Ethics and the Market: Insights from Social Economics (Advances in Social Economics)

Ethics and the Market

Much existing economic theory overlooks ethics. Rather than situating the market and values at separate extremes of a continuum, Ethics and the Market contends that the two are necessarily and intimately related. This volume brings together some of the best work in the social economics tradition, with contributions on the social economy, social capital, identity, ethnicity and development, the household, externalities, international finance, capability, and pedagogy. Proceeding from an examination of the moral implications of markets, the book goes on to explore such themes as the institutional arrangements of social economies, individual and household decision-making, and economic development in a global context. Ethics and the Market illuminates the diverse and dynamic theoretical approaches that are employed in social economics, reflecting on their continuously evolving relationship with neoclassical economics. This book will prove vital reading for students and academics in the fields of Economics, Sociology, Gender Studies, and Public Policy. Betsy Jane Clary is Professor of Economics at the College of Charleston in South Carolina, USA. Wilfred Dolfsma is both an economist and philosopher and is affiliated with Erasmus University Rotterdam and Maastricht University, the Netherlands. Deborah M. Figart is Dean of Graduate Studies and Professor of Economics at the Richard Stockton College of New Jersey, USA.

Advances in social economics Edited by John B. Davis Marquette University This series presents new advances and developments in social economics thinking on a variety of subjects that concern the link between social values and economics. Need, justice and equity, gender, cooperation, work, poverty, the environment, class, institutions, public policy and methodology are some of the most important themes. Among the orientations of the authors are social economist, institutionalist, humanist, solidarist, cooperatist, radical and Marxist, feminist, post-Keynesian, behaviouralist, and environmentalist. The series offers new contributions from today’s most foremost thinkers on the social character of the economy. Published in conjunction with the Association of Social Economics. Books published in the series include: Social Economics Premises, findings and policies Edited by Edward J. O’Boyle

The Social Economics of Health Care John Davis

The Environmental Consequences of Growth Steady-state economics as an alternative to ecological decline Douglas Booth

Reclaiming Evolution A Marxist institutionalist dialogue on social change William M. Dugger and Howard J. Sherman

The Human Firm A socio-economic analysis of its behaviour and potential in a new economic age John Tomer Economics for the Common Good Two centuries of economic thought in the humanist tradition Mark A. Lutz Working Time International trends, theory and policy perspectives Edited by Lonnie Golden and Deborah M. Figart

The Theory of the Individual in Economics Identity and value John Davis Boundaries of Clan and Color Transnational comparisons of intergroup disparity Edited by William Darity Jr and Ashwini Deshpande Living Wage Movements Global perspectives Edited by Deborah M. Figart Ethics and the Market Insights from social economics Edited by Betsy Jane Clary, Wilfred Dolfsma, and Deborah M. Figart

Ethics and the Market Insights from social economics

Edited by Betsy Jane Clary, Wilfred Dolfsma, and Deborah M. Figart

First published 2006 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN Simultaneously published in the USA and Canada by Routledge 270 Madison Ave, New York, NY 10016 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2006 Selection and editorial matter, Betsy Jane Clary, Wilfred Dolfsma and Deborah M. Figart; individual chapters, the contributors This edition published in the Taylor & Francis e-Library, 2006. “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.” 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 A catalog record of this title has been requested ISBN10: 0-415-39461-9 ISBN13: 978-0-415-39461-1

Contents

List of illustrations Notes on contributors Preface Acknowledgments List of abbreviations 1 Introduction

vii viii xiv xvi xviii 1

BETSY JANE CLARY, WILFRED DOLFSMA, AND DEBORAH M. FIGART

PART I

Morality and markets 2 The moral embeddedness of markets

9 11

JENS BECKERT

3 Creative destruction and community

26

JON D. WISMAN

4 Borrowing alone: the theory and policy implications of the commodification of finance

41

GREG P. HANNSGEN

5 Teaching the ethical foundations of economics: the principles course JONATHAN B. WIGHT

55

vi Contents PART II

Redefining the boundaries of economics 6 The normative significance of the individual in economics: freedom, dignity, and human rights

67

69

JOHN B. DAVIS

7 The impact of identity on economics

84

MIRIAM TESCHL

8 The relationship between consumption and production: conceptualizing well-being inside the household

98

ELIZABETH OUGHTON AND JANE WHEELOCK

9 Social economy as social science and practice: historical perspectives on France

112

DANIÈLE DEMOUSTIER AND DAMIEN ROUSSELIÈRE

10 France and Québec: the progressive visions embodied in different social economy traditions

126

CAROLE BIEWENER

PART III

Social economies in transition

141

11 Accounting for societal externalities

143

LAURA MCCANN

12 Ethnicity, democracy and economic development: a pluralist approach

161

MANUEL BRANCO

13 A gender-aware approach to international finance

175

TONIA L. WARNECKE

14 Social capital and the capability approach: a social economic theory

191

ALEXANDRE L. BERTIN AND NICOLAS SIRVEN

Index

204

Illustrations

Figures 2.1 8.1 8.2 11.1 11.2 11.3 14.1

Typology of moral action in market exchange The social relations of household provisioning The relationship between household endowments and individual well-being Hog farming in Worth County, Missouri Optimal output with environmental and societal externalities Optimal output when net societal externalities change sign as output level increases Exchange entitlement mapping with social capital

13 101 104 150 153 153 197

Tables 13.1 13.2 13.3

Female representation in the IMF and World Bank Female representation in regional development banks Female representation in UNCTAD

184 184 185

Contributors

Jens Beckert studied sociology and business administration at the Freie Universität Berlin and the New School for Social Research in New York. He received his Ph.D. in Sociology from the Freie Universität in 1996 and his Habilitation in 2003. He was a Visiting Fellow at Princeton University in 1994–5 and at the Center for European Studies at Harvard University in 2001–2. He was Associate Professor of Sociology at the newly founded International University Bremen before becoming a full Professor at the Georg-August-University Göttingen. His book, Beyond the Market: The Social Foundations of Economic Efficiency, was published by Princeton University Press in 2002. His many other publications on economic sociology have appeared in the Journal of Economic Issues, Theory and Society, Zeitschrift für Soziologie, and Kölner Zeitschrift für Soziologie und Sozialpsychologie. Alexandre L. Bertin is a Ph.D. student at the Centre d’Economic du Développement at University Montesquieu in Bordeaux, France. His main fields of interest are development economics and poverty, with a particular focus on capability and non-monetary micro approaches. His field research is in Guinea, where he works in collaboration with geographers, anthropologists, biologists, and sociologists on an international development program. His publications deal with issues such as well-being, welfare, poverty, and capability. He teaches courses in macroeconomics, microeconomics, and statistics. He has also taught African decision-makers about the economy, in a Frend foundation for development based in La Rochelle. Carole Biewener is Professor of Economics and Women’s Studies at Simmons College, Boston, MA, USA. She received her B.A. from Douglass College and her Ph.D. from the University of Massachusetts, Amherst. She teaches courses in economic development, gender in development, women and work, feminist economics, and social justice. She is also coordinator of the interdisciplinary minor in social justice. She is particularly interested in issues relating to economic difference. Building on her previous work on the French Socialist government’s

Contributors ix monetary and financial policies in the 1980s, her current research is focused on community development and social economy projects in the United States and Canada with an emphasis on progressive finance initiatives. Manuel Branco is Associate Professor of Economics at the University of Évora, Portugal, and is currently the Head of the Department of Economics. He graduated in Economics and in Geography from the University of Paris 1, Panthéon-Sorbonne, and received his Ph.D. in Economics from the École des Hautes Études en Sciences Sociales, also in Paris, France. He joined the University of Évora in 1989 and since then has taught several courses in the fields of development economics and the history of economic thought. His main research interests concern the political economy of development and underdevelopment and the interaction of economic and non-economic factors in the development process, more specifically with respect to ethics, democracy, culture, and inequality. His latest publications, both coauthored, include Underdevelopment as Cultural Resistance or Culture as Resistance to Underdevelopment and Animal Health and Production in a Development Perspective. Betsy Jane Clary is Professor of Economics at the College of Charleston, South Carolina, where she teaches courses in the history of economic thought, economic history, monetary theory, and honors economics for the Honors Program. Her current research interests include the relationship between ethics and economics, religious socialism in Germany in the 1920s, and relationships between individual freedom and order in society. She has published in the Review of Social Economy, the Forum for Social Economics, and numerous book chapters. She is a past President of the Southwestern Social Science Association (SSSA), the Southwestern Economics Association, and the Women’s Caucus of the SSSA. She serves on the editorial board of the Review of Social Economy and is Program Secretary of the Association for Social Economics. John B. Davis is Professor of History and Philosophy, University of Amsterdam and Professor of Economics, Marquette University. He is the author of Keynes’s Philosophical Development (Cambridge, 1994) and The Theory of the Individual in Economics (Routledge, 2003). He is a co-editor with Wade Hands and Uskali Mäki of The Handbook of Economic Methodology (Elgar, 1998) and a co-editor with Warren Samuels and Jeff Biddle of The Blackwell Companion to the History of Economic Thought (Blackwell, 2003). He has published in the Cambridge Journal of Economics, Economic Journal, Review of Social Economy, Review of Political Economy, History of Political Economy, Economics and Philosophy, European Journal of the History of Economic Thought, Journal of Economic Methodology, and other journals. He is a past

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Contributors President of the History of Economics Society, past Chair of the International Network for Economic Method, and the Editor of the Review of Social Economy.

Danièle Demoustier is Professor of Economics and Director of the Research Group in Associative and Cooperative Socio-Economics (Equipe de Socio-économie associative et coopérative) at the Institute of Political Studies in Grenoble, France. She is a member of the National and International Scientific Councils of the International Center of Research and Information on the Public and Cooperative Economy (CIRIEC) and a member of the editorial boards of the Annals of Public and Cooperative Economics and the Revue Internationale de l’Economie Sociale. Her current research centers on two diverse topics: the effects of the enterprises of the social economy on urban and local development; and the history of social economic thought. She is the author and editor of several books on worker cooperatives and social economy, including Les Cooperatives Ouvrières de Production (1984), L’économie Sociale et Solidaire (2001), The Enterprises and Organizations of the Third System in the European Union (2001), and Economie Sociale et Développement Local (2004). Wilfred Dolfsma is both an economist and philosopher and holds a Ph.D. in Economics. He is employed by the Erasmus University Rotterdam and Maastricht University, the Netherlands. His research interests concern the interrelations between economy, society, and technology. He has published on various aspects of consumption and the formation of preferences, media industries, feminist economics, as well as on globalization and the developments and effects of intellectual property rights (IPR). He also does research in the history and methodology of economics. He has co-edited, with Charlie Dannreuther, Globalization, Social Capital and Inequality (Edward Elgar, 2003), and authored Institutional Economics and the Formation of Preferences (Edward Elgar, 2004). His co-edited Reading the Dynamics of the Knowledge Economy is forthcoming (edited with Luc Soete). His articles have been published in the Review of Social Economy, Journal of Economic Issues, Journal of Economic and Social Geography, International Journal of Social Economics, and Feminist Review. He is 2005–6 Research Fellow at the Netherlands Institute for Advanced Studies (NIAS), and Coeditor of the Review of Social Economy. Deborah M. Figart is Dean of Graduate Studies and Professor of Economics at the Richard Stockton College of New Jersey. She is coauthor (with Ellen Mutari and Marilyn Power) of Living Wages, Equal Wages: Gender and Labor Market Policies in the United States (Routledge, 2002) and coauthor (with Peggy Kahn) of Contesting the Market: Pay Equity and the Politics of Economic Restructuring (Wayne State Uni-

Contributors xi versity Press, 1997). Among her edited volumes are Living Wage Movements: Global Perspectives (Routledge, 2004), Working Time: International Trends, Theory and Policy Perspectives (Routledge, 2000), Emotional Labor and the Service Economy (Sage Publications, 1999), and Women and the Economy: A Reader (M.E. Sharpe, 2003). She has published numerous papers and essays on labor market issues. She is President of the Association for Social Economics and a Co-editor of the Review of Social Economy. Greg P. Hannsgen is a Resident Research Associate at the Levy Economics Institute of Bard College, Annandale-on-Hudson, New York. He is Editor of the Report and many other Institute publications, including policy briefs on such topics as the War on Poverty, a proposal for a world currency, and the American Model for economic policy. He is conducting research on macroeconomics, money, and social economics. His publications include “Minsky’s Acceleration Channel and the Role of Money,” in the Journal of Post Keynesian Economics, spring 2005. Hannsgen received a B.A. in Economics from Swarthmore College, a Master’s degree from the Humphrey School of Public Affairs at the University of Minnesota, and an M.A. and Ph.D. (2002) in Economics from the University of Notre Dame, where his dissertation analyzed how the money supply is determined – by the central bank or by the activities of firms and commercial bankers. Laura McCann is Assistant Professor of Agricultural Economics at the University of Missouri-Columbia. Prior to taking that position, she spent four years as a Lecturer at the University of Western Australia. She received her Ph.D. in Agricultural and Applied Economics from the University of Minnesota. Her research concerns non-point source environmental policy evaluation with an emphasis on the associated transaction and administrative costs, and the determinants of those costs. One of her recent publications in this area is “Transaction Cost Measurement for Evaluating Environmental Policies” (with Bonnie Colby, Bill Easter, Alex Kasterine, and K.V. Kuperan) in the March 2005 issue of Ecological Economics. Elizabeth Oughton is a Visiting Research Fellow at the Centre for Rural Economy at the University of Newcastle upon Tyne. Her research interests include rural development, food systems, and the household economy. Previous research has been concerned with paid and unpaid aspects of household provisioning and natural resource use in both high and low income countries. She has worked in India, Jordan, Central and Western Europe. She is currently involved in developing conceptual and methodological work on interdisciplinarity, and in organic and lowinput food systems in Europe. She has published in geography, rural sociology, rural development and socio-economics.

xii

Contributors

Damien Rousselière is a Ph.D. candidate and Lecturer in Economics at the Institute of Political Studies in Grenoble, France. He is a member of the Research Group in Economics of the Service Industries at the LEPIICNRS (Economic Laboratory on Production and International Integration-National Center for Scientific Research) and a member of the Research Group in Associative and Cooperative Socioeconomics (ESEAC, Institute of Political Studies, Grenoble). He was a Visiting Fellow at the Center for Research on Social Innovations (Ecole des Hautes Etudes Commerciales de Montréal) in 2004–5. His dissertation, based on a regulation school approach, is a comparative study between Québec (Canada) and France on social economy (cooperative and nonprofit enterprises) in the performing arts and creative industries. His interests in social and institutional economics include the economics of worth, the history of economic thought, service industries, and cultural economics. Nicolas Sirven received a Doctorate in Economics from the Centre for Development Economics (University Montesquieu in Bordeaux). He works in the field of development economics, with a special interest in social issues. Most of his publications deal with social capital and human well-being. His approach to economics is both theoretical and empirical/practical. For example, he recently completed a study in Madagascar in 2002 to investigate people’s abilities to cooperate among social networks. For 2005–6, he holds a post-doctoral position in Cambridge, UK, at the Capability and Sustainability Centre-Von Hegel Institute, under the direction of Flavio Comim, where he works on the concept of social capability. Miriam Teschl is Fellow of Robinson College and College Lecturer at the University of Cambridge, UK. She studied Economics at the University of Graz in Austria and Economics and Philosophy at the University of East Anglia in the UK and at the GREQAM, University of AixMarseille in France, where she also obtained her Ph.D. on “The Identity of the Economic Agent” under the supervision of Alan Kirman. Her research focuses on the representation of the economic agent from the point of view of the philosophical question of personal identity and its consequences on welfare evaluations. Tonia L. Warnecke is a Ph.D. candidate in Economics at the University of Notre Dame in South Bend, Indiana. Her most recent paper analyzes the influence of various social and fiscal policies on gender roles and women’s labor force participation in Spain. In 2005, she received a research and travel grant from the Nanovic Institute for European Studies in order to attend a statistical workshop held by the Luxembourg Income Study. Her dissertation explores the ways that family and tax policies affect women’s employment in the oft neglected regions of Southern and Eastern Europe. In other research, she is also investigating the gender determinants and effects of part-time and contingent work.

Contributors xiii Jane Wheelock is Professor of Socio-economics in Sociology and Social Policy at the University of Newcastle upon Tyne, where she has worked since 1992. She has been researching the ways in which household livelihoods relate to the lives that women and men lead since 1985. Her research explores the theoretical interconnections between the paid and unpaid work and understandings of the household. Much of her work has strong policy implications, including the significance of gender and the importance of formal and informal childcare in underpinning work strategies. Key publications include: Insecure Times: Living with Insecurity in Modern Society, co-edited with J. Vail and M. Hill (Routledge, 1999) and Work and Idleness: The Political Economy of Full Employment, co-edited with J. Vail (Kluwer, 1998). She has three grown children and one grandson. Jonathan B. Wight is Associate Professor of Economics at the University of Richmond, Virginia, where he teaches courses in economics and international studies. He was raised in Africa and Latin America. He received his M.A. and Ph.D. degrees in Economics from Vanderbilt University and his B.A. degree from Duke University. Prior to attending graduate school, he spent a year in service with the Jesuit Volunteer Corps in Portland, Oregon. His current research focuses on the ethical foundations of capitalism. His academic novel, Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue (Prentice-Hall, 2002), explores the interplay of morals and markets for economic efficiency. Other writings include numerous journal articles and the coauthorship of a book on the mind–body link in health care economics, The Medical Offset and Public Health Policy (with J.L. Fiedler, from Praeger, 1989). He was the recipient of the University of Richmond’s Distinguished Educator Award in 2002. Jon D. Wisman is Professor of Economics at American University in Washington, DC. He teaches graduate courses in the history of economic thought and economic methodology. At the undergraduate level, he has recently taught principles of macroeconomics, European economic history, American economic history, economic development, and labor economics. He has published in a wide variety of economic journals, including the Journal of Social Economics, Journal of Economic Issues, Social Research, World Development, Review of Political Economy, International Journal of Social Economics, Review of Social Economy, Peace Review, and Revue d’économie sociale, as well as contributed numerous book chapters. He edited Worker Empowerment: The Struggle for Workplace Democracy (1991). At present, he is working on a book tentatively titled: We All Must Work: Creative Destruction and the Pursuit of Happiness. During 2002, he served as President of the Association for Social Economics.

Preface

Many economists, when asked about the relationship between economics and other fields, frame their views in terms of the economics imperialism movement of the 1960s and 1970s when democracy, government and politics, crime and punishment, marriage and fertility, discrimination, the law, religion, and other non-economic subjects were explained with neoclassical tools in a methodological individualist manner. There was great confidence for a time in the belief that other disciplines had failed to adequately explain these subject areas, and it was thus widely assumed that the economic method would provide advances that could not be achieved with the methodologies of these other disciplines (Radnitzky and Bernholz 1987). An important test of this assumption was whether those in political science, psychology, sociology, anthropology, and other social science fields agreed that the application of the economic method to those fields produced gains in understanding. It is clear today, however, that the great majority of practitioners in those fields reject the view that the economic method applied to these subject areas offers progress, so that what has in fact happened is that the economics imperialist movement has simply created a parallel universe of interpretations of these subject areas primarily only of interest to economists professionally interested in promoting the expansion of economics. But there was a further, unanticipated effect of the economics imperialism movement. The suggestion that the economic method could be applied outside economics invited the response that non-economic methods might equally be applied to economics. This “reverse imperialism” movement (Frey and Benz 2004) is most strongly associated with the introduction into economics of ideas from psychology (behavioral economics), biology (evolutionary economics), and most recently neuroscience (neuroeconomics), but also finds important expression in the recent re-invigoration of thinking about the application of ethics to economics (social economics). This volume, Ethics and the Market: Insights from Social Economics, collects some of the most recent and most innovative contributions to this last field. As part of the new reassessment of the nature and status of economics in the last two decades (Davis 2006), it

Preface xv might be termed a new social economics because, rather than having the goal of defending some small place for ethics vis-à-vis an expansionist, positivist economics, the view shared by contributors to this volume is that standard neoclassical thinking offers little compared to an analysis that sees ethical thinking as pervasive in economic life. There is a difference, however, between this new social economics and the other new movements that have recently emerged in economics. By and large, these other new movements offer a natural science vision of the social economic world. While there are valuable gains to be made in economics by incorporating insights from cognitive psychology, biology, and other natural science fields, that the social economic world is one in which normative value plays a central role implies there are limits to what can be achieved in re-making economics along natural science lines. This volume shows just how much more can be achieved with a broader, more humanistic vision of society and the economy. John B. Davis

References Davis, J. (2006) “The Turn in Economics: Neoclassical Dominance to Mainstream Pluralism?” forthcoming, Journal of Institutional Economics 2 (1): 1–20. Frey, B. and Benz, M. (2004) “From imperialism to inspiration,” in J. Davis, A. Marciano, and J. Runde (eds), Elgar Companion to Economics and Philosophy, Cheltenham: Elgar. Radnitzky, G. and Bernholz, P. (1987) Economic Imperialism: The Economic Method Applied outside the Field of Economics, New York: Paragon.

Acknowledgments

Social economics, an interdisciplinary field that bridges the social sciences and the humanities, is the study of the economy in the context of social, cultural, and political institutions, recognizing the role of ethics, morality, identity, and society in economic theory. Social economists endeavor to broaden the scope and methodology of economics and support research and analysis on policies to eradicate poverty, unemployment, hunger, inequality, and discrimination. We value the pursuit of economic justice and promote an economy that values human beings and allows individuals to live with dignity. The Association for Social Economics (ASE), founded in 1941, sponsors a World Congress approximately once every three years where academicians and practitioners gather to explore issues central to social economics. This volume is a compilation of some of the papers originally presented at the Eleventh World Congress of Social Economics held in Albertville, France, in June 2004. The chosen theme of the World Congress was the role of social economics in analyzing increasing globalization and the insights social economics might offer to address the benefits, as well as the costs, involved in this globalization. Participants from Europe, North America, Asia, Africa, Australia, and New Zealand presented papers and participated in plenary sessions and roundtables. Of the papers presented at the conference, those that were submitted for inclusion in this volume underwent rigorous review by the editors and were selected on the bases of their quality and of the likely contribution to the social economics paradigm. In the review process, the editors recognized the underlying theme of ethics across the various papers and the place of ethics in economic theory and practice as the dominant thesis of the contributors. Ethics and the Market: Insights from Social Economics presents important scholarship and offers new contributions to social economics. This volume benefitted from the contributions and help of many individuals. Elba Brown-Collier, Secretary of the ASE, along with the editors, served as a member of the program committee of the Eleventh World Congress and maintained all of the records and correspondence of the Congress. John B. Davis serves as the editor of the series in which this

Acknowledgments xvii volume appears and helped bring the project to fruition. A number of people at Routledge, among them economics editor Robert Langham and editorial assistant Taiba Batool, have provided exceptional help. We hope that this volume stimulates both a greater interest in social economics as a branch of inquiry and activism to eradicate injustice and promote wellbeing, goals inherent in our philosophy and mission. Betsy Jane Clary Wilfred Dolfsma Deborah M. Figart

Abbreviations

AAEA ASE CDs CDEC CEO CRIDA CRISES DIES ESOPs FDI FRB GM HMO IMF OECD PSU UN UNCTAD USDA/NASS WEDO

American Agricultural Economics Association Association for Social Economics Certificates of Deposit Corporation de Développement Économique Communautaire Chief Executive Officer Centre de recherche et d’information sur la démocratie et l’autonomie Centre de recherche sur les innovations sociales en économie sociale Délégation interministérielle à l’innovation sociale et à l’économie sociale Employee Stock Ownership Plans Foreign Direct Investment Federal Reserve Board of Governors General Motors Corporation Health Maintenance Organization International Monetary Fund Organization for Economic Cooperation and Development Parti Socialiste Unifié United Nations United Nations Conference on Trade and Development United States Department of Agriculture, National Agricultural Statistics Service Women’s Environment and Development Organization

1

Introduction Betsy Jane Clary, Wilfred Dolfsma, and Deborah M. Figart

The moral and the social quality of conduct are, in the last analysis, identical with each other. (Dewey 1966: 358)

In contrast with most economists, who believe that ethical considerations do not and should not interfere with market processes, the contributors to Ethics and the Market: Insights from Social Economics argue persuasively that ethics and the market are intimately and inextricably related. Much economic theory does not include ethics as part of economic behavior, and, in most economic models, ethical considerations, like psychological motivations, habits, or customs, are treated only in general and all are purged from the market and from economic behavior. This view neatly reflects the way many economists believe ethics should be involved in their own work: not at all. These economists aim to pursue a value-free conception of academic work in which the science of prediction is separable from political or ethical visions of what should be. The unsustainable nature of this view is laid bare in this volume. At the level of market processes as well as at the level of economic theory, the contributions in this volume demonstrate the role of ethics in the market. For social economists within the heterodox economic tradition, ethics, morality, identity, and social values permeate economic practices, even when they go unacknowledged or are explicitly disavowed. The economic sphere is embedded within the larger social sphere, and “the economy” and “society” are not viewed as separate or at least separable spheres of life activity (see, for example, Dolfsma et al. 2005). Rather than situating the market and values at separate extremes of a continuum, Ethics and the Market contends that the two are necessarily and intimately related. In a similar vein, Irene Van Staveren (2001) has noted that mainstream economists neglect the mutual interdependence of three values: freedom, care, and justice. Instead, they have focused on the market as a sphere characterized by freedom to the exclusion of other

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B.J. Clary, W. Dolfsma, and D.M. Figart

values, which are relegated to separate spheres of interpersonal relations and the state. Though one may contest this particular characterization, her analysis points to the need for broader discussions (see, for example, Davis 2003), even if the strictures of Occam’s Razor would then be violated (Hirschman 1988). Among the few prior contributions to this discussion, most tend to start from the standpoint of one of the extremes, ethics or the market. For this reason, an in-depth account of either of the extremes is neither presented in this introduction nor in any of the chapters. Not only are introductions or elaborations of such views readily available – the reader may refer to Charles Wilber (1998) for one on ethics, for instance – such an approach may soon end up in one extreme attempting to incorporate the other without changing much itself, or even reflecting on itself. A case in point is Kurt Rothschild’s scholarship in Ethics and Economic Theory: Ideas, Models, Dilemmas (1993). Rothschild does provide a relatively early critical assessment of the relationship between economic theory, scientific objectivity, and ethics. In addition, the author argues that it is very difficult for the economist to study “laws” of economics without even touching ethical questions; economic theories, despite claims of objectivity, either implicitly or explicitly have aspects that have ethical implications. Leland Yeager (2001), similarly, writing from an institutional economic perspective, argues that economics without ethics is sterile, calling for economists to be aware of their ethical position/standpoint. Nevertheless, Yeager’s approach to the issue is starting squarely from one of the perspectives, attempting to understand ethical considerations from the perspective of the market, or vice versa, as an add-on (see also Anderson 1995; Hamlin 1996). In contrast, this volume does not study ethics from the perspective of economics or deconstruct the ethics within economics, but aims to actually integrate the two. In doing so, it is necessary to formulate the implications of ethical considerations for economic concepts, by, for example, looking at the concept of the individual as more than homo economicus. If and when this means that core concepts need to be fundamentally rethought or replaced, so be it. In addition, different macro- and microeconomic topics can and need to be related to ethics, as it matters what perspective is taken. In actual fact, then, we sympathize with the admonition of Shoshana Grossbard-Shechtman and Christopher Clague (2001) that the discipline of economics needs to be expanded, so that economists can draw from related fields such as sociology, political science, industrial relations, social psychology, and business/management. Taking the next step toward building a new and more useful theory/paradigm, our argument, implicit in the remainder of this volume, is that reaching this goal might only be possible by first understanding how the market and ethical concerns are conceptually related. Any prior belief that a “science” such as economics or the academic study of ethics needs to be value-free is incorrect. Values will

Introduction 3 permeate boundaries, and we had better acknowledge this (see Wilber and Hoksbergen 1986) if our theories are to be of any use and benefit.

The volume and the chapters Economic orthodoxy is increasingly under fire from multiple directions, and some leading figures in the field acknowledge that fundamental concepts might have to be seriously reconsidered. One angle from which sustained criticism has come is that of social economics. Social economics has a coherent framework to offer, one that has been developed and used for considerable time and which provides economics, as well as other social sciences, with a rich source of insights in the opening decade of the twentyfirst century. This volume brings together some of the best work in the social economics tradition. The chapters are selected from nearly 100 separate contributions to the Eleventh World Congress of Social Economics, in Albertville, France, in June 2004. What ties the contributions together is the issue of how ethics and the market are connected. Three key themes are illuminated, corresponding to the parts of the volume. In broad strokes, the three parts of Ethics and the Market proceed from an examination of the moral implications of markets, to reflections on transformations in economic theorizing, to transformations in the institutional arrangements of social economies themselves. The first part of the volume interrogates the central institution of mainstream economic theories: the market. Market mechanisms are contextualized by examining the relationship between economic forces and morality, community, social capital, and ethics. The second section of the volume analyzes transformations within both the dominant economic paradigm and that of social economy. These contributions treat individual and household decision-making in a much richer and more comprehensive way than in neoclassical economics. The chapters in this section also suggest that social economics is a diverse and dynamic theoretical approach, whose relationship to the dominant paradigm has been continuously redefined. The final section showcases some of the empirical research conducted by heterodox social economists that focuses on economic development in a global context. Part I, “Morality and markets,” explores how moral and ethical questions can be incorporated into the study of political economy. Does the expansion of market relations, via globalization and the deepening dependence on market mechanisms via commodification, undermine moral and ethical behavior, or does it not? In Chapter 2, Jens Beckert examines the effects of morally motivated behavior on market outcomes and claims that these are “ambivalent.” Actors in economic context behave by moral conviction if they act in accordance with some principle that is oriented toward the well-being of others or the common good, and such behavior is followed even if it demands forgoing additional personal profit (or utility).

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The extent to which morality plays a role for market exchange is widely contested, not only within economics but within sociology as well. While economists in the neoclassical tradition see moral action as blocking economically efficient outcomes, economists from other, heterodox, theoretical traditions presume that the logic of self-interest must be moderated by morality for the “common good” or even for the functioning of markets themselves. Both positions are also found in sociological thinking. Beckert critically examines the following questions. Does morality hinder economic efficiency or is morality a necessary condition for markets to operate? Which problems, exactly, can be resolved through morally motivated behavior? And what limitations to economic efficiency are caused by morality? While a social mechanism can help overcome market failure, it can also have negative effects. Jon Wisman’s chapter assesses the forces within the growth and development of capitalism that threaten communities and the ensuing costs of such “creative destruction.” Social economics is uniquely positioned to evaluate the meaning and nature of community. The author explores both the contemporary plight of community and the potential for its renewed strength. In the subsequent chapter, Greg Hannsgen analyzes this issue in more detail with an application to banking. Hannsgen asks how personal and social relationships foster trust that might facilitate banking transactions. He claims that one should not see such transactions as a pure commodity in the sense defined in textbook economics. Changes in the way both consumers and firms borrow money have implications for governance and equality of access to credit. Marketization of commercial lending, by depersonalizing economic processes, may eliminate some of the biased practices that were fostered by personal ties between borrowers and lenders. The “rituals of banking” may interfere with efficient market outcomes. On the other hand, marketization may increase risk, since personal relationships were a means of obtaining information. The author concludes that new financial arrangements are not necessarily more or less stable than the old financial order; the key to stable and democratic institutions lies in appropriate governance. Jonathan Wight, in Chapter 5, concludes the opening section. Wight explores the extent to which markets can create the kind of society we want by focusing on the ethical foundations of economics, making a strong claim that this topic should be presented explicitly in the courses we teach. Wight discusses how the content of a principles course would change with modeling ethical conduct in markets, developing the example of the treatment of the global economic system. Would and, if so, how would efficiency arguments change when ethical approaches to globalization are duly considered? The author asserts that understanding the ethical foundations of economics is a crucial skill in a student’s toolkit. The development of critical thinking, for instance, ultimately requires the cultivation of individual moral judgment, and that judgment goes beyond simple

Introduction 5 categories of “right” versus “wrong” as the classics teach us. The authors in this opening section are not of one mind on this question. Alternative perspectives about the prospects for transcending the hegemony of neoclassicism in the economics discipline and differing conceptions of social economy as an alternative paradigm are presented in Part II, “Redefining the boundaries of economics.” A hallmark of the neoclassical framework – the individual – is conceptually scrutinized. Social economics starts with a socially embedded individual. The chapters included in this section expand the notion of the socially embedded individual and address such questions as how we are to conceive of individual identity; what sort of framework for evaluating the well-being of individuals within households is appropriate; and how we account for the existence and actions of organizations and institutions that are commonly referred to as part of the “social economy” or “third sector.” In the opening chapter of the section, John Davis contends that the limits of the rational individual as economic agent are seen as undermining the legitimacy of mainstream formulations. He provides a basis for the consolidation of social economics as an alternative. Specifically, Davis observes that we are in the midst of an historical transition in economics, with neoclassical economics being increasingly pushed aside. In particular, he argues that the fact–value distinction appears to have entered upon a qualitatively different chapter in its history. Davis terms this a “destructive phase,” in which it works to eliminate neoclassicism’s past value commitments in vague anticipation of a coming creative phase when a new set of dominant values will be promoted, again under the false cover of neutrality. The author’s objective is to provide a diagnosis of the current destructive phase of the fact–value distinction in terms of the breakdown of the atomistic conception of the individual, and then advance an alternative, viable conception of the individual as socially embedded. Davis takes an explicit stand in relation to what an individual is (and ought to become) as he develops a model of identity. Miriam Teschl then provides a contrast with Davis in Chapter 7. According to Teschl, (some) economists do not fail to represent an economic agent with an identity, but these models do not explicitly account for her identity. The concept of the homo economicus has only an implicit model of identity, a model that can be brought to light and made explicit. Making identity explicit in our models is an issue to be taken seriously within economics, because the way economists model the economic agent’s identity will affect (the modeling of) behavior and choices. Further, and very importantly, the identity model may shape social policy recommendations. One area to which such profound discussions relate is the household. Elizabeth Oughton and Jane Wheelock’s contribution in Chapter 8 in large part follows the previous discussion, yet the authors extend it by analyzing how consumption and production are intimately related in social contexts. Consumption is often considered a good, providing positive

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utility, with spending income a proxy for obtaining well-being. In contrast, involvement in production is a disutility, a sacrifice of well-being. The orthodox economic calculus assumes that both consumption and production are governed by formal rationality. But if we look at production and consumption in terms of social relations, then we can introduce substantive rationality as an additional analytical tool. A social economics perspective views consumption and production holistically, as complementary rather than oppositional. Both incorporate social relations, so that both can be understood in terms of social relationships. Drawing on Amartya Sen and others, the authors provide a conceptual examination of the creation and distribution of intra-household wellbeing. The meaning of the term “social economy” (économie sociale) has evolved and has remained contested over time, especially in France. Danièle Demoustier and Damien Rousselière put into perspective current policy debates taking place in France most pressingly, but elsewhere as well, by returning to the history of the constitution of “social economy” as a social science and as a set of “social practices.” The phrase “social economy” was used in classical political economy in the early nineteenth century, and contributions to the field from the social-Christian tradition of the followers of Henri Saint-Simon and from scientific socialism are also significant. Social economy, the science as well as the set of practices, has thus changed over the last century and more. Social economics, once defined as simply a broadening of traditional political economy, has now become, the authors claim, an alternative perspective in its own right. Carole Biewener (in Chapter 10) extends the argument, if only in a geographical sense. Biewener addresses the alternative vision embodied in different “social economy” traditions in France and in Québec, Canada, utilizing two texts representative of two different, though related, traditions: Alain Lipietz’s For the Third Sector: The Social Economy and Solidarity and Louis Favreau’s and Benoit Lévesque’s Community Economic Development: Social Economy and Intervention (titles translated into English). Biewener compares how each defines the boundaries, contours, and character of that which comprises the social economy by considering how the social economy is understood in relation to the “state” and the “commodity sector.” Both the French and Québécois traditions offer significant, exciting, and vibrant economic alternatives to market capitalism that encompass an important range of social and economic activity and that offer improved criteria for shaping economic activity. Macroeconomic questions concerning how to shape economic development, both locally and globally, are addressed in Part III, “Social economies in transition.” The process of liberalized development currently “in fashion” – and promoted by international agencies such as the World Bank – may trample over local institutions and culture. The authors in this section highlight the dangers of policies built on a narrow economic vision,

Introduction 7 from the erosion of the fabric of rural life in the United States to the pathologizing of ethnic diversity in Africa, and from indifference to the gendered impacts of financial crises to the appropriation and dilution of the concept of social capital. The authors provide substantive analytical tools for reconceiving policy analysis that utilize insights of social economics. Building on and developing broader conceptions of market mechanisms, the chapters consider the many implications of economic liberalization and homogenization on the social and physical environment. In Chapter 11, Laura McCann develops a novel theoretical approach to welfare economics that calls for an evaluation of “societal” externalities. She argues, specifically, that the increased agricultural productivity experienced during the twentieth century has had tremendous benefits for both farmers and for society as a whole, but it has also resulted in unintended effects on the environment and on rural communities. While the environmental externalities have been extensively studied by economists, societal effects have been largely ignored. McCann argues that these effects can be incorporated into economic analyses using the techniques that have been developed for non-market valuation of environmental goods. Introducing cultural factors along with economic factors in the development process, Manuel Branco follows with a critical analysis of the concept of “culture” and its use. Ethnic diversity in Africa and other developing regions supposedly inhibits the development of strong, democratic nation-states. Branco asserts that not only does this approach posit a universalist trajectory for development; it obscures the cultural diversity that is also present in advanced industrial countries. The author offers that his defense of culture should not be mistaken for radical relativism or the consecration of difference. Instead, principles of consociational democracy as a foundation for a pluralist development policy offer a “third way” between the dominant, neoclassical model within development studies that ignores difference, on the one hand, and the particularistic fundamentalism that depoliticizes the development process on the other. Tonia Warnecke’s chapter follows with an adept summary of feminist critiques of economic liberalization policies, positioning her within the heterodox finance literature. She argues that growing numbers of financial crises, fueled by liberalization, which have aggravated the poverty problem, particularly among the world’s women, might be attributed to an incomplete and biased framework. Using Sen’s capability approach, Alexandre Bertin and Nicolas Sirven conclude the volume by providing a rigorous framework to evaluate the role that social capital plays in poverty reduction. Their purpose is to find an analytical framework that could support a strict definition of social capital and preclude the limitations of the World Bank’s more traditional analysis using this term. In the final chapter, Ethics and the Market: Insights from Social Economics returns to its central theme of how to structure social institutions to create an economy that enhances well-being. This volume, then,

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emphatically argues, as in John Dewey’s Democracy and Education, that we should not define ethics or morals too narrowly “giving them, on the one side, a sentimental goody-goody turn without reference to what is socially needed, and, on the other side, overemphasizing convention and tradition so as to limit morals to a list of definitely stated acts” (1966: 357). Ethics is not synonymous with religion. The ethical and the social are intimately related: ethics, moral attitudes, are not isolated considerations, left to ponder on during leisurely Sundays afternoons, if at all. The social and the economic are, in turn, connected. Contributions to this volume make this clear in theoretical as well as in empirical ways.

References Anderson, E. (1995) Value in Ethics and Economics, Cambridge, MA: Harvard University Press. Davis, J. (2003) The Theory of the Individual in Economics, London: Routledge Dewey, J. (1966 [1916]) Democracy and Education, New York, NY: Free Press. Dolfsma, W., Finch, J., and McMaster, R. (2005) “Market and Society: (How) Do They Relate, and Contribute to Welfare?” Journal of Economic Issues 39 (2): 347–56. Grossbard-Shechtman, S. and Clague, C. (eds) (2001) The Expansion of Economics: Toward a More Inclusive Social Science, Armonk, NY: M.E. Sharpe. Hamlin, A.P. (ed.) (1996) Ethics and Economics, Aldershot: Edward Elgar. Hirschman, A.O. (1988) “Against Parsimony – Three Easy Ways of Complicating Some Categories of Economic Discourse,” Economics and Philosophy 1 (1): 7–21. Rothschild, K.W. (1993) Ethics and Economic Theory: Ideas, Models, Dilemmas, Aldershot: Edward Elgar. Van Staveren, I. (2001) The Values of Economics: An Aristotelian Perspective, London: Routledge. Wilber, C.K. (ed.) (1998) Economics, Ethics, and Public Policy, Lanham, MD: Rowman & Littlefield. Wilber, C.K. and Hoksbergen, R. (1986) “Ethical Values and Economic Theory: A Survey,” Religious Studies Review 12 (3/4): 211–12. Yeager, L.B. (2001) Ethics as Social Science: The Moral Philosophy of Social Cooperation, Cheltenham: Edward Elgar.

Part I

Morality and markets

2

The moral embeddedness of markets Jens Beckert

What role does morality play for market outcomes? For most sociologists the functioning of markets is closely connected to the moral conduct of economic actors. This position is expressed, for instance, by the French sociologist Émile Durkheim (1984) who argued that purely self-interested behavior cannot produce stable exchange relations. Only through the “non contractual conditions of contract” do actors feel effectively bound to the contractual obligations they have agreed to. The moral code stops actors from exploiting their exchange partners through opportunistic behavior. This way morality supports the functioning of markets by reducing transaction costs. Another sociological classic – Max Weber (1984) – made morality a cornerstone in his explanation of macroeconomic development: for him the emergence of modern Western capitalism had an indispensable basis in the moral doctrines of Protestantism. Wolfgang Streeck (1997: 198) followed this idea by introducing the notion of “beneficial constraints,” meaning that the performance of an economy “may be improved by the surrounding society retaining and exercising a right for itself to interfere with the choice and pursuit of individual preferences.” However, the conviction that markets need a moral basis has not gone undisputed in sociology (Luhmann 1986, 1988). But more than sociologists, economists have challenged this position. Most famously the model of the “invisible hand” expresses the connection of public virtue to private vices and thereby disconnects market outcomes from morally motivated action. “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their selfinterest” (Smith 1976: 18).1 A famous contemporary expression of the unwanted consequences of morally motivated behavior in markets is Milton Friedman’s (1973) dictum that the social responsibility of business is to make profits. According to Friedman, any deviation from profit maximization is itself morally problematic since the moral task of economic actors is to maximize economic welfare. While economists standing in the neoclassical tradition see moral action orientations as blocking economically efficient outcomes, economists from other theoretical traditions presume that the logic of self-interest must be

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moderated by morality in order to allow for the “common good” or even for the functioning of markets itself. The institutionalist tradition, and also the new microeconomics, sees norms, values and trust as indispensable elements of the functioning of markets (Arrow 1973). There are situations where selfishness should be held back by moral principles to achieve superior outcomes. The reason is that markets themselves are “morally unreliable” (Offe 1989). Morality is certainly not the only mechanism by which market failure can be corrected. Morality does play, however, an important role for overcoming free-riding and for solving principal–agent problems. These brief remarks give an impression of the essentially contested role of morality for market outcomes. The conflict is not one that separates academic discipline; it runs through disciplinary lines. My intention in this chapter is to critically examine these positions: Does morality hinder economic efficiency or is morality a necessary condition for markets to operate? Which problems exactly can be resolved through morally motivated behavior? And which limitations to economic efficiency are caused by morality?2 The question of the effects of morality on markets is not only of academic interest. It is also from the background of recent corporate scandals that morality in business – or the lack thereof – has become a pressing issue in public debate. Have corporate managers become more selfish? What institutional or moral safeguards are needed to prevent the excesses that brought companies like Enron and Worldcom to bankruptcy? What I will argue is that the contested role of morality has its causes in the indeed profoundly ambivalent consequences that morality has on market outcomes. Morality allows for the emergence and stabilization of market exchange, but it is also an action orientation that can block exchange relations that are economically beneficial. I intend to contribute to a better understanding of this ambivalence by introducing a taxonomy that distinguishes four different forms of morality-based behavior and try to understand what consequences derive from these types of morally motivated action. The four forms I will discuss I call “cooperation,” “group solidarity,” “blocked exchange,” and “altruism.” There is a fifth type that I will call “Trojan altruism.” It plays a special role since it does not reflect moral behavior but makes parasitic use of morality by pretending to be beneficial to others while being in reality selfish. By morality, I mean that actors act in accordance with some principle that is oriented (also) toward the well-being of others or the common good and is followed even if it requires forgoing additional personal profit or utility. Amartya Sen (1977) has called this action orientation “commitment.” With reference to the terminology introduced by Robert Frank (1990), one can formulate: to act morally, an actor must be willing to engage in “irrational behavior without regret.” “Irrational behavior” refers to decisions that deviate from individual utility maximization. The “lack of regret” implies that the behavior was chosen not simply by miscalculation of outcomes but by a deliberate choice.

The moral embeddedness of markets 13 My argument is not that the observation of inefficiencies due to moral orientations of actors gives justifications to change these expressions of value rationality. Instead, the argument is that economies operate within the context of a moral universe that resists the logic of economic efficiency and that at times this resistance is itself a precondition for market exchange, while at other times it produces inefficiencies.

A typology of moral behavior in market exchange Morality can enter into market exchange in four different forms, depicted in Figure 2.1. It can enter by taking one’s own well-being and the wellbeing of others into consideration. This I will call cooperation. An important special case of cooperation will be discussed under the heading of group solidarity. The third typological form in which morality can enter into market exchange is by an action orientation that is entirely nonconsequentialist, i.e., it disregards the welfare effects for ego and alter-ego. This comes closest to Weber’s (1985) notion of value rationality. I will refer to this as “blocked exchange” (Walzer 1983). Morality can also enter the decision-making process in the typological form of ignoring consequences for one’s own well-being but having the well-being of others in mind. This I will call altruism. Finally, the last form is a parasitic way for morality to enter a decision-making situation. It indicates an action that appears to be beneficial to others but is in fact primarily advantageous to Ego

Non-beneficial

Non-beneficial

Beneficial

Blocked exchanges

(Trojan altruism)*

Alter-ego

Beneficial

Group solidarity

Altruism

Cooperation

Figure 2.1 Typology of moral action in market exchange. Note Trojan altruism is not a form of moral behavior, but uses morality in a parasitic way.

14 Jens Beckert the actor himself. This behavior, which is actually immoral, I will call Trojan altruism. Cooperation By cooperation, I refer to a set of reciprocal promises and expectations that guide exchange relationships in a mutually beneficial way. Such promises and expectations can become effective through an intersubjectively shared moral code that binds the behavior of the parties to the exchange. Based on this moral code, market participants will fulfill their contractual obligations even if it would be advantageous for them not to do so. They will also disclose relevant information accurately.3 Morality in “cooperation” can contribute to the solution of prisoner dilemma situations and principal–agent problems. In the prisoner dilemma, all players will achieve a superior outcome if they cooperate. Effective ethical codes can help to induce cooperative behavior and thereby contribute to resolve endemic free-rider problems (Arrow 1973; Beckert 2002a). The significance of morality in principal–agent situations is no less important. It has already been described by Weber (1984) in his treatment of the role of Protestant sects in American business life. Weber observed that sect members are trusted in business relations disembedded from the local community due to an effective ethical code that will bind the behavior of the sect member even when conducting business with complete strangers. Hence the ethical code allows actors to engage in mutually beneficial transactions that are otherwise considered too risky and would not take place. Both parties in the exchange profit. In other words, morality can help to prevent market failure and thereby increases the efficiency of the system. Prisoner dilemma situations and principal–agent problems both show little ambivalence with regard to the consequences of commitment-guided behavior for market outcomes – morality has almost exclusively positive effects. If the logic described by George Akerlof (1970) for the used car market holds true, then not only the principal (the buyer of the car) is better off if he or she can rely on the accuracy and completeness of the information revealed, but also the agent, himself, is better off. Otherwise the market would fail to come into existence or more costly monitoring devices would need to be introduced. The same holds true for labor relations where a lack of any other motive besides personal gain will have negative effects for productivity (Akerlof 1984). A similar argument can be made with regard to professional ethics that are a coordinating force in the exchange relations between laypeople and expert systems.4 Group solidarity A closely related type of morally guided behavior affecting markets is “group solidarity.” It is based on the pooling of resources. Group solid-

The moral embeddedness of markets 15 arity differs from “cooperation” by drawing a boundary between those actors covered by the moral obligations and those not covered by these obligations. Through this boundary of exclusion – or network closure (Coleman 1990) – group solidarity achieves an ambivalent status as the moral principles are only coordinating behavior within the group. Behavior can be non-moralistic, purely self-interested with regard to the consequences of decisions for outsiders. Solidarity is a non-universalistic ethic (Bayertz 1998). Looking at social relations within the group, “group solidarity” has characteristics similar to “cooperation.” It is a mechanism for improvement of one’s own situation and that of other group members by overcoming free-riding. Solving free-rider problems is a precondition for the effective pooling of resources. In modern capitalist economies, the union movement is probably the most relevant empirical form of group solidarity. Unions enhance the workers’ power positions in the industrial conflict by credibly threatening to withdraw a significant amount of labor from the production process that cannot be substituted for in the short run. Unions do have the instrumental goals of negotiating better wage settlements, working conditions or greater job security. However, as Claus Offe and Helmut Wiesenthal (1985) have shown, membership mobilization by unions cannot rely exclusively on rational instrumental motivations, but it must also appeal to a moral obligation to participate, even if unions want to serve nothing “but the member’s individual utilitarian interests” (Offe and Wiesenthal 1985: 183). Commitment-based behavior leading to the pooling of resources can have positive consequences for the instrumental goals of the group members. Its role in market efficiency, however, is highly contested. From a market-liberal perspective, union solidarity amounts to a cartel that increases prices for labor and thereby leads to inefficient equilibria. Based on this claim, unions are seen as being responsible for unemployment. This argument, however, does not go unchallenged. According to more institutional based approaches in economics (and sociology), unions do play a constructive role in markets and general economic welfare by helping to institutionalize industrial conflict, forcing companies to invest into their competitiveness and increasing consumer purchasing power (e.g., Streeck and Schmitter 1985). The positive role of group solidarity has also been demonstrated in research on ethnic economies (Portes and Sensenbrenner 1993). Here network closure can help overcome market failures that arise through discrimination. This can be exemplified by ethnic economies in the USA. In order to be able to start a company, some immigrant groups, who do not have access to American capital markets, come together in rotating credit associations, pooling their assets and using them in turn to finance their individual businesses. This makes the creation of firms, that can otherwise not be established, possible. Though these associations rely on intense

16 Jens Beckert reciprocal monitoring of their members, they are also based on the moral implications of belonging to the same ethnic group. At the same time, nonmembers of the ethnic group are excluded from the benefits and thereby discriminated against through ascriptive criteria. This shows the purely self-interested side of group solidarity with regard to non-members. Community or family-based network closure is, however, by no means unequivocally positive for the economic well-being of the members of the solidaristic community. If moral codes demand that economically successful family (or community) members support less successful members by transferring resources, these resources are not available for individual business investments. As observed by anthropologists, this can inhibit economic development and gives rise to avoidance strategies by which successful entrepreneurs try to circumvent family obligations. One interesting strategy has been observed in indigenous villages in Ecuador. Male owners of garment and leather artisan shops convert to Protestantism. By doing so the entrepreneurs “remove themselves from the host of social obligations for male family heads associated with the Catholic Church and its local organization” (Portes and Sensenbrenner 1993: 1339). In more general terms, this supports Max Weber’s claim that one of the chief causes for the success of modern Western capitalism was that Protestantism guided economic exchange away from the close connectedness of economic affairs to social obligations. Weber (1986) alluded also to a further problematic consequence of distinguishing between a morality within the group and an external morality that is characterized by pure utilitarianism. He found this type of particularism in societies adhering to Confucianism and saw in it the reason for general mistrust becoming a dominant feature in all business relations reaching beyond the group’s boundaries. Not morality as such but a morality that is only valid for the family and the clan was a factor that prevented the development of extensive exchange relations. Blocked exchange The third type of morally guided behavior in markets I will call, using a term introduced by Michael Walzer (1983), “blocked exchange.” Blocked exchange refers to the prohibition or restriction of the monetary exchange of certain objects or services based on moral codes. It is the opposite of cooperation where the function of morality is to enable market transactions. Blocked exchanges prevent the market exchange of certain goods and services by keeping them outside the market realm.5 Which transactions are blocked changes historically and differs between societies. Therefore, it is not possible to make a finite list of goods and services to which exchange restrictions apply. Two economically crucial fields where such changes have occurred are the limitations of charging interest for lending money and the abolition of slavery. Cultural differences can be seen in

The moral embeddedness of markets 17 religiously motivated taboos on the consumption of certain food products like pork. Despite historical and social variance, it is possible to list categories of goods that are likely to be restricted from monetary exchange in modern societies. One category is exchanges that affect the human body. It is prohibited to buy another person (slavery and adoption). The commercial sale of body parts for medical reasons is mostly forbidden (organ markets); in many countries, women are prohibited from carrying a child to term for another, infertile woman (reproductive medicine); and the sale of sexual services is restricted and even prohibited in many countries (prostitution). A second realm is the market exchange of political influence and offices. The purchase of political decisions is called corruption and as such is illegal. The third realm are legal claims and obligations that cannot be purchased or sold. There is no market for trading criminal punishment. The rights to vote, to freedom of expression, or to freely exercise one’s religious beliefs are all non-marketable.6 In general terms, blocked exchanges are characterized by the separation of the goods or services that are connected to “sacred” (Durkheim) social values from the “profane” sphere of the market. It is not instrumental rationality that motivates exchange blockages but rather value rationality (Weber), i.e., the belief in the value of an action independent of its consequences for oneself or for others. As Durkheim has argued, the act of establishing such taboos is an important aspect of the identity of a social group. This implies that blocked exchanges cannot be explained by their contribution to economic efficiency. The idea that political decisions and human beings cannot be bought might have positive economic consequences. Nevertheless, the justification for prohibiting corruption or abolishing slavery is not based on an economic rationale but rooted in social values that discredit corruption and slavery on moral grounds. Even if norms cannot be explained functionally, it is possible to ask for economic consequences of restrictions on specific exchanges since they do not have merely moral relevance, but have functional consequences for the economic system as well. According to Weber’s theory of rationalization, the (originally religiously motivated) decoupling of exchange from moral obligations was one of the crucial preconditions for the development of a modern, functionally differentiated economy. The dissolution of religious restrictions on money-lending, the decoupling of exchange from particularistic privileges, and the development of modern labor markets were among the most important developments in this process. A case for positive economic effects stimulated by the decoupling of economic exchange from moral restrictions has been analyzed by Viviana Zelizer (1979) in her research on the development of the life insurance industry in nineteenth-century America. This industry was originally blocked by moral objections, primarily expressed by women, who refused to receive a “premium” for their husband’s death. For many years, this moral

18 Jens Beckert conviction blocked the development of an effective financial instrument for the economic protection of widows. It is not possible here to show the consequences of blocked exchanges in detail. This would demand a close discussion of each morally motivated restriction on market exchange. What I want to illustrate briefly, however, is that the economic effects of blocked exchanges show profound ambivalences with regard to individual welfare and macroeconomic efficiency. While the aforementioned examples point to negative economic consequences, examples for positive economic effects from restrictions of market exchange come easily to mind. Such effects can be attributed to the blockage of the purchasing of political decisions, as can be seen from the examples in corruption-ridden countries. Also, the restrictions on the use of labor power – for instance the prohibition of child labor – have positive economic implications regarding the future productivity of children. One complication with regard to welfare effects derives from the following paradoxical effect that has been observed in the market for blood (Titmuss 1971). The blood market – and possibly other markets for goods taken from the human body as well – has an atypical supply curve. The introduction of an exchange market for blood does not leave the supply of voluntary blood donations unaffected; where blood supply becomes a commercial activity, donors feel less responsibility to continue donating it. Hence, monetary compensation leads to a reduction in voluntary supply. This result, which contradicts economic reasoning, cites economic reasons for organizing blood donations as a gift. Finally, the prohibition of markets for moral reasons might have unintended side-effects that must be examined. One important aspect is that the prevention of markets gives way to the emergence of illegal markets that have consequences usually seen as socially and individually negative. Such markets emerge when not all actors submit to the morally demanded behavior. This can be observed not only in the case of (illegal) markets for organs. The prohibition of prostitution undermines the protection of illegal sex industry workers and makes them especially vulnerable; the prohibition of certain narcotics leads to the emergence of drug dealers, crime and serious problems for public health. Through these effects, the morally motivated prohibition of markets shows profound moral and economic dilemmas. Altruism The fourth type of morally motivated behavior relevant for markets is “altruism.” Altruism is defined by a voluntary self-commitment to behavior based on value that inflicts costs on oneself for the benefit of others. Altruism has several forms. The most economically significant one is the voluntary inclusion of otherwise externalized costs. This is the core arena

The moral embeddedness of markets 19 of business ethics, fair trade, and socially conscientious consumer choices. If companies voluntarily abstain from hiring child labor, pay living wages, and protect the natural environment in which they operate their plants, they increase their costs (i.e., their shareholder’s or customer’s costs) for the benefit of stakeholders like their employees and neighborhood communities. By now, voluntary codes of conduct have led to the establishment of an international standard on social accountability (SA 8000). Some large retailers purchase only from manufacturers that comply with the SA 8000 standard (Biggart and Delbridge 2004). This can be seen as an indicator for an increasing “moralization of markets.” It is, however, debatable to what extent compliance with standards of social or environmental accountability does indeed reflect altruism. Companies might simply attempt to avoid conflicts with important stakeholders by complying with social accountability standards or create an image as socially conscientious businesses as an effective argument in their marketing strategies. If profit strategies motivate the compliance of companies to standards of social and environmental accountability, their behavior is not covered by the notion of altruism. While the significance of altruism in business behavior is ultimately an empirical question, two theoretical points can be made. First, the market mechanism limits the possibility of altruistic choices that cannot be turned into increased revenues. Managers in a market economy are structurally forced to orient their decisions towards profit-making. Any other behavior will lead to a loss in profits and a reduction in market share. Second, the role of the market mechanism does not imply that decisions are determined by the market. Most organizations do have significant slack to allow for inefficient decisions without jeopardizing the survival of the company. Moreover, if one assumes that, under conditions of complexity and fundamental uncertainty of outcomes, managers cannot identify optimal strategies, the perspective of market determination of business decisions is flawed. Under such conditions managers will base their decisions on culturally legitimated conceptualizations of rationality. This constitutive role of culture allows for the introduction of ethically motivated decisions into firm behavior despite market pressures towards efficiency (Beckert 2002b). Whether an expression of genuine altruism or not, the addition of moral considerations into the market does change the way business is conducted. Pressure to find ethically reflective strategies develops mostly as a result of investor and consumer choices. Investment fund managers might invest only in companies that have progressive policies towards gays and lesbians or that comply with standards of social accountability. An interesting example is also the rising field of Islamic banking. Here investments are only made to companies that comply with “Islamic values” (see Biggart and Delbridge 2004: 39). This is a form of altruism on the investor’s side if the investor must assume that his investment will have a lower return because he or she forgoes more lucrative alternative

20 Jens Beckert investment opportunities. Consumers show altruistic action orientations, for instance, by buying more expensive goods from a neighborhood store, instead of purchasing from Wal-Mart, because they believe in the value of having neighborhood stores. Consumer boycotts on the other hand express condemnation of certain business practices by consumers. Consumers are willing to avoid a product or store in order to support practices that comply with their values. But what are the economic consequences of such altruistic, valuedirected allocations of capital and consumer purchasing power? They are costly for the investor or the consumer in monetary terms. One pays a higher price for bread in the local grocery store compared to purchasing it from Wal-Mart. One does without apples from South Africa if they are produced under Apartheid conditions, even if they are better value economically. One invests in certain mutual funds even though one expects a lower rate of return compared to alternative investment opportunities. These are counterpreferential choices if one assumes selfishness is the standard for economic choices.7 The story becomes more complicated once attention is shifted to the producing firms, countries, and traders that are subject to the value-based consumer and investor choices. A shift in allocation of investment capital and consumer purchasing power due to altruistic decision-making is beneficial only to those companies, industries or countries that are favored by the social values. It is economically detrimental to those parties which are negatively discriminated against. Looking at macroeconomic consequences, the loading of economic exchange relations with value orientations that are followed through altruistic decisions may be problematic as well. They might lead to a particularization of exchange that undermines competition. It contradicts the functional differentiation of the economy, or its detachment from substantial value convictions that makes economic exchange non-discriminatory and inclusive. If decisions are based on altruism, capital is not allocated exclusively under criteria of economic efficiency. Moreover, any judgment of altruism must consider that, given the complex interrelations within the economy, effects may be highly unspecific and contaminated by unintended consequences that may outweigh their positive intentions (Luhmann 1993: 136). Boycotts may also hurt those actors whose interests will be protected.8 Altruism can have similar non-intended effects as the blockage of exchange does. Trojan altruism A further way in which morality can enter markets I want to call “Trojan altruism.” This is not a type of moral behavior, but refers to the strategic use of substantial value orientations for one’s own benefit and at the cost of others. Trojan altruism is deceitful. There are several examples that stand at least under suspicion to form cases of Trojan altruism. The first

The moral embeddedness of markets 21 one is food aid to Third World countries. Food aid increases supply in local markets, causes the depreciation of prices and thereby drives local producers out of the market. It can also contribute to a change in demand by influencing the taste of consumers and thereby decreasing demand for local crops. The dependency created through the destruction of local agricultural production is at the same time beneficial to food exporting countries in the developed world. The suspicion of Trojan altruism also plays a role in current political discourse about standards of social and environmental accountability in global production systems. Codes of social accountability are increasingly honored in business transactions with Third World suppliers. Prison labor, child labor, sweatshop working conditions, and pollution of the environment are prime issues. The definition of the codes of conduct takes place mostly in the North. This opens the possibility that the enforcement of a seemingly morality-based standard – for instance the policy not to buy products made through the use of child labor – is in fact a hidden enforcement of a competitive disadvantage for Third World countries, implying additional hardship for the poor. In many countries, child labor is a crucial source of family income and low wages are one of the few competitive advantages of the economies of the South. The same argument can be made with regard to standards of environmental protection. To make this point more systematically: Altruism might reflect a paternalistic definition of interests of the South by people in the North that have little to do with the interests people of the South actually have. This suspicion of paternalistic definition of interests became an important dispute between nongovernmental organizations (NGOs) from the North and the South in the anti-globalization movement in recent years.

Conclusion What can we learn from the proposed distinction of types of moral behavior in markets? The argument pursued in this chapter was that the role of morality for market outcomes is deeply ambivalent. Market liberal objections to any type of coordination devices with the exception of self-interest don’t do justice to the problems emerging from unequal initial endowments, monopolistic market structures, external effects, free-riding, and principal–agent problems. This, on the other hand, does not imply that morality-based decision-making can be seen as unequivocally positive for the efficiency of market outcomes. Morality might be discriminatory to outsiders, hinder the functional differentiation of the economy, and block markets that would be beneficial for at least some market participants. These profound ambivalences disqualify all positions of unqualified rejection of morality as an action orientation of market participants. However, they also point to the benefits of demoralization of market exchange. The typology introduced in the chapter identifies different

22 Jens Beckert implications of morality for the efficiency of market outcomes for the different types. Mostly positive effects can be attributed to cooperation, i.e., moral behavior in the context of problems associated with free-riding and principal–agent situations. In these situations, ethical codes are one mechanism by which market failure can be avoided and more efficient outcomes achieved. By contrast, exchange blockages appear profoundly ambiguous, as they represent values in a society. As an ideal type, their enforcement is independent of their consequences for personal utility and macroeconomic welfare effects. They can nevertheless contribute to economic well-being, by, for instance, blocking the purchase of political decisions (corruption). They can, on the other hand, prevent the functional differentiation of the economy and might result in unintended consequences such as the emergence of illegal markets. While it might be politically decided to reduce the scope of markets by legally blocking the exchange of certain goods and services, these non-intended consequences must be reflected in any consequentialist moral judgment of such restrictions. Altruism transports substantial value orientations into the realm of the economy as well. Its evaluation depends on the values that are enacted but also on the unintended effects it causes. Altruism can give moral justification to redistributive policies and thereby help to integrate the issue of equity into a market economy. Group solidarity has ambivalent consequences, too. It can lead to the cartelization of market exchange and it excludes outsiders. On the other hand, it can also help stabilize markets, reduce power differentials between different social groups, and help to pool resources for investments that would otherwise be unobtainable. Finally, Trojan altruism is a parasitic use of morality that does not find moral legitimation. Its effects are clearly negative, based on the criterion of Pareto-efficiency, since it aims at gaining advantages at the cost of the other side of the exchange. While the typology does not lead to unambiguous distinctions with regard to the welfare effects of the four specific forms of commitmentbased behavior, it does provide insights into the specific problems that are characteristic for the different types. Moreover, it indicates that the moral embeddedness of the economy is not a dysfunctional relic from premodern times but rather an integral part of the efficient functioning of markets. At the same time, the role of morality in the market cannot be reduced to its economic functions. The observation of inefficiencies due to moral orientations of actors does not itself give justification to condemn these expressions of value rationality. Instead, these inefficiencies demonstrate that economies work within the context of a moral universe that itself cannot be reduced to criteria of economic efficiency. The ambivalence of morality for market outcomes is due to the fact that markets necessarily operate within a social field in which economic and non-economic values merge. This can be beneficial to economic outcomes or inhibit economic efficiency. The theoretical insight emerging from the ambivalent role of

The moral embeddedness of markets 23 morality on markets is that no economy will ever be “only economic” even if this inhibits some of its economic functions.

Notes 1 This reading of Adam Smith reflects the interpretation of his work by proponents of the neoclassical tradition in economics. Smith scholars have argued pervasively that this is a flawed interpretation of the Scottish enlightenment philosopher (Wight 2002). The purpose here, however, is to present an analytical position that plays an important role in economic thinking. 2 Focusing on the economic effects of morality on market outcomes I will not deal with three other questions related to morality in the economy. First, I will not discuss the question of the consequences that derive for economic theory from the inclusion of morality. Amartya Sen (1977), among others, has shown that morally motivated behavior demands profound changes of neoclassic economic models. Second, I will also deal only marginally with the question of noneconomic justifications for “moral systems of exchange” (Biggart and Delbridge 2004). A third question connected to the issue of morality and markets that is not dealt with here refers to the relationship of morality and institutions, including what institutional support actors need in order to make it more likely that they will actually act in accordance with the moral convictions they hold (see Hirschman 1986; Offe 1989). 3 An increasingly relevant counter-example is fake medication. Particularly in Third World countries, patients are increasingly confronted with bogus medications that either contain no active ingredients or even include substances that are poisonous. Pharmaceutical companies are not only worried about this tendency because it affects their business through a loss in short-term sales, but also because it can lead to market failure due to a loss in customer confidence in the effectiveness of medications. 4 The only ambiguity arising in the prisoner dilemma and in principal–agent situations is with regard to the trust-taker or agent. Particularly when the behavior of the agent cannot be completely observed by the principals, it might be a more profitable strategy for him or her to alternate between moral (cooperation) and immoral (defection) strategies. Such mixed strategies do not necessarily lead to market failure, in part, because the exchange partner does not have the information to know which strategy the agent actually follows. As experimental studies in game theory show, there are other strategies besides unconditional cooperation that have superior payoffs for the trust-taker (agent) compared to unconditional cooperation. For the agent it may be sufficient to act partially morally to earn the full benefits of morality. However, this behavior would not be covered by the notion of morality applied in this paper according to which moral behavior reflects counterpreferential choices. 5 Societies may succeed only incompletely in the enforcement of such blockages. This does not, however, invalidate the claim that certain exchanges are morally rejected and that subsequent restrictions do have effects on the way these goods and services are exchanged. 6 A much more complete list of blocked exchanges is provided in Walzer (1983). 7 These value-oriented allocations of money can be integrated into an economic decision-making model that demands only coherence of choices. 8 Boycotts are morally ambivalent. They might be seen as positive by society if values are expressed that find widespread acceptance. The act of boycotting products from South Africa during the Apartheid regime found broad social support. But what if investment is directed to companies upon the condition that

24 Jens Beckert they avoid hiring foreigners or Jews? What about boycotting Korean groceries in black neighborhoods of Los Angeles? For the moral evaluation of altruism, the concrete values at stake must be considered. This presupposes a principle for the regulation of value conflicts.

References Akerlof, G.A. (1970) “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism,” Quarterly Journal of Economics 84 (3): 488–500. Akerlof, G.A. (1984) “Gift Exchange and Efficiency-Wage Theory,” American Economic Review 74 (2): 79–83. Arrow, K. (1973) “Social Responsibility and Economic Efficiency,” Public Policy 21 (3): 303–17. Bayertz, K. (1998) “Begriff und Problem der Solidarität,” in Kurt Bayertz (ed.), Solidarität: Begriff und Problem, Frankfurt: Suhrkamp, pp. 11–53. Beckert, J. (2002a) Beyond the Market: The Social Foundations of Economic Efficiency, Princeton, NJ: Princeton University Press. Beckert, J. (2002b) “Von Fröschen, Unternehmensstrategien und anderen Totems. Die soziologische Herausforderung der ökonomischen Institutionentheorie,” in Andrea Maurer and Michael Schmid (eds), Neuer Institutionalismus. Zur soziologischen Erklärung von Organisation, Moral und Vertrauen, Frankfurt am Main: Campus Verlag, pp. 133–47. Biggart, N.W. and Delbridge, R. (2004) “Systems of Exchange,” Academy of Management Review 29 (1): 28–49. Coleman, J. (1990) Foundations of Social Theory, Cambridge, MA: Harvard University Press. Durkheim, É. (1984) [1893] The Division of Labor, New York, NY: Free Press. Frank, R. (1990) “Rethinking Rational Choice,” in Roger Friedland and A.F. Robertson (eds), Beyond the Marketplace: Rethinking Economy and Society, New York, NY: De Gruyter, pp. 53–87. Friedman, M. (1973) “The Social Responsibility of Business is to Increase Its Profits,” in Milton Snoeyenbos, Robert Almeder and James Humber (eds), Business Ethics: Corporate Values and Society, New York: Prometheus Books, pp. 73–83. Hirschman, A.O. (1986) Rival Views of Market Society, New York, NY: Viking. Luhmann, N. (1986) Ökologische Kommunikation, Opladen: Westdeutscher Verlag. Luhmann, N. (1988) Die Wirtschaft der Gesellschaft, Frankfurt: Suhrkamp. Luhmann, N. (1993) “Wirtschaftsethik – als Ethik?” in Josef Wieland (ed.), Wirtschaftsethik und Theorie der Gesellschaft, Frankfurt: Suhrkamp, pp. 134–47. Offe, C. (1989) “Bindung, Fessel, Bremse. Die Unübersichtlichkeit von Selbstbeschränkungsformeln,” in Axel Honneth, Thomas McCarthy, Claus Offe, and Albrecht Wellmer (eds), Zwischenbetrachtungen im Prozess der Aufklärung, Frankfurt: Suhrkamp, pp. 739–74. Offe, C. and Wiesenthal, H. (1985) “Two Logics of Collective Action,” in Claus Offe (ed.), Disorganized Capitalism, Cambridge, MA: Polity, pp. 170–220. Portes, A. and Sensenbrenner, J. (1993) “Embeddedness and Immigration: Notes on the Determinants of Economic Action,” American Journal of Sociology 98 (6): 1320–50.

The moral embeddedness of markets 25 Sen, A.K. (1977) “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,” Philosophy and Public Affairs 6 (4): 317–44. Smith, A. (1976) [1776] An Inquiry into the Nature and Causes of the Wealth of Nations, Chicago, IL: University of Chicago Press. Streeck, W. (1997) “Beneficial Constraints: On the Economic Limits of Rational Voluntarism,” in Rogers Hollingsworth and Robert Boyer (eds), Contemporary Capitalism: The Embeddedness of Institutions, Cambridge: Cambridge University Press, pp. 197–219. Streeck, W. and Schmitter, P.C. (1985) “Community, Market, State – and Associations? The Prospective Contribution of Interest Governance to Social Order,” in Wolfgang Streeck and Philippe C. Schmitter (eds), Private Interest Government: Beyond Market and State, London: Sage, pp. 1–29. Titmuss, R.M. (1971) The Gift Relationship, London: Allen and Unwin. Walzer, M. (1983) Spheres of Justice, New York, NY: Basic Books. Weber, M. (1984) [1904] “Die protestantischen Sekten und der Geist des Kapitalismus,” in Johannes Winckelmann (ed.), Die protestantische Ethik, Vol. 1, Eine Aufsatzsammlung, Gütersloh: Gütersloher Verlagshaus, pp. 279–317. Weber, M. (1985) Wirtschaft und Gesellschaft, 5th edn, Tübingen: Mohr. Weber, M. (1986) [1920] Gesammelte Aufsätze zur Religionssoziologie, Tübingen: Mohr Siebeck. Wight, J. (2002) Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue, Upper Saddle River, NJ: Prentice-Hall. Zelizer, V. (1979) “Human Values and the Market: The Case for Life Insurance and Death in 19th century America,” American Journal of Sociology 84 (3): 591–610.

3

Creative destruction and community Jon D. Wisman

The bourgeoisie, wherever it has got the upper hand, has put an end to all feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the motley feudal ties that bound man to his “natural superiors,” and has left remaining no other nexus between man and man than naked self-interest, than callous “cash payment.” It has drowned the most heavenly ecstasies of religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in the icy water of egotistical calculation. (Marx and Engels 1848: 475) The more that is in the contracts, the less can be expected without them; the more you write it down, the less is taken – or expected – on trust. (Hirsch 1976: 88)

During most of human history, we have lived in communities with fairly high degrees of permanence. Almost everyone born in a community died in that same community. Within these sites of socialization, individuals found their identities and sense of self-worth. Indeed, for most of human history, individuals could not conceive of themselves as existing outside their native communities. Banishment was a fate worse than death. Of course, communities were periodically disrupted, even destroyed. They were ever threatened by wars, nomads, famines, and plagues. But once catastrophe passed, if spared total destruction, communities tended to reform and maintain their essential character until struck by the next catastrophe. Over the past few centuries, a new menace has evolved to threaten communities: capitalist economic growth. Unlike earlier threats, however, this new menace not only disrupts communities relentlessly, it erodes their very foundation. Marx was the first to grasp fully the community-destroying character of capitalism. He saw, in fact, how capitalist development totally transforms all aspects of social life. As he put it (along with Engels), under the regime of capitalism, “all that is solid melts into air” (1848: 476). Not only are the processes of production and distribution of economic output constantly

Creative destruction and community 27 revolutionized, but all other domains of life are also continually transformed. Villages die while cities grow; traditional families fade away as individuals become more independent of traditional ties; old ideas and values are delegitimated by growing science, and new ideas and values more consistent with new evolving social structures. In the apt terminology of Joseph Schumpeter, capitalism is a dynamic system of “Creative Destruction” (1962: 83). However, capitalism’s creative destruction has not been very creative in generating new institutions that might substitute for the social and psychological functions of traditional communities. This has led many critics to advocate various controls upon or limits to capitalist expansion. But such measures, if not carefully crafted, would come at a high cost, for it is this process of creative destruction that has made capitalism the most dynamic long-run, wealth-creating system history has ever known. It has enabled those countries that have adopted capitalist institutions to achieve everrising material standards of life. It has also brought greater political democracy and greater freedom of self-determination to the overwhelming majority of those who live in these societies. This chapter is motivated by the fact that the forces threatening communities are gaining strength. It is the nature of capitalism’s creative destruction that it builds upon itself, that over the long haul, its pace continually accelerates. This is especially evident in the wake of the fall of Eastern European socialism. Eastern European socialism provided an important form of military, economic, and ideological “friction” slowing the advance of capitalism. Today, with the disappearance of such friction, the spread of capitalism into every corner of the globe is speeding up. At the same time, the pace of technological change continues its acceleration. The result is that the process of creative destruction is becoming strikingly more robust. Accordingly, communities can be expected to come under increasingly intense assault. The tendency of capitalism to undermine communities and the values associated with participation in them is especially problematic for social economists, for whom material prosperity is necessary but not sufficient for human flourishing. Below I explore the contemporary plight of community. The subsequent section examines the meaning and nature of community. Attention is then given to the specific character of the forces that are eroding modern communities. The chapter concludes with a brief discussion of the potential for renewed strength for communities as capitalism continues to evolve.

The character of community It is not easy to find a clear, widely accepted definition of community. For instance, 50 years ago, sociologist George Hillery, Jr. (1955) found 94 different definitions of community in sociological literature. Yet most of

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these definitions, as well as those that have come forth since, have emphasized three elements: area, common ties, and social interaction (Lyon 1987: 5; see also Karp et al. 1977: 65). The very looseness implied by these three elements is an advantage. If humans need some form of community for their socio-psychological well-being, presumably, many differing forms of community might enable this need to be fulfilled. The presumption that humans need some form of community is grounded in a point made by Aristotle when he defined humans as zoon politicon, as political beings. Aristotle’s claim is supported by archeology and evolutionary biology. We have always lived in groups. Through evolution – both biological and cultural – we have been selected to live together in social groupings. These groups have always given us our identity and our sense of worth. In the evolution of the human species, sociability was selected, as were other traits, because it provided a survival advantage. Living in groups enabled economies of scale (although quite limited in the hunting and gathering stage) in both production and defense. In production, for instance, concerted coordination with others in hunting could significantly increase average individual success. Sharing of output could provide a form of social security. And in defense, obviously, numbers count. But what sort of behavior might be expected from individuals within groups? Individuals could be expected to help others. By behaving in a manner appreciated by others they would stand a greater chance of receiving assistance in turn and consequently surviving and passing on their genes. That is, natural selection would favor those who struggle for social approbation. Consequently, individuals would strive to be appreciated. Or as Adam Smith, widely known as a proponent of homo economicus, put it in his Theory of Moral Sentiments (1759), they need to be loved.1 To achieve this love, individuals will work hard, be generous, even heroic. Community, then, might be understood as that social phenomenon that enables people to establish supportive reciprocal relationships. It provides a social context within which their activities can be appreciated such that individuals may feel worthy and possess a sense of identity and belongingness. It is not surprising, then, that the three elements of area, common ties, and social interaction have generally been designated as defining characteristics of community.

The anatomy of modern community destruction The first comprehensive study of community and its decline is found in the work of Ferdinand Tönnies. Tönnies (1887) distinguished between precapitalist Gemeinschaft social orders and capitalist Gesellschaft ones. Gemeinschaft (typically translated as community) social orders are characterized by personal social relationships, bound by tradition and a strong sense of social belonging. Gesellschaft (typically translated as society or

Creative destruction and community 29 association) social orders, by contrast, are composed of rational, selfinterested individuals joined together by contractual (whether market or legal) relationships. Many sociologists believe the analysis built upon this Gemeinschaft–Gesellschaft distinction to be “one of the most extensive, consistent, and powerful bodies of theory sociology has ever developed” (Lyon 1987: 103–4). The decline of Gemeinschaft and the rise of Gesellschaft was consequent to capitalist economic development. Economic progress permitted, and for defense required, ever larger social units. Interpersonal relations became less face to face, less personal and more abstract. Interpersonal relations also became more overtly self-interested. In traditional or Gemeinschaft social orders, roles are given by birth status and the breadth of behavior requiring conscious calculation of self-interest is fairly narrow. Moreover, conscious pursuit of self-interest is ideologically suppressed. Traditional religions typically depicted self-interest as sinful. Individuals are instructed to treat all others as brothers and sisters, to be charitable. However, the rise and spread of markets reward conscious self-interest. Indeed, in the marketplace, it is necessary to be not only self-interested, but self-interested in a rational, calculating manner. The reason is that competition in market exchange forces all participants to strive to get the best deal. Those who are clever in exercising their self-interest become richer. By contrast, those who enter the market with charitable sentiments towards their trading partners get the lesser deal. If they persist, they will be ruined. So, too, will the irrational. Thus, as markets come increasingly to mediate between individuals, conscious self-interested behavior becomes increasingly the norm. Little wonder, then, that most traditional religions have viewed markets with suspicion, if not downright hostility. Note, for instance, Ecclesiasticus, 27:2: “As a stake is driven firmly into a fissure between stones, so sin is wedged in between selling and buying.” It is an open question whether expanding markets actually make individuals more self-interested, or simply more aware, and therefore more rational and calculating in their expression of self-interest. Whatever the case, individuals, viewing others’ behavior as self-interested, feel a certain remove from them. In their widely acclaimed study of American society, an attempt to update de Tocqueville’s classic study of Americans, sociologists Robert Bellah and his colleagues (1985) noted that “the purely contractual structure of the economic and bureaucratic world is becoming an ideological model for personal life . . . and complete psychological contractualism leads to the notion of an absolutely empty relationship” (127, 139). Or as psychologist Barry Schwartz (1994) has put it: “love, friendship, family, education, meaningful work, and political freedom – lose much of what makes them so good when the market gets too close to them” (22). Expanding markets have also brought greater geographic mobility. This, of course, represents an advance in human freedom. However, it also tends to weaken community. As people increasingly relocate to other

30 Jon D. Wisman regions or distant neighborhoods, children learn at tender ages that becoming strongly attached to others is followed by considerable pain when physical separation occurs. In stable communities, individuals might do good deeds for others with some expectation, even if only faintly felt, that good deeds might be done in return. However, if there is a considerable amount of geographic mobility, such reciprocity is less likely to work. There is an increased likelihood that those assisted may move away and thus not return the favor. From a self-interested standpoint, then, helping others becomes less rational. Indeed, extensive experimental research suggests that, for cooperative behavior to thrive, individuals must expect that those in whom they have invested trust will be present in the future to return the trust (see Axelrod 1984). Within traditional societies, social status was given by birth; status was ascriptive. Those born serfs would remain serfs for life. So too would their superiors remain superiors. Traditional societies offered few ways in which status might change. Moreover, it was important to know and stay in one’s place. Social sanctions helped ensure that individuals would do so. The rise and spread of markets eroded ascriptive status. In market society, status becomes performative. Those who are successful in market transactions can become richer and thereby improve their social standing. The unsuccessful find their social status falling. Within market society, vertical or social mobility becomes possible. Vertical mobility, however, is corrosive of community. Those who rise in status leave behind their old friends, and perhaps even their families, as they seek new acquaintances who possess higher status. Indeed, their old friends and family may be embarrassments to them insofar as they reveal their former lower status. Thus where there is a high degree of vertical mobility, people might be expected to form less permanent personal relationships. It has also been argued that economic dynamism makes it more “expensive” to spend “friendship” or even “family” time with others. That is, economic dynamism increases the subjective value of time. Fred Hirsch (1976) suggests that the central reason for this is that growth increases the value of alternative ways to “spend” time. As productivity brings higher returns to work, leisure, and hence time for family, neighbors, and friends, becomes more expensive. That is, time spent leisurely with others becomes more expensive as the monetary value of time increases. Two other forces also act to increase the subjective value of time as economic growth continues. As Staffan Linder (1970) argued in The Harried Leisure Class, higher income means more consumption which itself takes increasing amounts of time. Hirsch (1976) notes how the quest for “positional goods” – those that are limited in supply, such as the best home locations, ocean-front vacation homes, elite school educations, and the best jobs – absorbs increasing amounts of time. In both instances, as “free”

Creative destruction and community 31 time becomes scarcer with a higher value, less time is available for friendship. Yet another way in which capitalist economic growth has been destructive of community lies in the divided interests of capital and labor. Marx argued that the very essence of capitalism is that the producers – the workers – are separated from ownership and control of the means of production. Indeed, he identified the rise of capitalism as the traumatic social transformation in which this separation of workers from tools and resources occurred. And once workers no longer owned or controlled the means of production, their interests were at odds with those of owners – the capitalists. The fundamental struggle was between employer and employee. Capitalists, forced by competition to seek the highest profits possible, would strive to squeeze the greatest work from workers for the least pay, whereas workers would struggle for higher pay, greater economic security, and more control over their own lives. Marx attempted to demonstrate that the separation of capital and labor and their consequent conflict resulted in far broader social consequences in terms of both the nature of politics and ideology. For well over 200 years, the interests of labor have been pitted against those of capital, both within the firm and in the political arena, over such issues as the length of the working day, the intensity of the work pace, the introduction of new technology, workplace safety, the right to organize into unions, immigration, international trade and – over the past 50 years – the appropriate uses of fiscal and monetary policies. Although some of the issues have changed, the fundamental tension between the interests of capital and labor have continually been in evidence, albeit ignored by contemporary mainstream economics (see Wisman 1992). This has been especially true with regard to communities. In order to maximize profits, the interests of capital may relocate their plants in search of lower wages. In the United States, during the 1970s and 1980s, such plant relocation accounted for a significant shift of economic activity from the “frostbelt” (northeast and north central states) to the “sunbelt” (the south and southwest). Today, plant relocation to avoid organized and high-wage labor has increasingly become international, to countries where labor is unorganized, wages low, and repressive governments keep workers relatively passive. The export of jobs abroad has begun to affect certain portions of the service sector as well, especially for data processing and phone service support. The local economies of the abandoned communities are devastated as unemployment soars and other local businesses suffer loss of demand for their products. In addition, the infrastructure such as roads, sewage systems, local school buildings and so forth, that was built to support the plants and their workers is often left to decay (for an extended discussion, see Bluestone and Harrison 1982). This represents a significant waste of society’s scarce capital. And, of course, workers who are vulnerable to

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losing their employment and being forced to seek employment elsewhere are understandably less likely to invest heavily in their communities. Plants also shop around in search of the most lax environmental regulations. To the extent that communities yield by lowering their environmental standards, members feel less attached to the community and thus less resistant to moving to healthier and less blighted areas. The divided interests of capital and labor also set in motion a dynamic that militates against community within firms. Ideally, workers within a firm would have an interest in helping each other on the job, in sharing skills and knowledge, and in cooperating in ways that are often essential not only for a sense of community, but also for high productivity. Such sharing is what might be expected from people who work together. But the divided interests of capital and labor within conventional capitalist firms reduce the potential for community and productivity gains that such cooperation would yield. In such firms, it is not irrational for a worker to view all other workers as potential enemies, not only as candidates for potential promotions,2 but also in terms of job security, since each will prefer that others be laid off first should hard times come. Where there is job insecurity, it is in each worker’s self-interest not to share production knowledge and skills, lest in doing so others are provided with an advantage when the interests of capital choose which workers to let go. Needless to say, such tensions are hardly conducive to the sentiments that underlie community. Within the United States at present, the greatest threat to community for the majority of the population may well be the increasing inequality that has accompanied the movement toward a more unfettered form of capitalism over the past 30 years. Societies have always been somewhat segregated by income, with neighborhoods reflecting income and wealth levels. Yet to a certain extent, all income levels made use of the same public goods. Thus, they all had some interest in the quality of public goods such as schools, public safety, and parks. Indeed, these public spaces had a democratizing effect as the cultural and educational advantages of the rich could “rub off” on all others. But the greatly increased inequality over the past 30 years has afforded the well-off greater potential for walling themselves off from the rest of the population in gated communities, private clubs, and private schools for their children. For them, as Robert Reich points out, communities are increasingly becoming commodities, sought out and purchased like other commodities, “marketed, evaluated, and purchased like any other” (2001: 198). This, of course, intensifies the segregation of the population according to income and privilege. It is, as Christopher Lasch (1995) put it in the title of his last book, The Revolt of the Elites. And because of the rich’s disproportional political power, support for public services such as schools, parks, and public safety is eroded. That is, the institutions enabling community for the majority of the population are weakened, while the potential for community for the rich has increased.

Creative destruction and community 33 A vicious cycle is launched. Poorer public services prompt increasing numbers to opt out of the public sphere, to gate themselves into protected communities, further weakening support for public goods, prompting yet more exits. The children of those unable to afford exit receive ever poorer educations, amass ever less human capital, and thus qualify for yet poorer paying jobs, rendering the distribution of income yet more unequal. Community for the few comes at the cost of weakened community for the many. Further, Richard Wilkinson (1996) has found that greater inequality not only reduces social cohesion, but also increases stress.

Traditional communities’ downside The disintegration of community did not, of course, begin with the rise of capitalism. It has been proceeding at least since more complex social organization became possible in the wake of the adoption of agriculture about 10,000 years ago. Agriculture permitted larger social groupings, which meant in turn the fusing of languages, religions, and cultures generally, and hence the devaluation of the specific identity of each smaller, more personal grouping. But these forces operated so slowly as to be all but imperceptible. Capitalism sped up this process dramatically. Thus, this devaluation ever continues as horizontal and vertical mobility lead individuals out of their native groupings, whether these be village, town, nation, religious community, or even family. For many, this process has been, and remains, deeply painful. Although many communities were destroyed without the willing participation of their members, others have witnessed disintegration by the free choice of members for a better existence. They have voted with their feet. Moreover, although traditional groupings may have provided for basic human psychological needs, the costs were never low. Such groupings required conformity and left little personal space. They could be stifling. This is aptly captured in a German saying at the end of the middle ages as the rise of commerce and towns came to erode traditional communities: Stadtluft macht frei (town air makes you free). The disappearance of traditional communities can be seen as both tragedy and opportunity. The tragedy is obvious: humans lose an important anchor for identity and meaning. From their membership in traditional communities individuals drew a sense of self-worth, they found grounding for self-esteem. On another level, age-old traditions were irrevocably lost, and such losses to the cultural richness of humanity are akin to the decline in biological diversity as species of plants and animals disappear. Just as once a biological species becomes extinct, it is lost forever, so once a cultural tradition disintegrates, it can never be regained. On the other hand, traditional cultures are domains of unfreedom. Their character faces the individual as do objects of the natural world. That is, just as humans face nature as independently given, so too do they

34 Jon D. Wisman face traditional culture. Traditional cultures exist outside the will of individuals. Individuals do not choose to be members of such domains. Membership occurs as an accident of birth, and there is no good reason to presume that the practices of such cultures are good and just. They may promote or they may impede the fullest happiness of the culture’s members. They may be extremely repressive (Brint 2001: 17). The disappearance of traditional communities presents humans with the potential for a new freedom. They might freely struggle to create new communities that best fit their needs. They might substitute “elective” for “natural” communities. They might examine past traditions to learn what practices promise them fullest happiness. Although humans may never be fully free of the past, they are increasingly empowered to no longer be mere passive victims of an arbitrary past. To some extent, this is precisely what has occurred in modern societies. As traditional cultures disintegrated, people have sought a sense of community in a wide variety of social institutions, from their workplaces and neighborhoods to sports teams and clubs. However, social observers suggest that the replacement institutions that might promise to provide most with a ready and rich sense of belonging, a source of identity and self-worth, have not significantly evolved. Many such observers continue to inform us that a lack of a sense of community is suffered by most in modern society. Sociologist Suzanne Keller (1988), for instance, argues that “The desire for belonging, security, and connectedness in the mass society is not assuaged by privatism, consumerism, and the pursuit of selfinterest, and the euphoric spectacles of the mass media provide at best an illusion of togetherness” (173). There is, however, some debate as to whether members of modern society suffer from a lack of community. Larry Lyon (1987) points out that “there is virtually no direct, empirical evidence to support the claims of individual isolation, alienation, and anomie that are supposed to accompany a movement toward a more Gesellschaft-like society” (103). Nevertheless, as Lyon goes on to point out, there is reason to believe that this may be, at least in part, due to the definition and the difficulty in testing. The fact is that given our biological-cultural evolution, it would be quite surprising if humans were found not to need community. And given the fragmented character of modern society, it would also be surprising if adequate community is enjoyed by most modern peoples.

Toward renewed community Might there be means for adequately replacing the socio-psychological functions of earlier communities? Governmental efforts at community development have been made in the United States, especially during the 1950s and 1960s. These efforts were typically targeted at disadvantaged areas. They were meant, in Lyon’s words, “to battle the effects of modern-

Creative destruction and community 35 ization by transforming socially isolated, politically impotent individuals into organized, territorially based neighborhoods pursuing common goals” (1987: 109). These efforts, however, have met with only very limited success. It has also been suggested that voluntary organizations such as churches, professional organizations, labor unions, and charities replace and meet the same socio-psychological needs as traditional communities. People become, as Melvin Webber (1963) has put it, “more closely tied to various interest communities than to place communities” (29, cited in Lyon 1987: 111). Lyon, however, believes that this claim is questionable, on the grounds that, whereas “voluntary organizations can provide a measure of Gemeinschaft, the territorial community seems certain to remain a primary basis for the psychological community” (1987: 111). In 1995, in a much discussed article, Robert Putnam even found that participation in local groups has been falling over recent decades (1995).3 Following on work done in the 1980s (Bourdieu 1983; Coleman 1988), he adopted the somewhat economistic term social capital to capture community. Social capital is: “the idea that individuals and groups can gain resources from their connections to one another (and the type of these connections). These resources can be used to produce certain goods” (Paxton 1999: 89).4 Using different methodologies, others who have attempted to measure social capital have come up with conflicting results. However, in a recently published book, Putnam has mustered new data to suggest that he was far more on the money than he had earlier suspected (2001).5 When examined against the backdrop of the past several centuries, it may be difficult to generate a great deal of optimism concerning the regeneration of community. Yet there is some ground for optimism. There does appear to be increasing realization that the erosion of community is a problem. Robert Bellah et al. found “all the classic polarities of American individualism still operating: the deep desire for autonomy and selfreliance combined with an equally deep conviction that life has no meaning unless shared with others in the context of community” (1985: 150). Yet, the authors’ findings conclude that “There is a widespread feeling that the promise of the modern era is slipping away from us” (1985: 277). Should this be true, it could have dangerous political consequences. Evidence suggests that in a “mass” society where individuals are “atomized” or without a sense of belongingness that accompanies membership in communities, people are more vulnerable to manipulation by charismatic leaders and the mass media, and hence more readily attracted to totalitarian movements (Kornhouser 1959). There is some evidence, however, that in wealthy Western societies values are changing in a manner that suggests greater attention might be given to policies that promise to renew communities. Sociologist Ronald Inglehart (1990) has found that robust economic growth following World

36 Jon D. Wisman War II generated a shift from materialist to postmaterialist values, from “an overwhelming emphasis on material well-being and physical security toward greater emphasis on the quality of life.” He defines postmaterialists as follows: “Postmaterialists, according to our reasoning, are Postmaterialists precisely because they take economic security for granted” (1990: 5, 238). Inglehart defined the materialist values as relating to physiological needs, specifically those having to do with physical and economic security. These values encompass the following categories: a stable economy, economic growth, stable prices, strong defense forces, a low crime rate, and maintenance of order. By contrast, postmaterialist values relate to social and self-actualization needs and have to do with belonging and esteem, as well as intellectual and aesthetic values. They include the following categories: a less impersonal society, more of a say in job and community, more say in government, free speech, ideas matter, and beautiful cities and nature.6 Such a change makes intuitive sense to an economist. That is, from the point of view of economics, it is reasonable to expect that declining marginal utility would eventually accompany the accumulation of ever more material goods, and that those things sacrificed, such as community and leisure time, would thereby increase in relative importance. Community is not, of course, the only desirable end that has suffered as humanity has sought greater material abundance. So too did the quality of work. It is understandable that, in a world of pinching scarcity, work quality would be traded off for higher income. However, with affluence, workers might be expected eventually to seek more meaningful and fulfilling work, especially given the centrality of work to human happiness. As Robert Lane (1991) has noted: “It is in work, not in consumption and, as research reports show, not even in leisure, where most people engage in the activities that they find most satisfying, where they learn to cope with their human and natural environments, and where they learn about themselves” (235). Moreover, there is a strong sense in which community and work go together. In their extensive interviews of Americans, Bellah et al. found them in agreement that “two of the most basic components of a good life are success in one’s work and the joy that comes from serving one’s community. And they would also tend to agree that the two are so closely intertwined that a person cannot usually have the one without having the other” (1985: 196). A demand for more meaningful and fulfilling work would have positive consequences for the regeneration of community, especially if it entailed greater participation in decision-making and ownership. Such participation appears to be slowly evolving. There are two basic reasons for this. Given our material abundance, workers cannot be as easily motivated either by the fear of privation or merely the lure of higher salaries. Second, modern technology, combined with the heightened speed

Creative destruction and community 37 of technological change, increasingly requires that workers be generalists who are continually educated on the job to stay current, and who must increasingly make coordinating decisions with coworkers. Greater participation in the workplace would encourage community in two broad ways. Such participation would generate a greater sense of community within the firm, reducing the gulf in the divided interests of capital and labor. And the firm’s workplace meets the three most common characteristics that sociologists have offered in definitions of community: area, common ties, and social interaction. Second, greater participation could be expected to increase workers’ commitment to the firm, and by extension, the larger community. Greater democratic participation in the workplace might augment social capital – the civic organizations and social networks that generate higher levels of trust that in turn facilitates greater cooperation for mutual benefit. Much like human capital, when a certain level of social capital is attained, it tends to be self-reinforcing and cumulative (Coleman 1988). People’s willingness to “invest” in their communities could be expected to be inversely proportional to the likelihood that they will leave the community or directly proportional to the length of time they are likely to remain (Verba and Nie 1972; Elden 1981). If greater worker participation results in more stable firms, then communities would be less vulnerable to the twin enemies of plant closings and worker mobility. Changes in the workplace that favor the renewal of community are, for the most part, coming forth spontaneously with changes in values and the character of capitalism. Nevertheless, some of the momentum toward greater workplace participation has come from legislation (motivated by these changing values) that provides tax incentives for firms to grant workers a share of ownership. Between the initial legislation in 1974 and the late 1990s, these Employee Stock Ownership Plans (ESOPs) grew to include almost nine million workers owning close to 9 percent of all US corporate stock. Whether further legislation encouraging worker participation will be forthcoming is an open question. But it should be noted that, although workplace democracy has generally been associated with the left end of the political spectrum, it is fully consonant with the values of the right: private property, markets, and democratic self-determination. Indeed, one of the most conservative members of Congress, Republican Dana Rohrbacher of California, has proposed “ESOPs plus plus,” whereby tax advantages would be created for firms to provide over 50 percent ownership to workers, with 90 percent worker participation, and with full worker voting rights, one vote per worker (“Will America . . .” 1999: 4). The revival of community is essential for the creative construction of an economy in which material development is a precondition for human development rather than an end in itself. Forces are in play favoring community regeneration. But whereas the contemporary evolution of

38 Jon D. Wisman capitalism appears to favor greater worker participation and the community enhancement this promises, other aspects of capitalism’s creative destruction continue to work to the detriment of community. Ultimately the future potential for further regeneration will depend upon the future evolution of social attitudes favoring measures supportive of community.

Notes 1 As the first modern economist, Smith is usually thought of as viewing humans as self-interested and materialistic. However, his conception of humans was far richer, as the following passage suggests: “Humanity does not desire to be great, but to be beloved,” and “it is chiefly from [the] regard to the sentiments of mankind that we pursue riches and avoid poverty” (1759: 212, 276, 112). For a discussion of Smith’s conception of human motivation, see Wisman (1990). 2 Studies have found that competition for individual advances such as promotions and bonuses reduces cooperation within the firm (see Lazear 1989). W. Edwards Deming, legendary advisor to post-World War II Japan on quality control, long argued against competition within the firm’s workplace (Gitlow 1987). 3 Putnam (1995) traces the decline in community participation to television, as opposed to a quickened pace of creative destruction. He finds a negative correlation between the number of groups that individuals join and the average hours of television watched per day. However, it may be that they retreat to television because such groups fail to fulfill their need for community. 4 Alternatively, social capital has been interpreted as a relational artifact or a relational asset, one that inheres in social relations and networks (Burt 1997; Leana and Van Buren 1999). 5 Supporting this view, Keller notes that “certain desires are uniquely frustrated by American culture”: 1 The desire to live in trust and cooperation with known others in a collectivity. 2 The desire for involvement with known others in the solution of common problems (not only special interest ones). 3 The desire to share in the creation of the common life within an identifiable social framework where the impact of one’s deeds or misdeeds may be discerned directly . . . 4 The desire to bequeath a sense of attachment to future generations. (1988: 180) 6 Inglehart’s research findings appear supportive of Abraham Maslow’s (1968) conception of a pyramid of human needs, in which as those needs lower in the pyramid such as the material ones are met, higher needs are sought. Self-actualization stands at the peak of Maslow’s pyramid.

References Axelrod, R. (1984) The Evolution of Cooperation, New York, NY: Basic Books. Bellah, R.N., Madsen, R., Sullivan, W.M., Swindler, A., and Tipton, S.M. (1985) Habits of the Heart: Individualism and Commitment in American Life, New York, NY: Perennial Library. Bluestone, B. and Harrison, B. (1982) The Deindustrialization of America, New York, NY: Basic Books.

Creative destruction and community 39 Bourdieu, P. (1983) “Forms of Capital,” in John G. Richardson (ed.), Handbook of Theory and Research for the Sociology of Education, New York, NY: Greenwood Press, pp. 241–58. Brint, S. (2001) “Gemeinschaft Revisited: A Critique and Reconstruction of the Community Concept,” Sociological Theory 19 (1): 1–23. Burt, R. (1997) “The Contingent Value of Social Capital,” Administrative Science Quarterly 42 (2): 339–52. Coleman, J.S. (1988) “Social Capital in the Creation of Human Capital,” American Journal of Sociology 94 (supplement): S95–S120. Elden, M. (1981) “Political Efficiency at Work,” American Political Science Review 75 (3): 43–58. Gitlow, H.S. (1987) The Deming Guide to Quality and Competitive Position, Englewood Cliffs, NJ: Prentice-Hall. Hillery, G., Jr. (1955) “Definitions of Community: Areas of Agreement,” Rural Sociology 20 (4): 779–91. Hirsch, F. (1976) Social Limits to Growth, Cambridge, MA: Harvard University Press. Inglehart, R. (1990) Culture Shift in Advanced Industrial Society, Princeton, NJ: Princeton University Press. Karp, D.A., Stone, G.P., and Yoels, W.C. (1977) Being Urban: A Social Psychological View of City Life, Lexington, MA: DC Heath. Keller, S. (1988) “The American Dream of Community: An Unfinished Agenda,” Sociological Forum 3 (2): 167–83. Kornhouser, W. (1959) The Politics of Mass Society, Glencoe, IL: Free Press. Lane, R.E. (1991) The Market Experience, New York, NY: Cambridge University Press. Lasch, C. (1995) The Revolt of the Elites and the Betrayal of Democracy, New York, NY: W.W. Norton. Lazear, E.P. (1989) “Pay, Equality and Industrial Politics,” Journal of Political Economy 97 (3): 561–80. Leana, C.C. and Van Buren, H.J. (1999) “Organizational Social Capital and Employment Practices,” Academy of Management Review 24 (3): 538–54. Linder, S.B. (1970) The Harried Leisure Class, New York, NY: Columbia University Press. Lyon, L. (1987) The Community in Urban Society, Chicago, IL: Dorsey Press. Marx, K. and Engels, F. (1848) The Communist Manifesto, in Robert C. Tucker (ed.), The Marx–Engels Reader, 2nd edn, New York, NY: W.W. Norton [1978], pp. 469–500. Maslow, A. (1968) Toward a Psychology of Being, New York, NY: Van Nostrand Reinhold. Paxton, P. (1999) “Is Social Capital Declining in the United States? A Multiple Indicator Assessment,” American Journal of Sociology 105 (1): 88–127. Putnam, R.D. (1995) “Bowling Alone: America’s Declining Social Capital,” Journal of Democracy 6 (1): 65–78. Putnam, R.D. (2001) Bowling Alone: The Collapse and Revival of American Community, New York, NY: Simon and Schuster. Reich, R.B. (2001) The Future of Success, New York, NY: Alfred A. Knopf. Schumpeter, J.A. (1962) [1942] Capitalism, Socialism, and Democracy, 3rd edn, New York, NY: Harper Torchbooks.

40 Jon D. Wisman Schwartz, B. (1994) The Cost of Living: How Market Freedom Erodes the Best Things in Life, New York, NY: W.W. Norton. Smith, A. (1759) The Theory of Moral Sentiments, Indianapolis, IN: Liberty Classics [1976]. Tönnies, F. (1887) Community and Society, New York, NY: Harper and Row [1963]. Verba, S. and Nie, N. (1972) Participation in America: Political Democracy and Social Equality, New York, NY: Harper and Row. Webber, M.M. (1963) “Order in Diversity: Community without Propinquity,” in W. Wingo, Jr. (ed.), Cities and Space: The Future Use of Urban Land, Baltimore, MD: Johns Hopkins University Press, pp. 25–54. Wilkinson, R.G. (1996) Unhealthy Societies: The Afflictions of Inequality, London: Routledge. “Will America Be 30% Employee Owned in 2010?” (1999) Owners at Work, Summer: 4. Wisman, J.D. (1990) “Pour une économie appropriée, une conception de l’homme appropriée,” Revue d’économie sociale, Spring: 161–8. Wisman, J.D. (1992) “Capital–Labour Tensions and Liberal Economic Thought,” International Journal of Social Economics 19 (10, 11, 12): 279–97.

4

Borrowing alone The theory and policy implications of the commodification of finance Greg P. Hannsgen

Do bankers and their borrowers really accomplish anything when they meet over games of golf? If so, what will be the effects of an emerging financial system in which such social ties are replaced to a great extent by arm’s-length business relationships? Most economists would acknowledge that some sort of change is under way in the way consumers and firms borrow money. Bonds now account for two-thirds of non-financial business debt outstanding, compared to one-half as recently as 1985 (Federal Reserve Board of Governors 2003; Bassett and Zakrajsˇek 2003). The number of new commercial and industrial bank loans has been falling monthly (Economagic 2003; Bassett and Zakrajsˇek 2003). This trend parallels the increasing dominance of Freddie Mac and Fannie Mae in the mortgage markets. These “government-sponsored enterprises” that package mortgages into bonds for sale to the public now guarantee or own roughly half of the mortgages outstanding in the United States. Taken together, these trends represent a commodification of finance. There are several reasons why traditional bank loans differ from pure commodities. The characteristics of commodities are discussed below, but, briefly, several features of bank loans differentiate them from commodities. One important difference is that bank borrowers are offered an interest rate that is set by the bank – not the market – and that may be lower for “good customers.” Firms with an ongoing relationship with a bank may receive favorable treatment. In return, they may pass along information to their banks to which an “arm’s-length” lender might not have access. Ties between borrower and lender partly take the form of personal relationships and social interaction and not simply business letters and contracts. They may be governed by norms of reciprocation, rather than specific quid-pro-quos. To the degree that bank finance is, to use a sociological term, “embedded” in ongoing personal relationships, it is not a commodity (see Mirowski 1990; Anderson 1993). On the other hand, the increasingly prevalent forms of finance based upon securities do not rely as heavily on close personal relationships. Consider some characteristics of bonds. Publicly issued securities are traded in

42 Greg P. Hannsgen anonymous public markets by firms and securities owners who do not have any intimate knowledge of the issuer. Investors are indifferent between two bonds with the same risk–return profile. Some securities, especially mortgage-backed securities, are traded as members of a broad, generic category rather than as the obligations of particular persons or firms. Generally, members of a class of bond trade at similar values, as would two different bushels of wheat of the same quality. The owner of a bond typically has little personal contact with the firm or bank that originally issued the security and may hold the bond for a very short period of time. Often a bond is held as part of a very diverse portfolio, so that the owner has only a small stake in the profitability of the issuing firm. Though banks are heavily involved in finance when it comes to underwriting securities or originating asset-backed securities, their relationship to borrowers is fleeting; when banks generate securities, they are in the position of purveyors of a commodity rather than long-term partners of enterprises. Because of the need to market their loans and bonds, banks must always act with one eye on financial markets rather than payoffs that might be gained in the course of a long ongoing relationship. This chapter discusses the policy implications of a shift to less personal forms of finance. If bankers are discriminatory in forming relationships, a reduction in the personal aspects of obtaining loans might be desirable in many respects. An example would be an improvement in the fairness of the lending process. But not all goods are best treated in an impersonal way. There are perhaps equal concerns surrounding the rise of bond finance. One such area is governance. Commercial banks often monitor firms’ activities and can exert some control, ensuring that their funds are not misused. Owners of bonds, having a more distant relationship with borrowers, do not have the information and leverage needed to discipline borrowers in this way. Second, the changing form of finance may have implications for equality of access to credit. Since investment increasingly takes the form of securities purchases, it matters whether women and minority-group members are excluded from debt markets. This chapter finds that there exist no grounds on which one can argue that commercial bank loans should generally be preferred to securities sales – or vice versa – from the point of view of efficiency, governance, or equality of access. The well-known attributes of bank and financial market lending, respectively, are less economically functional than many observers believe. The main duty of a lender is to assess risk, and neither banks nor markets can surmount the biases and irrational aspects of estimating risk. Risk is always gauged within a framework of convention and is subject to racial and other biases. Nevertheless, the fairness and efficiency of the lending process is potentially subject to improvement. Several existing institutions point the way toward such improvement, but to simply reverse course and return to traditional commercial banking would be a retrograde step. Making the financial sector truly rational will

Theory and implications of commodification 43 require policy-makers to think seriously about race, gender, and class and about the distribution of power.

What do banks do? The recent changes in finance fit the general pattern of commodification identified by Elizabeth S. Anderson (1993) and other experts on the differences between economic and non-economic goods. We would like to know what is at stake, from a policy perspective, in this commodification. What has been lost with the move toward securities finance will depend upon what banks actually do when they make loans and how they go about it. Two groups of economists who have studied this issue are the imperfect information school and the social economists. I examine the views of these groups, concentrating on the social economists, and then suggest some extensions in the following section. Imperfect information Economists and sociologists generally agree that the role played by commercial banks has something to do with their ability to counter dishonest borrower behavior and deal with risk (Stiglitz and Weiss 1981; Bernanke 1983; Bernanke et al. 1999). In a pathbreaking paper on the role of banks in the Great Depression, Bernanke (1983) argued that banks are unique in their ability to lend to small “idiosyncratic” borrowers who did not have access to the bond market. Banks are able to intermediate between their depositors and small borrowers because they are specialists in making certain money is lent to “good” borrowers. Their techniques include “developing expertise at evaluating potential borrowers; establishing longterm relationships with customers; and offering loan conditions that encourage potential borrowers to self-select in a favorable way” (Bernanke 1983: 263). In the view of Bernanke and other New Keynesians, commercial banks are experts in reducing the costs associated with various forms of risk that arise in an environment of asymmetric information. The purpose of banks is to deal with unobservable characteristics of the borrower and his or her endeavors. Banks may solve the problem of asymmetric information by requiring collateral, setting a below-market-clearing interest rate, and/or establishing a long-term relationship (Stiglitz and Weiss 1981; Townsend 1982). To their credit, the imperfect-information Keynesians recognize the importance of bank credit, vis-à-vis other forms of lending. They argue that the relationship between the bank and its client is important and that such relationships, not just the interest rate, are crucial to the functioning of the credit market. This group of Keynesians, then, offers one possible answer to the question of what might be lost with the decline of commercial and

44 Greg P. Hannsgen industrial lending by banks. Their answer is that problems of asymmetric information will re-emerge unless some institution replaces the role of banks in assessing potential borrowers. The investment bank that originates a security need not concern itself with the true creditworthiness of a borrower. The holder of the security is only concerned about its value until the security is sold. So, even if it were possible for the parties involved to develop long-term business relationships, such ties would not yield any economic benefit. But, even in drawing attention to the unique role of commercial banks, the New Keynesians have not adequately theorized about the social aspects of lending. Social economists’ insights into banking An alternative view of what is at stake in the waning of commercial bank business loans is suggested by a different group of researchers. Recently, social economists and sociologists have begun to investigate the properties of bank credit, particularly its social aspects. A number of findings have emerged. First, borrowers who have long-term relationships with a certain bank tend to be able to borrow at lower interest rates than those who do not purchase multiple services from one bank or do not have long-term ongoing relationships with a bank. Second, particular bankers are often “friends” of a sort with their customers and customers’ families, and they feel they can trust those customers more than others. Third, borrowers of high social station or with connections to powerful individuals often enjoy unusually good access to credit. Fourth, race and gender matter in the lending process. Fifth, the availability of credit to a firm is partly influenced by the presence of bankers on the firm’s board of directors and by the school from which the Chief Executive Officer (CEO) graduated. Finally, bankers often make use of third parties – with whom they are tied by religion, ethnicity, or nationality – to verify the honesty of a borrower (see Uzzi 1999; Guseva and Rona-Tas 2001; Keister 2002; Ferrary 2003). Most or all of these findings, indicating that access to credit depends upon personal characteristics and relationships, conflict with the characteristics of a market good described by philosopher Elizabeth Anderson: The norms governing market relations are impersonal, suitable for regulating the interactions of strangers. Each party to a transaction views his relation to the other as merely a means to the satisfaction of ends defined independent of the relationship and of the other party’s ends. . . . Because market transactions can be completed so as to leave no unpaid debts on either side, they leave the parties free to switch trading partners at any time. The impersonality of market relations thus defines a sphere of freedom from personal ties and obligations. Impersonal freedom also implies that one need not exhibit specific personal characteristics or invoke special relationships to gain access

Theory and implications of commodification 45 to the goods traded on the market. Money income, not one’s social status, characteristics, or relationships, determines one’s access to commodities. The impersonality of the market has been evolving for centuries, and, in some cases, notably regarding discrimination on the basis of race, ethnicity, gender, and sexual orientation, it still has a long way to go. (Anderson 1993: 145) In Anderson’s terms, commercial banks do not act as purveyors of a commodity. When those with a longstanding relationship to a banker – personal or businesslike – are able to obtain loans at special interest rates, Anderson’s conditions fail to hold in some respects. For instance, consider her criterion that in a true market system banks need not have special relationships with those to whom they lend money. A contrary case is provided by Guseva and Rona-Tas (2001): Reliance on existing networks of trust allows Russian banks to issue cards to families and friends of top bank executives . . . Another solution is to stretch direct, personal ties. Trust is transitive. Friends and relatives of banks’ top executives and long-term customers often recommend potential cardholders, both formally and informally. (639) Furthermore, banks and their customers do not interact as strangers; they often know both their clients and their families quite well. One bank relationships manager related that “on the golf course, at a ball game, or the theatre, they [borrowers] will let their guard down more often. We exchange information – not like a marriage – more like dating” (Uzzi 1999: 488). Banks see their relationships with customers as more than instruments to achieve their private ends. The relationships themselves have value to both partners, a finding of two researchers: The optimization is not a strict economic one because it integrates both a psychological and a social dimension. When a client declares bankruptcy, the banker does not only see the failure of a client but also the failure of a friend . . . The nature of these exchanges is not purely economic. They are symbolic and social, too. (Ferrary 2003: 689) The embedding of commercial transactions in social attachments promotes the benefits discussed above by enacting expectations of trust and reciprocal obligation that actors espouse as the right and proper protocols for governing exchange with persons they come to know well. (Uzzi 1999: 483–4)

46 Greg P. Hannsgen What is the role of all these social influences on access to credit? Some clearly serve no ends other than the prejudices of the lender. Do some of the social aspects of credit ensure honesty or serve any other economic function, or do they merely amount to nepotism, elitism, and racism? According to evidence gathered by social economists and sociologists, bankers believe that the types of social strategies enumerated here help them make sure loans are paid back – the problem cited by the imperfectinformation Keynesians. (Of course, as the social experts acknowledge, these strategies have their own drawbacks.) In fact, close relationships ease the flow of information. According to one “relationship manager”: A relationship on a social basis tends to break a lot of ice and develop a relationship that’s more than cold facts, interest rates, and products. It’s an emotion-based bond . . . that’s so important to have . . . [because] the customer will let us know about problems early, so we can correct them. (Uzzi 1999: 488) Also, in many cases, honesty is enforced by the threat of ostracism (Ferrary 2003: 688). A businessperson who does not act in good faith may find it difficult to do business anywhere in the community. Sociologists emphasize the economic function even of partnerships that take on a fraternal guise. “Exchange partners share the belief that these motives, coupled with access to private information, can enlarge the pool of potentially beneficial transactions that are not available through market means” (Uzzi 1999: 484). Thus, while relationships between bankers and businesspeople may draw upon motives that are normally not considered economic, some believe the end result is economically beneficial to all parties involved. In one author’s words, socially embedded ties both “create unique value” and “motivate exchange partners to share the value” (Uzzi 1999: 483, emphasis in original). The sociological studies of banking cited here indicate an aspect not emphasized by imperfect-information Keynesians or most other economists: personal and social relationships of trust, and not just business relationships, are involved. They help solve informational problems without formal contracts, collateral, credit rationing, and so on. These relationships are not only “dyads” of two firms, but groups of people with multiple ties. These social relationships permit the free flow of information, and they also help ensure honesty by putting “social capital” at stake. But the friendships involved often take on a logic and purpose all their own, reorienting business activity partly toward social ends (the desire and compulsion to reciprocate the favors of a friend), rather than profit maximization. Most of these benefits of relationship finance do not carry over to a commodified world. Originators of securities do not benefit from information about the true creditworthiness of a borrower over the long term, since

Theory and implications of commodification 47 their involvement ends very quickly. They are also less concerned with enforcing repayment. Any inside information the bank may have is useless, because securities purchasers place little credence in information offered by a bond “salesperson.” For this reason, there is little point in developing relationships in the first place. The important things to note about the social view of banking are: (1) that social economists and sociologists agree that the main function of banks is to help ensure the selection of “good” borrowers and their repayment of loans; (2) that sociologists emphasize the role of non-economic relationships, such as friendships, in which business partnerships are embedded; and (3) social economists cite the importance of other aspects of relationships than the flow of information, such as social pressures, that help ensure honest behavior.

Some qualifications and a social theory of risk Existing theories of banking set forth by imperfect-information Keynesians and social economists clearly show that commercial banking is not merely the sale of certain services on a market. But both groups leave some issues unexamined. Below I elaborate and offer an alternative, social theory of risk. First, good friendships are characterized by honesty. But often, intimate relationships drive people to keep some bad news unspoken, if revealing it might bring shame. For example, many people are more likely to give personal information to their psychologists, with whom they have a strictly professional relationship, than to close friends. In addition, by the time banker and client become friends, it may be too late to stop a project. If a pair of individuals has a great deal invested in a particular project (including their emotions), it may be in their interests to keep problems to themselves. Another reason honesty is less likely to prevail than one might think is the fact that the businessperson and the banker are often drawn to one another by commonalities or relationships that predate whatever loans are granted and that tend to transcend business matters. Both parties are privy to much information even before a transaction is formally considered, and the banker is as likely to be a co-conspirator as a whistleblower. A system of kickbacks, for example, is most likely to be successful when there is trust among the businesspeople involved in the scheme (see Granovetter 1985: 491–2). When business relationships are governed by the norms of personal relationships, the relationship might come to take precedence over the business venture itself. If the banker and his or her client are enjoying one another’s company too much, they may not be productive when they meet. Further, while commodification of a good, such as sex, may rob it of its essence, some goods actually are commodities and are best seen in that light (Anderson 1993: 180–1). This can be the case particularly if one party

48 Greg P. Hannsgen to a relationship uses a pretext of genuine care to strengthen his or her economic position vis-à-vis the other party. One thinks of certain corporations that use a paternalistic stance toward their employees to extract more effort or gain consent to exploitative conditions. Also, many salespeople encourage their customers to think of them as friends, so that they become reluctant to slam the door or refuse an offer. If “personal” banking fits into the same category as these situations, it may enable the banker or client to gain the upper hand and appropriate value rather than create it. Unexplored in the literature is that the rhetoric of “value-creation” may be misleading, in that oftentimes relationships come about because products are tied together in such a manner as to share rents that would otherwise be reaped by stockholders or consumers. Banks often provide needed loans as a compensation for other (more profitable) business (Atlas 2003). This form of marketing is illegal, and at best it is a form of anti-competitive behavior; at worst it amounts to a form of bribery. Clearly, there is a difference between sharing the benefits of honest behavior and this sort of mutual backscratching. It may also be that socializing between banker and borrower is merely a cultural expectation or a form of conspicuous consumption, in no way necessary for whatever business is transacted. Even in this case, an individual who declines to socialize may risk losing a loan, but the loss would merely reflect the fact that norms of conduct had been violated. Playing golf, enjoying a drink at happy hour, or attending a baseball game may simply serve a social function or mark the participants as members of an elite group. All of these observations suggest that, while relationships between bankers and their business customers are an important factor in lending activities, they are not always economically functional. In fact, they may represent an inefficiency or a waste of resources. Business may be thoroughly mixed with pleasure, but no clear causal relationship may exist between the two. From a policy perspective, this section has thus far demonstrated that some of the rituals of banking may be less useful than some people believe; the world might not suffer too much if they were eliminated in favor of more anonymous forms of lending. However, the anecdotal evidence gathered by Ferrary (2003) and Uzzi (1999) that socializing acts as an enforcement mechanism should be taken seriously. The view propounded here is that form does not merely follow function. An alternative way of viewing the “relationship” aspect of banking, and one that may encompass some of the ideas expressed by imperfectinformation and social economists, is to see the attribution or perception of risk as social to the core, following the contours of social groupings and arising from social interactions, rather than individual choice (Douglas 1992; Dymski 1998). First, perceptions of risk tend to be shared by social

Theory and implications of commodification 49 groups or by an entire culture. Groups of people tend to regard other groups as bearing risk, with individual characteristics being a secondary consideration. One thinks of caste societies, in which members of some groups are believed to contaminate others merely by touching them. Often these sorts of beliefs are fostered by a kind of mass hysteria, as, for example, in the case of the early reaction to the AIDS epidemic. The same risk may be regarded as more or less threatening, depending upon its social context. In particular, risk among socially connected individuals may be underestimated or regarded as acceptable. In many cultures, people use other family members’ plates without washing them, but would never do the same with strangers’ or even friends’ dinnerware. Certain neighborhoods in the United States are dangerous and susceptible to public-health problems; this phenomenon is certainly in part a selffulfilling prophecy. One observer points out that “cultural values and social location have always provided the materials for self-serving constructions of epidemiological risk. The poor, the alien, the sinner have all served as convenient objects for such stigmatizing speculations” (Charles Rosenberg, quoted in Douglas 1992: 36). Second, socially shared notions of risk are not inculcated in a process separate from, and prior to, doing business. The acquisition of knowledge about risk is accomplished at the “nineteenth hole” (in golf) and other informal gatherings. Mary Douglas’s critique of modern theories of risk perception is as follows: Public perception of risk is treated as if it were the aggregated response of millions of private individuals. Among other well-known fallacies of aggregated choice, it fails to take account of persons’ interaction with one another, their advice to one another, and their persuasions and intersubjective mobilizations of belief. (1992: 40) Or, embeddedness [of business relations in social ones] changes actors’ motives rather than treats them as immutable. While RMs [relationship managers] may build networks to gain access to private information, enacting a relationship also attenuates the narrow aims that may have motivated it originally. (Uzzi 1999: 500–1) Trust develops between particular individuals in an ongoing process as business takes place (Granovetter 1985). To extend these observations to policy questions, commercial banking, in drawing businesspeople into intimate relationships, may create as many problems as it solves. If banking draws its strengths from social relationships

50 Greg P. Hannsgen and commonalities, by nature it will exclude certain individuals who do not enjoy the needed social connections. If attributions of risk are culturally relative, it may be better to allocate credit on a more anonymous basis through an institution such as the bond market. Also, the institutional features of banking, to the extent that they contribute to certain forms of bias in the assessment of risk and the allocation of credit, may be subject to debate or criticism. If banking relationships are used for risk reduction as much as risk perception, then relationships may create creditworthiness, rather than the converse. The proper institutional framework might encourage the formation of needed relationships that would not otherwise exist. Banks that hired loan officers from more diverse socio-economic, racial, ethnic backgrounds might find that the potential for profitable business existed in some hitherto neglected places. Not all useful business relationships are to be found at golf courses. Consider some examples in which risk is perceived and handled in an unconventional institutional context. The Grameen Bank of Bangladesh has demonstrated that extremely poor borrowers who lack credit in almost all societies can be reliable, at least given the right kind of institutional support. Compartamos, a similar Mexico City financial institution lending to very poor women, has a default rate of just over two percent (Weiner 2003). It is interesting to note that this organization uses some of the same social techniques as more traditional banks. When the bank opens for business in a new town, officers seek out the most highly respected women to obtain advice on establishing a lending institution. This phenomenon can also be observed in industrialized economies; studies indicate that small business loans granted under the Community Reinvestment Act are just as profitable on average as regular loans (Thomas 2002: 22). These examples of the social theory at work show that commercial banks are not very effective or evenhanded in discerning risk. They are biased toward groups from which their customer base has traditionally been drawn. They accept certain cultural givens, such as the notion that the elite are more likely to pay money back to the bank. Having done all this, they fail to recognize their own biases, insisting that their risk-control techniques are objective and scientific. As a result, they fail to offer disadvantaged borrowers the same sort of embedded relationships that allow more conventional businesses to flourish.

Conclusion and policy implications of commodification What are the policy implications of the marketization of finance, in light of the skeptical interpretation of banks’ role offered above? Is marketization a development to be encouraged? Clearly, some of the most important implications of the sea change in banking are related to governance. Securities owners may be too far removed from the activities of a corporation to prevent insiders from engaging in fraud or managing poorly. The

Theory and implications of commodification 51 danger of lax governance has been illustrated recently by a string of corporate scandals. On the other hand, some might argue that investor capitalism, more than banker-dominated capitalism, can potentially support the dynamism and efficiency of firms. These observers assert that this role for investors could be ensured if firms’ activities were made visible to outsiders, perhaps by assiduous accountants and regulators. Increased transparency would also help ensure that securities were priced correctly, helping to improve efficiency. Well-informed traders could impose discipline on corporate managers by selling shares of poorly performing companies (Rajan and Zingales 2003). It is therefore in the interests of good governance, in this view, to eliminate cozy banker–borrower relationships, which often allow inefficient activities to go unchecked. This argument about governance depends upon the risk-assessment abilities and other knowledge of securities holders. But Keynes (1936: ch. 12) showed that securities pricing is not rational. Investors never operate with full knowledge of the prospects of a company or how it should be managed. The technology stock boom of the 1990s is just one example. If investors lack the information to price stocks rationally, it is hard to see how they can ensure proper management, even with adequate accounting standards. In comparison, bankers have a wealth of information at their disposal and are not as skittish as securities holders, partly because their investments are illiquid. The social theory of risk provides support for the Keynesian argument. Douglas (1992) believed that scientific measures of risk are often as unreliable as those of traditional societies and might have been skeptical of the ability of a particular new form of finance to solve the problem once and for all. Both Keynes and Douglas argued that the perception of risk was based largely upon convention and mass psychology, as well as the bias of the perceiver. The degree of risk of a future project is in principle unknowable. Whether through a securities market or a commercial banking system, risk is always dealt with through social means. No particular forms of finance, in the abstract, can claim any special ability to solve the problem of risk, or of governance. Some authors have argued that individual investors are more willing to take risks on innovative ideas and startup entrepreneurs than are traditional banks. Banks often make decisions by consensus and have a great stake in maintaining their reputations; therefore, according to some, they are biased toward established, conventional projects. It is only in a highly idealized, and probably unattainable, financial system that ordinary individuals could issue bonds. (A related institution, the venture capital market, has recently shown its limitations.) This casts doubt on a second purported benefit of securities finance: the notion that competitive securities markets somehow democratize the allocation of capital. Proponents of this view often cite cases such as

52 Greg P. Hannsgen the Grameen Bank (Rajan and Zingales 2003), but, as we have seen, institutions of that type rely on many of the strategies used by relationship bankers, rather than the arm’s-length relationships touted by these proponents. One rather radical solution to the governance and access problems associated with marketized lending would be to enhance the relationship of firms with their workers as a replacement for their dealings with bankers, by allowing workers to carry a dual role as investors. This approach would offer the same kind of checks and balances, long-term perspective, and intimate relationships and would have the added advantage of introducing the views of individuals from working-class backgrounds. Workers may be the only group to know more about a firm than its bankers. They have a vested interest in a firm’s success and would have an interest in preventing wasteful or greedy behavior by managers. Workers, like traditional banks, would not dump their investment based upon their animal spirits. They might be willing and able to help see a firm through hard times because they are rooted in their companies and share a stake in their long-run success. An ongoing process of worker involvement, much like bank involvement, could go beyond the provision of finance to an improvement in governance. Finding ways to give workers equity interests in firms would provide more financial stability. Greider (2003) has described some successful company turnarounds executed with the help of capital from union and other pension funds. This approach would aid effective governance without simply moving backward to a world in which traditional bankers, with their hidebound traditions, held enormous economic power. What worker ownership and bank capitalism have in common is the use of “voice” rather than “exit” as a means of control (Hirschman 1970). Securities holders who believe that a firm is poorly managed can exit (or threaten to exit) by selling their positions. But insiders such as workers, who cannot readily exit, can provide input through the use of voice in decision-making. Much as in a marriage, many problems can be solved short of the threat of separation. Another implication of securitization involves Community Reinvestment Act regulations, which require that all banks set aside some of their loans and investments for under-served groups and areas (Thomas 2002). Potentially, these rules go beyond governance to allow people from diverse backgrounds to start their own firms. Studies show that these laws have been somewhat successful, but they are subject to certain types of bank evasion. One such form of circumvention is to meet the letter of the law by investing in securities, certificates of deposit (CDs), and mutual fund shares backed by certain forms of loans to disadvantaged firms and consumers – the kinds of commodified instruments emphasized here – rather than by direct lending. Often these instruments are bought and sold

Theory and implications of commodification 53 several times in order to gain multiple credits for the same underlying investment (Thomas 2002: 14). Unfortunately, this type of investment deprives the borrower of the type of ongoing relationship with a major lending bank that is such a key to obtaining additional services, as bankers lose interest in minority firms once they have met their legal requirements. Moreover, some of the investments recently acquired by major banks fall on the borderline between “subprime” and “predatory” loans. The latter involve unfair terms and are sometimes granted with the anticipation that the borrower will default. The lender has no stake in the success of the borrower, since failure is anticipated from the beginning. This argument illustrates that the type of relationship that exists between a banker and its customer may reflect economic power. Disempowered people may find it difficult to form beneficial relationships. Good policy should be aimed at compensating for inequalities of power. In sum, a “sea change” has taken place in how firms and homebuyers obtain finance. Some scholars, including many social economists and sociologists, have argued that the old system, in which people knew the bankers intimately, was functional because it allowed lenders to have a peak at inside information as to the viability and legitimacy of a project. Others argue that it is the new system that achieves the greatest efficiency and should therefore be promoted by policy. The thrust of this chapter is that both forms of finance can be either functional or dysfunctional (especially in their handling of risk) and the means exist to make them more functional. In the current system or in any conceivable reformed system, social relations will form the basis for both types of finance. Rather than attempting to dismantle “relationship finance” in the name of some utopian system free of social influences, efforts should be made to make both forms of finance – relationship-based and commodity-based – more stable and democratic.

References Anderson, E.S. (1993) Value in Ethics and Economics, Cambridge, MA: Harvard University Press. Atlas, R.D. (2003, March 19) “Corporations in Survey Say Banks Tie Loans to Other Business,” New York Times, p. C4. Bassett, W.F. and Zakrajˇsek, E. (2003) “Recent Developments in Business Lending by Commercial Banks,” Federal Reserve Bulletin, December: 477–92. Bernanke, B. (1983) “Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression,” American Economic Review 73 (3): 257–75. Bernanke, B., Gertler, M., and Gilchrist, S. (1999) “The Financial Accelerator in a Quantitative Business Cycle Framework,” in John B. Taylor and Michael Woodford (eds), Handbook of Macroeconomics, Vol. 1C, New York, NY: Elsevier, pp. 1341–90. Douglas, M. (1992) Risk and Blame: Essays in Cultural Theory, New York, NY: Routledge.

54 Greg P. Hannsgen Dymski, G. (1998) “Disembodied Risk or the Social Construction of Creditworthiness,” in Roy Rotheim (ed.), New Keynesian Economics, New York, NY: Routledge, pp. 241–61. Economagic (2003) “Commercial and Industrial Loans at All Commercial Banks,” www.economagic.com/em-cgi/data.exe/fedstl/busloans1. Federal Reserve Board of Governors (FRB) (2003) Flow of Funds Accounts of the United States: Annual Flows and Outstandings, tables L.101, Washington, DC: FRB. Ferrary, M. (2003) “Trust and Social Capital in the Regulation of Lending Activities,” Journal of Socio-Economics 31 (6): 673–99. Granovetter, M. (1985) “Economic Action and Social Structure: The Problem of Embeddedness,” American Journal of Sociology 91 (3): 481–510. Greider, W. (2003) The Soul of Capitalism, New York, NY: Simon and Schuster. Guseva, A. and Rona-Tas, A. (2001) “Uncertainty, Risk, and Trust: Russian and American Credit Markets Compared,” American Sociological Review 66 (5): 623–46. Hirschman, A.O. (1970) Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Cambridge, MA: Harvard University Press. Keister, L. (2002) “Financial Markets, Money, and Banking,” Annual Review of Sociology 28: 39–61. Keynes, J.M. (1936) The General Theory of Employment, Interest, and Money, New York, NY: Harcourt. Mirowski, P. (1990) “Learning the Meaning of a Dollar: Conservation Principles and the Social Theory of Value in Economic Theory,” Social Research 57 (3): 689–718. Rajan, R. and Zingales, L. (2003) Saving Capitalism from the Capitalists: Unleashing the Power of Financial Markets to Create Wealth and Spread Opportunity, New York, NY: Crown Business. Stiglitz, J. and Weiss, A. (1981) “Credit Rationing in Markets with Imperfect Information,” American Economic Review 71 (3): 393–410. Thomas, K. (2002) “CRA’s 25th Anniversary: The Past, Present, and Future,” Working Paper no. 346, Annandale-on-Hudson, NY: Levy Economics Institute. Townsend, R. (1982) “Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information,” Journal of Political Economy 90 (6): 1166–86. Uzzi, B. (1999) “Embeddedness in the Making of Financial Capital: How Social Relations and Networks Benefit Firms Seeking Financing,” American Sociological Review 64 (4): 481–505. Weiner, T. (2003, March 19) “With Little Loans, Mexican Women Overcome,” New York Times, p. A8.

5

Teaching the ethical foundations of economics The principles course Jonathan B. Wight

Plagiarize! Let no one else’s work evade your eyes. Remember why the Good Lord made your eyes. So don’t shade your eyes but Plagiarize, plagiarize, plagiarize! (Only be sure to always call it please, “research.”) (Lehrer 1997)

When we analyze the source of humor, one ingredient is surely incongruity, the juxtaposition of opposites. So when Tom Lehrer, the consummate Harvard mathematician, openly calls for plagiarism, this is funny because it is exactly the opposite of what we expect – it is absurd. And yet, from the viewpoint of modern economics, is plagiarism really so absurd? We teach our students to maximize short-term profits (in a moral vacuum). We drill them that producers minimize private costs of production (without reference to ethical codes of conduct). We expect economic agents to operate with atomistic selfishness, assuring them that this will magically produce the greatest good for society (ignoring Adam Smith’s ethical foundations for the invisible hand). Why should we doubt that these messages, communicated over the decades, would not take root? It is personally efficient for students to plagiarize. Time is scarce, and filching allows term paper production costs to be minimized and the potential output of a grade to be maximized. Professors, incidentally, are better off when students plagiarize because they will enjoy reading superior papers than otherwise.1 Future employers may be none the worse, since much of what is relevant to a worker’s future productivity will be learned on the job. And what manager would not be thrilled with employees who know how to develop shortcuts in production? The student who plagiarizes is merely playing the part economists have written: she has become homo economicus.2 What then, is so bad about plagiarism? This chapter attempts to resurrect economics from this dismal portrayal. Modern economists understand intuitively (even if they fail to

56 Jonathan B. Wight teach about it) the role of ethical behavior in human endeavors. Two centuries ago Adam Smith likened human society to an “immense machine,” in which virtue supplies “the fine polish” on the wheels (1982 [1759]: 316). In business, as in academia, honesty promotes dynamic efficiency gains. Cheating and fraud do the opposite. Smith called vice the “rust” that causes the wheels of society to “jar and grate upon one another.” Beyond the instrumental benefits of observing and modeling ethical conduct, there is another, perhaps more compelling, reason for instructors to address ethical concerns in the economics classroom. While many courses in economics impart a high level of technical training, the development of critical thinking ultimately requires the cultivation of individual moral judgment (Fels and Buckles 1981; Nelson 1989; Stapleford 2000). The exploration of moral questions in various realms of life is at the core of the liberal arts experience. One such question concerns the merits or demerits of a global economic system. There is good reason not to leave this analysis to the arts, anthropology, or philosophy alone. Economists have a comparative advantage in understanding economic trade-offs and in framing choices upon which human decisions are made. Yet a narrow economic efficiency argument for trade by itself is insufficient to resolve any debate about globalization. Economists must recognize and confront alternative goals and ethical approaches if they are to contribute to this discussion. It is noteworthy that, when Milton Friedman made his famous declaration that the social responsibility of a business was to make as much money for its stockholders as possible, his argument is couched in terms of efficiency, equity, and morality. A key assumption was that businesses would operate within a social system in which “Some key [moral] institutions must be accepted as ‘absolutes,’ not simply as instrumental” (1962: 167). This chapter thus argues that economics instructors should engage their students in critical thinking exercises which entail aspects of moral inquiry. The objective is not to teach students what is “right” and “wrong” but to sensitize them to ethical questions that arise in carrying out both positive and normative economic analyses.3 The chapter concludes with examples of short teaching modules that can achieve some of these objectives.

Historical roots The usual starting point for discussing the ethics of globalization is with Adam Smith, who as professor of moral philosophy studied the principles of economic activity and the humans engaged in it within a broad political, social, and ethical landscape (Pack 1991; Young 1997). The Wealth of Nations (1776), for example, can be read at two levels: as a scientific text on wealth creation and the distribution of income resulting from specialized production and international market trading; and as moral inquiry into these outcomes and the ethics of self-interest. Smith’s earlier volume,

The principles course 57 The Theory of Moral Sentiments (1759), is a study not just of self-interest but of social interests broadly conceived, including the motivations for altruism, loyalty, trust, and most importantly, self-restraint based on ethical considerations and commitments. In other words, it is a treatise on the deliberations of a moral agent. In a Journal of Economic Literature survey, Keith Tribe concludes that: The Smithian conception of self-interest is not an injunction to act egoistically and without moral scruple, safe in the knowledge that by doing so the public good would somehow or other result: it is embedded within a framework of social reciprocity that allows for the formation of moral judgment. (1999: 621) Central to Smith’s moral judgment about globalization is his concern for justice. In The Wealth of Nations, for example, Smith refers to this subject on average about once in every seven pages; in Moral Sentiments he addresses it on average once every other page or so.4 Smith’s system cannot function without this normative foundation. Smith notes that “Justice . . . is the main pillar that upholds the whole edifice. If it is removed, the great, the immense fabric of human society . . . must in a moment crumble into atoms” (1982: 86). Smith’s concept of justice mainly refers to the prevention of unwarranted violence against others and the widespread adoption of a set of fair rules governing interaction (e.g., trade). Commutative justice is thus the critical issue for Smith’s economic and social system, although at times he does advocate public policies for distributive justice (Young and Gordon 1996; Verburg 2000). It is thus hardly surprising that the rise of interest in ethics in economics is paralleled by a surge of articles and citations on Adam Smith. Citations to Smith’s The Theory of Moral Sentiments, the book addressing the moral foundations for micro behavior, grew from under ten per year in the early 1970s to roughly four times that by the late 1990s (Wight 2002a). While justice is central to Smith’s conception of markets and wealth, it is a rare economics professor who spends much time on this. In the twentieth century, the rise of positivism led economists to press for scientific objectivity – subsuming moral problems under a “normative” label which could be walled off from pure economics. To many modern authors, however, including several Nobel Laureates, ethical matters infuse economics and cannot be surgically extracted without killing the patient (see, for example, Boulding 1969; Hayek 1974; Wilber and Hoksbergen 1986; Etzioni 1988; Evensky 1993; Piderit 1993; Buchanan 1994; Young 1997; Vickers 1997; and others). Amartya Sen argues in On Ethics and Economics (1987) that any sanitized separation of positive and normative analysis is impossible and undesirable. It is impossible because the process of science requires making investigative decisions which are value-laden. It is desirable to

58 Jonathan B. Wight have investigators who are conscious of their ethical steps and alert to implications that arise from them. Hausman and McPherson (1993) produced a survey on this subject in the Journal of Economic Literature, “Taking Ethics Seriously: Economics and Contemporary Moral Philosophy,” followed by a book, Economic Analysis and Moral Philosophy (1996). Deirdre McCloskey summarizes the critique of dogmatic positivism in The Rhetoric of Economics when she writes: “Modernism promises knowledge free from doubt, free from metaphysics, morals, and personal conviction. . . . What it is able to deliver is . . . the metaphysics, morals, and personal convictions of the scientists” (1998: 152). To summarize these arguments, moral concerns infuse the study of economics. Having a greater ethical awareness could make students better economists, both in terms of becoming self-conscious of their own values brought to the investigation and in terms of understanding and modeling the economic behavior of moral agents. Beyond this, as will be elaborated below, ethical judgments are an essential component of critical thinking.

Issues for teaching The consideration of ethics is central to a liberal arts education (Wilber 1999) and vital for those students pursuing careers in business (Wight 1999). Simply knowing the so-called positive economics of a situation is inadequate for decision-making. Requiring students to take a final position on public issues is essential for increasing awareness about the ethical implications (Emami 1999). The importance of this can be illustrated by the wrongful death judgment against General Motors (GM) in 2000. A jury levied $4.9 billion in punitive damages against the company for a faulty fuel-tank design on the Chevy Malibu (later lowered to $1 billion). Compared to alternatives, the chosen design put the occupants at greater risk from fire or explosions in a rear-end collision. The “smoking gun” that outraged the jury was an internal memorandum detailing that GM engineers had advance knowledge of the problem. Engineers noted it would cost $8.49 per car to fix the problem, but that wrongful death lawsuits could be settled for only $2.40 per car. Following standard cost/benefit analysis, they adopted the “efficient” private solution, the defect was not corrected, and the buying public was left uninformed of these details. Real economic choices (like this one) frequently entail trade-offs between intersecting and conflicting moral demands. Simple rules for short-run profit maximization fail to serve us unless they are encapsulated within a wider context of ethical claims (some of which are certainly economical). Ethical literacy can enhance the way economic theory is used for analyzing private and public problems – and economic theory can add depth to ethical discussions. As an example of the latter point, the enormity of the award in the Malibu case may reflect the jury’s uninformed consideration of the economic trade-offs (e.g., between safety and afford-

The principles course 59 ability) that do in fact exist when building cars. This is why both economic and ethical literacy must combine to clarify economic choices. In the 1970s, Rendigs Fels (joined later by Stephen Buckles) produced a useful text for introducing students to such critical-thinking exercises. The Casebook of Economic Problems and Policies: Practice in Thinking (5th edn, 1981) provides a delineated and standard process through which public policy questions may be analyzed. These are: (1) to state the problem; (2) to list all the competing goals and policy options which may be relevant; (3) to analyze each policy option in light of the stated goals; (4) to evaluate (rank) the policy options based on the student’s own value judgments about the worth of the goals achieved; and (5) to reach a decision based on these ethical, as well as economic, findings. Fels and Buckles do not stress enough, it seems to me, the obvious ethical judgments which also arise in steps 1-to-3 of a public policy analysis, but this is a minor drawback. A benefit of the public policy approach to teaching economics is that efficiency is always viewed as one of several competing virtues in the public policy sphere. A well-rounded decisionmaker would never stop analyzing a problem simply because Option A was found to be the most efficient. Such an analysis would be incomplete if it failed to consider implications for fairness, equity, freedom, and other values relevant to the issue under discussion. This requires ethical analysis and a moral decision. Regrettably, many teachers think their job is done once they have used economic analysis to uncover the most “efficient” outcome – apparently unaware of (or unconcerned about) the normative basis for how “efficiency” is defined in the first place. As Fels and Buckles note, “values cannot be science-free and science cannot be value-free” (1981: 112). The overriding but unconscious bias economists give to efficiency is itself a moral value (Viner 1984: 119; Hausman and McPherson 1993: 675). Many conventional teachers would no doubt defend their actions by arguing that economists can do little to enhance ethical training, and classroom time is better spent on an analysis of efficiency since that is the economist’s area of comparative advantage. By analogy, a medical student should not be burdened with discussions of medical ethics: class time would be better spent teaching the future surgeon a new and better technique for removing the appendix. Such criticism might be valid if the diminishing returns to specialization were not so pervasive from an undergraduate’s perspective. In the liberal arts, as in business schools, excessive technical training and the absence of normative inquiry is cause for concern. In The Wealth of Nations, for example, Smith notes that the person “whose whole life is spent performing a few simple operations . . . has no occasion to exert his understanding.” Such a person becomes, over the years, “as stupid and ignorant as it is possible for a human creature to become” (1981: 782). Smith quite pointedly decries the worker’s productivity gain

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acquired at the expense of his intellectual and social virtues. By failing to address the moral dilemmas that shape public policy debates, students are left with perhaps extraordinary technical skills in economics but may be thoroughly unprepared for life and work.5

Ethics modules in economics courses One approach is to introduce short ethical modules into economics courses, with the content and methods for introducing students to ethical inquiry suitable for students at various levels. This can be done without excessive use of class time. Four techniques are discussed here: an in-class game, public policy essays, the use of the visual arts, and the use of a novel. In-class game The “Robinson Crusoe Game” may be played on the first day of class in Principles, Intermediate Micro, or other classes that emphasize solutions to scarcity. It is important to play the game before students have had time to develop alliances or expectations. Without advance warning, I break students into groups of four to five students. Each group is given one minute to introduce themselves and to pick a leader. I toss each group leader a candy bar and tell them: “You are stranded on a desert island. Walking on the beach today you found this candy bar. You have five minutes to determine what to do with it.” There is usually a moment of shocked silence, followed by what turns into a spirited discussion. Virtually all leaders consult their groups, and most of the time leaders divide the candy bar equally among the members of the group. When I ask students why they selected this allocation method, they are usually puzzled by the question because the answer to them is all too obvious: it is fair. This first-day experience sets the tone that economics is concerned with allocation under conditions of scarcity. It highlights the importance of values, especially equity, that play a part in the allocation outcomes within traditional societies or family groups. Students can readily understand that social relations (here, group identity and social harmony) play an important part in some choices, supplementing the selfish individualism model of traditional theory.6 Adam Smith’s Theory of Moral Sentiments provides the theoretical foundation for understanding the formation of social identity (and is developed more formally later in the course). This game creates a fruitful starting place from which to examine nonmarket allocation mechanisms and the values they hope to serve. From here it is an easy lead-in to discussing purely egalitarian systems such as the family structure, and to move on to command economies and the costs and benefits of these in terms of material incentives and other values such as freedom and efficiency. From the beginning, students see the global

The principles course 61 market system as an alternative to other social arrangements. When we go on to discuss the standard international trade model in a few days, students have a stronger basis for understanding the relevance of efficiency in raising average standards of living; yet they are aware of distribution of income and other problems that this entails.7 Public policy essays One relatively easy way to introduce ethics into the classroom is to assign short public policy essays. Using the format suggested by Fels and Buckles (1981), students analyze the economic content of a controversial public issue based on newspaper accounts. But in addition to standard analysis of incentives and efficiency, they are also required to map out the conflicting moral values that underlie the issue. Finally, they are asked to endorse a particular policy that serves their moral values. While virtually any public policy issue will work for this exercise, a focus on health care, which is controversial, is particularly useful in highlighting the many conflicting goals of policy. For example, one issue concerns a terminally ill three year old boy whose family’s Health Maintenance Organization (HMO) denies a request for a possibly lifesaving surgery. The operation offers just a small possibility of saving the boy’s life, yet costs $250,000. Students first identify relevant goals at stake: fairness to this family, to other HMO families, to potential HMO families, and to other parties; allocative efficiency in consumer spending and resource use; technical efficiency in terms of saving the most lives; freedom of private corporations to make decisions; and other considerations students deem important. Then they analyze how each goal is affected by allowing, or not allowing, the boy’s operation. Their final decision entails a careful personal valuing of these different outcomes. The power of economic thinking is manifestly evident as students think of hidden repercussions and unintended consequences of each decision. More importantly, students come to recognize that their decision is ultimately a moral reckoning: an assessment of right and wrong action. It is important to emphasize to students that their grade in this exercise is based on the quality of their analysis, not in their final weighing of values. Economics is seen as a vehicle for understanding public policy analysis, not the end in itself. Even after repeating this injunction numerous times, I still get students who admit that they chose the “efficient” solution simply because this was a course in economics! Such unconscious biases are likely to be widespread. This particular health care essay encourages students to use a consequentialist model of ethical decision-making (e.g., utilitarian), in which the costs and benefits of different actions are assessed, and the action with the largest net benefit is chosen. It is appropriate at this point in the course to introduce students to two other ethical approaches in Western philosophy:

62 Jonathan B. Wight the deontological system of duties (Kantian); and the Aristotelian system of virtuous character. In most courses there is not time to do each justice, but even a brief outline can provoke great insight for students who previously may have assumed that only the consequentialist approach was acceptable in economics. The issue of alternative ethical approaches can be brought alive by asking students to put themselves in the shoes of a doctor working in a for-profit HMO. I ask them whether the doctor should act so as to maximize the company’s profits? If so, could the interests of the patients and doctors at times be in conflict? How are such conflicts resolved? At this point I hand out a copy of the Hippocratic Oath, in which doctors swear to place the patient’s interests first (ahead of profit). Such duty-based notions of ethics resonate strongly with students, who, as noted earlier, have a strong bias towards behaviors that adhere to principles which are “fair” and can be justified as such. On the other hand, the consequentialist approach of cost/benefit analyses can make students appreciate other ethical dimensions of HMO’s decisions, especially when large costs or benefits are hidden or unintended. The brief elaboration of ethical systems provides students with some handholds for understanding their own ethical approaches which they utilize in other essays. Another possible public policy essay on health care concerns the shortage of human kidneys for transplant, caused by a government price ceiling. Should a free market be allowed? Again, students are expected to carefully discuss the anticipated effects of a market on technical and allocative efficiency, as well as ramifications for equity, freedom, public safety, and other goals. They then must utilize an ethical system to reach their own decision. Films Using the arts to teach garners student interest and there is also a compelling pedagogical rationale for their use (see Wight 2006). Films provide a vehicle in which economic choices and policies can be studied within a social, political, and ethical framework. The Grapes of Wrath, Wall Street, Erin Brockovich, and Mr. Smith Goes to Washington are engaging films that address economic concepts while questioning “right” and “wrong” behavior. To avoid using up class time, students review selected movies outside of class and earn extra credit points by providing a one- to twopage analysis of each. As with the public policy papers, movie analyses include not only the economic issues of efficiency and equity, but also an evaluation of other values (e.g., morality, freedom, and so on). The point here is to arouse the students’ “moral imaginations” (to use Adam Smith’s phrase) in thinking about issues in economics. The purpose is not to teach students the “correct” ethical response, but to provoke them to consider alternatives and to reach a conclusion for themselves.

The principles course 63 A novel Finally, over fall or spring break students read my own short academic novel, Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue (Wight 2002c). This book addresses the formation of individual moral conscience within a global market system. The adventure story makes for easy reading, as Adam Smith comes back to life and travels across America; Smith’s own writing provides much of the dialogue. The novel can be used to explore various ethical concerns such as: the moral foundations for global capitalism, the role of moral agency in enhancing economic efficiency through social relations and trust, and the role of self-actualization in the operation of business. The book provides links between The Wealth of Nations and The Theory of Moral Sentiments. Students read the book outside of class (it takes an afternoon) and write a short essay on it. One essay asks them to examine the “greed is good” philosophy of Bernard Mandeville and others in the context of what Smith wrote on this subject. They compare and contrast Smith’s views with those of the character Gordon Gecko in the movie Wall Street. Students apply this debate to recent financial scandals and are asked to identify the role that moral agency plays in the “invisible hand.” Students thus come to understand that the founder of economics saw moral institutions as part of the structure in which businesses operate and moral imagination as an instigator of social and economic evolution.

Conclusion The aforementioned techniques for introducing ethical issues into the economics classroom can be undertaken with a fairly small opportunity cost of time. Ethical modules can be interwoven into class materials, and students quickly become adept at thinking about both positive and normative dimensions of these issues. It should be clear that this approach is merely an introduction to some of the ethical dimensions of economics, and an even wider and deeper coverage of ethics would be highly desirable in an advanced course, such as the one described by Wilber (1999). In particular, one area I do not devote adequate time to is the discussion of how ethics permeates positive economics. My reason for holding back is not just the time constraint; I also do not want to spend the semester contradicting the textbook. Hence, I prefer to add ethical modules that supplement, rather than directly challenge, the traditional paradigm. My purpose at this juncture is to legitimize moral inquiry as a subject in economics and to give students the opportunity to practice their critical thinking on several issues of importance. Social economics is a method of analyzing economic issues within the context of complex social systems. Economic agents are also human persons. Using the pedagogical exercises (or similar techniques) consistent with social economics presented here, I would hypothesize that students

64 Jonathan B. Wight will be better prepared for business – and life – having analyzed issues of scarcity and choice within a holistic framework that includes ethical considerations.

Notes 1 Some plagiarized papers are too polished, which is how teachers become suspicious of them. 2 This account of things is surely too harsh, since implicitly profit maximization is meant to happen through legal and ethical means. Yet how many professors take the time to emphasize this point? Later in the paper I record the number of times Adam Smith refers to “justice” in The Wealth of Nations – surely far more often than principles instructors do. 3 As discussed below, it is impossible to carry out “positive” economics without making “normative” judgments. Hence, these terms are ambiguous and misleading. I continue to use them because this is the way textbooks approach the field, and students need to understand their traditional meanings, even if outdated. There are additional merits to this approach (Weston 1994). 4 The data come from a word search for “justice” on the Liberty Fund Library website (http://www.econlib.org), which maintains searchable electronic versions of Smith’s two books. 5 The Association for Social Economics addresses this issue through conference sessions and published proceedings. Instructors may also wish to consult the collection of articles in O’Boyle (1999) and Wilber (1998). 6 By contrast, faculty who unquestioningly preach the standard homo economicus model in isolation of other considerations may unconsciously alter the entering values of their students (Frank et al. 1993; Frank 1996). 7 Details of the Robinson Crusoe game are found in Wight (2002b).

References Boulding, K.E. (1969) “Economics as a Moral Science,” American Economic Review 59 (1): 1–12. Buchanan, J.M. (1994) Ethics and Economic Progress, Norman, OK and London: University of Oklahoma Press. Emami, Z. (1999) “Teaching Principles of Economics From a Social Economics Perspective,” in Edward J. O’Boyle (ed.), Teaching the Social Economics Way of Thinking, Lewiston, NY: Edwin Mellen Press, pp. 501–12. Etzioni, A. (1988) The Moral Dimension: Toward a New Economics, New York, NY: Free Press. Evensky, J. (1993) “Ethics and the Invisible Hand,” Journal of Economic Perspectives 7 (2): 197–205. Fels, R. and Buckles, S. (1981) Casebook of Economic Problems and Policies: Practice in Thinking, 5th edn, St. Paul, MN: West Publishing Company. Frank, R.H. (1996) “Do Economists Make Bad Citizens?” Journal of Economic Perspectives 10 (1): 187–92. Frank, R.H., Gilovich, T.D., and Regan, D.T. (1993) “Does Studying Economics Inhibit Cooperation?” Journal of Economic Perspectives 7 (2): 159–71. Friedman, M. (1962) Capitalism and Freedom, Chicago, IL: University of Chicago Press.

The principles course 65 Hausman, D.M. and McPherson, M.S. (1993) “Taking Ethics Seriously: Economics and Contemporary Moral Philosophy,” Journal of Economic Literature 31 (2): 671–731. Hausman, D.M. and McPherson, M.S. (1996) Economic Analysis and Moral Philosophy, Cambridge: Cambridge University Press. Hayek, F. von. (1974) “The Origins and Effects of Our Morals: A Problem for Science,” in Chiraki Nishiyama and Kurt R. Leube (eds), The Essence of Hayek, Stanford, CA: Hoover Institution Press, pp. 318–30. Lehrer, T. (1997) “Lobachevsky,” in Songs and More Songs by Tom Lehrer, Los Angeles, CA: Rhino Records. McCloskey, D. (1998) The Rhetoric of Economics, 2nd edn, Madison, WI: University of Wisconsin Press. Nelson, C.E. (1989) “Skewering on the Unicorn’s Horn: The Illusion of Tragic Tradeoff Between Content and Critical Thinking in the Teaching of Science,” in Linda W. Crow (ed.), Enhancing Critical Thinking in the Sciences, Washington, DC: Society for College Teachers, pp. 17–27. O’Boyle, E.J. (ed.) (1999) Teaching the Social Economics Way of Thinking, Mellen Studies in Economics, Vol. 4, Lewiston, NY: Edwin Mellen Press. Pack, S.J. (1991) Capitalism as a Moral System: Adam Smith’s Critique of the Free Market Economy, Aldershot: Edward Elgar. Piderit, J.J. (1993) The Ethical Foundations of Economics, Washington, DC: Georgetown University Press. Sen, A. (1987) On Ethics and Economics, Oxford: Blackwell. Smith, A. (1982 [1759]) The Theory of Moral Sentiments, D.D. Raphael and A.L. Macfie, eds, Glasgow Edition, reprinted by Liberty Press, Indianapolis, IN. Smith, A. (1981 [1776]) An Inquiry into the Nature and Causes of the Wealth of Nations, two volumes, R.H. Campbell and A.S. Skinner, eds, Glasgow Edition, reprinted by Liberty Press, Indianapolis, IN. Stapleford, J.E. (2000) “Christian Ethics and the Teaching of Introductory Economics,” Markets and Morality 3 (1): 67–87. Tribe, K. (1999) “Adam Smith: Critical Theorist?,” Journal of Economic Literature 27 (2): 609–32. Verburg, R. (2000) “Adam Smith’s Growing Concern on the Issue of Distributive Justice,” Journal of the History of Economic Thought 7 (1): 23–44. Vickers, D. (1997) Economics and Ethics: An Introduction to Theory, Institutions, and Policy, Westport, CT: Praeger Publishers. Viner, J. (1984) “Adam Smith,” in John Cunningham Wood (ed.), Adam Smith: Critical Assessments, London: Croom Helm, pp. 111–21, reprinted from the International Encyclopaedia of the Social Sciences, New York: Macmillan. Weston, S.C. (1994) “Toward a Better Understanding of the Positive/Normative Distinction in Economics,” Economics and Philosophy 10 (1): 1–17. Wight, J.B. (1999) “Will the Real Adam Smith Please Stand Up? Teaching Social Economics in the Principles Course,” in Edward J. O’Boyle (ed.), Teaching the Social Economics Way of Thinking, Lewiston, NY: Edwin Mellen Press, pp. 117–39. Wight, J.B. (2002a) “The Rise of Adam Smith: Articles and Citations, 1970–97,” History of Political Economy (1): 55–82. Wight, J.B. (2002b) “Discovering Adam Smith’s Moral Sentiments: Scarcity and Choice in a Robinson Crusoe Game,” paper presented at the National Council

66 Jonathan B. Wight on Economic Education, Allied Social Science Association meetings, 4–6 January 2002, Atlanta, GA. Wight, J.B. (2002c) Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue, Upper Saddle River, NJ: Financial Times/Prentice-Hall. Wight, J.B. (2006) “Adam Smith’s Ethics and the ‘Noble Arts’,” Review of Social Economy (forthcoming). Wilber, C.K., ed. (1998) Economics, Ethics, and Public Policy, Lanham, MD: Rowman and Littlefield Publishers, Inc. Wilber, C.K. (1999) “Teaching Economics and Ethics: A Social Economics Perspective,” in Edward J. O’Boyle (ed.), Teaching the Social Economics Way of Thinking, Lewiston, NY: Edwin Mellen Press, pp. 585–614. Wilber, C.K. and Hoksbergen, R. (1986) “Ethical Values and Economic Theory: A Survey,” Religious Studies Review 12 (3/4): 208–14. Young, J.T. (1997) Economics as a Moral Science: The Political Economy of Adam Smith, Cheltenham: Edward Elgar. Young, J.T. and Gordon, B. (1996) “Distributive Justice as a Normative Criterion in Adam Smith’s Political Economy,” History of Political Economy 28 (1): 1–25.

Part II

Redefining the boundaries of economics

6

The normative significance of the individual in economics Freedom, dignity, and human rights John B. Davis

Neoclassical economists have long employed the fact–value distinction to advance one set of moral values for economics at the expense of all others under the false cover of value-neutrality. I term this stage in the history of the distinction its creative phase reflecting its successful use in creating one dominant set of values for economics. But we now seem to find ourselves in the midst of an historical transition in economics itself with neoclassical economics being increasingly pushed aside by an array of new research programs that bear little or no resemblance to it (Davis 2006). Thus, in what may be a recurring cycle, the fact–value distinction appears to have entered upon a qualitatively different chapter in its history, though one ultimately no less misleading than the last. I term this its destructive phase in which neoclassicism’s value commitments are exposed and its reputation as a value-neutral science rejected in arguments made by proponents of the new research programs, each of which is said to be value-neutral but each of which like neoclassicism seeks ultimately to advance new sets of values for economics under the false cover of value-neutrality. Of course, those who reject the fact–value distinction are neither bound by this cycle of deception and manipulation, nor precluded from reasoned discourse about values in economics. My goal here, then, is to provide one diagnosis of the current destructive phase of the fact–value distinction in terms of the breakdown of the neoclassical atomistic individual conception, and then advance an alternative, viable conception of the individual as socially embedded, which supports values contrary to those I fear are set to emerge in the new research programs in economics in the wake of the breakdown of the atomistic conception. My point of entry is personal identity analysis applied to the conception of the individual in economics (Davis 2003). The first and second sections of the chapter use personal identity analysis to examine the traditional neoclassical and socially embedded individual conceptions respectively. The balance examines the normative implications of the socially embedded individual conception in a discussion I characterize as an investigation of “the normative significance of the individual.” The third section interprets personal identity in terms of

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personal integrity, and then takes up the connection between personal integrity and dignity. Dignity is thus first explained in its personal aspect in terms of the sense of self-esteem or pride individuals may possess. But dignity also has a closely associated social aspect that involves the basis society provides for this sense of dignity individuals may possess. The chapter’s fourth section examines dignity in relation to self-respect, and specifically in terms of the Kantian idea that human dignity depends upon having a capacity for claiming human rights. The fifth section turns to social-economic policy, and discusses the idea of a decent society as one which does not undermine human dignity through the existence of institutions that humiliate individuals. The final section ends with a comment on the current phase of the fact–value distinction in economics.

The neoclassical atomistic individual conception The neoclassical conception of the individual is subjectivist in defining the individual as no more than a collection of preferences. The idea that individuals are atomistic beings – or that their individuality is a matter of what they are apart from others rather than what they are in relation to others – follows from the form this subjectivism takes that requires that preferences are always the individual’s own preferences and no one else’s preferences. I have previously argued that the “own preferences” definition of the individual is circular and vacuous, and that it cannot establish that individuals are separate and distinct beings (Davis 2003: ch. 3). Establishing that individuals are separate and distinct beings involves successfully addressing the first of two tests I have argued any conception of an individual must pass in order to provide a viable account of personal identity in economics. I termed this test the individuation test, and then further required that any viable conception of the individual also be able to satisfy what I termed the re-identification test – the idea that for whatever the conception of the individual at issue one must also be able to show that the individual thus understood is re-identifiable across change. I will not review my arguments regarding why the neoclassical subjectivist conception of the individual fails both the individuation and reidentification tests, and does so in ways that seem in principle irremediable. Rather, here I simply focus upon how I believe the subjectivist conception has failed – a failure, interestingly, that is largely accepted by many contemporary mainstream economists – and what the implications of this failure are for the destruction of traditional neoclassical values. The main point is that the neoclassical conception that made individual distinctness or independence depend on understanding individuals subjectively also eliminated this very basis on which individuals were seen to be distinct from one another. Thus, the representation of choice now dominant in economics, which involves nothing more than maximization of a formal objective function, applies equally well to any

The significance of the individual 71 type of agent, whether it be the single individual, a collection of individuals, an animal or collection of animals, non-living machines programmed to implement maximizing operations, or even cyborg agents made up of an amalgam of living, non-living, human and animal parts (Mirowski 2002). Alternatively, there is nothing in the current understanding of choice that requires it apply to any type of agent in particular. In effect, then, contemporary economics has lost its criteria for distinguishing human individuals or indeed any types of agents as distinct and independent beings. The moral values this development destroys are individual sovereignty over choice, freedom as associated with choice, and the idea of the individual as a moral center of the economy. For all the complaints one may have against neoclassicism and against the promotion of these values to the exclusion of other equally important moral values, these values have been historically progressive and essential to the modern ideals of democratic society. But current mainstream economics is no longer in a position to defend and promote these values, because it has abandoned its former theoretical basis for understanding individuals as distinct independent beings. What values, then, might the current destructive phase of the fact–value charade be about to put in the place of these? Of course, it is necessary to be speculative about this, but we might begin by asking what failing to distinguish between human individuals and machines implies. Or we might ask what simply failing to distinguish between different distinct human beings implies. A systems-based rationality that lacks any ontology of human individuals and that advances vague ideas of the “greatest good” may ultimately frame the way in which moral values for economics are elaborated in the future. Moral systems that invest no moral significance in individuals are no stranger to the twentieth century, and have often been associated with totalitarian political systems. Neoclassical economics, with its emphasis on individual choice, has generally contested these systems, despite its beginnings in utilitarianism, which has sometimes served as a prop to authoritarian political views. The rise of “scientific” formalist economics within the body of neoclassical economics in the last two decades, however, seems to signal the end of this defense of the individual as normatively significant. I do not mean to say that current mainstream economics or economists are authoritarian, merely that they no longer offer a defense of individuals as they once did. I hope these very brief remarks help to make apparent why I have emphasized the importance of the concept of personal identity in economics. The applicability of the concept to the field is not immediately obvious (Davis 2003). What I wish to emphasize here is the close relation between one’s conception of the individual, or lack of one, and the normative views one thinks appropriate to understanding economic life. From this perspective, the breakdown of the neoclassical conception of the individual is accordingly not just central to understanding economics’ status as a science, but also central to understanding the normative posture of

72 John B. Davis economics in contemporary society. Thus, in what follows, I seek to fill the gap left by the slide of neoclassical economics into a new agent-ambiguous mainstream economics by setting out a possible alternative future for economics and its normative agendas based on an alternative conception of the individual associated with heterodox economics.

The heterodox socially embedded individual conception The heterodox conception I employ – taken to reflect a number of different contemporary approaches – explains individuals’ personal identities non-subjectively in terms of relationships between individuals. Individuals are socially embedded in their relations to others, and this is what paradoxically creates their individuality, independence, or distinctness. I say “paradoxically” because many heterodox economists are skeptical that there even is a conception of the individual as a distinct being appropriate to heterodox economics, rather arguing that the broad sweep of the tradition is holist, and that individuals play but a modest role in understanding social forces and institutions. Thus, the first step in laying out the socially embedded individual conception is to show how individuals understood in this way can indeed be individuated or distinguished from one another, or pass what I call the individuation test. Two related but slightly different ways of showing this involve emphasizing individuals’ capacity for forming collective intentions (Davis 2002, 2003) and their capacity for forming commitments to others (Davis forthcoming). Collective intentionality and individuation Collective intentionality analysis is the theory of how individuals form intentions when using first-person plural or “we” speech (Gilbert 1989; Tuomela 1995). Philosophers have traditionally explained individual intentions as if they were always formulated in first-person singular or “I” speech terms (e.g., Anscombe 1979), but of course “we” speech is as prevalent as “I” speech, and individuals clearly express intentions using “we” speech. What is interesting about “we” speech as compared to “I” speech, however, is its more demanding success conditions. When an individual says to others, “we will do such-and-such,” it is incumbent upon that individual to gauge whether others will go along with what has been said. In contrast, “I” speech is easier, since it is only the individual’s own intention that is involved, and thus the main burden is simply on effective communication. It should be emphasized that in both cases, however, we are only talking about individual intentions. That is, a we-intention is not a group intention, since properly speaking groups are not cognitive beings that can form intentions. A we-intention, rather, is an individual’s expression of an intention which that individual ascribes to a group in using “we” language

The significance of the individual 73 in reference to members of that group. To get a sense of what this means for thinking of individuals as socially embedded, note that whereas we might thus say that an older holistic tradition explains the social nature of individuals by embedding individuals in social relations, the non-holistic we-intention approach makes it possible to explain the social nature of individuals by embedding social relations in individuals. What, then, is the significance of this for thinking about the personal identity of socially embedded individuals? When individuals successfully express we-intentions, they apparently do two quite different things at one and the same time. On the one hand, they constrain themselves by adjusting what they say to incorporate how others look upon whatever their shared we-intention is about. On the other hand, they engage in this self-constraining behavior freely in virtue of the fact that intentional behavior is always free behavior. (It makes no sense to say someone else can make me intend something.) Of course, one can be involuntarily constrained by others, but only individuals can freely constrain themselves. Recall, then, that the first personal identity test, the individuation test, requires that, for any conception of the individual, it must be possible to show that individuals thus understood are distinct from one another. This test is satisfied for the we-intention interpretation of the socially embedded individual conception. When individuals express we-intentions, and freely constrain themselves, they effectively selfindividuate themselves or self-distinguish themselves from others. We might understand this to occur at two levels. First, when individuals merely consider expressing a we-intention, they single out and compare themselves to those to whom their expression of a we-intention would apply. Second, their actual expression of a we-intention has a performative quality in the effect it has of distinguishing themselves in relation to those to whom it applies. Thus, the way in which individuals are members of social groups explains how they sustain individuality in those groups. Commitment and individuation A parallel argument regarding how socially embedded individuals can be shown to be distinct from one another can be elicited from Amartya Sen’s conception of the individual who makes commitments to others, which he associates with a “self-scrutinizing and reasoning” aspect of the self (Sen 1985, 2002; see, for example, Davis forthcoming). Since his well-known “Rational Fools” paper, Sen (1977) has argued that individuals have a special capacity for forming commitments to others, and that the exercise of this capacity is unrelated to the satisfaction of their own welfare goals. Commitment, I thus suggest, operates in much the same way as individuals’ expression of we-intentions in that when individuals make commitments to others they bind themselves by those commitments yet do so freely. As with we-intentions, others cannot force an individual to make a

74 John B. Davis genuine commitment; only individuals themselves can make genuine commitments. Thus, Sen’s “self-scrutinizing and reasoning” conception of the individual is one in which individuals also self-individuate themselves, and pass the individuation test. Sen’s individual is a socially embedded one in that it involves individuals being independent and distinct precisely in virtue of their capacity to make commitments that tie them to others (Sen 1999). The re-identification test Passing the individuation test, however, is only half of what is required for establishing whether a particular conception of the individual explains personal identity. Also required is that an individual seen to be distinct in some way can also be shown to be re-identifiable in that same respect through a process of change. Thus, if we take individuals to be distinct and independent beings in virtue of their having a capacity to express weintentions or form commitments, do they indeed sustain this capacity across the change in their lives? One way we may understand this process of change that is specifically appropriate to seeing individuals as socially embedded is in terms of the constant variation in one’s social affiliations with others. Individuals are embedded in an almost endless variety of social affiliations over their lifetimes, and it is accordingly fair to ask whether they sustain a capacity to freely express we-intentions or form commitments to others, or rather come to do these things unfreely, and thus become “oversocialized” (Granovetter 1985) beings who fail to selfindividuate themselves over time. What I am referring to is whether individuals retain a special kind of freedom specifically reflective of their being social beings. Freedom has often been defined in negative terms of the individual’s independence from others; here freedom is rather defined in positive terms of the individual’s relation to others. If individuals sustain this specific type of freedom over their lifetimes in the sense of at least being able to regularly exercise it, then on the analysis here they may be said to have personal identities over their lifetimes. I think, however, that a fair evaluation of the state of many individuals in the world today leads to the conclusion that many people are not able to regularly exercise this kind of freedom across their lives’ many changing social affiliations. They are, as it were, gradually beaten down by pressures from others to conform to group dictates, and thus become “oversocialized” beings who increasingly fail to freely use “we” speech and form genuine commitments to others. They use the language of “we,” but not freely; they may claim to make commitments, but really follow the lead of others. In effect, their native capacity to do these things does not develop into a sustainable capability that would justify our attributing personal identities to them. In the case of the embedded individual conception, whether or not individuals actually have personal identities, I thus argue, is contingent upon the way the social world is organized, specifically on

The significance of the individual 75 whether social relationships in all their variety are generally organized so as to promote individuals developing a capability to freely express weintentions and form commitments across their continually changing and diverse social connections. The embedded individual conception thus provides us with an understanding of personal identity as an individual potential, then, but does not guarantee that individuals will actually be able to have personal identities. This implies that on this conception of the individual, personal identity becomes an object of social-economic policy. In order to be more concrete about what this policy might involve, in the balance of the discussion here, I accordingly set out which moral values underlie this particular conception of the individual as a socially embedded being. I understand this project as a characteristically social economic one, in that those who may be placed in this tradition have consistently distinguished themselves from other economists, both heterodox and orthodox, in their enduring concern with the nature of the individual and the normative significance of the individual in economics (e.g., O’Boyle 1998; Lutz 1999; George 2001; Danner 2002; van Staveren 2001). By “normative significance of the individual in economics” I mean those values specifically associated with the moral autonomy and dignity of individuals in economic life, together with the implications which these values possess for our thinking about the organization and moral character of economic systems. A special concern with the normative significance of the individual in economics, then, represents one particular entry point into the normative evaluation of economics and economic life. I have chosen this particular entry point because it is my judgment that modern history has made the individual a moral focus, and because that moral focus may be in jeopardy at the current point in time – certainly in economics and perhaps more widely. From this overall perspective, my examination of personal identity in economics is meant to provide a systematic foundation for investigating the normative significance of the individual in economics. Essentially, until one has a viable conception of the individual, it seems that one’s investigation of the individual’s normative significance must be limited and incomplete. However, I believe the socially embedded individual conception advanced above provides a viable conception of the individual, and thus in the following sections I outline a structure of normative ideas that hopefully begins to provide a more complete account of the normative significance of the individual based on this particular conception. The subjects I take up are: integrity and dignity, dignity and selfrespect, and the idea of a decent society.

Integrity and dignity A distinction can be made between personal integrity and moral integrity, where personal integrity refers to the coherence of a person’s character, and moral integrity refers to whether a person’s character is virtuous

76 John B. Davis (McFall 1987). Personal integrity appears more fundamental than moral integrity in that moral integrity presupposes personal integrity, and one can have a personal integrity without having moral integrity. Here I am first interested in personal integrity as close in meaning to the idea of personal identity. Personal identity, as I have explained it in connection with the socially embedded individual conception, concerns whether individuals are able to maintain a distinctness or independence across their many, differently demanding social relationships. We may understand this to be a matter of personal integrity if distinctness from others also involves individuals having an internal coherence. Conversely, individuals who lose this internal coherence, though they may still have personal identities in terms of having a sustained capacity for expressing we-intentions and forming commitments, may be fragmented and center-less. Personal integrity, it might thus be said, is a somewhat stronger way of looking at personal identity as if from the inside out, or in terms of how one’s relations and commitments to others cohere with one another from the point of view of individuals themselves. One influential interpretation of personal integrity as internal coherence is that of Henry Frankfurt who sees persons as having personal integrity when they are able to regulate their first-order desires by their second- or higher-order desires (Frankfurt 1971). Individuals’ internal coherence on this view is a matter of their having a unitary, hierarchical organization to their different, possibly competing desires. Another leading interpretation of personal integrity as internal coherence that is closer to the identity approach here is Bernard Williams’ understanding of personal integrity as the product of individuals’ identity-conferring commitments (Williams 1973, 1981). Individuals make various commitments to others (sometimes just to various social causes), and this gives them each a personal integrity in terms of those commitments with which they identify most strongly. Further, when an individual’s different commitments conflict, the stronger ones dominate, and these then become the commitments responsible for conferring a sense of identity on the individual. Note, then, how Frankfurt and Williams’ understanding of personal integrity as underlying identity helps expand our personal identity view of individuals as active beings. On that view, individuals are active beings in having a capacity for expressing we-intentions and forming commitments to others. But from the Frankfurt–Williams personal integrity perspective, this capacity should also be seen as simultaneously at work in individuals’ construction of or conferral of personal identities upon themselves. Personal identity, then, is not just something that can only be seen from the inside out, or from the point of view of individuals themselves in terms of their sense of what coherence or personal integrity they may or may not possess. Individuals actively invest in their personal integrity by way of the ties and commitments they make to others, and thereby engage in a kind of reflexive self-construction of themselves. This can be reasonably inter-

The significance of the individual 77 preted to include the idea that they are always in a process of selfevaluation – or “self-scrutiny” as Sen puts it (1985, 2002) – since any process of self-construction presumably needs some sort of accompanying stocktaking activity in which one forms a view of oneself in order to evaluate the effects of one’s actions upon one’s identity. Put differently, when individuals are engaged in actions that affect their identities, their accompanying self-evaluation or self-scrutiny provides them an understanding of themselves, or makes them reflexively conscious of themselves. That is, they acquire a self-consciousness. This sense of self that individuals have provides a basis for how we might think about individual dignity. The concept of dignity is central to many contemporary views regarding the moral autonomy and independence of the individual, but is often not very clearly explained. One complication in explaining dignity is that it has both a personal aspect and a social aspect which are linked together in a manner that is not immediately transparent. Thus, it is one thing to speak of individuals having a sense of dignity, and another, though nonetheless related thing to speak of there being a social basis for their having a sense of dignity. Avishai Margalit suggests one way of linking these two aspects of dignity in terms of the concepts of self-esteem and self-respect: “Dignity is similar to pride. Pride is the expression of selfesteem; dignity is the expression of the feeling of respect persons feel toward themselves as human beings. Dignity constitutes the external aspect of self-respect” (1996: 51). Dignity, pride, and self-esteem are similar on the personal level. But elsewhere Margalit goes on to distinguish self-esteem and self-respect, arguing that “self-esteem is a ranking concept [that] relies on the beliefs people have about their own achievements,” while self-respect is a matter of “belonging” which one has in virtue of some social membership (Margalit 1996: 46–7). Thus, self-esteem is a matter of one’s own opinion and feelings about oneself as compared to others, while self-respect is a matter of how one believes one is entitled to regard oneself in virtue of being an equal member of some social constituency. That is, self-esteem is better associated with the personal aspect of dignity, while self-respect is better associated with the social aspect of dignity. Indeed, self-esteem and self-respect do not always go hand-in-hand in that one might have the one without the other (Sachs 1981).1 But one important basis for individuals having pride, dignity, and self-esteem, as Margalit indicates in the passage above, is whether they feel entitled to self-respect. That is, the social side of dignity underlies and supports the personal, self-esteem side. This thus necessitates our giving special attention to the social side of dignity in terms of its basis in the concept of self-respect.

Dignity and self-respect According to most commentators, when we speak of self-respect in terms of how one is entitled to regard oneself in virtue of being an equal member

78 John B. Davis of some social constituency, we enter the social normative domain of human rights. Immanuel Kant is a main source of this understanding as, for example, when he states that “the dignity of humanity” requires that we not “suffer [our] rights to be trampled underfoot by others with impunity” (Kant 1983 [1797]: 99). The principle continues to be widely accepted, and is central to much thinking about human dignity today. For example, the United Nations (UN) “Universal Declaration of Human Rights” associates dignity and human rights by beginning with a mutual “recognition of the inherent dignity and . . . the equal and inalienable rights of all members of the human family” (United Nations 1948). Why, then, does having certain fundamental rights make it possible for one to have dignity and self-respect? Joel Feinberg sets out the basic case for this connection, first in terms of the personal side of dignity and then in terms of its social side. In the former respect, “the activity of claiming” one’s rights, Feinberg argues, is what gives individuals a sense of personal dignity, and leads to their expression of this sense of dignity (Feinberg 1970: 257). But, of course, individuals are not always active in claiming their rights, and, more seriously, barriers may also exist to their claiming their rights. Thus, to fully understand human dignity one must go beyond whether individuals simply express claims to their rights to also speak of individuals having some socially “recognizable capacity” to assert claim to their rights. “What is called ‘human dignity’ may simply be the recognizable capacity to assert claims. To respect a person, then, or to think of him as possessed of human dignity, simply is to think of him as a potential maker of claims” (Feinberg 1970: 252). Being invested with a capacity to make claims of one’s rights, moreover, is the product of a social arrangement that makes the individual a member of a community. Not only must a system of rights be in place, but they must also be guaranteed to all individuals to whom they apply if we are to say individuals have a capacity to claim their rights. Social membership as an established or institutionalized status thus underlies the capacity to make rights claims, plus the self-respect which then flows from this capacity, and finally the sense of dignity individuals possess as a result. One mark or sign of whether individuals have this capacity, feel selfrespect, and maintain a sense of dignity is whether individuals feel resentment or indignation should they be unfairly treated by others or have their rights infringed. Resentment and indignation, from this perspective, are socially justified feelings of outrage experienced by individuals who have an accepted status as members of a community with rights in that community. Human dignity, therefore, involves a self-respect that comes of being an accepted member of a community equal in certain basic rights. Returning to the issue of individuals’ personal identity in economic life, possessing dignity and self-respect, we may now add, involves individuals having a personal integrity. Individuals have a personal integrity to the extent that

The significance of the individual 79 they are able to organize and create an internal coherence for themselves in their changing and varied interactions with others. In ordinary ways of speaking, they are typically said to be self-directed and in a state of selfcontrol. Certainly this sort of quality is additionally needed to fully describe human dignity (Meyer 1989). Of course there have always been individuals who are self-directed and in self-control without having the benefits associated with being accepted members of a community (having rights that justify self-respect and help create a sense of dignity). However, such individuals usually have a stoic quality about them that tends to be rare and exceptional. More commonly, individuals are self-directed and in self-control when they have the self-respect and dignity that comes of having established rights in a community. Thus, to make having a personal identity an object of social-economic policy requires that we think of this identity in terms of individuals having a personal integrity supported by a system of rights that generates self-respect and human dignity. Let me therefore summarize from all this what seem to be the main elements involved in a normative focus on the individual in economics. First, to make the individual a focus at all requires we operate with a satisfactory conception of the individual, where in personal identity terms this is a matter of how individuals may be seen to be sustainably distinct beings. Socially embedded individuals may be seen to be sustainably distinct in virtue of possessing a self-individuating capacity for expressing weintentions and forming commitments to others. What this personal identity view isolates in specifically normative terms is a special kind of freedom exercised across one’s lifetime of many changing social affiliations. Second, when we think of personal identity as personal integrity, we suppose that being an individual also involves having an internal coherence. Having a sense of the internal coherence in one’s life in turn gives the individual a sense of dignity. Integrity thus introduces dignity as a second value in the normative characterization of the individual. Third, however, whether individuals have dignity depends very much on whether they feel justified in this regard, and this is a matter of whether they have a socially accepted capacity to claim rights. Dignity in this regard is a matter of having justified self-respect. Human rights thus constitute the third key value associated with a normative characterization of the individual. Therefore, for the socially embedded individual conception, freedom, dignity, and human rights produce a structure of values that provide an account of the moral autonomy and independence of the individual. Central to this conception of the individual is the idea that individuals are able to reflexively engage in a process of self-evaluation whereby their object of attention is themselves as subjects. In normative terms, this reflexivity takes the form of dignity that constitutes the value link between the values of freedom and human rights. Dignity is a reflexive concept both in its personal aspect as self-esteem or pride and in its social aspect as self-respect. The former arises out of personal identity, freedom, and

80 John B. Davis personal integrity; the latter arises out of membership in a community and human rights. The three values together explain the normative significance of the individual, but dignity plays the central role.

Dignity and the idea of a decent society To say that dignity is a central value is also to identify a normative point of entry for social-economic policy. In neoclassical and current mainstream economics, efficiency is the normative point of entry that guides policy prescription. The goal of efficiency recommendations is of course to eliminate inefficiency. What, then, is the goal of policy recommendations that make dignity a central value standing between freedom and human rights? Conversely, what is it that we wish to eliminate in the interest of promoting human dignity? Margalit (1996) defines humiliation as the violation of human dignity, and defines a decent society as one whose institutions do not humiliate people. In contrast, a civilized society is one in which people do not humiliate other people, and violate their dignity. A civilized society is of course to be preferred to a decent society, but realism recommends we make at least decent societies our aim, and thereby focus on the creation of non-humiliating, dignity-enhancing institutions if we are to make the moral autonomy and independence of the individual central to our normative thinking about economics. What, then, does humiliation involve? If we think in terms of its manifest effects on individuals, we might begin by noting that when individuals are humiliated they are made to feel ashamed or caused to have a sense of shame about themselves. That is, humiliation targets individuals’ pride and self-esteem. But I suggest that systematic humiliation, as the product of a set of social institutions, has a deeper object, namely, reducing individuals’ self-respect. Self-respect, recall, has its basis in the status of belonging and membership in a community, whereas self-esteem is a function of how individuals see themselves relative to others (Margalit 1996: 46–7). Accordingly, institutions that humiliate individuals, such as systems of racial or ethnic discrimination, or household structures that are genderbiased, have the effect of denying individuals membership in a community or reducing their status in a community – in their own eyes. Of course, some stoic individuals may maintain a sense of self-esteem despite the existence of humiliating institutions. But assuming that self-esteem for most individuals depends in important ways on their community status and thus on their self-respect, humiliating institutions work to undermine human dignity by attacking most individuals’ self-regard in this most fundamental way. Put in terms of personal identity, humiliating institutions undermine individuals’ personal integrity or their sense of identity. I argued above that, on the socially embedded individual conception, whether individuals have personal identities is a matter of whether they are able to sustain a

The significance of the individual 81 capacity (have a capability) to freely constrain themselves to the terms of participation in the many social groups to which they belong. Humiliating institutions, then, by attacking individuals’ self-respect, also work to undermine individuals having personal identities. Or, since having a personal identity involves being able to exercise freedom in this way, a system of humiliation also works to limit individual freedom. Societies, of course, have many institutions. The character of a society, accordingly, can be seen to be a matter of the balance of humiliating and non-humiliating institutions it possesses, and the extent to which a society’s institutions humiliate individuals can be seen to be a matter of the number and severity of humiliating institutions it possesses. Making human dignity a central value of social-economic policy, then, means changing social institutions to eliminate humiliating institutions. In this respect, a dignity-based social-economic policy is like efficiency-based policy, since both aim to change institutional arrangements. But a dignitybased social-economic policy involves a more complex value structure in that it combines a specific kind of freedom necessary to personal identity and personal integrity with a reliance on human rights as a guarantee of community membership. There are advantages and disadvantages to operating with a more complex value structure such as this. The main disadvantage is the simple appeal that one-dimensional efficiency recommendations offer is not available when we focus on human dignity. The main advantage is that emphasizing human dignity enables us to begin with a key result of modern history regarding what is normatively important in human society – namely, the dignity and moral autonomy of individuals – and then understand the logic behind that result in a reasonably persuasive way. Having a reasonably persuasive way of understanding the normative importance of the dignity and moral autonomy of individuals, it seems, may be particularly important at the current time in history if one principal defender of the individual – neoclassical economics – is either giving up that defense or leaving the stage altogether. With these conclusions in mind, I return to the fact–value distinction to comment on its current phase and possible future.

The creative phase of the fact–value distinction While heterodox economists might hope that mainstream economics will disabuse itself of the fact–value distinction in the future, a more realistic view is to suppose that it will remain in good standing for the majority of economists. Thus, I suggest that the more important work for heterodox economists is to work to counter the logic of the distinction by emphasizing the value commitments of economics, and contesting them where they are unacceptable. Today this means exposing the “turn in economics” (Davis forthcoming) by charting the new directions economics is currently taking, and then exhibiting the new value commitments these new directions involve. I suggested at the

82 John B. Davis outset that the new directions economics is currently taking involve a destructive phase of the fact–value distinction in the undermining of old neoclassical value commitments. This process is really the obverse of a new creative phase in which new value commitments appropriate to a new economics will be elaborated. But just as the new directions in economics are yet to become very clear, so the value commitments that will attend these new directions are also yet to become very clear. This stage in the development of economics thus seems to offer opportunities to those who reject the mainstream economics vision, since in the emerging mainstream value-interregnum there exists space for promotion of social values that are arguably more humane and more in keeping with a fuller normative understanding of economic life. My arguments here make the individual an entry point, first in terms of personal identity analysis and second in terms of a focus on dignity as a central value. This focus is in part strategic, since neoclassical economics has enjoyed a wider appeal for years in virtue of its emphasis on the individual. Heterodox economists of course reject the neoclassical view conception of the individual, but more important it seems to me is mainstream economics’ increasing lack of interest, even abandonment of individuals as a conceptual and normative focus. The heterodox opportunity, then, is to take over the individual as a focus, though on terms that are (normatively) more acceptable. To the extent that the wider appeal of economics is in its defense of the individual, it may be that the coming creative phase of the fact–value distinction may be successfully built upon a genuinely comprehensive understanding of individuals, rather than upon a vision of society in which individuals do not count. Indeed, in such circumstances it might even transpire that economists will come to question the fact–value distinction itself.

Note 1 This is suggested in the often ambiguous use of the term “pride,” as when people say they take no pride in something, but nonetheless have their pride.

References Anscombe, G. (1979 [1963]) Intention, 2nd edn, Oxford: Basil Blackwell. Danner, P. (2002) The Economic Person, Lanham, MD: Rowman & Littlefield. Davis, J. (2002) “Using Sen’s Real Opportunities Capabilities Concept to Explain Personal Identity in Folbre’s ‘Structures of Constraint’ Analysis,” Review of Political Economy 14 (4): 481–96. Davis, J. (2003) The Theory of the Individual in Economics, London: Routledge. Davis, J. (2006) “The Turn in Economics: Neoclassical Dominance to Mainstream Pluralism?,” Journal of Institutional Economics 2 (1): 1–20. Davis, J. (forthcoming) “Identity and Commitment: Sen’s Fourth Aspect of the Self,” in B. Schmid and F. Peters (eds), Rationality and Commitment, Oxford: Oxford University Press.

The significance of the individual 83 Feinberg, J. (1970) “The Nature and Value of Rights,” Journal of Value Inquiry 4 (Winter): 243–57. Frankfurt, H. (1971) “Freedom of the Will and the Concept of a Person,” Journal of Philosophy 68 (1): 5–20. George, D. (2001) Preference Pollution: How Markets Create Desires We Dislike, Ann Arbor, MI: University of Michigan Press. Gilbert, M. (1989) On Social Facts, London: Routledge. Granovetter, M. (1985) “Economic Action and Social Structure: The Problem of Embeddedness,” American Journal of Sociology 91 (3): 481–510. Kant, I. (1983 [1797]) The Metaphysical Principles of Virtue, trans. J. Ellington, Indianapolis, IN: Hackett. Lutz, M. (1999) Economics for the Common Good, London: Routledge. Margalit, A. (1996) The Decent Society, Cambridge, MA: Harvard University Press. McFall, L. (1987) “Integrity,” Ethics 98 (1): 5–20. Meyer, M.J. (1989) “Dignity, Rights, and Self-Control,” Ethics 99 (3): 520–34. Mirowski, P. (2002) Machine Dreams: Economics Becomes a Cyborg Science, Cambridge: Cambridge University Press. O’Boyle, E. (1998) Personalist Economics: Moral Convictions, Economic Realities, and Social Action, Boston, MA: Kluwer. Sachs, D. (1981) “How to Distinguish Self-Respect from Self-Esteem,” Philosophy & Public Affairs 10 (4): 346–60. Sen, A. (1977) “Rational Fools: A Critique of the Behavioral Foundations of Economic Theory,” Philosophy and Public Affairs 6 (1): 317–44. Sen, A. (1985) “Goals, Commitment, and Identity,” Journal of Law, Economics and Organization 1 (2): 341–55. Sen, A. (1999) Reason before Identity, New Delhi: Oxford University Press. Sen, A. (2002) Rationality and Freedom, Cambridge, MA: Belknap Press. Tuomela, R. (1995) The Importance of Us: A Philosophical Study of Basic Social Notions, Stanford: Stanford University Press. United Nations (1948) “Universal Declaration of Human Rights,” Geneva: United Nations Office of the High Commissioner for Human Rights, http://www.unhchr.ch/udhr/. van Staveren, I. (2001) The Values of Economics: An Aristotelian Perspective, London: Routledge. Williams, B. (1973) “Integrity,” in J.J.C. Smart and Bernard Williams (eds), Utilitarianism: For and Against, Cambridge: Cambridge University Press, pp. 108–18. Williams, B. (1981) Moral Luck: Philosophical Papers 1973–1980, Cambridge: Cambridge University Press.

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The impact of identity on economics Miriam Teschl

Within the philosophical tradition of personal identity, Derek Parfit’s (1986) puzzling cases are quite famous. He invents imaginary stories such as a person being teletransported from Earth to Mars. A scanner records and afterwards destroys the brain and body of the traveling person, and sends this information by radio at the speed of light to a machine on Mars that makes an exact organic replica of this person out of new matter. This travel takes a few minutes during which the person on Earth loses consciousness after having entered the teletransporter and pushed a green button to start the scanning process. It is in the replica that the person will regain consciousness on Mars. The interesting question now is: if the person entering the teletransporter were ourselves, would we push the green button and think that the replica is ourselves? Parfit’s suggestion is that these puzzling cases help us find out what makes us consider that we remain the same person: “We discover our beliefs about the nature of personal identity over time” (Parfit 1986: 200). This is indeed an intriguing question. Once we start thinking about the nature of personal identity or the nature of our self, we come soon to the point where we have to reconsider the person as an organic entity, a thinking being with certain desires and aims, traditionally said to possess a soul, self, or similar (metaphysical) things. Are we all these aspects at once, are we a metaphysical being, or can we simply be reduced to organic functions of the body and the brain? Once we answer these questions, we will also discover that according to what we think we are, we will see ourselves confronted with a different space of possible actions, with different possibilities to change ourselves or the world around us, or even with different aims to strive for. The subject of identity or self has received some attention in economics. Economists either critically evaluate the relationship of a person to her social identity (Sen 1999, 2004) or model the influences of social identity on people’s behavior (Akerlof and Kranton 2000, 2002). However, it is John Davis’ merit to have brought the philosophical discussion of people’s personal identity into economics (2003). He explains that philosophers look out for a criterion of “identification” to distinguish people from each

The impact of identity on economics 85 other at one moment in time, and that this criterion should also serve as “re-identification” of the selfsame individual over time. He then applies these two criteria to the neoclassical and mainstream conception of the economic agent and claims that it fails to present a view of a continuous and distinct person. He proposes his own conception of a socially embedded individual. In this view, each individual has the capacity to freely selfimpose specific group memberships, which distinguishes her from others. If the individual has achieved the capability of consistently self-imposing memberships, she can be re-identified through time. However, many people may not have this capability. Social policies may have to be directed so that individuals learn to distinguish themselves from others. Davis’ contribution to economics is that he takes an explicit stand in relation to what an individual is and thus develops his own conception or model of identity.1 In this chapter, I will argue, contrary to Davis, that economics does not fail to represent an economic agent with an identity, but that the economic agent is based on implicit models of identity. These models can be brought to light. We then have, following Parfit’s example, to analyze if these implicit models of identity fit with our beliefs of the nature of identity or the self. However, this means that we, as economists, must become aware of our beliefs according to which we measure a model’s “fitness” to represent an adequate identity model. Once we take a stand, as Davis did, and formulate what we believe a person is, we have to decide if we think that a model that fails to represent our belief is still a “good model” with which economic analysis can be done and which, arguably, influences social policy decisions. To guide our beliefs about identity or the self, I suggest looking at philosophers who engage in the analysis of personal identity. However, philosophers not only guide and stimulate our thought about identity and what it means to be a person. Philosophical accounts of personal identity can also serve as a tool to detect the implicit identity models in economics. That is, if we compare philosophical models of identity with economic models, we will recognize parallels between the ways in which philosophers and economists see the person. I will indicate these parallels between the philosophical and the economic conception of the individual. However, even philosophers have no ready-made answer concerning personal identity. One also has to explore the coherence and subtlety of the philosophers’ ways of thinking. But this helps us become aware of our beliefs about identity, which then can enrich economic theory. Thus, making identity an explicit aspect of analysis is an issue to be taken seriously in economics. The particular characterization of the economic agent’s identity will have consequences on the representation of people’s behavior and choices. Furthermore, according to the identity model adopted, social policy recommendations will differ. In the next section, I will introduce the philosophical discussions of personal identity by looking at Harry Frankfurt’s (1971) paper “Freedom

86 Miriam Teschl of the Will and the Concept of a Person.” Frankfurt tackles the question of what makes a person a person. Second-order desires form a person’s will, and are the characteristic feature of being a person (Frankfurt 1971: 7). Frankfurt’s ideas have indeed received attention within economics. Hirschman (1984), notably, links Frankfurt’s ideas to the conception of the economic agent by comparing it to the standard model and its development made by George Stigler and Gary Becker (1977). I then explore Terence Penelhum (1971), who extends Frankfurt’s reflections to considerations about being a self-identical individual over time and, more specifically, to the issue of conflicting desires within the individual. Penelhum’s approach can be compared to the economist’s renewed interest in people’s conflicting desires represented in terms of their “hyperbolic preferences” such as in Roland Bénabou and Jean Tirole (2002). And finally, I will analyze a very recent paper by Pierre Livet (2004), who discusses the possibility of changing one’s identity over time given conflicting desires and incoherencies between different aspects of one’s identity. I will also compare Livet’s identity model to Bénabou and Tirole’s conception of the economic agent. The last section concludes with a short discussion of the outcome of our search and understanding of identity models within economics.

Evaluation of preferences Frankfurt begins his paper with the claim that simply identifying a person with an entity to which one ascribes some form of consciousness and some corporal characteristics is not identifying a person at all because “there are many entities besides persons that have both mental and physical properties” (Frankfurt 1971: 5). The essential difference for him between a person and some other entity is the structure of a person’s will. He draws a distinction between first-order desires, or what people want, and secondorder desires, i.e., what people want to want. However, a second-order desire does not yet say anything about the person’s will or effective desire that guides her behavior. A person might have a second-order desire without experiencing any first-order desire: a physician who treats drugaddicted patients might want to have the desire for taking drugs in order to better understand drug addicts without really wanting to take drugs. But a second-order desire can turn into a person’s will or second-order volition if she desires that a specific existent and experienced first-order desire becomes her motive of action. The person’s second-order volition is fulfilled when the person is indeed moved by the desire she wants to have. It is not fulfilled if the person is moved by some unwanted desire. Then, “what he wants at that time is not (in the relevant sense) what he wants to want” (1971: 10). Frankfurt calls “wantons” (1971: 11) those beings that have first-order and even second-order desires, but no second-order volitions. That is,

The impact of identity on economics 87 wantons do not care by which desire they are driven. But a wanton is nevertheless rational by deciding how to do what she wants to do. However, she will not establish any desirability over her wants themselves. A person, on the other hand, employs rationality to evaluate the different desires by which she is driven and to decide over their respective desirability. Thus, what distinguishes a person from a wanton is not reason, as such, but will. A drug addict therefore who does not care about taking drugs or not taking them is a wanton. On the other hand, a drug addict, who knows herself to be driven by her addiction, but wants to be guided by the desire not to take drugs, is a person with the will to refrain from taking drugs. But this person is only an unwilling addict because, finally, she is driven by a desire that is not her will and takes the drugs (1971: 12). Thus, whereas the unwilling addict identifies through her second-order volition with a specific first-order desire, namely the one to refrain from taking drugs, the wanton addict has no identity other than the first-order desires (1971: 13). Thus, for Frankfurt, a person is a being endowed with the capacity to reflect and to evaluate her own desires. But what actually are these desires? First-order desires seem to be unrefined drives, inclinations, and urges, and nothing indicates that desires might be linked to some form of joyful living. Second-order desires distinguish themselves from first-order desires only by being desires about them. These second-order desires though seem to be desires without power. Only those that become second-order volitions will have the power to turn first-order desires into effective desires of action. But Frankfurt does not explain when and how second-order desires turn into second-order volitions and thus start differentiating persons from wantons. “[T]he essence of being a person lies not in reason but in will” (1971: 11) writes Frankfurt. This means that wantons have no means to differentiate between different desires. One might say that they have no standpoint, be it moral, social, personal etc., according to which they would make a distinction between their wants. Persons have a will that decides which of the first-order desires should be the effective one. This will could be considered to be a specific standpoint from which people judge their desires. However, where do these standpoints come from? Of course, we can imagine that the will has some moral or social origin. However, a complete account of the person would then require that the person is able to step back and to evaluate her second-order volition. Otherwise this person would be a “second-degree wanton” who does not care about the desirability of her will. This idea of yet even higher-order desires could prolong Frankfurt’s approach indefinitely. Frankfurt (1971: 16) acknowledges this difficulty but claims that common sense ensures that the individual finally identifies with some higher-order desire. But even if this response would give a satisfactory argument, we might claim that people do not choose their identification once and for all. Desires probably change over time and with them people’s identifications. How can we then re-identify the person as the same person if her identifications changed in the meantime?

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Interestingly, Albert Hirschman (1984) brought Frankfurt’s discussion into economics exactly because he claims that it might be adapted to account for people’s changes in their preferences. He accounts for two types of preference changes. One is an unreflected change in people’s preferences understood as people’s tastes. Following Frankfurt’s terminology, Hirschman names these changes wantons (1984: 89). He claims that standard neoclassical economics only accounts for wanton changes. On the other hand, there may be reflected changes in people’s preferences. These changes are preceded by the formation of metapreferences and “much argument has obviously gone on within the divided self . . .” until these changes have been made (1984: 90). These changes refer to people’s values and not simply to their tastes. Given this distinction between wanton and nonwanton changes in preferences, Hirschman understands Stigler and Becker’s (1977) attempt to avoid the simplistic notion of preference changes in standard neoclassical economics. However, Stigler and Becker transform people’s changes in preferences to changes in their behavior influenced by a modification in their price and income structure. Hirschman therefore concludes that they do not account for Frankfurt’s idea of reflective evaluation. “May I urge,” he says, “that changes in values occur from time to time in the lives of individuals, of generations, and from one generation to another, and that those changes and their effect on behavior are worth exploring – that, in brief, de valoribus est disputandum?” (1984: 90). Hirschman does not propose an alternative model of an individual with the capacity to change his values. This is unfortunate because his enthusiastic reference to Frankfurt does not seem to be justified given that Frankfurt actually did not consider any change in values (or the will) over time. Furthermore, Hirschman’s claim that economists focused on wanton-preference changes seems peculiar. Standard economics assumes it is dealing with unchanging preferences because it does not have a framework that allows an account for changes in preferences (Stigler and Becker 1977: 76). Traditional economists leave changes in preferences to be explained by sociologists or biologists. What Stigler and Becker, therefore, want to introduce is an economic framework in which people’s behavior is not a simple outcome of wanton preferences, but the outcome of economic tools such as changing prices and incomes. However, they do not simply take price and income changes as the source of changes in people’s behavior. Their main innovation is that, whereas in traditional theory, people are supposed to express their preferences on standard market goods and services, Stigler and Becker’s economic agents express preferences over household-produced “commodities,” such as health, social standing and reputation, and pleasures of the senses “that [people] produce with market goods, their own time, their skills, training and other human capital, and inputs” (1977: 77; see also Becker 1996: 5). Thus, Stigler and Becker claim that market goods and

The impact of identity on economics 89 services are means to produce one’s own preference satisfaction. People express preferences or tastes over commodities. What matters are not those means, which may vary over time according to price and income, but the satisfaction of tastes, which they suppose not to change over time and among persons. “On this interpretation one does not argue over tastes for the same reason that one does not argue over the Rocky Mountains – both are there, will be there next year, too, and are the same to all men” (1977: 76). It appears, therefore, that even Stigler and Becker develop some sort of higher-order approach in which they distinguish simple goods from higher-order goods or commodities. And indeed, where Frankfurt sees common sense in people’s eventual identification with certain desires, Stigler and Becker put forward the Rocky Mountains in order to stop short any sort of evaluation or reflection on those commodities. However, the difference between Frankfurt and Stigler and Becker is that the latter are producing a model of a rational drug addict where the former only sees an unwilling one. That is, it appears to be more coherent in Stigler and Becker’s approach not to revise one’s tastes than not to revise one’s will in Frankfurt’s identity model. The economic agent of the former always behaves rationally whereas the latter might find himself torn apart by competing interests and drives. However, it is also evident that Stigler and Becker’s rational agent is dependent on many external or exogenously given factors, such as prices and income, but also the agent’s endowment, his anticipation of future utility, and thus his time preference, and his price elasticity of demand. Evidently, social policy measures will vary according to the model of identity employed. Frankfurt’s model would demand the provision of means that help the individual to live according to his will whereas Stigler and Becker’s model demands, for example, long-term changes in price structures to which the individual can rationally react.

Processes of achieving outcomes Frankfurt’s ideas have, of course, had some philosophical responses. One of these is Terence Penelhum’s “The Importance of Self-Identity.” Penelhum adds some interesting aspects to Frankfurt’s considerations, especially by introducing the concept of self-identity. “Roughly, as I understand this very vague notion, someone has achieved self-identity (or ‘found himself’) if his choices and aspirations are integrated in a certain way. This sort of integration is achieved if the desires that move him to act are desires that he acknowledges and wishes to be moved by . . .” (Penelhum 1971: 669). Consequently, if one may achieve self-identity by integration, one may also become self-alienated if this integration fails to happen. If a conflict of desires arises, a person can follow different patterns of behavior. She can, first of all, take an evaluative stand towards herself and recognize the elements that produce the conflict. Consequently, she can either strengthen her will by not giving in to the dominant desire, but to

90 Miriam Teschl the one she chooses to have, or, she can change her will so that it coincides with the desire that is driving her. Second, the person could also try not to solve but to conceal her conflict. In that case, she engages in some form of self-deception, for example, by not admitting to herself that she acts according to a desire that she does not want to have. The person could also admit being driven by a specific desire but attribute the cause of this desire to some external factor or influence. Penelhum calls the first of these two patterns of behavior in case of conflict the “truthful” or “authentic response,” the second the “dishonest” or “inauthentic response” (1971: 670–1). The solution of conflicts takes time. But once the conflict is solved, people might feel like “a new man” and they may look back with “distaste,” “remorse” or “embarrassment” about their previous inauthentic responses (1971: 672). On the other hand, it can also happen that conflicts cannot be solved even though a person truthfully tries to do it. Then the individual is looking back into her past pre-conflict “personality” with some sense of pleasure and would prefer it to her present situation. Thus, solving or not solving conflicts may engender “marked changes in personality.” Depending on the kind of conflict or on the outcome of the conflict, an individual will identify more with her past or present personality. Indeed, “[t]he alienation one can feel toward one’s past personality and actions, though not logically identical, can generate responses analogous to those generated by divisions within one’s present personality” (1971: 672). However, a person can also identify herself with some intended future personality that she hopes will already have successfully resolved a present conflict. But with whatever aspects the individual identifies herself, those with which she does not identify are equally part of her. To take identification as the sole criterion for a person’s identity would therefore be not only a very subjective matter but also too volatile as a continuous criterion because it changes over time according to successful or unresolved conflicts. It thus is important to have a criterion of identity “against which the truthfulness of a person’s explicit or implicit judgments about himself can be measured: a standard, one might roughly say, or psychological objectivity” (1971: 673). This criterion, Penelhum says, can be a person’s bodily continuity. Even if the person does dissociate herself from past actions and desires and does not identify herself with them any more, there is no reason to think that non-identification is a criterion for nonidentity. All identifications and non-identifications reside in the same body. Penelhum’s approach thus adds substantial ideas to Frankfurt’s paper. First of all, it leaves behind the rather crude distinction between persons and wantons. Here, people do not only take an evaluative stand towards their own desires, but they also engage in self-deception or behave deliberately like a wanton. A Penelhumian drug addict, for example, is not simply an unwilling drug addict but is able to acknowledge her addiction and to

The impact of identity on economics 91 undertake a treatment. On the other hand, she might equally deny being a drug addict or attribute her addiction to external circumstances and continue to live with this self-destructive behavior. Thus, Penelhum’s person does not have some sort of “magic will” but engages in more or less serious elaboration of internal conflicts (probably) with the aim of achieving self-identity. In fact, one of Penelhum’s weaknesses is that he does not elaborate in more detail why people should solve their desire-conflicts. He claims that being self-identical does not yet imply “contentment” (1971: 670). Indeed, the person might feel embarrassment and remorse about her inauthentic responses to conflicts in the past once she resolves them. But has a person really resolved her conflicts if she feels guilty about them? A person might have resolved a desire-conflict against a certain background or according to a specific moral or social standpoint. But if she feels remorse and embarrassment about her past personality, did she really solve her desireconflict? One might indeed assume that in this case, the standpoint in question according to which she assesses her internal quarrel created a new level of conflict. Hence, a second level of evaluation would be needed to evaluate not only her immediate conflicts but also those associated with different points of assessment. This, therefore, would mean that a person’s identifications concern a broader view of their personality, including meaning or justification they give to their life as a whole and not simply to their resolved conflicts at a moment of time. Again, non-identification alone is certainly not a criterion for non-identity. However, if a person is concerned with self-identity, her body alone, as Penelhum suggests, is certainly not a sufficient criterion to account for her continuous identity over time. It seems that both aspects contribute to a person’s identity. Penelhum’s concept of the person touches certain aspects that have also been considered by economists. The concern regarding self-deception, especially, begins to find some echo in economics. One form of economic self-deception is associated with the assumption that people have strong preferences for the present. This translates into self-control or weakness of the will problems. People thus have to engage in self-deceiving strategies to make sure that they will keep their motivation to execute some tasks when the moment arrives to do them. Economists Roland Bénabou and Jean Tirole (2002), for example, present a standard utility-maximizing individual who is concerned with the benefit he may achieve if he engages successfully in a certain activity at a later moment of time. However, the individual will do this activity only if he is confident enough about his ability to successfully complete the task. But he does not know his ability exactly. The individual’s weakness of will is represented in terms of quasi-hyperbolic preferences, which means that the individual’s marginal rate of substitution between two periods suddenly increases at the moment of carrying out a certain action. Hence, if at the moment he should undertake the task he is not confident enough

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about his ability, he will procrastinate and continuously postpone carrying out the activity. Bénabou and Tirole divide the individual into three time slices, referring respectively to the pre-undertaking-task self (self 0), the undertaking-task self (self 1) and the benefit-receiving self (self 2). Prior to doing the task, the individual (self 0) receives a signal (or looks out for a signal) about his (self 1’s) ability. The individual then takes a critical stand towards his own desires and abilities and decides what to do with the information about his ability that will either positively or negatively affect his level of self-confidence. The main aim is to receive a benefit, that is, to experience contentment at a later date. However, to successfully achieve contentment, the individual can give himself authentic or inauthentic information about his true ability. When the individual is confident enough to do the task, any positive information about his ability will be “vacuously” beneficial to him and does not change his behavior or motivation to do the task. But if the individual is not skilled enough to do the job, he will make sure to remember correctly the information about his ability because it would be better to be less confident and not to undertake the task. The individual will, however, try to forget the information he receives if it would suppress his self-confidence to such a degree that he will start postponing the job, even though his ability would be high enough to undertake the job successfully. Therefore, whereas in the first two cases, authentic information is always beneficial for the individual, in the last case, the individual is better off being inauthentically informed because otherwise he would procrastinate and demonstrate weakness of will. Bénabou and Tirole thus consider how the individual would behave if he wants to achieve contentment but knows himself to be prone to procrastination. In that case, Penelhum’s individual would assumingly like to achieve self-identity by trying to modify his desire to procrastinate. It thus seems that one of the differences between Penelhum’s and Bénabou and Tirole’s individual is that one tries to integrate different selves whereas the other is some multiple self, changing his identification through time from self 0 who wants to undertake a certain task, to self 1 who has a tendency to procrastinate and not to undertake the task, to self 2, who finally enjoys contentment if self 1 has been successful. However, Penelhum would say that the change in identification is not yet a reason not to consider the individual as the same individual through time. It suffices to have an identity criterion to which those different identifications refer. Penelhum thinks it is the body. In Bénabou and Tirole’s approach it can be considered to be the person’s ability, which is given and remains constant throughout time.2 The key difference between Penelhum’s and Bénabou and Tirole’s conception of the person seems to be the aim the person is striving for. Whereas Bénabou and Tirole’s individual achieves some benefit once he successfully accomplishes some specific task, Penelhum’s individual achieves some benefit once he solves his internal conflicts. The first maxi-

The impact of identity on economics 93 mizes some utility; the latter maximizes his integration or “sense of identity.” Bénabou and Tirole’s individual chooses to act in order not to procrastinate and not in order to resolve his desire to procrastinate. But this is exactly what Penelhum would call an inauthentic response to internal desire-conflicts, which leads to self-alienation rather then self-identity. The difference with the economic agent, furthermore, is that Penelhum’s individual is not only interested in the outcome, but also in the process of getting there. People feel integrated if they are in harmony with their desires and if they achieved harmony in an “authentic” way. This means that the outcome of their actions will affect people’s sense of identity, but that people’s sense of identity will also affect the outcome; the way in which internal conflicts are solved to achieve self-identity will have consequences on people’s behavior. Taking into consideration the importance of self-identity will arguably have effects on social policy measures to the extent they might differ from simple utility maximization under given circumstances. Indeed, not all individuals will want to manipulate their memories in order to achieve the best possible outcome, but would want to overcome their tendency to procrastinate. Hence, we might believe that processes and the way one achieves outcomes matters in a person’s life and that the feeling of self-identity is an important ingredient in terms of what it means to be a person.

Identity and change Over the years, there have been many philosophical contributions trying to explain personal identity by finding the right criterion that allows the person to be re-identified through time. Penelhum proposed bodily continuity as the criterion of identity. But this seems to be an insufficient criterion if identification and self-identity matter. Identity seems to require more than bodily continuity. Indeed, philosopher Pierre Livet (2004) argues that one identity criterion alone is too weak to account for personal identity over time. He thus proposes to consider a combination of different criteria. Furthermore, he argues that a characteristic feature of what it means to be a person is that a person has the capacity to change herself over time. A model of identity must then bring together two a priori mutually exclusive aspects, namely invariance and change. Only the integration of what Livet calls different “identity functions” offers a satisfying account of personal identity. The identity functions that Livet proposes are organic identity, mnemonic identity, identity of personality, and social identity. Together, these identity functions contribute to a continuous identity of the selfsame person over time. Organic identity accounts for the continuity and change of a person’s body. In this body resides all other identity functions. First of all, it contains a person’s mnemonic identity. Mnemonic or psychological identity

94 Miriam Teschl consists in the various memories a person retains of her experiences over time. The identity of personality describes a person’s character or temperament. It can be represented by a list of priorities (or preferences) according to which the person acts. Finally, social identity can be thought to be represented by a list of social positions in various social domains that the person occupies and with which the person identifies herself. Thus, all these four aspects, namely body, memories, personality, and social identity, contribute to a continuous identity of the same person. However, these four criteria or identity functions do not remain the same over time. They change, but not all of them will change at the same time. While some of them change, others will remain unchanged and this thus forms a chain of changed and unchanged identity – criteria that account for a person’s continuity over time. But how can it be explained that a person has the capacity to change, at least to some degree, herself? Livet assumes that a person can “influence” the continuity of her identity by changing particular aspects or “identity functions.” For example, a person might want to change her body by fasting and dieting. She can also willingly influence to some degree the content and quantity of her memories. She could also decide to change her personality or her social identity. However, there must be a reason for a person to change particular identity aspects of herself. Without a reason, no change will be willingly induced. Livet argues that a reason for change will be a certain conflict between her personality and her social identity. Indeed, a person might act either according to her personality or character and follow her personal priority-order. Or she might adopt priorities associated with her social identity or social status. It therefore might happen that consequences of certain actions that are carried out on the basis of this person’s personality or list of priorities “hurt” her social identity, or vice versa. For instance, a person might feel uncomfortable with certain social norms associated with her position in a particular social domain. This distress will be a reason for change. She might thus act on the basis of her personality or priority order and change her social positions (by changing her job, living in a different town, etc.). This means that the person adopts the point of view of the “hurt” identity aspect and tries to change the identity function that is at the origin of the felt uneasiness. Once she changed her social position, she re-established coherence between the different aspects of identity functions and achieved, as Penelhum would say, integration and self-identity. Personal identity thus is the interplay between the different identity functions that guarantees a person’s continuity over time. The principle of change implies that one identity function remains unchanged while being the originator of change in the remaining identity functions. Hence, personal identity has been “decoupled” into two levels, one that guarantees re-identification and one that allows for change. This “decoupling” is the reason why Livet does not have to invoke higher-order systems to under-

The impact of identity on economics 95 stand continuity and change in personal identity. Their difficulty was that they could not explain why and how higher orders change other than by supposing a yet even higher order of preferences or desires. In Livet’s model however, personality and social identity do have the power to influence each other and to change personal identity over time. No higher order comes into play. How does Livet’s model of identity blend with the economic model? It certainly is not applicable to Stigler and Becker’s model, which considers a stable preference ordering for commodities and is thus in opposition with Livet’s approach, which argues that revision of preferences (or identity aspects) is possible. What about Bénabou and Tirole’s model in which the individual tries to modify his memories according to his tendency to procrastinate? We might indeed conceive of a person with a given identity of personality who has the preference or priority to achieve a certain benefit. Knowing her weakness of will, the personality function of the person will try to modify her mnemonic function in order to make sure that she will at a later date complete a specific task that is necessary to achieve the desired outcome. Self 0’s personality identity will therefore distort the information about her ability to assure that self 1 does the action. But even though the mnemonic identity between self 0 and self 1 changed, both temporal phases belong to the same person as the remaining identity functions and especially the identity of personality did not change. However, in a modified version of their model, Bénabou and Tirole introduce the idea that not only the memory of a received information can be modified by self 0, but that at the moment of doing the task, self 1 realizes that self 0 might have modified the information and will not take it at face value. “The resulting structure is that of a game of strategic communication between the individual’s temporal selves” (Bénabou and Tirole 2002: 875), which will decide about the outcome of doing or not doing a specific task. In Livet’s terms, this means that self 0 modifies her mnemonic identity based on a given personality identity. However, self 1 may distort the mnemonic function once more, as she may not take her memories for granted. But on what basis can she do this? One might assume that self 1 modifies her memories again on the basis of her personality. But her personality did not change over time. Presumably, only a change in personality would constitute a good reason to change once again the person’s memories on the basis of her personality. But nothing obvious changed between self 0 and self 1 other than that time has passed. However, if it is the passage of time that makes the personality suddenly change, then this change can be considered as ad hoc and would introduce a discontinuity in the person’s identity. In this case, the change in personality could not be assured by a chain of re-identification of unchanged identities, which were at each time the originator of the respective changes in the other identities. Self 0 and self 1 do not seem to represent two temporal phases of the same individual. It appears that this time we are in fact

96 Miriam Teschl confronted with a multiple self rather than with a coherent and continuous person. Indeed, Bénabou and Tirole’s claim that their model “allows us to unbundle the ‘self that knows’ from the ‘self that does not know’ ” (2002: 885) seems to bring an end to the continuity of personal identity of a selfsame individual. Bénabou and Tirole’s model gives insights into welfare analysis by helping to ascertain when it would be better for an individual to apply a strategy of active self-esteem maintenance and to manipulate memories or to accept who you are (2002: 902) and stick to authentic information. These are certainly interesting aspects to consider and present a new domain of research within economics. However, their policy recommendations are founded on a very specific view of the identity of the individual and on the way the individual changes herself over time to come to terms with her weakness of will. Rather than present an individual who is able to change the source of her internally felt incoherence between different temporal selves that belong to the same person, this model depicts the strategies of competing selves whose only coherence comes about via self-deception by manipulating memory contents. An important aspect of what it means to be a person is an individual’s internal coherence: being capable of changing the self to overcome detrimental desires without self-deception. Social policies should recognize this and enhance exactly this capacity of change.

Conclusion Looking at the philosopher’s way of dealing with questions of personal identity and what it means to be a person helped us to recognize that even economists implicitly engage in a more or less developed model of identity. However, it has also made it clear that formulating explicit models of identity within economics would have consequences, not only on how to model people’s behavior, but also on social policy measures to be based on those specific perspectives of the person taken. From the standard neoclassical utility-maximizer, to Stigler and Becker’s contribution of stable preference orderings over commodities to Bénabou and Tirole’s characterization of a time-inconsistent economic agent, we saw that the economic agent falls short in, first, being an individual who is able to reflect on his values or preferences, and, second, in being an individual who is also concerned about the process of achieving a certain desired outcome and not only in the outcomes themselves. In some cases, we might add a third shortcoming: the economic agent is represented as a multiple self, a self for each desire, who can achieve coherence only by playing strategic games among those selves. These three shortcomings could be considered to be contrary to fundamental beliefs about what we think a person is and how his identity evolves over time. It would therefore be of interest to engage in economic research based on a model of the economic agent that takes account of our beliefs about a person’s identity over time.

The impact of identity on economics 97

Notes 1 For a discussion and critique of Davis’ identity model see Luchini and Teschl (2005). 2 Of course, one could also imagine that the ability changes according to the frequency with which the individual engages in a certain activity. This would add a further layer of difficulty in re-identification.

References Akerlof, G.A. and Kranton, R.E. (2000) “Economics and Identity,” Quarterly Journal of Economics 65 (3): 715–53. Akerlof, G.A. and Kranton, R.E. (2002) “Identity and Schooling: Some Lessons for the Economics of Education,” Journal of Economic Literature 40 (4): 1167–201. Becker, G.S. (1996) Accounting for Tastes, Cambridge, MA: Harvard University Press. Bénabou, R. and Tirole, J. (2002) “Self-Confidence and Personal Motivation,” Quarterly Journal of Economics 117 (3): 871–915. Davis, J.B. (2003) The Theory of the Individual in Economics: Identity and Values, London: Routledge. Frankfurt, H. (1971) “Freedom of the Will and the Concept of a Person,” Journal of Philosophy 68 (1): 5–20. Hirschman, A.O. (1984) “Against Parsimony: Three Easy Ways of Complicating Some Categories of Economic Discourse,” American Economic Review 74 (2): 89–96. Livet, P. (2004) “La Pluralité Cohérente des Notions de l’Identité Personnelle,” Revue de Philosophie Économique 9 (1): 29–57. Luchini, S. and Teschl, M. (2005) “Is There Personal Identity in Economics?” Ethique Economique, 3 (1): available online. Parfit, D. (1986) Reasons and Persons, Oxford: Oxford University Press. Penelhum, T. (1971) “The Importance of Self-identity,” Journal of Philosophy 68 (20): 667–78. Sen, A. (1999) Reason before Identity: The Romanes Lecture, Oxford: Oxford University Press. Sen, A. (2004) “Social Identity,” Revue de Philosophie Économique 9 (1): 7–27. Stigler, G.J. and Becker, G.S. (1977) “De Gustibus Non Est Disputandum,” American Economic Review 67 (2): 76–90.

8

The relationship between consumption and production Conceptualizing well-being inside the household Elizabeth Oughton and Jane Wheelock

This chapter aims to develop the social economics paradigm with respect to the household as an institution.1 Our earlier empirical work on vulnerable household livelihoods has uncovered the facts, both that consumption capabilities may be important in demonstrating fitness to participate in production activities, and that production activities in small business households may provide consumption benefits, for example to those who see themselves as entrepreneurs. This chapter is based upon the presumption that the fundamental economic problem is provisioning the household (Polanyi 1957). It explores the extent to which well-being within the household comprises production as well as consumption elements. In what ways does this help us to understand the interdependencies between the well-being of individuals and of the household? We go about exploring this question through closer examination of the interaction between the instrumental and intrinsic values of work. Certainly well-being incorporates values with respect to the way we (or I) go about being-and-doing-in-the-world, arising from the paid and unpaid work required for a household livelihood. We suggest, then, that finding a space for intrinsic motivation (doing something for its own sake) is an essential component of well-being. In conventional economic terms, consumption is considered a good, providing positive utility, so that spending income becomes a proxy for obtaining well-being. In contrast, involvement in production is a disutility, a sacrifice of well-being. The orthodox calculus assumes that both consumption and production are governed by formal rationality. When people behave by the rules of formal rationality they are calculating the best way of meeting given needs by quantifiable means; they are behaving according to instrumental values (Weber 1968). But if we look at production and consumption in terms of social relations, then we can introduce substantive rationality as an additional analytical tool. As we have said elsewhere, “Substantive rationality is the use of particular values to determine actions” (Wheelock and Oughton 2001: 136). When people act in terms of substantive rationality, there is space for intrinsic values to be included. A broader theoretical perspective views consumption and production holistically, as complementary rather than

Conceptualizing well-being in the household 99 oppositional. Both production and consumption incorporate social relations, so that both can be understood in terms of social relationships; relationships that are embodied in work. This chapter will look at the interconnections between the formal, calculative rationality seen as typical of (alienated) labor market relations, and substantive rationality. In orthodox economic terms, substantive rationality is often seen as the blueprint for relations inside the household (see, for example, Reid 1934; England 1993). We want to suggest that it is more appropriate to investigate the mix of formal and substantive rationality which guides people’s actions in both market and household spheres. One way of exploring what might otherwise be a very abstract discussion is to focus on the ways in which household and individual well-being interact in terms of caring. Caring is a key household activity that can use a varying mix of internal domestic and outsourced market resources, and is of fundamental concern to feminist economics (Folbre 1994; Himmelweit 2000). Examining the creation and distribution of intra-household well-being requires consideration of (gendered) power relations as well as interdependencies of well-being inside the household. In concluding, we aim to contribute to the discussion (e.g., Gasper and van Staveren 2003; Iverson 2003) on constructing a bridge between Sen’s capabilities framework (which provides a basis for evaluating inter-household well-being) and its application to the distribution of intra-household well-being.

What is household provisioning? We begin with household provisioning (or householding) as this is at the heart of the economy and it is central to the social economist’s construction of the economic problem. Stanfield provides a clear exposition of this approach, drawing on Karl Polanyi. Polanyi offers an understanding of market society as the spread of formal market rationality, where the breakdown of social relations “lies in the lethal injury to the institutions in which . . . social existence is embodied” (Polanyi 1957: 157). The function of the economy is to provision society, with the economy as an instituted process which secures social reproduction. J.R. Stanfield (1986) emphasizes the substantive nature of economic activity, as revealed through methods grounded in concrete empirical analysis. This contrasts with both the structuralist approach of Marxism, and the formalism of orthodox economics. For the social economist, it is the provisioning of lives rather than the action of choice that therefore underpins the economic system. Important to our argument is that implicit within this approach is a rejection of the idea of insatiable wants. The economic dynamic of household provisioning is that of sufficiency, rather than efficiency or optimization. The substantive value standard of sufficiency is social reproduction (O’Hara 1995). That is to say, a flourishing society is maintained as a going concern. If social reproduction is the value standard, then distribution

100 Elizabeth Oughton and Jane Wheelock becomes extremely important in understanding economic achievement (Stanfield 1982). In orthodox economic terms, household provisioning processes divide between production and consumption with distribution determined by the market in which a formal rationality is assumed to operate. In contrast, from an institutional economics perspective, production, consumption, and distribution are subject to a mix of substantive and formal rationalities. Let us work through the institutional approach step by step before going on to look at how these work out in practice. Institutionalists conceive of all economic activity – including household provisioning – as taking place within a socio-cultural context. Household provisioning draws on domestic, market, and state resources, nested within this complex environment (Wheelock 1996). Household provisioning includes production for use and not gain. True, markets and money are still significant for the household, but they are not the only form of economic relation. As economic activities within such a provisioning process, production and consumption cannot be meaningfully distinguished. It is, however, important to realize that the socio-cultural context is not fixed and that change may be more or less rapid according to historical period. For example, ideas about appropriate childcare changed quickly in Britain following World War II, encouraged by government policies assuming household income to be based on a male breadwinner wage (Lewis 1984). A significant part of the cultural context, then, is the activity of the state which may also play a direct part in inter-household distribution (as when child benefit is made payable to mothers in person). Household provisioning is a process of building up livelihoods that shape lives. In an earlier study (Oughton et al. 2003), we developed the institutional framework through empirical work exploring livelihood creation in rural microbusiness households in Britain and Norway. There was evidence from the majority of households that the ways in which members wanted to live their lives limited the extent to which economic maximization determined their livelihood choices. Decisions within the Norwegian businesses in particular were guided by values associated with family, place, and tradition rather than with maximizing income.2 This example helps us to understand the complexities of the household as an institution and illustrates household provisioning in the light of substantive rationality. A further example of these complexities is Rhoda Halperin’s analysis of an Appalachian community. She shows that “the coordination, timing and scheduling of different economic activities (production, distribution and consumption) by people who move in and out of differently organised economic institutions” (Halperin 1991: 96) is a key feature of household provisioning.3 Our arguments now turn to focus upon the roles of substantive and formal rationality in household economic provisioning, and the changing relative strengths of these rationalities within the broader institutional

Conceptualizing well-being in the household 101 environment. Let us first consider the orthodox distinction between production and consumption, where production performs the instrumental function of bringing in a household income and consumption involves the using up of that income. In this very simplified model, both production and consumption are subject to formal rationality. Within orthodox economics, this model has been updated with the recognition that unpaid production activities take place within the household and that the distribution of consumption goods within the household is not just based on a calculus of economic gain (Mincer 1962; Becker 1965). Additionally, we may consider work – which in orthodox terms has been regarded as purely instrumental – as an activity which has intrinsic value in its own right and therefore contributes to well-being.4 Social economics takes this further. Figure 8.1 tries to capture the more complex nature of the social relations which we hypothesize underpin household provisioning. There are three elements to this complexity. First, production (P) and consumption (C) are not regarded as simply distinct activities. We represent this in the diagram as a fuzzy and porous boundary. Production may have intrinsic as well as instrumental value, as when a job is enjoyed for its own sake as well as for the payment it generates (Lane 1991). For example, we suspect that recent industrial action for higher pay by university staff in the United Kingdom in part arises from the changing nature of academic work. As academic institutions shift towards a more market-based model of formal rationality, the substantive rationality that applied to people’s understanding and enjoyment of their work is being destroyed. Similarly, in the case of consumption, although in a completely different context, a demonstrated capacity to spend on

Household provisioning, which involves both production (P) and consumption (C) P B (B) The socio-economic context of provisioning

Formal rationality Substantive rationality

Figure 8.1 The social relations of household provisioning.

C

102 Elizabeth Oughton and Jane Wheelock ceremony in south India may be a significant factor in establishing production activities in relation to others (Oughton 1992). The second element is the changing relative significance of the roles that substantive and formal rationalities play in both consumption and production activities. This is most easily illustrated with reference to recent studies of childcare. As women have moved into the labor market, childcare in Britain has become commodified with more use of nurseries, childminders, and nannies. This commodification is supported by policy through the Labour Government’s National Childcare Strategy, introduced in 1998 (Wheelock et al. 2003). Feminist scholars show that over time there appears to be a ratchet effect, so that mothers not working outside the home increasingly compare themselves with mothers in the paid workforce as the norm (Himmelweit and Sigala 2002). Nevertheless, there is substantial empirical work that demonstrates parental preference for grandparenting care of children while mothers are at work (Wheelock and Jones 2002). Arlie Hochschild (1997) goes further to show that, once you have two wage earners in a household, the industrial time of the workplace also constructs domestic time – to the detriment of caring for children. The third element of complexity is that relating to intra-household distribution. We look at this more closely below when we discuss the relationship between individuals and the household.

The cultural context of householding We return now to the larger picture of household provisioning and our concern with its place within the cultural environment. Since household provisioning in Polanyi’s model is as production for use rather than for gain, markets and money are accessories. At the same time, Polanyi (1957) argued that the historical spread of market relations weakens social relations, disembedding economic activity from its social context. Maintaining consumption rather than just maintaining the worker becomes the concern of the market economy, and market relations thereby enter the home, creating invidious demand through constant dissatisfaction (Veblen 1912; Galbraith 1962; Baran and Sweezy 1968; Smart 2003). An example would be the spread of ownership of “white goods” such as refrigerators and washing machines during the 1950s and 1960s, VCRs in the 1980s, and personal computers in the 1990s. For Polanyi, the extension of motivation based on gain is counteracted by the “double movement,” in which social movements act to re-establish social relations with the specific aim of limiting the damaging impact of market imperatives. An example would be the century-long trade union pressure to restrict the working day to eight hours (Figart 2004). Yet, over the past 50 years, capitalist market relations have extended into areas which historically have not been regarded as subject to market rationality. Thus, Le Grand (1997) suggests that as quasi-market relations spread in the public sector, self-interestedly

Conceptualizing well-being in the household 103 “knavish” behavior may substitute for altruistic “knightly” behavior. The effect is that materialism has become a more marked element in social relations. This includes the social relations of household provisioning (Wheelock 1999). In other words, the cultural context is not fixed, and the cultural reference points for household decision-making shift over time. This has important implications for the analysis of household provisioning.5 The cultural context of provisioning is threefold: state, market, and household. These three arenas together form the institutional environment within which livelihood decisions are made. We have already argued (as, for example, does Lane 1991) that work has both intrinsic and instrumental elements. We are therefore able to discuss the decisions that the household makes about provisioning in terms of the decisions it makes about work, with work acting as a numeraire. Decisions about work are made in a context of constrained choice within this institutional environment (Folbre 1994). In some cases, choices are acts of judgment about the content, meaning, and outcome of work. For example, “Jackie,” an entrepreneur whom we met in our earlier empirical research, continued with starting a new business venture despite a previous business going into liquidation; was committed to the community through the employment of disadvantaged workers; and had no regrets about leaving more secure employment for the buzz of being an entrepreneur (Oughton and Wheelock 2003). In other words, the intrinsic enjoyment that Jackie gained from being an entrepreneur meant that she put aside calculations around the advantages she might gain from employment activities. However, as institutional economists emphasize, choices may also be affected by habit and by invidiousness (see, for example, Veblen 1912; Stanfield 1995). So, in a changing cultural context in which social relations are becoming more influenced by material criteria, households may feel it necessary to have two earners in order to meet newly accustomed material standards. It is this acceptance of a culture of “keeping up with the Joneses” that leads to the household provisioning value of “sufficiency” being replaced by one of an economic treadmill (Lane 1991; Schor 1992; Hochschild 1997). The treadmill syndrome begins when income and consumption become the ends, rather than the means of life. The countervailing element of Polanyi’s double movement may thus have a limited impact, as formal economic rationality itself becomes an institutionalized value (Stanfield 1995). Similarly, government policy, in assuming selfish instrumental motivations on the part of state bureaucrats, may undermine or even destroy motivations based on public service (Le Grand 1997). The cultural context for work has thus changed. One of Amartya Sen’s key contributions is that, in the same vein as institutional economists, he acknowledges the significance of the cultural context (Sen 1999). In an earlier article (Oughton and Wheelock 2003), we incorporated insecurity into this cultural context in order to understand its

104 Elizabeth Oughton and Jane Wheelock

Household endowments (A) Transformation 1: Provisioning

Livelihood capabilities (B)

Transformation 2: Being and doing Observed functionings of the household and the individual (C)

Institutional environment affecting household livelihood and processes

Figure 8.2 The relationship between household endowments and individual well-being.

impact on household livelihood capabilities. Again here, as a starting point, we are going to modify Sen’s focus on the individual, and take the household as the unit of analysis. We can now look at the places within Sen’s framework where active household decision-making occurs, which are represented as transformations in Figure 8.2. This diagram summarizes the framework that Sen has developed to understand provisioning processes as a foundation for well-being, where his starting point is the endowments (assets or resources) available to the individual. The diagram assumes that the ways in which the household may use endowments (A) is governed by entitlements mediated by legal and social rights. For example, a British household with an expectant mother may be entitled to maternity benefit, and subsequently to childcare tax credit. These are forms of endowment mediated by government social policy. Thus we have incorporated these processes of establishing entitlements within the institutional (or socio-cultural) environment. Transformation 1 is a provisioning transformation that covers the movement from endowments to livelihood capabilities. Livelihood capabilities represent the potential ways of “being and doing” open to the household and its members. Let us illustrate this transformation with two

Conceptualizing well-being in the household 105 examples. Going back to our study of business livelihoods: Jackie could have either started again as an entrepreneur in a new business, or she could have become an employee once more. Or, in the context of caring, a father may apply for two weeks’ leave for the birth of a child born by caesarean section, since his help in looking after the new baby could be very important. Transformation 2 covers the movement from livelihood capabilities to achieved functionings, that is, the actual choices made in the context of constrained opportunities. Can Jackie live with the financial risk that goes with the enjoyment of being an entrepreneur? The family’s decision on whether the father should take leave will depend on whether the growing household can afford to do without his salary for those two weeks, and get by on paternity pay (if entitled to it). The key problem is how to look at these transformations taking into account relationships within the household.

Distribution of well-being within the household We return, therefore, to look at the distribution of intra-household wellbeing. We have talked about “sufficiency” as the value basis for householding, and shown how this may give way to maximization and efficiency, but we have not yet dealt explicitly with distribution. Stanfield (1982) points out that the institutional emphasis on livelihoods means that the economic provisioning process has the individual as the ultimate beneficiary, but that distribution is vital to social reproduction. Robeyns (2001) shows clearly the strength of ethical individualism in Sen’s capability approach to evaluating well-being. As a feminist, Robeyns discusses how social constraints can affect the ability to convert individual capabilities to achieved functionings. She uses the differences between men and women and their perceived obligations to care for children. So, despite recent legislation providing for paternity leave in Britain, fathers may not avail themselves of these provisions because either workplaces or households may hold on to traditional views that mothers give the best care for newborn babies. However, Deneulin and Stewart (n.d.) criticize this individualist approach, arguing that the “structures of living together” are preconditions for individual agency. As they see it, these “structures of living together must be included as space for evaluating the quality of life, in addition to the evaluation space of individual capabilities” (4). For ethical individualism, such structures of living together are merely instrumental. However, as Deneulin and Stewart assert: “The structures of living together are those structures which belong to a particular historical community, which are the very conditions for individual lives to flourish, and which are irreducible to interpersonal relations and yet bound up with these” (7). Deneulin and Stewart’s insights are crucial in underpinning our

106 Elizabeth Oughton and Jane Wheelock approach to the distribution of production and consumption in the household. As we have argued, production and consumption each have both instrumental and intrinsic value. The rationalities that are drawn on to make decisions about production and consumption are therefore both formal and substantive. These decision-making processes are at the same time constrained and expanded by being made in the context of membership of a household. Let us return to transformation 1 – the transformation from endowments to capabilities – to bring out the significance of membership of a provisioning group. The resources that the household can draw on are more than the sum of resources available to the individual. Moreover, different individuals benefit from endowments arising from their group memberships outside the household. The transformation of individual endowments to household capabilities can benefit from economies of scale and shared rights of ownership or use, for example. Janet Finch (1989), in her study of family obligation, points out that household decision-making with regard to which member takes on care of older parents can depend on which son, daughter, or son/daughter-in-law has fewest labor market commitments, allowing members to continue to earn. Such decisions draw on formal rationality to make choices within the non-market arena of caring. Sen is concerned with the capability set of the individual with respect to the second transformation of livelihood capabilities into observed functionings (transformation 2). Robeyns (2001) advocates the importance of ethical individualism at this point, because this allows us to focus on difference between individuals. She sees this second transformation of capabilities into achieved functionings as reflecting the constraints and opportunities facing individuals: male, female, young, old, able-bodied, or otherwise. Individuals command differing levels of power within the household. In parallel, the institutional norms that surround different individuals constrain their relative as well as their absolute achievement of well-being (Folbre 1994). This argument treats the social relations of the household in instrumental terms, affecting distribution. But there is also intrinsic value in the structures of living together. Living together is an important dimension of the doings and beings of the household, a valued functioning. We suggest, though, that the more formal rationality has imbued decisions with respect to provisioning, the more likely it is that formal rationality will also imbue intra-household relations. For example, in terms of the social reproduction of the household, whether childcare is done within the household, through the market, or from state provision, depends on the mix of formal and substantive rationality adopted by household members. Wheelock and Jones (2002) have shown that, where both parents spend time in paid work in order to enjoy a higher level of income, the household may draw on kin networks – almost always the maternal grandparents – to help with childcare. In other words, grand-

Conceptualizing well-being in the household 107 parents are making a gift of time to their daughter. Grandparents draw on a substantive rationality in giving care, while daughters apply a formal rationality to using their own time in the labor market. But parents are able to make decisions about paid work and childcare that allow them the qualitative benefits of maintaining care within the close kin networks of the family. In this situation, complex social relations produce an outcome based on decisions drawing on both formal and substantive rationalities. The broader literature on the sociology and anthropology of consumption (see Douglas and Isherwood 1980; Fine and Leopold 1993) conceptualizes the importance of consumption for establishing meaning in people’s lives. It is in the second transformation of capabilities into functionings that this meaning is created. Yet again, there are many forces acting on the individual’s decision-making at this point, arising from the cultural context of provisioning the household as discussed above. Individuals make judgments about the meanings and gains from work and their claims in terms of their needs, role, and contribution to the provisioning of the household. But at the same time, invidiousness and habituation undermine active judgment, feeding into an economic treadmill of work and spend.6 The resulting lack of time combines with the perception of unsatisfied wants to obscure consideration of non-material needs. To re-emphasize our earlier argument, the householding value of sufficiency becomes compromised.

Conclusions This chapter has argued that provisioning the household is the fundamental economic problem. Provisioning consists of production, consumption, and distribution. We have shown that production and consumption are difficult to differentiate, and that each has both instrumental and intrinsic value. We have pointed toward empirical evidence to demonstrate this. Individuals, drawing on substantive and formal rationalities, make decisions about their production and consumption activities taking both aspects of value into account. This adds complexity to the analysis for any economist concerned with the ways in which people achieve well-being. Nevertheless, we argue that a holistic approach offers insights in terms of the distribution of paid and unpaid work within and outside the household. Through this we have drawn attention to the porous nature of the boundary between the household and the rest of the social and economic world. This may be one way of moving towards an analysis which integrates behavior within and outside the household. What specifically does our heterodox perspective have to contribute to understandings of well-being inside the household? We draw attention to the changing nature of the institutional environment within which provisioning decisions are taken. This dynamic is a function of the shifting boundary between market and non-market relations, as understood by Karl Polanyi. The positive valuations given to both consumption and

108 Elizabeth Oughton and Jane Wheelock production often encompass, and may arise from, social relations. On the other hand, the material relations of an expanding market are entering the household, and to an extent the instrumental values associated with this expansion may counter intrinsic values. Insofar as social meanings are increasingly derived from commodities, the market sphere incorporates social relations, rather than systematically destroying them as Polanyi argues. But some of these social relations derive from covetousness and habit rather than being positively sought out through an active process of seeking sufficiency. Implicit in Polanyi’s argument is that social embeddedness is an unalloyed good, which may not be the case. Answering the question with which we started the paragraph: one contribution of our perspective is to underline the porous nature of the household boundary. The capabilities framework has been used to understand distribution both with respect to individuals and groups. In this chapter, we have tried to look explicitly at the relationship between the individual and the household group. Entitlements assume that individuals are embedded in a set of social relations and that there is an institutional context within which entitlements are transformed into capabilities. Thus, a second contribution we make is to focus on the social relations of the household when we are exploring the transformations between household endowments and individual well-being. We have found commonalities between the capabilities framework and an instititutionalist approach to household behavior, in particular through the understanding of both the instrumental and the intrinsic values achieved in household provisioning. However, the capabilities framework does not satisfactorily deal with the positive aspects that the individual gains from being part of a group which lives together. Here we find ourselves more in agreement with the arguments of Deneulin and Stewart than with those of Robeyns. We find taking the capabilities and the institutional approach together analytically useful. We think that we have shown, for example, that this mixed approach is helpful in facilitating in-depth description. We believe that it can be operationalized by looking at particular elements of individual and household behavior. There is a remaining problem. How can this dual approach be operationalized in a way that is useful for the development of social policy?

Notes 1 Stanfield (1995) sees institutional and social economics as synonymous. For both, the wants of the individual and the resources available are part of the variables that need to be explained by economics. Human wants and technology change by virtue of influences that are endogenous to the human social system and theoretical and empirical examination of the processes by which these changes occur is essential to the comprehension of any human group. 2 This pattern was also observed amongst urban microbusiness households (Baines and Wheelock 1998)

Conceptualizing well-being in the household 109 3 Halperin (1991) argues that householding (household provisioning) is not necessarily contained with the household, but includes other close (primarily kin) individuals. We consider that Halperin adopts an overly rigid definition of the household. We have argued elsewhere that the boundaries of the household are fuzzy and porous (Wheelock et al. 2003). Our more flexible definition encompasses what Halperin refers to as the householding “group.” 4 Marx (1973), in the Economic and Philosophic Manuscripts of 1844, sees work as the essence of human nature. 5 Smart (2003) argues that an increasing proportion of production is devoted to cultivating demand and increasing consumption. 6 Some possible evidence for this is that in Britain over the last ten years private borrowing has doubled and now stands at £4,000 per head (£38,000 when mortgage debt is included). The total of private borrowing is higher than the level of total government borrowing. Servicing such levels of debt even at current low interest rates in addition to provisioning day-to-day needs implies long hours of paid work.

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110 Elizabeth Oughton and Jane Wheelock Hochschild, A.R. (1997) The Time Bind: When Work Becomes Home and Home Becomes Work, New York, NY: Metropolitan/Henry Holt. Iverson, V. (2003) “Intra-household Inequality: A Challenge for the Capability Approach?,” Feminist Economics 9 (2–3): 93–115. Lane, R.E. (1991) The Market Experience, Cambridge: Cambridge University Press. Le Grand, J. (1997) “Knights, Knaves or Pawns? Human Behaviour and Social Policy,” Journal of Social Policy 26 (2): 149–69. Lewis, J. (1984) Women in England 1870–1950, Brighton: Wheatsheaf. Marx, K. (1973) Economic and Philosophic Manuscripts of 1844, London: Lawrence and Wishart. Mincer, J. (1962) “Labor Force Participation of Married Women: A Study of Labor Supply,” in Aspects of Labor Economics: A Conference of the Universities (A Report of the National Bureau of Economic Research), Princeton, NJ: Princeton University Press. O’Hara, P. (1995) “Household Labor, the Family and Macroeconomic Stability in the US 1940s–1990s,” Review of Social Economy 53 (1): 89–120. Oughton, E.A. (1992) Vulnerability, Seasonality and Public Distribution System in Western India, University of Newcastle upon Tyne, unpublished Ph.D. Oughton, E. and Wheelock, J. (2003) “A Capabilities Approach to Sustainable Household Livelihoods,” Review of Social Economy 61 (1): 1–22. Oughton, E., Wheelock, J., and Baines, S. (2003) “Micro-businesses and Social Inclusion in Rural Households: A Comparative Analysis,” Sociologica Ruralis 43 (4): 331–48. Polanyi, K. (1957) The Great Transformation: The Political and Economic Origins of Our Time, Boston, MA: Beacon Press. Reid, M. (1934) The Economics of Household Production, New York, NY: John Wiley and Sons. Robeyns, I. (2001) “Sen’s Capability Approach and Feminist Concerns,” available: www.st-edmunds.cam.ac.uk/vhi/sen/papers/robeyns.pdf. Schor, J. (1992) The Overworked American: The Unexpected Decline of Leisure, New York, NY: Basic Books. Sen, A. (1999) Development as Freedom, New York, NY: Knopf. Smart, B. (2003) Economy, Culture and Society: A Sociological Critique of Neo-liberalism, Buckingham: Open University Press. Stanfield, J.R. (1982) “Towards a Value Standard in Economics,” Economic Forum 13 (Fall): 67–85. Stanfield, J.R. (1986) The Economic Thought of Karl Polanyi: Lives and Livelihoods, New York, NY: St. Martins Press. Stanfield, J.R. (1995) Economics, Power and Culture: Essays in the Development of Radical Institutionalism, Basingstoke: Macmillan. Veblen, T. (1912) The Theory of the Leisure Class, London: Macmillan. Weber, M. (1968) Economy and Society, New York, NY: Bedminster Press. Wheelock, J. (1996) “People and Households as Economic Agents,” in Maureen Mackintosh (ed.), Economics and Changing Economies, London: International Thomson Business Press, pp 79–104. Wheelock, J. (1999) “Who Dreams of Failure? Insecurity in Modern Capitalism,” in John Vail, Jane Wheelock, and Michael J. Hill (eds), Insecure Times: Living with Insecurity in Contemporary Society, London: Routledge, pp. 23–40.

Conceptualizing well-being in the household 111 Wheelock, J. and Jones, K. (2002) “ ‘Grandparents Are the Next Best Thing’: Informal Childcare for Working Parents in Urban Britain,” Journal of Social Policy 31 (3): 441–63. Wheelock, J. and Oughton, E. (2001) “The Household in the Economy,” in Susan Himmelweit, Roberto Simonetti, and Andrew Trigg (eds), Microeconomics: Neoclassical and Institutionalist Perspectives on Economic Behaviour, London: Thomson Learning, pp. 113–41. Wheelock, J., Oughton, E., and Baines, S. (2003) “Getting By with a Little Help from Your Family: Toward a Policy-relevant Model of the Household,” Feminist Economics 9 (1): 19–45.

9

Social economy as social science and practice Historical perspectives on France Danièle Demoustier and Damien Rousselière

Like “économie,” which in French means both economics and economy, the term “social economy” [économie sociale] has multiple meanings (Vienney 1994). First, cooperatives, mutual societies, and associations or voluntary organizations recognize themselves as consisting in a social economy. Such organizations are found in almost all economic sectors. A social economy enterprise’s primary purpose is to satisfy the common needs of the members, not to make a profit or provide a return on capital. Social economy, rather, is based on voluntary and open membership; equal voting rights (one member, one vote); autonomy; and independence (Vienney 1995; Demoustier 2003). Social, economic, political, and cultural changes affect such organizations over time. This chapter explores the history of the constitution of “social economy” as a social science and as a field of analysis, regrouping under this term certain social practices. This process culminates in the 1981 entry into French law of a definition of a new type of company: a particular form of a non-capitalist or a-capitalist company. An historical perspective shows the close yet ambivalent relation between these two main definitions of social economy (Chomel 1995). In social sciences, social reconfigurations are always accompanied by vast re-interpretative undertakings of hybridization and conceptual innovation that set out to capture the ongoing processes (Rémond 1987). This ambiguity can also be found in the dual activity of social economists (such as Buchez, Proudhon, Marx, Walras, or Gide) who were also involved in practical action.

Social economy and three ideological traditions In the early nineteenth century, the term social economy was used in diverse ways within three ideological traditions: liberal, Christian, and socialist (Desroche 1983). These traditions nonetheless had some common objectives: “social economy means, no more no less, another way to do political economy” (Gueslin 1998: 1). We will discuss each tradition in turn.

Social economy as social science and practice 113 The liberal tradition: social economy as an enhancement of political economy In the liberal tradition, Charles Dunoyer, in Treatise on Social Economy (1830), defines productive means of wealth as “the funds of personal faculties, refuting the restrictive analysis of the production of wealth of classical economists such as Say or Smith” (Dunoyer 1830: 551). This idea of the construction of social economy as an extension of political economy by a broadening of its field of analysis to “all that is useful, responding to needs and desires,” taking away from it all naturalist determination and all moral content, draws mainly on the utilitarian approach of John Stuart Mill. The latter had already put forth the importance of “productive consumption” (health, education) that, in satisfying the most important needs of men, contributes at the same time to collective enrichment (Mill 1848). For these liberals, the “immaterial functions” must reinforce liberty and morality. In fact, for Dunoyer they integrate the sources of health, wellbeing, and the healthy life that he perceives as stimulants for intelligence and training, as well as the learning of mores and “good civil habits” (Dunoyer 1830: 88). These ideas come close to those of Thomas Malthus, since “the laboring classes must raise themselves up through work, foresight, and morality” (Dunoyer 1830: 470). Like liberals such as Mill, Dunoyer therefore favors free and voluntary association between workers and bosses (see also Bastiat 1864; Clark and Elliott 2001). Such an association is perceived as being in the interest of all, contributing to social progress through the moralization of and control over the working classes: “The associate escapes the seduction of cafés and pubs. While living better, he [the worker] makes savings and the attraction of savings, once begun, is well-known” (Casimir-Périer 1864: 28). In relation to these liberal traditions, social economy as social practice is constituted around patronage, by the establishment of institutions of mutual benefit and the creation of a social environment deemed favorable (housing, collective gardens, childcare services, etc.), thus paternalistically attempting to better living conditions. With the import of the Italian model of People’s Banks (Banques Populaires), it is in the domain of credit cooperation that the liberals bring a real contribution to the constitution of a sector of social economy (Gueslin 1998: 138).

The Christian tradition: critique of political economy and the right to work In the social-Christian tradition of the followers of Henri Saint-Simon, associationnistes such as Philippe Buchez, the legal scholar Auguste Ott, and the republican journalist Louis Blanc defend the idea of an association as the guarantee of the right to work in the struggle against pauperism. Competition is denounced as harmful.

114 Danièle Demoustier and Damien Rousselière Setting itself against the “English principle” of the separation of sciences, which consists of “political economy as having to constitute itself as the science of wealth in order to place itself outside the entirety of human knowledge,” Ott (1851: 5) denounces the assimilation of physical laws to the “moral world.” Physical forces are predetermined, whereas man is free; their effects are independent of each other, whereas the actions of men living in communities are interdependent. The self-regulation of the market should be replaced by social provision. Louis Blanc equally denounces the systematic search for the lowering of prices: “a good deal [a cheap price] profits those who consume only in throwing the seed of the most ruinous anarchy amongst those who produce” (1847: 77). Social economy is a science, which like all science must not only differentiate between its object and its goal, but the latter must also be subordinate to a more general principle of justice: “to organize work towards the most perfect preservation of society and the individual and of the achievement of liberty, equality and fraternity” (Ott 1851: 20). Social economy thus conceived, following Buchez, leaves great room for association, seen as “the key word of the problem posed to modern civilization” (1851: 132). Buchez (1831: 31–6), in fact, promised “the association of work and not that of capital” by “the constitution of a common social capital which would be inalienable and indivisible,” as “the means for improving the condition of city workers.” This association belongs to the larger general program of social reform through the constitution of ad hoc institutions. Buchez, like Ott, expressed the need for a special bank destined to give credit to associations. Endowed by the state, it could draw upon public savings. Blanc widens this role of the state, seen as a “Bank for the poor” (1847: 14), which, qua financer, would have to intervene as a regulator as well in order to put technical progress at the service of society. Buchez’s theses prevailed over those of Blanc in the interim government of the 1848 Revolution. Although Blanc was the president of the Luxembourg Commission (as a substitute for a Labor Minister called for by the workers), the model of national workshops for the unemployed took priority over social workshops for workers of strategic industries (Sewell 1979). After their closing in June 1848, the National Assembly proclaimed the right to association and supported the workers’ associations by authorizing a credit of three million francs. This credit would back the opening of 300 production associations, a certain number of which gathered bosses and workers from the workshops. But, at the same time, the state restricted them from federating, before entirely abrogating the right of association when the Second Republic became the Second French Empire with the anti-parliamentary constitution of Napoleon III. Many projects not only to reduce competition between associations but also to support new creations, and to escape the constraints of competition between producers thereafter, were destined to fail (Desroche 1981).

Social economy as social science and practice 115 The socialist tradition: social economy and scientific socialism The movement of “scientific” socialism examined the concrete structures of cooperation, differentiating associative enterprise from political associations. A debate opposed Karl Marx and Pierre-Joseph Proudhon regarding the emancipatory power of the labor association (Lowit 1962; Jossa 2005). For Marx, only political association (like The International Workingmen’s Association), feeding the political struggle, can reach this end. Marx’s (1864, 1894) references to “the political economy of labor” salutes the cooperative movement as a “great victory over the political economy of property,” (1864: 1469) but puts forth two principal series of criticisms which limit the extent of this victory. On the one hand, cooperation lacks an intrinsic dynamic likely to energize it own expansion. Limited to sporadic and occasional attempts, the cooperative movement is powerless to transform capitalism on its own or to “arrest the growth in geometrical progression of monopoly.” Moreover, cooperative action does not constitute an efficient means for “freeing the masses, nor even for perceptibly lightening the burden of their misery” (Marx 1864: 1469). On the other hand, the cooperatives that are formed in capitalist society cannot attain or even claim to be the most definitive form of associated work: “they naturally reproduce, and must reproduce, everywhere in their actual organization all the shortcomings of the prevailing system” (Marx 1894: 304). They should be considered as “transitional forms from the capitalist mode of production to the associated one” (Marx 1894: 304). Nonetheless, these two critical reservations do not strip the cooperative of its importance: “the idea of cooperation is intimately linked, in Marx’s point of view, with the end of such action: the establishment of ‘a republican system of association of free and equal producers’ ” (Lowit 1962: 84). Proudhon (1846) disagrees: the constitution of a social economy is “the accord of reason and social practice”(54), the end of which is the safeguard of human personality (Neurisse 1983). Proudhon’s view is based on a profound conception of “justice,” balancing social and physical forces. He denounces “the right of escheat” related to capitalist property, allowing the owner the capacity to extract the value that collective labor creates. By eliminating useless intermediaries, the “mutual society” represents both the interests of consumers and producers. Divergence of interests would also be allayed by industrial-agricultural federations and agreements with consumers that together form “a productionconsumption union.” The French workers’ movement struggled with these tensions and in its meetings from 1876 to 1879 distanced itself progressively from Proudhon’s theses in favor of Marxist theories as spread by Jules Guesde, challenging labor cooperation while cautiously promoting consumer cooperation. In 1879, criticisms became even more virulent. Isidore Finance (1879: 329), for instance, denounced cooperation in general (“nothing but a name: the

116 Danièle Demoustier and Damien Rousselière largest divisor of the working class”). At the end of the century, Jean Jaurès (1903: 37) tried to reconcile political, union, and cooperative action, for “the democratic state is the supreme cooperation towards which the other cooperatives stretch as if as towards their limit.” But, despite the experiments of the stock exchange of socialist cooperatives and the Albi Workers’ Glassworks in close relation with the main French trade union Confédération Générale du Travail, the rupture with the union movement is already complete by 1879. As the workers’ congresses saw the victory of Guesde’s Parti Ouvrier Français, trade unions became the main means of workers’ action. This was happening while the Republicans, following the liberals of the Second Empire, were using the cooperation as “a bulwark against Socialism.” The turn of the nineteenth-to-twentieth century thus is an important moment for social economy (Vienney 2000). It is from this point onwards that “academic social economy” is established, following the Walras/Gide debate and the contributions of Fauquet, as we will see in the subsequent section.

Social economy between morality and science: the Walras/Gide debate In 1896, Léon Walras defined l’économie sociale as the voluntary distribution of wealth, based on the criteria of the “just,” thus differentiating it from the natural production through pure economics. The popular cooperative associations participating in the production of wealth figure in applied economics (see Demoustier 1988). The association movement does not directly respond to the problem of social justice, but promotes free and voluntary association privately initiated. In encouraging the entry of workers to the owners’ class, workingclass associations combine economic progress with social and moral progress, since they “fulfill their great economic role which is not to get rid of capital, but to make everyone a capitalist, as well as their no less important moral role which is to introduce democracy to the mechanism of production and to clear its way to access business, the veritable school of active politics” (Walras 1898: 261). One must thus see “in cooperative association the last word, the supreme effort and the definitive success of individual initiative” (Walras 1896: 21). Charles Gide differentiates himself from Léon Walras, an author with whom he corresponded. Gide distinguishes between pure economics – only to explain what is – and social economics – to study voluntary relationships that men form with each other so as to improve their living condition (Gide 1926: 3). For social economics as normative economics, Gide defines a cooperative as the framework for the reconciliation of divergent interests in the name of an ulterior principle of justice (the just price theory), in line with the theory of justice developed by Gabriel Tarde. The

Social economy as social science and practice 117 cooperative thus allows the transformation of conflicts between men into conflicts within each man, laying the basis for a peaceful resolution of conflicts and solidarity that Gide does not observe but desires. “It is the best form of character building to have to argue the pros and cons in one’s own conscience” (Gide 1924: 36). The report of the sixth division on “social economy” of the Paris World’s Fair of 1900 was written by Gide (1905). After having suggested in the first edition that three rankings of institutions of social economy were possible: according to their characteristics, their origins, and their goals, he retains only the last two. Thus, the institutions of social economy are divided between “all the forms of free association . . . of state intervention . . . of proprietary institutions that participate in four major objectives: raising salaries, the rise in comfort and well-being, security for tomorrow and independence” (10–12). In the different editions of his report, Gide progressively abandons the term social economy, preferring “institutions of social progress” and giving up on an expression “the indeterminacy of which could well lead to misunderstanding.”

From social economy to cooperative economy: on Fauquet’s contribution The crisis of the 1930s rehabilitated the cooperative, which benefitted from access to public markets and took hold strongly in the domains of consumption and agriculture. Nevertheless, evaluation of the contribution of the cooperative was not unambiguous, and its role in economic and political transformations not beyond discussion. Holding the chair in cooperation at the International Labor Organization, Georges Fauquet followed Gide’s approach in aiming to integrate “man as a whole,” into his system: the capitalist and market-based economy . . . has gradually detached the economic from the social and, thus, giving birth to hard realities that served as a model for the abstractions of economists. Conversely, the cooperative institutions, by restituting to the associates the function that the salesman had taken away, reintegrate the economic into the social. (Fauquet 1935: 44) Cooperatives are distinguished by their sectors of activity and, above all, the nature of their membership: workers’ cooperatives and consumers’ cooperatives for the emancipation of the working class; and farmers’ cooperatives. Despite the distinctions, Fauquet advocated the unity of the cooperative in showing that, on the one hand, the cooperative is a business at the service of its members and not a firm out to profit its shareholders, and, on the other hand, an associate is both a member of the cooperative

118 Danièle Demoustier and Damien Rousselière association and a user of the cooperative enterprise. Herein lies the source of the rules of indivisible resources (the basis of solidarity between generations), of equality between the members (the basis of democratic functioning), and of proportionality in the individual redistribution of surplus (a pro rata on activity). Distinguishing himself from the coopératisme of the Rochdale pioneers and from Gide of the cooperative period, Fauquet proposes an argument in terms of sectors. The cooperative sector shares economic activity with the private/capitalist sector (small, agricultural, or artisanal businesses) and the public sector. Though it is coextensive to the private sector, the cooperative sector maintains relations with these two sectors of a different kind: with the capitalist sector, there are relations of competition and struggle which do not however exclude commercial relations at the heart of national economies or on the international market; with the public sector: complex and variable relations following the degree of development of cooperative institutions and the political and economic orientation of the state. (Fauquet 1935: 36) Fauquet came to be considered as one of the founders of the cooperative movement by the International Cooperative Alliance (Watkins 1986). His theses were institutionalized in the post-war period. The law of 1947 marked the unity of the cooperative enterprise, beyond specific statuses, but it took until 1968 for different cooperative movements to unite and form the French National Association of Cooperative Federations. Consumers’ cooperatives, farmers’ cooperatives, and new credit cooperatives developed in defense of small groups of farmers and consumers. Parallel to the integration of cooperatives – along with mutual societies and associations – in economic, industrial and social policies, the term “social economy” progressively designates a field of activity and categories of actors, the study of which necessitates an interdisciplinary combination of law, economics, and sociology due to their institutional idiosyncrasies (Vienney 2000). This process intensifies in the late twentieth century.

Transformations of social economy: from the relations with economics to an economic sociology? Since the 1970s, socioeconomic conditions have changed and transformed the context in which the cooperative movement developed. Critics of industrial public policies became increasingly outspoken, clearing the path for the liberalization of prices, job markets, and capital. Cooperatives within highly competitive fields felt increasingly constrained by pressures generated within the capitalist sector; and rising numbers of people

Social economy as social science and practice 119 endured economic and social exclusion. Renewed attention was given to the nature of cooperative organizations or the so-called social economy, including from mainstream economics and economic sociology points of view. The nonprofit sector: a mainstream economics vision of social economy In the 1970s, national representatives of cooperatives, having a sense of imminent changes, joined the directors of mutual societies and the associations in social work and education to create a common federation. Sociologist Henri Desroche was called upon to discuss the denomination of their organizations, by then referred to as nonprofit organizations. Desroche insisted upon not adopting a negative definition; he proposed the term “enterprises of social economy” to designate “an associative, participative and united economy” (Desroche 1983: 230). This definition can incorporate “institutional” social economy but also an “emerging” social economy. Desroche thus redefines the cooperative practice as a “voluntary practice of self managed socializations” (1981: 3) close to self-help, mutual aid, and self-reliance. With the abolition of the social economy unit by the European Commission, some try to redefine social economy as a nonprofit sector in line with mainstream economics (Archambault 1997). This approach considers that all associations have an economic activity, and assimilates all the nonprofit-making associations to non-commercial associations. Inspiring projects such as the inclusion of “a satellite account” of social economy in the national accounts, this framework separates or artificially dissembles the larger part of French cooperatives and mutual societies from the rest of the economy. Foundations whose paradoxical particularity is to pursue social goals with entirely financial means are included. Many theorists, as noted by Favereau 2002; Hodgson 2002, thus rely on neoclassical economic analysis to explain the growing role of these organizations in a mixed market economy. For instance, the nonprofit sector is seen as a group of organizations taking charge of “public goods” with a limited audience. The constraint of non-distribution of profit weakens their incentives to maximize profit at consumers’ expense. Nonprofit organizations may, however, inspire consumer confidence, especially when quality is not observable prior to the purchase (Archambault 1997; Enjolras 2000). Social economy and alternative economy The ideas of Michel Rocard, the socialist minister of Planning and Economic Development in 1981, rather than those of Jacques Delors (architect of the “common market” that preceded the European Union) have

120 Danièle Demoustier and Damien Rousselière been at the heart of the socialist party from its 1977 congress onwards. Social economy becomes the mixed economy, the objective of which is industrial modernization, or the workers’ cooperative, playing a role in the creation and revival of small and midsize enterprises. Also, the creation of the DIES (Délégation interministérielle à l’innovation sociale et à l’économie sociale) in 1981 constitutes a consecration of “institutionalized” social economy, rejoining “the cooperatives, mutual societies, and . . . the associations whose activities of production assimilate them to these bodies” (Decree no. 81-1125 of 15 December 1981). Vienney (1994, 1995) formalized the cooperative (later extended to all of the social economy) in legal-economic theoretical terms. The unity of the field comes from “a correspondence between the rules of certain institutions, the place of their activities in the economy, and the identity of actors that are their participating members” (Vienney 1994: 71). Taking an institutionalist approach, following Fauquet, and close to the Regulation School (André and Delorme 1983), Vienney points out how social economy is “an ensemble of activities of production of goods and services, which functions according to specific social rules” (1994: 72). The difficulty of this definition of social economy results from the fact that one is faced with a set of institutions in renewal; some organizations are losing their initial characteristics whereas others are acquiring them (Vienney 1994: 117). By analyzing the relation between their own rules and those of the socioeconomic system – of which they are a part – we can understand the formation and the transformation of these organizations. Thus, following this analysis, the organizations of social economy play a role in crisis regulation as the “post-Keynesian solution” (Vienney 1995), constraining the self-oriented interest of parties with a view to stimulate social utility. Besides this formalized social economy, there is the tentative establishment (with lesser success in France than in Germany) of a movement promoting social change and an alternative economy. These currents are successively fed by the journals Autogestions and then Autrement.1 A critique of institutions inspired by the work of Ivan Illich (1973), of the hierarchy in and outside work, the goals of the alternative are diverse: reflection on product utility, from automobiles to weapons; on technologies – soft versus hard; on alternative (medical) treatment; on alternative education. On the organization of work, it takes up the reflection of former European Union chairman Jacques Delors favoring small-sized units, worker management, that foster the warmth of human relations. The founder of this movement, Aline Archimbaud (1995: 68), characterizes this alternative economy as “a radical form of social economy . . . for the period of concomitant crises of productivism and salaried society,” due to the unacceptable effects of the mode of accumulation on the environment and society. But this alternative economy is stuck between survival strategies (by necessity) and the refusal of dominant norms (by choice).

Social economy as social science and practice 121 While the social priority goes from social change to the quest for new jobs in a service economy, the movement does not find durable modes for structuring itself, except in alternative, solidarity-based finance. The solidarity-based economy: from social economics to economic sociology From the beginning of the 1990s, voluntarist actions and policies tried to decrease unemployment by supporting the development of new services likely to respond both to the demand for jobs and to the demand for services (Demoustier 2001). The promotion of community-based services, called services solidaires, were attempts to create both jobs and necessary services in certain areas of activity such as youth centers, social integration enterprises, childcare services, voluntary organizations for environmental protection, neighborhood restaurants, and musical cafés (Laville 1992), supported by the creation of specialized agencies (such as the Agence de Développement des Services de Proximité close to the CRIDA – Centre de recherche et d’information sur la démocratie et l’autonomie). This collective of alternative and solidarity-based enterprises complemented fair trade practices (to rebuild reciprocal links between consumers in industrialized countries and producers in developing countries) and tried to structure itself as a national committee. Sociologist Jean-François Draperi underscored a new model for a social economy: charitable rather than egalitarian, less alternative than integrated into civil society as a reaction to the power of a “predominant” economy producing exclusion and inequality. The reference is not the cooperative but the working project, the social enterprise: “the actual meeting of two practical traditions: social welfare and social economy” (Draperi 2003: 49; see also Borzaga et al. 2001). A theory to differentiate these processes comes from the work of the CRIDA. Jean-Louis Laville refers to Karl Polanyi’s approach (1944) that identifies four economic patterns (free market, redistribution, reciprocity, and domestic administration), to demand the reinsertion of the economic into the social. New forms of companies should be promoted, characterized by “reciprocal tendencies, economic hybridization and democratization brought on by users and the institutional change” (Laville 1994: 168). Supporting community-based services allows for new forms of regulation to be put into place on the local level and permits the establishment of “community groups, intermediaries between the anonymous collectivity and the family, . . . places likely to foster real and free solidarity, to which many people aspire” (Laville 1992: 208). Faced with the crisis of abstract solidarity, the emergence of new concrete solidarity thus prevents the return to “inherited” solidarity of the family. In the debates on the relationship between social economy and solidarity-based economy, the idea of the “redundancy” of social economy

122 Danièle Demoustier and Damien Rousselière is heavily discussed. The main French journal on social economy (the Revue des études cooperatives founded by Gide in 1921 to become the Revue internationale de l’économie sociale in 1986) has staged these discussions. As an example: “The model of social economy necessarily meets the model of solidarity-based economy through its common values of solidarity, cooperation, democratic or participative management, through its rules of ‘a-capitalism’ ” (Collombon and Parodi 1997: 60). The journal established points of convergence between the different dynamics around the recognition of social and solidarity-based economy, although the theoretical construction of this alliance is yet to be done (Espagne 2002).

Conclusion The historical approach adopted in this paper shows the complex relation of social economy to the standard theory of economics as well as the different views of authors contributing to discussions about the social economy in France. Social economy as practice is mainly recognized either by its objectives – health and education, the right to work, social progress in the nineteenth century, innovation and modernization, local development in the 1970s and the 1980s, social relations, and the creation of jobs and activities in the 1990s; by its institutional frameworks – patronage, association, social rights – followed by statutory frameworks – cooperatives, mutual societies and associations – although the statutes are bound to evolve as a function of the insertion of social economy into its environment; or by its modus operandi, that is to say their internal characteristics. Empirical evidence from the description of the large-scale success story of Mondragon Corporacion Cooperativa in Spain (Forcadell 2005), the growth of nonprofit organizations in the cultural sector (Greffe 2002), and broader cross-country investigations such as the World Values Survey (Dekker and Van den Broek 1998; Paxton 2002) support the social economic arguments developed here. In addition, two theoretical debates relate closely to the discussion here and present a challenge to the mainstream view in economics. The first one questions the nature of the firm: why are there so many kinds of organizations (Williamson 1999: 30)? As documented by some economists (Weisbrod 1998), organizations with different objectives than for-profit objectives are characteristic of any modern society, “no matter how strong the pledged and actual allegiance to the ideology of the market” (Arrow 1998). The second questions the nature of the economy, and particularly its relation to society, as we can notice different relations between economy and society (Polanyi 1944; Dolfsma et al. 2005); can the social economy be viewed as the social capital of a society, contributing to human development and a democracy-based society (Paxton 2002)? Thus, the ambivalent and diverse character of social economy examines research in social science on a more general level. It points out that the

Social economy as social science and practice 123 comprehension of economic, political, and social phenomena calls for a dialogue between theory and practice, between science, ethics, and morality. As new actors are appearing, new activities are structuring themselves according to the rules of social economy, and older forms are being reexamined in their process of transformation; they are questioned by the tensions with the public and capitalist logics (Vienney 1995). Social economy is undergoing a renaissance and a transformation, but it is also consolidating itself, contrary to mainstream economics theses that confine it to a strictly palliative or transitory role.

Note 1 Autogestions thus praises Yugoslav, Israeli, and Algerian workers managing experiences, a favorite theme of the PSU (Parti Socialiste Unifié – a leftist party) and the journal Critique Socialiste whereas Autrement aims to be the organ of expression of extra-labor (hors travail) movements inspired by Illich and analyzed by Alain Touraine and the journal Esprit.

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10 France and Québec The progressive visions embodied in different social economy traditions Carole Biewener In both France and Québec, Canada, there are social economy traditions that look beyond the “state” and the for-profit, commodity sectors to community economic development and the “third sector” to provide an alternative arena for economic activity and progressive social change. This chapter provides a critical assessment of the progressive visions embodied in these social economy traditions by focusing on two important books that are representative of the two different (though related) traditions: Alain Lipietz’s For the Third Sector: A Solidarity and Social Economy (2001) [Pour le Tiers Secteur. L’économie Sociale et Solidaire] and Louis Favreau’s and Benoît Lévesque’s Community Economic Development: Social Economy and Intervention (1999) [Développement Économique Communautaire. Économie Sociale et Intervention].1 I consider the progressive vision of these traditions by comparing how each of the texts define the boundaries, contours, and character of what comprises the social economy and by considering how the social economy is understood in relation to the “state” and the “commodity sector.” In both the French and Québécois contexts it is the “crisis of the Welfare State” and of market-oriented production that is used to explain the recent growth of the social economy and/or third sector activity. This is often put in terms of “the crisis of Fordism.” Thus, the social economy, the third-sector, and community economic development are positioned relative to the failures of the welfare state and left social democratic practice, as well as relative to the inadequacies of profit-oriented commodity production. The public and commodity sectors are seen as unable to produce enough jobs and/or to provide for the full range of social needs (Lipietz 2001: 17). The social economy and/or third sector is, therefore, called upon to respond to the unresolved problems of the welfare state and commodity production by “filling in the gaps” left by the crisis. One of the main contentions in this chapter is that defining the social economy and/or third sector in relation to the gaps, inadequacies, and crises of the commodity and public sectors lends to both of these perspectives certain strengths and certain weaknesses or limitations. To put it broadly, I argue that both traditions offer significant, exciting, and vibrant

Visions in social economy traditions 127 economic alternatives that encompass an important range of social and economic processes and that offer important alternative criteria for shaping economic activity. Indeed, my interest in these social economy traditions is fed in large part by my own work within what many of us have come to call a “postmodern Marxist-feminist perspective” that is interested in the radical project of proliferating differences which enable alternative class, gender, sexual, and racial ways of being. In the realm of economics, this is a project to enable “economic difference” in a manner that activates people as creative economic subjects and that fosters nonexploitative economic activity (see Gibson-Graham 1996, 2003; Biewener 1999, 2001; Community Economies Collective 2001). Therefore, one aspect of the social economy projects in both France and Québec that I find to be of particular importance is their understanding of the economy as a diverse space populated by a wide range of practices and economic entities. This is a refreshing contrast to the all too present representations of the economy that characterize it in monolithic, homogenous, and ubiquitous market capitalism terms (whether in the neoclassical economic perspective or in the classical Marxian one). Indeed, insofar as the social economy perspectives develop an analysis that highlights the diversity of economic activity, they contribute to understanding the social conditions that enable the creation of nonexploitative, noncapitalist economic processes and thereby foster alternative progressive forms of economic activity. Yet, at the same time, both projects leave a vast social terrain relatively uncontested and seemingly not in need of significant progressive social change. As I argue in the following pages, in working to legitimate and enable “social economy” and/or “third sector” activity, the French tradition does not develop a progressive agenda for the commodity and public sectors; whereas the Québécois tradition comes to define itself in terms of a community’s local democratic control over resources without also developing an agenda to redistribute resources on a broader social scale.

France and the movement for a third sector First, let us consider the French tradition as represented by Alain Lipietz’s book, For the Third Sector: A Solidarity and Social Economy. Published in 2001, this book was written in large part as a result of a charge by the French Minister of Employment and Solidarity to create a statute for a new category of enterprises – those with a “social goal.” This charge indicates clearly how institutionalized “social economy” issues are in France. It also marks the importance of the social economy as a vibrant political project for many. Thus, much of Lipietz’s book is concerned with justifying the special fiscal and regulatory privileges enjoyed by existing social economy entities – mutuals, cooperatives, and associations – so as to extend them to new types of activity that have come to be recognized as

128 Carole Biewener part of a “solidarity economy” or the third sector. The fiscal privileges are primarily justified, according to Lipietz, because of the positive externalities and the provision of public goods and services that result from thirdsector activity such that, in Lipietz’s words, “in the final analysis social and ecological usefulness is what justifies the specificity of the third sector” (2001: 27). Thus, because third-sector entities provide socially useful outcomes in addition to privately useful ones, they merit support from the state sector, primarily in the form of lower social welfare and business taxes. While Lipietz acknowledges that it is often difficult to define what constitutes a positive social outcome (and that such a determination should rightly be left to some form of democratic deliberation), throughout the book he characterizes “socially oriented” production in general terms by referring to the production of “social ties,” the creation of “social networks,” and the rebuilding of the “social fabric.” At one point he writes that what defines third-sector activities is the creation of “social capital in the sense meant by Putnam (2000),” that of building a network of social relationships along with the capacity for a community to take care of itself (30). Here Lipietz builds upon the work of others in the French social economy tradition who have argued for a rethinking of economic activity in both its “interpretive” and “practical” dimensions (Lévesque et al. 2001: 61). For them, the goal of economic activity should not be defined just in terms of the production of goods and services. Instead, new forms of producing must be undertaken that incorporate a “complex ensemble of values” including that of “creating social ties that combine initiative and solidarity” (Laville 1995–6: 22). Thus, in the French tradition, activities that are to be included in the social economy have a hybrid character: they produce an actual good or service that someone pays for and they create a socially useful outcome – that of creating “direct social ties of a community-based type” on the “material basis of services rendered” (Lipietz 2001: 29). Lipietz provides further characterization of third-sector activity when he distinguishes it from the two “primary” sectors: the public sector and the “secteur marchande” (which I am translating as the “commodity sector”). With respect to the secteur marchande, what I find to be particularly notable is that while, in some sense, Lipietz locates commodity production as different from third-sector activity, it is clear that the production of commodities per se does not establish a firm boundary between the two because, as noted above, much third-sector activity involves the production and sale of a use-value that is sold and purchased, i.e., a commodity. Lipietz also addresses the issue of whether profitability should mark the boundary for what may “count” as third-sector activity. Here he argues strongly that third-sector entities should be able to earn a modest profit if some of the profit is reinvested in the enterprise. For Lipietz then, it is not so much the presence/absence of profit that is at

Visions in social economy traditions 129 issue, but the extent of profit (moderate versus large), the role the search for profit plays (whether it is the main driving force of the business’s raison d’être or whether there is a “disinterested management”), and whether or not the profit is reinvested in the social enterprise. In this latter respect Lipietz situates third-sector entities firmly in the French social economy tradition by referring to “the principle of the indivisibility of reserves” that characterizes mutuals, cooperatives, and associations (45). Thus, to the extent that a social economy enterprise is able to build up its own capital, it creates “social capital in both the accounting sense and in Putnam’s sense” (46). Lipietz also argues that the third sector should be able to rely to some extent on private capital for financing, as long as the funds come from the same community in which the third-sector entity works or from employees who expect only a “modest” return (41). Indeed, he is concerned that current French regulations limit funding for third-sector activity, since only cooperatives are able to have employees invest in their enterprise and the new Alternative Venture Capital Funds (Cigales, clubs d’investissement à gestion alternative et locale de l’épargne) are not able to lend to local associations.2 Thus, Lipietz has taken important attributes that are often associated with a “market economy” or “capitalism” and, in a sense, has “unattached them.” He presents a typology in which commodities can be produced by noncapitalist, “third-sector” entities; economic viability via the production of surplus (or profit) is a concern shared by all production entities, not just capitalist ones; and “private” financing that must be valorized to some extent can be used to foster noncapitalist, social economy relations. This characterization therefore diversifies the economic space in important ways by recognizing that third-sector activity may be compatible with a range of different economic conditions. For those of us concerned with recognizing and enabling progressive alternatives to capitalism within the current economic context, this then is a significant move. It is important to note, however, that neither of these books characterize their projects in “anticapitalist” terms. Indeed, there is a notable lack of reference to “capitalism” or a “market economy” in both texts; and in Lipietz’s book the secteur marchande is cast in a relatively benign manner, though subject to the harsh realities of profit maximization. I find this lack of reference to capitalism to be especially intriguing given Lipietz’s background as a theoretician in the Parisian Regulation School (see Lipietz 1977, 1979, 1983; Aglietta 1976; and Boyer 1986) and given the strong history of socialist and communist politics in France. The “absence” of capitalism and the market in these two texts is also intriguing relative to how other economic traditions (within both neoclassical economics and Marxism) center their discussions around an “economy” defined solely in “market” or “capitalist” terms, thereby presuming the ubiquity of the capitalist market economy as well as the identity of capitalism, markets,

130 Carole Biewener and economy. I am not sure whether to read this capitalist absence as ceding the terrain of capitalism, as a pragmatic turn so as to not politicize the issues (to not raise any “red” flags), or whether this is a strategy to produce “economic difference” and to recenter economic and social analysis around different economic categories. As noted above, the social economy project has intersected in important ways with those who advocate a diversification of the economic space (Laville 1995–6; Aznar et al. 1997). Perhaps this absence of capitalism should be read as all three at once, producing different and contradictory effects. Now, if the production of commodities, profitability, and private financing do not mark the boundary line between what constitutes the secteur marchande and the “third sector,” what else does aside from the provision of socially useful outcomes or positive externalities?3 Here Lipietz notes that another important characteristic of third-sector activity is that of democratic functioning. To be included in the third sector, work must be undertaken in a “democratic” fashion, following the rules associated with the social economy: that of “one person, one vote” and that of free association (45). Under these organizational principles “power is regulated by people joining rather than by the provision of capital” and the people who freely associate in a common enterprise are the ones who undertake democratic management of the enterprise (45–6). Indeed, Lipietz strongly emphasizes the importance of fostering free association. In places the text becomes a mini-treatise on how important it is to create new forms of citizenship, to create “a reciprocity of free individuals” (63); and it is this “free association” aspect of the third sector that seems to most clearly delineate it from the “public sector.” As Lipietz writes, “the freely associative dimension of the social and solidarity economy, based upon initiative and direct solidarities and upon face-to-face regulation explains why it cannot and should not allow itself to be absorbed by the public sector” (64). Thus, the “third sector” is defined not only with respect to its goals of producing socially useful outcomes but also with respect to its internal modes of organization – that of democratic functioning and the reinvestment of profits (58). Yet, while on the one hand Lipietz carves out an important space for third-sector activity, he also clearly limits this space and, thereby, cedes important terrain since he contends that it is best for the third sector to coexist with the public sector and the commodity sector. In arriving at this conclusion, he raises the important issue of how private efforts, labor, or contributions are to be socially recognized or validated. Following the work of Polanyi (1944), Lipietz distinguishes the three sectors according to the “three forms for the social validation of private labor” (62). In the commodity sector, private labor is valorized via monetary exchange. The sale of the good or service “validates the utility of the activity undertaken” to produce it. In this case, social ties are based on exchange. In the public sector, the provision of social services is “validated by democratic debate”

Visions in social economy traditions 131 and social ties are based on redistribution (61). Whereas, in the social economy sector, the regulatory principle of reciprocity or mutuality reigns. From Lipietz’s perspective, each socialization principle has its own problematic aspects: the cold, calculated, and narrow self-interest of commodity exchange; the abstract and rigid bureaucracy associated with public-sector redistribution; and the favoritism that often marks reciprocity (64). Therefore, it is the coexistence of the three regulatory logics as embodied in the three different sectors that ensures that the “perversions” of each will best be controlled and compensated for (64). It is here that we come up against what I consider to be one of the most problematic limitations of this project for, with this reasoning, Lipietz leaves out a large arena for progressive social change – that of the two primary sectors and, most notably, that of private-sector commodity production. I return to this later. For now, I would like to emphasize how such a positioning of thirdsector activity as complementary to public and profit-oriented commodity forms of provisioning makes it all the more important to understand more precisely which types of “activities” Lipietz has in mind when he refers to third-sector entities that serve social ends or that produce positive externalities. Given that the third sector is located in part relative to the “crisis of Fordism” which has produced long-term unemployment, services aimed at “reintegrating” the chronically unemployed are seen as one important axis for third-sector activity. Indeed, the French government’s support for “enterprises with a social goal” can be traced to the 1981 Schwartz Report on The Professional and Social Integration of Youth which relied heavily upon the macroeconomic logic of “activating passive expenditures” to argue for state financial support for services oriented toward job training and “social integration” (Lipietz 2001: 17–18). However, when exploring the “gaps” that need to be filled in terms of the goods and services that are not being provided (rather than in terms of the labor that is not being employed), the explanation for the need for third-sector activity becomes that of the dissolution of the traditional ties of the patriarchal family; and the crisis instead appears to be that of needing to provide services that women used to provide via unpaid domestic labor: In traditional society, human activity took place primarily in the domestic sector, which was patriarchal. Women “voluntarily” assured not only the satisfaction of daily needs but also the coverage of life’s risks: the care of the sick, the convalescing, the dependent, and the bedridden. Women also provided a considerable amount of education. (20) Although the welfare state is understood as “progressive” in comparison to “traditional society” (because it brought many important universal

132 Carole Biewener and unconditional rights), the commodity and public sectors “have never been able to cover the entire range of needs that used to be covered by traditional society . . . nor a series of new needs emerging in this ‘postmodern’ world” (22). Therefore, the third sector is called upon to fill this gap: “It is in this immense field of community-based services, some of which have yet to be rediscovered and some of which have yet to be invented, that we can locate the third sector’s vocation” (24). I find this to be a surprising, yet important turn in Lipietz’s analysis. By recasting the crisis from that of Fordism to that of the dissolution of traditional patriarchal family ties, Lipietz shifts the terms of what is at stake in a significant way. Here he argues for the explicit recognition of the social importance of women’s paid and unpaid caring labor and a “regularization” of this work in a manner that institutionalizes it as third-sector activity which is adequately remunerated: When these activities are no longer undertaken within the mute gendered division of family labor, but in the name of the community, then this validation and remuneration can only be paid by the client or the public collectivity. . . . And in the case of the third sector, by both at the same time. (61) The dissolution of traditional ties, while opening up a space for true voluntary devotion by each person toward those to whom one is close . . . will necessitate the mobilization of an ever-growing number of people who will have the care of children and older people as their principal activity (and this will be difficult and highly skilled work) and who will be paid so that they might “live.” It is unthinkable to reduce these activities to the principles of commodity exchange or public redistribution. A huge field is thus opened up for the social and solidarity economy. (65–6) The project to build a third sector thus becomes, in many respects, a project to recognize that caring labor is socially necessary and that it must be supported and remunerated at a level that enables the providers/workers to enjoy a decent standard of living. Further, this project also recognizes that such remuneration should not be solely market-determined, which clearly establishes the legitimacy of other bases for claims to receiving a portion of the “social product.” Thus, here we have not only an economic analysis that legitimizes nonmarket criteria for conferring social usefulness or social validation, but one that also establishes nonmarket criteria for determining the distribution of some portion of social wealth, insofar as the wages of third-sector workers should be determined by some sort of a “living wage” standard rather than solely by

Visions in social economy traditions 133 the dynamics of market exchange. Clearly then, Lipietz’s characterization of the third sector incorporates important feminist concerns.4 However, the characterization of social economy activity in terms of “direct services” and caring labor; of face-to-face work or person-toperson services; of providing “security, comfort, conviviality, and social integration” (61) also cedes a vast terrain. For what is the progressive social vision for the production of goods and services that are not provided “directly” or “face-to-face” or via caring labor; that are not based upon “geographical proximity” or as part of a “local” social network? What is the progressive vision for those of us who spend large portions of our lives working in factories, offices, and retail outlets, or who work as “civil servants” in some capacity? For those of us who are “socially integrated” via wage labor? In short, what is the progressive vision for the secteur marchande or even for the public sector? Thus, while Lipietz’s analysis does diversify the economic space in important ways and incorporates crucial feminist issues, thereby opening up significant alternatives to what I would call “capitalism,” he also cedes any explicit project of transforming what remains of “capitalism” (even if this “capitalism” is more circumscribed and not named as such).

Québec and community economic development By contrast, the Québécois social economy tradition explicitly embraces a project of creating a “new model or logic of development” that gives it a broader emancipatory vision in some respects. As Louis Favreau and Benoît Lévesque show in their book, Community Economic Development: Social Economy and Intervention (1999), in Québec the “social economy” has become part of a larger “Community Economic Development” project that has developed significantly since 1985. Here too the growth of “new” social economy activity and the turn toward community-based initiatives is seen as arising in response to the “crisis” of the previous Fordist model. As Favreau and Lévesque characterize it, there has been a triple crisis: a “crisis of Fordism, of wage labor, and of the welfare state” (xx). They emphasize how the crisis of Fordism has created a lack of jobs and chronic unemployment, thereby producing a “new form of exclusion – exclusion from wage-labor” (8). This has created “a fragmented society in which the excluded masses are not exploited by anyone” (16). Favreau and Lévesque thus highlight the “high economic and social costs” (11) that have resulted from long-term unemployment. For them it is primarily the macroeconomic logic of the costs of unemployment that serve to justify support for the social economy and community economic development rather than the microeconomic logic of positive externalities. Work is seen not just as a way of “making a living” (33). It is a key aspect of how people become integrated into society, helping to shape their personal and social identities, their “sense of self.” Thus,

134 Carole Biewener chronic unemployment – a “new” form of social exclusion – “threatens all of society, not just the margins” (16).5 How then does community economic development respond to this triple crisis of Fordism, of employment, and of the welfare state? Further, what makes this a “new” approach or an “alternative”? Favreau and Lévesque argue that community economic development responds to the social problem of exclusion by providing an alternative means for “reintegrating” people who have been marginalized via chronic unemployment. For them, engaged communities offer an important new form of social integration, and this engagement needs to address the economic aspect of community life (33). They identify at least four distinctive characteristics of the community economic development approach. First, it is communitybased and, thereby, focuses upon using local resources in socially productive ways. Second, there is a strong emphasis upon building “intermediary organizations” such as community development corporations that create public spaces between “the state” and the “citizen.” Third, there is a strong emphasis on building partnerships by fostering participation by multiple stakeholders: A new approach is taking shape, that of partnership, conceived of neither as an alienating or dependent form of participation . . . nor as an equal and consensual relationship . . . but as a form of compromise where the actors do not give up their respective perspectives, thereby leaving space for “conflictual cooperation” . . . [In this manner] the interested parties are able to advance common concrete objectives while also defending different, even opposed, interests. (31) This emphasis upon building communities of difference and the recognition of a plurality of interests is also evident in the fourth aspect that distinguishes this new “logic of development,” that is, a strong emphasis on “diversity” in the range of activities undertaken: “We need to allow for the production of goods and services via a combination of commodity (sale of goods and services on the market) and noncommodity forms (public financing and social transfer payments) and nonmonetary forms (reciprocity and volunteerism)” (28). A large portion of the book is devoted to examining a wide range of examples of social economy activity, including a community kitchen, small-scale community enterprises, loan circles, community loan funds, planning and coordination by community development corporations, youth centers focused on social integration via skills training and collective management practices, housing cooperatives, community gardens, domestic violence centers, a community television station, community health centers, and workers’ cooperatives offering a range of services from home aid and childcare to building maintenance and lawn care.

Visions in social economy traditions 135 The emphasis upon incorporating and integrating a wide range of activity under the umbrella of “community economic development” distinguishes this approach relative to both the civic engagement/grassroots empowerment movement (Boyte 1984) and the socialist “worker selfmanagement” movement. The civic engagement movement tends to focus upon fostering democratic political participation, with little explicit emphasis upon areas of economic activity, while the socialist movement has focused upon building workers’ cooperatives and ownership. The Québécois project moves beyond workplace-centered democratic initiatives by targeting “the economy” more broadly and “economic development” in particular as crucial arenas for democratization. Indeed, they emphasize the importance of using economic activity as a way of building community, of creating “social integration,” and of fostering economic citizenship. One might summarize the community economic development approach as aiming to “democratize economic development” through local governance, local control, and growth that develops endogenously on the basis of community resources (26).6 Thus, in the Québécois case, the emphasis upon local economic autonomy and empowerment delimits this progressive agenda in important ways. On the one hand, there is the vibrancy of the project to “empower” people and to “activate them” in the arena of “the economy,” to enliven people’s creativity and imagination around economic issues, and to enable people to become subjects of the economy rather than being subjected to the economy (Community Economies Collective 2001). In this endeavor to build communities of difference there is clear attention to the multiplicity of ways in which people engage in economic activity. People are to participate in economic development initiatives in a wide range of capacities – as workers, citizens, consumers/users/clients, community owners, investors, and residents – and the “neighborhood” is to serve as the integrating site. The emphasis upon local autonomy for social economy activity also translates into a concern with the entities being economically viable so as to be able to become self-financing and to not have to depend on state subsidies. Clearly self-financing can provide important material conditions for sustainability. Yet, by defining their vision in terms of “local” autonomy and thereby emphasizing the importance of relying on local resources, this project limits the scope of its progressive alternative in important ways, for it does not develop a politics oriented toward social transfers of surplus within a broader community, nation, or region. Indeed, neither the French nor the Québécois projects offer a strong redistributive agenda. They thereby relegate issues of social inequality to the shadows of their progressive politics. As others have noted, since the social economy projects are based on a language of social utility rather than upon a language of entitlement, they have developed a politics oriented toward responding to social needs and have neglected a politics oriented toward gaining and maintaining social rights (Boivin and Fortier 1998).

136 Carole Biewener Certainly, one could read these projects as in some sense predicated upon an existing welfare state in which there are extensive transfer payments. Lipietz explicitly embraces the importance of a public sector: “The public sector has an important redistributive mission that is in the general interest and undertaken on the basis of abstract generalized norms” (Lipietz 2001: 64). Further, as discussed above, he recognizes the importance of the coexistence of the public sector and the third sector, with the social economy posed as a supplement or complement to the welfare state. This then opens up the space for the possible coexistence of progressive projects built upon broad social redistribution, a language of rights, and a language of providing for social needs. Favreau and Lévesque, on the other hand, are more explicit in defining their project against that of the welfare state, claiming that the turn to community economic development and the promotion of social economy activity is a search for “alternatives to social transfers as the resolution of social problems and recomposition of the social fabric”(Favreau and Lévesque 1999: 4). Thus, while in the Québécois tradition there is a clear concern with addressing the effects of poverty by “revitalizing” local communities via community economic development, there is no clear emphasis upon developing a redistributive agenda that would attack social inequality on a broad scale. Indeed, Favreau and Lévesque pose the primary problem or crisis as a “movement from a society of inequality to a society of exclusion” (8), thereby reframing their emancipatory project in terms of “social integration” and a refashioning of the social fabric, rather than in terms of addressing social inequality. This seems quite problematic in a period where there are many people who have jobs (and are, therefore, “socially integrated” via wage labor) but the jobs do not pay living wages nor provide adequate benefits. As one critic has commented, the social economy approach often seems to be situated “within a dynamic of a sharing of poverty rather than a sharing of wealth” (Lamoureux 1998: 49). Indeed, there are concerns in many quarters that the French and Canadian governments’ embrace of the “social economy” is a way of dealing with the crisis in social services brought on by the neoliberal strategy of privatizing economic activity and eviscerating the public sector (Shragge 2003; Lamoureux 1998; LeBel 1998). Favreau and Lévesque recognize the possibility of the social economy sector becoming simply a subcontractor to the state, substituting low-paid wage labor and unpaid voluntary labor for relatively well-paid and regularized public-sector jobs.7 They comment on how the social economy sector is posed with an important challenge: will it follow “a neoliberal path, in which the associative world and voluntary participation become palliatives within the framework of a dual society” or will it pursue the progressive path of “redefining the relationship between the economic and the social by revalorizing citizens’ power and, thereby, democratizing society and the economy” (Favreau and Lévesque 1999: 10)? While

Visions in social economy traditions 137 Favreau and Lévesque clearly advocate for the “progressive path” of defining the social economy in terms of local democratic control, one may ask if they adequately address the material conditions for enabling and fostering such democratization – those that involve the redistribution of social wealth and the social conditions under which wealth is produced in all arenas of economic activity.

Notes 1 All translations are by the author. I focus on these texts as they are good examples of work that connects academic inquiry with community-based activity. This is important because in both France and Québec theoretical work about “social economy” has been tied to “grassroots” activity. Alain Lipietz is a French economist from the Parisian Regulation School (which also includes Michel Aglietta and Robert Boyer). While he has written significant theoretical work (see, for instance, Lipietz 1977, 1979, and 1983), more recently he has been quite active as a militant in the French Green Party and, as such, has worked with community-based “third-sector” groups to further alternative, progressive forms of economic and social activity. Similarly, Louis Favreau and Benoît Lévesque have been actively engaged as both scholars and community activists. Favreau, currently a sociologist and editor of the well-known journal, Economie et Solidarité, previously worked as a community organizer for 20 years. Lévesque, also a sociologist, is the co-founder of the Center for Research on Social Innovation in Social Economy (CRISES, Centre de recherche sur les innovations sociales en économie sociale). 2 In this respect there is an important difference between the French and the Québécois contexts, for in Québec there is an extensive network of alternative, community-based forms of credit that can be used to finance social economy activities (Biewener 2001). 3 It is important to note here that even the criterion of producing socially useful outcomes cannot be said to identify third-sector activity in any firm manner for, as Lipietz notes in passing, some private, profit-oriented, commodity production also produces positive externalities (59). In this respect, what distinguishes third-sector activity is that without state subsidies third-sector services would not be provided (60). 4 Here I am struck by the similarities and differences with Nancy Folbre’s concerns in her book, The Invisible Heart (2001). Folbre’s analysis is similar to Lipietz’s in so far as she argues that there is a crisis of care and that the provision of caring labor needs to be supported by the public sector because of the positive externalities and public goods that it produces. However, unlike Lipietz, rather than casting the market or commodity sector as compatible with caring labor activity, Folbre emphasizes the contradictory and often negative dynamics at play. For instance, she shows how competitive capitalism is undermining family-based child- and elder-care, while at the same time failing to provide incentives for adequate market-based substitutes. Further, Diane Lamoureux (1998) cautions that, while social economy advocates may look to this sector to provide long-lasting valuable work for women, there are indications that the opposite is actually occurring when jobs in the social economy substitute for public-sector employment and offer less permanent positions with lower pay and fewer benefits. 5 The analysis of unemployment as a form of social exclusion has also been addressed extensively in the French social economy tradition, most notably in

138 Carole Biewener the work of Bernard Perret and Guy Roustang (1993). They recognize wage labor as both a means of exploitation and of emancipation, and they identify three ways in which wage labor enables access to the public sphere: first, by recognizing the social utility of one’s labor via market validation; second, by the recognition and socialization of the wage laborer within a firm or organization; and, third, by recognition of workers’ rights, especially that of collective bargaining. Thus, the social economy traditions in both France and Québec emphasize the importance of wage labor in creating one’s social identity. Wage labor is understood as an important arena for fostering economic forms of “citizenship” and a sense of community whereas unemployment carries the negative effect of reducing the scope of one’s citizenship. 6 Michel Parazelli and Gilles Tardif (1998) raise the important question of to what extent the radical democratic discourse is matched in practice. They note the lack of rigorous studies of the actual practices of community development organizations in Québec. Indeed, they cite the problematic example of a community economic development organization in Montreal, Corporation de Développement Économique Communautaire (CDEC) Rosemont-Petite Patrie, which developed a project to address long-term unemployment without including any unemployed people in the project planning (75–7). They argue that this “hope for democratic inclusion” is thus more of a “dream” that serves to “dissimulate the constraints of a repulsive reality by substituting the image of an ideal social model: mass poverty and marginalization replaced by the social economy” (89). 7 Lamoureaux (1998) emphasizes how it is most often women who are “ghettoized” in second-rate social economy jobs, such that the social economy serves to reinscribe the devalorization of women’s work rather than to confer more social value on it. She cites a study by Maude Rochette (1996) which compared the average hourly salary for female childcare workers in Canada, finding that those working in nonprofit childcare facilities earned $10.87 (Canadian) per hour on average and those in for-profit facilities earned $8.08, while comparable jobs in the public sector paid between $14.61 and $20.46 per hour (15).

References Aglietta, M. (1976) Régulation et Crises du Capitalisme, Paris: Calmann-Lévy. Aznar, G., Caillé, A., Laville, J.-L., Robin, J., and Sue, R. (1997) Vers une Économie Plurielle. Un Travail, une Activité, un Revenu pour Tous, Paris: Syros. Biewener, C. (1999) “A Postmodern Encounter: Poststructuralist Feminism and the Decentering of Marxism,” Socialist Review 27 (1–2): 71–96. Biewener, C. (2001) “The Promise of Finance: Banks and Community Development” in J.K. Gibson-Graham, Stephen Resnick, and Richard Wolff (eds), Re/presenting Class: Essays in Postmodern Marxism, Durham, NC: Duke University Press, pp. 131–57. Boivin, L. and Fortier, M. (eds) (1998) L’Économie Sociale: L’Avenir d’une Illusion, Québec: Éditions Fides. Boyer, R. (1986) La Théorie de la Régulation: Une Analyse Critique, Paris: La Découverte. Boyte, H.C. (1984) Community Is Possible: Repairing America’s Roots, New York, NY: Harper and Row. Community Economies Collective (2001) “Imagining and Enacting Noncapitalist Futures,” Socialist Review 28 (3–4): 93–105.

Visions in social economy traditions 139 Favreau, L. and Lévesque, B. (1999) Développement Économique Communautaire: Économie Sociale et Intervention, Québec: Presses de l’Université du Québec. Folbre, N. (2001) The Invisible Heart: Economics and Family Values, New York, NY: New Press. Gibson-Graham, J.K. (1996) The End of Capitalism (as We Knew It): A Feminist Critique of Political Economy, Cambridge, MA: Blackwell Publishers. Gibson-Graham, J.K. (2003) “An Ethics of the Local,” Rethinking Marxism 15 (1): 50–74. Lamoureaux, D. (1998) “La Pannacée de L’économie Sociale: Un Placebo pour les Femmes?” in Louise Boivin and Mark Fortier (eds), L’Économie Sociale: L’Avenir d’une Illusion, Québec: Éditions Fides, pp. 25–53. Laville, J.-L. (1995–6) “Pour l’Économie Solidaire,” Coopératives et Développement 27 (1–2): 19–24. LeBel, G. (1998) “La Reconnaissance de l’économie Sociale, ou l’étatisation du communautaire,” in Louise Boivin and Mark Fortier (eds), L’Économie Sociale: L’Avenir d’une Illusion, Québec: Éditions Fides, pp. 101–33. Lévesque, B., Bourque, G., and Forgues, E. (2001) La Nouvelle Sociologie Économique, Paris: Desclée de Brouwer. Lipietz, A. (1977) Le Capital et Son Espace, Paris: Maspero. Lipietz, A. (1979) Crise et Inflation: Pourquoi?, Paris: Maspero. Lipietz, A. (1983) Le Monde Enchanté. De la Valeur à l’Envol Inflationniste, Paris: La Découverte/Maspero. Lipietz, A. (2001) Pour le Tiers Secteur. L’Économie Sociale et Solidaire: Pourquoi, Comment, Paris: Éditions La Découverte & Syros. Parazelli, M. and Tardif, G. (1998) “Le Mirage Démocratique de l’économie Sociale” in Louise Boivin and Mark Fortier (eds), L’Économie Sociale: L’Avenir d’une Illusion, Québec: Éditions Fides, pp. 55–99. Perret, B. and Roustang, G. (1993) L’Économie contre la Société. Affronter la Crise de l’intégration Sociale et Culturelle, Paris: Seuil. Polanyi, K. (1944) The Great Transformation: The Political and Economic Origins of Our Time, Boston, MA: Beacon Press. Putnam, R.D. (2000) Bowling Alone: The Collapse and Revival of American Community, New York, NY: Simon and Schuster. Rochette, M. (1996) Partenariat Etat/communautaire. Les Groupes de Femmes y Gagnent-ils au Change?, Québec: Conseil du statut de la femme. Schwartz, B. (1981) L’Insertion professionnelle et sociale des jeunes: rapport au Premier ministre, France: La Documentation française. Shragge, E. (2003) Activism and Social Change: Lessons for Community and Local Organizing, Peterborough, Canada: Broadview Press.

Part III

Social economies in transition

11 Accounting for societal externalities Laura McCann

In North America, the beginning of the twentieth century saw an agriculture based on animal traction, animal manure, and mechanical weed control, with relatively low productivity. In the twenty-first century, tractors have replaced horses and bullocks; chemical fertilizers have replaced animal manure; and herbicides have largely replaced cultivation as the primary means of weed control. Coupled with advances in plant breeding, these changes have dramatically increased productivity per unit of land and per unit of labor. This increased productivity has had tremendous benefits both for farmers and for society as a whole but has also resulted in unintended effects on the environment and on rural communities. This is not surprising to those familiar with what Merton (1976) refers to as the law of unintended consequences. A number of negative environmental externalities associated with new technologies have eventually appeared. Excess nutrients result in the eutrophication of lakes and rivers, reducing aquatic life and the recreational value of these water bodies. Hypoxia in the Gulf of Mexico may be due to agricultural practices in the midwestern United States. Groundwater supplies have become contaminated with nitrates and pesticides. Insecticides have unintended effects on birds and beneficial insects. Herbicide resistance is a severe problem in some parts of the world. Critics fear that biotechnology will also have unforeseen effects. Including environmental externalities in the economic evaluation of new and existing technologies and management practices is now well accepted. Although according to economic efficiency criteria, the optimal amount of pollution is not zero, including environmental externalities in the evaluation may reduce the amount of production that is optimal or change the optimal production technology. In addition, the recreational, aesthetic, and biodiversity benefits associated with resource conservation are acknowledged by the economics profession and sophisticated techniques have been developed to measure these non-market benefits. As evidence of this, at the 2002 American Agricultural Economics Association (AAEA) annual meetings, almost 17 percent of the sessions were directly related to environmental and natural resource issues, not

144 Laura McCann including sessions on biotechnology, food safety, or benefits estimation techniques. New technologies and improved productivity have had some negative societal effects such as the demise of small towns in rural North America. Technological advances that improve incomes for the early adopters ultimately result in increased supplies and lower prices for farmers, a phenomenon which Willard Cochran, in the 1950s, called the “technological treadmill.” Labor-saving machinery, economies of scale, and larger farms mean that fewer people are needed on farms, which reduces the rural population.1 Also, larger farms are less likely to buy from local retailers than small farms (Chisolm and Levins 1994). It is no longer viable for every town to have a post office, bank, or clothing store. Schools close down, consolidate or reduce the educational activities they can provide. The number of jobs in rural communities declines. The fabric of rural America thins. This phenomenon is not confined to the United States. In Britain, Shorten et al. (2001) conclude that many villages are not economically, socially, or environmentally sustainable. In Australia, the number of farms was halved from 1961 to 2001 (Hopkins 2002). The Australian Human Rights Commissioner, Chris Sidoti (1998: 1), said that “Many communities in rural Australia are under siege – they have declining populations, declining incomes, declining services, and a declining quality of life.” These changes have been seen as an inevitable, albeit unfortunate, consequence of improved labor productivity. In addition, a variety of well-intentioned policies have had perverse effects, partly because social consequences were not considered or poorly predicted. Cochrane and Runge (1992) argue that in the USA, subsidies have actually accelerated the demise of small farms compared to a laissez-faire policy. Van der Sluis and Peterson (1998) examined 100 agriculturally dependent counties and found that programs such as acreage reduction and set-asides caused net outmigration, reducing non-farm populations by about 15 percent over the 1960 to 1990 period. John Ikerd (1996) bemoaned these trends at the 1996 AAEA meetings and said we should preserve small farms and rural communities despite the economics of the situation. As economists, we tend to treat these effects on rural communities as “non-economic.” If, however, we view these changes as a type of externality, we can analyze them in a standard economic framework and use established economic tools to measure them. This chapter asserts that the profession should pay more attention to what can be called “societal” externalities when evaluating whether projects or technologies increase welfare. It is necessary to begin by discussing some welfare economic concepts in order to show that societal externalities are well within the purview of standard applied welfare economic theory and that they are not merely pecuniary externalities, which can be ignored. These concepts are then used to show that many of the changes in rural communities can be seen as societal externalities. Two specific

Accounting for societal externalities 145 examples, the plight of Worth County in northern Missouri, USA, and structural changes in the hog industry, are presented. A theoretical framework for environmental externalities is then expanded to include societal externalities. The final section of the chapter argues that contingent valuation and choice modeling techniques, commonly applied in environmental economics, can also be used to value societal externalities.

Welfare economics and societal externalities Standard welfare economics is based upon a utilitarian philosophical perspective that goes back to 1791 when Jeremy Bentham expressed the social goal as “the greatest good for the greatest number.” More recently, Roemer (1996: 127) states that under utilitarianism or welfarism, “the justness of a social state can be evaluated by knowing only the utilities that that state delivers to individuals.” The social welfare function implied by Bentham is the unweighted sum of utilities over individuals. While other perspectives exist (rights-based, capacity-based), Roemer indicates that utilitarianism is the oldest and most widely accepted social choice rule among economists. This is the underlying philosophical perspective of this chapter. Alternative perspectives in the literature are discussed at the end of the chapter. While externality is a commonly used term, it is important to examine several definitions in more detail because some would argue that these unfortunate consequences for rural communities are a result of the market working, not an example of market failure. One distinction in the literature is that between Pareto-relevant, technical, or real externalities, which are considered to be examples of market failure, and pecuniary externalities, which are not. Randall (1987: 182) describes an externality as “any situation in which the utility of one individual is influenced by an activity under the control of another” but goes on to exclude certain cases from being Pareto-relevant. For example, an increase in the price of a good decreases the utility level of a consumer but changing prices reflecting changing relative scarcity promote efficiency. Bromley (1991) discusses the two aspects of an externality: (1) that an agent’s utility function or production function contains real variables, the levels of which are chosen by others; and (2) the agent that chose the levels of the variables did not compensate the recipient. Bromley distinguishes pecuniary from technological externalities: “Pecuniary externalities are transmitted through the pricing system . . . while technological externalities are real-valued physical effects transmitted from Alpha to Beta. . . .” (1991: 69). Mishan (1971) distinguishes real externalities, which have a direct influence via arguments in the utility or production function, from pecuniary externalities, which affect utility and output indirectly via relative prices. In the definitions of real or technical externalities examined above, environmental externalities such as pollution, noise, dust, etc. were the

146 Laura McCann focus of the discussion. The economics literature also includes other types of externalities including positive ones, such as the aesthetics of a flower garden, literacy, and health. Fundamentally, however, externalities are broader than this. Buchanan (1962) discusses political externalities, which refer to situations where political action is carried out without unanimous consent, thereby reducing the choice set of agents. Boadway and Bruce (1984) indicate that, while orderings of social states are judged based on individual preferences, an individual’s ordering may depend on commodities consumed by others thus allowing for altruism. In practice, however, the literature discusses social costs as in costs borne by society as well as the producer but seldom addresses costs that the general public would think of as social and which relate to quality of life. These might include crime, lack of trust, loss of a sense of community or social cohesion, disruption due to relocation, level of inequality in the community, change in the industrial focus of the community, disruption of daily living patterns, and change in leisure opportunities. These are examples of issues that would be addressed in a social impact assessment (Burdge 1998) and that are based on research in sociology. Because satisfaction or utility depends on how the world is experienced by individuals, which depends on our interactions with others as well as the consumption of commodities, this seems to be an oversight on the part of the profession. We look at impacts such as the water quality of a lake and perhaps even the aesthetics of whether an ugly factory is visible from the shore, but not whether people feel safe leaving their keys on shore while they go swimming. These effects are real in that they enter into the utility function of individuals and thus are externalities that should be included in economic analyses. To avoid confusion, the term “societal” is used in this paper to distinguish these types of externalities from the more encompassing term “social,” which can relate to environmental, aesthetic, health, as well as societal externalities. As with other types of externalities, societal externalities can be either positive or negative.

Societal externalities in the rural context The concept of societal externalities can now be applied to the issue of technical and structural change in agriculture. As discussed in the introduction, these changes have had both positive and negative effects. As incomes in developed countries have increased, it may be that the negative effects are becoming relatively more important than in the past. Cheap, plentiful food is no longer as important to the public in developed countries as it was early in the twentieth century.2 Relative scarcity of social attributes3 versus consumable goods has changed and economists have tended to ignore this in their analyses. The number of farms has decreased and the size of farms has increased in both the USA and Australia. According to the United States Depart-

Accounting for societal externalities 147 ment of Agriculture’s National Agricultural Statistics Service (USDA/NASS 2001), the number of farms decreased from 6.4 million in 1920 to 1.9 million in 1997, with a particularly large drop in the 1950s, from 5.4 to 3.7 million. Over that same period, average farm size increased from 148 to 487 acres. The increase in size of farms and changes in the structure of agriculture have an impact on the rural population. In the early 1940s, Walter Goldschmidt (1998) compared two communities in California’s Central Valley, one which was primarily composed of large corporate enterprises and another which was primarily family farms. This led to the Goldschmidt Hypothesis: communities with large absentee-owned farms are less developed both economically and socially than comparable communities with family farms. Societal externalities flow from production processes and structural change similar to the way in which environmental externalities flow from production processes. In the same way that chemical pollutants are a byproduct of the functioning of a market that affects individuals who may or may not purchase the product, societal externalities are similarly a byproduct of market forces. It is not being suggested that we prevent structural change in agriculture, rather that we should take account of these externalities in the same way that the optimal output or production process of a factory should be adjusted to take account of environmental externalities. It is important to distinguish between real or technical externalities and pecuniary externalities as indicated in the previous section. Changes in technology may affect the price of labor or land but this represents a pecuniary externality because it is transmitted through the price system. When hog prices decrease due to industrialization and economies of scale in that industry, smaller farms will be forced to close down, a consequence which would be described as a pecuniary externality. Costs of production decrease and consumer prices decrease resulting in an increase in net welfare. One might also argue that if businesses in the community experience reduced sales due to families relocating to the city, this also represents market efficiency. However, if the loss of that farm family leaves a hole in the social fabric of the community, is that still a pecuniary effect? Is the fact that the church no longer has the services of the best voice in the choir, or the high school no longer has enough people to form a football team not a real externality in that it enters directly into individuals’ utility functions? What market mechanism is in place for the church or the football team to be compensated for their loss? If abandoned farms are unsightly to tourists and rural residents, what mechanism exists to compensate them?4 Lynne (2002) writes of the “gloom among youth who might otherwise pursue food system careers” (410). Are these not spillover effects, societal externalities arising from the industrialization of agriculture? Negative societal externalities do not only affect farmers and rural residents. Residents of cities might like to see and experience

148 Laura McCann vibrant rural communities rather than dying ones and they might even value the fact that they exist even if they do not actually leave the city, analogous to the phenomenon of existence value in the environmental economics literature. It should be noted that these negative impacts may be offset by positive impacts felt elsewhere in the economy or at a later point in time. For example, if the person with the wonderful voice joins a choir in their new location, this will have a positive impact. The past literature on secondary benefits in cost–benefit analyses suggests that, if economic activity in one area was just displacing economic activity in another area, the net effect would be zero and these benefits could be disregarded (Marglin 1962). Whether the positive externalities counterbalance the negative externalities in the case of technical and structural change in agriculture is an empirical issue which would need to be addressed. It would seem, however, that in the case of societal externalities within a particular region, the loss to a small community would generally outweigh the benefits to a large one, similar to the phenomenon of decreasing marginal productivity. Another issue is the dynamic or transition costs of moving to a new equilibrium. Returning to the example of the swine industry, in the original equilibrium, there were a large number of small and relatively inefficient producers. In the new equilibrium, after structural change, there are a small number of large and efficient producers. Comparing the two equilibria, there has been an increase in efficiency. There may, however, be costs associated with this transition that are not apparent when focusing only on the equilibrium situations. A trivial example might be moving costs, but there would also be adjustment costs associated with learning a new trade and putting children in new schools. If so, it may be more appropriate to analyze this change by taking account of the discounted sum of costs and benefits over time. The time frame involved also becomes important both due to discounting as well as the impact on transition costs. A related issue is the rapid pace of technological change. Historically, advances in agriculture have occurred on much slower time scales. This allowed both people and social institutions to adjust. One reason that many “efficient” policies are not put in place may be that policy-makers recognize that distributional issues, fairness, and social consequences are important, but that economists do not address them. These policy-makers have implicitly been taking societal externalities into account when arguing to save the family farm or imposing Conservation Reserve Program5 acreage limitations on a county basis. Colby (1988) indicates that area of origin protection regarding transfers of water in the western United States is designed to protect business, public services, cultural values, and communities, i.e., to avoid another situation like that of Owens Valley in California where purchases of water rights by Los Angeles resulted in the demise of agriculture. The Clayton/Peterson

Accounting for societal externalities 149 amendment providing additional funding for rural development, which was included in the US House Farm Security Act of 2001, is the most recent effort to ensure that rural “communities do not slowly fade away” (Clayton et al. 2001:1, quote from a letter from the sponsors to their House colleagues). If we do not address the issues that politicians value, our advice will not be adopted and the net value of the research will be negative.

Examples of societal externalities Prior to presenting the formal model, two examples that illustrate the societal externalities experienced in rural North America due to depopulation and industrial agriculture are presented. Many rural areas have seen a decrease in population which limits the social amenities and services that can be provided.6 Worth County, Missouri, on the border with Iowa, is one of the counties that has been most affected by changes in agriculture and a detailed examination of that county will clarify the concepts addressed in this chapter. Worth County is classified as agriculturally dependent, which means that over 20 percent of the economy is based on agriculture. Farm numbers have decreased from 414 in 1974 to 356 in 1997, and average farm size has increased from 352 to 422 acres (Missouri Agricultural Statistics Service 2002). As shown in Figure 11.1, the number of hog farms has also decreased dramatically over this period from 225 in 1969 to 14 in 1997, while the number of hogs and pigs has decreased from 29,000 in 1970 to 4,000 in 1999 (USDA/NASS 1999). The number of beef farms has decreased from 429 in 1969 to 228 in 1997, and the number of beef cattle has also decreased from 30,000 in 1970 to 23,200 in 1997 (USDA/NASS 1999). Worth County’s population has decreased from 3,359 to 2,382 since 1970 (US Census 2002). One half of the schools closed with total enrollment dropping from 778 to 453 students (Missouri School Directory 2001). Employment has also decreased from 413 to 279 jobs (US Department of Commerce 1997). According to Donald Null (2002), an extension agent, The early and mid-eighties was a very tough time for agriculture in the US. Worth county is very heavily dependent upon agriculture . . . it was during the mid-eighties that we lost both of our automobile dealers, one machinery dealer, two hardware stores, one grocery store, one bank, the cap manufacturing business, and a couple of service stations. While the cap factory later reopened, many residents commute to neighboring counties for work. The county is struggling to provide services and it may be forced to shut down the courthouse and other centralized county government since land values and retail sales are stagnant or decreasing

150 Laura McCann 250

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Figure 11.1 Hog farming in Worth County, Missouri.

(Belschner 2002). No benefits are paid to county employees and no elected official is getting the salary they are entitled to by state law. More than a fourth of the children live below the poverty line and a fourth of its residents are over 65. Crime related to methamphetamine laboratories is a problem in the county, a reflection of the growing nationwide problem highlighted by a New York Times article (Egan 2002). The other types of societal externalities, such as lower participation in groups, are not collected at the county level on a systematic basis which further illustrates that these effects are not valued by researchers. A community in Worth County has tried to fight a hog farm owned by Land O’ Lakes (a large agricultural cooperative) by incorporating their town, Irena, which gives them legal and taxing authority (Stevens 1999). This is an example of the backlash that is being experienced by corporate hog farms nationwide and another example of the concepts presented in this chapter. A book, Pigs, Profits and Rural Communities, edited by anthropologists (Thu and Durrenberger 1998), presents the negative consequences of the industrialization of swine production in the United States. The editors indicate that there is a range of effects on the physical, social, psychological, and political well-being of people which is not incorporated into our economic analyses. The environmental impacts such as manure spills, nutrient enrichment of surface and groundwater, odor, and

Accounting for societal externalities 151 health impacts on workers and neighbors are recognized by economists, but the authors in this volume also discuss the disadvantages for communities of the separation of ownership, management, and labor. They give examples, such as Jackson County, Michigan (DeLind 1998), where industrial hog production has torn communities apart. Investors from Detroit, benefitting from a variety of tax incentives, financed the project, which was managed by Sand Livestock Systems Incorporated of Maine. Farmers who sold land for the hog facilities benefitted but the promised improved climate for Michigan grain farmers never materialized and neighbors suffered negative impacts on their health and quality of life. Land values collapsed. One neighbor indicated that friends refused to come to his home after production began. There was also a high level of anger and frustration over the lack of community consultation and the loss of confidence in government agencies to look out for their interests. In addition, communities often bear increased health and education costs due to the influx of cheap, unskilled labor, costs that are not borne by the firm. Corporate hog farms have resulted in lower prices for consumers, but the low prices have also caused many small hog farmers to go out of business. From 1994 to 1996, one-fourth of hog producers in the US quit. Jim Braun (1998: 44) clearly linked the loss of hog producers to the loss of societal amenities: For generations, tens of thousands of us farmers relied on pork production to put food on our tables, pay for our land, and help pass our land on to our children. For generations, we pork producers went to town to worship, to educate our children, to buy supplies, and to entertain ourselves. Rural communities thrived as farmers thrived.

A theoretical framework for societal externalities The concept of societal externalities can be presented using a standard theoretical framework associated with environmental externalities. For ease of exposition, the standard separable model is presented, although a functional form that incorporates the possibility of joint, non-separable impacts may be used. A profit-maximizing firm will choose the amount of output q*, that maximizes the difference between revenue, pq, and costs c(q) where p is the market price of each unit of output and c(q) is the cost function which depends on the amount of output. Max [pq  c(q)] q

The first-order condition for the privately optimal level of output is: p  c or MB  MC

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For the case where there are external environmental or aesthetic effects that depend on the output, E(q), the relevant maximization problem becomes: Max [pq  c(q)  E(q)] q

The first-order condition for the socially optimal level of output, q**, is: p  c  E For the case presented in this chapter, where there may be net external societal effects as well as external environmental effects, we need to modify this standard treatment. Societal effects may also depend on the output per firm, S(q). This would be the case when the negative societal effects appear due to economies of scale in an industry, which then result in a smaller number of larger firms. It should be noted that there may be positive societal externalities as well as negative ones but negative ones are more relevant for situations such as Worth County. The relevant maximization problem when both environmental and societal externalities are present is: Max [pq  c(q)  E(q)  S(q)] q

and the first-order condition for the socially optimal level of output, q***, is: p  c  E  S Figure 11.2 shows that when marginal external environmental effects are incorporated, the optimal level of production q** is less than the privately optimal amount q*. In addition, when both types of external effect are incorporated in the decision problem, the socially optimal level of output is q*** which is lower again than the socially optimal amount when only environmental effects are incorporated. This graph assumes that marginal negative environmental and societal effects increase as output per firm increases. Figure 11.3 shows the case where the marginal societal externalities are positive at lower levels of output and then become negative at higher levels of output per firm. Therefore, the curve including net societal effects is below the curve which only includes environmental effects at low levels of output and is above it at higher levels of output. The example shown indicates that the optimal level of output including societal externalities, q***, is still lower than the case where only environmental externalities are incorporated but it could be the case that incorporation of societal externalities could increase the optimal output level per farm compared to only

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Figure 11.2 Optimal output with environmental and societal externalities.

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Figure 11.3 Optimal output when net societal externalities change sign as output level increases.

154 Laura McCann considering environmental externalities. For example, this could be the case if marginal benefits were lower than indicated on the graph. Empirical evidence is needed to determine the magnitudes of these societal externalities and to what extent they accentuate or attenuate the effect of incorporating environmental externalities.

Incorporating societal externalities into economic analyses A case for incorporating societal externalities into economic analyses of technical and structural change has been made. However, in order to include these effects, we must first measure them; fortunately we already have the tools to do so. Advances in environmental economics and nonmarket valuation mean we can measure and take into account the welfare loss due to the pollution caused by factories and farming practices. We could similarly measure the decrease in welfare that is due to the industrialization of agriculture, together with its benefits. Travel cost methods could be used to value the loss of the local bank or post office. Contingent valuation or choice modeling could be carefully used to examine a wider range of social issues. For example, while direct interpersonal comparisons of utility to examine distributional issues are not feasible, we could measure what value individuals place on equity in the same way we use surveys to measure existence and option values for a natural resource. By asking people their willingness to pay for social attributes, we can move many of the difficult issues of values and ethics from the economics discipline to the economic agents. Obviously, surveys would need to be designed and the data interpreted in light of the limitations and potential biases associated with these valuation methods. There has been a trend to incorporate additional factors into our economic evaluations. Emery Castle’s (1998) discussion of the relevance of the social capital concept in relation to rural studies is related to the concept of societal externalities. Multifunctionality refers to externalities and public goods that are jointly produced with food and fiber. In the European context, this typically includes the traditional landscape, amenities, vital rural communities, and environmental protection (LataczLohmann and Hodge 2001). For example, some Europeans are concerned that hedgerows are being removed to allow more efficient use of large machinery because this has a negative effect on the esthetics of the landscape, becoming less visually pleasing to tourists and others. Some argue (Harrison-Mayfield et al. 1998) that because of the positive externality provided by the traditional landscape, farmers should be paid to preserve it. Chisholm and Fraser (1998) discuss the historical and cultural value of grazing in the Victorian Alps in Australia that needs to be balanced with the environmental damage caused by grazing. Blamey et al. (2000) included job loss as an attribute in an environmental choice modeling study. While preservation of jobs was valued, it was less important than

Accounting for societal externalities 155 species preservation in that study. More recently, and more relevant for this article, Cordes et al. (2003) used a contingent valuation study to measure attachment value to a rural Nebraska community. In Australia, Bennett et al. (2004) examined the trade-offs between environmental improvements (to waterways, wetlands, esthetics, and biodiversity) and loss of farmers or rural residents. They found that both rural and urban residents had a positive value for preserving rural populations. People may care about the way a product is produced, and that may shift the demand curve. Organic produce is purchased because people worry about the effect of pesticides on their own health, but also because they want to promote an agriculture that is less polluting. Free range chickens command a premium because of a perceived improvement in quality and also because consumers want to promote better treatment of animals. Fair trade bananas and coffee are purchased not because the quality of the product is different, but because of the positive social effects in the producing country, therefore the premium paid could provide a value for those social effects. According to Hornblower (2000), coffee became “the first foodstuff to be independently certified for the U.S. market based on criteria of economic justice.” A number of methodological issues would need to be addressed regarding implementation of the recommendations in this chapter. As evidenced by Cordes et al. (2003), determining an appropriate hypothetical scenario and payment vehicle could be more problematic than in the case of environmental goods. Choice modeling may be more adapted to these issues than contingent valuation because it allows trade-offs between multiple attributes of a situation. More fundamentally, development of a typology of values associated with societal externalities may be needed in order to design surveys and facilitate comparisons of studies. For example, in the environmental field, revealed preference techniques are useful for obtaining measures of use values, but stated preference techniques are needed to obtain existence values. Methodologies based on self-interested individuals may not be well suited to examine the full range of values that are associated with loss of community, but they would provide a lower bound for such values. In addition, this type of research could lead to advances in the area of social capital and increased interest by economists in the role of groups. It is also the case that implicit assumptions about the status quo property rights allocation embedded in neoclassical economics, and therefore non-market valuation, are questioned by institutional economists. One view is that externalities should be considered as inputs, not as byproducts, thus focusing attention on the ownership of those inputs (Schmid 2004). Vatn and Bromley (1995) caution against using contingent valuation in making policy choices regarding the environment and this would presumably carry over to societal externalities. To Castle (1999), the use of benefit–cost analysis represents a normative decision, that the values

156 Laura McCann inherent in neoclassical economics have biased the research agenda related to natural resource economics, and that the self-interest hypothesis needs to be evaluated. Nevertheless, he indicates that neoclassical economics will remain the dominant paradigm used in natural resource and environmental economics.

Conclusion It is hoped that this chapter stimulates a critical analysis of the implicit and explicit assumptions that we use in economics. If the ultimate goal of economics is to maximize utility rather than production or income (since they are only a means to an end), then we should incorporate what individuals value into our analyses instead of implicitly imposing our values on them. “Economics is not just the study of markets, but more generally the study of human preferences and behavior” (Hanemann 1994: 37–8). Some researchers are focusing on examining the role of relationships in economics (Easterlin 2003; Ash 2004). A psychological study of empathy found that many of the same areas of the brain are stimulated when people see a loved one subjected to a pain stimulus, as when they experience it themselves (Singer et al. 2004). If people value viable towns and jobs for other people, then economists should include those variables in their economic analysis. Economic techniques can provide a conduit for the expression of individual preferences. It is also the case that the debate regarding multifunctionality and international trade (Paarlberg et al. 2002) would benefit from quantifiable measures of the multiple outputs from agricultural production. Incorporation of a wider range of impacts is in line with social economics which sees the market economy as one component of the social economy. I have implicitly assumed that the magnitudes of societal externalities are large, implying that they should be routinely incorporated into economic analyses and policy decisions, but this is an empirical question. If the measured effects are very small, particularly with respect to the transaction costs that would be involved with policy implementation, it may be appropriate to ignore them. On the other hand, even if the magnitudes are significant, new policies may not be necessary. It may be the case that existing policies can simply be modified in order to lessen the societal externalities that they cause or that new policies that would cause large societal externalities are not implemented. Including societal externalities in analyses does not mean that economists will recommend that we return to the agriculture of the early twentieth century, rather that both the increased productivity as well as the negative societal and environmental changes associated with it are taken into account in a broader economic framework.

Accounting for societal externalities 157

Notes 1 For Cochrane (1979), the most important force in American agriculture in the twentieth century was farm mechanization and technological advance. This resulted in labor being pushed out of agriculture. However, Peterson and Kislev (1986) argue that in some instances labor was actually pulled out of agriculture because of the relatively high non-farm wages. 2 According to Maslow’s hierarchy of human motivation (1970), physiological and safety needs must be met before higher-order needs such as the desire for belonging, esteem, knowledge, and self-actualization are strived for. 3 Robert Putnam (2000), in Bowling Alone, argues that the level of social connectedness in the USA has dropped significantly and that this connectedness is vital for the well-being of individuals and nations. 4 William Gabler (1997) photographed abandoned farmhouses and wrote a book, Death of the Dream: Farmhouses in the Heartland, that has been made into a television documentary. 5 The Conservation Reserve Program was established in the 1985 US farm bill and pays producers to take land out of production and put it into conserving uses, for example by planting trees or perennial grasses. 6 A study of rural Missouri by the Brookings Institution (2002) found that while the population of most rural counties (51 of 93) fell in the 1980s it grew in the 1990s (76 of 93). The exceptions were the northern agricultural counties and the Bootheel region in the southeast corner of the state.

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12 Ethnicity, democracy and economic development A pluralist approach Manuel Branco

Because mainstream economic studies are built on the assumption of the universality of economic rationality, in the study of development processes, there is little or no room for culture. “Culture” is taken here as the shared knowledge, values, beliefs, and attitudes transmitted from generation to generation that are at the foundation of order and sense, and that allow members of a community to behave in a convenient and acceptable manner, or at least an understandable one (De Kadt 1999). Fortunately, the obvious unrealistic character of mainstream studies has brought a growing number of heterodox scholars to study the interaction of cultural and economic factors, though not all share the same paradigm. For some, culture can be seen as an obstacle to development, and therefore cultural change should precede development. For others, the dominant development model destroys local cultures and consequently is responsible for the alienation and impoverishment of individuals and communities. These two visions of the interaction of cultural and economic factors in development processes, though apparently contradictory, might produce the same outcome: the perpetuation of underdevelopment. In the first case, the loss of values it might imply could nourish a resistance to the very idea of progress and change; in the second case, the risk of cultural isolation might induce social and economic immobility. The incorporation of progress in developing countries demands, therefore, a renewed dialogue and a new insight into their economies. The first step is to insist on the chances of promoting an original path for development rather than on the need of removing the obstacles to traditional development. The second step is to construct an alternative set of premises to the dominant system of knowledge production. In this alternative set of premises, pluralism should play an important role. According to Richard Norgaard (1994), western rationality believes that there is only one best way for knowing any particular system and that our separate individual ways of understanding complex systems are merging into a coherent whole. Within this monist approach, there is one best way to reach the good life and, thus, there is also one best culture to

162 Manuel Branco facilitate the process. Accordingly, mainstream studies see global development as the spread of the capitalist economical and ethical system to all parts. In the same fashion, the belief that underdevelopment is solely the consequence of the exploitation of the periphery by the center is also a derivation of the monist approach. In a pluralist approach, on the contrary, complex systems, such as development processes, can only be known through alternate patterns of thinking (see Norgaard 1994). A pluralist approach not only accepts different views to the problem, but also does not fear the contradictory unraveling that might occur as a result of the use of opposed standpoints. As Norgaard (1994: 97) puts it, “to accept conceptual pluralism is to accept multiple insights and the inherent inability of science to describe complex systems, to predict how they may behave, or to prescribe how to make them behave in another way.” Monism in development studies is, undoubtedly, aesthetically beautiful because of its very strong explicatory power, if only it could explain anything. Pluralism, on the contrary, allows a deeper knowledge of a social phenomenon because it accepts complexity, but has trouble in designing policies. On the one hand, the knowledge produced by universalistic models is useless to understand the complexity of the development processes because of its lack of realism, but, on the other hand, insisting on the uniqueness of a particular social phenomenon may lead to the dissolution of policy-oriented knowledge because any information gathered is threatened by the immediate expiration of its validity. We should avoid ignoring what the other has to say, but we also have to make sure that there is still something to say to each other. Thus, between the dominant model, that ignores difference, and the particularistic fundamentalism that depoliticizes the development process there has to be some kind of path. The main purpose of this chapter is, therefore, to propose a pluralist approach of the interaction of cultural and economic factors in development processes, an approach that will use and combine different perspectives to look at ethnic diversity and authoritarianism, with special reference to Africa, and its relation with economic development. Finally it will try to show that a pluralist development policy might not be such a difficult task after all.

Ethnicity and economic development If a poll were to be done on the cultural obstacles to economic development, I would not be surprised if ethnic diversity were the answer that would arise most often. Indeed, the constant propagation of images portraying civil war, along with its procession of statistics about the killing and destruction, is very persuasive to demonstrate the importance of the cultural dimension of economic development, and the disruptive power of ethnicity, especially in Africa, the most ethnically diverse continent. The

Ethnicity, democracy and development 163 concept of ethnicity usually refers to aspects of relationships between groups that consider themselves, and are regarded by others, as culturally distinctive. This distinctive character can be defined by a sense of common historical origin, shared culture, language, value orientation, shared social norms, and sometimes religion. Although the anthropological definition of the concept does not imply any pejorative burden, ethnicity, from the beginning of development studies, has always been taken as a brake on economic development. Let us review the arguments most often displayed. Trying to explain why the industrial revolution started in England, David Landes (2002: 244) states that England had the early advantage of being a nation, taken not only as a territory but also as something close to what we could call a cultural entity. According to Landes, the importance of nations is that they can reconcile social purposes and individual action, enhancing the latter’s performance through collective synergy. Furthermore, development economics, either diagnosing or suggesting policy, thinks in terms of the nation-state. The object of the analysis is the national territory, the national income, the national productive structure and so on. Even the obstacles are accounted at the national level: demographic growth, natural conditions, imbalances in foreign economic relations and, of course, ethnic diversity. In other words, one of the first steps of a development process would be building a nation-state, a viable nation-state I should add, and this is, exactly, the source of the trouble. Indeed, a 1988 survey showed that 63 out of the 111 conflicts occurring in the world at the time were internal, and among these, 36 could be considered as wars for the shaping of new countries (Berlinguer 2002). A more pacific way of building nations is to look for the national identity or the greatest amount possible of cultural features shared by a more or less large group of people. Once again, how can one do it easily if within the 184 independent countries in the world there are more than 600 linguistic groups and 5,000 ethnic groups (Berlinguer 2002)? Nation-building is all the more difficult since the very idea of nationstate is a purely European innovation (Kantorowicz 1951; Hobsbawm 1992) and, therefore, presumably hard to transpose to other cultures. In the nineteenth century, the Europeans believed that Africans had never built nations, and that, indeed, they were incapable of doing so (Davidson 2000: 20). Considering then, as today, that ethnic diversity was the African curse, they carried out the physical and cultural construction of the African nation-states regardless of local identities. Basil Davidson (2000: 96) argues that it is true that the ancient multicultural kingdoms of Ghana, Mali, Songhay, and Kamen, were similar to the feudal European states but, unlike them, could not produce any kind of national identity. However, where national identity was created and was starting to evolve towards a very western-like form of nation-state, with the Asante for instance, its potential was disrupted by the colonial domination, declares

164 Manuel Branco Davidson. When the nationalist movements sought independence, they built the new nations within the borders of the colonial territories and it seemed that the ethnic groups got trapped inside these limits. Since the very start, then, African nations appeared to be doomed because of difference. In addition to creating serious difficulties to the construction of nations, numerous studies on ethnic diversity and public-policy suggest that ethnic diversity reduces the efficiency of public service delivery, undermines economic performance through the inhibition of social capital, and trust (Easterly and Levine 1997; Alesina et al. 1998; Collier and Garg 1999), fosters clientelism (Van de Walle 2000) and, finally, restrains development because it hinders democracy, taking for granted that democracy is essential to economic development (Przeworski and Limongi 1993; Alesina and Perotti 1994; Branco 1999). In accordance with a pluralist approach, we should, now, confront these views with alternative ones, starting with the last argument. It is easily accepted that whenever there is a strong ethnic diversity, political structures tend to be organized around ethnic groups rather than around philosophical affinities. Therefore, whenever an election is called, it is ethnic belonging, or demographic vigor, that is balloted rather than strategies outlined to enhance the public good. In this sense, ethnic diversity interferes negatively with what can be considered one of the pillars of democracy, but are we sure that in mature democracies, where free choice is a powerful instrument to legitimate economic policies, such interferences never occur? In an election in the United Kingdom for example, can we be assured that when people vote, they only care about weighing strategies, and their tradition, and culture, such as belonging to a Conservative or Labor political family does not interfere in their judgment of the goodness or badness of this or that particular policy? In other words, ideology is accepted to be one of the pillars of western democracy, but, regardless of our values, what makes ideology better than ethnicity in procuring stability, representativeness, and fairness to governance? Moreover, some studies sustain that it is not so much ethnic diversity that impedes democracy, but democracy that is essential to mitigate, or even eliminate, the potential negative effects of ethnic diversity (Collier 1999), although others do not agree with this (Horowitz 1999). Studies on democratic Botswana and Mauritius (Carroll and Carroll 1997; Acemoglu et al. 2002) show that not only have these countries succeeded in maintaining a high growth rate, they have also created fairly honest and competent bureaucracies, in which the plural character of their societies has apparently been reasonably reflected. One could argue that Botswana does not display a very strong ethnic diversity when compared to other African countries (Stedman 1993), but when countries face the presence of a major ethnic group side by side with smaller groups, the risk of conflict is apparently higher than when ethnic diversity is wider (see Collier 1999).

Ethnicity, democracy and development 165 With respect to the question of ethnic diversity raising transaction costs, some arguments sustain that, on the contrary, in the absence of trustworthy institutions, like courts or other contract-enforcement institutions (Collier and Gunning 1999), the ethnic group reduces cheating because of the moral obligations that each member has to respect in order to preserve the good name of the group (Wintrobe 1995); therefore ethnicity can, in fact, contribute to reducing transaction costs. Furthermore, in the absence of proper institutions, the ethnic group can provide a system of insurance, or social security, against common setbacks of life. On this matter, Nigerian historian Peter Ekeh (1990) draws a parallel between the rise of feudalism in Europe and the consolidation of the ethnic affiliation in Africa, each of these systems being a response to the need of security of the people. Thus, every time the state could not ensure security to its citizens, as during the slave trade or the post-colonial and neo-colonial state predation, ethnic and kin affinities became tightened. We should add that in the absence of private property in rural Africa, ethnic groups and their rules have proven to be one of the few effective instruments for land allocation (see Bates 2000; Rakotoarisoa 2002). In relation to the lowered efficiency of public-service delivery, the deleterious effects of ethnic diversity, in general, only occur in the context of governments that are undemocratic (Collier 1999). Indeed, dictatorships tend not to transcend the ethnic group of the dictator, so that the more ethnically fragmented the society, the more narrowly based will governance be, whereas democratic governments, in such societies, must be ethnically cross-cutting. In turn, the more narrowly based the governance, the greater the payoff to predation (or plundering) relative to the inducement of generalized growth (Collier and Gunning 1999). The problem, thus, is not ethnic diversity as much as the lack of democracy. Therefore, we could be facing a political issue rather than a cultural problem. After the independences, many of the new African leaders thought that building nations meant more or less the same as homogenizing society. They used a considerable amount of their energy to repress any claim to difference, institutionalizing undemocratic governance as the only way to reach the alleged first stage of development. The problem is that the attempt to erase cultural difference by the means of political repression was not only harmful to economic development but, in several cases, also both inefficient and counterproductive to foster national unity. Indeed, according to Samir Amin (1989) the repression of cultural pluralism led to the exacerbation of this same cultural pluralism through clandestine forms, much more dangerous to the goal of national unity that repression was supposed to achieve.

The roots of cultural differences Until now we have assumed ethnic diversity of the new territories as an indisputable fact, but reality is not that simple. Cultural differences exist

166 Manuel Branco everywhere within nations. In Europe, we talk of provincialism instead of ethnicity. In some cases, cultural differences led to the establishment of precise borders circumscribing separate national states; in the vast majority of the cases, the construction of the national states arose from the aggregation of different cultural identities. The question, then, is why has this process been so hard to achieve in so many areas of the Third World, especially in Africa? Amin (1989: 151) declares impudently that the colonial administration has a determinant responsibility in the creation of the ethnic reality. George Nkrumah (1998) sustains that the laws and the institutions inherited from the colonial powers were often designed to exploit ethnic, religious, and linguistic differences within and between African states. Finally, Basil Davidson (2000), on tribalism – a ramification of ethnicity – declares that it is a convenient invention of the colonial period. The purpose of this invention seems obvious: it intended to make the colonial administration of vast territories easier and cheaper, without the mobilization of a great number of Europeans who were not only scarce, in view of the enormous task, but also clearly unadapted to the climatic conditions in the field, and thereby condemned to face high natural mortality rates (Acemoglu et al. 2001). The invention of cultural differences also served the needs of the colonial rulers in the creation of labor reservoirs and the segmentation of labor along ethnic lines (Ishemo 2002). This does not mean that ethnic diversity only exists in our western minds. Ethnic diversity and ethnic conflict are facts of contemporary life. The point is that this diversity was overestimated from the beginning and exacerbated with calculated action by the colonial administration. The invention of the ethnic group, argues Amin (1989), was made by a bunch of bad anthropologists in a frenzy of classification that can be compared to the meticulous work of adventurer botanists discovering the rainforest. The differentiation between Tutsis and Hutus in both Rwanda and Burundi, for example, is a perfect illustration of the artificial methods used to separate people that any important feature, culture, language, or history, did in the first place. Some say that, traditionally, the Tutsi minority was the ethnic group that dominated the Hutu majority, but we know well today that the feudal Tutsi domination was made up by the Belgian colonization (Lacoste 1993: 747). Indeed, in order to control the territory, the Belgian administration relied on the Tutsi minority, invoking a fake ethnical, and almost racialist, distinction between a Bantu and Hamite origin that gave the Tutsis an alleged touch of nobility to which Hutus could not aim. The colonization established the Tutsis as the elite and naturally the administration in the pre-independence period was monopolized by them, creating as one could expect natural frustration and resentment among the Hutus. External influence of the colonizer is at the origin of the surge of many other ethnic groups such as the Bambara, in Mali, or the Bete, in Ivory Coast (Latouche 1986; Lacoste 1993). In Madagascar, at the

Ethnicity, democracy and development 167 beginning of the twentieth century, the colonial administration artificially defined the existence of 18 tribes and today people recognize themselves in this distinction, especially because the names that were given to the tribes were related to the physical characteristics of the territories they inhabited (Rakotoarisoa 2002): Tefasy means those who come from the sands, Tanala, those coming from the forest, and so on. Ethnic conflicts can also be the result of other external interferences, besides the colonial adventure. According to Yves Lacoste (1993) many of today’s ethnic conflicts in Africa have their origins in the slave trade. From the eighth century until the nineteenth century, the Arabs first, and the Europeans onwards, used some ethnic groups to capture slaves. A great deal of the actual ethnic conflicts would, thus, be coincidental with the frontier between the predator and the predated groups among the African population. Although slavery is a very old system, one which actually continued long after the Congress of Vienna prohibited it in 1815, there is no doubt that the mass slave trade has an external origin, based on the labor demands of the economic systems of other colonized regions – the Americas by the Europeans and the Mediterranean and the Middle East by the Arabs. Thus, it seems that we are facing an historical, political, and economical issue, closer to class struggle than to cultural clash.

On the cultural roots of authoritarianism In the Wealth and Poverty of Nations, attempting to draw the outline of the political and social institutions necessary to reach the goals of economic growth and development, David Landes (2002) refers to the importance of tolerance and the rule of law, supporting the views of many who consider the way in which authority was performed an important factor in the western European development process. The opposition between centralized and delegated use of power seems, indeed, quite relevant in explaining the precocity of economic development in England and in the Netherlands when compared to France or Germany. Regarding political institutions, the Roman tradition establishes the unconditional character of the sovereign’s power. In the Anglo-Saxon tradition, on the contrary, sovereignty is delegated. In terms of the administration, the principles are the same. In the Roman tradition, it is the central administration that decides all, whereas in the Anglo-Saxon tradition matters that can be decided locally need not be taken higher up in the hierarchy of the state. In England, for example, county sheriffs and judges have been elected since the twelfth century whereas in France the need is felt to designate the public servants from the center and, very often, to make sure that they come from a region other than the one to which they were appointed (Hénaff 2000: 62–3). This procedure is, actually, still largely followed in today’s French administration. The centrality tradition gave French kings the possibility of deciding,

168 Manuel Branco more or less by themselves, the nature and the level of taxes. Consequently, taxation struck essentially the productive population leaving the socially inactive elites free of charges. In England, on the contrary, the monarchy was obliged to negotiate with different social groups. Taxes were now decided in common and the tax burden was more equitably distributed. The fact that the government became more public and accountable also allowed higher levels of taxation than in Continental Europe (Epstein 1995). According to Marcel Hénaff (2000), this resulted in innovation and competitiveness with long-lasting benefits for all. From an institutional point of view, this would explain why England was better prepared to launch the industrial revolution than France, in spite of the fact that their economies seemed to be growing at a similar rate during the eighteenth century (see, for example, Epstein 1995). After this brief overview, we should ask ourselves if a tendency towards authoritarianism in politics, explaining the obstruction to development, could be found in the different cultural traditions in the Third World. In a conference on globalization, science, culture, and religions, held in Lisbon in October 2002, Daniel Etounga-Manguelle (2002), chairman of a Yaounde-based company, declared that among the progress-resistant features of the African culture was an excessive concentration of authority and power in one individual, who will often claim magical powers. The recent history of Africa gives indubitable examples of this excessively centralized manner, to say the least, of performing authority, but is this the demonstration we were looking for, that authoritarianism is a cultural feature? Indeed, on many occasions, while analyzing the cultural background of underdevelopment, especially in Africa, there is a tendency to isolate these features from the last centuries of the societies’ history. If one wants to look for, say, an African tradition of performing authority, one should not forget the few hundred years of colonization and unequal development that have affected this continent. In order to get a more authentic view of tradition in these fields, one should probably have to study pre-colonial Africa. In doing so, the image of the despotic tradition in African ruling is not so striking. Where there were organized states the forms of government could be either centralized or more participative. One feature, though, seems present almost everywhere, the possibility of the people overthrowing the ruler in many different institutionalized ways (Davidson 1981; Ayittey 1992; Lacoste 1993). It seems that culture, or tradition, cannot explain authoritarianism among the majority of African countries during the post-colonial period. The brief alternative explanation offered below results from the combination of the economic structure and the institutions inherited from the colonial period. Regarding the economic structure, a major part of African economies are dependent on the export of a scarce variety of natural resources, or plantation crops, which have shown a tendency to lead to loot-seeking activities (Collier and Gunning 1999: 9). This kind of appro-

Ethnicity, democracy and development 169 priation of national income is clearly opposed to democratic, problemsolving distribution of national wealth, even more so when the ruling elites constitute a small group. The gains to an extractive strategy, a euphemism for loot, are closely related to the size of the ruling elite group (Acemoglu et al. 2001: 1376). When the elite is scarce, each member can expect a larger piece of the pie and so, the smaller the elite group, and we could add the more unequal the income distribution, the greater the incentives to be extractive. Following the same line of thought, the greater the extractive character, the greater the risk for the elite of becoming a political loser, that is to say, of losing their economic and social status if replaced, which, in turn, favors authoritarian strategies to keep the power. In many parts of Africa, the fact that the European colonization was mainly interested in exploiting the natural resources and the exotic crops is the main reason for their excessive specialization and their alienating dependence from volatile external markets (Frank 1966; Jalée 1973; Amin 1973, 1977). In turn, the fact that the colonial administration delegated the day-to-day running of the state to a small domestic elite (Acemoglu et al. 2001) as well as the low investment made on educating the native population, partly explains the existence, at the time of independence, of a small elite group, almost exclusively connected to either extractive activities or colonial administration. After having taken control of the state, this elite received few incentives to change the institutions and consequently favored the undemocratic and extractive institutions that prevailed in the colonial era (Acemoglu et al. 2001). If we are convinced of this line of thinking, it follows that authoritarianism has little to do with culture and is much more related to historical and economical matters. A comparative study of Botswana and Lesotho provides an enlightening example. Despite sharing the same traditional ruling institutions in pre-colonial times, and being very close both linguistically and culturally, Botswana evolved towards a democracy and Lesotho did not. The reason for this divergence should be sought in the recent history of the two countries. The limited impact of the colonial rule in Botswana, as compared to the experiences of many other nations in Africa, South America, or the Caribbean, allowed the continuity of the pre-colonial institutions and the elites that came to power after the independence were only partly members of the former administrative elite (Acemoglu et al. 2002: 23); the power, therefore, became essentially delegated. In Lesotho, on the contrary, the wars against the Boers and the fact that the British were much more interventionist undermined the traditional institutions and contributed to the centralization of the political power in the hands of the colonial elites (Acemoglu et al. 2002: 29). This does not mean that ethnic diversity, for example, does not have any negative effects on the development process. Ethnic diversity can

170 Manuel Branco foster violence and destruction as the world has witnessed in Rwanda and more recently in Congo, former Zaire. The solution, though, in the majority of the cases, is political and economic and does not imply that one has to adopt an alien culture apparently best fit to promote development. Leaving behind their culture, in order to enjoy the delights of development, should not even be an option, as many studies show that the only countries that have succeeded in development are those that kept intact the spine of their culture, e.g., Japan, South Korea, or Taiwan (Dockès and Rosier 1988; Latouche 1992; Lê Than Khôi 1992). If there were any secret in the success of the once called “New Industrializing Countries” of the Far East, it was the combination of openness to the external winds of progress, namely technical progress, and the cultivation of tradition. Because societies always search to change and to last, this combination appeared to be mutually beneficial, as change ensured continuity and tradition worked as a technique to incorporate change (see for example Perrot 1994).

Contribution to a pluralist development policy In order to build a pluralist development policy, instead of picking alternative views of the interaction between cultural and economic factors, one needs to use all the different and sometimes contradictory approaches to the problem. In a pluralist approach, no school of thought can claim to explain underdevelopment. Each is partial and delivers one particular vision of reality. Accepting one does not mean recognition of the other is impossible but, rather, the need to combine them in order to catch complexity and therefore to come close to reality. Thus, in studying ethnicity, democracy, and development, neo-Marxist as much as neoclassical or new institutionalist approaches have been termed. On the one hand, imperialism under the shape of colonial administration and the heritage of a particular economic structure based on the export of very few goods, mainly natural resources, can explain the resilience of such cultural features as ethnic diversity and authoritarianism. On the other hand, neoclassical and new institutionalist interpretations, which insist on pointing out the fatal influence of undemocratic and corrupt states to explain underdevelopment, can also help us to understand why it has been so hard to create a sense of the common good and, thus, to substitute wealth exaction for wealth creation. Traditionally, these views, especially neo-Marxist and neoclassical, are presented as contradictory and, therefore, they are seldom combined to account for underdevelopment. Despite the fact that it was exacerbated and sometimes erected stone by stone by colonial authorities, ethnic diversity is a fact in a large part of Africa. The conflicting nature of this ethnic diversity has often contributed to jeopardize the meager economic achievements in many parts of the

Ethnicity, democracy and development 171 continent. But the attempts made with the purpose of homogenizing nationalities have also brought totalitarian regimes and even more hatred between communities, which means that hindering ethnic diversity has become, in turn, a new obstacle to development. If democracy has been a decisive tool to mitigate, or even eliminate, the potential negative effects of ethnic diversity, in practical terms, the introduction of democratic governance in an ethnically diverse country, especially in Africa, does not appear to be a simple task. The solution, as we have seen above, should not be found in the elimination of ethnic diversity, because ethnic groups play an important role in the absence of crucial institutions to development such as courts or social security, but according to Adrian Leftwich (2000) more so in the confinement of ethnic loyalty to the private sphere. The first ingredient of a pluralist policy aiming at the reconciliation of ethnicity, democracy, and development consists in the transformation of the economic structure of most of the African developing countries. The diversification of the sources of internal and external revenue is crucial to create new elites and to soften the mechanism of the political loser. The actual structure of foreign trade, for example, at the origin of a lootseeking economy, is not favorable to this enterprise. In this sense, specialization can represent a brake as much as a propeller to development. The trends within the global economy point to further specialization and, therefore, pursuing democratization and specialization, both part of the mainstream new political economy agenda, might, in fact, have contradictory effects. The second ingredient of our pluralist policy consists in admitting that democratic governance is not forcibly a synonym of majority democracy. Among ethnically divided countries, the principle of the “winner takes all” might not be applied. This should not mean that the governments produced by this system would not be democratic; they would just be based on a different, plural, conception of democracy. The exploration of such possibilities is not new. On this matter the most cited work is Arend Lijphart’s (1977) in which the author analyzes the democratic political systems of ethnically, or culturally, divided countries such as Switzerland, the Netherlands, and Belgium. In this system that he calls consociational democracy, the government is not politically homogenous but composed, instead, of the different political organizations proportionally to their weight in parliament. The fact that these countries display stable and democratic governance is sometimes presented as a demonstration of the non-inevitability of conflict and totalitarian political regimes in ethnically and culturally divided societies (Dahl 2000; Michalon 2003). Therefore, the ethnic diversity in itself should not constitute an obstacle to democracy and even to development as the countries referred to above are also among the wealthiest in the world. Democratic reforms implemented in Africa in the 1990s only had

172 Manuel Branco formal effects, partly because the majority system confers power to the organization that obtains the majority of the seats in parliament, frustrating all the others. When these organizations correspond to ethnic groups, it means that the minorities are condemned to remain apart from the administration of public affairs. On the other hand, the ethnic group holding the majority can hardly obtain the cooperation of the opposition because there are no foreseeable political gains in it for the latter. Therefore, this form of democracy, instead of contributing to reducing the conflicting potential of ethnic diversity could, on the contrary, foster violent coexistence of the different groups. The examples of consociational democracy presented above only concern European countries and one may ask if this experience can be transposed to other parts of the world, namely to Africa. The democratic, and relatively successful, development strategy in Mauritius shows that it is possible to import this governmental system to other countries where ethnic diversity can be even stronger. Nevertheless, Leftwich (2000) draws attention to one very crucial condition for the implementation of consociational democracy: the recognition by the local political forces of the need to compromise. A system based on the principles of the consociational democracy is a chance to break the vicious circle in which several developing countries have been imprisoned since the creation of their nation-states. Ethnic diversity could cease to be a source of conflict and an obstacle to democracy, and democracy would not need to wait for cultural homogeneity to function. In this sense, two extreme speeches on the interaction of cultural and economic factors can be dismissed, the first being that the cultural particularities of developing countries are an obstacle to democracy, and the second that parliamentary democracy is a western concept and, therefore, cannot be adapted to suit Third World countries.

References Acemoglu, D., Johnson, S., and Robinson, J. (2001) “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review 91 (5): 1369–401. Acemoglu, D., Johnson, S., and Robinson, J. (2002) “An African Success Story: Botswana,” Discussion Paper Series 3219, London: Centre for Economic Policy Research. Alesina, A. and Perotti, R. (1994) “The Political Economy of Growth: A Critical Survey of Recent Literature,” World Bank Economic Review 8 (3): 351–71. Alesina, A., Baquir, R., and Easterly, W. (1998) “Public Goods and Ethnic Divisions,” Washington, DC: World Bank, available at http://econ.worldbank.org/ docs/241.pdf. Amin, S. (1973) Le Développement Inégal, Paris: Ed. Minuit. Amin, S. (1977) O Imperialismo e o Desenvolvimento Desigual, Lisboa: Ed. Ulmeiro.

Ethnicity, democracy and development 173 Amin, S. (1989) La Faillite du Développement en Afrique et dans le Tiers Monde, Paris: L’Harmattan. Ayittey, G. (1992) “Les Blocages du Développement Africain,” Paris: Institut Euro 92, unpublished. Bates, R.H. (2000) “Ethnicity and Development in Africa: A Reappraisal,” American Economic Review 90 (2): 131–4. Berlinguer, L. (2002) “Globalization and the Conflict of Identities,” paper presented at the Conference on Globalization, Science, Culture and Religions, Fundação Calouste Gulbenkian, Lisbon, 15–16 October, unpublished. Branco, M. (1999) “Da Democracia e do Desenvolvimento,” Revista Crítica de Ciências Sociais, 55: 53–85. Carroll, B. and Carroll, T. (1997) “State and Ethnicity in Botswana: A Democratic Route to Development?,” The Journal of Development Studies 33 (4): 464–86. Collier, P. (1999) “The Political Economy of Ethnicity,” in Annual World Bank Conference on Development Economics 1998, Washington, DC: International Bank for Reconstruction and Development, pp. 387–99. Collier, P. and Garg, A. (1999) “On Kin Groups and Wages in Ghanaian Labour Market,” Oxford Bulletin of Economics and Statistics 61 (2): 131–51. Collier, P. and Gunning, J.W. (1999) “Why Has Africa Grown Slowly?” Journal of Economic Perspectives 13 (3): 3–22. Dahl, R. (2000) Democracia, Lisboa: Temas e Debates, original edition in English, On Democracy (Yale University Press, 1999). Davidson, B. (1981) À Descoberta do Passado de África, Lisboa: Sá da Costa, original edition in English, Discovering Africa’s Past (Longman Group, 1978). Davidson, B. (2000) O Fardo do Homem Negro, Porto: Campo das Letras, original edition in English, The Black Man’s Burden, 1992. De Kadt, E. (1999) “L’enjeu Culturel et Les Chances de la Santé dans un Contexte International,” in Gilbert Rist (ed.), La Culture Otage du Développement, Paris: L’Harmattan, pp. 149–73. Dockès, P. and Rosier, B. (1988) L’Histoire Ambigüe: Croissance et Développement en Question, Paris: Presses Universitaires de France. Easterly, W. and Levine, R. (1997) “Africa’s Growth Tragedy: Policies and Ethnic Divisions,” Quarterly Journal of Economics 112 (4): 1203–50. Ekeh, P. (1990) “Social Anthropology and Two Contrasting Uses of Tribalism in Africa,” Comparative Studies in Society and History 32 (4): 660–700. Epstein, S.R. (1995) “Freedom and Growth: The European Miracle,” in Eileen Barker (ed.), LSE on Freedom, London: LSE Books, pp. 165–81. Etounga-Manguelle, D. (2002) “Globalization and the Conflict of Identities,” paper presented at the Conference on Globalization, Science, Culture and Religions, Fundação Calouste Gulbenkian, Lisbon, 15–16 October, unpublished. Frank, A.G. (1966) “The Development of Underdevelopment,” Monthly Review 18 (4): 17–31. Hénaff, M. (2000) “L’éthique Catholique et l’esprit de Non Capitalisme,” Éthique et Économie, Revue du MAUSS, no. 15, 1er semestre 2000, Paris: Editions La Découverte, pp. 35–67. Hobsbawm, E. (1992) Nations and Nationalism since 1780, Programme, Myth, Reality, New York: Cambridge University Press. Horowitz, D. (1999) “Structure and Strategy in Ethnic Conflict: A Few Steps toward Synthesis,” Annual World Bank Conference on Development Economics

174 Manuel Branco 1998, Washington, DC: International Bank for Reconstruction and Development, pp. 345–70. Ishemo, S. (2002) “Culture, Liberation and Development,” in Deborah Eade, Thierry G. Verhelst, and Wendy Tyndale (eds), Development and Culture, Oxford: Oxfam, pp. 25–37. Jalée, P. (1973) Le Pillage du Tiers Monde, Paris: Maspero. Kantorowicz, E. (1951) “Pro Patria Mori in Medieval Political Thought,” American Historical Review 56 (3): 472–92. Lacoste, Y. (1993) Dictionnaire de Géopolitique, Paris: Flammarion. Landes, D. (2002) A Riqueza e a Pobreza das Nações, Lisboa: Gradiva, 5ª edição. Original edition in English, Wealth and Poverty of Nations, 1998. Latouche, S. (1986) Faut-il Refuser le Développement, Paris: Presses Universitaires de France. Latouche, S. (1992) L’Occidentalisation du Monde, Paris: La Découverte. Lê Than Khôi (1992) Culture Créativité et Développement, Paris: L’Harmattan. Leftwich, A. (2000) States of Development, Cambridge: Polity Press. Lijphart, A. (1977) Democracy in Plural Societies: A Comparative Exploration, New Haven, CT and London: Yale University Press. Michalon, T. (2003) “L’Afrique au Défi de l’État Pluricommunautaire,” Le Monde Diplomatique, 4 December. Nkrumah, G. (1998) “Battling Africa’s Colonial Legacy,” Al-Ahram Weekly, no. 381, June. Norgaard, R. (1994) Development Betrayed: The End of Progress and a Coevolutionary Revisioning of the Future, London and New York: Routledge. Perrot, M.D. (1994) “À Propos du Culturalisme: Du Super Flou au Superflu?” in Gilbert Rist (ed.), La Culture Otage du Développement, Paris: L’Harmattan, pp. 31–49. Przeworski, A. and Limongi, F. (1993) “Political Regimes and Economic Growth,” Journal of Economic Perspectives 7 (3): 51–69. Rakotoarisoa, J.A. (2002) “Les Racines Culturelles de la Crise Malgache,” Le Monde Diplomatique, March. Stedman, S.J. (ed.) (1993) Botswana: The Political Economy of Democratic Development, Boulder, CO: Lynne Rienner. Van de Walle, N. (2000) “Economic Reform in Africa, 1980–2000: Patterns and Constraints,” paper presented at the Workshop on Democracy and Development, Gulbenkian Foundation, Lisbon, 23–24 June, unpublished. Wintrobe, R. (1995) “Some Economics of Ethnic Capital Management and Conflict,” in Albert Breton, Gianluigi Galeotti, Pierre Salmon, and Ronald Wintrobe (eds), Nationalism and Rationality, Cambridge: Cambridge University Press, pp. 43–71.

13 A gender-aware approach to international finance Tonia L. Warnecke

Much of the orthodox approach to economic policy-making is founded on liberalization, a favorite “catchphrase” of economic and political vernacular over the last few decades. Following the orthodox paradigm, developed countries push for the neoclassical vision of the laissez-faire global economy, and expect developing countries to do the same. This trend toward liberalization has reshaped the sphere of international finance in particular, which has shifted its center of activity from the public to the private sector. Many orthodox economists support neoliberal policies, arguing that decentralized government and liberalized capital flows promote a more efficient allocation of resources and, in turn, higher economic growth (see Quinn 1997; Klein and Olivei 2000; Bekaert et al. 2001). An important question, then, is whether or not the recent experiences of the global economy have validated this theory. While examining the track record of Latin America and Asia – two regions that implemented financial liberalization programs – one cannot answer this question in the affirmative. In these regions, financial liberalization programs have been associated with “low levels of productive investment . . . and economic growth, a flourishing of speculative investments, dramatic increases in non-performing bank loans, and financial crises” (Grabel 1995: 128; see also Rodrik 1997, 1999; Stiglitz 2002). Such outcomes, the antithesis of orthodox policy prescriptions, suggest problems with both the analysis and the prescriptions. As an alternative to the orthodox approach, I adopt a heterodox conception of financial crises. The heterodox (specifically, post-Keynesian) finance literature argues that orthodox financial policies have not led to stability and global growth, and furthermore, they have actually contributed to an increasing amount of financial instability. However, I supplement this post-Keynesian view by integrating the gender dimension. Orthodox policy is nominally gender-neutral, but there are significant gender effects associated with contemporary orthodox theory and policy. To note but one example, stabilization policies such as budget cuts may be gender-neutral “on paper,” but the actual policy outcomes tend to disadvantage women relatively more than men. If household funds are

176 Tonia L. Warnecke insufficient for external medical and childcare expenses, the “money cost” for these services is often translated into “time cost” for people within the household; socially determined roles often allocate these non-monetary costs to women. I elaborate these types of gender effects in a later section. Unfortunately, the gender dimension is often overlooked, even in heterodox papers. This is problematic because there are several feedback effects between gender equity and financial policies. Exploring these relationships is crucial to understanding the implications of particular policy choices. In several ways, the liberalization of international finance can be linked to growing gender inequity. The growing numbers of financial crises have aggravated the poverty problem, and women – constituting more than 70 percent of the poor (Center for Women and Democracy 2004) – have suffered disproportionately. From this point of view, the contemporary system of international finance and its associated policies are not gender-neutral since these crises are considered a byproduct of financial liberalization. Furthermore, the stabilization plans designed to address financial crises “work to the benefit of men more than to the benefit of women” (Elson 1992: 47). Developing a feminist approach to international finance will help to address these important issues, and to consider “how gender relations and inequalities are embedded in what might appear to be hidden economic interactions” (Benería et al. 2000: 10). By (1) suggesting modifications to orthodox policy, and (2) depicting the need to create heterodox solutions, I aim to provide a foundation for a gender-aware approach to international finance. The fundamental premise, therefore, is that the sphere of international finance (and the policies designed to regulate this sphere) cannot be considered an entity closed off from, and impermeable to society. Because I emphasize the intricate relationships between economic policies and social outcomes, especially with regard to gender equity, this research endeavor is compatible with social economics.

The international financial system In this section, I develop a heterodox view, maintaining that fragility and financial crises are endogenously created by financial liberalization. This perspective is a marked departure from the orthodox view, which treats such crises as anomalies, as aberrations from the trend path toward fullemployment, high-growth equilibrium. According to economic orthodoxy, crises are products of government failure and/or external shocks. In contrast, a heterodox approach is based on the following three premises: 1 2 3

Financial liberalization creates instability at the domestic level; The interdependencies between countries then make each country vulnerable to financial crises; and The orthodox stabilization package does not attain its intended results, and can exacerbate the problems of countries in financial crisis.

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These three premises are used to substantiate the conclusion of this section: the orthodox stabilization package must be rejected along with the orthodox theory. Regarding the first premise, domestic-level instability is spawned by financial liberalization in a few different ways. Financial liberalization both widens and deepens the banking and financial services sectors of a country, leading to a diversification of available services and a greater number of firms providing such services. As financial sectors are deregulated, lucrative entrepreneurial opportunities emerge in several areas, including financial structures, institutions, products, production techniques, and marketing (see Arestis and Glickman 2002). The drive to secure these “fresh” profits intensifies inter-firm competition. While competition can lead to more efficient production of goods and services by forcing firms to improve quality and/or lower costs, competition can also foster an environment conducive to speculative behavior. Firms begin to utilize a new type of rent-seeking behavior as they attempt to exploit regulatory loopholes. A firm declining to participate in these activities “may face slower growth and a loss of market share” (Grabel 1995: 142). Because of this, a particular tension emerges between a firm’s potential to capture profits and the possibility of overextending its resources. At first, this fragility is masked by the astounding successes realized by some entrepreneurs. Risky investments may begin to seem less risky. In any case, any personal success motivates further speculation. The firm does not fear greater indebtedness because success breeds a disregard for the possibility of failure: the absence of serious financial difficulties over a substantial period leads to the development of a euphoric economy in which increasing short-term financing of long positions becomes a normal way of life. (Arestis and Glickman 2002: 241) Over time, though, this interplay creates a destabilizing force that slowly spreads throughout the domestic economy. Reacting to the highly competitive environment, firms are bound to undertake certain investments and to reduce their bank reserves in ways that might have previously been unacceptable (Grabel 1995). As the value (and cost) of investments climb, firms may require very high returns in order to satisfy their obligations, and, as this cycle continues, firms may need to “increase debt to pay debt” (Arestis and Glickman 2002: 240). This succession of events is entirely endogenous to the process of financial liberalization, and will continue until the cycle reaches a breaking point. It is important to note that the determinants of this breaking point are different for orthodox and heterodox economists. As previously mentioned, orthodox economists refer to exogenous shocks to the financial

178 Tonia L. Warnecke system. However, the prosperous cycle can easily be halted by endogenous factors. (The endogeneity of the breaking point is characteristic of a heterodox view.) An example of this endogeneity follows: as aggregate demand increases, financed by speculative investment, this demand acts as a catalyst boosting interest rates (Arestis and Glickman 2002: 241). As interest rates rise, the costs of debt servicing rise for firms and individuals. Increased demand also leads to increased production (i.e., supply), and the associated demand for labor enables workers to demand higher wages. Together, these factors squeeze company profits and, over time, firms’ profits decline and/or vanish. Yet, this sequence of events is far from being exogenous to the financial system; it seems a natural component of the business cycle. Moreover, this cycle becomes more pronounced and magnified by the higher debts incurred through speculative finance. As a result, the domestic financial system rests on a shaky foundation. Moving to the second premise, this domestic fragility is contagious because of the interdependencies between countries. With international financial liberalization, the “mood” of a domestic financial sector (positive or negative) is easily transmitted to investors in other countries. A positive outlook will naturally inspire investors to pour more money into the “successful” country. Since financial liberalization deregulates capital flows, investors worldwide are able to capitalize on any perceived arbitrage or profit-making opportunities. This occurred in both Asia and Latin America, where capital inflows increased dramatically prior to their respective financial crises. While the additional funds seemed purely advantageous for the recipients, the investment actually contributed to the speculative cycle by enabling banks to intensify their lending and borrowing. Furthermore, the positive economic mood curbed caution for both creditors and debtors. In a world of speculative finance, a country’s economic mood is surprisingly fickle. The far-reaching success of some firms cannot compensate for the staggering indebtedness of others. As more firms default on their debts, foreign investors become wary and withdraw funds from the country in question. “Herding” behavior spreads and capital flight completely reverses the previous capital investment. Since most central banks only have a limited amount of reserves to buffer the exchange rate, capital flight can lead to an exchange rate crisis. The main problem with financial liberalization, then, is the increased vulnerability of countries to financial crises (both domestic and external in origin), largely because of the shift from hedged finance to speculative finance. A second problem is that free capital flows have not benefited the least developed nations. In the mid-1990s, 14 countries received 95 percent of all private flows to developing countries, and the low-income countries’ share of foreign direct investment (FDI) inflows averaged only 6.8 percent (Singh and Zammit 2000: 1251). Furthermore, as deregulated finance has replaced official development assistance, low-income countries have fewer

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funding options available to them. While private capital flows may be an “efficient substitute” for official flows in some countries, lower-income countries remain unattractive to foreign investors. However, even the lucky recipients of capital inflows remain vulnerable to changes in investor moods. Many countries depend upon these inflows to finance their development schemes and social assistance plans, and the volatility of capital flows from one year to the next can be very disruptive. If a country receives substantial inflows for a length of time, it is likely to count on their continuation when making decisions regarding investment and expenditure. Yet the recipient country is entirely at the mercy of changing foreign interest rates, which can quickly make other countries appear more attractive for investment. In light of the financial fragility caused by liberalization, the orthodox theory of international finance must be rejected. Nonetheless, international financial institutions have not considered any fundamental change to the liberalization strategy. Instead, they have proposed a more gradual, step-by-step approach to financial liberalization. Sequenced reforms, however, may contribute to the cycle of speculative finance rather than eliminate its risky behavior. The reason for this is simple: national endorsement of economic programs creates an “aura of safety” around the economy (Arestis and Glickman 2002: 245). As a result, feelings of economic invulnerability are likely to minimize investor fears and, correspondingly, their financial conservatism. These behavioral patterns easily perpetuate the aforementioned cycle of fragility and crisis. The links between liberalization and financial fragility create further problems because the financial crises have not been adequately ameliorated by the orthodox stabilization package (premise number three). This package includes tight monetary policy and contractionary fiscal policy, in addition to structural reforms, financial and trade liberalization, and privatization. This standard set of policies is universally implemented in financial crisis situations, even though such crises can have (and have had) very different causes. Using a static policy package in dynamic financial crises is not a recipe for success, as exemplified by the Asian crisis. In that case, the World Bank admitted that tight monetary policy was an inappropriate approach to exchange rate stabilization. Why? In an environment of weak banks, higher interest rates can weaken the exchange rate further by increasing risk premiums attached to the currency (Aslanbeigui and Summerfield 2000: 85). The exchange rate can also suffer from falling expectations, since the stabilization package “is likely to reduce both output and income equality” (Taylor 1995: 1959). By revealing the inadequacy of the orthodox stabilization package, these examples suggest that it must be rejected along with the orthodox theory of international finance. Orthodox finance has been challenged by heterodox critics, and for good reason. However, even these critics have largely missed the gender biases inherent in orthodox theory and policy. Among other factors,

180 Tonia L. Warnecke considering the gender dimension requires a comparison of policy results for men and for women. Gender equity is emphasized; policy intent is distinguished from policy outcome, and (in accordance with social economics) it is understood that social norms which are not necessarily “economic” – for example, gender bias – may influence the worldview of the policy-makers and in turn, shape the economy.

The gender dimension In this section, a discussion of the impact of orthodox theory on women is followed by an explanation of the “gender-blind” nature of said theory. Finally, policy adjustments to the orthodox stabilization package are proposed, in order to create a gender-aware conceptualization of financial policy. Although it is beyond the scope of this chapter, I must emphasize the necessity of formulating re-gendered policies that do not depend on the orthodox framework. This remains a subject for future research. First, it is necessary to determine the effects of orthodox financial policies on women. Many leaders accept that financial liberalization will create “winners” and some “losers.” It is worth asking who these losers are likely to be. How has the mainstream approach to international finance affected women? What new perspectives might a feminist approach within social economics offer? Many studies have demonstrated the asymmetrical benefits accruing to men and women as a result of economic growth. Yet, an equally important point is that women suffer disproportionately from economic declines and financial crises. The principal reason for the disproportionately negative impact of orthodox financial stabilization policies on women is that financial crises have aggravated the global poverty problem, and women constitute the majority of the world’s poor. Moreover, economic crises disproportionately affect women in several specific ways, the first being employment. While in advanced countries . . . economic downturns tend to throw more men out of work than women, in many developing countries the opposite is the case . . . in many semi-industrial countries . . . women tend to be employed in labor-intensive export industries which are more prone to fluctuations. (Singh and Zammit 2000: 1259) The International Labor Organization suggests that women are more susceptible to job losses in an economic downturn. Since many employers do not consider women to be family breadwinners, they are likely to prioritize male employment when facing business difficulties (Singh and Zammit 2000). Furthermore, women are harder hit by wage cuts because their salaries are lower than men’s to begin with.

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Examining the Asian crisis, Aslanbeigui and Summerfield (2000) show that women’s employment suffered more than men’s in the key crisis years of 1997–8. In Indonesia, 46 percent of the unemployed were women, even though they comprised only one-third of the labor force. Some 50–60 percent of the unemployed in Thailand were women, and Korean women “comprised 75% of discouraged workers and 86% of retrenched workers in the banking and financial service sectors” (Aslanbeigui and Summerfield 2000: 87). These statistics suggest that economic downturns are not gender-neutral in terms of employment. The management of financial crises, primarily through International Monetary Fund (IMF) stabilization programs, also disproportionately harms women. Programmatic “emphasis on efficiency and market-based growth has replaced the earlier goal of welfare states to promote social welfare through equity and redistributive policies” (Benería et al. 2000: 9). This ideological swing has led to a particular conception of fiscal tightening: reducing social expenditures, implementing new user charges for health and education, and slashing food and transportation subsidies. These cost savings for the state, however, are not really social savings. The costs for these services are merely shifted from the state to the household, which creates a gap “between household basic needs and the level of monetary income” (Floro 1995: 1926). Faced with insufficient household income, households must match these monetary costs by “non-economic” methods. When this cost shift occurs, developing country households forgo some of these services – particularly primary education for girls (Aslanbeigui and Summerfield 2000: 90). Studies of developing countries indicate that user charges for education lead families to remove their younger female children from school in order to protect their investment in their older sons (see, for example, Frankenberg et al. 1999: 20). By disinvesting in the future labor force, this trend could be perceived as a misallocation of resources (Palmer 1995: 1983). Other, “essential” services are “paid for” with lengthier and more intensive household labor. For example, spending more time shopping for food bargains or growing food in backyard gardens can substitute for some food purchases (Floro 1995: 1917). More time is required to cook raw foods when processed and packaged foods become too expensive. As health care fees are imposed, more time is spent caring for the health needs of one’s family members. This labor time does not contribute to GDP-enhancing activities (Bakker 2001: 235). Yet, while gender-typing typically relegates such tasks to women, these types of time and energy “expenditures” are entirely ignored in macroeconomic accounting. As a result, the market becomes an incomplete substitute for the state and the household fills in the “unseen” gap between the two. The household (rather, woman of the household) is assumed to be able to compensate fully for any shortfall in the state provision of social reproductive

182 Tonia L. Warnecke services. However, by reducing time available for education (and training in personal financial management), this increased labor time bars most women from the benefits of liberalized finance – which include expanded loan, investment, and real-estate opportunities, as well as the jobs created in these fields. If most women are to gain from the open financial markets, they also need access to the public-sector services eliminated by stabilization programs. State-provided services (such as health care and food subsidies) reduce the time required for household labor, enabling women to use this time to acquire the skills necessary to enter and participate in the liberalized financial market. Having access to financial services enables a woman to undertake more household responsibility in providing for her family. Therefore, there is, as Diane Elson (1992: 57) says, “a complementarity between state provision and market access.” Substituting the market for the state is not in the best interests of most women. There are other factors barring women from equal access to financial services. A feminist approach, as in Bakker (2001), accepts that financial goods and services are allocated through the political structure and social relations of markets. These political and social aspects include unequal power relations between men and women, which unofficially regulate access to the financial sector. Power is a key issue for access, but the status of women in developing countries is “much more marginal than in the West. Fewer laws exist to protect women’s rights, and such laws are less likely to be enforced” (Aslanbeigui and Summerfield 2000: 85). Because of this, women are not likely to enjoy equal access to financial instruments and services, and the availability of financial resources is not synonymous with their accessibility in practical terms. Women in developing countries are also less likely to have personal knowledge about securities, investments, and loans. If targeted instruction is not provided to women (an unlikely occurrence in less developed countries), women will not share many of the benefits from financial liberalization. In this sense, “neutral” policies applying to everyone, both men and women, are not genderneutral at all. Thus, the central impact of mainstream theory on women may be illustrated through the inequitable socioeconomic results of orthodox financial policies. This leads to the second topic of this section: what makes international policies gender-blind? First, it is important to realize that international financial policies are macroeconomic policies. Although macroeconomic policies are not holistic policies, macroeconomic theory presumes “economy-wide adding up or aggregation conditions that individuals’ actions have to obey” (Taylor 1995: 1953). Aggregated statistics are formed by adding up price and quantity information about the market behavior of firms or households, which is more accessible than information about individuals. Because macroeconomics revolves around categorical figures, aggregation ignores the internal dynamics of the analyzed groups. In gender terms, this means that “household” issues of unequal power or

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unequal distribution of resources are generally not taken into consideration. When aggregating statistics, the data focus on particular groupings of individuals. Aggregating this data seems forthright and unbiased, but it is actually based on a socially constructed methodological foundation. Which groupings are chosen for aggregation, and which sectors of data are disaggregated, are crucial (but “invisible”) decisions. These decisions will “reflect the priorities of those with strongest control of resources” (Elson 1995: 1863). These choices are also based on certain assumptions regarding, as Isabella Bakker (2001: 230) argues, the “determinants of the level and pattern of economic activity; about human capabilities, how they are allocated to production, and how they are reproduced and maintained.” Feminist economists argue that these assumptions reflect a relatively autonomous, mobile individual that can freely access resources – in other words, characteristics that “fit” men more than women. The mainstream approach has not looked for signs of gender in macroeconomic data because gender is conceived as a social (non-economic) issue. As John Ruggie claims, “what we look for obviously has an effect on what we find” (cited in Sylvester 1991: 3). Gender-conscious policy proposals depend on the availability of data disaggregated by gender. According to Nahid Aslanbeigui and Gale Summerfield (2000: 98), the “numerous gender differences in unpaid work and informal sector activities, allocations of time and consumption within the household, and the transformation of permanent jobs into temporary contracts have not been accounted for in surveys.” Very little genderdisaggregated data are available in the banking and financial services sectors. Furthermore, the scanty data that are disaggregated by gender are relatively incomparable across countries, due to different standards of measurement. As a result, the macroeconomic disregard of the “private” realm of the household “seems to reflect traditionally male thinking, with its emphasis on control and its penchant for absolute and dichotomous categories” (Sylvester 1991: 2–3). An important question, then, is whether women have sufficient “voice” in the economic policy-making realm. Unfortunately, they do not; of all policy-making sectors, economics and finance are those in which women have the lowest levels of representation (Women’s Environment and Development Organization [WEDO] 2002: 1). There are only 28 female ministers around the world in the areas of Finance, Trade, Development, Industry and Agriculture. Women comprise less than 8.3 percent of the World Bank Board of Directors, none of the International Monetary Fund Board of Directors, 5.5 percent of the World Bank Board of Governors, and 2.2 percent of the IMF Board of Governors (WEDO 2002: 2) (see Table 13.1). Furthermore, this underrepresentation continues in regional development banks, key institutions addressing poverty. As shown in Table 13.2,

184 Tonia L. Warnecke Table 13.1 Female representation in the IMF and World Bank Institution

% Female

IMF Board of Governors WB Board of Governors IMF Board of Directors WB Board of Directors

2.2 5.5 0.0 8.3

Table 13.2 Female representation in regional development banks Institution

% Female

(Board of Directors) European Investment Bank Asian Development Bank African Development Bank Inter-American Development Bank

16.1 0.0 16.6 7.1

there are no women in the Asian Development Bank Board of Directors and only 7.1 percent in the Inter-American Development Bank. The highest female representation at this level is only 16.6 percent, for the African Development Bank, trailed closely by the European Investment Bank with 16.1 percent (WEDO 2002: 2). Does a focus on the higher levels of management provide an overly skewed view of the gender breakdown? It is true that female representation among the general staff of these organizations has increased over the last ten years. Women comprise about 34 percent of IMF staff and nearly 40 percent of World Bank staff (WEDO 2002: 3). However, the question remains: who makes the policies? Because the Board of Directors is delegated the principal role for policy-making, it is significant that women are not well represented at this level. This disproportion pervades other important policy-making organizations as well, such as the United Nations Conference on Trade and Development (UNCTAD), as indicated in Table 13.3 (WEDO 2002). Since women have only a minor presence in these key institutions, international economic policies are gendered in a few different ways. However, “gendered” policies do not require a conscious discrimination against women. Gendered policies are more often “gender-blind,” meaning that women’s interests are rendered invisible because they are not consciously taken into consideration. Since fewer women are voting members of these international institutions, active advocacy for women’s interests is in short supply. Consequently, the possibility of gender bias in particular policies is likely to be relegated to the back burner of discussion. Increasing female representation in these institutions would not only

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Table 13.3 Female representation in UNCTAD Professional staff levels

% Female

(Lowest to highest) 1 2 3 4 5 6 7 8 9

0.0 37.0 43.9 28.9 19.5 15.4 0.0 0.0 0.0

increase gender dimensions of policies, but is likely to enhance the focus on general human development goals. However, including more women in the IMF and World Bank is not a sufficient solution for re-gendering international financial policies. IMF and World Bank policies reflect the mainstream separation of “public vs. private” and “economic vs. social” – even though this approach to international finance, and to any associated “economic” disequilibria, creates social problems for women. Further, most of these problems are excluded from policy considerations since the unpaid and informal sectors are excluded from economic accounting. In this manner, international financial policy dissociates itself from a particular portion of its consequences: the disproportionate negative effects on women. The IMF passes any concern for gender disparities to the World Bank, seeing the latter as a “development” agency and itself solely an “economic” stabilizer (Aslanbeigui and Summerfield 2000: 94). While the World Bank has incorporated more gender analysis into its mission, it has not formulated a consistent (or adequately funded) approach to gender issues. Furthermore, Anne Krueger has claimed the World Bank should “avoid ‘soft issues’ such as women’s rights” and should not delve into such “theoretically controversial areas and practically unpopular policies” (cited in Aslanbeigui and Summerfield 2000: 95). So the question remains: will either of these institutions seriously address the links between international finance and gender?

Gendering financial policies Creating new policy prescriptions is a complex task, and even more so when attempting to use a gender-sensitive framework. The final portion of this chapter discusses various options for integrating gender into economic policies. Of course, re-gendering international finance is not just a matter of fairness, justice, or democracy. There are also economic reasons to

186 Tonia L. Warnecke reshape the international financial architecture from a new gender perspective. Improving the equality of access to financial instruments will promote a more efficient allocation of resources and a more efficient use of labor time. Several feminist economists accept that stable and steady economic growth is the best first step for improving conditions for both men and women. Given the volatility of the international financial system, re-regulating some areas of finance in developing countries may be a wise policy decision. The goal of this regulation would be to inhibit the domestic and global instability resulting from speculative finance. Enabling developing countries to control capital flows would also support a more long-term focus on restructuring and development.1 Most likely, this would lower the countries’ susceptibility to “hot money” movements and shift the composition of inflows towards more stable, long-term, and committed investment. This solution is not explicitly re-gendered, but has the potential to create more gender equity as an externality. Another important point is that steps have been taken toward social (and gender) equity at the microeconomic level of finance, but this has not been matched by similar effort at the macroeconomic level. A variety of financial institutions around the world have joined the microfinance bandwagon, serving clients that are excluded from the formal banking sector (due to lack of collateral, for example). Between eight and ten million poor households are now served by microfinance programs, and these clients generally borrow to finance self-employment activities such as rice processing, livestock raising, or traditional crafts (Morduch 1999: 1575). An interesting (and at first, unexpected) finding is that the major microfinance programs (Grameen Bank in Bangladesh, BancoSol in Bolivia, Bank Rakyat Indonesia, Bank Credit Desa in rural Indonesia, and Foundation for International Community Assistance village banks in 25 countries) enjoy loan repayment rates of more than 95 percent – better in many cases than repayment rates in the formal banking sector. Some microfinance institutions (BancoSol and Rakyat Indonesia) are financially sufficient; many others are not, requiring subsidies to maintain their operations. However, the financially less capable institutions often reach out to relatively poorer clientele, or clientele in rural areas that are more difficult to access. In essence, the emphasis on pure profit maximization has given way in part to an emphasis on “social capital,” defined as “institutions, relationships, and norms that shape the quality and quantity of a society’s social interactions” (World Bank 2002; see also Rankin 2002). The high loan repayment rates can be attributed to the factors differentiating microfinance from formal banking: group-lending contracts that minimize the adverse selection problem, peer monitoring that lessens moral hazard, and dynamic incentives such as progressive lending (loan amounts are increased as timely repayments occur) and credible threats to cut off future funding if loans are unpaid. These incentives are most effect-

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ive among clientele with limited mobility, which may be one reason for women’s higher repayment rates. Indeed, the vast majority of microfinance clientele are women; females comprise 95 percent of Grameen Bank borrowers. Of course, the fact that women borrow does not necessarily translate into female control over the borrowed funds; studies by Goetz and Sen Gupta (1996) and Hashemi and Schuler (1997) estimate that significant female control over the borrowed funds is maintained in 62 to 63 percent of cases involving Grameen Bank loans. Goetz and Sen Gupta, however, also find that women’s control over funds borrowed from another microfinance institution, the Bangladesh Rural Advancement Committee (BRAC), was much lower at 28 percent. This means that microfinance should not be equated with female empowerment, but it is helping “households that are not destitute but still remain considerably below poverty lines” (Morduch 1999: 1610). Microfinance has enabled institutions around the world (even the financially sufficient ones) to formulate a more “social” approach to finance. The popularity of microfinance programs contrasts sharply with the emphasis on social spending cutbacks and strict economic growth at the macro level. A gender-aware approach to international finance would consider the impact of international policies on what I would call “global” social capital. Global social capital would build upon the broadest view of social capital outlined by the World Bank, which moves beyond individual-level relations to capture “the most formalized institutional relationships and structures representative of the state . . . [so that] the corporate sector, and civil society create forums in and through which they can identify and pursue common goals” (World Bank 2002). By creating goals that combine international financial targets with socially sustainable policies, it may be possible to alleviate some of the uneven growth that is so common in developing countries beginning to follow the neoliberal policy schema (see Bhalla 1995; Morris 1995; Smith 1996; Dixon 1999). Moving to more explicit re-gendering, macroeconomic modeling techniques could also be altered to reflect a gender-aware view of international finance.2 According to Elson, the easiest way of introducing gender into a macroeconomic model is by disaggregating at least one of the variables (1995: 1851). This strategy is the least controversial and is more likely to be accepted by the mainstream, because it does not challenge the basic scope of the model. For example, it does not include coercion and power relations. However, a gender-disaggregated model could reflect the fact that men and women often face different constraints in earning income. These constraints may include the following: discrimination against women outside the household; copying of gender-specific role models; and the restricted range of economic activities which are more easily compatible with motherhood (Collier 1990: 159). Second, men and women often have “radically different propensities to consume particular public services” (Collier 1990: 149). Because of this, budgetary changes due to

188 Tonia L. Warnecke stabilization packages “can have very different gender-differentiated effects” (Collier 1990: 149). A disaggregated model could incorporate these types of gender distinctions. A more involved and contentious tactic is to “identify missing variables which have a particular gender significance and bring them into the model” (Elson 1995: 1852). For example, the macroeconomic model could incorporate a new sector for analysis – the unpaid household sector. By calling attention to the gap between market and state provision of resources, this could help to make stabilization policy more responsive to household adjustment. Furthermore, introducing a non-market sector into the model could create a more socially responsible foundation for financial decision-making. However, this modeling approach is very controversial because it challenges the market-only basis of traditional models, and it bridges the current divide between “economic” and “social.” Hence, this type of model is heterodox (social economic) in nature.

Conclusion Cultivating a feminist approach to international finance is important because financial policy-making can no longer be the sole concern of the experts. The reason is simple: liberalization has thrust the consequences of international policies into the everyday lives of women around the globe. Of course there is no “magic formula” for ridding the global economy of financial crises, as financial panics are nothing new. Crises in finance plagued the global economy long before the recent waves of liberalization. However, reducing the frequency of these crises and their severity are feasible policy goals. Moderating the economic and social devastation from these crises would benefit all persons, including women. Furthermore, stabilization packages can be tailored to mitigate the disproportional effects on women. For example, “applying fees to university education or to specific health services” would probably not exacerbate gender inequalities as much as “fees for primary education or primary and reproductive medical care” (Palmer 1995). In conclusion, it is not that orthodox financial policies emphasize growthat-any-cost, but they certainly support economic growth at high social costs. For women, these social costs often have disproportionately negative feedback effects which dampen their prospects for economic productivity in the future. It is crucial to develop a detailed feminist approach to international finance, in order to bring a focus on gender-specific welfare back into the picture. In this way, a gender-aware approach would lead to a “leveling up” of women’s quality of life, rather than a “leveling down” of men’s. Because it focuses on the inseparability of society and economy and emphasizes the socioeconomic feedback effects of policies targeted at the economy, this gender-aware approach to international finance is compatible with a social economic approach. Of course, a gender-aware, social economic approach to international finance may not eliminate global

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financial crises. Nonetheless, by redefining development in a more holistic manner (instead of a narrow focus on profit alone), the disastrous cycle of boom and bust is likely to moderate in the sphere of international finance.

Notes 1 For arguments supporting the use of capital controls, see, for example, Rodrik (1998) and Stiglitz (2002). 2 It is worth noting that models are the foundation for most orthodox theory, but may not be for all heterodox theory. Because of this, further research is needed.

References Arestis, P. and Glickman, M. (2002) “Financial Crisis in Southeast Asia: Dispelling Illusion the Minskyan Way,” Cambridge Journal of Economics 26 (2): 237–60. Aslanbeigui, N. and Summerfield, G. (2000) “The Asian Crisis, Gender, and the International Financial Architecture,” Feminist Economics 6 (3): 81–103. Bakker, I. (2001) “Engendering the Economics of Globalization,” in Jim Stanford, Lance Taylor, and Ellen Houston (eds), Power, Employment and Accumulation: Social Structures in Theory and Practice, Armonk, NY: M.E. Sharpe. Bekaert, G., Harvey, C., and Lundblad, C. (2001) “Does Financial Liberalization Spur Growth?,” NBER Working Paper No. 8245, Cambridge, MA: National Bureau of Economic Research. Benería, L., Floro, M., Grown, C., and MacDonald, M. (2000) “Introduction: Globalization and Gender,” Feminist Economics 6 (3): vii–xviii. Bhalla, A.S. (1995) Uneven Development in the Third World: A Study of China and India, New York: St. Martin’s Press. Center for Women and Democracy (2004) “Vita Activa: The Center for Women and Democracy Fall 2004 Newsletter.” Seattle: University of Washington [online], available at , accessed 4 April 2003. Collier, P. (1990) “The Impact of Adjustment of Women,” in World Bank, Analysis Plan for Understanding the Social Dimensions of Adjustment SDA Unit Africa Region, Washington, DC: World Bank. Dixon, C.J. (1999) The Thai Economy: Uneven Development and Internationalisation, London and New York: Routledge. Elson, D. (1992) “Male Bias in Structural Adjustment,” in Haleh Afshar and Carolyne Dennis (eds), Women and Adjustment Policies in the Third World, New York: St. Martin’s Press. Elson, D. (1995) “Gender Awareness in Modeling Structural Adjustment,” World Development 23 (11): 1851–68. Floro, M.S. (1995) “Economic Restructuring, Gender and the Allocation of Time,” World Development 23 (11): 1913–29. Frankenberg, E., Thomas, D., and Beegle, K. (1999) “The Real Costs of Indonesia’s Economic Crisis: Preliminary Findings from the Indonesia Family Life Surveys,” Policy Brief. Labor and Population Working Paper Series 99–04, RAND. Goetz, A.M. and Gupta, R.S. (1996) “Who Takes the Credit? Gender, Power, and Control over Loan Use in Rural Credit Programs in Bangladesh,” World Development 24 (1): 45–63.

190 Tonia L. Warnecke Grabel, I. (1995) “Speculation-led Economic Development: A Post-Keynesian Interpretation of Financial Liberalization and Adjustment,” International Review of Applied Economics 9 (2): 127–49. Hashemi, S.M. and Schuler, S (1996) “Sustainable Banking with the Poor: A Case Study of the Grameen Bank,” Working Paper No. 10, Washington, DC: JSI Research and Training Institute. Klein, M.W. and Olivei, G. (2000) “Capital Account Liberalization, Financial Depth, and Economic Growth,” Boston, MA: Fletcher School of Law and Diplomacy, Tufts University, unpublished. Morduch, J. (1999) “The Microfinance Promise,” Journal of Economic Literature 37 (4), pp. 1569–614. Morris, C.T. (1995) “How Fast and Why Did Early Capitalism Benefit the Majority?” The Journal of Economic History 55 (2): 211–26. Palmer, I. (1995) “Public Finance from a Gender Perspective,” World Development 23 (11): 1981–6. Quinn, D. (1997) “The Correlates of Change in International Financial Regulation,” American Political Science Review 91 (3): 531–51. Rankin, K.N. (2002) “Social Capital, Microfinance and the Politics of Development,” Feminist Economics 8 (1): 1–24. Rodrik, D. (1997) Has Globalization Gone Too Far?, Washington, DC: Institute for International Economics. Rodrik, D. (1998) “Who Needs Capital Account Convertibility?” in “Should the IMF Pursue Capital Account Convertibility,” Princeton Essays in International Finance, no. 207, pp. 55–65. Rodrik, D. (1999) “Globalization and Labor, Or: If Globalization is a Bowl of Cherries, Why Are There So Many Glum Faces around the Table?” in Richard E. Baldwin, Daniel Cohen, Andre Sapir, and Anthony Venables (eds), Market Integration, Regionalism and the Global Economy, pp. 117–52, New York: Cambridge University Press for CEPR. Singh, A. and Zammit, A. (2000) “International Capital Flows: Identifying the Gender Dimension,” World Development 28 (7): 1249–68. Smith, D.A. (1996) Third World Cities in Global Perspective: The Political Economy of Uneven Urbanization, Boulder, CO: Westview Press. Stiglitz, J. (2002) Globalization and Its Discontents, New York, NY: W.W. Norton. Sylvester, C. (1991, December) “Feminist Theory and Gender Studies in International Relations” International Studies Notes [online], pp. 32–8, available at , accessed 15 November 2002. Taylor, L. (1995) “Environmental and Gender Feedbacks in Macroeconomics,” World Development 23 (11): 1953–61. Women’s Environment and Development Organization [WEDO] (22 January 2002) “The Numbers Speak for Themselves” [online], available at , accessed 4 April 2003. World Bank (updated 10 October 2002) “What Is Social Capital?” [online], available at , accessed 28 April 2004.

14 Social capital and the capability approach A social economic theory Alexandre L. Bertin and Nicolas Sirven

According to Robert Putnam (2001), who found trace of the expression in an article dating to 1916 (Hanifan 1916), social capital seems to be a quite early notion in human sciences. Nevertheless, this concept is conventionally attributed to the sociologist Pierre Bourdieu (1980), who developed and popularized it with an eye to highlighting its role in the preservation of social class from a macro-social perspective. Social capital in this context refers to the entirety of resources an agent can obtain from his/her social network: “the current or potential resources linked to the possession of a durable social network of more or less institutionalised relationships of mutual knowledge and mutual acknowledgement; or in other words the idea of belonging to a group” (Bourdieu 1980: authors’ translation.) Influenced by Bourdieu’s work, James Coleman (1988) introduced the concept of social capital in a more micro-socioeconomic framework, relying on the hypothesis of rational individuals. Social capital is seen as a productive asset derived from the social structure that facilitates cooperation among rational individuals. Since the mid-1990s, Putnam popularized Coleman’s conception of a new factor of production through its ability to explain why some countries or regions develop further than others. Being involved in social organizations and sharing the same norms and values promote trust and facilitate cooperation and coordination for mutual profit (Putnam 1993; see also Helliwell and Putnam 1995). Subsequently, Francis Fukuyama (1995) emphasized the role of social capital as the key element fostering economic growth and development because it produces trust. His assertion relies on the usual neo-institutional theory stipulating that trust among people reduces transaction costs and thus fosters economic growth (North 1990). Little by little, the notion of social capital evolved from its original conception to finally take into account the entirety of social interactions among all economic agents. Such a derivation from Bourdieu’s prior work leads to two main points. First, social capital is seen as a public good, whereas Bourdieu highlights the fact that it is an exclusive resource for some individuals. Second, the various forms of social features associated with social capital reduce the explanatory power of this concept. Put

192 Alexandre L. Bertin and Nicolas Sirven differently, “social capital means different things to different persons” (Dasgupta and Serageldin 1999: x). The ever-increasing importance of social capital in the economic literature does not signify a general agreement on its definition. By and large, the idea crystallized in the metaphor of social capital seems to stress that the social environment (norms, values, networks, social activities, etc.) has an effect on individuals’ well-being. This idea is simultaneously shared by social economics and the capability approach. Social economists have long recognized that the (social) environment influences how preferences are formed and decisions are made by individuals (Dolfsma 2002; Davis 2003), while the capability approach recognizes social interactions as a central human functional capability1 (Nussbaum 2000). Both of these approaches are powerful alternative analytical frameworks for human development and economic policy. The purpose of this chapter is to provide an attractive pathway between the two frameworks. The challenge is to find both a strict definition of social capital and an analytical framework that could support the idea of improved access to resources. More precisely, the concept of social capital can be criticized from a social economic perspective (e.g., Dolfsma and Dannreuther 2003) so as to reinterpret Bourdieu’s work in a capability approach. The chapter is structured in the following way. First, we aim to overcome the limitations of mainstream analysis by suggesting an alternative definition of social capital based upon the rights an agent has over the resources of his social network. We then turn to the mobilization of social capital in order to get access to resources. In Amartya Sen’s words, the resources an agent can obtain from his social network are part of an entitlement set. Those entitlements are individual means people can use to achieve their own way of life. In other words, social capital can improve people’s capabilities. Following this scheme, we employ Sen’s capability approach to evaluate the role social capital plays in poverty reduction.

An alternative definition of social capital Ever since the development of social capital in the literature, some scholars pointed out the limitations of such a fuzzy concept (Arrow 1999; Solow 1999). Most of those criticisms arise from the partial analysis of Bourdieu’s work by Coleman. Indeed, the latter’s conception of social capital gives little attention to the importance of differential access to resources based on class, which is at the heart of Bourdieu’s aim. Therefore, a strong conceptualization of social capital based upon a reinterpretation of Bourdieu’s work in a microeconomic framework could resurrect its analytical power.

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Some limitations of the mainstream approach to social capital In the last 15 years, the focus on social capital as a factor in economic growth has shifted the literature back from a micro- to a macroeconomic level of analysis. Some authors have denounced the abundance of definitions of social capital that enhance the multifaceted vagueness of the concept (Portes 1998; Dasgupta and Serageldin 1999; Sobel 2002). The World Bank launched the Social Capital Initiative (SCI) in 1996, utilizing many of the heterogeneous approaches dealing with social interactions. This vagueness has been proposed to hold back a multidimensional and multiform perspective where several different elements make part of social capital (Grootaert and van Bastelaer 2002a, 2002b). The concept refers to any feature of social organizations, including networks, norms, and values that have an economic outcome. Social capital is widely understood as bonds within the family, groups, or social networks members; bridges linking together different associations and other civic organizations; and ties between institutions from the civil society and local or national governments. As underlined by Grootaert and van Bastelaer (2002a: 4), such an approach takes into account some large effects of complementarities and substitution between the forms and dimensions of social capital. However, the analytical framework provided by the World Bank associates together under one thematic banner a wide range of socioeconomic studies that do not always share the same conception of social capital. For example, some authors stress the negative effects of social capital on economic performance (Portes and Landolt 1996; Rubio 1997), whereas it is usually described as a productive factor. One reason for such misunderstandings about social capital resides in the mainstream economist’s desire to use “social capital” as synonymous with “institution” in the analysis of economic growth determinants. There are some “productive” forms of social capital as well as some “perverse” ones, just like one can account for “good” and “bad” institutions. The World Bank (2003: 38) actually articulated that “the difference between social capital and institutions is often fuzzy and there are strong influences among the different social assets.” Therefore, social capital is very closely related to the concept of institutions, as seen by the New Institutional Economics (North 1990), and the former is more and more used as a substitute for the latter in recent studies. Such a practice can be explained by Arrow’s position stipulating “institutions are a form of capital.” Nevertheless, it does not justify the use of the term capital. Indeed, a form of capital is a specific asset with the properties of being accumulated, fungible, and rentable. Most of the literature does not deal with the first two issues. There is no consensus on the third one, which considers social capital as rentable when its effects on economic performance are positive. In other words, social capital – as conceived by the World Bank – should be seen as an asset, rather than a form of capital.

194 Alexandre L. Bertin and Nicolas Sirven Another problem raised by the mainstream approach of social capital is related to the measurement of the concept. Due to the slippery breadth of the concept, social capital can be evaluated using a range of different variables (e.g., Helliwell and Putnam 1995; Knack and Keefer 1997; Narayan and Pritchett 1997, 2000; Krishna and Shrader 1999; Krishna and Uphoff 1999; Grootaert 2000; Grootaert and Narayan 2004). To make possible comparisons between empirical results, some studies use an index of trust as a proxy for social capital (Whiteley 2000). However, this methodology raises some complications. First, there is some evidence, unlike Putnam2 (2000), that “trust” only poorly captures the effects of social capital on growth (Beugelsdijk and van Shaik 2001). Second, the Organization for Economic Cooperation and Development (2001) stresses some misunderstandings about the meaning of “trust” according to relationships among people in different time, space, and culture. Third, Durlauf (2002) raises some econometric difficulties linked to the use of community-based data so as to explain individual economic performance: “In light of the vagueness of the concept, I believe that the use of observational data to identify substantive forms of social capital is unlikely to be successful” (495). On the whole, it seems quite difficult to search for a good index of social capital as long as a strict, simple, and operational definition of social capital is not given. Social capital as an endowment In order to provide an alternative definition of social capital, it may be interesting to come back to its roots. More precisely, one can focus on the derivation of Bourdieu’s macro-social conception into Coleman’s microeconomic one. According to Bourdieu, a fundamental property of social classes is to ensure their reproduction by excluding non-class members from the resources (e.g., social capital) of the social network. Hence, the main difference with Coleman’s reinterpretation is that one can no longer consider social capital as a public good because its use is exclusive. Taking that into account, an alternative way of defining social capital is to consider it as a private form of capital in a microeconomic framework. In other words, the analysis of this concept should take its private good characteristics as a starting point. Such a viewpoint may raise some debate about the formation of social capital. Since it is a private good, standard economics suggests individuals rationally invest time and/or money in social activities with the aim of benefitting from positive social externalities or social support from their network of relationships. The anthropological literature, on the other hand, indicates that a “gift” from an individual to another member of his or her network is not necessarily rational, but may follow from a set of normative obligations. According to prior work by Marcel Mauss (1924), individuals within a community are submitted to three kinds of obliga-

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tions: the gift has to be given, accepted, and “repaid.” The latter obligation is consistent with the principle of reciprocity that means each giver is entitled (through norms, values, and informal institutions of the community) to a gift that the given has to make in turn. To sum up this idea: “one gives because one is constrained to, because the given has a kind of property right over everything the giver owns” (Mauss 1924: 19; authors’ translation). Following this, we can turn to a rights-based definition of social capital. Assume that an individual within a social network or a community can benefit from the help of other members in event of need. This means he or she has the “right” to access resources that other people would afford him or her. Assume this norm is the same for all members; anyone that can ask for help is conversely supposed to provide social support to any other member (Mahieu 1989). For example, if agent i is given money by members (j, k, l, m, . . .) of her/his network at time t; in turn, one can expect i helps j at time t  1. Such reciprocity is guaranteed by strong norms and values that discourage free-riding behaviors. In other words, every time agent i asks her/his network for help, s/he has, in turn, the obligation to provide subsequent social support to other members who have already helped him. Note that the result is the same if i provided social support before asking for help. The network is no longer seen as social capital, but rather as the social structure in which social resources are embedded (Lin 2001). Social capital is defined as the rights an agent can exercise over his social network so as to access some particular resources. This characterization breaks up the “fuzzy” conception of social capital and avoids any functionalist considerations. Social capital becomes a causal notion because social interactions (such as remittances) lead to expectations of gift-giving and thus create reciprocity and cooperation. The analogy with other forms of capital is now undeniable: while human capital comes from investments in oneself, social capital can be accumulated through investments in others. The main difference is that, whereas other forms of capital can be obtained on the market (capital markets for financial capital, goods markets for physical capital, the labor market for human capital), it appears that the mobilization space3 for social capital is only within the network of an agent’s sustainable relationships. In summary, social capital refers here to the rights an agent has over the resources of his social network. These rights can be accumulated and transformed in other kinds of resources. That is why we consider social capital as an endowment an individual can mobilize in event of need.

Social capital and access to resources Once social capital is defined as an endowment, its analysis must take into account the accumulation and the use of the rights an agent has over his

196 Alexandre L. Bertin and Nicolas Sirven social network. In this perspective, Amaryta Sen’s (1981) entitlement approach of poverty and famines provides an analytical framework where all the forms of capital (physical, financial, human) are considered as a means to access resources. The challenge is to incorporate social capital as defined here into this approach, and to specify its particularities as a special form of capital. The entitlement approach A quarter of a century ago, Sen (1981) proposed a new interpretation of the causes of famine that is radically different from the standard approach based on the lack of food available in the society (Malthus’ population principle). Sen focused on the inability to “command food through the legal means available in the society” (1981: 45). For him, famines could occur even when there is enough food to feed the entire community, and those who suffer from famines are those who are not able to convert their endowments into food; Sen uses the expression of “entitlement failure.” This failure appears when poor people do not have access to a category of goods because their endowments are insufficient or not adapted to produce those goods or to gain them by transactions. Endowments are then defined as the stock of different forms of capital (physical, financial, human, and social) an agent possesses. Sen argues that it is not the amount of resources that is important to avoid poverty, but the transformation from endowments to some bundles of goods required for living well. This transformation is legitimated by a system of property rights. Those rights are guaranteed when the transformation respects some “entitlement relations”: (1) production-based entitlement, when one is entitled to what one produces by using one’s own resources and one’s own labor force, or (2) transaction-based entitlement, when one is entitled to goods gained by market mechanisms and transfers. All the bundles of goods one can obtain by transactions of endowments are called “exchange entitlement,” and the “exchange entitlement mapping” is “the relation that specifies the set of exchange entitlements for each ownership bundle” (Sen 1981: 3). Poverty can thus be analyzed as an inadequate exchange entitlement set that does not contain suitable goods to obtain those that are necessary to avoid poverty. At this stage of analysis, it is easy to understand endowments from social networks as a subset of an agent’s entitlements set and social capital as a part of endowments transformed into social resources. A particular focus on social capital An individual’s stock of social capital is made of the whole rights that give him or her access to some of the resources of his/her own social network. Those potential resources represent part of the entitlements set an agent

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Resources B

y1 S1 Poverty line

Z S0

y0

S2

O

x1

x0

A

Social capital

Figure 14.1 Exchange entitlement mapping with social capital.

can get with a given social capital endowment. Following the above analysis, an agent can mobilize his/her social capital so as to get resources that would enhance his/her well-being. Figure 14.1 illustrates the incidence of poverty of a conversion of social capital into purposeful resources. In Figure 14.1, x0 stands for the amount of social capital agent i is endowed, and y0 represents the potential social resources associated to x0. To simplify, the relation between entitlements and social capital is of the form y  p.x where p is the transformation rate of social capital (x) into resources (y). In situation S0, agent i is below the poverty line Z; i.e., one considers the agent poor because his/her resources are insufficient to fulfill his/her needs. Now, assume agent i asks for help. Put differently, s/he chooses to exercise the (informal) rights s/he has over the members of her/his network. Note that exercising those rights in order to acquire resources can be analyzed as “selling off” social capital. Consistent with reciprocity hypothesis, agent i will have to provide subsequent resources to members of the network, and thus transforms part of his/her rights into social obligations. The stock of social capital declines from x0 to x1, but is associated with an increase in resources agent i has available. To sum up, an agent can benefit from the resources of a network by becoming somehow indebted to the group. As a result, an individual mobilizes social capital when s/he takes advantage of her/his ownership rights on the resources of her/his social network. It seems that these rights are necessarily distinct; they are the

198 Alexandre L. Bertin and Nicolas Sirven sum of those rights to which an individual may lay claim once s/he has honored his/her obligations vis-à-vis community. According to Mahieu (1989), these rights become apparent via the exchange of one’s time or goods, which elicit a certain level of obligation. By bringing this last property into play, it may be considered that an agent’s rights and social obligations take the form of transfers with other agents (not taking place in a market but within a social network). Social capital and poverty reduction Sen’s entitlement approach laid the foundation for a much more complex analysis of welfare: the capability approach. Considering social capital as an endowment in the entitlement approach led us to evaluate its impact on well-being using the capability approach. Although there is a constantly growing body of literature on both the capability approach and social capital, and although they put forward new ways of analyzing poverty, few studies have linked the two concepts together. Therefore, in order to be able to explore this new analytical framework, this section will offer an interpretation of the capability approach before going on to identify how social capital works alongside it. The capability approach Of the various interpretations of the capability approach, the greatest importance can be given to that which focuses on rethinking the utilitarian precepts that aim to measure the happiness of individuals. Essentially, the utilitarian doctrine rests on the principle that utility can only be measured in an indirect way, if one wants to make inter-personal welfare comparisons. In this reading, the standard neoclassical approach considers utility to be a growing function of consumption (the monotonicity hypothesis), or an increasing function of income (more generally, of the resources available to the representative agent). For a long time, this argument has been vaunted as the keystone in the majority of pro-developmental policies, to increase wealth in order to improve living conditions. It has only been relatively recently that theories have begun to appear which offer a less simplistic vision of human development. Here, Sen’s work provides the principal point of reference. The capability approach Sen developed brings into question this direct link between the resources available to an agent and his level of welfare. According to Sen, at least two obstacles exist to equivalence between an agent’s resources and the level of well-being. First, it can be considered that an agent’s resources are potential as long as s/he has not made good use of the ownership rights on those resources. In other words, an agent’s standard of living does not depend solely on the total value of her/his resources (commodities), but also on the ability to transform resources

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into baskets of goods. Second, once an agent does have a stock of goods or resources available, the usage (doings and beings) s/he can make of them is conditional on a whole range of personal characteristics (age, gender, handicap, etc.) and social characteristics (the position held in the community, etc.), all of which represent what Sen (1985) names the functions of utilization. They determine an agent’s ability to use the goods available (capability) in order to be free to choose a way of life that suits him or her (functionings). In summary, these three elements – resources, entitlements, and functions of utilization – will determine the extent of choices open to an individual (options for being and doing). The more curtailed the capability extent is, the poorer an individual will be in terms of life choices. Therefore, poverty is not a lack of resources anymore, but rather a lack of capabilities. Interest ands limits of the capability analysis of social capital The main application of the capability approach for social capital is to make a strict distinction between the concept, its social environment, and its effects. Indeed, social capital as an endowment is made of informal rights of property that gives it the status of an asset. Because those rights can be accumulated, social capital has the characteristics of a special form of capital. This conception differs from the World Bank’s point of view where the concept is a “fuzzy” combination of several social interactions that have an economic payoff. In contrast, the capability approach separates those social interactions between the informal social rights an agent accumulates (social capital) and the social environment, composed of norms and values that ensure these rights. More precisely, the social environment is different from social capital because the former plays the role of a function that transforms the latter into a vector of capabilities. Even if this theoretical clarification gives social capital a precise conception, several difficulties apply at the empirical level. More precisely, according to Jérôme Ballet and François-Régis Mahieu (2003), the evaluation of social capital is quite possible in this framework using inter vivos remittances, but the main problem deals with the measure of capabilities (Robeyns 2003). Remember, the capability set represents all the individual freedoms an agent can enjoy among all the achievable functionings. Therefore, if one wants to measure the level of individual capabilities, one will be confronted with a problem of multidimensionality. Indeed, the capability set of an agent is made of infinitely achievable functionings that are not all observable. Moreover, Sen (1985) underlines that achieved functionings take into account additional information in the sense that there is a process of choice of life absent in the measure of capabilities. Consequently, most of the empirical studies focus on functionings rather than capabilities (see, for example, Chiappero-Martinetti 2001; Lelli 2001). Therefore, the capability approach tends to be nothing more than a

200 Alexandre L. Bertin and Nicolas Sirven complement of the usual welfarist conception of poverty (Ravallion 1998; Lachaud 2002).

Conclusion The purpose of this chapter has been to find an alternative framework of analysis for the concept of social capital employing a social economics perspective. The main difficulty with social capital rests on the fuzziness of its definition. One source of confusion comes from the derivation of Bourdieu’s conception of this concept by Coleman, who tries to apply the hypothesis of individual rationality to social behavior. Nevertheless, by doing so, Coleman leaves behind the notion of access to resources rooted in the original function of social capital. Therefore, social capital is seen as an element of the social structure that acts on it, and, further, the definition of social structure is vague. The World Bank provided a unified framework for a wide range of heterogeneous studies on social capital, but without establishing an operational definition of this concept. To shed light on this concept, we adopt a rights-based definition of social capital. Thus, social capital is an asset made of the informal social rights that an agent can acquire from her/his social network. Such an interpretation makes social capital play the same role as other forms of capital: people can mobilize it in event of need. In Sen’s capability approach, social capital refers to an endowment, i.e., a set of means to achieve a life people are reasonable to value. More precisely, this theoretical framework distinguishes social capital from its social environment (network, norms, and values, etc.) and allows a much more precise evaluation of people’s endowments to struggle against poverty. At this stage, further research could build empirical evaluations of social capital following a rights-based approach.4 The main limitation of the capability approach rests on the empirical methodological difficulties in evaluating people’s capability level.

Notes 1 Affiliation is defined as the seventh central human functional capability as follows: “Being able to live with and toward others to recognize and show concern for other human beings, to engage in various forms of social interaction . . .” Nussbaum (2000: 79). 2 Actually, Putnam found a strong correlation between “trust” and some components of social capital (number of associations, number of people involved in associations, etc.). 3 One could define this expression as both real and virtual places where resources are allocated. Markets, social networks, the state, and any institutions that guarantee entitlements according to the law, norms, and values common to those who belong to them, all enter into this definition. 4 Studies by Ballet and Mahieu (2003), for example, propose a monetary measure of social capital through remittances.

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References Arrow, J.K. (1999) “Observations on Social Capital,” in Partha Dasgupta and Ismail Serageldin (eds), Social Capital: A Multifaceted Perspective, Washington, DC: World Bank, pp. 3–5. Ballet, J. and Mahieu, F.-R. (2003) “Le Capital Social: Mesure et Incertitude du Rendement,” in Jérôme Ballet and Roland Guillon (eds), Regards Croisés sur le Capital Social, Paris: L’Harmattan, pp. 41–56. Beugelsdijk, S. and van Shaik, T. (2001) “Social Capital and Regional Economic Growth,” discussion paper, Tilburg University, the Netherlands, unpublished. Bourdieu, P. (1980) “Le Capital Social,” Actes de la Recherche en Sciences Sociales, no. 31: 2–3. Chiappero-Martinetti, E. (2001) “A Multi-dimensional Assessment of Well-being Based on Sen’s Functioning Theory,” Revista Internazionale di Scienza Soziale 108 (2): 207–39. Coleman, J.S. (1988) “Social Capital in the Creation of Human Capital,” American Journal of Sociology 94 (supplement): S95–S120. Dasgupta, P. and Serageldin, I. (1999) “Preface,” in Partha Dasgupta and Ismail Serageldin (eds), Social Capital: A Multifaceted Perspective, Washington, DC: World Bank, pp. ix–x. Davis, J.B. (2003) The Theory of the Individual in Economics, New York, NY: Routledge. Dolfsma, W. (2002) “Mediated Preferences: How Institutions Affect Consumption,” Journal of Economic Issues 36 (2): 449–57. Dolfsma, W. and Dannreuther, C. (2003) “Subjects and Boundaries: Contesting Social Capital-based Policies,” Journal of Economic Issues 37 (2): 405–13. Durlauf, S. (2002) “On the Empirics of Social Capital,” The Economic Journal 112 (483): 459–97. Fukuyama, F. (1995) Trust: The Social Virtues and the Creation of Prosperity, New York, NY: Free Press. Grootaert, C. (2000) “Social Capital, Household Welfare and Poverty in Indonesia,” Local Level Institutions Study Working Paper No. 6, Social Development Family, Environmentally and Socially Sustainable Development Network, Washington, DC: World Bank, unpublished. Grootaert, C. and Narayan, D. (2004) “Local Institutions, Poverty and Household Welfare in Bolivia,” World Development 32 (7): 1179–98. Grootaert, C. and van Bastelaer, T. (2002a) The Role of Social Capital in Development, Cambridge: Cambridge University Press. Grootaert, C. and van Bastelaer, T. (2002b) Understanding and Measuring Social Capital, Washington, DC: World Bank. Hanifan, L.J. (1916) “The Rural School Community Center,” Annals of the American Academy of Political and Social Science 67 (April): 130–8. Helliwell, J. and Putnam, R. (1995) “Economic Growth and Social Capital in Italy,” Eastern Economic Journal 21 (3): 295–307. Knack, S. and Keefer, P. (1997) “Does Social Capital Have an Economic Payoff? A Cross-country Investigation,” Quarterly Journal of Economics 112 (4):1251–88. Krishna, A. and Shrader, E. (1999) “Social Capital Assessment Tool,” Social Capital Initiative Working Paper no. 22, Washington, DC: World Bank, unpublished.

202 Alexandre L. Bertin and Nicolas Sirven Krishna, A. and Uphoff, N. (1999) “Mapping and Measuring Social Capital: A Conceptual and Empirical Study of Collective Action for Conserving and Developing Watersheds in Rajasthan, India,” Social Capital Initiative Working Paper no. 13, Washington, DC: World Bank, unpublished. Lachaud, J.-P. (2002) Pauvreté Monétaire et Privations des Capacités en Afrique, Contribution à l’analyse des interactions, Série de recherche no. 6, Centre d’économie du développement, University of Montesquieu at Bordeaux. Lelli, S. (2001) “Factor Analysis vs. Fuzzy Sets Theory: Assessing the Influence of Different Techniques on Sen’s Functioning Approach,” 1st International Conference on the Capability Approach, 5–7 June, Cambridge. Lin, N. (2001) “Building a Network Theory of Social Capital,” in Nan Lin, Karen Cook, and Ronald S. Burt (eds), Social Capital: Theory and Research, New York, NY: De Gruyter, pp. 3–27. Mahieu, F.R. (1989) Les Fondements de la Crise Économique en Afrique, Paris: L’Harmattan. Mauss, M. (1924) “Essai sur le Don. Formes et Raisons de l’échange dans les Sociétés Archaïques,” L’Année Sociologique, seconde série, Tome I. Narayan, D. and Pritchett, L. (1997) “Cents and Sociability: Household Income and Social Capital in Rural Tanzania,” Policy Research Working Paper No. 1796, Social Development and Development Research, Washington, DC: World Bank. Narayan, D. and Pritchett, L. (2000) “Cents and Sociability: Household Income and Social Capital in Rural Tanzania,” Economic Development and Cultural Change 47 (4): 871–97. North, D.C. (1990) Institutions, Institutional Change and Economic Performance, New York, NY: Cambridge University Press. Nussbaum, M.C. (2000) Women and Human Development: The Capabilities Approach, New York, NY: Cambridge University Press. OECD (2001) The Well-Being of Nations: The Role of Human and Social Capital, Paris: OECD. Putnam, R.D., with Leonardi, R. and Nanetti, R. (1993) Making Democracy Work, Princeton, NJ: Princeton University Press. Putnam, R.D. (2000) Bowling Alone: The Collapse and Revival of American Community, New York, NY: Simon and Schuster. Putnam, R.D. (2001) “Foreword,” in Susan Saegert, J. Phillip Thompson, and Mark R. Warren (eds), Social Capital and Poor Communities, New York, NY: Russell Sage. Portes, A. (1998) “Social Capital: Its Origins and Application in Modern Sociology,” Annual Review of Sociology 3: 1–14. Portes, A. and Landolt, P. (1996) “The Downside of Social Capital,” The American Prospect 26 (May–June): 18–22. Ravallion, M. (1998) “Poverty Lines in Theory and Practice,” Living Standard Measurement Study Working Paper No. 133, Washington, DC: World Bank. Robeyns, I. (2003) “Sen’s Capability Approach and Gender Inequality: Selecting Relevant Capabilities,” Feminist Economics 9 (2–3): 61–92. Rubio, M. (1997) “Perverse Social Capital: Some Evidence from Colombia,” Journal of Economic Issues 31 (3): 805–16. Sen, A. (1981) Poverty and Famines: An Essay on Entitlement and Deprivation, Oxford: Clarendon Press.

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Index

accountability 19 adoption 17 Africa 7, 162, 165, 166, 168, 169, 170, 171, 172 agriculture 33, 143, 147, 148, 155, 156, 183 Aid to Families with Dependent Children; see also welfare reform AIDS 49 alienation 99 altruism 12, 13, 18–20, 22; Trojan altruism 13, 20–1, 22 anthropology 16, 107, 194 apartheid 23 Aristotle 28, 62 Asia 175, 178 Association for Social Economics 64 Australia 144, 146, 154, 155 Bangladesh 50, 186, 187 bankruptcy 12 banks and banking 41, 42 Becker, Gary 86, 88, 89, 101 behavior 85 Bentham, Jeremy 145 biology 34, 88; evolutionary 28 biotechnology 143 blocked exchange 12, 13 Bolivia 186 bonds see securities Botswana 164, 169 Bourdieu, Pierre 191, 192, 194 boycotts 20, 23 Britain see United Kingdom California, State of (USA) 147 capabilities, livelihood 104, 106; see also Sen, Amartya capital 31, 51, 118, 178, 196 capital markets 15

capitalism 11, 15, 26, 33, 51, 52, 127, 129 capitalist economy see capitalism Caribbean 169 caring (caring labor) 99, 102, 132, 133, 134, 176 Catholic Church 16 certificates of deposit see securities childcare see caring children 18, 132, 181; child labor 21 choice 71, 85, 100, 154, 155 Christian ideological tradition 112, 113–14 civic organizations 193 class 43, 116, 191 Coleman, James 191, 192, 194 collective intentionality analysis 72–3 colonialism 163, 165, 166, 169 commodification 3, 43, 47, 50; of finance 41 commodity sector see market sector community 3, 4, 26, 27, 29, 36, 37; definition of 27, 28 comparable worth see pay equity comparative advantage 56 competition 177 cooperation 12, 13; defined 14 cooperatives 116, 117, 118, 122, 127, 134, 135 conflict 90, 92, 93, 94; ethnic 167 Confucianism 16 Congo 170 consumption (consumers) 5, 36, 41, 99, 107, 119; capabilities 98 contentment 92 creative construction 37 creative destruction 27 credit 15, 44, 46, 129 critical thinking 56 cultural differences see diversity

Index 205 culture 38, 102, 103, 107, 161 customs and habits 1 Davis, John 2, 5, 69, 70, 71, 72, 73, 81, 84, 85, 97 debt 178 democracy 164, 165, 171, 172, 185 desire 86, 87, 93 Desroche, Henri 119 development see economic development development economics 163 dignity 69, 70, 77–80, 81 discrimination 80 distribution 105, 131, 132, 169 diversity 7; cultural 7, 16, 165; ethnic 7, 162, 164, 166, 169, 170, 171, 172 Dunoyer, Charles 113 Durkheim, Émile 11 earnings differentials see wage gap economic agent 85, 86 economic citizenship 135 economic development 6, 7, 11, 50, 122, 134, 135, 161, 164, 170, 171, 182, 186, 189, 191 economic growth 26, 30, 31, 35, 36, 191; see also Gross Domestic Product economic orthodoxy see neoclassical economics Ecuador 16 education 131, 181 efficiency 13, 15, 17, 18, 22, 42, 53, 56, 61, 62, 143, 145 Employee Stock Ownership Plan 37 England see United Kingdom environment 183; physical 7; regulations 32 environmental economics 156 environmental goods 7 equality 114, 118 equity 56, 59, 62 ethics 3, 58, 162; decision-making 61; ethical code 14, 22, 55; ethical conduct 4, 56; in social economics 1 ethnicity see race-ethnicity Europe 166, 172 European Commission see European Union European Union 119, 120 externalities 131, 143, 144, 145, 146; environmental 154; social 146–56; technical 147

fairness 59, 185 Fauquet, Georges 117, 118 Favreau, Louis 6, 126, 133, 137 feedback effect 176 feminist critiques: of economic liberalization 7; of international finance 176, 188 feminist economics 99, 102, 133, 176, 182 financial crises 175 Fordism 126, 131, 132, 133, 134 foreign direct investment 178 France 6, 114, 115, 118, 120, 126–37, 167 Frankfurt, H. 76, 85, 86, 87, 88, 89, 90 free rider problem 15 freedom 59, 62, 69, 71, 74, 79 Friedman, Milton 11 game theory 23 gemeinschaft 28, 29, 35 gender 43, 44, 80, 175, 176, 180 General Motors 58 Germany 120, 167 gesellschaft 28, 29, 34 Gide, Charles 116, 118, 122 globalization 3, 4, 21, 60 Grameen Bank 52, 186, 187 Gross Domestic Product 181 group solidarity 12, 14–15, 22 habits see customs health (care) 61, 62, 88, 176, 181 heterodox economics 81, 114, 162, 176 heterodox theory see heterodox economics Hirschman, Albert 88 Hispanic see race-ethnicity homo economicus 2, 28, 55, 64 honesty 47 household 5, 103, 175, 182; decisionmaking 3 housework see social reproduction human capital 37, 88, 196 human needs see needs human rights 69, 78, 79 human wants see wants humiliation 80 identity: personal 1, 5, 28, 69, 76, 80, 84, 86, 89, 92, 93, 94, 95, 133, 163; organic 93; social 94, 133 ideology 164 illegal activity 48

206 Index immigrants 15, 31; see also race-ethnicity imperfect information 46 imperialism 170; see also colonialism income 6, 32, 100, 169 India 102 individual: choice 71; neoclassical conception 70, 91; social conception of 114; as socially embedded 5, 72–3, 74, 76, 79, 80 Indonesia 186 inefficiency see efficiency inequality 32, 136, 176 institutional discrimination see discrimination institutional economics 2, 12, 15, 32, 50, 100, 100–1, 103, 108, 117, 168, 193 institutions see institutional economics integrity: moral 75, 76; personal 75, 76 international finance 176 International Labor Organization 180 International Monetary Fund 181, 184, 185 international trade see trade investment 42 invisible hand 11, 55 irrationality see rationality Ivory Coast 166 Japan 170 judgment 4; moral judgment 4 justice 57, 185; commutative 57 Kant, Immanuel 62, 70, 78 Keynes, John Maynard (and Keynesianism) 43, 46, 51, 175 labor markets 17, 99, 118 Landes, David 163, 167 Latin America 175, 178 Lesotho 169 Lévesque, Benoit 6, 126, 133, 134, 137 liberal ideological tradition 112 liberalization 118, 175, 176, 177, 178, 179, 182 liberty 114 Lipietz, Alain 6, 126, 127, 128, 130, 129, 132, 133, 136 Livet, Pierre 93, 94, 95 living conditions 198 loans (lending) 41, 42, 44, 134, 186 macroeconomic development see economic development

Madagascar 166 mainstream economics see neoclassical economics Mali 166 Malthus, Thomas 113 Mandeville, Bernard 63 markets 103; economy see capitalism; exchange 13, 18, 29; functioning of 11, 22; goods 88; illegal 18; mechanism 19; rise of 30; sector 128, 133 marriage 52 Marx, Karl (Marxism/Marxist economics) 26, 31, 99, 109, 115, 127, 129, 170; Marxist-feminism 127 Mauritius 164, 172 Mexico City, Mexico 50 Michigan, State of (USA) 151 microfinance 186, 187 Middle East 167 Mill, John Stuart 113 Missouri, State of (USA) 145, 149, 150 model building 96, 187 morality 1, 3, 4, 11, 12, 23, 56, 62; moral code 11 mortgages 41 mutuals see cooperatives nation-building 163 natural resource economics see environmental economics Nebraska, State of (USA) 155 needs 38 neoclassical economics 1, 3, 5, 7, 69, 71, 81, 85, 98, 119, 127, 129, 161, 162, 170, 175, 177, 188, 192, 193 neoliberalism 136, 175 Netherlands 167 New Industrializing Countries 170 New Keynesians 43, 44 nonprofit sector 119 normative economics 64, 71, 155 norms 44, 120, 136 Norway 100 objectivity 2, 90 ontology 71 Organization for Economic Cooperation and Development 194 orthodox economics see neoclassical economics Pareto efficiency see efficiency partnerships 134

Index 207 patriarchy 131, 132 pedagogy 4, 56; use of films 62–3; use of novels 62–3 philosophy 44, 61–2, 84, 85, 93, 96 plagiarism 55, 64 pluralism see heterodox economics Polanyi, Karl 99, 102, 103, 107, 121, 122, 130 policy 48, 59, 144, 148, 156, 164, 176, 192; development 170, 179; fiscal 31; industrial 118; laissez-faire 144, 175; macroeconomic 182; monetary 31; social-economic 81, 85; stabilization 175, 176, 188 political economy see heterodox economics pollution 21, 154, 155 positive economics 64, 71 post-Keynesians 120 postmodernism 127 poverty 136, 176, 180, 196, 197, 198 preferences 86–9; individual 11; satisfaction of 89 pride 82 principal agent problem 14 prisoner dilemma 14 production 98, 99, 107, 131; of knowledge 161, 162 productivity 55, 143, 144, 148, 156 profit (maximization) 11, 31, 46, 58, 117, 119, 128, 129, 131, 177, 191 profit motive see profit Protestantism 11, 16 Proudhon, Pierre-Joseph 115 provisioning 98, 99, 100, 101, 104, 107, 108, 131 psychology 29 public goods (public services) 33, 119 public sector 126, 130 Putnam, Robert 35, 38, 128, 157, 191, 194, 200 quality of work 36 Québec, Canada 6, 126–37 race-ethnicity 42, 43, 44, 80, 163 rationality 12, 17, 29, 32, 42, 99, 100, 106, 107, 161, 194 redistribution see distribution regional development banks 184 relationships 4, 41, 45, 47, 52 religion 8, 29, 33 rights 132, 135, 197, 200 risk 42, 48, 49, 177, 179; assessment 51

Robinson Crusoe 60–1, 64 Rothschild, Kurt 2 Rwanda 166 Saint-Simon, Henri 6, 113 science 6, 69 scientific or formalist economics see positive economics securities 41, 42, 51, 52 self-confidence 92 self-interest 11, 29 self-respect 77, 79, 80 Sen, Amartya 6, 12, 23, 57, 73, 74, 77, 84, 103, 104, 192, 196, 198, 199; Sen’s capability approach 7, 105, 108, 192, 198–9 service sector 121, 132, 134, 181 slavery 17, 167 Smith, Adam 11, 23, 28, 55, 56, 57, 59, 60, 62, 63, 64, 113 social capital 3, 46, 114, 128, 164, 191, 193; defined 35, 38, 192, 195, 200; as an endowment 194, 195; entitlement approach 196; index of 194 social change 126, 131 social democracy 126 social economics 3, 43, 46, 99, 108, 188, 192, 200 social economy 117, 119, 129; defined 6, 112, 118; as a science 114 social fabric see social capital social practices 112 social relations 99 social reproduction 99, 131, 132, 136, 181; see also caring social sciences 112 social ties see social capital social values see values socialist cooperatives see cooperatives socialist ideological tradition 112 socialization 26 sociology 15, 27, 29, 34, 35, 37, 43, 46, 47, 88, 107, 121 solidarity-based economy 121; relationship with social economy 121 South Africa 20, 23, 38 South America 169 South Korea 170 Spain 122 specialization 171 standpoint 87 state 103 Stigler, George 86, 88, 89 stocks see securities

208 Index sufficiency 99, 103, 105 Taiwan 170 tastes and preferences theory see Becker, Gary taxes 168 teaching of economics see pedagogy technological change 148 “third sector” 128, 130, 131, 132; as part of the social economy 5, 6, 126, 127 Third World 21, 23, 168 time use; family time 30; leisure (free) time 30, 31, 36 trade (international) 31, 156 trade-offs 56, 58 traditional society (culture, community) 30, 33, 34, 131 trust 46, 49, 191 underdevelopment see economic development unemployment 133, 134, 137 unions 15, 31 United Kingdom 100, 101, 105, 109, 144, 164, 167 United Nations 78, 184 United States 144, 146 unpaid work see social reproduction utilitarianism 71

utility: marginal 36; maximization of 12, 91, 92–3, 146, 156; social 135 values 1, 2–3, 35, 36, 42, 48, 57, 71, 98, 101, 106, 108; World Values Survey 122 Van Staveren, Irene 1, 75 Veblen, Thorstein 282 venture capital see credit wages 31, 133, 180; living wage 132, 136 Wal-Mart 20 Walras, Léon 116 wants 108n wealth 32, 114 Weber, Max 11, 16, 17, 98 welfare: economic 11, 15, 18, 96, 144 welfare state 126, 133, 136 well-being 7, 22, 36, 99, 105, 150 women 175, 180; unpaid see social reproduction; work of 131, 132, 138n worker ownership 36, 52; see also Employee Stock Ownership Plan worker participation 36, 37 working class see class World Bank 179, 184, 185, 193, 199 Zaire see Congo

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