 percent of personal income; by 1994, this percentage had climbed to 11.5 (Economic Report of the President 1996:309). What of financial transactions of a speculative nature? One way to measure them is to compare transactions on the New York Stock Exchange with transactions involving the production, exchange, and consumption of goods and services. In 1970 the total value of shares traded on the New York Stock Exchange was $135.1 billion, equal to 13.03 percent of the GDP. By 1995 the value of shares traded on the exchange had reached $2,538.0 billion, a figure now equal to 35.03 percent of GDP. During these years the annual average rate of growth in stock market values outpaced the monetary growth of domestic output by 12.4 percent to 8.1 percent, a clear reflection of the increase in speculative activity.6 This is a valid comparison, for, as Keynes noted in The General Theory, the energies and skills of the professional investor and speculator are ‘not concerned with making superior long-term forecasts of the probable yield of an investment over its whole life, but with foreseeing changes in the conventional basis for valuation a short time ahead of the general public’ (1936:159). In a neglected chapter in The General Theory (chapter 12), Keynes spoke eloquently of the difference between enterprise and speculation. To paraphrase, speculation refers to making money by trading in things— mostly securities— that already exist. This is the world of stock, bond, and commodities markets. Enterprise involves making money by producing new wealth, especially in the form of capital goods; it is crucial to the real growth of the economy. Speculation makes individuals wealthy, but does not necessarily contribute to real growth. As Keynes said, ‘Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done’ (ibid.).

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The current triumph of speculation over enterprise has gone far beyond anything Keynes could have possibly imagined! How did this all happen in less than a quarter-century? Three developments made it possible. First, there was the abandonment of fixed exchange rates with the demise of the Bretton Woods system in the early 1970s. Contrary to the predictions of conservatives like Milton Friedman, flexible exchange rates did not bring balance of payments stability, equilibrium and tranquility. Rather, in the international economy we have continuous speculation involving minute changes in foreign exchange rates, speculation that even central banks working in cooperation are often helpless to stem. Many conservatives prefer a return to the gold standard, but, since this is unlikely to happen, they want exchange rates, like all other prices, determined by markets, not by a quasi-government agency like the International Monetary Fund. A second crucial development is the speedy and ongoing emergence of an electronic, computer-based technology that makes it possible to transfer billions of dollars’ worth of transactions in all the world’s currencies anywhere in the globe in literally a matter of seconds. In today’s electronic-based financial world, the market is never closed—when New York is shutting down, Tokyo is starting a new day. Further, there seems to be no end to the ingenuity of financial gurus in inventing, ever more risky speculative paper instruments, of which ‘derivatives’ are the latest.7 Finally, these developments coincide with the wave of economic and financial deregulation that began in the 1970s, sweeping through the United States, England, and other nations. Within nations, regulatory powers— especially over financial markets—were weakened, and on the global scene, laissez-faire is the norm. No effective international controls exist with respect to the torrent of financial transactions that show up on millions of computer screens day and night everywhere. The international financial system is morally meaningless; the only thing that counts is the bottom line. CONCLUSION: WHAT IS TO BE DONE? What we have seen in the last twenty-odd years are deep and malignant transformations in four institutional arrangements that are crucial to the health of the economy—the market itself, the national government, the military establishment, and the financial system. These are key elements in the institutional crisis we confront, the existence of which is the root cause of the American economy’s sluggish performance since the watershed year of 1973. So what is to be done? It is not enough to lay out the problems we confront, necessary as this is. One must identify and propose solutions. Even more important, we must examine critically their feasibility—both politically and economically. There are no grounds for optimism on this score, but ‘we’— meaning the institutionalists—must press ahead. Some comments follow on how this must be done.

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First, there is no economic solution to our troubles separate from politics. Political economy is the game, not abstract, value-free economics. This is elementary. A first political point is that those who believe in a free and liberal society dedicated to the well-being of all citizens—a society built upon standards of material life and decency below which no one is allowed to fall—face a farreaching and revolutionary challenge to this ideal, one greater, perhaps, than that of the Great Depression. Neither Nixon nor Reagan mounted such a deep assault upon the liberal ideal as has come from a resurgent right, symbolized by Newt Gingrich and his zealous cadre of like-minded baby-boomers. Make no mistake: the new right’s ultimate goal is nothing more than the systematic dismantling of the economic and social institutions created by the New Deal and expanded significantly under Johnson, and even, surprisingly, under Nixon. For the long haul, defeating this political threat is the first order of business. The second political challenge we confront is equally formidable. It is nothing less than the dismantling of the national security state that the Cold War brought to our society. The Cold War is over, the former Soviet Union is in disarray, and it is difficult to foresee a new military threat arising from Russia. There are two closely related reasons why such a dismantling is necessary. Let us be clear. The fundamental constitutional principle of civilian control of the military is not threatened. This is not the issue. What is crucial is the political power of the Military-Industrial-CIA complex—a power so formidable that the Pentagon still commands in the post-Cold War era a disproportionate share of the resources available to the public sector. President Clinton’s projected military budget through fiscal year 2002 totals $1.8 trillion, a figure that will average 3.1 percent of projected GDP (Congress of the United States 1996:67). This translates into annual military expenditures still close to Cold War levels, even though no serious threat to American security is visible on any horizon. The second reason is that the savings from reduced military outlays are the only source for the resources needed to cope with the formidable economic problems that lie over the horizon. With the budget deficit for fiscal year 1996 estimated at $145.6 billion (Current Economic Indicators 1996:32), and a political climate aggressively hostile to taxes, further borrowing or tax increases to finance even the most worthwhile projects are out of the question. Thus, the military budget is the only place to turn. We should opt for what the Federation of American Scientists calls ‘the one percent solution’. The FAS makes a convincing case that our goal should be to reduce military outlays to 1 percent of the GDP by the year 2000 (Federation of American Scientists 19948), the level to which military outlays have fallen after every war in our history save World War II. The formidable firepower that our military forces command makes the 1 percent solution possible without endangering our national security. Dismantling America’s Cold War military establishment will not be easy or painless, economically, politically, or socially. Many millions of jobs, not to mention billions of dollars in business profits, are tied to current and future levels of

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military outlays. Yet nothing is being done by either the Congress or the Clinton administration in the way of serious planning for a transition to a post-Cold War economy. Developing a blueprint for such a transition would be a useful exercise in practical economics, one which economists within the institutionalist tradition ought to undertake. There are other crucial things that most of us know need to be done. The productivity problem must be attacked through a massive investment in public and private capital and education. The tax system must be wholly transformed. Universal health care is a must. The gross maldistribution of income and wealth must be confronted and changed. We must find out how to create truly good jobs —jobs that pay a living wage. We must bring the freewheeling, laissez-faire global economy under effective social control. In a cynical and skeptical age, faith in our national government must be restored. To sum up, our most fundamental task is to reinvent the New Deal to meet the challenges of the twenty-first century. This is the challenge that the economics profession ought to be meeting. Sadly, though, the thrust of the new classical economics, now the mainstream, is that all economic policy is irrelevant, abdicating ‘from the moral obligations of a discipline that would have no raison d’être if social malfunctions did not exist in the portion of society we call the economy’ (Heilbroner and Milberg 1995:94). In the current climate of political and economic opinion in the United States, the public is clearly unwilling to support the kind of radical, far-reaching changes sketched out here, but this is not to say that present attitudes cannot be changed. New ideas are the ultimate sparkplug for social and economic change, ideas that should come from the academy. Given the scandalous abdication of mainstream economics from any response to this challenge, institutionalists and other dissenters from the sterility of contemporary economic thinking must supply the ideas. No one knows precisely what the future entails, but there are lessons to be learned from history. Today, the real economy of enterprise and production is in thrall to the paper-chasing economy of money and finance. The scale of contemporary financial domination is unprecedented, but we are not the first nation to experience this. It happened to Spain in the sixteenth century, to Holland in the eighteenth century, and to Britain in the late nineteenth and early twentieth centuries. These nations were the leading economic powers in their day. The common element in their experience was the belief that the ascendancy of finance and speculation over production and enterprise was but a prelude to an even higher level of civilization, prosperity, and world leadership. It was not. What happened to each of these world leaders was collapse and economic decline. The United States is not immune, for in the 1890s and the 1920s speculation run rampant led to boom, collapse, and economic ruin for millions of families. Again we are being lulled by a siren song persuading us that this time it is really different. We are on the ramp leading to the super information highway that will

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take us to a new, computer-based civilization of prosperity stretching into an indefinite future. Perhaps, but one should remain skeptical. The more likely scenario is that this latest round of financial manipulation and speculation will be no different than those of the past—ending in a crash. Because today’s financial house of cards is far bigger than anything constructed in the past, the collapse when it comes may be even more spectacular than what we saw in 1929. NOTES 1 Real weekly wages fell by 18.9 percent between 1974 and 1995, median family income was only 1.8 percent higher in 1995 than in 1973, while output per worker in the non-farm business sector grew at an annual average rate of 1.2 percent per year between 1974 and 1994, compared with an annual average growth rate of 2.5 percent between 1948 and 1970 (Economic Report of the President 1996:330, 332; 1995:310). 2 In this chapter, ‘classical economics’, as Keynes used it in The General Theory (1936:3 n. 1). 3 As an aside, it is interesting to note that the Republican Revolution is being led by three Ph.D.s—Newt Gingrich’s degree is in history, and Dick Armey and Phil Graham are both Texas-bred economists. 4 As normally used in economics, the term ‘externality’ refers to a side or spillover effect from an economic activity that does not have a market price. In this chapter the term is used in a much broader sense to refer to the failure of unregulated markets to attain social and economic results that are in the public interest, such as full employment or an equitable distribution of income. As so used the concept is subjective. 5 This colorful phrase was coined in 1971 by the late Joan Robinson to describe how military spending had become the dominant force in the American economy. 6 Calculated by the author from data in Economic Report of the President (1995: 289) 384, and data supplied by Smith Barney, member, New York Stock Exchange. 7 A common feature of derivatives is that they bet on the future values involved in almost any transaction imaginable! 8 This entire issue is devoted to analysis of the US defense budget.

REFERENCES Business Week (1995a) ‘Business Week/Harris Poll’, 23 January: 41. —— (1995b) ‘The New Populism’, 13 March: 72. —— (1995c) ‘Portrait of a Skeptical Public’, 20 November: 138. Committee on Ways and Means, US House of Representatives (1992) Green Book, Washington, DC. Congress of the United States, Congressional Budget Office (1996) The Economic and Budget Outlook: Fiscal Years 1997–2006, Washington, DC. Current Economic Indicators (1996), Washington, DC: US Government Printing Office.

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Dumas, L.J. (1986) The Overburdened Economy, Berkeley: University of California Press. Employment Act of 1946, Public Law 304, Seventy-ninth Congress. Federation of American Scientists (1994) Public Interest Report, 74 (6). Friedman, M. (1995) ‘Public Schools: Make them Private’, Pittsburgh Star Gazette, Two Star Edition, 27 August: F1. Government Printing Office (various years) Economic Report of the President, Washington, DC. Heilbroner, R. and Milberg, W. (1995) The Crisis of Vision in Modern Economic Thought, New York: Cambridge University Press. Hicks, J.R. (1974) The Crisis in Keynesian Economics, New York: Basic Books. Kaldor, M. (1981) The Baroque Arsenal, New York: Hill & Wang. Keynes, J.M. (1936) The General Theory of Employment, Interest and Money, London: Macmillan. Krugman, P. (1990) The Age of Diminished Expectations, Cambridge, MA: MIT Press. National Academy of Engineering, Committee of Technology, Transfer, and Utilization (1974) Technology Transfer and Utilization: Recommendations for Reducing the Emphasis and Correcting the Imbalance, Washington, DC. Peterson, W.C. (1991) Transfer Spending, Taxes, and the American Welfare State, Boston: Kluwer Academic Publishers. —— (1994) Silent Depression: The Fate of the American Economy, New York: W.W.Norton. Phillips, K. (1993) Boiling Point, New York: Random House. US Department of Commerce, Bureau of the Census (1975) Historical Statistics of the United States, Series 99–105, Washington, DC. —— (1983) Historical Statistics of the United States, Series P60–184, Washington, DC. —— (1988) Measuring the Effect of Benefits and Taxes on Income and Poverty: 1986, Current Population Reports, Series P60–164-RD-1, Washington, DC. —— (1992) Workers with Low Earnings, 1964 to 1990, Current Population Reports, Series P60–178, Washington, DC. —— (1993a) Money Income of Households, Families, and Persons in the United States, Current Population Reports, Series P60–184, Washington, DC. —— (1993b) Poverty in the United States: 1992, Current Population Reports, Series P60– 185, Washington, DC. Vickrey, W. (1993) ‘Today’s Task for Economists’, American Economic Review, 83 (1): 2.

15 LIBERALISM, STRUCTURAL ADJUSTMENT, AND THE WASHINGTON CONSENSUS The debt crisis in Africa E.Wayne Nafziger Daniel Fusfeld has consistently been critical of the prevailing neoclassical consensus and its application to the economic policy of the United States and other rich capitalist countries, both domestically and internationally. This chapter examines how neoclassicism’s policies are reflected in the strategies of the International Monetary Fund (IMF), the World Bank, and high-income countries of the Organization for Economic Cooperation and Development (OECD) toward developing nations in sub-Saharan Africa (henceforth identified as Africa). Major institutions, mostly based in Washington, comprise what John Williamson, an economist at the Institute for International Economics, calls the Washington consensus: the IMF, which provides credit, mostly to developing countries to ease short-term international payments imbalances; the World Bank, which lends capital to developing countries; and the United States, a major lender and aid donor. Williamson also includes the high-income OECD countries, primarily the West and Japan, which are the majority shareholders of the World Bank and IMF, as a part of this consensus (1993: 1329–36; 1994:26–8). The chapter shows the effect of the policies of Washington institutions, as exemplified in the Washington consensus, on the economic development of Africa, especially in the wake of the severe debt crisis beginning in the early 1980s. I begin by providing background information concerning Africa’s contemporary economic crisis. The next section, the main body of the chapter, deals with the components of the Washington consensus, how these are manifested in Bank/Fund policies, the contradictions between the goals and policies of Washington institutions, and the impact of the policies on Africa. African criticisms of adjustment programs precede the concluding section, which recommends changes in the policies of Washington institutions and Africa. BACKGROUND After 1979, economic policy-making for Africa and other low-income developing countries has been primarily shaped by conditions of IMF/ World Bank loans of last resort. In 1987, the IMF’s managing director, Jacques de Larosière, asserted: ‘Adjustment is now virtually universal [among less

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Table 15.1 Economic indicators

Sources: UNDP (1994:129–218); World Bank (1994:162–228); and table prepared by L.Naiken for Nafziger (1996:173).

developed countries, or LDCs]…. Never before has there been such an extensive yet convergent adjustment effort’ (IMF Survey 1987:50). Many development economists have labeled the 1980s the ‘lost development decade’, with negative growth in real GNP per capita for Africa, Latin America, and the Middle East. The World Bank indicates a reduction in Africa’s GNP per person of 0.8 percent annually from 1980 to 1992 (1995:162–3; see also Table 15.1). The following are some of the indicators of sub-Saharan Africa’s destitution: (1) a life expectancy of fifty-two years, compared with sixty-six years for the world; (2) an infant mortality rate of ninety-three per thousand, compared with forty-eight per thousand for the world; (3) an adult literacy rate of 50 percent, compared with 67 percent for the world; (4) a poverty rate (based on undernourishment and lack of shelter and clean water) that is 50 percent higher than the developing world as a whole (48 percent to 31 percent); and (5) farm income per farm worker, the lowest of any world region, is 67 percent of the world’s and 1 percent of North America’s (Table 15.1; UNDP 1994: 73, 134– 5, 174–5). Additionally, food grain production per capita fell 20 percent from 1960 to 1991 in the sub-Sahara, while the same figure rose 14 percent in developing countries generally (Nafziger 1996:175–7). The sub-Saharan external debt increased from $56 billion in 1980 to $97 billion in 1985, $174 billion in 1990, and $194 billion in 1992. The origins of the sub-Saharan external debt crisis have been widely discussed in the literature. In the early 1980s, the sub-Sahara continued its international goods and services deficits of the previous decade, from external shocks, such as the recession in the MDCs (more developed countries), declining commodity

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terms of trade, and the decline in real official development assistance (ODA), in the midst of rapidly increasing world real interest rates.1 The sub-Sahara’s debt overhang, without new money or debt reduction, restrained investment and adjustment. African countries, with years of austerity and stagnation, could not afford to reduce spending to effect an external transfer. Large future repayments acted as a tax on investment. Paying back the debt often meant slowing economic growth to avoid an import surplus. The 1994 external debt stock of sub-Saharan Africa, $165 billion, was less than Latin America’s stock of $437 billion, or less than East, Southeast, and South Asia’s $460 billion, a reflection of the sub-Sahara’s low income and poor credit rating; but the debt to GNP ratio in the sub-Sahara was higher than for any world region (World Bank 1994). Sometimes even low ratios of debt service to export earnings reflected substantial default or debt rescheduling. For example, the sub-Sahara’s scheduled debt service (interest and principal payments due) was substantially higher than actual debt service; in 1990, scheduled debt service was 65 percent of export earnings, a figure higher than in Latin America, while the actual debt service paid was 24 percent of export earnings, lower than Latin America’s figure but far more than the minimal burden the depressed region could bear (Nafziger 1993:17). STABILIZATION AND ADJUSTMENT IN GLOBAL CONTEXT The objectives of IMF stabilization are to decrease demand in order to moderate inflation, and to switch demand from foreign to domestic sources, depreciating currency to reduce an international payments deficit. In Africa, Bank/Fund lending to resolve external crises was usually linked with devaluing, decontrolling prices, reducing social spending, privatizing public firms, and integrating the domestic economy into the world economy, but the sequence of these adjustments often exacerbated stagflation and external deficits. Africa is caught in an export trap, as the growth of primary-product exports faces competition from other economies requiring similar expansion for adjustment. Moreover, protectionism in the more developed countries limits the growth in Africa of primary-product processing and light manufacturing for export. MDCs’ nominal tariff rates appear low, 5–6 percent of value after the General Agreements on Tariffs and Trade’s (the GATT’s) 1974–79 Tokyo Round trade negotiations. However, nominal figures are deceptive, as MDCs’ effective rates of protection, which are a measure of protection as a percentage of value added by production factors at each processing stage, have been substantial for manufacturing. The Tokyo Round’s effective protection on LDC commodities according to processing stage, lowered only a little after the GATT’s Uruguay Round, completed in 1994, was 3 percent on stage 1 (the raw material, for example, raw cotton), 23 percent on stage 2 (lowlevel processing, as of cotton yarn), 20 percent on stage 3 (high-level processing, as of cotton

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fabrics), and 15 percent on stage 4 (the finished product, for example, clothing). MDCs’ effective rates of protection— which are highest at low levels of processing, where Africa concentrates its production—have discouraged processing and manufacturing. More than half of MDCs’ imports from LDCs are at stage 1, and more than three-fourths at stages 1 and 2; MDCs’ import shares from Africa are even higher than from LDCs generally (World Bank 1994a: 166; UNCTAD 1994:x). UNICEF economists reported that from 1980 to 1985, when the Bank/ Fund adjustment programs limited sub-Saharan social spending, child welfare (nutrition, literacy, primary school retention, immunization, and survival) deteriorated. Tanzanian President Julius K.Nyerere asked in 1985: ‘Must we starve our children to pay our debt?’ In 1989, Adebayo Adedeji, ECA’s executive secretary (1975–91) of the Economic Commission for Africa (ECA), observed that Africa would not recover without lifting the ‘unbearable albatross’ of debilitating debt burdens, low export prices, and net capital outflow (including capital transfers to the West by the wealthy and politically influential) (UNICEF 1985:21; Harsch 1989:47–50). THE WASHINGTON CONSENSUS Since the 1970s, there have been at least two major visions of the international economic order: that of the Group of 127 (G127) LDCs of Africa, Asia, and Latin America that are members of the United Nations Conference on Trade and Development (UNCTAD) and the liberal approach of the Washington consensus, emphasizing reliance on the market, private initiative, and deregulation. UNCTAD called for a new order in the mid 1970s, when the G127’s modest gains from previous years were threatened by worldwide inflation, a fourfold increase in oil prices (1973–74) and the subsequent deterioration in the foreign exchange and debt position. The following are components of the Washington consensus as implemented by Washington institutions in Africa. Investment in health and education This investment is by reforming countries, especially in basic literacy facilities and primary, vocational, and scientific education. However, the conditions laid down by Washington institutions contributed to reduced investment rates by LDC governments in health and medical care, basic facilities, and primary, vocational, and scientific education; particularly adversely affected was investment in social services (education and nutrition). The ratio of education and health to total government expenditures for the twenty-one World Bank/IMF adjustment loan recipients fell from 21 percent during 1978–81 to 20 percent in 1982–86. Countries with the most adjustment reduced their share of social expenses the most. Between 1980 and 1985, social indicators for low-income

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sub-Saharan Africa showed no progress. Life expectancy at birth increased from forty-six to forty-eight years, but the infant mortality rate remained at 126 per thousand and the average daily calorie consumption fell from 2,060 to 1,911. The FAO estimate of per capita calorie intake as a percentage of daily requirements fell by 1 percent for fifteen of the twenty-one adjustment loan recipients from 1978–81 to 1982–85 (ECA/OAU 1986; Pinstrup-Anderson et al. 1987:73–89). Furthermore, World Bank statistics indicate that the sub-Sahara’s primary school enrollment rate (primary enrollment as a percentage of children aged 6–11 years) fell from 79 percent in 1980 to 67 percent in 1987 (World Bank 1996:343); during the same period, annual expenditure per primary school pupil (in 1985 US dollars) fell from $56 to $44 in the low-income sub-Sahara and from $162 to $130 for the middle-income sub-Sahara (Jesperson 1992:34). Thus, while Washington institutions emphasize investment in health and education, the conditions set by these institutions contributed to reduced investment rates, which particularly adversely affected investment in social services, contributing to reductions in school enrollment rates and daily calorie supply per capita in Africa in the 1980s. The role of the state Ironically, for adjustment policies to be successful, Washington institutions require a strengthening of the capacity of the state. Accords between a subSaharan government and the Bank/Fund force the state to monitor closely the financial flows essential to reverse external imbalances and reduced living standards. To deal with the Bank/Fund, the state needs to improve its analytical, planning, and data-gathering capabilities, provide technical assistance and training, reform state-owned enterprises, and privatize public enterprises. Stein’s study indicates that in the late 1980s, after the retirement of Nyerere, the IMF structural adjustment lending in Tanzania reinforced a strategy of state centralization and production, including state monitoring of parastatal enterprises operating on a commercial basis (Stein 1991). Moreover, those in control of the state protected sectors containing their (and their allies’) vital interests during negotiations and the implementation of adjustment programs. Karl Polanyi’s words apply to Washington institutions: ‘Even those who wished most ardently to free the state from all unnecessary duties, and whose whole philosophy demanded the restriction of state activities, could not but entrust the self-same state with the new powers, organs and instruments required for the establishment of laissez-faire’ (1994:140–1; also see Sandbrook 1991:101). Financial institutions The Washington consensus does not emphasize an active state role in preventing industrial concentration (for example, through multinational corporations or their roles in joint enterprises) to spur domestic entrepreneurship and capitalism, with

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their potential for learning by doing. Nor is there much stress on state regulation to avoid the growing concentration of private financial institutions, which exacerbates financial repression, such as distorted capital markets and financial prices. Emphasis on correcting external deficits The IMF, its major shareholders, and other members of the lending cartel do not stress economic development; instead, they emphasize correcting external deficits in a short period. This is in contrast to British Chancellor of the Exchequer John Maynard Keynes in 1944, who envisioned an IMF oriented toward stimulating demand for rapid economic growth and putting the major adjustment burden on surplus countries. The Food and Agriculture Organization (FAO) of the UN contends: ‘An important aspect of [IMF] loans and their associated policies is that they do not present a growth package as such,.. [but] their primary role is to serve as a balance-of-payments support’ Since the IMF loans are short-term (one to two years), and supply-side (structural) changes take years, the IMF programs almost always require demand restraint, with contractionary monetary and fiscal policies (spending reductions and slow growth in the money supply.2 The World Bank has been slicing up adjustment loans into smaller and smaller elements, and since the release of each slice (or tranche) is dependent on the performance of certain conditions, the World Bank, in practice, has a planning horizon almost as short as the Fund’s. Although price controls, exchange rate misalignments, and government budget deficits contributed to Africa’s external crisis, the immediate freeing of markets and contraction of spending did not resolve the disequilibrium. After 1981, the IMF emphasized shock treatment for demand restraint in low-income countries, rarely provided financing for external adjustments, and cut programs from three years to one year, applying Reaganomics internationally. One year is not enough for adjustment. Demand restrictions, inflation deceleration, and currency depreciation, especially in economies with high trade to income ratios, do not switch expenditures to exports and import substitutes or expand primary production quickly enough to have the desired effect on prices and trade balances. Even in the United States (1985–88), the current-account improvement from devaluation took about two to five years, with a worsening trade balance in the first year. The time for adjustment is due to lags in decision, delivery, replacement, and production. Successful devaluation in the sub-Sahara depends on demand and supply elasticities, which are generally low over a one to two year period, especially in agriculture. The elasticity of demand for primary products like tea, coffee, sugar, and cocoa is so low that increasing the output of agricultural exports to undertake Bank/Fund-sponsored adjustment may result in reduced revenues from increased output. On the supply side, farmers have very low short-run (one year or less) but moderately low long-run elasticity (0.3–0.9) for cash crops, as farmers

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choose to allocate labor and land variously to commercial output, subsistence commodities, black-market activity, non-farm work, or leisure. Supply response would be at least a year or two for cotton and tobacco and between five and six years for tree crops such as coffee, tea, cashews, and sisal in Tanzania. Cost-induced inflationary pressures (due to devaluation from economic interests fighting to maintain income and consumption shares) would reduce output expansion. Inadequate infrastructure, such as poor transport for Ghanaian cocoa, limits supply increases, slowing export response to higher cedi prices for a given dollar price of cocoa. Still, most African countries no longer oppose devaluation but want more control over its size, timing, structure (such as single versus multiple exchange rates), and accompanying policy measures (Loxley 1986:13–36; Campbell and Stein 1991:20–2). Governments rarely know the ‘correct’ market rate or how exchange rate changes will affect income and trade variables that feed back to affect the equilibrium price of foreign exchange. Finally, LDCs remove balance of payments deficits quickly not from exchange rate changes (and expenditure switching) but from reduced import demand due to a fall in real income (or a depressed economy). The planning horizon Washington institutions have a short-term planning horizon. While the crises in Ghana, Zambia, and Senegal, as well as other sub-Saharan countries undergoing Bank/Fund adjustment programs in the 1980s and 1990s, developed over ten to twenty years, stabilization usually takes at least that long. Many countries have too little time to stabilize, let alone restructure their economies. Liberalizing and privatizing, while probably an appropriate goal, work more effectively if planned over a longer period. Zambia faced major political opposition to eliminating food subsidies and increasing farm prices, tasks less daunting if part of a long-term plan. Bias toward comprehensive rather than evolutionary change The Washington consensus stresses immediate comprehensive changes to liberalization, rather than gradual adjustment, as in the nineteenth and twentiethcentury West and Japan. Today’s adjusting economies have far more price, exchange rate, and other market distortions than MDCs did in an earlier stage of their development, and thus require more time to create market institutions. The theory of the second best states that if economic policy changes cannot satisfy all the conditions necessary for maximizing welfare, then satisfying one or several conditions may not increase welfare. Thus liberalizing one price while other prices are still repressed may be worse than having all prices distorted. As

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Alec Nove put it, ‘To change everything at once is impossible, but partial change creates contradictions and inconsistencies’ (1983:168). Still, few African countries are likely to possess the combination of factors that helped Ghana undertake immediate massive changes. Ghana’s economic distortion, ranked the highest in the world (World Bank 1983), provided scope for substantial gains from ‘getting prices right’, especially from raising cocoa producer prices, which in 1976, at 22 percent of export prices, were the lowest in the world. Moreover, Ghana’s adjustment program focused on relatively few policy instruments concentrated primarily on agriculture. As the Chinese case illustrates, commercial agriculture, which requires fewer wage and outside price changes, may gain more from rapid liberalization than industry does. A contemporary strategy with substantial success is that of China, which, according to the World Bank, had, with South Korea, the fastest economic growth in the world from 1980 to 1993 (World Bank 1995:162–3). China characterizes its path toward reform as ‘touching stones while walking across a river,’ a strategy of building incrementally on previous institutions. It rejects Washington institutions’ immediate comprehensive change or ‘shock therapy’, the approach of Russia in the early years of the 1990s, where efforts to liberalize in a ‘big bang’ failed in the midst of a lack of enabling market institutions. Trade, exchange rate, and capital liberalization Washington institutions not only do not provide enough time for adjusting to chronic international goods and services deficits; they also fail to recognize that successful trade liberalization and exchange rate equilibration usually require the domestic ability to produce inputs previously bought overseas. In Africa, Ghana was a fortunate exception in that its increased volume of cocoa exports resulting from cedi depreciation relied largely on inputs already produced internally. In contrast, Zambian exporters suffered from liberalization during the 1980s because domestic industry lacked the capability of producing inputs previously purchased abroad. Moreover, as the preference for them declined during liberalization, indigenous firms in Zambia found it increasingly difficult to compete with well established foreign firms with oligopolistic power, benefiting from monopoly advantages, such as patents, technical knowledge, superior managerial and marketing skills, better access to capital markets, economies of large-scale production, and economies of vertical integration (that is, cost savings from decision coordination at various production stages).3 Trade liberalization in the midst of stabilization, even if politically possible, is likely to perpetuate a government budget crisis in Africa, with its poorly developed factor and input markets. As Mosley et al. (1991) argue, given labor and resource immobility, early liberalization of external trade and supply-side stimulation in ‘one glorious burst’ results in rising unemployment, inflation, capital flight, and the subsequent undermining of adjustment programs. This trade reform failure is consistent with second-best theory, which indicates that

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removing one distortion in a highly distorted economy may reduce overall welfare. Mosley et al. (1991:110–16) and FAO (1991:101–3) suggest the following trade, exchange and capital market liberalization sequence: (1) liberalizing imports of critical capital and other inputs, (2) devaluing the domestic currency to a competitive level, while simultaneously restraining monetary and fiscal expansion to curb inflation and convert a nominal devaluation to a real devaluation, (3) promoting exports through liberalizing commodity markets, subsidies, and other schemes, (4) allocating foreign exchange for maintaining and repairing the infrastructure for production increases, (5) removing controls on internal interest rates to achieve positive real rates, and expanding loan agencies to include farmers and small businesses, (6) reducing public sector deficits to eliminate reliance on foreign loans at banking standards without decreasing real development spending, and reforming agricultural marketing to spur farmers to sell their surplus, (7) liberalizing other imports, rationalizing the tariff structure, and removing price controls and subsidies to the private sector, and (8) abandoning external capital-account controls. The eight-step sequence recognizes the necessity of reforming internal capital markets before liberalizing international capital markets. However, neither the World Bank’s nor the IMF’s recommendations bore much relationship to this sequence. In most cases, the Bank asked for liberalized trade early without limiting the imports that it should be applied to. For example, the foreign exchange requirements associated with trade liberalization, the major component of the Bank’s first structural adjustment program in Kenya (1980), became unsustainable, so liberalization had to be abandoned. Import liberalization preceded agricultural export expansion based on commodity market liberalization, price decontrol, and export promotional schemes. Recipients should implement demand-reducing and switching programs before supply-increasing ones. If countries begin with supply reforms, which take a longer time, the lack of demand restraint will contribute to inflation and an unmanageable current-account deficit. Still, adjustment loan recipients also need to avoid excessive initial demand restraint that depresses the economy; simultaneous devaluation, as in stage 2, could avoid their contractionary effect. Privatization The Washington consensus for LDC privatization provides few safeguards for preventing industrial concentration. As Frances Stewart argues (1990), the Bank’s focus should be on substituting local private ownership for public ownership or reforming parastatals, rather than on wholesale privatization. Even the World Bank contended: ‘the key factor determining the efficiency of an enterprise is not whether it is publicly or privately owned, but how it is managed’ (1983:50). If entry barriers are removed, the report states, there is no presumption that the private sector has better management. Moreover, Bank/

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Fund analyses in the mid 1980s indicated that public enterprises can perform well with competition, managerial autonomy and accountability, hard budget constraints, and firm size commensurate with technical and managerial skills (Stewart 1990; World Bank 1983:50). The transition from centrally managed state enterprises to a liberal, privatized economy is politically and technically difficult. Prices masked by controls inevitably rise. Forcing inefficient firms to close is likely to be unacceptable where labor is not mobile. Pent-up demand for imports may hurt the balance of payments. Skilled people are usually lacking (Mills 1989:14–18). Moreover, government may require parastatals to achieve social objectives, such as setting quality standards, investing in infrastructure, producing social goods for lowincome earners, controlling sectors vital to national security, wresting control from foreign owners or minority ethnic communities, rescuing bankrupt firms in key sectors, avoiding private oligopolistic concentration, raising capital essential for overcoming indivisibilities, producing vital inputs cheaply for the domestic market, capturing gains from technological learning, and creating other external economies that private firms would overlook. To illustrate, Nigeria’s abolition of the government Cocoa Marketing Board and licenses for marketing cocoa in 1987 resulted in poor quality control and fraudulent trading practices, which adversely affected the reputation of Nigerian cocoa. The government subsequently incurred substantial costs reintroducing inspection procedures and marketing licenses (Hackett 1990: 776). Moreover, the effectiveness of creating market incentives and deregulating state controls presupposes a class able and willing to respond by innovating, bearing risk, and mobilizing capital, as in the early modern West and Japan. While significant groups of indigenous entrepreneurs have emerged in Nigeria and Côte d’Ivoire, the private sector in Tanzania, Ghana, and Zambia, for example, is much more limited. Additionally, some regimes have restricted the commercial and industrial enterprises of such visible minorities as the Chinese in Southeast Asia, the Asians in East Africa, and the Lebanese in West Africa. Even where privatization is desirable, government may want to proceed slowly to avoid a highly concentrated business elite being created from newly privatized firms falling into a few hands, as was true in Nigeria and much of the rest of Africa during their indigenizations since the early 1970s. It would be ironic if two goals of privatization—improvements in efficiency and competition—were sabotaged because of the creation of new oligopolies from a limited number of buyers. Moreover, the fact that the private sector may lack the business skills and experience means that an emphasis on providing private competition to the private sector and a gradual reduction of the relative size of the public sector may be preferable to abrupt privatization. To quote a publication of the World Bank/ IMF (1990:83): ‘The rationale for privatization is most straightforward and least controversial where a public enterprise is [engaged in a purely commercial activity and is] already subject to competition.’

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While Ghana’s reform of state-owned enterprises (SOEs) in the mid 1980s was to enhance their competitiveness and management responsibility, restructuring failed to modify management or corporate boards, the criteria for management promotion and pay, or the rules for allocating capital between SOEs. Indeed, existing managers, many of whom should have been discharged, oversaw enterprise divestiture, viewing work-force retrenchment and restructuring as unrelated activities, disproportionately laying off production workers and retaining administrative and clerical staff, and sometimes, in the absence of guidelines for work-force requirements, reporting no redundant staff (Davis 1991:987–1005). Export expansion LDCs could still benefit from using international competition and marketclearing exchange rates to spur rapid export expansion. Moreover, they can gain from the product cycle, in which Japan’s, Germany’s and the United States’ comparative advantage in unstandardized goods embodying research, innovation, and advanced technology becomes a comparative disadvantage as markets grow, techniques become common knowledge, and the goods become standardized, so less sophisticated countries can mass-produce the items with less skilled labor. But the potential primary and light manufacturing export expansion industries overlap substantially among low-income and lower-middleincome countries. African and other LDCs need to insist that the GATT/World Trade Organization press MDCs to reduce trade barriers in manufacturing, especially in those sectors with high levels of processing. Lack of emphasis on safety nets How do the effects of structural adjustment programs influence inequality, poverty rates, and basic needs attainment? A UNICEF study of eighteen subSaharan countries indicates that rising debt was accompanied by falling GDP per capita over the 1980–85 period in 72 percent of the countries, declining government expenditures per person in 60 percent, and falling shares of both health and education in 47 percent (Pinstrup-Anderson et al. 1987:74–8). To adjust, the sub-Sahara had to reduce its external deficit substantially between 1982 and 1986 by cutting back imports, investment, and government spending. Most sub-Saharan countries failed to maintain the physical infrastructure built in the 1960s, reducing expenditures on social services and subsidies (Commander 1989: 231–4; World Bank 1988:29–30). The numerous cuts in living standards in sub-Saharan countries undergoing adjustment usually hurt the poor and disadvantaged disproportionately. Lowincome households adjusted with increased labor, self-production, reserve use, debt, or (with the paucity of public assistance) income transfers within the clan. Even the IMF’s managing director, Michel Camdessus, stated, ‘Too often in

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recent years it is the poorest segments of the population that have carried the heaviest burden of economic adjustment’ (Grant 1989:17–18). Compared with 1980, real non-agricultural wages dropped considerably during stabilization and adjustment programs (most with the Bank/Fund)—in Tanzania by 40 percent by 1983, in Zambia by 33 percent by 1984, in Malawi by 24 percent by 1984, in Kenya by 22 percent by 1985, in Zimbabwe by 11 percent by 1984, in Mauritius by 10 percent by 1985, and in Swaziland by 5 percent by 1983. During the same period, open unemployment increased in the same countries (Van der Hoeven 1989: 30–1). FAO’s estimate of per capita calorie intake as a percentage of daily requirements fell by 1 percent for fifteen recipients of adjustment loans from 1978–81 to 1982–85. Ghana suffered a decline from 79 percent to 72 percent; Zambia from 96 percent to 92 percent; and Malawi from 108 percent to 105 percent. The effect of adjustment varies among the population. Retrenched civil servants and employees may be victims of structural adjustment and stabilization —laid off because of austerity measures or production shifts. Low-income and vulnerable groups hurt by reductions in social programs or price shifts include the urban working class, small farm holders, rural landless laborers, lactating and pregnant women, infants, the disabled, and the aged, but some political leaders and bureaucrats may gain from access to resources and information on shifting opportunities, commercial and industrial business people from decontrol and privatization, and commercial farmers from higher food prices. Zimbabwe’s Ministry of Health found that the percentage of underweight children less than 6 years old in rural areas rose from 18–22 percent in 1982 to 48 percent in 1984. The Zambia Basic Needs Report in the early 1980s outlined how reduced recurrent allocations after adjustment discouraged a rural woman with a sick child from walking 15 km to the nearest health center, as the woman knew the center was frequently out of drugs (Parfitt and Riley 1989:33; Davies and Saunders 1987:3–23). Studies of the 1980s indicated that Bank/Fund structural adjustment and macroeconomic stabilization programs rarely restored growth and balance of payments equilibrium or reduced poverty rates in Africa. However, the Bank and the IMF can minimize damage to anti-poverty programs by funding programs that compensate the most vulnerable portions of the population. On compensation, IMF managing director Camdessus points out: People know something about how to ensure that the very poor are spared by the adjustment effort. In financial terms, it might not cost very much. Why? Because if you look at the share of the poorest groups in the distribution of these [adjusting] countries’ income, it is a trifling amount… Unfortunately it is generally ‘everyone else’, and not the poverty groups, that is represented in government. (Grant 1989:18–20)

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However, Mosley et al. are correct in indicating that statements such as this by Camdessus ‘almost certainly exaggerate the extent to which the Fund at the operational level has moved or will move away from this traditional brief’, that is, the required internal changes for restoration of a sustainable macroeconomic recovery (1991:54). The IMF lacks a program to address borrowing countries’ concerns for redistributing income or to compensate those most vulnerable to adjustment programs. Tsatsu Tskikata indicates the redistributive impact of adjustment programs in Africa strike at powerful vested interests—rentiers and patrons whose opportunities come under threat as these measures bite…. The politics of stabilization is so often also the politics of destabilization, as a government determined to effect these transformations will face attempts to overthrow it…. Unless the…state is transformed or is transforming there can be little hope for sustained recovery for Africa’s economies much less hopes of attaining development. (Tskikata 1990:161) Evidence suggests that the Bank/Fund adjustment programs are initially likely to worsen the condition of the poor. Adjustment programs should be redesigned to protect the income and social services of the poor. Indeed, success in an adjustment program requires maintaining (perhaps even increasing) safety nets. The poor are highly represented among urban workers, petty traders and artisans, informal-sector workers, small farmers, tenants, landless workers, and single heads of households, as well as among the old, infants, pregnant and lactating mothers, the ill, the handicapped, and the unemployed. While the Bank/Fund pay lip service to income distribution and basic needs, in practice, as with Ghana, Zambia, and Tanzania, they subordinate poverty reduction to the unfettered working of the free-market system. The Bank and Fund lack systematic studies of the effects of adjustment on poverty and income inequality; for example, the Bank-sponsored study on 1987–88 Ghanaian poverty examines a point in time but makes no comparisons across time. Lack of emphasis on self-directed development Both Washington institutions and African leaders now agree that the effort by several African states in the 1960s and 1970s to undertake comprehensive economic planning was largely a failure. The complaints of African elites and their supporters regarding Washington planning emphases focus on other disagreements. The Washington consensus for LDCs fails to ask for nationally generated longterm plans (assembled by local researchers, government officials, and chambers of commerce and industry); instead Washington institutions emphasize policy

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analysis by outside economists from the Bank/Fund. As the former World Bank official Dragoslav Avramovic argues, ‘Adjustment and development programmes should be prepared, and seen to be prepared, by national authorities of African countries rather than by foreign advisers and international organizations. Otherwise commitment will be lacking’ (Avramovic 199:ii). Technical change requires a prolonged learning process embodied in nationals improving capital and controlling experts transferring technology. African countries face externally imposed conditions by the World Bank, the IMF, and MDC governments on technology use and other policies. But the experience of the West and Japan underlines the importance of African governments controlling MDC capital flows and the employment of MDC personnel introducing technology into the country. Like early Japan, Africa today must be in charge of its planning and development to be able to capture technological learning gains for sustained economic growth (Nafziger 1995). Neglect of political factors The implementation of the Washington consensus stresses economic liberalism, while de-emphasizing political factors, such as the impact of Washington institutions’ programs on internal political power and political democratization. Of course, many African elites saw the writing on the wall, anticipating Bank/ Fund shifts toward liberalization. Some elites allied with the Bank/Fund, supported restructuring and became (with their accomplices and clients) the nouveau riche. The Bank/Fund cooperation also enabled elites to protect their interests from reform. The funds from adjustment lending and the distribution of benefits from stabilization and restructuring influence the shifts of power within countries. For example, in Tanzania in the late 1980s, President Ali Hassan Mwinyi, some economists, business people, and bureaucrats supported Fund/ Bank liberalization reforms from which they subsequently benefited. Adjustment came disproportionately at the expense of poverty programs, wages, employment, and public services for the working and peasant classes, who received little benefit from the borrowing, rather than of the ruling elites and upper classes whose spending had contributed to the crisis. Many opposed the economic liberalism of the Bretton Woods agencies (the Bank and Fund), whose publications emphasized long-term structural adjustment but whose programs, under constant monitoring, usually carried out demand reduction. To control opposition, some adjusting regimes arrested, banned, jailed, deported, and sometimes even killed dissenting intellectuals, students, and journalists. Are reforms sustained after Bank adjustment programs are completed? Ann Krueger, a sometime World Bank insider, contends that a Bank program tips money and political power within the country toward those benefiting from liberalization (1974:291–301). However, except for the shift to a flexible exchange rate regime, the overwhelming majority of policy reforms lasted no longer than the Bank program—an unsurprising finding, given the looseness of

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conditions and assessment as well as the Bank’s eschewing the strategy of organizing the gainers or compensating the losers from reform.4 The Washington consensus insists on policies that hinder political democratization. On 8 July 1991, the IMF managing director Michel Camdessus deplored statements ‘that countries that have recently introduced democracy lack the maturity to manage rigorously [and] that we must facilitate their task by closing our eyes to the abandonment or temporary suspension of the adjustment process’ (IMF Survey 1991:227). While World Bank economists Stanley Fischer and Ishrat Husain think LDCs not undertaking Bank/Fund reform and adjustment should carry their debt burden until they attain the political will, African finance ministers complain that the Bank/Fund neglect political constraints in undertaking adjustment. How can the Bank/Fund expect to persuade African officials to implement adjustment programs which tarnish their prestige as political leaders? (Fischer and Husain 1990:24–7; Mills 1989:21–3.) Deepak Lal, a frequent World Bank consultant, contends ‘that a courageous, ruthless and perhaps undemocratic government is required to ride roughshod over…newly-created special interest groups’. Democratic governments are viewed by Lal as the source of irrational economic policies to placate interest groups (1983:33). As a World Bank study points out, transitional democracies have been remarkably unsuccessful in implementing IMF adjustment programs. Indeed, authoritarian systems appear to be especially successful, the study contends, in controlling rapid inflation in polarized environments (World Bank 1991:132–4). In designing adjustment programs, the IMF cannot neglect domestic political pressures, especially by economies facing declining terms of trade and export purchasing power, as in Nigeria (1983–85) and Zambia (1983–91). In 1987, President Kenneth Kaunda, who lost the IMF ‘seal of approval’ by restricting debt servicing to 10 percent of export earnings in the face of Zambia’s 70 percent obligation, asked the Bank and Fund, ‘Which is a better partner for you in the long run, a nation which devotes all of its resources to paying the debt and, therefore, grinds to an economic and political halt, or a stable nation capable of sustaining the repaying of its entire debt?’ (Seshamani 1990:120.) AFRICAN CRITICISMS OF ADJUSTMENT AND STABILIZATION PROGRAMS Independent empirical studies fail to show the success of the Bank/Fund adjustment. They show, instead, that taken as a whole the record of growth, external balance, and social indicators of sub-Saharan countries with strong Bank/Fund adjustment programs was no better than that of those with weak or no adjustment programs. Moreover, Bank/Fund programs reduce investment and social spending.5 The Bank could argue that sub-Saharan Africa would have no better record with adjustment programs organized by national planners. Turning this statement

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on its head, many African leaders see no evidence that national planners do any worse than did the Bretton Woods twins, but at least national adjustment plans provide indigenous people with experience and learning benefits. Perhaps in desperation more African leaders may surmise that default (or a less confrontational alternative, such as pressure for debt write-downs, write-offs, and rescheduling) is less costly than any feasible Bank/Fund conditions. Africans have criticized the adjustment programs. Concerns include (1) insufficient coordination and diplomacy among the recipient country and its creditors (including the Bank, which presses for lower tariffs to promote domestic competition while the Fund advises avoiding tariff reductions to maintain public revenues), (2) too much policy dominance by the Bank and Fund, (3) overoptimistic assumptions about the international environment and commercial bank lending, (4) neglect of external factors, such as oil shocks and deteriorating terms of trade, (5) too little attention to poverty and spending on nutrition and education, (6) inadequate program design, (7) poor program implementation, (8) insufficient adaptation to local conditions, (9) the secrecy of the recipient country’s letter of intent with the Bank/Fund, reducing internal dialogue, and (10) too little consideration of how conditionality may undermine a political leadership’s legitimacy. On the last point, critics charge Bank/Fund staff with too much emphasis on less developed countries’ leaders’ political will or courage, reducing the politics of adjustment to an exercise in machismo. African finance and planning officers want the Bank and Fund to place priorities on employment, growth, reducing income inequality, and maintaining health and educational programs, rather than reducing government budget deficits, restructuring parastatals, removing food subsidies, liberalizing international trade, improving exchange rates, and encouraging exports. Because structural adjustment redistributes income, it involves careful political management. African countries need a more gradual approach to adjustment to avoid debilitating consequences and to minimize the domestic social costs of adjustment. Countries need flexibility, protection of minimum social services, and public support, including a perception that costs and benefits are distributed fairly. Political leaders must consult all interested parties (not just ministers, highranking government servants, and planners) in designing the adjustment program (Mills 1989:21–3). CONCLUSION: A SKETCH OF POLICY APPROACHES In 1988, the Toronto meeting of the Group of Seven industrialized countries (G7), Paris Club forum for official debt, and Berlin Bank and Fund meetings agreed to a ‘menu’ of three options for restructuring the debt of the poorest countries. The United States agreed to reschedule African debt with longer maturities (a lesser write-down than for middle-income countries Egypt—a ‘debt for war’ swap—and Poland in 1990), while allowing other G7 countries to apply interest rates at below bankers’ standards. However, since the Toronto terms

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apply only to debts maturing within eighteen months of consolidation, the reduction in actual debt service was only $100 million annually in 1989–90. If creditors apply the same mix of options, over the 1989–2000 period, as they did from 1989 to 1990, the total indebtedness of low-income Africa will be reduced by just $2 billion, and annual savings of debt service will only be 2.5 percent. In July 1991, British Prime Minister John Major proposed replacing the Toronto terms with the softer Trinidad terms that would reduce low-income Africa’s debt stock by $18 billion. These terms, first proposed by Major as Chancellor of the Exchequer at the September 1990 Commonwealth Conference in Trinidad, included: (1) rescheduling of the entire stock of debt in one stroke instead of renegotiating maturities only as they fall due, (2) increasing the debt cancellation from one-third to two-thirds of outstanding debt, (3) setting market interest payments on the remaining one-third stock for five years and requiring phased repayment with steadily increasing debt-service payments tied to export and output growth, and (4) stretching repayments of the remaining stock to twenty-five years with a flexible repayment schedule. Major unilaterally announced the Trinidad terms’ cancellation of $18 billion debt, primarily African, at the Harare Commonwealth Conference in October 1991, right after the United States and Japan objected to the terms at the London G7 and Paris Club meetings.6 Not until late 1994 did the United States and Japan agree to the Trinidad terms, but these are endangered, given the US attitude toward foreign aid in the mid to late 1990s. The Trinidad terms for Africa cost the rich countries little, while private creditors would lose nothing from debt write-offs, as they face a Laffer curve, where expected debt paybacks increase from debt write-downs. The inherent barrier to the US Brady Plan emphasis on banks’ voluntary, piecemeal reduction of African debt is the damaging precedents for large debtors, in which nonparticipating banks holding claims (that will rise in value) are better-off than participants. Debt write-downs only work with concerted debt reduction, where all commercial creditors and debtors participate on a pro-rated basis (as in US Chapter 11 bankruptcies) under international agency auspices to exclude nonparticipants’ free-riding. The World Bank, donor governments, commercial banks, and regional development banks (such as the African, Asian, Inter-American, or European development banks) rely on an IMF ‘seal of approval’ of a stabilization program, usually contingent on the borrower’s reducing demand, before arranging loans, aid, and debt write-offs for Africa and other developing countries. This is a managed oligopoly of policy advising, an economic policy cartel, which leaves debtors with little room to maneuver. In reality international policy enforcement is cartelized, with OECD governments, especially the United States, the European Union, and Japan, largely determining policy through their control of the World Bank and the IMF, and their regulation of commercial banks. Africa and other LDC debtors would benefit from the breaking up of this loan and policy cartel through strengthening of independent financial power within the

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world economy—UNDP, UNCTAD, East Asian or Middle Eastern banking, the European Union and Japanese positions independent of the United States—and a delinking of commercial banks, the World Bank, and bilateral funds from IMF approval. MDC debt write-down, trade liberalization, and increased foreign aid can facilitate Africa’s economic turnaround. However, if the MDC cartel, reliant on IMF approval, refuses to provide more liberal concessions and market access, Africa may have no choice but to default and manage its own adjustment, while cooperating with other LDCs to undermine the cartel’s stranglehold. However, MDCs have an interest in assisting low-income Africa while supporting indigenous economic planning. Although the immediate cost to MDCs and banks is negligible, this breathing space might enable some African political leaders to form wider coalitions emphasizing long-range planning. While political conflict or blatant corruption may preclude effective capital use in some African countries, a major international effort can stabilize political institutions and improve mass economic welfare in Ghana, Côte d’Ivoire, Senegal, Benin, Zimbabwe, Zambia, and Uganda, to name just a few. NOTES 1 See Krueger (1987:165–87); Nafziger (1993) and World Bank and UNDP (1989). 2 Food and Agriculture Organization of the United Nations (1991:89); and Stewart (1990:3). 3 Kindleberger (1974:267–85). Even trade, agricultural and informal industrial enterprises faced price and production constraints largely determined by multinational enterprises of the international market. 4 Mosley et al. (1991:101–49); and African Finance Ministers, as reported in Mills (1989). 5 Loxley (1986:96–103); UNCTAD (1991:8); Economic Commission for Africa (1989); Food and Agriculture Organization of the United Nations (1991: 101–49); Mosley et al. (1991), summarized in Nafziger (1993:168–74). 6 Mistry (1991); various issues of Africa Research Bulletin; and other sources from Nafziger (1993:178–218).

REFERENCES Adedeji, A., Rasheed, S. and Morrison, M. (eds) (1990) The Human Dimensions of Africa’s Persistent Economic Crisis, London: Hans Zell Publishers. Africa Research Bulletin (Economic Series) (various years). Avramovic, D. (1991) ‘Africa’s Debts and Economic Recovery’, North-South Roundtable, Abidjan, Côte d’Ivoire, 8–9 July. Baldwin, R.E. and Richardson, J.D. (eds) (1974) International Trade and Finance. Boston, MA: Little Brown.

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Campbell, B.K. and Loxley, J. (eds) (1989) Structural Adjustment in Africa. New York: St Martin’s Press. Campbell, H. and Stein, H. (eds) (1991) Tanzania and the IMF: The Dynamics of Liberalization, Boulder, CO: Westview. Cavanagh, J., Cheru, F., Collins, C., Duncan, C. and Ntube, D. (1985) From Debt to Development: Alternatives to the International Debt Crisis, Washington, DC: Institute for Policy Studies. Central Bank of Nigeria (various years) Annual Reports and Statements of Account, Lagos. Cohen, B.J. (1991) ‘Whatever Happened to the LDC Debt Crisis?’, Challenge, 34 (MayJune): 47–51. Commander, S. (ed.) (1989) Structural Adjustment and Agriculture: Theory and Practice in Africa and Latin America, London: Overseas Development Institute. Cornia, G.A., Jolly, R. and Stewart, F. (eds) (1987) Adjustment with a Human Face, vols 1–2, Oxford: Clarendon Press. Cornia, G.A., Van der Hoeven, R. and Mkandawire, T. (1992) Africa’s Recovery in the 1990s: From Stagnation and Adjustment to Human Development, Basingstoke: Macmillan. Cuddington, J.T. (1986) Capital Flight: Estimates, Issues, and Explanations, Princeton: Princeton Studies in International Finance 58, Princeton University. Davies, R. and Saunders, D. (1987) ‘Stabilisation Policies and the Effect on Child Health in Zimbabwe’, Review of African Political Economy, 22 (1): 3–23. Davis, J.T. (1991) ‘Institutional Impediments to Workforce Retrenchment and Restructuring in Ghana’s State Enterprises’ World Development, 19 (8): 987–1005. Economic Commission for Africa (1983) ECA and Africa’s Development, 1983–2008: A Preliminary Perspective Study, Addis Ababa. —— (1985) Survey of Economic and Social Conditions in Africa, 1983–84, E/ECA/CM. 11/16 (April), Addis Ababa. —— (1989) African Alternative Framework to Structural Adjustment Programmes for Socio-economic Recovery and Transformation (AAF-SAP), E/ECA/CM.15/6/Rev. 3 (April), Addis Ababa. ECA/OAU (Economic Commission for Africa/Organization of African Unity) (1986) Africa’s Submission to the Special Session of the United Nations General Assembly on Africa’s Economic and Social Crisis (31 March), Addis Ababa. The Economist (various years). Erbe, S. (1985) ‘The Flight of Capital from Developing Countries’, Intereconomics, 20 (6): 268–75. Fischer, S., and Husain, I. (1990) ‘Managing the Debt Crisis in the 1990s’, Finance and Development, 27 (2): 24–7. Food and Agriculture Organization of the United Nations (1991) The State of Food and Agriculture 1990, Rome. Ghai, D. (ed.) (1991) The IMF and the South: The Social Impact of Crisis and Adjustment, London: Zed Books. Grant, J.P. (1989) The State of the World’s Children, New York: Oxford University Press. Hackett, P. (1990) ‘Economy’, in Africa South of the Sahara, 1990, London: Europa Publications. Harsch, E. (1989) ‘After Adjustment’, Africa Report, 34 (3): 47–50.

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Heller, P., and Tait, A. (1983) ‘Government Employment and Pay: Some International Comparisons’, Finance and Development, 20 (3): 44–7. IMF Survey (various years). IMF Survey (1991) ‘Managing Director’s Address: A Viable Economic System is a Priority for Emerging Democracies’ (29 July): 227. International Monetary Fund (1988) World Economic Outlook, October 1988, Washington, DC. Jesperson, E. (1992) ‘External Shocks, Adjustment Policies and Economic and Social Performance’, in G.A.Cornia, R.Van der Hoeven, and T.Mkandawire (eds) Africa’s Recovery in the 1990s: From Stagnation and Adjustment to Human Development, Basingstoke: Macmillan. Khatkhate, D. (1987) ‘International Monetary System—Which Way?’, World Development, 15 (12): vii–xvi. Kindleberger, C.P. (1974) ‘The Theory of Direct Investment’, in R.E.Baldwin and J.D.Richarson (eds) International Trade and Finance, Boston, MA: Little Brown, 267–85. Krueger, A.O. (1974) ‘The Political Economy of the Rent-seeking Society’, American Economic Review, 64 (1): 291–301. —— (1987) ‘Origins of the Developing Countries’ Debt Crisis’, Journal of Development Economics, 27 (4): 165–87. Lal, D. (1983) The Poverty of ‘Development Economics’, London: Institute of Economic Affairs. Lawrence, P. (ed.) (1986) World Recession and the Food Crisis in Africa, London: James Currey. Lessard, D.R., and Williamson, J. (eds) (1987) Capital Flight and Third World Debt, Washington, DC: Institute for International Economics. Loxley, J. (1986) ‘The IMF and World Bank Conditionality and sub-Saharan Africa’, in P.Lawrence (ed.) World Recession and the Food Crisis in Africa, London: James Currey, 96–103. Mills, C.A. (1989) Structural Adjustment in sub-Saharan Africa, Economic Development Institute Policy Seminar Report 18, Washington DC: World Bank. Mistry, P.S. (1991) ‘African Debt Revisited: Procrastination or Progress?’ Paper prepared for the North-South Roundtable on African Debt Relief, Recovery, and Democracy, Abidjan, Côte d’Ivoire, 8–9 July. Mosley, P., Harrigan, J. and Toye, J. (1991) Aid and Power: The World Bank and Policybased Lending, vols 1–2, London: Routledge. Nafziger, E.W. (1988) Inequality in Africa: Political Elites, Proletariat, Peasants, and the Poor, Cambridge: Cambridge University Press. —— (1993) The Debt Crisis in Africa, Baltimore: Johns Hopkins University Press. —— (1995) Learning from the Japanese: Japan’s Pre-war Development and the Third World, Armonk, NY: M.E.Sharpe. —— (1996) The Economics of Developing Countries, 3rd edn, Upper Saddle River, NJ: Prentice Hall. Nigeria. Office of Statistics (various years) Digest of Statistics, Lagos. Nove, A. (1983) The Economics of Feasible Socialism, London: Allen & Unwin. Ogbuagu, C.S.A. (1983) ‘The Nigerian Indigenization Policy: Nationalism or Pragmatism?’, African Affairs, 82 (2): 241–66.

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Overseas Development Council (1982) US Foreign Policy and the Third World: Agenda, 1982, New York: Praeger. Parfitt, T.W., and Riley, S.P. (1989) The African Debt Crisis, London: Routledge. Pinstrup-Anderson, P., Jaramillo, M. and Stewart, F. (1987) ‘The Impact on Government Expenditure’, in G.A.Cornia, R.Jolly, and F.Stewart, Adjustment with a Human Face: Protecting the Vulnerable and Promoting Growth, vol. 1, Oxford: Clarendon Press. Polanyi, K. (1944) The Great Transformation: The Politics and Economics of our Times, Boston: Beacon Press. Rahimibrougerdi, A. (1988) ‘An Empirical Investigation of the Effects of Major Exogenous Shocks on the Growth of Non-oil and Oil-exporting Developing Countries from 1965 to 1985’, Ph.D. dissertation, Manhattan, KS: Kansas State University. Sandbrook, R. (1991) ‘Economic Crisis, Structural Adjustment and the State in subSaharan Africa’, in D.Ghai (ed.) The IMF and the South: The Social Impact of Crisis and Adjustment, London: Zed Books. Seshamani, V. (1991) ‘Zambia’, in A.Adedeji, S.Rasheed, and M.Morrison (eds) The Human Dimensions of Africa’s Persistent Economic Crisis, London: Hans Zell Publishers. Stein, H. (1991) ‘Deindustrialization, Adjustment, and the IMF in Africa’, World Development, 19 (12): 1679–92. Stewart, F. (1990) ‘Are Adjustment Policies in Africa Consistent with Long-run Development Needs?’ Paper presented to the American Economic Association, Washington, DC, 30 December. Tskikata, T. (1990) ‘Ghana’, in A.Adedeji, S.Rasheed, and M.Morrison (eds) The Human Dimensions of Africa’s Persistent Economic Crisis, London: Hans Zell Publishers. UNICEF (1985) Within Human Research: A Future for Africa’s Children, New York. —— (1989) The State of the World’s Children, 1989, New Delhi. UNCTAD (1991) Trade and Development Report, 1991, New York. —— (1994) Trade and Development Report, 1994, New York. UNDP (1994) Human Development Report, 1994, New York: Oxford University Press. Van der Hoeven, R. (1989) ‘External Shocks, Adjustment, and Income Distribution’, in J.F.Weeks (ed.) Debt Disaster? Banks, Government, and Multilaterals Confront the Crisis, New York: New York University Press. Wall Street Journal (various years). Weeks, J.F. (ed.) (1989) Debt Disaster? Banks, Governments, and Multilaterals Confront the Crisis, New York: New York University Press. Williamson, J. (1993) ‘Democracy and the ‘Washington Consensus’, World Development, 21 (8): 1329–36. —— (ed.) (1994) The Political Economy of Policy Reform, Washington, DC: Institute for International Economics. Williamson, J. and Lessard, D.R. (1987) Capital Flight: The Problem and Policy Responses, Washington, DC: Institute for International Economics. World Bank (1983) World Development Report, 1983, New York: Oxford University Press. —— (1988) Adjustment Lending: Policies for Sustainable Growth, Washington, DC. —— (1988) Adjustment Lending: An Evaluation of Ten Years of Experience, Washington, DC.

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—— (1991) Global Economic Prospects and the Developing Countries, Washington, DC. —— (1993) World Debt Tables: External Finance for Developing Countries, 1993–94, vols 1–2, Washington, DC. —— (1994a) World Debt Tables, 1994–95: External Finance for Developing Countries, vols 1–2, Washington, DC. —— (1994b) World Development Report, 1994, New York: Oxford University Press. —— (1995) World Development Report, 1995, New York: Oxford University Press. —— (1996) African Development Indicators 1996, Washington, DC: International Bank for Reconstruction and Development. World Bank and International Monetary Fund. Joint Ministerial Committee of the Boards of Governors (1990) Problems and Issues in Structural Adjustment, Washington, DC. World Bank and UNDP (1989) Africa’s Adjustment and Growth in the 1980s, Washington, DC.

16 ECONOMICS WITHOUT HISTORY The efforts to Westernize the East Thomas E.Weisskopf

The nations of Eastern Europe and the former Soviet Union, now making the transition from administrative-socialist to market-capitalist economies, have become the favorite testing ground for orthodox Western economic theory. Western economic advisers have collaborated with Eastern economic policymakers to push for the implementation of programs of economic restructuring designed to build new Western-style capitalist economies from scratch. A striking feature of the economic strategies and policies being pushed in the East is the extent to which they are grounded in neoclassical economic theory and divorced from the historical legacies, and the associated political and social realities, of the societies involved. In his teaching and writing, Dan Fusfeld always stressed the importance of the larger historical and institutional context in which economic activity (and economic theorizing) takes place. His perspective is sorely lacking in the currently dominant approach to economic policy in the East. Much as Wolfgang Stolper bemoaned the widespread phenomenon of ‘Planning without Facts’ in the context of Third World economies a generation ago, Dan Fusfeld might well bemoan the equally widespread phenomenon of ‘Economics without History’ in the erstwhile Second World today. In this chapter I propose to explore the kinds of problems that have arisen in the former Soviet Union as a consequence of the hegemony of economic theory over history. I will: outline the program of restructuring advocated by most Western theorists for formerly administrative-socialist economies, show how this program fails to come to grips with the historical legacy of these societies, and discuss the nature of the consequent policy failures. I will draw primarily on the experience of Russia, which illustrates the issues most clearly. In what follows I will start from the assumption that the goal of economic restructuring in the nations of the former Soviet Union is a viable capitalist market economy of the kind found in North America or Western Europe. I personally favor a democratic form of socialism, but I believe it is quite unrealistic to expect that such a society can be built on the ruins of Soviet-style administrative socialism.1 The issue I address in this chapter is therefore simply the suitability of Western economic restructuring strategy for the construction of a well-functioning capitalist economy in the former Soviet Union.

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THE STANDARD REFORM POLICY PRESCRIPTION Western economists have developed a standard policy prescription for restructuring the economies of the East, in the wake of the demise of Communist Party rule and the abandonment of ‘actually existing socialism’.2 The three principal elements of this prescription are: 1 Rapid price liberalization (including the establishment of full currency convertibility at a free-market exchange rate, and the removal of barriers to foreign trade and investment). 2 Stringent fiscal and monetary austerity (achieved by sharply reducing government subsidies, entitlement payments and the emission of money and credit). 3 Rapid and wholesale privatization of state enterprises, industrial and agricultural, large and small (to shift ownership and control from the public sector to private individuals)—along with the development of stock markets as a putative source of profit-oriented discipline on enterprise managers. A fourth element is sometimes added to this package (often as an afterthought): 4 The establishment of a permanent social safety net (to protect the population from the worst effects of the dislocations sure to accompany massive economic restructuring and likely to recur periodically also in more mature stages of capitalist economic development). There are differences of opinion over the pace and the sequence with which these policy reforms need to be carried out, but most Western economists—especially those associated with international economic organizations (e.g. the World Bank and the IMF) and/or offering advice to reforming governments—urge rapid and simultaneous movement on all fronts in what is often labeled a ‘big bang’ strategy, or ‘shock therapy’. Reasoning that ‘you can’t jump across a chasm in two leaps’, they want rapid and comprehensive measures to achieve macroeconomic stabilization, get most of society’s assets into private hands quickly, and then let free markets take care of restructuring enterprises and allocating goods and services. On this view price liberalization and market-clearing are needed to ‘get the prices right’, so that they reflect scarcity values; markets need to clear —the sooner the better. Full currency convertibility and the reduction of trade barriers are intended to impose competitive discipline on domestic firms and to attract much-needed foreign investment. Fiscal and monetary austerity is designed to tamp down inflationary pressures and impose hard budget constraints on enterprises. These enterprises, severed from a protective government bureaucracy, will have to make the difficult choices needed for greater efficiency at both the micro and the macro level. Where a rapid sell-off of state enterprises

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is infeasible, voucher-based mass privatization schemes are often recommended —to give the general public a stake in the nation’s capital stock and a sense of participation in the building of capitalism. Lip service, at least, is paid to the construction of a new social safety net—so as to replace the enterprise-based social and welfare services characteristic of actually existing socialism. But this element of the standard policy prescription clashes with the prescribed fiscal austerity, requiring as it does new government agencies and substantial government outlays. As a result, it tends to be swept under the rug and treated at best as a secondary concern. Advocates of the standard shock therapy package have in mind the smoothly functioning laissez-faire capitalist system featured in introductory economics textbooks. They presume—with Adam Smith and so many neoclassical theorists —that individuals operating independently in a market context will tend to bring about what is best for the society as a whole. Free markets are viewed as a mechanism assuring economic efficiency; markets set up incentives which encourage effort and good work and which penalize idleness and inefficiency, and they allocate resources to their most profitable use. Once prices have been freed and property rights transferred to private agents, markets are expected to function in formerly socialist societies more or less as they do (or are supposed to do) in contemporary Western capitalist societies. People’s economic behavior will soon conform to that found in well-developed market economies: individuals will show independence and initiative in seeking to improve their own economic situation, businesses will compete honestly and reliably to lower costs and improve product quality, enterprise managers will be responsive to the wishes of shareholders, and contracts among individuals and businesses will be fairly and fully enforced. From this perspective, history is largely irrelevant to the design of reform policy. The historical legacy of the societies to be transformed represents an impediment to be swept away as rapidly and as fully as possible. Once the new policies required for market functioning are in place, one can expect the people— following their natural instincts—to respond to market forces much as they do in long-standing capitalist societies elsewhere in the world. THE IMPORTANCE OF THE INSTITUTIONAL FRAMEWORK The more thoughtful economic reformers recognize that in order to develop a well-functioning capitalist market economy it is also necessary to bring about major changes in the institutional environment of the ex-socialist economies. To function effectively, a market system must be embedded in institutions that limit problems of malfeasance and, more generally, circumscribe the transaction costs of market operations. What is needed is a comprehensive institutional structure of laws, regulations, and sanctions which channel people’s self-seeking drives into activities that create new wealth rather than simply redistributing old wealth.

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Moreover, to be efficient a market system must also find ways to limit the incidence and avoid the negative consequences of ‘market failures’ arising from public goods, externalities, and other well-known sources of divergence between private and social benefits and costs. Depending on the context, market failures may best be alleviated by the extension or redefinition of private property rights, by state regulation or intervention, or by voluntary mechanisms of cooperation. But each of these kinds of solution depends on an appropriate legal and institutional framework which serves to back up private property rights, public programs, or community organizations. In the absence of the appropriate institutions, market participants will have to devote substantial resources to such non-productive activities as security and contract enforcement; rent-seeking activities will tend to displace productive activities; and private benefits and costs will depart significantly from social benefits and costs. These problems are indeed very prominent in societies emerging from administrative socialism: the Communist Party-based authority structure bred widespread cynicism and opportunism, and its collapsed disciplinary mechanisms have not yet been replaced by effective alternative institutions. As a result, the costs and risks of doing honest business are very high, and the economic efficiency gains from a decentralized market system are very hard to realize. To the extent that more constructive patterns of behavior are found in contemporary market economies, it is in considerable part because markets have been embedded in an infrastructure of institutions that encourage such behavior. This infrastructure consists not only of welldefined property rights, but also of a legal and judicial system that enforces contracts and settles business disputes, a regulatory system that limits the accumulation of private economic power and prevents well-placed and/or well-informed people from taking economic advantage of others. In the absence of such institutions, markets will encourage narrowly self-serving, opportunistic and non-cooperative behavior, which will harm the economy as a whole. Douglas North, probably the most prominent Western economist to take seriously the importance of institutions in economic development, has written (1996): Economies are poor when institutions are structured in such a way as to produce high costs of transacting in political and economic markets…. Creating cooperative frameworks of economic and political impersonal exchange is at the heart of solving problems of societal, political and economic performance…. The institutional framework provides the incentive structure that dictates the kinds of skills and knowledge perceived to have the maximum payoff… relative weights (as between redistributive and productive incentives) are crucial factors in the performance of economies.

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Serious advocates of the standard policy prescription outlined in the previous section do insist that institutional reform is an essential prerequisite to success of the policies. They call for new laws and rules to govern property rights, accounting and contracting; the training of accountants, lawyers and public officials who understand these laws and rules; courts and judges to enforce them; and government regulatory agencies that can limit malfeasance and other destructive practices. These kinds of institutional reforms are, of course, far more difficult to implement successfully than the economic policies associated with shock therapy. It can readily be understood, however, that, without such institutional change, policies which rely on the invisible hand of the market are highly unlikely to achieve their desired effect. THE IMPORTANCE OF THE UNDERLYING CULTURAL ENVIRONMENT If institutional reform were in itself sufficient to assure the success of marketoriented economic reform policies, the task facing ex-socialist societies would at least appear feasible—if more difficult and more timeconsuming than generally assumed. There is, however, yet another layer of the problem to be addressed. Market societies depend for their success not only on market-appropriate infrastructural institutions, but also on market-appropriate values and norms. To be sure, the market mentality—Adam Smith’s ‘propensity to truck and barter’—never disappeared even in the most rigidly administered economy under Communist Party rule, and all kinds of markets have mushroomed in the exsocialist countries since the administrative-command system collapsed. But it is one thing for myriad transactions to take place between buyers and sellers; it is quite another for such transactions to work ‘as if by an invisible hand’ to coordinate the independent actions of atomistic individuals in such a way that they promote the interest of the economy as a whole. Not only must there be a supportive institutional framework, but to function effectively a market system must be embedded in a general culture of honesty, trust, and willingness to cooperate with others when joint effort is required to achieve desired results. What is most important to the success of economic reform and/or development efforts based on unleashing the market is that ‘norms of generalized morality’ emerge to sustain the market order.3 The morality at issue is an otherregarding one that fosters personal honesty and trustworthiness in economic transactions; if it is sufficiently widespread, it encourages trust that others will also keep their word and conduct their business without deceit or fraud. People are then enabled to cooperate with one another in economic endeavors, confident that each person will do his or her part. Such moral norms are generalized to the extent that they encourage honest, trusting and cooperative behavior with any other person—not only with those whom one knows personally or with whom one already has some kind of kinship, social or relational bond.

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As Jean-Phillipe Platteau has argued, honest and trustworthy behavior is especially likely to be established and sustained on a significant scale in a society where: 1 A large number of people have a preference for honesty and trustworthiness to begin with. 2 They also have sufficient trust in others’ predisposition to be honest and trustworthy. 3 The bent toward honesty and trustworthiness is not easily discouraged by bad experiences, and it is easily reinforced by good experiences. 4 Cheaters or free-riders are subject to strong guilt feelings. 5 Honest and trustworthy people are willing to punish breaches of honesty and trust even when their own interests have not been harmed, and when applying the punishment costs them more than they are likely to gain from it. Fulfillment of these five conditions in any given society depends largely on the prevalence of moral values, which in turn are linked with moral norms. Values represent what a person considers ‘right’; norms reflect what ‘society’ considers right. Norms are expectations about people’s actions which express a standard of conduct people believe they ought to follow lest they expose themselves to some sanctioning or unpleasant experience. There must be an underlying social consensus to impose sanctions on norm violators. These sanctions can come, in principle, from any one of three sources: (1) the state, (2) other agents, or (3) self-policing. Relying on the state can be very costly; relying on other agents is unlikely to work beyond relatively small groups. This leaves self-policing as an essential basis for adhering to a norm. Moral norms are rules that are at least partly internalized by agents and prompt people to take others’ interests into account; they provide the basis of self-policing. Individuals conform because of a personal attitude about the act itself—conformity becomes intrinsically rewarding and deviation intrinsically costly, so there is no need for external rewards or sanctions. Moral norms are followed even when violation would be undetected and unsanctioned, because the moral act is valued for its own sake. The honesty and trust required to make the market work cannot be expected to be assured simply by embedding market relations in dense networks of long-run interpersonal relations and ties.4 This kind of ‘embeddedness’ assures honesty and trust by the use of reputation mechanisms; but it does not apply as and when markets transcend family, local and community ties—as they must to accomplish their full task of developing global impersonal exchange. Not limited-group morality codes, but abstract rules for all, are needed, for it is too costly to generate and communicate the information necessary to sustain the former. By obviating the need for ubiquitous monitoring, and for external rewarding of

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honesty and/or penalizing of malfeasance, norms of generalized morality ensure low-cost enforcement of the rules of the market game. Primary socialization (of children by parents) plays a crucial role in the norm generation process, but moral norms are subject to erosion; they form ‘social capital’ and are liable to depreciation if the cost of honesty and cooperation is high or increasing. The maintenance of moral norms thus requires more or less continuous reinforcement by secondary socialization (of people in schools, workplaces, etc.).5 The needed norms are not directly dependent on state enforcement of appropriate conduct and punishment of antisocial behavior; but legal and political institutions must at least be consistent with the cultural context underlying the norms. It is important to recognize that people’s predilection for honesty and trust cannot be expected to come about spontaneously as the market itself expands; the appropriate behavior patterns require the rejection of an individual’s immediate interest in favor of the longer-term interest. Indeed, Adam Smith himself—as paraphrased by David McNally (1988: 193)—held that ‘the only guarantee that commercial relations will not shred the moral fabric of a society is the creation of an institutional framework which sets bounds on [people’s] selfinterested action’. Thus other-regarding values sustaining cooperative behavior make both the market and capitalist enterprises work better, reducing for both firms and society as a whole the costs of monitoring and enforcing the terms of transactions—as individuals internalize public-good considerations and strengthen the conviction that public-good-oriented laws are to be respected and obeyed rather than constantly challenged. Ultimately the cultural endowment of a society plays a crucial determining role in shaping its moral norms and hence the success or failure of market mechanisms. A government can quickly establish marketsupporting institutions (private property rights, laws of contract, etc.), but it cannot create the social/ cultural conditions required to make them work effectively by a simple act of will. The market is embedded in society, not the other way round; even a strong ideology of generalized morality diffused by the state has little chance of taking root if it falls on social terrain unable to understand it. Indeed, if market institutions and market-oriented policies are imposed on an uncongenial cultural fabric, the social structure may actually react by undermining or subverting the functioning of the market—with unexpected and often undesirable effects. Below, we will see how this has happened in contemporary Russia. First, however, we need to examine key elements of the institutional and cultural fabric woven by Soviet-style administrative socialism. THE HISTORICAL LEGACY OF SOVIET-STYLE SOCIALISM The economic base bequeathed by the Communist Party regime in the Soviet Union was in some respects quite favorable to the development of a viable

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capitalist economy. The favorable features include a very substantial raw material base for industry; an extensive transport network; a well educated labor force, including many highly skilled specialists; mastery of certain advanced technologies (notably in military and space-related fields); a huge potential market of consumers; and a heavily urbanized population accustomed to wage labor. On the negative side, the Soviet economy was characterized by a huge and inappropriate structural bias in favor of the military, a depressed agricultural sector dominated by relatively inefficient collective farms, and massive environmental deterioration—in the form of polluted air and water, toxic wastes, radiation hazards, etc. Ultimately more significant for the prospects of capitalist development in the former Soviet Union, however, is the framework of institutions, values and expectations which developed under decades of Communist Party rule in the context of Soviet-style administrative socialism. Some of the most important elements of this institutional and cultural legacy are detailed below. First, virtually all producers in the Soviet economy were in a position of much greater dependence on the state for their economic success than those in capitalist economies have ever been. Producers relied on state enterprises and/or branches of the government bureaucracy for obtaining resources and inputs, and they often depended on state trading agencies for locating buyers and delivering their outputs. Managers of both agricultural and industrial enterprises became used to fulfilling the demands of their administrative superiors, not to orienting their activities to the demands of purchasers in consumer or producer markets. Second, people in the Soviet Union were assured of a high level of economic security by state programs guaranteeing full employment as well as rather extensive welfare benefits (mostly linked with people’s workplaces)—even though the average material standard of living of the population was relatively modest. In any transition away from the administrative socialist system, exSoviet citizens are bound to seek assurance that they will not be left unprotected against uncertainty and insecurity— e.g. the possibility of losing one’s job, or not having the resources to deal with a medical calamity. Finally, and most important, the Soviet experience strongly inhibited the development of precisely the kind of norms of generalized morality which are so important to the effective functioning of a market economy. In the early decades of the USSR the challenges of building a new socialist system (and then the military threat to the homeland) inspired many Soviet citizens to relate to one another in a trustworthy and cooperative manner. As Josef Stalin gained paramount authority, however, suspicion and even paranoia became a way of life. Stalin’s death led to a reduction in the intensity of mutual distrust, but in subsequent decades cynicism and opportunism became increasingly prevalent— in part because of the increasingly visible self-interest and corruption on the part of highly placed officials. During the long ‘stagnation’ (as Russians refer to the years under Leonid Brezhnev’s rule), the only thing that stood in the way of a self-interested free-for-

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all was party discipline. When this discipline disappeared with the collapse of the Communist Party, opportunistic and antisocial behavior became all the more rampant. Examples include the emergence of secretive clans from the shadows of the second economy to monopolize trade and distribution networks; the movement of high government officials into lucrative positions in virtually unregulated new financial organizations such as commercial banks and investment funds; and myriad deals whereby top party officials and their friends or favorites gained control of prime real estate and other assets previously belonging to the Communist Party. In general, Soviet-style totalitarian politics, rigidly bureaucratic administrative command in the name of planning, and a system of patronagebased bestowing of privileges in government agencies and enterprises, had all served to breed the very opposite of norms of generalized morality. The Soviet regime was fundamentally characterized by the discretionary power of bureaucrats over subordinates; so reputation effects from personal ties played a critical role in coordinating economic activity under planning. Vertical relations between superiors and subordinates were highly personal, with gifts in exchange for services. The word ‘mafia’ is aptly used to characterize the networks of personalized relationships which developed—both legally and illegally—under the Soviet system, and with the end of Communist Party rule mafias have become the prototypical organizational form of economic activity in the former Soviet Union. In this context, no shared social ethics or norms of generalized morality can exist.6 Codes of conduct are governed by limited-group morality, emphasizing strength of ties to kin, friends or close relations. Procedural norms are particularistic, if they apply at all; professional standards are low; rewards and sanctions are based on patronage; and there is a complete absence of a code of conduct based on the principle of abstract equality among individuals. The legacy of corruption and opportunism among government bureaucrats, and the whole culture of patron-client relationships, have made it almost second nature for public officials to serve particular private rather than general public interests. And so the state is regarded—with considerable justification—as at best incompetent and at worst as thoroughly corrupt. SHOCK THERAPY MEETS RUSSIAN REALITY Advocates of shock therapy are confident that the implementation of marketpromoting policies, and the establishment of market-infrastructural institutions, will work to bring the benefits of a well-functioning market system to societies emerging from Soviet-style socialism. They recognize that it may take time to sweep away what they see as the lingering impediments of the preceding system, but they expect to see—after an initial period of painful adjustment—gradually spreading market-appropriate patterns of behavior and corresponding economic progress.

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The Russian experience of the last five years provides an important and interesting case in point. As the former Russian Republic became the independent Russian Federation in late 1991, President Boris Yeltsin entrusted economic policy-making to his Acting Prime Minister, Yegor Gaidar. Gaidar and his associates were strong believers in a shock therapy approach to economic transformation, and in early 1992 they launched a radical economic program to transform the remains of Russia’s disintegrating administrative socialist system quickly into a market capitalist economy.7 Their program involved the freeing up of most prices (including that of the ruble), sharp cutbacks in government spending as well as central bank loans, and a call for rapid privatization of both small and large-scale state enterprises. Privatization of large-scale enterprises was linked to a mass voucher program, in which citizens were enabled to participate in the purchase of enterprise shares through privatization checks distributed gratis by the government. The overall Russian economic restructuring program included all of the basic elements of the standard reform policy prescription outlined earlier. By 1996 enormous changes had unquestionably taken place in the Russian economy. The old administrative socialist system of governmentdominated resource allocation, government-determined prices and government-controlled enterprises had been largely dismantled and a new market-oriented and privateenterprise-based Russian economy had come into being. Long queues for goods in short supply had virtually disappeared; almost any goods or services were available to those who could afford the price. The doors to international economic relations had been opened wide: there was no more government monopoly of foreign trade; the ruble was freely convertible into other currencies and allowed to find its price in foreign exchange markets; and foreign capital investment was welcomed. The vast majority of Russian state enterprises had been privatized (at least formally)—with the exception of large enterprises in such relatively strategic sectors of the economy as defense and energy products. Close to a third of all Russian citizens held some kind of claim to ownership of productive assets, whether in the form of shares in large enterprises, shares in funds investing in such enterprises, or joint ownership of a small establishment. This transformation of the economy took place in a context of deepening economic crisis. By 1996 the aggregate output of the Russian economy, as well as Russian per capita income, were only at about one half of their levels at the beginning of the decade.8 But supporters of the economic reform program were confident that the worst was over, and that the new Russian capitalist economy was poised for a take-off into a prosperous future. While appearances certainly suggest that Russia is becoming a Western-style market capitalist society, a closer look at the transformation that has occurred over the past five years suggests a rather different conclusion. What is striking is that, in a number of important spheres, the economic reforms have worked out in a different way than initially intended. As we shall see, popular values and expectations rooted in Russian culture have reacted to the shock therapy reforms

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in such a way as to generate a new economic situation that is neither a normal Western-style capitalist system nor a traditional Soviet-style socialist system. Privatization of state enterprises The intent of the Russian privatization program was to restructure enterprise property rights in such a way as to enable outsiders (domestic individual or institutional investors or foreign investors) rather than insiders (enterprise managers and workers) to acquire majority ownership and control of formerly state-owned enterprises. This goal reflected the premise of shock therapy advocates that enterprises (above a relatively small size) can operate efficiently and dynamically only if their management is made responsive to external owners interested solely in profit maximization. Under administrative socialism enterprise managers were concerned primarily with fulfilling plan targets and thereby pleasing their superiors in the economic hierarchy, and secondarily with the economic security and social welfare of enterprise workers as well as themselves. Shock therapy enthusiasts wanted to see enterprise managers made accountable not to superior government officials or to their own workers, but to new shareholding and profit-minded owners. In this context managers would presumably not shy away from terminating redundant workers or even from shutting down plants and enterprises which could not be run at a profit. To the surprise of many of the reformers most active in promoting the Russian voucher-based privatization process, a substantial majority of privatized enterprises—both small-scale and large-scale—have ended up not under new external ownership, but under predominantly insider ownership. Enterprise workers typically hold the largest fraction of ownership shares in the new jointstock companies, while managers in practice exercise control over major management decisions—partly by representing worker interests in their traditional paternalistic way and partly by inducing worker shareholders to support management interests. It might well be more accurate to speak of the ‘commercialization’ rather than the ‘privatization’ of former state enterprises. What has happened, in the main, is that state-owned and centrally planned enterprises have been turned into legally independent companies owned and controlled by former managers and worker collective leaders. The predominance of insider control of privatized enterprises in Russia reflects in part the underlying cultural and political reality that the Russian people strongly value stability and desire security. Far from conforming to the Western capitalist norm, the pattern of manager control of newly privatized Russian enterprises represents a continuation of a trend in property structure shifts which began in the early 1990s (in the old Soviet Union) with ‘spontaneous privatization’. Since the late 1980s under Mikhail Gorbachev, Russian enterprise managers have been seeking greater autonomy from outside control; and they have been able to make use of the privatization process to enhance and consolidate their autonomy amid a disintegrating political order and

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a chaotic economic system. If anything, the pattern of Russian privatization has ended up strengthening rather than weakening managerial prerogatives and managerial paternalism. Instead of stimulating productive new capital formation, the privatization process has actually served to reduce real investment in industrial enterprises— by breaking the link between control over real assets and control over investment flows. In the Soviet system both were controlled by the state. After privatization, managerial teams strengthened their control over real assets—while commercial banks gained control of investment flows. The banks are reluctant to supply adequate credit for investment in real asset formation because the imperfect system of contract enforcement—in an overall context of underdeveloped norms of generalized morality—makes credit supply to enterprises highly risky. Thus much Russian bank capital has been going to less risky short-term commercial activities—e.g. to finance domestic and international trade and distribution. Industrial management behavior In the old Soviet system, and indeed throughout the years of perestroika up to the demise of the Soviet Union, the priorities of industrial managers were jobs, wages, housing and social services (for themselves and their workers). In the new order marked by voucher-based privatization, Russian managers are showing somewhat less concern for these objectives and somewhat more concern for the bottom line. Yet competition is limited, there is still much reliance on state subsidies, and there is as yet no credible threat of bankruptcy.9 The key to the economic success of an enterprise—whether private or public—is usually access to ruble credits, access to dollar credits, and/or access to foreign markets; and all of these depend heavily on political contacts. Industrial enterprise managers, together with worker collective leaders, remain most anxious to assure the survival of the enterprise and to maintain the economic security of its workers; they are far less interested in increasing the return to capital via lean-and-mean restructuring. Although the radical reformers in the Yeltsin administration paid at least lip service to the importance of dealing with problems of unemployment, their overall economic strategy (including sharp cuts in government spending) raised great doubt about their desire and/or ability to compensate dismissed employees for their loss of employment and enterprise-based social services. Thus it has done little or nothing to relieve enterprise managers of the implicit obligation to keep on providing employment and social services to their workers. A rapid change in enterprise management orientation is very hard to achieve in Russia, and it may even be counterproductive. It is hard to achieve because enterprise management involves a behavioral pattern deeply embedded in the culture of the society—a culture where one cannot count on a stranger to be honest or trustworthy. Management styles in Russia will change only as and when the culture itself evolves. Even if a rapid switch to a much more profit-

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oriented enterprise management style could be achieved, it might well be damaging to the economy—for in the contemporary environment of underdeveloped market institutions, what is profitable is far from what is economically efficient or socially desirable. Indeed, rapid reorganization, streamlining and/or liquidation of existing enterprises in order to show a profit could result in the loss of potentially valuable elements of existing capital stock as well as valuable skills and know-how of the current labor force. And a drive for profits would be likely to result in the abandonment of many social services provided previously by state-owned enterprises, since such services do not generally yield a profit. This would help enterprise-level profits, but it would lead to a much greater demand for state-provided social services at a time when the government is already short of funds and is also trying unsuccessfully to meet many other high-priority needs. Agricultural reform In the agricultural sector the Russian government under Boris Yeltsin has brought about a significant number of institutional and policy changes, consistent with the overall effort to build a private-enterprise-based market-oriented economy.10 For political reasons land reform has proceeded somewhat more slowly than enterprise reform; indeed, to this day much of the land is not freely and easily bought or sold. However, a multiplicity of land tenure forms now exist in the countryside; many kinds of lease arrangements are possible, and several hundred thousand completely private small farms have sprung up. The dominant state and collective farms of the Soviet era have been reorganized, in a process whereby members could opt to remain in a more independent form of agricultural cooperative or leave the cooperative with a proportionate share of land and property. Vertical ties between the center and the remaining cooperatives (which still account for the lion’s share of agricultural land and production) have been restructured to give the latter much more autonomy; a substantial share of agricultural output must still be delivered to the state, but at prices much closer to market-clearing levels. Yet in spite of the enactment of many pro-market agricultural economic policies, and the development of all kinds of new rural institutions, much remains as before in the countryside. First of all, collective forms of farm organization have remained much more popular than expected. Indeed, many of the old Soviet-style collective and state farms have changed little more than their name and their formal juridical status. Only a small minority of rural residents have opted to become independent farmers. There has simply not been—and there does not seem likely to be in the foreseeable future—any mass decollectivization of Russian agriculture. Why have the pro-capitalist and pro-market policy changes not had greater effect? The main reason appears to be the continuation of powerful social and cultural forces in Russian rural life, which impart an enormous conservatism to

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the agricultural sector. For several generations collective farms have served as a source of community and security for rural Russians, assuring members and their families of work, food, health care, education, pensions, and access to a variety of social and cultural amenities. To leave such an environment is to renounce a social and cultural milieu that provided participants with a meaningful identity. It is also economically very risky—especially when one cannot count on norms of generalized morality to inform market transactions. Efforts at macroeconomic stabilization The old Soviet economic system was, of course, dominated by the state, and it was precisely this state domination that the Russian economic reformers who gained decision-making power in early 1992 viewed as the source of most of the nation’s economic problems. The shock therapy enthusiasts thus considered it vital to break—once and for all—the power of the state over the economy, in order to render irreversible the transformation from administrative socialism to market capitalism. To be sure, the disintegration of central state power was already well under way during the latter years of the Gorbachev regime. After the collapse of the Soviet Union, however, the process accelerated. Partly by default, partly by deliberate policy, political power was very substantially diffused from the center to regions and localities; and effective economic power was diffused from government ministries to former state enterprises and to local government agencies. From the perspective of the Russian economic reformers, this kind of rejection of the historical legacy was all to the good. Private enterprise in a free-market context could be expected to do far more efficiently what the old Soviet state had tried to accomplish in the economic sphere. The main economic task of the Russian central government was to cut its expenditures sharply, in order to bring them into line with tax revenues and to balance the budget; while the Russian central bank was to restrict the growth of the money supply, in order further to dampen inflationary pressures. For the most part, however, Russian government macroeconomic stabilization efforts have been quite unsuccessful; fiscal and monetary collapse has been averted largely by a substantial infusion of credits from international institutions. The sources of the continuing macroeconomic stabilization problems are various, but the Soviet historical and cultural legacy looms important in two key respects. First of all, central state revenues have plummeted, while popular demand for continued public spending—in such areas as public sector wages, pensions, health and education—has made it politically impossible to cut expenditures anywhere near as much as advocated by shock therapists. Continuing and politically effective demand for state spending to directly benefit citizens is the current expression of a long-standing Russian expectation that the state will take

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care of the basic needs of the people. The inadequacy of government revenues can be attributed not only to the loss of authority of the Russian central government over regional and local government agencies, but also to the lack of a Russian tradition of tax payment compliance on the part of enterprise managers and wage and salary earners. Under the Soviet system, most revenues were raised in the form of enterprise turnover taxes linked with state ownership of enterprises and strict central control of prices and incomes. In the monetary arena, efforts by the Russian central bank to curtail money supply growth have frequently been frustrated by politically effective demands on the part of failing enterprises for enough credit to stay in business. Where and when sufficient credits for this purpose have not been forthcoming, curtailment of public money supply growth has been countered by growth in private money supply—in the form of inter-enterprise debt. Instead of forcing failing firms to declare bankruptcy, as in well-functioning market economies, the inability of many Russian enterprises to pay their bills has led to voluntary growth of mutual indebtedness among all enterprises. In this way old patterns of real resource flows continue, as they used to in Soviet days, independently of enterprise balance sheet considerations. The contradictions of a rapid transition For shock therapists, great speed and great scope are essential to successful economic reform. One cannot be too brutal in sweeping away the old system in order to make way for the new. There will be more pain in the short run, but more gain in the long run, if the reform process bulldozes ahead; indeed, if it fails to do so, there is a great risk that it will become completely mired in the mud of the old regime and fail to move forward at all. One implication of this approach—clearly in evidence in contemporary Russia —is that the new market economy develops in a context of enormous social and economic dislocation. As people in various walks of life scramble to find their footing in a world of new policies and changing institutions, some are much luckier or much more adept than others, and inequalities of all kinds grow rapidly. Indeed, the distribution of income in Russia has surged from relatively equal to highly unequal by international standards. The sudden dismantling of the old order has greatly increased the scope for corruption, and the historical legacy of nomenklatura privilege and a shadow economy has made groups of mafiosi—much more often than dynamic new entrepreneurs—the greatest beneficiaries of economic reform. The dislocation and inequality that have characterized the rapid transition have had a number of counterproductive effects on the establishment of a viable and effective market economy. They have strengthened the long-standing orientation of most ordinary Russians—agricultural and industrial and service workers—to value stability and security over the kind of risk and enterprise called for in a market system. They have led to a powerful political backlash against market-

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oriented reform, which has clearly influenced in a very conservative direction the campaigns of virtually all candidates for the Russian Duma in December 1995 and the Russian presidency in June 1996. Finally, and perhaps most importantly in the long run, the ‘wild’ environment in which capitalism and the market have come to Russia has made it all the more difficult to develop the cultural norms of generalized morality which are so crucial to a viable and effective market economy. Indeed, if anything, there has been regress in this respect. Criminality and racketeering in business, trade and finance have surged. The Soviet legacy of personal clientelism has been reinforced by the current weakness of the government authorities, and by the continuing opportunism of many government officials in the context of underdeveloped market-regulatory institutions. As a result, conditions have been created in which unscrupulous and powerful or well-connected individuals and groups can amass vast fortunes through semilegal and illegal operations. Many potentially productive entrepreneurs—both domestic and foreign—have been discouraged by the high costs and risks of doing honest business in Russia. Indeed, to be trusting and cooperative nowadays is more likely to make one a sucker than a contributor to general economic welfare. Extremely self-regarding values, widespread distrust of others, and indeed outright crime are all too evident. Overcoming the damaging cultural legacy of Communist Party rule was bound to be a daunting task and a very long-run process under the best of circumstances —one which would call for exceptional moral as well as political leadership. The nature of the transition to market capitalism under way in contemporary Russia has only made this an even greater challenge for the future. CONCLUSION In Russia in 1918 a group of ‘young intellectuals, with little grip on the realities of administration’, undertook an ‘elemental chaotic proletarian nationalization from below’ (Fischer, quoted in Murrell 1995:177). They were trying to bring about a socialist revolution in the absence of a strong proletariat and of a socialist culture. Their Marxist background should have imbued them with an understanding of how the historical legacy of Tsarist Russia would constrain the prospective road to socialism. In the fire of revolution and civil war, however, the Bolsheviks cast caution to the winds and sought immediately to bring about a totally new order. Some seventy-four years later another group of young Russian intellectuals, with little grip on the realities of administration, initiated what well might be described as an ‘elemental chaotic bourgeois denationalization from above’. They were trying to bring about a capitalist revolution in the absence of a strong bourgeoisie and of a capitalist culture. Their neoclassical economic background (and that of their Western advisers) gave them no sense of the historical legacy

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of Soviet-style socialism and how it would constrain any prospective transition to capitalism. In both these cases there were much more promising alternative strategies open to the revolutionaries—strategies whose common denominator is gradualism. The Bolsheviks did turn to a gradualist economic approach when they launched the New Economic Policy (NEP) in the early 1920s. The NEP was successful in restoring the nation’s economic health; but it could not reverse and ultimately succumbed to the logic of authoritarian centralism which marked the early Bolshevik years. The pro-capitalist revolutionaries of the early 1990s could have opted for a gradual process of economic reform—one involving the progressive liberalization of prices and the opening up of the economy, a more nuanced approach to macroeconomic stabilization, and a slower and more equitable process of privatization which would have encouraged diverse forms of enterprise ownership and control. Such an approach would have eased the pain of the transition, prevented the massive polarization of society between the few who have struck it rich and the many who have plunged into poverty, and it would have encouraged rather than discouraged the development of norms of generalized morality. To adopt such a gradualist strategy at the present time (1996) would almost surely be too late; unfortunately, much of the damage of precipitate action has already been done. The Bolshevik Revolution ended up in Stalinism—a tragic parody of socialist ideals. The danger now is that the efforts of Boris Yeltsin’s team of economic reformers will end up in a form of authoritarian corporatism—a parody of capitalist ideals. NOTES 1 For my advocacy of democratic socialism see Weisskopf (1993); for my skepticism about its feasibility in the East, see Weisskopf (1995). 2 My characterization of the standard Western policy prescription is close to that of Murrell (1995). 3 This term is due to Platteau (1994), whose analysis has strongly influenced my own. 4 The embeddedness thesis has been advanced by Granovetter (1985). 5 If moral norms are backed by strongly held religious beliefs, involving an allknowing God, they may be sustained without secondary socialization even under the most adverse earthly circumstances. 6 The discussion in this paragraph draws heavily on Litwack (1991). 7 See Kotz (1996: chapter 9) for a more detailed description of the Russian shock therapy program. 8 According to Goskomstat (the Russian State Statistical Committee), the Russian GDP declined by 47 percent from 1990 to 1995. Since the Russian population

312 THOMAS E.WEISSKOPF

actually declined in the early 1990s (see below), per capita GDP fell by slightly less than 47 percent. 9 That there is no credible threat of bankruptcy is, of course, quite inconsistent with the intent of the shock therapy approach to economic restructuring, but it reflects one of many ways in which the Russian economic and social system, so influenced by its Soviet legacy, has resisted in unanticipated ways the imposition of shock therapy policies. 10 My discussion of agricultural reform in Russia owes much to Wegren (1994).

REFERENCES Goskomstat (1995) Statisticheskoe Obozrenie, 4. Granovetter, M. (1985) ‘Economic Action and Social Structure: The Problem of Embeddedness’, American Journal of Sociology, 91 (3): 481–510. Kotz, D., with Weir, F. (1996) Revolution from Above: The Demise of the Soviet System, London: Routledge. Litwack, J.M. (1991) ‘Legality and Market Reform in Soviet-type Economies’, Journal of Economic Perspectives, 5 (4): 77–89. McNally, D. (1988) Capitalism: A Reinterpretation, Berkeley: University of California Press. Murrell, P. (1995) ‘The Transition According to Cambridge Mass.’, Journal of Economic Perspectives, 33 (1): 164–78. North, D. (1996) ‘Where Have we Been and Where are we Going?’, paper presented to the Conference on Economics, Values and Organization at Yale University, 19–21 April. Platteau, J-P. (1994) ‘Behind the Market Stage Where Real Societies Exist’, Journal of Development Studies, 30 (3, 4): 533–77, 753–817. Wegren, S.K. (1994) ‘Rural Reform and Political Culture in Russia’, Europe-Asia Studies, 46 (2): 215–41. Weisskopf, T.E. (1993) ‘Democratic Self-management: An Alternative Approach to Economic Transformation in the Former Soviet Union’, in B.Silverman, M. Yanowich and R.Vogt (eds) Double Shift: Transforming Work in Post-socialist and Post-industrial Societies, Armonk, NY: M.E.Sharpe. —— (1995) ‘Market Socialism in the East’, Dissent, 42 (1): 82–8. —— ‘Economic Perspectives on Privatization in Russia, 1990–94’, in J.Hopps and D.Iatridis (eds), The Socioeconomic Impact of Privatization: Challenges for Central and Eastern Europe, Westport: The Greenwood Publishing Group, forthcoming.

ACKNOWLEDGEMENT I am grateful to David Kotz and Mark Weisbrot for their comments on an earlier version of the chapter.

INDEX

Adams, W. 13 Africa (sub-Saharan) 272–289 Anderson, L. 23–7 Arrow, K. 210, 216 Asia 86, 166, 275 ‘as-if’ xvii, 205–16

collective 187 collectivism 170, 173–2 corruption 309 costs 146–69; opportunity cost 146–4, 149–62; opportunity sets 147–61, 155, 157, 160– 9 Creative Reliability, Principle of (PCR) 196–6, 200–11 culture 163, 169, 171–81 cultural capital 226–9

Barro, R. 165 Baumol, W. 165 behavioral variation 186, 188–8, 196–7, 200, 202 Bergson, A. 9 Bertaux, N. 23 Blaug, M. 34 Baudichon, B. 108–15 Boulding, K. 17

David, P. 38 decision-making process 205–20 decision making under uncertainty 25–9, 198, 200, 208, 214 debt crisis 86, 91, 98, 100, 272–7 developing countries 86–8, 98, 274–9, 278, 283, 289 deviants 214 dimensions of the economic entity 191– 196 Dorfman, J. 10

classical political economy/economists 67– 78, 83, 93, 106 Clark, J.B. xiv–xv, 67, 78–8, 155 Clark, J.M. 81, 165 coase theorem 147–6, 160 Coats, A.W. 137 COGEE xv, 135 CSWEP 104–11, 115, 119 competition 6, 78–7, 171, 174, 192, 195, 197 conform 213 ‘Conceptual Framework of Modern Economics’ 30, 37–2, 51–5 ‘Contract with America’ 264 conventions 205, 212–5, 217, 220 convergence 163–4, 170 cooperation 6, 82, 171, 174, 192 Corn Laws 67–8, 83

Eastern Europe 86, 294 economic development 25, 86–3, 91–8, 94, 98, 99 economics education 29, 44, 58–2, 108, 124–6, 133–5 economic history 25, 29, 44–8, 46–3, 117 economic methodology 29, 34, 37, 39, 44, 50, 61 efficiency wage 224 entrepreneur 218, 220 entrepreneurship 205, 218, 277

313

314 INDEX

evolution/evolutionary 186, 194, 202, 205, 212 experimentation 209–21 Fawcett, M.G. 109 feminist economics 117–4 feminist movement 104, 106–22 Fetter, F. 78 Friedman, M. 206–16, 258, 268 Fusfeld, C. 2 Fusfeld, D.R. 22–28, 29–41, 44–61, 100, 116–3, 120, 124, 129, 135–4, 163, 169, 186, 224–6, 242–6, 256, 272, 294 Fusfeld, I. 2 Gallaudet College 2–2 Game Laws 73–78 gender issues 57, 87, 94, 95–3, 103, 109, 116 gender and development 95–3, 100 gender in economics 103–10, 106–24 gender of economists 103–11, 116–5 Gestalt 5–6, 19, 32–7, 36, 40, 53, 59 ghetto economy 15, 29, 57, 61 Gilman, C.P. 112–20 Gödel’s theorem 20, 52 gradualism 310 great depression 2, 261 growth 163, 172–91 growth paradigm/theory 86–94, 99–6, 164, 170 Haldane, J.B. 22, 25 Harrod-Domar model 89 Hayek, F. 36, 219 Haymarket 80 Heckscher, E. 6 Heiner, R. 198 history of economic thought 22–8, 44–8, 46–3, 56, 61, 98, 117, 124–48; job opportunities 129–8; Ph.D. dissertations 130–9; status in curricula 125–5 History of Economics Society 124 Hofstede, G. 170–80 human capital 164–3, 167–7, 183, 224, 226–9, 228, 232, 236, 241, 243

Human Development Index 94–1 Human Development Paradigm 86–3, 92, 94–6 Hume, D. 214 hypothetico-deductive 34, 36, 40 individualism 163, 170–82 inertia 215 inference 208 inner city 224 innovation 186, 199, 200–10, 203, 205, 216–6, 218 institutions 205, 256–70; government 262–8; military 265–9; money and finance 266–268; private market 258–5 institutionalism/institutionalists 4, 7–8, 16– 18, 29–3, 32, 34–8, 37, 39–3, 50–4, 256– 70, 264, 268–3 International Monetary Fund 86, 98, 268, 272–289, 295 International Association for Feminist Economics 103, 119 International Network for Economic Method xiv, 20–4, 29 Ireland 71–8 job competition model 224–7, 227 Keynes, J.M. 5, 213, 256, 260, 267, 270, 277 Keynesianism/Keynesians 5, 7, 14, 18–2, 25, 134, 140, 265 Knight, F.H. 206 Krueger, A. 286 Krugman, P. 265 labor economics 25, 29, 44, 55, 224 labor force attachment 225–8 labor force participation 224, 227, 232–6 labor-intensive farming 67–3 labor markets in Boston 224–56 Laissez-faire 67, 80–7, 269, 277, 296 Latin America 86, 273–8 learning 209–19, 219 Lewis, A. 90

INDEX 315

Libby, B. 115 London School of Economics 111 Lucas, R. 167–7, 174 Luxemburg, R. 114 Maddison, A. 165 Malthus, R. 71 Marcet, J. 106–14 Margolis, H. 215 Marshall, A. 8, 110–18, 117, 213 Martineau, H. 106–14 Marx/Marxism/Marxists 3–4, 15–16, 52, 54, 57, 69, 114, 118, 134, 140 maximization 206–16 McCloskey, D. 117–4 mercantilism 6 Michigan State University 11–13, 15–15, 119 Middle East, the 273 Miller, M. 169 Mitchell, W. 6 More Developed Countries (MDCs) 86, 89, 98, 274–9, 283, 289 NAIRU 259 Napoleonic Wars 75 neoclassical (orthodox) economics 23–7, 26, 31, 38–3, 51, 79, 81, 87, 95, 98–5, 117–4, 146–6, 159–8, 164–3, 183, 205, 216, 224, 269, 272 networks 226–9, 230, 233, 236 new deal 2–3, 10, 45, 268–3 new (endogenous) growth theory 87, 92–9, 100, 164–3, 167–6, 170 norms 299 North, D. 298 Nyerere, J.K. 275–90 Paley, M. 110–17 paradigm-seeking 205, 209–21, 220 pattern models 5, 15, 31–37, 39–4, 53–7, 57, 61 poachers 73–78 Polanyi, K. 9, 12, 41, 51, 54, 192 political economy 44, 50, 55–9 Polkinghorn, B. 106

positivism/logical empiricism/positivists 30, 32, 35, 39, 52–6 primitive accumulation 67–2, 70–6, 73 privatization 295, 303–20 power 146–61, 158–7, 161, 193, 257 public capital 264 railroads 78, 80 restructuring in Russia 294–10; cultural environment 298–6; institutional framework 297–13; shock Therapy 303–309 Reynolds, R. 8 Ricardo, D. 67, 70–8, 92–9 rights 147–65, 161, 192–1 Romer, P. 92–9, 165 Roosevelt, F.D. 2, 3, 10, 44–8, 120 Rostow, W. 88 routine 219 rural-urban migration 90 Russia 279, 294, 303–26 Russell, B. 19 Rutherford, M. 36, 37 Samuels, W. 33 Schumpeter, J. 9, 15–16, 38, 54, 82, 203 Sen, A. 92 single price theorem 53–8 small-scale agriculture 68–6 Smith, A. 53, 77, 91, 213, 296, 298, 300 Smith, B.L. 108 social capital 226–9, 300 social costs 147 Solow, R. 90, 164 South Korea 92 Soviet Union 294–10, 301–17, 305–3 Sraffa, P. 18 Stigler, G. 8, 82 Stolper, W. 294 suffrage era 104, 109–22 structural adjustment 86–3, 90–7, 95, 98, 100, 272, 276–289 Tawney, R.H. 6 Taylor, H. 107–14, 117 Thurow, L. 224 Torrens, R. 69

316 INDEX

transition 86–3, 91, 95, 309 Trollope, A. 76–77 uncertainty 205–15, 208–18, 216 unemployment 224–7 University of Michigan 11–12, 13–15, 17, 21–27, 58–2, 61, 116–4, 129, 135, 140, 224, 256; political economy seminar 23–7, 26, 44, 61 URPE 15, 15, 56, 59 utility functions 148 Vaughn, K. 136 value dilemmas 171 Veblen, T. 5–6, 51, 56 Vickrey, W. 8, 259 Walker, D. 136 Walthan Black Acts (1722) 73–9 Washington Consensus 272, 275–95 Weber, M, 6 Weisskopff, T. 23–7 Winter, S. 202 Witt, U. 198, 202 Wollstonecraft, M. 106–13 women’s movement 15 world bank 86, 90, 98, 272–289, 295 Wu, H. 20–4 X-inefficiency 205, 216