International Journal of Social Economics, Volume 32, Number 3, 2005

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ISBN 1-84544-094-3

ISSN 0306-8293

Volume 32 Number 3 2005

International Journal of

Social Economics 30 years of IJSE: Festschrift in honour of Professor John O’Brien: part 4 Guest Editor: Barrie Pettman

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International Journal of

ISSN 0306-8293

Social Economics

Volume 32 Number 3 2005

30 years of IJSE: Festschrift in honour of Professor John O’Brien: part 4 Guest Editor Barrie Pettman

Access this journal online _________________________

182

Editorial advisory board __________________________

183

The “advantage of latecomer” in abating air-pollution: the East Asian experience Toru Iwami ___________________________________________________

184

A paradigm of Islamic money and banking Masudul Alam Choudhury and Md. Mostaque Hussain________________

203

Are political principles stable? Tibor R. Machan ______________________________________________

218

Cultural lag: a relevant framework for social justice Richard L. Brinkman and June E. Brinkman ________________________

228

Economics and religion: globalization as the cause of secularization as viewed by Adam Smith James E. Alvey ________________________________________________

249

Book review______________________________________

268

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CONTENTS

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EDITORIAL ADVISORY BOARD James Alvey Massey University, New Zealand

Professor Doktor Manfred Prisching Karl-Franzens-University, Graz, Austria

Professor Leslie Armour Department of Philosophy, University of Ottawa, Canada Dr Josef Barat Minister of Transportation, Sa˜o Paulo, Brazil

Professor Stylianos A. Sarantides University of Piraeus, Greece

Professor Y.S. Brenner Department of Economics, University of Utrecht, The Netherlands

Professor Udo E. Simonis WZB Science Centre, Berlin, Germany

Professor Tan Chwee-huat Faculty of Business Administration, National University of Singapore

Professor K.K. Seo College of Business Administration, University of Hawaii at Manoa

Editorial advisory board

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Professor Clem Tisdell University of Queensland, Australia Dr Matti Viren University of Turku, Finland

Dr Floreal H. Forni Centro de Estudios e Investigaciones Laborales del CONICET, Buenos Aires, Argentina

Professor Jimmy Weinblatt Department of Economics, Ben Gurion University, Israel

Professor Patrick McNutt Indecon Consultants, Dublin and Institute for Financial Management, University of Wales, Bangor, UK Dr Daniel O’Neil Department of Political Science, The University of Arizona, USA

Professor Zhang Wenxian Fudan University, Shanghai, China Professor Laszlo Zsolnai Director, Business Ethics Centre, Budapest University of Economic Sciences, Hungary

International Journal of Social Economics Vol. 32 No. 3, 2005 p. 183 # Emerald Group Publishing Limited 0306-8293

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The “advantage of latecomer” in abating air-pollution: the East Asian experience

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Toru Iwami Faculty of Economics, University of Tokyo, Bunkyo-ku, Tokyo, Japan Abstract Purpose – Aims to focus on air pollution as one of the environmental problems that tends to improve at higher income levels. Design/methodology/approach – The paper provides a combination of narrative with argument and analysis. Findings – Between the early 1970s and the mid-1980s, air pollution in Japan, in particular that caused by sulfur dioxide (SO2), was reduced to a remarkable degree. This reduction resulted from responses to mounting civil protest: governmental regulation policy on the one hand, and innovation of abatement technology and energy efficiency on the other. In large Southeast Asian cities, despite rapid economic growth, air pollution is less severe than it was in Japan in the early 1970s. This is because both government and industry in Southeast Asia took early initiatives to prevent environmental degradation, learning from the experiences of developed countries. Originality/value – The conclusions drawn help in understanding the prerequisites for reducing CO2 emissions. If developed countries actually succeed in creating abatement technology for CO2, this will surely affect the development policy in developing countries. Keywords Air pollution, East Asia, Environmental management Paper type Research paper

1. Introduction During its period of high-speed economic growth, Japan suffered from “distortion of economic growth”, as witnessed by various kinds of industrial pollution. This problem, however, was, for the most part, successfully remedied by means of abatement measures from the early 1970s onwards. Many East Asian countries have subsequently recorded “miraculous” economic success by adopting development policy similar to that employed in Japan, policy that has come to be associated with a heavy impact on the natural environment, as in Japan. “No other region has as many heavily polluted cities, and its rivers and lakes are among the world’s most polluted. In short, Asia’s environment has been under attack. While rapid economic development has created dynamism and wealth, Asia has, at the same time, become dirtier, less ecologically diverse, and more environmentally vulnerable” (Asian Development Bank, 1997; Iwami, 2001). “Asia” characterized by “rapid economic development” in this context undoubtedly implies “East Asia”. Researching the environmental situations of the region, however, O’Connor (1994) concluded that countries that have industrialized later have been apt to succeed in International Journal of Social Economics Vol. 32 No. 3, 2005 pp. 184-202 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510580751

The original version was presented at a seminar of the Universite´ Louis-Pasteur, Strassbourg, France. The author gratefully appreciates advice from Naoto Kunitomo and the financial support of the Sumitomo Foundation, the AGS (Alliance for Global Sustainability) Fund, and the Research Institute for Humanity and Nature, Kyoto.

environmental preservation, thanks to learning from the experiences of, and receiving technology from, developed countries[1]. Whether or not such an “advantage of the latecomer” that actually exists is the starting point of this paper. If East Asian countries have actually enjoyed healthier natural environments than Japan during their respective high growth periods, what factors have contributed to this difference, and how have these countries learned from the experiences of Japan and other developed countries? Gerschenkron (1962, chapter 1) pointed out the importance of “borrowed technology” as an “advantage of backwardness”, while stressing that banks, governments and even prevailing ideologies in later-industrialized countries play different roles from those in advanced countries. As regards the latter point, we can raise the question of whom, and with what motivation, takes the initiative to introduce new technology to developing countries. In the case of environmental protection, such technology transfer is not a natural development, since new measures usually require additional costs, and sometimes conflict with economic development policy. An investigation into the conditions under which environmental protection is actually feasible, therefore, will help us to understand the scope of development policy in developing countries. This paper focuses on air pollution, as discussions of the environmental Kuznets curve (EKC) often characterize it as one of the environmental problems that tends to improve at higher income levels. In other words, analysis of the case of air pollution may provide us with clues as to how to solve the conflicts between economic development and environmental preservation. 2. The EKC and air pollution The hypothesis of the EKC states that the quality of the environment initially deteriorates with rising income, but later, after income reaches a certain level, it begins to improve again. Therefore, a graph with income level on the horizontal axis and environmental degradation on the vertical axis shows an inverted U-shaped curve[2]. It is questionable, indeed, whether the EKC actually applies to any aspect of environmental quality, but the World Bank (1992) has delineated an inverted U-shaped curve for air pollution in the form of suspended particulate matter (SPM) and sulfur dioxide (SO2). Thereafter, Shafik (1994), Selden and Song (1994), Grossman and Krueger (1995) and Panayotou (1995) have all presented econometrically similar results with respect to air pollutants. If the EKC actually exists, the background to the phenomenon would include: (1) the changing composition of industry and consumption; (2) a growing awareness by citizens of environmental concerns; and (3) the financial capacity for environmental and related investments. With rising income, the center of weight in production and consumption shifts from primary to secondary and then to tertiary industry. In the process of a shift from primary to secondary industry, environmental conditions deteriorate, while the shift from secondary to tertiary industry causes alleviation of the negative impact on the environment. With higher income, citizens become more aware of issues other than immediate material survival and induce their governments to introduce stricter environmental regulation. Likewise, the investments necessary for environmental

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protection are only feasible with the financial resources made available by a certain level of income. In order to examine the EKC empirically, however, we must be aware of several points. First, much research is based upon cross-sectional analysis due to the limited availability of time-series data. While such limits are unavoidable, we should also be aware that factors other than income level have varying effects in different countries[3]. Nevertheless, large quantities of pooled cross-sectional time-series data yield more accurate results than time-series data alone, as Shafik (1994) and Grossman and Krueger (1995) have shown. Secondly, we should note the fact that data often vary considerably according to time and place of measurement. The atmospheric concentration of SO2 in Jakarta as of 1996, for example, presents the lowest monthly average of 0.002 ppm in January, and the highest average of 0.008 ppm, four times as much as the lowest figure, in August and September. Concentrations of oxidized nitrogen (NOx) for the same year show the lowest figure of 0.005 ppm in January, and the highest figure of 0.093 ppm, approximately 19 times as much as the lowest figure, in July[4]. In addition, different locations, whether big cities, rural areas, or industrial zones, record significant differences in air pollution levels even within the same country. It is questionable, then, whether we can meaningfully compare a country’s environmental situation with its GDP per capita as calculated on a national basis. In a country with as vast an area as China, for example, it would be preferable to use regional income figures, where possible. The third point is the question of whether using data for emissions amounts or for atmospheric concentration is more reliable in investigating SO2 and carbon dioxide (CO2) levels. Atmospheric concentration levels are directly observed, while emissions data are indirectly estimated from energy consumption and the sulfur content of each energy source (Kaufmann et al., 1998, p. 210). Panayotou (1995), for example, employs consumption data for petrol, coal and natural gas to calculate emissions in developing countries and, consequently, his figures reflect neither energy efficiency nor improvements in end-of-pipe technology. However, employing concentration data raises another question of whether the observation spot is actually representative. Fourthly, even if emissions amounts for air pollutants might seem to be directly linked to income levels, they may be influenced by factors other than income. For example, while concentration of economic activity and population seem to increase air-pollution, they also tend to promote measures of pollution abatement. Atmospheric pollution is usually observed in large cities with large populations and the quality of urban air is usually a greater concern to policy-makers than that in rural areas even if the situation in the latter is more serious. The differences between developed countries, moreover – between North America on the one hand, and Japan and Europe on the other – are attributed to differing degrees of geographical population concentration[5]. However, whether spatial concentration increases or decreases air pollution is a matter for empirical examination. As a matter of fact, preventive measures are taken in response to such factors as political initiatives by citizens, and when financial capabilities so permit. While it is true that both of these factors are, to a certain extent, related to income level, the former political factor is difficult to measure quantitatively. At any rate, empirical research including factors other than income may lead to ambiguous results.

3. Is there evidence for the existence of an “advantage of latecomer?” An “advantage of latecomer” would imply that countries industrializing later would complete the process in a shorter time and/or with better performances. Factors related to this issue include not only technology transfer, and initiatives on the part of government and private institutions (for example, banks), but also learning from the experiences of developed countries. East Asian countries have followed the industrialization pattern of developed countries, shifting one after another from labor-intensive to capital-intensive industries, and then, recently, even to technology-intensive industries. While technology transfer itself does not necessarily cause such shifts, they are promoted thereby. However, we should note that technology transfer can have a double-edged effect on air pollution. On the one hand, it can lead to enlarged industrial capacity, resulting in increased pollutant emissions, but on the other hand, abatement technology can be made available to the recipient country. Whether the net effect on pollution is positive or negative depends in part on the characteristics of the technology and on levels of public and government awareness. The former negative effect is related to the degree of industrialization achieved by a country (measured by, for example, the share of manufacturing in the GDP, or other corresponding variables), whereas the latter positive effect is not easily measured. If the level of pollution is positively correlated with the level of industrialization, we can conclude that the negative effect is larger. But if the correlation is either negative or unclear, then it implies that factors other than the negative effects of technology transfer are, in fact, at work. Figure 1 shows the advantage of latecomer as illustrated by the EKC. Latecomers cause lower levels of environmental degradation than their industrial predecessors when compared at the same income level. The peak of the EKC, however, can stand either at the same income level (Yb) or at a lower one (Ya). When the latecomer traces EKC2 rather than EKC1, this shows that society recognizes environmental damage and protection measures are implemented at an earlier stage of economic development.

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Figure 1. The EKC and advantage of latecomer

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3.1 OLS analysis of SO2 emission Now, we rely on ordinary least-square analysis (OLSA) with pooled cross-sectional time-series data for SO2 emission from nine East Asian countries: Japan, Taiwan, China, Korea, the Philippines, Singapore, Indonesia, Malaysia and Thailand, with a structural equation (1).

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EM ¼ a þ bY þ cY 2 þ dEF þ eIS þ fD1 þ gD2 þ u

ð1Þ

where EM represents SO2 emissions per capita (tons) as a dependent variable. SO2 emissions are determined by energy consumption and the efficiency thereof, as well as by energy source and end-of-pipe abatement technology. Since emissions data are constructed from energy consumption, however, it makes no sense to regress emissions on energy consumption. In addition to the income, we include as explanatory variables energy efficiency EF (GDP per unit of energy consumption, US dollars, 1990 PPP per kilogram oil equivalent); IS (the manufacturing share in GDP, except for China, where IS represents the share of the secondary industrial sector, including not only manufacturing but also mining, construction, electricity, gas and water); and u is error term. Apart from IS, variables are expressed in logarithm. While energy price may indeed affect energy consumption and, accordingly, SO2 emissions, energy price is not included in the equation, since most of the data belongs to the period after the first oil crisis of 1973. Moreover, we add dummy variables for latecomers. The latecomer is defined by an index of IS in 1990 divided by IS in 1973. A large index here indicates rapid industrialization between 1973 and 1990, hence denoting latecomer status. D1 stands for those countries with an index larger than 1, but smaller than 1.5: the medium latecomers, namely Korea, the Philippines, and Singapore. D2 stands for an index larger than 1.5: the latest comers, so to say, namely, Indonesia, Malaysia, and Thailand. Countries with an index smaller than 1, namely Japan, Taiwan and China, have experienced a decline in manufacturing share. We call them the predecessors that are represented by the constant of the equations. Yet, it may sound odd to characterize China as a predecessor rather than a latecomer. The industrial share of China’s GDP was, in fact, as high as 43 percent in 1973, while it declined to 37 percent in 1990. It must be noted, however, that the large share of secondary industry in the Chinese economy does not necessarily indicate an “advanced” level of industrialization. The Chinese manufacturing sector in the 1970s contained large numbers of small-scale, local factories associated with low technology and poor efficiency (Sinton et al., 1998, p. 814). Consequently, we also carried out an OLSA that excluded China. Equation (a) in Table I represents the estimated results of the OLSA without dummies. Equations (b) and (c) represent those including dummies: the former is composed of all nine countries, while the latter excludes China. As it happens, equation (c) does not reveal any significant differences from equation (b). EF should be negatively correlated to emissions; in other words, higher energy efficiency reduces emissions. Equations (a)-(c) show that energy efficiency is accompanied by minus signs as expected, with sufficient statistical significance. In addition, the estimated coefficients of both linear and quadratic Ys show the signs expected from the inverted U-shaped curve, with statistically significant t-statistics. As for IS, equation (a) shows plus signs with significant t-statistics as expected: higher

(a) Dependent variable: SO2 emissions of East Asia Constant 233.98 (24.33)* Y 6.17 (3.08)* Y2 20.30 (22.46)** EF 21.60 (25.17)* IS 3.53 (3.49)* D1 D2 Samples R2

168 0.71

(b)

(c)

226.40 (25.09)* 4.49 (3.30)* 20.20 (22.42)** 21.64 (28.70)* 1.72 (1.77)*** 0.92 (7.64)* 20.50 (22.76)* 168 0.90

2 36.32 (2 5.51)* 6.61 (3.93)* 2 0.32 (2 3.16)* 2 0.67 (2 2.53)* 2 0.77 (2 0.59) 0.91 (6.98)* 2 0.74 (2 3.40)* 150 0.91

Notes: t-statistics in parenthesis. *significant at the 1 percent level; **significant at the 2 percent level; ***significant at the 10 percent level Sources: SO2 emissions: ASL and Associates (n.d.), income and population: Heston and Summers (n.d.), Industrial structure: Asian Development Bank (n.d.) , Economic Planning Agency of Japan (n.d.), Energy efficiency: IEA/OECD (n.d.)

industrialization increases emissions. But equations (b) and (c) do not show enough statistical significance to IS, suggesting that the share of manufacturing is better interpreted in terms of the speed of industrialization, reflected in dummy variables. The signs of estimated coefficients for D1 and D2 are the most relevant to our discussion. D1, representing medium latecomers, shows a plus sign, suggesting a tendency toward greater emissions than the predecessors. On the other hand, however, D2, the latest comers, shows a minus sign; in other words, a tendency toward reduced emissions. The advantage of latecomer, then, is evident in the latter case.

3.2 Comparing atmospheric concentrations Here, we use atmospheric concentration data to examine to what extent the latecomer actually performs better in the case of air pollution. “Latecomer” in this context has a double connotation: the first expresses the relationship between East Asian countries and Japan, while the second refers to that between Japan and Western countries. Japan was a latecomer in the early 1970s when it made such remarkable progress with pollution abatement. In this paper, however, we discuss mainly the first connotation. Figures 2-4 show the relationship between air pollution, SO2, total suspended particulates (TSP), and nitrogen dioxide (NO2) on the vertical axes, and income level on the horizontal axes. TSP represents different types of matter, depending on the environmental standards of each country. Japan, Malaysia and Singapore, for example, use SPM (more strictly speaking, PM10), whereas Thailand uses both TSP and PM10. Income level is expressed in terms of US dollars, 1995 PPP.

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Table I. Estimated results of SO2 emission equations: pooled time-series data from the early 1970s to 1990

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Figure 2. SO2 concentration and income level

Figure 3. NO2 concentration and income level

The observation spots are all in large cities, mostly capital cities. The situation of air-pollution can be largely different among cities, depending on the geographical location and the distance from the industrial area, for example. True that some Chinese cities are said to show high concentration of atmospheric pollutants. Apart from individual information on specific areas, however, data comparable across countries are difficult to collect. Given the difference even within a country, using income at a national level rather than at a local level, as in Figures 2-4, might be misleading. Yet, local income data are not similarly available across countries. Despite these limits, following observations are worth noting.

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Figure 4. TSP concentration and income level

3.3 Japan The line plotted in each figure shows air pollution in Japan. SO2 in Japan decreased remarkably from 126 mg/m3 in 1970 to 30 mg/m3 in 1988, when average incomes stood at 11,395 US dollars and 20,092 US dollars, respectively. Thereafter, SO2 concentration remained almost at the same level, despite rising income. NO2 increased from 60 to 100 mg/m3 in the 1970s and then decreased to 75 mg/m3 in the early 1980s, forming a wave, but stayed almost unchanged thereafter, albeit at a higher level[6]. TSP, which was not observed in the early 1970s, decreased between 1974 and 1980, followed by a slight increase. Generally speaking, however, it did not show significant change. Among the air pollutants, the improvements followed different patterns, with that of SO2 on the one hand contrasting with that of NO2 and TSP on the other. We discuss in the next section what happened in the 1970s when SO2 pollution was remarkably reduced. 3.4 East Asian countries Comparing the East Asian countries (represented by filled squares in Figures 2-4) with Japan, it turns out that equal levels of SO2 concentration are attained with lower income levels in the Philippines, Thailand, Malaysia, Indonesia, China, Korea and Singapore. This trend can also be observed in the case of NO2 concentration in Thailand, Indonesia and Singapore. As for TSP, however, it is clear that the environmental conditions of Indonesia, China, Thailand and Philippines are far worse; they have two or three times the amount of TSP, when compared with Japan as of 1974. The high level of TSP on the one hand, and the low level of NO2 on the other, can be attributed to the quality of automobile engines. Automobiles used in East Asian countries are relatively of old vintage, and their engines, not well maintained, tend to cause incomplete combustion, thereby discharging greater amounts of TSP but less NOx. Automobile engines of high quality enable complete combustion, and more NOx, but fewer TSP, are emitted into the air [7]. However, converting to such engines would incur too great a cost on car drivers in these countries.

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Indeed, the source of TSP is not always automobiles alone. In Bangkok, under the real estate boom before the currency crisis broke out, construction sites may have been another major generation source. In large cities away from industrial areas, however, automobile engines are considered to be the main cause. In Malaysia, large cities and rural areas have different sources of TSP. Diesel engines account for one third of TSP in large cities, while in rural areas, biomass (trees) burning accounts for one third[8]. The share of transportation as the source of TSP is 35 percent in Jakarta, and 45 percent in Manila as of the early 1990s (World Bank, 1997a, b). 3.5 Developed countries Compared with Japan’s air pollution, Western countries in general, including Australia and New Zealand (represented by triangles in Figures 2-4), show a better situation. This fact implies that there is no clear evidence of the advantage of latecomer between Japan and Western countries. As was discussed above, good urban air quality in European countries is sometimes attributed to population density; however, we also see that the United States and Australia show the similar levels of SO2 concentration to other Western countries. Nevertheless, this is quite natural because both the US and Australian data are observed in big cities, which have almost the same population densities as those in other developed countries. De Bruyn (1997) stated that it was not the changing industrial structure in Germany and the Netherlands that led to reduced SO2 emissions, but, rather, policy factors supported by international agreements made the greatest contribution. In East Asia, the increased industrialization is accompanied by a decline in SO2 concentrations, although similar international agreements do not exist among the countries. The question still remains, then, of why SO2 levels remain relatively low. The analysis has not yet explained which factors are actually at work in reducing emissions. They include, for example, a shift of fuels from coal to petroleum, natural gas, and even to uranium, as well as the innovation of end-of-pipe abatement technology. We will discuss these factors in more detail in Section 4. 4. Japan’s experience 4.1 Political initiative Let us review several backgrounds to the rapid decrease of air pollutants, especially SO2, in Japan beginning in the early 1970s. First, to note the fact that civil movements had a significant impact on government policy from the latter half of the 1960s. For abating air pollution, in particular, a symbolic case was the “Yokkaichi Pollution Lawsuit” sued in 1967, which appealed against damage to health (chronic bronchitis, asthma, and pulmonary disease) caused by exhaust gases from oil refineries and electric power plants. Against this background, the Basic Law for Environmental Pollution Control, and the Air Pollution Control Law were legislated in 1967 and 1968, respectively, and followed by the establishment of the Environment Agency in 1971. In responding to the civil movements, local governments took the initiative, while the national government followed suit somewhat reluctantly. The Pollution Control Agreement of 1964 between Yokohama City and the Electric Power Development Co., Ltd was the first example, and the second was the agreement between the Tokyo Metropolitan Government and the Tokyo Electric Power Co. in 1968[9]. It should be

remembered, however, that the voices raised by residents forced local governments to implement such measures, and that the firms, on their part, accepted them, with a desire not to injure the relationship with the residents. Generally speaking, the pollutions that attracted public attention in the high-growth period was concentrated in specific areas. In the case of the heavy and chemical industrial zones located along the Pacific coastline such as Tokyo and Yokohama, the high political consciousness of the residents was one of the driving forces for anti-pollution policies. In cities like Kita-kyushu, called a “company-castle town”, it was not easy for residents to raise their voices against a big company providing a great many local employment opportunities. In such situations, however, there might be room for local government to play a mediating role. 4.2 Regulation and policies Under the Soot and Smoke Regulatory Law of 1962 and the Air Pollution Control Law of 1968, the Japanese government gradually strengthened control of oxidized sulfur (SOx), and environmental standards were upgraded almost every year from the first regulation in 1968 to the eighth in 1976. Photochemical smog in a residential area of Tokyo (Suginami) turned public attention to NOx as a serious air pollutant for the first time, leading to enactment of ambient and emissions standards in 1973, somewhat later than in the case of SO2. Total emissions control for SOx was introduced to Tokyo, Osaka and Yokohama in 1974, and applied similarly for NOx to the same three cities in 1981. This system of assigning a fixed amount of discharge to each factory was introduced because the prior regulation was flawed, in the sense that it defined only the maximum concentration of discharges, and that larger total amounts of SOx and NOx could be discharged if diluted with water and air. With regard to exhaust control for automobiles, the US Air-pollution Control Act of 1970, called the Muskie Act, constituted a milestone. This legislation stimulated competition between the Japanese and US automobile companies to develop technologies achieving its standard within five years. In Japan, the first automobile exhaust controls were determined in 1966, and the Vehicle Exhaust Standard was notified in 1973, setting strict standards for that time in line with the Muskie Act (Hama-uzu, 2000). NOx standards became yet stricter between 1975 and 1978. Earlier than any other country, Japan actively engaged in regulating lead-containing gasoline, and regular gasoline was unleaded in 1975. Teranishi (1994) states that the years after the first oil crisis are characterized by the retreat of anti-pollution policy. Certainly, the NOx standard was toned down in 1978 in order to give depressed industries some breathing space[10]. This was certainly a factor in the increased atmospheric concentration of NO2 in the latter half of 1970s as shown in Figure 3. Nevertheless, efforts to save energy were promoted in response to the energy prices hike. As a result, SO2 pollution was alleviated even during the period of “retreat”. This is an interesting example of the way that the environmental situation can be improved by the efforts of governments and the private sector despite supposedly unfavorable economic conditions. Administrative guidance, then, played a major role in pollution abatement, as it has with other industrial policies. The direct regulations worked very effectively in delimiting maximum emissions. They were flawed, however, insofar as they provided

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no incentives to decrease emissions beyond the imposed limit. Further reductions could only be achieved by continuously lowering the maximum limit. Indirect, market-friendly policies were also employed in part. Tax-cuts were applied to those firms that implemented the abatement measures. The governmental financial institution (the Development Bank of Japan) also provided special loans to oil refineries and thermal power plants to construct desulfurizer equipment and natural gas (LNG) storages, respectively. The fact that these policies were actively implemented during the first half of 1970s suggests that they were important elements in decreasing SO2 pollution (for more details see Terao (1994)). 4.3 Technical aspects Measures to reduce SOx emissions include: (1) switching to fuel with low sulfur content; (2) desulfurization of crude oil; and (3) end-of-pipe desulfurization. Until the early 1970s, “low sulfurization” was the predominant approach. In particular, switching to fuel with low sulfur content was the preferred measure due to its low cost. End-of-pipe desulfurization, moreover, was not technically feasible in the 1960s. In addition, power plants built higher chimneys, thereby dispersing polluted smoke and reducing SOx concentrations. In the high-growth period, the major consumers of energy were the electricity, steel and petrochemical industries. In response to pollution regulation, the electricity and steel industries employed “direct burning of crude oil” and “naphtha burning”, thereby reducing emissions of oxidized sulfur, as crude oil and naphtha contain less sulfur than heavy oil. However, directly burning crude oil without first refining it produced the side effect of depriving the petrochemical industry of opportunities to acquire raw materials. Consequently, oil refinery firms tried to develop techniques for direct desulfurization of crude oil (Terao, 1994). However, the situation changed dramatically after the oil crisis. Securing crude oil became an urgent priority and the “low-sulfurization” policy of shifting to oil with less sulfur content became less important. As a result, during the period from the mid-1970s to the mid-1980s, SOx reduction was realized first by energy saving policy, secondly by the improvement of desulfurization technology, and only thirdly by fuel conversion[11]. Power plant desulfurization technology was actively developed in Japan and is of the highest international standard[12]. The unique process of two-step combustion accompanied by denitrification is seldom seen in other countries. Consumption of LNG rapidly increased after the first oil crisis. LNG has been used in large cities with high population density and, thus, high probability of damage by air pollution. The fact that NOx abatement measures came after those for SOx, corresponds with the order of recognition on the part of the public and the administrative authorities. “Conversion of fuel” makes no sense in the case of NOx, which is generated by the oxidization of nitrogen in the air. NOx emissions were reduced by means of the technologies of two-step combustion and flue-gas denitrification. Measures to control exhaust gases were developed in accordance with strict environmental standards, decreasing NOx from automobiles.

5. East Asian countries 5.1 Policy response In Southeast Asia, authorities in charge of environmental administration were established in the 1970s, almost simultaneously with Japan. An exceptionally early example is the Philippine National Water and Air Control Commission established in 1964, followed by the Indonesian National Environmental Committee (later reorganized as the Ministry of Development and Environment), and the Singaporean Ministry of Environment, which were both established in 1972, the Malaysian Ministry of Science, Technology, and Environment in 1974, and the Thai National Environmental Committee in 1975. Air-monitoring systems were introduced relatively early in the Philippines and Singapore, in 1970 and 1971, respectively. In other ASEAN countries like Indonesia, Malaysia and Thailand these systems were introduced somewhat later in the 1970s (Matsuoka et al., 2000). Southeast Asian countries, then, established environmental protection facilities early on, before the period of their respective remarkable economic growth. Except for in the Philippines, however, monitoring systems were, in fact, developed rather later, from the late 1980s to 1990s, as increased amounts of air-monitoring equipment and a shift from manual to automatic measurement during that period suggest. Southeast Asian authorities introduced American standards (Singapore and Malaysia) for air pollution, and the Japanese (Singapore) and European (Thailand, Malaysia) standards for vehicle exhaust, respectively, implying that they followed the examples of the developed countries. Did, as in Japan, civil movements cause these administrative actions? The Japanese case suggests that public authorities and local government in particular should play active roles. The question is whether or not the civil “voice” both reaches and is received by government. Funatsu (2000) found that civil movements and non-governmental organizations (NGOs) in Thailand focus mainly on water pollution and large scale projects like dams, but rarely on air pollution. However, according to an NGO named with respect to air pollution, recent improvement of air pollution in Bangkok resulted from policy enacted by the Metropolitan Area Governor, who is also an adviser of the NGO[13]. Yet it is difficult to determine objectively how important civil movements have actually been. Another example is Singapore, where NGOs are scarce in the shadow of a “tough” government, but environmental policies are quite progressive due to the presence of talented technocrats. This case represents another counterexample to Japan.

5.2 Energy efficiency Energy consumption in East Asia has increased remarkably in line with economic growth. Krugman (1994) once characterized the pattern of economic development in this region as being caused by large inputs of production factors rather than by rising productivity. Does this explanation also hold good in the case of energy? Table II reveals that energy consumption per capita increased in every country during the two decades from 1973 onwards. However, energy efficiency in terms of GDP per unit of energy consumption increased greatly in China from 1978[14], followed by a lower rise in Japan, Taiwan, and the Philippines (up to the mid-1980s), while it declined in Korea (from the mid-1980s), Malaysia and Indonesia (until 1990).

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196 Table II. Energy consumptions, energy efficiency and SO2 emissions in East Asian countries

Japan China Korea Taiwan Indonesia Thailand Philippines Malaysia Singapore

Energy consumption per capita (ton of oil equivalent) 1975 1980 1990 1995

Energy efficiency (GDP per unit consumption, US dollar per kg) 1975 1980 1990 1995

2.9 0.53 0.67 0.94 0.33 0.44 0.4 0.61 2.04

4.00 1.18 4.35 4.55 3.85 4.55 5.00 5.26 4.17

2.97 0.6 1.08 1.58 0.4 0.49 0.44 0.81 2.65

3.55 0.75 2.13 2.36 0.55 0.78 0.45 1.23 4.94

3.96 0.88 3.29 3.06 0.61 1.09 0.49 1.86 7.19

4.55 1.30 3.57 4.17 4.17 5.26 5.56 5.56 4.35

5.26 2.13 3.85 5.00 4.76 5.88 4.76 4.76 3.85

5.00 3.03 3.45 5.26 4.35 5.88 4.35 4.35 3.70

Source: IEA, energy balances of OECD countries, energy balances of non-OECD countries

From these figures seen, East Asia has not displayed an across-the-board pattern of immense energy consumption, but is, rather, composed of contrasting groups. In 1995, energy efficiency in East Asian countries, except for Korea, is higher than Japan as of 1973 (Table III). Even when compared with Japan in 1995, Taiwan, Indonesia, Thailand, the Philippines and Singapore perform better. That these East Asian countries show higher energy efficiency than Japan as of the mid-1970s corresponds to the low level of SO2 concentrations they show in Figure 2.

5.3 Desulfurization The greatest barrier to introducing desulfurization equipment is its high cost. However, Thailand was the second Asian country after Japan to install desulfurization equipment in electricity power generation, due to Japan’s financial support through ODA (Imura and Katsuhara, 1995, p. 259). On the other hand, despite its lower cost, denitrification has not been widely introduced, mainly because of the low concern about NOx in developing countries. A shift to fuels with low sulfur content is less expensive and, accordingly, more easily undertaken. According to the energy sources of electricity generation shown in Table III, atomic energy greatly increased in Japan, Korea and Taiwan between the 1970s and 1990s, whereas in Southeast Asian countries except for the Philippines, natural gas increased its share as an energy source. There is no doubt that increasing shares of atomic energy and natural gas contribute to reduced SO2 emissions, while the increasing share of coal in every country results in a counter-balance. In Malaysia, exploitation of natural gas from the 1970s through the 1980s was a major factor in power stations switching energy source from imported oil to natural gas in the mid-1980s, causing a significant decline in SO2 emissions (Vincent, 1997, p. 421). China, while producing large amounts of coal, seems to have decreased its total energy consumption, in particular that of coal, since 1997 (Sinton and Fridley, 2000). This change in China, the largest energy consumer in East Asia, has surely had a great impact. As a whole, we can conclude that these shifts in energy sources have reduced SO2 emissions in East Asia.

1973 Japan China Korea Taiwan Indonesia Thailand Philippines Malaysia Singapore 1996 Japan China Korea Taiwan Indonesia Thailand Philippines Malaysia Singapore

Energy sources Gas Nuclear

Coal

Oil

Hydro

Total

8.0 61.5 9.1 6.9 – 3.5 0.1 – –

73.2 15.7 82.3 76.7 55.8 69.5 85.7 76.6 100.0

2.3 – – – – – – – –

2.1 – – – – – – – –

14.4 22.8 8.7 16.4 44.2 27.0 14.2 23.4 –-

456,387 166,800 14,825 20,735 3,624 6,971 13,186 4,783 3,719

18.2 75.8 35.2 42.1 24.3 20.0 13.2 3.7 –

21.0 5.3 18.5 21.4 17.7 29.3 49.6 32.0 78.7

20.2 0.2 12.1 4.2 42.3 42.0 0.1 54.2 18.7

30.2 1.3 33.1 26.1 – – – – –

8.1 17.4 1.1 6.2 12.2 8.4 19.3 10.1 –

1,000,436 1,080,018 223,598 144,930 66,706 87,467 36,663 51,382 24,100

Note: Energy source in percent, total in GWh Source: IEA, energy balances of OECD countries, energy balances of non-OECD countries

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Table III. Energy sources for electricity in East Asian countries

5.4 Mobile source Let us remember that the data in Figures 2-4 were collected in big cities, where the main air pollutants come from mobile sources, namely automobiles. Apart from Indonesia, ASEAN countries adopted European exhaust emissions standards. Table IV shows that regulations on gasoline cars in Thailand, the Philippines, and Malaysia are stricter than the Japanese standards of 1973. Diesel cars are also, generally speaking, more strictly CO (g/km)

HC þ NOx (g/km)

Gasoline car Thailand Philippines Indonesia Malaysia Japan (1973 standards) Japan (1975 standards)

2.2 0.5 2.72 0.97 No regulations 2.2 0.5 26.0 3.8þ 3.0 ¼ 6.8 2.7 0.39 þ 1.60 ¼ 1.99

from January 1999 from January 2000

Diesel car Thailand Philippines Indonesia Malaysia Japan (1986 standards)

1.0 0.7 2.72 0.97 No regulations 2.72 0.97 2.7 0.62 þ 0.98 ¼ 1.6

from January 1999 from January 2000

Source: Toyota Motor Co., and Hama-uzu (2000)

from January 2000

from January 2000

Table IV. Automobile Exhaust Regulations in ASEAN4

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regulated (except for CO regulations in the Philippines and Malaysia, which are almost the same as the Japanese standards of 1986). Exhaust regulations in ASEAN 3, then, are not only in place but are stricter than those of high-growth period Japan. Such regulations, however, may be only superficially strict, as their effectiveness depends largely on the controlling system and technical staff; in other words, whether vehicle inspection is actually enforced. In Malaysia, the Motor Vehicle Rule of 1995 enforces inspection programs only on commercial vehicles, which represent 11 percent of the total vehicles in use. In Thailand, inspections are required only at the time of initial delivery from factories (Ishak, 2001; Global Environmental Forum, 1999, p. 9). It is to be noted, however, that exhaust controls do not contain standards for controlling SO2 emissions; in other words, exhaust controls have contributed little, if anything, toward reducing SO2 concentrations. In Shanghai, as of 1999, 46 percent of SO2 emissions came from electricity power plants, 31 percent from other industrial sources, and 23 percent from households. In both Manila and Jakarta, as of 1992, almost two thirds of SO2 emissions were discharged from industrial sources, and the second greatest source in Manila was power plants (Quan, 2001; World Bank, 1997a, b).

5.5 Technology transfer Developed countries can impact developing countries by means of technology transfer on the one hand, and the “export of pollution” on the other. The former represents an “advantage”, and the latter a “disadvantage”, for the latecomer. Whether or not technology is successfully transferred depends on the accumulation of human capital on the part of the receiving country, a prerequisite for which is that the people there actually recognize the need for it. That new air pollution monitoring equipment began to be widely used in the 1980s implies that such conditions actually existed. Asian governments, it is said, are apt to prefer the most “advanced” technology in new manufacturing plants due to issues of “national prestige”. As a result, environmental protection technology is also of the highest quality. For example, in the case of the Bao Shan Iron Plant near Shanghai, the first phase of construction was completed in 1985, with the technical support of the Nippon Steel Corp. Both manufacturing process and environmental protection measures were of the same quality as those in Japan[15]. In such cases, the level of equipment is far beyond the needs of the receiving country. When the receiving country lacks the human capital necessary to accommodate an introduced technology, developed countries are further required to bridge the gap (Panayotou, 1995, pp. 33-4). Japan has been using the Japan International Cooperation Agency (JICA) for this purpose, and Singapore provides Indonesia with technical training for air pollution monitoring[16]. The cost of technology transfer is also very important for receiving countries. As the “Green Aid Plan” provided by Japan to China and Thailand shows, ODA is often associated with the transfer of environmental technology. When pollution crosses national boundaries as in the case of acid rain, environmental protection technology is more easily transferred. Even without such conditions, a shift in the concept of ODA toward environmental concerns helps to strengthen international cooperation.

5.6 Export of pollution Repetto (1995), as well as Grossman and Krueger (1995), stated that cost differentials in environmental regulations are not large enough to promote a shift of factories to less regulated countries. Indeed, the case of Japanese foreign direct investment (FDI) needs to be examined in more detail. But during the 1980s, the high exchange rate of the yen essentially accelerated the efforts of Japanese firms to expand their manufacturing base into Southeast Asia (see for example, MITI (1999, p. 122)). During periods when exchange rates fluctuate to a large extent, the influence of cost differentials in environmental protection is far smaller, if not negligible. More generally stated, does the new international division of labor, with developed countries as importers of manufactured goods and developing country as exporters, cause a shift of pollution sources to developing countries? Suri and Chapman (1998) state that rapid industrialization in developing countries leads to export of manufactured goods, thereby increasing energy consumption. East Asian countries undoubtedly fit this description. However, we should note that export-led industrialization in the region has not been accompanied by as high level of SO2 concentration as was seen in Japan at a corresponding income level. 6. Concluding remarks From the early 1970s to the mid-1980s, Japan actively engaged in abatement of air pollution, in particular SO2, to great effect. Indeed, this development corresponds to the EKC hypothesis, but was not the automatic result of economic development, such as a change in industrial structure. First, civil movements against pollution forced local and central governments to introduce regulation policy. Secondly, firms producing the pollutants succeeded in converting to fuels with less sulfur content, innovating desulfurization processes, and promoting energy efficiency. In East Asia, despite rapid economic growth, SO2 pollution in big cities is less serious than it was in Japan in the 1970s. Administrative authorities in these countries took the initiative in environmental protection and firms succeeded in reducing SO2 emissions by raising energy efficiency and employing alternative sources of energy. These initiatives reflect efforts to learn from the experiences of developed countries, which in itself suggests the validity of the advantage of latecomer hypothesis. While technology transfer is often characterized as definitive of the advantage of latecomer, there do remain barriers to such transfer due to, for example, the high cost of equipment and insufficient technical capability on the part of the receiving country. These barriers, however, can be removed by means of international cooperation. To finish, let us comment on the possibility of whether the study of SO2 reduction gives any hints for CO2 case. Some researchers argue that the inverted U-shaped curve is found also for CO2 emissions. But this is merely an econometric result since the income level for the upper turning point is too high to have been yet realized (Suri and Chapman, 1998, p. 199). Seen from another angle, this implies that the advantage of latecomer is only available when developed countries have accumulated experience and related technical capabilities. These conditions are satisfied in the case of air pollutants like SO2, but not yet for CO2. However, conclusions drawn from the SO2 case help us to understand the prerequisites for reducing CO2. If developed countries actually succeed in creating abatement technology for CO2, this will surely affect the development policy in

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developing countries. Noteworthy is the lesson that the predecessors can guide the latecomers by means of both the innovated technology and shared experience. Notes 1. Grossman (1995) expresses a similar opinion. 2. Stern et al. (1996) and Ekins (1997) give good surveys on this topic. For further discussion, see the special issues of Environment and Development Economics, Vol. 2, 1997 and Ecological Economics, Vol. 25 No. 2, 1998. 3. Selden and Song (1994), however, distinguish fixed-effects and random-effects. There do exist case studies on Asian countries; see, for example, Vincent (1997) for Malaysia, and Wu (1998) for Taiwan. 4. Badan Pusat Statistik, Environmental Statistics of Indonesia, 1998. 5. Kaufmann et al. (1998, pp. 218-9). Selden and Song (1994) also conclude that higher population density is accompanied by smaller emissions. 6. According to “The State of Air Pollution in 1990” (in Japanese), the Air Quality Protection Bureau,Environmental Agency of Japan, NO2 concentration declined remarkably from 0.044 ppm in 1971 to 0.019 ppm in 1977, and thereafter it stabilized. This is similar to the trend of SO2 reduction shown in Figure 2. However, to note is the fact that this NO2 data is an average compiled from many observation stations, the number of which rapidly increased from 36 in 1971 to 891 in 1977. Figure 3, on the other hand, uses data from a fixed point observation. 7. Interview at the Japan Bank for International Cooperation, 10 November 2000. 8. Malaysian Environmental Quality Report 1993, p. 9. 9. Terao (1994) and Tokyo Electric Power Corp. (1983). For abatement policies, see also Teranishi (1994) and Akiyama and Ueta (1994). 10. The environmental standard for NO2 in 1973 stated “0.02 ppm per hour of daily average”, but in 1978 it was modified to “between 0.04 and 0.06 ppm or less”, Akiyama and Ueta (1994). 11. Environmental Agency of Japan, Environmental White Paper for the Year 1990, p. 128. 12. Interview at the Tokyo Electric Power Co., 17 November 2000. 13. Interview at the Anti-Air Pollution and Environmental Protection Foundation, Bangkok, 8 March 2001. 14. For more details of energy efficiency in China, see Sinton et al. (1998), and Sinton and Fridley (2000). 15. Interview at Nippon Steel Corp., 26 May 2000, and Imura and Katsuhara (1995), pp. 191-3. 16. Ministry of the Environment, Singapore, 1999 Pollution Control Report, p. 30. References Akiyama, N. and Ueta, K. (1994), “Japan’s environmental policies and their new issues”, in Kojima, R. and Fujisaki, S. (Eds), Economic Development and the Environment: Problems of the Newly Growing Asian Economies (in Japanese), Institute of Developing Economies, Tokyo, pp. 229-63. Asian Development Bank (1997), Emerging Asia: Changes and Challenges, Asian Development Bank, Manila. Asian Development Bank (n.d.). Key indicators of Developing Asian and Pacific countries, Asian Development Bank, Manila.

ASL and Associates (n.d.). Global Sulfur Emissions Database, available at: www.asl-associates. com/sulfur.htm, ASL and Associates. De Bruyn, S.M. (1997), “Explaining the environmental Kuznets curve: structural change and international agreements in reducing sulphur emissions”, Environment and Development Economics, Vol. 2, pp. 485-503. Economic Planning Agency of Japan (n.d.). Abstract of Economic Statistics, various issues, Economic Planning Agency of Japan. Ekins, P. (1997), “The Kuznets curve for the environment and economic growth: examining the evidence”, Environment and Planning, Vol. 29, pp. 805-30. Funatsu, T. (2000), “Environmental policy: environmental politics and civic participation”, in Suehiro, A. and Azuma, S. (Eds), The Economic Policy of Thailand: Institutions, Organizations, and Actors (in Japanese), Research Series No. 502, Institute of Developing Economies, Chiba, pp. 307-41. Gerschenkron, A. (1962), Economic Backwardness in Historical Perspective, Harvard University Press, Cambridge, MA. Global Environmental Forum (1999), Environmental Measures of Japanese Multinational Firms (Thailand), Global Environmental Forum, Tokyo. Grossman, G.M. (1995), “Pollution and growth: what do we know?”, in Goldin, I. and Winters, L.A. (Eds), The Economics of Sustainable Development, Cambridge University Press. Grossman, G.M. and Krueger, A.B. (1995), “Economic growth and the environment”, Quarterly Journal of Economics, Vol. 110 No. 2, pp. 353-77. Hama-uzu, T. (2000), “Abating measures of air pollution caused by vehicle exhaust: Japan’s experience and Asia”, Views on East Asia (in Japanese), special issue of autumn, International Center for the Study of East Asian Development, Kita-Kyushu, pp. 156-69. Heston and Summers (n.d.), Penn-World Tables 5.6, available at : http://datacentre.chass. utoronto.ca/pwt/index.html. IEA/OECD (n.d.) Energy Balances of OECD Countries, Energy Statistics and Balances of Non-OECD Countries 1995/1996, IEA/OECD Imura, H. and Katsuhara, T. (Eds) (1995), Environmental Issues in China (in Japanese), Toyo Keizai Shimpo-sha, Tokyo. Ishak, A. (2001), “Urban air quality management: motor vehicle emission control in Malaysia”, paper presented at the Clean Air Regional Workshop, Fighting Urban Air Pollution: From Plan to Action, 12-14 February. Iwami, T. (2001), “Economic development and the environment in Southeast Asia: an introductory note”, International Journal of Social Economics, Vol. 28 No. 8, pp. 604-22. Kaufmann, R.K., Davidsdottir, B., Garnham, S. and Paully, P. (1998), “The determinants of atmospheric SO2 concentrations: reconsidering the environmental Kuznets curve”, Ecological Economics, Vol. 25, pp. 209-20. Krugman, P. (1994), “The myth of Asia’s miracle”, Foreign Affairs, Vol. 73 No. 6, pp. 62-78. Matsuoka, S. et al. (2000), “Comparative studies on social capability-building in East Asia”, Views on East Asia (in Japanese), Special Issue of autumn, International Center for the Study of East Asian Development, Kita-Kyushu, pp. 92-155. Ministry of International Trade and Industry –MITI (1999), White Paper for International Trade, Heisei 11 (in Japanese), MITI, Tokyo. O’Connor, D. (1994), Managing the Environment with Rapid Industrialization: Lessons from the East Asian Experience, OECD, Paris.

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Panayotou, T. (1995), “Environmental degradation at different states of economic development”, in Ahmed, I. and Doeleman, J.A. (Eds), Beyond Rio, The Environmental Crisis and Sustainable Livelihoods in the Third World, Macmillan Press, Basingstoke, pp. 13-36. Quan, Z. (2001), “The status quo of air pollution control and counter-measures in Shanghai”, paper presented at the Clean Air Regional Workshop, Fighting Urban Air Pollution: From Plan to Action, 12-14 February. Repetto, R. (1995), “Trade and sustainable development”, in Quibria, M.G. (Ed.), Critical Issues in Asian Development, Oxford University Press and Asian Development Bank, New York, NY, Hong Kong, pp. 186-212. Selden, T.M. and Song, D. (1994), “Environmental quality and development: is there a Kuznets curve for air pollution emissions?”, Journal of Environmental Economics and Management, Vol. 27, pp. 147-62. Shafik, N. (1994), “Economic development and environmental quality: an econometric analysis”, Oxford Economic Papers, Vol. 46, pp. 757-73. Sinton, J.E. and Fridley, D.G. (2000), “What goes up: recent trends in China’s energy consumption”, Energy Policy, Vol. 28, pp. 671-87. Sinton, J.E., Levine, M.D. and Wang, Q. (1998), “Energy efficiency in China: accomplishments and challenges”, Energy Policy, Vol. 26, pp. 813-29. Stern, D.I., Common, M.S. and Barbier, E.B. (1996), “Economic growth and environmental degradation: the environmental Kuznets curve and sustainable development”, World Development, Vol. 24 No. 7, pp. 1151-60. Suri, V. and Chapman, D. (1998), “Economic growth, trade and energy: implications for the environmental Kuznets curve”, Ecological Economics, No. 25, pp. 195-205. Teranishi, S. (1994), “Considering Japan’s environmental policies: lessons for Asian NIEs”, in Kojima, R. and Fujisaki, S. (Eds), Economic Development and the Environment: Problems of Newly Growing Asian Economies (in Japanese), Institute of Developing Economies, Tokyo, pp. 203-27. Terao, T. (1994), “Japan’s industrial policy and pollution”, in Kojima, R. and Fujisaki, S. (Eds), Economic Development and the Environment: Problems of the Newly Growing Asian Economies (in Japanese), Institute of Developing Economies, Tokyo, pp. 265-348. Tokyo Electric Power Corp. (1983), 30 Years’ History of the Tokyo Electric Power Corp., Tokyo Electric Power Corp., Tokyo. Vincent, J.R. (1997), “Testing for environmental Kuznets curves within a developing country”, Environment and Development Economics, Vol. 2, pp. 417-31. World Bank (1992), World Development Report, Development and Environment, Oxford University Press, New York, NY. World Bank (1997a), “Urban air quality management strategy in Asia”, Jakarta Report, Technical Paper No. 379, Washington DC. World Bank (1997b), “Urban air quality management strategy in Asia”, Metro Manila Report, Technical Paper No. 380, Washington DC. Wu, P-I. (1998), “Economic development and environmental quality: evidence from Taiwan”, Asian Economic Journal, Vol. 12 No. 4, pp. 395-412.

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A paradigm of Islamic money and banking

A paradigm of Islamic money and banking

Masudul Alam Choudhury and Md. Mostaque Hussain Department of Accounting, College of Commerce and Economics, Sultan Qaboos University, Muscat, Oman

203

Abstract Purpose – Theological perspectives in ethics, values and their functional application in the real world are vividly covered by the theory and practice of Islamic banking in recent times. This paper seeks to formalize the theological paradigm of the unity of God (Tawhid) and to make the groundwork of unity of knowledge in the context of the money, finance and real economy linkages. Design/methodology/approach – The paper combines narrative with argument and analysis. Findings – On the basis of this the structure of the balance sheet of Islamic banks with no interest rate as an ethical condition of Islamic financing is delineated. This topic is followed by a discussion on the experience of Islamic banks in recent times in the area of mobilizing resources and gaining profitability, popularity and stability by the Islamic financing methods and the direct mobilizing of financial resources into the real economy. In this way, the Islamic banks are shown to attain the much-needed complementary relations between social well-being for clients and financial efficiency for the banks. Originality/value – Adds insights to the theory and practice of Islamic banking. Keywords Islam, Banks, Religion, Law, Finance Paper type Research paper

Introduction Islamic banks as a novel phenomenon in the financial world since the mid-20th century have been construed as financial intermediaries that mobilize resources in the direction of projects approved by the Islamic Law (the Shari’ah) using Islamic financing instruments (Siddiqi, 1983). Islamic modes of financing comprise two basic principles, namely the interest-free financing instruments in the private sector and the development financing instruments based on both cost and profit sharing. Some of the principal instruments involved in such forms of resource mobilization are as follows (various Islamic Development Annual Reports): (1) trade financing and cost-plus mark-up on traded goods (murabaha); (2) profit-sharing (mudarabah) and equity participation (musharakah) in which cost-sharing among partners is also included; (3) rental on purchased equipment (ijara); and (4) Islamic banking portfolio using secondary financing instruments, such as shares and stocks revolving around the above-mentioned instruments. However, the financial resources are to be mobilized with the important condition of keeping the Shari’ah in view. They are therefore to be directed into the Shari’ah recommended goods, projects and goals. Thereby, socio-economic development and ethical prerogatives become part and parcel of the Islamic financing modes. Being so, Islamic banks have a mandate that extends beyond simply serving their clientele by

International Journal of Social Economics Vol. 32 No. 3, 2005 pp. 203-217 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510580760

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securing funds in the above-mentioned kinds of portfolios. They become development institutions, and thereby, play an important role in the economic and moral uplift of the Islamic society or community from the viewpoint of the Shari’ah. Islamic banks are thus to co-operate between themselves and with other national development institutions in accordance with the spirit of co-operation upheld by the Shari’ah for the benefit of all.

204 Precepts of the Shari’ah and the goals and instruments of Islamic banks What are the precepts of the Shari’ah in the financial field? They are to establish social security, property rights and the rights of progeny. In the extensive domain of the Shari’ah these goals are combined with the mandate of preservation of the Islamic State. Within the mix of the above-mentioned Shari’ah precepts, we find that the social, economic and political goals are taken up together with the financial ones. These together comprise the totality of the social, economic and political development issues of an Islamic society. Hence, when Islamic banks are linked with such a comprehensive network of goals in the light of the Shari’ah, the totality of the socio-economic and socio-political goals along with the financial ones would predominate in the objective criterion of an Islamic bank. For example, in the attempt to secure the funds of its clientele in the Shari’ah recommended ways, which comprise the tenet of securing property rights, the Islamic bank must embrace the other Shari’ah tenets as well. Thereby, socio-economic development goals become important in the Shari’ah determined social well-being function. The social well-being objective criterion of Islamic banks The social well-being function as the objective criterion of Islamic banks serving the tenets of maintaining social security, protection of progeny and preservation of the Islamic State, becomes a description of ways and means of financing resource mobilization that establish sustainability and the high ideals of the Islamic faith. This ideal goal involves the principle of Tawhid, that is the oneness of Allah (God) as the highest principle of Islam. The model of implementing the principle of Tawhid in the socio-economic, financial and political order involves organizing the modes of resource mobilization, production and their financing in ways that bring about complementary linkages between the Shari’ah determined possibilities. In this way, there appears co-determination among the possibilities, evolution of the instruments to be selected and implemented by many agencies in society at large. Islamic banks form a part and parcel and interconnecting mediums of a lively developmental organism. The developmental possibilities are realized both by the medium of discourse between management and shareholders of an Islamic bank as well as in concert with other Islamic banks, the central bank, enterprises, government and the community at large. In this way, a vast network of discourse related networking and relational system is established between the Islamic banks and the socio-economic order as a whole. Such unifying relations as participatory linkages in the economy wide sense convey the externalized meaning of Tawhid. This highest principle is now understood as the unity of knowledge emanating from the oneness of Allah as the one, who is complete and absolute in knowledge. The external meaning of Tawhid is now explained in terms of an increasingly relational, participatory and complementary

developmental order wherein possibilities unify among themselves. This unification process and sign in the externalized world is a meaning of the principle of Tawhid as we live it. The discourse related process and institution of determining such unifying possibilities by Islamic banks within the comprehensive outlook of the Shari’ah is called the Shura of the Islamic banks. In the end, by combining the totality of the Shari’ah precepts, Islamic banks become as much investment oriented financial intermediaries as they are agencies of sustainability of the socio-economic order, the socio-political order and preservation of community assets. It is now obvious that Islamic banks even when using the most modern kinds of instruments to attain such goals and sustain them over the long term would promote human resource development. In this way, the internal efficiency of Islamic bank and its informed connection with the community at large can be harnessed. Yet human resource development as a powerful instrument that causes Islamic banks to become development centered financial organisms in the total life of the Islamic community must be appropriately determined in the light of the Shari’ah. Take for example the questions relating to analytical methods of project evaluation. While it would be necessary to understand the complex methods of asset valuation from the viewpoint of interest-based concepts of the time value of money and the like, yet the truly Islamic methods of project evaluation would be central to the training of human resources in Islamic banks. In the same light, such training is to be imparted to the community through educational and practical training programs. Likewise, human resource development for project evaluation, technical assistance and feasibility report preparation on projects must keep in view the integrated outlook of the Islamic economy keeping the goals of the Shari’ah in mind. This can be realized by using a model of linkages among economic sectors that together can mobilize money into real economic activities and thus deter funds from speculative ventures, portfolio investments, bonds and money market funds. On the other hand, resource mobilization in all avenues of the Shari’ah recommended possibilities should be promoted so as to create a close link between monetary aggregates and real productive activities. The nature of money now turns out to be endogenous through its circulation in the real economy as a “quantity”. Money is not determined in this case by demand and supply concepts, since it does not have a market of its own, as in the case of goods and services. Instead, there are markets only of real goods and services that value the worth of money in the first place. Besides, such goods and services are those that are recommended by the Shari’ah in the light of well-being and linkages to generate complementary relations between various possibilities. On the basis of such real market exchange, real returns are measured in terms of prices, output and profits. These in turn determine the return on money. Islamic banks thus become important links between the national central banks, the economy and community in realizing such endogenous money-market interrelations. The nature of balance sheet of an Islamic bank Given below is a model of the balance sheet of an Islamic bank, in the absence of interest-based financing, in the light of the above-mentioned kind of general system of interactive, integrative and dynamic relations between money and the real economy. It reflects the valuation of asset and liability in the perspective of the endogenous

A paradigm of Islamic money and banking 205

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206

interrelationship between financial flows and the real economy in view of a developmental outlook. This is seen as the sure way to reduce interest rates in an economy wide sense (Choudhury, 1997). Model inter-Islamic bank balance sheets in the case of endogenous money In Table I, let us explain the relationship between the reserve ratio, r0 , and inter-bank loan flow as demand for liquidity for undertaking investments or spending. Spending of all kinds in the “good things of life” as prescribed by the Qur’an gives the meaning of resource mobilization. Since inter-bank loans for liquidity will increase in the face of increased demand for investment (spending), therefore, the reserve ratio, r0 , will decrease. Now the change in the quantity of money (M) is related to the change in the demand for liquidity (D), dD, by the multiplier, dM ¼ dD=r 0 : dM is inversely related with r0 . Investment (spending) demand increases as r0 decreases and vice versa. See Choudhury (1998) for details. B1 and B2 are two Islamic banks engaged in inter-bank loans. In a joint financing of venture (mudarabah and/or musharakah), let g1 denote the return to B1. This return then forms an asset of B1. Let g2 denote the return to B2, which then forms a liability to B1. Likewise, g2 forms a return to B2 and g1 forms a liability to B2. New money in the economy equals the amount of investment (spending) equal to 1ID·g 2 : In this way, in a multiple inter-Islamic bank loan-flow under joint venture, the total quantity of new money or investment capital (spending) arising from 1ID of initial spending equals,


g 2 þ g 22 þ g 42 þ g 82 þ · · · ¼ g2 1 þ g 2 = 1 2 g 22 ð1Þ The total amount of spending, Sp, which must be matched by the quantity of endogenous money in circulation is now given by,

Sp ¼ 1ID þ g2 þ g22 þ g 42 þ g 82 þ · · · ¼ 1 þ g 2 2 g 32 = 1 2 g 22 : ð2Þ To a linear approximation the above expression reduces to, Sp ¼ new money ¼ 1 þ g 2 :

ð3Þ

Likewise, for M ID of initial spending as endogenous money, the total money creation or new spending equals M ð1 þ g2 Þ: Since g2 is determined by the growth of real sector output, therefore, money is created in exact equivalence with this growth rate. For the concept of endogenous money see Choudhury (1997).

Table I.

Balance sheet for Islamic bank B1

Balance sheet for Islamic bank B2

Initial deposit ¼ ID 1.00 Reserve ratio ¼ r0 ¼ 0 Retention¼1 £ g1 Loan¼ investment (spending) In joint venture¼1 £ g2

Initial deposit ¼ 0 New deposit ¼ 1 £ g2 Retention¼1 £ g2£ g3 Loan ¼ 1 £ g 2 2 1 £ g 2 £ g3 ¼ 1 £ g22

ID ¼ Islamic Dinar

One of the many healthy consequences of endogenous money is that inflation remains controlled, since the value of transactions (as a reflection of investment or spending demand) per unit quantity of money in circulation remains stable. Another implication of endogenous money in Islam is that it creates a currency-denominated economy rather than demand-supply of money based on promissory notes and thus on an interest-bearing reserve ratio set both between the central bank and commercial banks and by the excess reserve ratio set by commercial banks.

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A contrasting view between endogenous and exogenous money supply by banks The contrast between endogenous and exogenous monetary systems is this. Assume that 1ID ¼ $1: Table II The central bank reserve is 10 per cent. Hence, dM ¼ ½dD=0:10
$ . ID dD;

ð4Þ



Sp ¼ 1ID þ g2 þ g22 þ g 42 þ g 82 þ · · · ¼ $0:90 1 þ g 2 2 g 32 = 1 2 g 22

, ID 1 1 þ g 2 2 g 32 = 1 2 g22 :

ð5Þ

Contrasting exogenous money The following shows the contrast between the two monetary systems with respect to the goals of economic stabilization and economic growth. Stabilization in the exogenous (fractional reserve monetary system) is passed on to the central monetary authority using the reserve ratio. Besides, the central bank reserve is positively related with the interest rate, in that, as the savings increase with higher interest rate the central bank reserve increases by the amount of the new deposits. Furthermore, if there is pursuit of aggressive monetary policy by the central bank, both the reserve ratio and the prime rate of interest may move upwards together. Now a higher amount of monetary contraction occurs by the twin decrease in dD and r. This can be seen in the expression (4). This will cause even a lower difference in the much-desired reserves of the central bank for transaction purposes in the exogenous fractional monetary system than in the 100-per cent reserve requirement monetary system. In both of the above cases with exogenous money in fractional reserve monetary system, Sp decreases, so that the role of the real economy in terms of spending in the Shari’ah outlets (socially productive and useful) for economic stabilization is reduced and taken over by the central bank’s function affecting reserve ratio and the prime rate

Balance sheet for conventional bank B1

Balance sheet for conventional bank B2

Initial deposit ¼ $1.00 Reserve ratio ¼ r0 ¼ 10 per cent Retention¼0.90 £ g1 Loan¼ investment (spending) In joint venture¼0.90 £ g2

Initial deposit ¼ 0 New deposit ¼ 0.90 £ g2 Retention¼ 0.90 £ g2£g3 Loan ¼ 0:90 £ g 2 2 0:90 £ g2 £ g 3 ¼ 0:90 £ g22

Table II.

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of interest. The withdrawal of resources from spending causes a lower rate or a volatile rate of return in economic and financial activities. Consequently, the growth rate of the money-real economy relationship in 100-per cent reserve requirement monetary system, which is the feature of endogenous money in circulation, is higher than the growth rate of the fractional reserve requirement monetary system.

208

Spending as the resource mobilization The example given above brings out the nature of spending in the Shari’ah recommended market activities as the source of economic stabilization, economic growth and social well-being. The concept of social well-being was explained above substantively in terms of the Tawhidi principle of universal complementarities (complementary relations) between all Shari’ah recommended goods and services. Total spending variable, S, can be related to real output by the equation, S ¼ AðQ=pÞa ;

ð6Þ

where Q denotes nominal GDP; p denotes the price level; A is a constant; b denotes the spending elasticity of Q/p. Expression (6) is written in terms of growth rates as, gS ¼ a1 g Q þ cgu

ð7Þ

where gS denotes the growth rate of spending; gQ denotes the growth rate of output; gu denotes the growth rate of an unaccounted for random variable. It is known that the real aggregate demand (spending) function would be flatter than the supply curve of real output. Hence, gS , gQ : Therefore, the rate of growth of real output growth is expected to be higher than the real spending rate. The above result is affirmed by Metwally (1989), who found statistically significant relation between real output growth and investment growth, investment being the second major component of total spending in the aggregate demand function. Since real output growth rate is an indicator of real productivity growth we conclude that inflation is checked when the rate of growth of real productivity exceeds the rate of growth of spending and which in turn is a significant positive function of real M1. Interest rate effect on money supply Metwally also estimated that the rate of interest has a significantly negative relationship with the rate of growth of money demand (M1). Now by combining the above results we deduce the following results: i #) Spending ") Investment ") rate of return; r increases and stabilizes " ð8Þ ) stability in M1 ") inflation stabilizes: Expression (8) can be extended to the following circular relationship under the effect of a sustained reinforcement of the result of expression (7) on the basis of preferences to spend in the “goods things of life” as the Qur’an encourages to spend in “moderation” on the Shari’ah recommended goods and services.

Stable r ) inflation stabilizes ) further spending ") M1 " ð9Þ ) circular causation A strongly endogenous relationship in this circular relation is proven by the 95 per cent level of significance in the t-statistic for the estimated coefficients in Metwally’s regression system. The continuity of the circular causation in expression (9) would depend on the formation of preferences towards productive spending in accordance with the Shari’ah, that is in accordance with the usage of the Shari’ah-based financial instruments that generate complementary relations between money and the real economy and thus bring about linkages in the general equilibrium system of interaction, integration and creative evolution of the money and spending variables. The preferences so formed are carriers of the knowledge production in the general equilibrium system of interrelations centered on Tawhidi causality of unity of knowledge between the Shari’ah possibilities. The final implication then is that Metwally’s results, which were time-dependent regression estimation, do not produce the circular causation as we have implied out of the first round in the one-directional results of expression (8). Only recursive continuity of knowledge formation can regenerate the process shown in expression (9). This requires institutional sensitivity to the interrelated process in the case of the money-real economy linkage issues. Evolution and historical performance of Islamic banks We have now explained the Islamic banking concept in the framework of a general system of relations. Islamic banks are seen to involve themselves as financial intermediaries and investment-oriented institutions in bringing about well-being of the community, society and the economy in the light of the Shari’ah. Next we will examine what role Islamic banks have played in recent times in these directions. We first examine the recent portfolio of financing made by the consortium of Islamic banks globally (International Association of Islamic Banks, 1988). First we will examine the Islamic banks’ balance sheets during the early years. We will then examine the recent performance of Islamic banks in different parts of the world. We will infer what structural change has taken place in recent times from the past trends in Islamic banks’ financing. Specific cases will be mentioned here including the experience of the Islamic Development Bank (IDB). It should be remembered nonetheless that the IDB being a regional development bank, functions differently from an Islamic bank. An Islamic bank is a private sector financial intermediary. It is subject to the statutory monetary policy requirements of the central bank of the parent country of the bank. In the early years between 1987 and 1988 alone, the aggregate balance sheets of Islamic banks showed an increase in the balance of accounts by 7.4 per cent. This increased further by 14.9 per cent in 1989 over 1987. Total assets increased by 107.4 per cent between 1987 and 1988. Shareholder’s equity increased by 12.4 per cent from US$469.3 million in 1987 to US$527.3 millions in 1988. Net distributed income increased from US$230.3 million in 1987 to US$280.1 million in 1988, a growth rate of 21.7 per cent. Rate of return on total investments was 15.8 per cent between 1987 and 1988. Equity volumes increased by 50.3 per cent, while the rate of return on equity was

A paradigm of Islamic money and banking 209

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210

18.6 per cent between 1987 and 1988. Total rate of return on capital was 18.6 per cent in 1988. Net profit rate was 11.1 per cent in 1988. Much of the high returns were due to concentration of resource mobilization in trade financing (murabaha). Equity financing and joint ventures formed a distant small ratio. Hence in the aggregate, Islamic banks performed remarkably well during this early period of time as far as financial returns on murabaha were concerned. Shareholders’ wealth was thus well protected by this financial instrument. The 1988 sectoral allocations of selected Islamic banks resources are shown in Table III. We note from it that agricultural and social allocations were minimal, except in the case of the Sudan Islamic bank. Recent performance of Islamic banks In recent times, Islamic banking and financing services have increased phenomenally around the world. There now exist 150 such banks spread over most countries of the world. Yet, the same trend in financing with a concentration around murabaha (trade financing) is found to intensify. Equity participation and profit sharing have remained distant minimum in the total allocation of resources. Secondary financial instruments in accordance with the Shari’ah could not be developed so as to give rise to a viable

Table III. Sectoral allocation of investment of Islamic banks (percentages of total financing) 1988

Faisal Islamic Bank of Egypt Industry Trade Agriculture Other sectors Total Dubai Islamic Bank Trade Services and family Other sectors Total Sudan Islamic Bank Agriculture Industry Trade Transportation Other sectors Total Faisal Finance Institution Inc. Turkey Metal industry Chemical and petroleum Clothing Food Tools Paper and printing Agriculture Contracting Total Source: IAIB (1998)

30.6 30.4 3.0 36.00 100.00 90.6 7.6 1.8 100.00 34.0 23.5 10.8 10.0 21.7 100.00 26.3 17.8 16.7 7.9 5.7 5.3 16.9 3.4 100.00

Islamic capital market. Islamic financial instruments are therefore traded in conventional stock markets. As a result, neither the developmental aspects of Islamic banking in favour of realizing an Islamic economy nor the distributive goals for the poor and marginal enterprises could be attained. Bank Islam Malaysia Berhad Bank Islam Malaysia Berhad (BIMB), one of the most progressive Islamic banks in the world today, quoted the following proportions of their mudarabah and musharakah funds (BIMB, 1994). Mudarabah financing stood at 0.21 per cent of the total financing in 1993 and 0.34 per cent in 1994. Musharakah financing stood at 1.85 per cent and 1.81 per cent, respectively, for the same years. These funds held by shareholders did not involve any active stakeholding and participation in decision-making except for major shareholders. The bank acted as management participant, mudarib, on behalf of its customers to make all decisions singly. Thus a principal-agent relationship existed in financial management and decision-making. Mudarabah and musharakah became a sleeping partnership in financial contracts between the clientele and the bank (Choudhury, 2001).

A paradigm of Islamic money and banking 211

Al-Rajhi In the case of Al-Rajhi banking and Investment Corporation in Saudi Arabia, Islamic banking services have shown good share values in its various Islamic financial instruments. This is indicated by their appreciating unit values. As shown in Table IV for Al-Rajhi banking services, unit shares of all funds increased within the span of a mere single week. Yet the condition behind all these instruments is their nature of fixed deposit without dividends allowed to be withdrawn in the short-term (Al-Rajhi Banking & Investment Corp., 2001). In April 2001, Al-Rajhi Islamic banking service posted 17.5 per cent increase in its profits over the first quarter a year ago. Equity shareholders’ capital increased by 8 per cent, that is to Saudi riyals (SAR) seven billion. Customer deposits rose to SAR 37 billion and operating revenue stood at SAR 904 million. Al-Rajhi has much of its Islamic funds in fixed deposits revolving around several kinds of Islamic financing instruments. Fixed deposits although good for affluent investors, who do not need to cash off in the short run, are not conducive for the marginal depositors and enterprises. Financial needs and exigencies affect marginal clientele continuously over the short run, particularly in financial markets and the economy that have become volatile these days. Hence a good degree of liquidity should Unit price Name of fund

(This week)

(Last week)

Commodity mudarabah fund Local shares fund Global equity fund Fund for Egyptian shares Middle East equity fund Balanced fund-1

$1,580.73 SR3,651.81 $139.98 $55.60 $92.69 $1.1129

$1,579.31 SR3,636.02 $138.37 $53.65 $91.08 $1.1079

Source: Al-Rajhi Banking & Investment Corp. (2001)

Table IV. Al-Rajhi Islamic banking services: current unit price

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212

be available to marginal depositors upon demand. Flexibility of cashing off without penalty to depositors should mark the feature of such funds. This would establish one of the conditions of the Shari’ah, which is easy access to property rights by the needy depositors. It is also found that some of the unit values are too high and may preclude small-scale investors from enjoying such financial instruments. It might be good to think of diversifying the large unit value shares into shares of smaller ones with affordable unit values. The result would be both product and risk diversification without diminution in the total unit value of shares. A good area to so diversify the shares is unit trusts with sectoral diversification. Linkages between sectors can then be generated by means of the Islamic financing instruments as a sign of economic development. Islami Bank Bangladesh Ltd The Islami Bank Bangladesh Ltd (IBBL) is one of the most successful and prominent of Islamic banks in the world. From a cursory examination of its performance data we can deduce the level of popularity and financial stability of IBBL. Much of the information given below is sourced from Rahman (2001). Table V gives the ranking of IBBL with respect to selected prominent private sector banks in Bangladesh. The level of popularity of IBBL can be deduced from her significantly highest volume of deposits. The highest volume of investment made by IBBL shows the effective mobilization of the deposits into productive outlets rather than holding them in the form of liquid saving. Consequently, the investment/deposit ratio is the second highest. Her financial productivity measured by income/employee is near to the highest. It is also found that the highest volume of investment results in attractive dividends out of total income. This aggregate figure on investment as resource mobilization over-rides a slightly lower investment per branch. This consequence shows up in a slightly lower net profit level. But such an indicator is a signal to the common shareholders’ well-being that IBBL keeps in view. Despite the lower retained income after dividends are declared, this indicator of popularity of IBBL does not result in lower incomes, which is seen to be near to the highest level. The popularity and competitive position of IBBL is also pointed out by her number of branches, which is higher than all other banks. Total employment figure is therefore the highest, although manpower per branch is the lowest. But when tallied against the investment per branch, the technical efficiency (investment per branch/manpower per branch) is the highest. This again reflects the highest technical productivity level of IBBL of all the other banks compared with. The highest efficiency level of IBBL is shown by her lowest cost of fund per branch, which over-rides the slightly higher total cost of fund. This again is an indicator of client-friendly banking procedures, which increases the popularity of IBBL among clients, especially among the microenterprises in Bangladesh. International consortium of Islamic banks On the financial stability indicators we find that total assets of IBBL increased at a handsome steady rate (Table VI). Likewise, in comparison with several banks IBBL’s statutory reserve is sound (Table 5). Revenue stream and equity streams are likewise competitive (Table VI).

No.

Particulars

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Paid up capital Statutory reserve Investment loss offsetting reserve Normal capital Provisional short-fall Adjusted capital Total deposit Total investment Investment per branch Investment deposit ratio (per cent) Total income Income per employee Cost of fund Establishment expenditure Total expenditure Cost of fund per branch Net profit Dividend F. Ex. business imports F. Ex. business exports No. of branches Total manpower Manpower per branch

IBBL 318 282 539 1,429 Nil 1,429 16,557 13,095 131 79 1,368 72 838 360 1,198 8 170 21 per cent 17,370 14,469 100 1,903 19

NBL

ABBL

(Taka in million) 391 373 321 286 Nil Nil 1,020 743 342 Nil 677 743 15,036 10,506 12,364 6,742 187 118 82 64 1,456 1,049 78 68 756 575 425 335 1,181 910 11 10 275 139 Nil 10 per cent 18,082 9,114 12,651 5,181 66 57 1,856 1,540 28 27

UCBL

CBL

230 191 75 496 493 3 9,187 5,152 65 56 887 45 461 306 767 6 120 Nil 10,176 4,529 79 1,948 25

1,602 263 Nil 172 584 (412) 8,500 5,820 77 68 918 49 453 289 742 6 251 Nil 6,180 1,450 76 1,855 24

Notes: BIBB: Al-Baraka Investment Bank of Bahrain; FIBB: Faysal Islamic Bank of Bahrain; DIB: Dubai Islamic Bank; JIB: Jordan Islamic Bank; BIMB: Bank Islam Malaysia Berhad; BIB: Bahrain Islamic Bank; IBBL: Islamic Bank Bangladesh Ltd.; FIBE: Faysal Islamic Bank of Egypt; KFH: Kuwait Finance House; QIB: Qatar Islamic Bank Source: Rahman (2001)

We turn next to many such Islamic banks, which together have performed with sound financial stability and have been popular among their clients. Table VI shows that except for some volatile movement in deposits for BIBB, in deposits, equity, assets and revenue for FIBE and BTFH, most other Islamic banks have recorded medium to healthy growth in all the critical financial indicators. Finally, Table VII shows that the Rate of Return on Assets and the Rate of Return on Equity have both been significantly positive and on an increasing trend between 1990 and 1998. These figures being positive, they indicate that Islamic banks internationally are fairly solvent. The Islamic Development Bank In recent times, the Islamic bank financing concentration in foreign trade has continued because this instrument was found to be the most profitable and attractive by its low risk. Foreign trade financing comprised 72 per cent of total financing of IDB on a cumulative basis between 1976 and 1995. Of this, much was on short-term trade financing. Long-term trade financing comprised a mere 2.87 per cent of total trade financing between 1976 and 1995. Yet foreign trade financing instrument is not of a developmental type. Dependence upon imported goods and inputs from non-Muslim

A paradigm of Islamic money and banking 213

Table V. IBBL vis-a`-vis private sector banks in Bangladesh (as on 31 December 1997)

7.5 21.0 3.1 2.4 5.4 12.2 34.1 6.4 11.9 25.2 30.8 35.4 16.3 12.6

7.6 17.6 1.6 9.7 10.7 2 2.4 20.3 18.6 5.1 18.5 27.4 9.1 12.0 10.2

7.7 3.3 5.5 4.6 4.3 5.6 6.9 5.2 4.1 13.4 2 2.4 9.8 5.7 5.7

10.8 3.0 23.8 5.2 4.7 1.6 11.8 13.3 5.1 15.9 8.7 14.8 7.6 7.2

Total deposits 199419901998 1998

13.9 2.7 212.2 5.8 5.2 22.4 17.0 22.0 6.2 18.5 21.1 20.1 9.8 8.8

19901994 12.0 9.9 210.5 7.1 4.3 4.5 12.2 21.2 10.4 21.4 21.7 14.8 10.7 11.3

7.3 6.2 3.8 4.5 4.8 9.3 9.7 6.5 3.6 9.3 1.3 12.0 6.5 6.9

9.6 8.0 23.6 5.8 22.6 6.8 11.0 13.6 7.0 15.2 11.0 13.4 10.0 9.1

Total investment 1990199419901994 1998 1998 7.1 6.2 5.1 4.5 28.8 5.1 9.2 5.1 4.1 13.3 3.3 10.7 5.4 6.4

9.4 5.2 22.3 5.6 9.5 1.9 11.5 13.2 7.8 16.0 12.0 10.4 8.4 7.8

Total assets 199419901998 1998

11.8 4.2 2 9.3 6.7 31.4 2 1.2 13.8 21.9 11.7 18.8 21.5 10.0 11.8 9.3

19901994

11.2 11.8 23.3 11.9 2.8 17.1 8.6 0.6 12.5 14.0 7.6 227.9 7.8 3.7

5.7 11.5 19.0 4.7 12.8 0.4 11.5 8.9 7.6 13.0 13.6 4.0 9.4 7.3

Total revenue 199419901998 1998 0.5 11.2 14.9 2 2.0 23.9 2 13.8 14.4 17.8 2.9 12.0 19.9 49.9 12.6 11.2

19901994

Notes: BIBB: Al-Baraka Investment Bank of Bahrain; FIBB: Faysal Islamic Bank of Bahrain; DIB: Dubai Islamic Bank; JIB: Jordan Islamic Bank; BIMB: Bank Islam Malaysia Berhad; BIB: Bahrain Islamic Bank; IBBL: Islamic Bank Bangladesh Ltd.; FIBE: Faysal Islamic Bank of Egypt; KFH: Kuwait Finance House; QIB: Qatar Islamic Bank Source: Rahman (2001)

7.7 14.4 0.2 17.6 16.3 2 15.2 8.0 32.2 2 1.3 12.1 24.1 2 12.1 8.7 7.9

RBIC KFH BIBB BIB FIBB FIBE DIB JIB QIB IBBL BIMB BTFH Simple av. Wt. av.

Table VI. Annual growth rates for some key variables of selected Islamic banks (1990-1994 and 1994-1998)

Bank

Total equity 199419901998 1998

214

19901994

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ROA RBIC KFH BIBB BIB FIBB FIBE DIB JIB QIB IBBL BIMB BTFH Simple average

ROE

1990-1994

1994-1998

1990-1994

1994-1998

3.8 0.4 1.2 0.9 5.45 0.2 0.5 0.9 0.4 1.4 1.1 1.8 1.9

3.7 2.2 2.4 1.1 4.9 0.1 0.6 0.8 1.1 1.4 0.9 1.3 2.3

25.9 6.6 3.6 10.8 16.8 3.7 8.7 19.2 2 2.3 32.9 13.2 42.9 19.9

25.6 29.3 7.3 11.1 15.9 1.3 8.5 11.3 16.4 28.8 13.2 38.3 22.1

Notes: BIBB: Al-Baraka Investment Bank of Bahrain; FIBB: Faysal Islamic Bank of Bahrain; DIB: Dubai Islamic Bank; JIB: Jordan Islamic Bank; BIMB: Bank Islam Malaysia Berhad; BIB: Bahrain Islamic Bank; IBBL: Islamic Bank Bangladesh Ltd.; FIBE: Faysal Islamic Bank of Egypt; KFH: Kuwait Finance House; QIB: Qatar Islamic Bank Source: Rahman (2001)

countries can increase the debts of importing countries. This problem was in fact noted with the foreign trade portfolio of IDB during the 1980s. In spite of the concentration of IDB financing in foreign trade, inter-communal trade among the member countries is a mere 9-10 per cent of their global trade for many years now. Member countries’ global share of trade was a mere 7 per cent in 1995. Over the 20 years period, 1976-1996, IDB had financed only three profit-sharing projects. Financing in these comprised only 0.15 per cent of total project financing (IDB, 1996). Recently, IDB has established a number of co-operative projects with Islamic banks. The emerging Islamic Banks’ Portfolio for Investment and Development is a fund jointly established by IDB and Islamic banks along with other participants. Between 1988 and 1996, a total of US$100 million was allocated in syndicated operations. IDB’s participation was 24.5 per cent. Islamic banks’ portfolio comprised 8.7 per cent. IDB’s Unit Investment Fund comprised 5.8 per cent. Pension Funds comprised 3.5 per cent. Other Islamic banks held 57.5 per cent of their assets in this portfolio. Such syndicated operations have been opened up in only two countries, Pakistan and Egypt, and then too they comprise only lease and trade financing operations. It had only 5.5 per cent of total IDB financing between 1976 and 1995. Participation in Islamic banks’ portfolio is of a shareholding type, that is mudarib type, whereby IDB acts as the manager of the Islamic banks’ portfolio. Inferences drawn From the quantitative picture given above it is clear that Islamic banks have done well in being profitable institutions towards maintaining the liquidity position of their depositors and shareholders. Yet the element of socio-economic development and a better prospect for diversification of project financing instruments is lacking. Consequently, the full impact of Islamic banks in development financing and in

A paradigm of Islamic money and banking 215

Table VII. Percentage rate of return on assets (ROA) and rate of return on equity (ROE), Islamic Banks Internationally, 1990-1998

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establishing sustainability of an Islamizing community remains a potential. Social well-being of the type we have explained in this paper in terms of measuring and directing Tawhidi based complementary relations among the Shari’ah recommended possibilities, needs more extensive networking and linkages between the financial and socio-economic development goals in accordance with the tenets of the Shari’ah.

216 Conclusion We have noted in this paper that Islamic banking in accordance with the Shari’ah precepts is a landmark in new paradigmatic thinking interrelating finance, economy, community and society. Islamic banks are therefore to carry out their operations and organize their plans and programs according to such a general systems outlook of finance with socio-economic development. It would then combine the goals of economic efficiency (growth) and social justice into complementary relations with each other. Such a model of socio-economic development is very different from the financial, economic and social models we are facing in the present age of capitalist globalization. To achieve the complementary goals and so actualize well-being for all, Islamic banks ought to focus on both financing as well as development in accordance with the tenets of the Shari’ah. We have laid down this perspective in this paper. We have also noted that Islamic Banks worldwide have done fairly well in terms of their financial stability and popularity among clients. In accordance with the arguments of this paper respecting the complementarities between economic/financial efficiency and social perspectives, the simultaneously good performance on the popularity indicator and financial stability brings out this point of the well-being objective of Islamic banks measuring such complementary relationship. This is a most powerful implication of the unity of knowledge in systems according to the Tawhidi paradigm that we have presented. These are indications that there is a rich premise for the normative principles of ethics and values emanating from Islam to be incorporated in the matters of money, finance, accountability and the real economy. In the context of volatile capital markets it is all the more necessary to start thinking of and organizing along lines of the money, finance and real economy linkages within corporate and national accounting systems. Such a bold experiment could save the prevalent equity markets from the vagaries of short-term interest-based fluctuations and the jitteriness of investor and consumer preferences. In recent times, volatile preferences have pervaded capital markets in terms of uncertain capital movements across risky portfolios of securities, shares and bonds yielding low rates. References Al-Rajhi Banking & Investment Corp. (2001), internet version, available at: www.alrajhibank. com.sa/investmentfunds.asp (accessed 22 April 2001). Bank Islam Malaysia Berhad (1994), Annual Report, BIMB, Kuala Lumpur. Choudhury, M.A. (1997), “The theory of endogenous money in comparative Islamic perspectives”, Money in Islam, Routledge, London, pp. 38-71. Choudhury, M.A (1998), “Reforming the capital market: Islamic concept of money”, Reforming the Muslim World, Kegan Paul International, London, pp. 145-63.

Choudhury, M.A. (2001), “Venture capital in Islam: a critical examination”, Journal of Economic Studies, Vol. 28 No. 1, pp. 14-34. International Association of Islamic Banks (1988), The Aggregate Balance Sheet of the International Association of Islamic Banks, Report, IAIB, Cairo. Islamic Development Bank (1996), Annual Report, IDB, Jeddah. Metwally, M.M (1989), “The role of the rate of interest in contemporary Islamic societies”, Middle East Business and Economic Review, Vol. 1 No. 1, pp. 32-47. Rahman, S.M.H. (2001), “Islamic banking revisited”, Thoughts on Economics, Vol. 11 No. 3-4, pp. 51-74. Siddiqi, M.N. (1983), Banking without Interest, The Islamic Foundations, Leicester.

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Are political principles stable? Tibor R. Machan Argyros School of Business and Economics, Chapman University, Orange, California, USA

218 Abstract Purpose – Aims to question whether political principles, for example, those of socialism or libertarianism, have lasting significance. Design/methodology/approach – Lays out a case for the stability of at least one variety of political principle, namely that of libertarianism or classical liberalism and argues that the normative version of these positions does manage to have lasting stability and significance. Findings – There is much that is true that people do not necessarily attend to – including certain principles of political life. It may well be true that everybody has the right to life, liberty and the pursuit of happiness, yet many of us reject this fact. Even judges and Supreme Court justices often fail to rule in a manner consistent with these principles. Originality/value – Provides insights concerning the nature of political and ethical principles. Keywords Ethics, Politics Paper type Conceptual paper

International Journal of Social Economics Vol. 32 No. 3, 2005 pp. 218-227 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510580779

Do political principles, for example, those of socialism or libertarianism, have lasting significance? Are they stable and enduring – or applicable only to a given time and place? What about the principles expressed in a constitution, for instance, in the USA or anywhere else? Are they, as some political leaders and even jurists of our time have claimed, “living documents”, meaning, are they something malleable, flexible, to be adjusted to different historical periods? Or do they contain something stable, permanent, even absolute? We need to be cautious in approaching the issue because one answer to our question, namely, that such principles at their best are “universal”, can be misunderstood. If by “universal” we have in mind that the principles will necessarily forever hold true, that is something none of us can know for sure. We are not required to have omniscience, know such matters way into the future. But this is not what matters[1]. It is unimportant and impossible to establish literal universality, especially in the fields of ethics and politics. What matters is whether such principles are fundamentally applicable to temporal yet ubiquitous human community life. Are they consistent with human nature, and do they reflect how we ought to live in each other’s company? We know, for example, that when we study adolescent psychology, we are not considering principles for all human beings but only for those in an early stage of human life. Are the principles of libertarianism and those that underline the US Constitution principles of this kind, able to inform us only about a given historical period, maybe even only in a given geographical area? Or are they “universal” in the more restrictive sense of that term – i.e. relevant to every known human society?

The Marxist critique The idea that principles of political economy – in particular, those of classical liberalism – can be stable and lasting has had many serious critics. One of the most influential was Karl Marx. Marxism, clearly a very influential social and political philosophy at least until recently, holds that humanity is on an unselfconscious voyage at each stage of which different principles of political organization obtain. Just as a living being goes through infancy, childhood, adulthood and eventually old age, so does humanity, according to this view. Just as the biological and, for some living beings, the psychological laws that govern that entity’s life, will vary from age to age, so do the principles of human community life change from age to age. Just as the same medical remedies do not apply to an infant as they do to an elderly person, Marx believed that humanity as a whole undergoes an analogous development. So, by this outlook, to try to live today by the principles that governed us, say, 250 or 2000 years ago would be a mistake[2]. Not every critic who is sceptical about the enduring relevance of certain political principles is a Marxist. But Marx and his teacher Hegel were so influential that even many who do not embrace their position adopt this, what is called historicist, element of it[3]. The idea of a living constitution tries to capture this element by calling to mind the fact that organisms go through stages of development and at different stages, different laws govern how they behave. So, critics have argued that while, for example, the US started with a political ideas and legal infrastructure, substantially libertarian, that reflected concerns appropriate at the time of the founding, they are appropriate no longer. The colonists were wary of the meddling of monarchies; saw this as unjustified, and forged appropriate rhetoric to make their point. But we ought not to take that rhetoric too literally. Social-political-economic principles serve purposes within a very specific historical context. As a case in point critics note that when the US Constitution was framed, it stressed the need for the government to promote the “free flow of commerce”, which makes sense for a new nation. A substantially laissez-faire public policy would, then, be the right one to follow at that period of the country’s history. But later, new tasks arose for governments; and these new tasks required substantial expansion of the scope of government’s jurisdiction and authority, especially as regards the economy. Thus, over time a massive bureaucratic and regulatory system would emerge that took almost no note of safeguarding such artifacts as rights to “life, liberty and the pursuit of happiness”; and this new leviathan has become the right political system for this country at its current historical stage. However, it is arguable that if the philosophical teachers who influenced Western liberal countries were correct, that rights are grounded in human nature, and if they were also correct that human nature is substantially unchanged over time, then this historicist view is a pure blunder. If, as for example, the US Declaration of Independence states, albeit succinctly, we do in fact have rights, among which are those to life, liberty and the pursuit of happiness, and if it is in fact the proper function of government to secure such rights, then unless we have somehow lost these rights or lost our human nature, the proper task of government remains the same (even if how exactly to go about that same fundamental task may have to accommodate new circumstances).

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I shall attempt to lay out a case for the stability of at least one variety of political principles, namely, that of libertarianism or classical liberalism. I will argue that the normative version of these positions does manage to have lasting stability and significance.

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The nature of man Certainly normative libertarians think they are in fact appealing to enduring principles as they forger their policy recommendations, criticism, and so forth. They do not make this claim casually. Only after they and their teachers studied the basic principles of human organization as articulated by such thinkers as Plato, Aristotle, Hobbes, Locke and Montesquieu, and as manifested in history, do libertarians affirm what they regarded as lasting ideas and ideals. While there are different strains of libertarianism, many regard the principles of this political outlook as derived from our basic human nature, which does not change from year to year and place to place. Man was Aristotle’s “rational animal” 2000 years ago, and he is the “rational animal” today. Which is why we can still read the ancient authors – Plato, Aristotle, Hobbes, and the rest – with profit. All these and millions of other people – historians, poets, novelists, scientists, explorers and jurists – speak to us intelligibly across the ages. If we could resurrect them, we could sit down and have a discussion. Maybe not about the internet, but certainly about child-raising, friendship, politics, beauty, all the elements of our shared humanity – all the values and concerns that do endure. That is because human nature endures. For example, all human beings, in all ages and places, have been creative. They invent things. They do not rely only on what happens to be available in the environment, as do as a matter of routine other living things. Plants and lower animals survive and flourish by following “built-in” directions or guides. Much of our own physiology is also hard-wired. But most other living things do not have to learn a good deal; they do not have to discover how the world work and how it might contribute to their lives. We, however, must learn – and, as we well know, some people refuse to do this. Human beings face alternative courses of conduct and, therefore, have moral responsibility to chose rightly. If human beings foul things up, we know well enough that it is often their own fault. Unlike animals, people can make very bad choices – as when they judge others not by the “content of their character”, but by their national or ethnic or racial background, or when they molest children, or betray their country, or engage in professional malpractice. As human beings, we are able to neglect our own needs or responsibilities. We are able to betray the principles we ought to live by. All this is in the nature of a creative being. What libertarianism and some of the statements of its ideals, such as the US Declaration, gives eloquent voice to is that certain basic principles of community life rest on these lasting, stable, fundamental facts about our nature. Accordingly, those principles, too, are lasting, stable and fundamental within the community of humanity. They apply in Britain, the USA, Germany, South Africa, Afghanistan, China, Russia, or Madagascar – even if they are openly rejected by the ruling authorities and, perhaps, even by most of the people. Two plus two is four even if a majority believes it to be five. Human beings can be wrong. What follows from this recognition? To start with, when the Nazis decided to kill Jews or Soviets the kulaks or the terrorists their victims it was not because they

happened to live by different but equally sound principles of community life! Their different ways were not on the order of, say, preferring goulash to spaghetti. Differences in such innocuous matters of taste are indeed highly variable and can co-exist quite happily. The political corruptions of these destructive regimes are not even comparable to “we like the impressionists and they like the surrealists” in art. Totalitarian killers are universally wrong – morally and politically wrong – and it is right to condemn them in no uncertain terms. So are terrorists who murder or otherwise use the lives of innocent unwilling children, men and women to make some (however, important or trivial) point. When some people refuse to acknowledge that others have basic human rights to life, liberty and the pursuit of happiness, when they wantonly murder and destroy, and we are justified in saying that this is objectively wrong and in condemning the perpetrators[4]. Of course, this moral confidence must be affirmed through hard study and examination of history, philosophy, and theology and by our own adherence, in practice, to the basic principles we have discerned. And once we have learned that certain principles do hold firm, when people attack us for them it is proper to resist confidently and without apology. It is proper to declare that those who consistently and persistently reject our principles live a bad life, that they are seriously wrong and require resistance at least when they attempt to impose their misguided ways on other persons. It is important to realize that the kind of knowledge one might have of such principles of ethics and politics is not of the “beyond a show of doubt” variety that may perhaps be available in some very rare field of inquiry, such as metaphysics or formal logic, but of the “beyond a reasonable doubt” kind. What is vital to see is that such “beyond a reasonable doubt” variety of knowledge is quite adequate – it is what we obtain in the hardest of the sciences and engineering, nothing more[5].

Citizens versus subjects The US Declaration for example, as other brief manifestos on political matters, is not a treatise on political theory. It is an announcement to the world of what the American founders held to be political truths, to be taken as self-evident in such a public announcement – namely, that we are created equal and are endowed by our creator with certain unalienable rights, among which are life, liberty and the pursuit of happiness. Another truth they alleged is that governments are instituted to secure these rights – deriving their just powers from the consent of the governed. What libertarian or other political manifestos state, therefore, is revolutionary ideas that require a good deal of unpacking. In the case of the libertarian account of these matters, up until the last three hundred years, in most places and in most times, government was treated, quite mistakenly libertarians believe, as the ruler of the people, as the sovereign. Kings were at least officially – but demonstrably mistakenly – regarded as ruling by divine right, entitling them to order their subjects to conform, to a greater or lesser extent, to their will. Even today, in some of the most civilized, advanced societies, like Holland, Norway and Sweden and England, people are referred to as subjects. Why? Because they are not officially considered to possess an independent will of their own; by law or public policy, they are subject to the will of the sovereign or the monarch. This is true in many

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countries even of the more liberal western world – not to mention parts of the world where sheiks, princes and dictators hold sway. The ideas of libertarianism spurn these beliefs. For example, the American Revolution was revolutionary because its political leaders proclaimed that sovereignty properly lay with the individual members of communities, not with the powers that be. The idea was that kings or other government officials are no different from you or me: they are human beings, like all of us. So why should we accept the notion they hold some sovereign authority over us, independent of our delegation of any such authority? Libertarians regard such a notion as a drastic mistake that must not be allowed to stand. They identify, instead, each person as a self-ruling citizen. A citizen is sovereign whereas a subject is not. As the controversial, but often eloquent American president, Abraham Lincoln put it, “No man is good enough to govern another man, without that other’s consent” (Jaffa, 1978; Lincoln, 1990). Arguably, it is that theoretical reconstituting of the moorings of governance which made the idea of the United States and of libertarians who developed that idea, so revolutionary, even if not all of them were successfully applied and incorporated into public policy. The notion of consent is not too hard to grasp in general terms. We all recognize that if a doctor were to begin operating on us without first gaining our permission, this would be an example of criminality, not medicine. Or that if a dentist was to detain us by force and start drilling our teeth that too would be criminal. So the idea that one’s life is one’s own and other people may intrude upon that life only by permission certainly seems like a candidate for a fundamental principle that is universally binding among human beings. So now consider libertarianism’s political principle of the basic natural, individual right to liberty, namely, that everyone has the right to be free from the forcible intrusion of others[6]. This principle is not widely observed in practice, especially among governments. The American founders and subsequent generations of libertarians invite us to ask what right anyone could have to intrude upon another without that other’s consent. If we are talking about parents and their sometimes-forcible guidance of their children, such intrusion can make sense – vis-a`-vis children. But if we mean relationships among human beings, it is clear that no person has any greater innate – or divine – right to push people around than anyone else has. The truth is that, if we are simply going by basic human nature and what a flourishing human life requires, you have a right to your life and I have a right to mine. Period. Thus, it is not to hard to appreciate, at least in a preliminary way, that everyone has an unalienable right to life and liberty. However, what about the right to the pursuit of happiness? That is a somewhat more complicated and controversial idea. But essentially it means that we all have the right to conceive of what kind of life we should lead, and then to pursue that life without interference – unless in the course of doing so we violate the same right of someone else. So different people might pursue happiness by farming, philosophy, internet wizardry, race-car driving, or any combination of all these things. That is what “pursuit of happiness” means – not that everyone’s conception of happiness is equally right or valid or sensible. One could certainly choose to live badly, and not necessarily wilfully. One could misconceive what would make one happy. (Although, to be sure, the evidence that one persistently is unhappy as a result of following a certain path would be hard to ignore, after a while.)

To pursue a wasteful, slovenly life may well be morally wrong; and people who care about you may well try to convince you to change your ways. But under the American system of a just and liberal community, they must not use force to do so. To that extent, the principles laid out in libertarian political thought, even when briefly sketched as in the American Declaration of Independence, are presumed to be stable and dependable. We accept them in some rudimentary fashion, even when we do not grasp or accept all their logical implications for public policy – which is often. The perhaps most controversial political principle associated with the classical liberal, bourgeois and American political traditions is the right to private property. I shall not spend much time discussing this – I have explored the matter elsewhere (Machan, 2002). I do wish to note, briefly, that the major objection to this principle – namely, that when one appropriates something a good portion of it did not come from one’s creative efforts – does not work. After all, we ourselves, who supposedly do not belong to anyone other than ourselves, did not create ourselves but came with numerous attributes that we simply inherited. That, however, does not entitle anyone else to lay a claim to us, to our labour, talents, advantages, and so forth. At any rate, many political theorists share the outlook that while human beings may have basic rights, the well-being of some nonetheless requires extensive government involvement in society. And if it is true that everyone possesses not just “negative” rights to life, liberty and the pursuit of happiness, but also “positive” rights to health care, social security, job safety, water-conserving toilets, etc., then government’s job is quite extensive and intrusive. Extensive taxation, wealth redistribution, social regimentation and the like would require a nearly unlimited government rather than the limited government that would be sufficient to secure negative rights. But the arguments here are weak, as I and other libertarians, from the more humble to those in prominent places, have tried to show on numerous occasions. Government unbound We are witnessing the kind of unlimited government nearly everywhere in the West that is spawned by doctrines such as the one proclaiming that we all come to have positive rights – to what amounts to other people’s involuntary servitude. The rationale for this is in part the “living constitution” doctrine, bolstered by views such as those proposed by Peter Unger, as follows.: On pain of living a life that’s seriously immoral, a typical well-off person, like you and me, must give away most of her financially valuable assets, and much of her income, directing the funds to lessen efficiently the serious suffering of others (Unger, 1996).

Moral claims such as these reintroduce into politics the idea that human beings and their works belong to others – that is the most sensible rendition of the idea that they “must give away” their wealth. (If they ought to do so, that would acknowledge that they and their works belong to them yet they should choose to give some of it away, something that would be up to them to do, be it right or wrong, and could not be imposed on them.) In any case, the position that such developments are the norm in the understanding of political ideas, so that whereas in the past people had only negative but now they have positive rights, support the policy of constant change in how human communities ought to be governed, change that is itself unprincipled and relies on the rule of

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persons, not the rule of stable (enough) law[7]. Consider that governments at all levels are now involved in overseeing virtually everything – tobacco farming, milk production, all varieties of businesses, the building of sports arenas, banning various kinds of sexual liaisons and drug consumption, and many more endeavours that have nothing to do with its proper task as libertarians have identified those. The seeds of this expansion of the scope of government were sown early in American history and earlier, of course, in the thoughts of those who tried to justify monarchy and other forms of absolutist government. In the USA, it is the Hamiltonian instead of the Jeffersonian conception of government that has triumphed. The transmogrification accelerated after the Civil War and, even more so, under the leadership of such presidents as Woodrow Wilson, Theodore Roosevelt and Franklin D. Roosevelt. And now the propriety of all-intrusive government is virtually the mainstream view. Meanwhile, government in the USA and elsewhere routinely fails to do its proper task, namely, function as peacekeeper in securing our negative rights. The libertarian idea is that citizens themselves, with their rights effectively protected, would go about doing all the tasks many now blithely expect of governments. They would do this in the natural course of pursuing their own happiness, through various voluntary associations – churches, clubs, corporations, orchestras, and sports teams. The idea is that we do not need the government to hold a gun to our heads to do the right thing, even if we do sometimes fail to do what is right. That recognition of our social capacity, so well captured in libertarian political thought, has largely fallen by the wayside as well. To be sure, there was never a time or place when allegiance to libertarian principle was pure and unsullied. In America, for example, the Constitution incorporated many serious compromises of the principles of the libertarian US Declaration. The Southern states, for example, wanted slavery to be legal. And the 13 colonies could not have forged a Union unless the Northern states acquiesced in that. Eventually slavery was abolished, at great and, as some would argue, unnecessary cost. But until then the Constitution was not loyal to the Declaration. Nor are many of our present laws loyal to the spirit and letter of the Declaration. In other countries, too, similar and more persistent compromises were made with the new, revolutionary classical liberal political outlook. Is there anything wrong with these departures from the libertarian heritage, however? After all, per the Marxist theory of social evolution, maybe times have changed and the libertarian principles proclaimed earlier have become obsolete. Must we now put them on a shelf and treat them as antique and merely of historical interest? Should we construe official statements of the libertarian or near-libertarian political theory, such as the US Constitution, as “living documents”, i.e. ones that, like an adolescent, are still undergoing development and hence cannot be expected to embody any permanent and lasting principles? There is no gain in saying the fact that many things in society change continuously and quite naturally – how we dress, our tools, our methods of raising children, our modes of transport and our cuisine are all different from what they were 250 years ago. And though we may sometimes lament a lost tradition or disparage a current fad, such changes seem par for the course – not a betrayal of eternal verities. So, maybe, along with all such variable things, everything else changes as well, and nothing at all is

permanent. Maybe honesty, loyalty, justice and integrity are all old-fashioned, outmoded notions, to which it would be a mistake to cling. Yet as we have seen, certain principles and truths do endure despite all the variations. For example, although there are options in how children might be raised, some basic ideas do remain true in any human community, any era. It is understood that parents have the responsibility to prepare their children for adulthood – a basic and universal moral assumption. Many who accept the basics of Darwinian evolutionary theory also accept the fact that over the eons, certain life forms have developed and become stable and basically unchanging while they last. Thus stable, lasting principles of botany, biology and psychology, as well as ethics and political economy, can be identified without in any way contradicting the reality of evolution as such. Principles of ethics and politics are not of the same character as the laws of gravity or photosynthesis. In the social and human realm, choice plays a role that it cannot play elsewhere. Laws pertaining to the bulk of inanimate and even much of animate nature are necessary and incontrovertible in that they are descriptive of how things work and must work, given all the factors involved. In contrast, moral and political laws spell out what is required to flourish in society, yet we are free to ignore or try to circumvent them. They are principles we ought to follow but which we have the freedom to evade – though not without penalty[8]. The same is true of health. Consuming strychnine is self-destructive, but we are quite able to act, at least for a little while, as if it were not so. That is the uniquely human situation. We are not like rocks and animals, compelled by impersonal forces to behave in certain ways, as are other items of the natural world that are compelled or driven to behave as they do. Both common sense and the criminal law accept that there are principles according to which we should conduct ourselves, but which we have the freedom to violate. We should refrain from stealing but some of us refuse to do so. We should refrain from smacking our children, and yet sometimes we do. The choice is ours So, arguably there is much that is true that we do not necessarily attend to – including certain principles of political life. It may well be true that everybody has the right to life, liberty and the pursuit of happiness, yet many of us reject this fact. Even our judges and Supreme Court justices often fail to rule in a manner consistent with these principles[9]. Of course, some people believe that these principles are valid – that there is good reason for them – despite the fact that others have lost sight of them. But we need not insist that, for example, Americans have in the past been unerringly loyal to the libertarian principles of their Declaration to argue that we have recently suffered an erosion in allegiance to these principles. Another source of violence against libertarian or near-libertarian principles is the willingness to trade liberty for “security,” a motive that has become particularly prominent in the wake of 11 September 2001. In a state of panic, people often yield to the temptation to abandon basic principles. It is when one fears most for one’s safety that one is most likely to become corrupted to lie or steal or cheat. When everything is okay, it is easy to tell the truth, and there is no urgency to steal. Similarly, when security is threatened some folks begin to think that liberty is expendable. Maybe it is

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not so important, now, to abide by due process of law. Maybe we will be more secure if we treat every suspicious-seeming person as guilty whether he is proven guilty or not. Yet, paradoxically, once we start thinking this way, the very idea of defending our system against enemies becomes moot insofar as we forsake our own formerly cherished freedom. Even in the direst circumstances, when the temptation is the greatest, we must maintain a commitment to fundamental principles of justice. Most libertarians have always spoken of unalienable rights – not occasional, intermittent, easily-compromised rights which governments and others may ignore when they wish. True, there have been occasions in the even the most libertarian of society’s history when major and widely admired figures have neglected the principle of rights. Even the much admired Thomas Jefferson and, most significantly, Abraham Lincoln departed from the principles a free government. The former compromised his limited government philosophy when he made the Louisiana Purchase, the latter when during the Civil War he suspended the Writ of Habeas Corpus, the greatest protection a free country can offer its citizens against arbitrary search and seizure. But the validity of a principle is not brought into question merely because certain people – even people we otherwise have reason to respect – do not respect that principle.

Notes 1. Of course, “universal” could mean something far less ambitious, namely, applicable merely to the universe of human beings And that is a distinct possibility in politics, as it is with numerous aspects of medicine, nutrition, anatomy, psychology, sociology and other disciplines pertaining to human life. 2. This, indeed, was Marx’s central criticism of capitalism, namely, that it was propounded as a universal rather than temporary political economic system The best source for seeing his views about this is the posthumously published volume Grundrisse. 3. This is a rather widely considered idea in a technical political philosophical language It is the belief that different historical periods call for different principles of social organization. Even outside of academe, a good many people argue along those lines. They say, “OK, back then, it was fine to favour Jeffersonian government of limited size, limited scope and so on, but today things are different, more complicated, and that idea is no longer true.” 4. It is important to note here that the precise terminology deployed to designate even the most stable principles of ethics and politics need not themselves be stable, so long as it is recognized that changing terms identify such principles more or less successfully throughout the history of human inquiry about them. For how best to conceive of this conceptual process (Pitkin, 1972). 5. The contemporary classic record of this account of knowledge may be found in Austin (1961). See also, Machan (1982) and Rand (1990). 6. This type of force is dubbed “coercion” to set it apart from others that do deploy power but either defensively or with permission, as when a dentists uses great force to extract a patient’s tooth. 7. See, for the defense of this historicist position (Melden, 1977). 8. Arguably this is the result of the fact of our free will For why this idea is not unscientific, see (Machan, 2001).

9. Indeed, for certain reasons having to do with the function of the Supreme Court or comparable judicial body in a liberal democracy, justices are restricted to doing only case-by-case legal analysis. The general principles must emerge from these and may not be simply announced by the court. References Austin, J.L. (1961), “Other minds”, Philosophical Papers, Clarendon Press, Oxford. Jaffa, H.V. (1978), How to Think About the American Revolution, Carolina Academic Press, Durham, NC, p. 41. Lincoln, A. (1990) in Basler, R.P. and Basler, C.O. (Eds), The Collected Works, Second supplement, 1848-1865, Rutgers University Press, New Brunswick, p. 108. Machan, T.R. (1982), “Epistemology and moral knowledge”, Review of Metaphysics, Vol. 36, pp. 23-49. Machan, T.R. (2001), Initiative – Human Agency and Society, Hoover Institution Press, Stanford, CA. Machan, T.R. (2002), The Right to Private Property, Hoover Institution Press, Stanford. Melden, A.I. (1977), Rights and Persons, Blackwell Publishing, Oxford. Pitkin, H.F. (1972), Wittgenstein and Justice, University of California Press, Berkeley, CA. Rand, A. (1990), Introduction to Objectivist Epistemology, Expanded Second Edition, New American Library, New York, NY. Unger, P. (1996), Living High and Letting Die: Our Illusion of Innocence, Oxford University Press, New York, NY, p. 13.

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Department of Economics, Portland State University, Portland, Oregon, USA

Richard L. Brinkman and June E. Brinkman Abstract Purpose – This paper aims to show the interrelation and relevancy of the concept and theory of cultural lag to social justice. The conception of social justice, though wide in scope, is applied in this paper to the limited domain of equality of opportunity and fairness with respect to income distribution. Design/methodology/approach – The methodology of this paper is holistic and interdisciplinary, and interrelates the social and the economic in the overall dynamics of general culture evolution. Findings – The “inverted U-curve hypothesis” of Simon Kuznets implies that a greater equality of income distribution would be forthcoming in an economy characterized by a mature phase of modern economic growth. Empirical evidence demonstrates that such a movement toward greater equality is subject to question. The American experience of the 1920s and the period from 1973 to the present offers evidence to question the U-curve hypothesis. Contrary to expectations, during these periods income distribution became more unequal. These periods, indicative of maladjustment, are used to demonstrate and serve as examples of cultural lags. The concept and theory of cultural lag exposes the need for prerequisite institutional adjustment. It consequently appears that the American institutional structure, currently directing the economy toward a policy orientation of laissez-faire and the resulting increased inequality of income distribution, is anachronistic to a modern industrial society oriented toward the goal of social justice. Originality/value – Relevant to the quest of social justice. Keywords Economics, Wealth and income, Social justice, Equality Paper type Research paper

Veblen and Ogburn: on the shoulders of two giants Two leading social scientists of the 20th century, Thorstein B. Veblen (1857-1929) and William F. Ogburn (1886-1959), are associated with the conception and theory of cultural lag (Brinkman and Brinkman, 1997; Glade, 1952).The theory of cultural lag, however, is ancillary to the main thrust of Veblen’s and Ogburn’s scientific endeavors. They are both similar and overlap in that their major focus is on the dynamics of general culture evolution as a basis for theory and explanation. Whereas Veblen sought a theory of economic evolution, in the context of the whole of culture evolution, Ogburn also used the whole of culture evolution but to explain the processes of social evolution. But of course, the economic process is inseparable from that of the social. The dynamics of culture evolution constitute a synthesis of both the social and the economic. To mainstream economists, however, the joining of economics to sociology constitutes “. . .a fate feared worse than the pox” (Bell and Kristol, 1981, p. 78). Both Ogburn and Veblen implemented and applied the seminal contribution of Edward Tylor in his formulation of the anthropological conception of culture, “as that International Journal of Social Economics Vol. 32 No. 3, 2005 pp. 228-248 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510580788

This paper is submitted in honor of John C. O’Brien who has made so many fine contributions over the years to the Association for Social Economics focusing on morality and ethics in economic analysis. We appreciate his integrity, reliability, and fairness as editor of the International Journal of Social Economics.

complex whole.” In many instances Veblen referred to the Tylor conception, and Veblen’s general matrix of theory reflects this emphasis. Veblen’s emphasis on culture is well-documented in the literature of institutional economics. In his quest for an evolutionary economics, Veblen directed attention to “cultural growth” (Veblen, 1961, p. 77). During the modern era, the dynamics of culture evolution have been controlled by pecuniary and predatory business institutions that have misdirected a potentially humanistic function for the economic process. Business institutions have dominated and subverted the economy toward the “. . .vendibility of the output, its convertibility into monetary values, not its serviceability for the needs of mankind” (Veblen, 1996, p. 51). Given his emphasis on the dominant role embedded in the power of business enterprise and business institutions, it followed that “A theory of the modern economic situation must be primarily a theory of business traffic, with its motives, aims, methods, and effects” (Veblen, 1996, p. 4). To Veblen and institutional economists in general, the corporation serves as the “master institution” (Veblen, 1997, pp. 86, 89). Veblen consequently was a premier iconoclast, and provided a penetrating critique of an evolving culture wrought in a crucible of corporate power dominated and directed by pecuniary habits of thought. Veblen used an holistic analysis embedded in culture evolution to explain economic evolution. Ogburn also used the same focus on culture but by comparison to explain social evolution. Ogburn clearly in many instances also drew attention to the Tylor conception and definition of culture (Ogburn, 1966, pp. 4-5, 58; Duncan, 1964, pp. 3-16). According to Ogburn, for many other sociologists, the tendency was to view social evolution in terms of the evolution of society. “What is it that is evolving? The answer is usually: Society” (Ogburn, 1966, p. 376). But to Ogburn social evolution was viewed in terms of the evolution of culture. “It is culture. Social evolution becomes then cultural evolution; and the evolution of groups since glacial times is part of the evolution of culture” (Ogburn, 1966, p. 377). As to their overall framework, both Veblen and Ogburn were tuned into the same frequency, i.e., to the tune played by “that complex whole” known as culture. The contribution by Ogburn “. . .seems to have been the first major work by an American sociologist in which the anthropological concept of culture was prominently employed” (Kroeber and Kluckhohn, 1952, p. 15). Similarly, it is arguable that Veblen was the first economist, and prior to Ogburn, to innovate the same focus for the discipline of economics. But Ogburn, while seekng reform, did not incorporate the same vitriolic vigor of critique inherent in the Veblenian analysis. Ogburn did not critique the system, per se, but rather in his contributions to the literature tended to avoid the negative role of business enterprise. And whereas Veblen established a school of thought, Ogburn did not. In the mold of the matrix of the sociology of knowledge, an expected and foregone conclusion is that Veblen, given his caustic critique of the system, was relegated to the “outside” and ostracized from the mainstream of economics. Ogburn, by comparison, given the milder direction of his analytical purview, became an “insider” and wrote a widely used textbook, achieved academic kudos, and was elected president of professional associations. Veblen, by comparison, and though, admittedly for a variety of reasons, had difficulty in maintaining an academic position and tenure. Veblen’s whistle-blower personality and outsider position precluded his conceptual and

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theoretical framework from being accepted by mainstream economists. Given a broader framework contained in the sociology of knowledge, it is understandable that Veblen’s theories did not penetrate textbooks and the mainstream of economic analysis, as Ogburn was able to do in the discipline of sociology. By comparison, Ogburn as a sociologist could discuss culture and the dynamics of invention and technological advance. To mainstream economists such a focus had historically represented the terra incognita of analysis. Consequently, the tendency among mainstream economists was to view Veblen as a sociologist, not an economist. This point was recognized by Veblen himself, “This cultural bearing of business enterprise”, might be considered outside the legitimate boundaries of economic analysis. But how might one discuss economics to the exclusion of the so-called “noneconomic”? Consequently, “In extenuation of this fault it is to be said that the features of general culture evolution touched upon . . . bear too intimately on the economic situation proper to admit to their being left entirely on one side” (Veblen, 1996, p. xx). Given the profound nature of his sociological analysis, one can consequently not deny that sociologists, even today, frequently claim Veblen as one of their own (Horowitz, 2002, p. 292). Veblen, of course, was not a sociologist, per se, but rather and importantly so was an economist intent on introducing the social and the cultural into economic analysis. Mainstream economists however tried to disown him and classify him as a sociologist, as would also be the case of the Nobel laureate Gunnar Myrdal, among others (Myrdal, 1972, pp. 14-5). Culture, however, does not evolve as an integrated or synchronized whole. Some parts of culture move faster than others and in the process others tend to lag behind, hence their ancillary focus on cultural lag that was implied in the Veblenian framework, but was explicitly stated by Ogburn. “The cultural lag approach has been one of the master concepts of modern social analysis . . . . The concept of cultural lag which Veblen used to analyze social processes, has been widely used by American sociologists . . . ” (Davis, 1968, pp. 304-5). And further, by a noted Veblenian scholar, “ . . . Veblen’s theory of cultural lag in which institutions and science and technology are perpetually in a state of maladjustment . . . Veblen has been characterized as both a conflict and cultural lag theorist . . . ” (Tilman, 1990, p. 967, 1987, p. 683). A recent publication co-authored by another leading Veblenian scholar noted the Ogburnian connection, and referred to cultural lag in six instances (Dugger and Sherman, 2000, pp. 6, 55, 75, 175, 178, 193). Another Veblenian scholar states in a comparison to Clarence Ayres: “This notion is similar to Ogburn’s conception of ‘cultural lag’” (Bush, 1987, p. 1094). Nonetheless, Ogburn claimed “. . . not to have read . . . ” Veblen in the derivation of his conception and theory of cultural lag (Ogburn, 1957, p. 167; Brinkman, 1981, p. 258, #2), and this point is similarly also noted by Bush (1987, p. 1113, #46). Ogburn, however, did not consider cultural lag to be his major contribution. Ogburn felt that his major contribution was related to exponential culture evolution and a Darwinian framework focusing on invention and technological advance (Duncan, 1964, p. xv). Both Veblen and Ogburn recognized the interconnection and interrelation of the parts of culture. In this sense they employed a functionalist approach of an organic whole and employed the analogy of culture operating as a machine. Veblen spoke of a machine process, “the character of a comprehensive, balanced process . . . ” constituting interstitial linkages, a “. . .concatenation of processes . . . relevant to the

industrial processes . . . ” and given “Any degree of maladjustment in the interstitial coordinations . . . a disturbance at any point brings more or less derangement to the industrial process at large . . . any maladjustment . . . ” (Veblen, 1996, pp.14-9, 1997, p. 5). And also relevant is a “lag behind the facts,” and, “Continued ‘lag, leak and friction,’ . . . ” (Veblen, 1997, p. 5). Ogburn’s treatment of cultural lag also draws attention to “. . .a correlation and interdependence of parts . . . ” as well as to the machine and functionalist analogy, “. . . culture is like a machine with parts that fit . . . ” (Ogburn, 1966, pp. 9, 200, 1957, p. 171). The problem therefore, relates to the fact that the overall organic whole or gestalt of culture does not advance as an integrated, synchronized whole but that some parts accelerate faster than other parts. In biology, in the development of a healthy body, the integration and synchronization of the parts of an organic whole, are provided for by DNA, as a code of life. In a sense, culture, as a store of knowledge, constitutes a social DNA and provides humankind with a code of social life and human behavior (Brinkman, 1981, p. 107; Dugger and Sherman, 2000, pp. 54-5). But humankind’s social DNA, as culture, has as yet to provide for a synchronization of interstitial or concomitant parts. Consequently, a problem persists in the manifestation of what might be classified as four basic types of cultural lags. The first is the usually cited case as a classic cultural lag in which material culture accelerates faster than the nonmaterial. For example, the H-bomb technology of material culture versus the lag in nonmaterial culture as government’s capacity to control. The second case is exemplified by material culture, as in automobile production, accelerating faster than other parts of material culture, such as roads, parking facilities and on. The third type of cultural lag relates to the social moving faster than the material, as in the case of science, as a social institution, moving faster than the capacity for the production of material technology as manifest in space exploration. The fourth case of a cultural lag is exemplified by one part of nonmaterial culture moving faster than another part of nonmaterial culture. We speak here of an institutional lag appearing as conflict and maladjustment, in which the size and power of corporations accelerate faster than unions which lag behind. In his explicit statement on cultural lag, Ogburn derived a diagram which can be used to demonstrate the phenomenon of a cultural lag (Ogburn, 1966, p. 206; Glade, 1952; Brinkman and Brinkman, 1997). This is shown in Figure 1, “A Sequential Time-paradigm of Cultural Lag”[1]. Part (A) represents a period of adjustment. In the analysis to follow, line 1 represents the independent variable (an economic growth indicator). Line 2 represents the dependent variable (income distribution). Point (a)

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Figure 1. A sequential time-paradigm of cultural lag

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represents the start of a period of maladjustment as indicated by (B) manifest in the early 1920s or for the later period demarcated by the 1970s, and indicates increases in income inequality. Part (C) would represent the period of adjustment yet to be achieved. We will relate this schema later in the paper to the “inverted U-curve hypothesis” as formulated by the institutional economist (Kuznets, 1955, 1963; Kapuria-Foreman and Perlman, 1995). Veblen and Ogburn consequently introduced new paths for their respective disciplines of economics and sociology relevant to cultural lag and integral to the overall dynamics of cultural evolution. Together, as a synthesis, Veblen and Ogburn offer an ideal matrix for those seeking an integration of economics with that of sociology, and especially, as members of the Association for Social Economics. Social justice: a conception in the context of income distribution The classic question, “What is justice?” that Socrates raises in Plato’s Republic, searches for an absolute standard, and has come down through the ages. This question continues to stir thinking in philosophy and the social sciences today; yet, it still begs answers. When Socrates presses his student for a definition of justice, the youth replies, “justice is giving a man his due” (Jones, 1952, p. 133). After a long dissection of these few words and their implications, Socrates admits that this young innocent “spoke better than he knew” (Jones, 1952, p. 133). But at another point in the dialogues this position is challenged with the notion that might make right: “Justice means nothing else than what is to the interest of the stronger party” (Jones, 1952, p. 63). In effect, rulers only say that they rule in the interest of their people, when actually they promulgate laws that they believe to be in their own interest. The dispute about justice really comes down to a dispute about a struggle for power. Of course, Socrates wins the argument, and the “ideal” of justice prevails, as it does to Plato. Yet to Aristotle, Plato’s student, justice in one respect is a state of character; it is not an abstract scheme or principle. Justice in this sense is concerned with a sense of fairness. It is a state of character that makes us “doers of just actions.” Since justice is a state, it may be studied by reference to its contrary, it is often injustice that makes us aware of justice (Aristotle, 1990, p. 39). “Throughout most of history the concept of justice has been far more concerned with the punishment of crimes and the balancing of wrongs than it has been with the fair distribution of goods and services” (Solomon, 1990, p. 292). This is exemplified in the biblical “eye for eye, tooth for tooth” (Leviticus, 24:20). Distributive justice, or social justice, while it goes back to Aristotle, has received attention more recently due to the work of John Rawls and his book, A Theory of Justice. Rawls revives and builds on traditional social contract theory with its emphasis on reason, and attempts to reconcile it with utilitarian theory that he feels places too much emphasis on utility as the basis for social judgments (Rawls, 1972). To Rawls, the “fundamental idea in the concept of justice is fairness” and he claims that it is this aspect of justice for which utilitarians are unable to account (Rawls, 1990, p. 305). “For example, it has sometimes been held that under some conditions the utility principle . . . justifies, if not slavery or serfdom, at any rate serious infractions of liberty for the sake of greater social benefits” (Rawls, 1990, p. 312). In Rawls’s social contract theory, which he claims to carry to a higher level of abstraction than that found in Locke, Rousseau, and Kant, free, equal, rational, and

moral persons come together in a hypothetical, idealized state, and choose the principles of justice for the basic structure of society. He calls this the “original position”. This differs from traditional contract theory in that the agreement is to accept certain moral principles and not to set up a society or form of government. The principles of justice are chosen behind a “veil of ignorance” because the persons involved are unaware of what their advantages would be in a future society. Owing to their ignorance, they are completely objective in their choices, hence he calls his theory “‘justice as fairness’; it conveys the idea that principles of justice are agreed to in an initial situation that is fair” (Rawls, 1972, p. 12). Rawls’s work has been highly controversial to the point that both libertarians and liberals are able to find areas of both agreement and disagreement. In a comparison of Rawls and Marx, the complaint is made that Rawls is not a “radical egalitarian” (Demarco, 1980, p. 395). In fact, he is willing to tolerate wide economic and social inequalities, and his work is a bellwether of contemporary Western democracies. For example, in Rawls’s paper “Justice as Fairness” he states, “Inequalities are permissible when they maximize, or at least all contribute to, the long-term expectations of the least fortunate group in society.” i.e. when “these inequalities set up various incentives which succeed in eliciting more productive efforts” (Rawls, 1990, p. 310). Others rally to Rawls’s support because of his emphasis on distributive justice, fairness, morality, and equality. For example, he is opposed to the principle of “mere equality” because it allows for too much influence from the contingencies of birth and talent, and not enough from the prior, institutional effects on behavior (Nagel, 1990, p. 330). Also, Rawls’s theory “. . . has been suggestive of a way to structure a society which incorporates both individual freedom and a fair distribution of material goods” (Blocker and Smith, 1980, p. xiii). And finally, “By far the most influential – and I believe the most important – theory of justice to be presented in this century has been John Rawls’s ‘justice as fairness’” (Sen, 1992, p. 75). Rawls’s writings are complex but provocative. For our purposes he touches on a number of issues of concern to this paper: Rawls considers justice to be a virtue of social institutions, or what he calls practices. The basic structure of society, which includes the major social, political, legal and economic institutions, is the primary subject of justice. This is so because it exerts profound influences on people’s lives. These influences are present at birth and continue throughout the person’s lifetime (Buchanan, 1980, pp. 4-41). His two principles of justice for social institutions are as follows. First, “Each person is to have an equal right to the most extensive total system of equal basic liberties compatible with a similar system of liberty for all.” Second, “Social and economic inequalities are to be arranged so that they are both: (a) to the greatest benefit of the least advantaged; and (b) attached to offices and positions open to all under conditions of fair equality of opportunity” (Rawls, 1972, pp. 302-3). The second principle is called the difference principle, and includes the primary goods of wealth, income, power, and authority. The “least advantaged” refers to those persons who have the lowest prospects of gaining the primary goods of society (Buchanan, 1980, p. 10). Our concern is with the relation between income distribution and social justice. We also agree with Gunnar Myrdal that “There is no way of studying social reality other than from the viewpoint of human ideals. A ‘disinterested social science’ has never existed and, for logical reasons, cannot exist” (Myrdal, 1969a, p. 336, 1969b).

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As with Rawls, we are analyzing the inequalities of income distribution in the context of institutional structures and, in particular, on the need for institutional adjustments. The prime importance of economic inequalities is their relationship to the social and political structures as laid out in Rawls’s two principles of justice as stated above. With Rawls, we agree that distributive justice is relative to the basic structure of institutions, and in a competitive economy inequalities will develop. But he also says “that in a competitive economy (with or without private ownership) with an open class system excessive inequalities will not be the rule. Given the distribution of natural assets and the laws of motivation, great disparities will not long persist” (Rawls, 1972, p. 158). In his schema, if a situation of great disparity did persist, it could be remedied by redistributing wealth in accordance with a principle of need. But this would only be temporarily compensatory if the basic structure of society and its institutions were not fair. And there is the rub! In this instance, Rawls joins the ranks of Socrates and the “ideal” of justice because, as we will show later, great and growing disparities do exist in the US today, and redistributing wealth in accordance with a principle of need in a capitalist society could only take place in the hypothetical state set up by Rawls in the “original position.” The great disparity in income in the US today calls for structural changes in the form of institutional adjustments to overcome cultural lags. Under the present system of unmitigated corporate power there is far too much room for what Aristotle called “pleonexia” or “grasping more than one’s share” (Solomon, 1990, p. 338). In summary, we agree with Socrates on the importance of establishing abstract principles of justice; these are needed ideals in guiding behavior. But we also recognize the variability of behavior at the social level, some of which allows for the promulgation of laws in the interest of the most powerful. Therefore, with Rawls, we agree that the principles of social justice must be related to the major social, political, legal, and economic institutions because of the profound effects of institutions in shaping people’s lives. Also, if there is to be equality of opportunity, there must be recognition of the prior institutional effects on behavior that place people at different starting points. This recognition helps to explain the plight of the least advantaged. Our concept of social justice has benefited from and been influenced by the Greek dialogues and by John Rawls’s discussion of distributive justice and justice as fairness. We have come to think of fairness as being at the very heart of social justice. But what does it mean to be fair? Rawls established fairness in his hypothetical world of the “Original Position.” But how is fairness established in reality, the world that Plato called the world of “flux”, the social world in which we interact? The first definition in the Random House College Dictionary is that to be fair is to be “free from bias, dishonesty, or injustice”. The key to this circularity is given in the second definition as “proper under the rules; a fair fight”. The outcry “That’s not fair” is often heard during childhood games as well as adult confrontations. But how is fairness established unless some context has been provided beforehand. In most cases there is a tendency to establish a level playing field, or to fall back on the rules of the game. Establishing rules and living by them is essential to social order. Even during wartime guidelines are established beyond which it is inhumane, or at least unlawful to tread. These guidelines are derived from values that evolve into institutions and result in the regulation of most social behavior.

To conclude, in this paper social justice as fairness is conceived within the context of traditional Western democratic values of “liberty and equality and, more specifically, equality of economic opportunity” (Myrdal, 1969a, p. 337, 1969b). With the large and growing disparity in income distribution in such a wealthy country as the US, the cry “That’s not fair” is in order. Cultural lag: delineated by the empirical base of American income distribution Perhaps in the whole of the science of economics there is nothing more fundamental that should be given primary concern than the distribution of income and wealth. “To determine the laws which regulate this distribution is the principal problem of political economy” (Ricardo, 1912, p. 1, italics added). The distribution of income and wealth constitutes the elixir of human life and well-being. Income and wealth provide for status, power, prestige, living standards, freedom of choice, and the equality of opportunity. Simon Kuznets, in the tradition of Wesley C. Mitchell and institutional economics, also sought to understand The Place of Science in Modern Civilization. Kuznets provided statistical evidence interrelating the “scientific epoch” to the processes of modern economic growth. Kuznets not only directed his attention to the empirical record, per se, but also sought explanation via theory and conception. And in this context, Kuznets wanted not only to understand the economic and growth process in isolation but also to learn more about the “functioning of society.” “Without better knowledge of the trends in secular income structure and of the factors that determine them, our understanding of the whole process of economic growth is limited . . . ”(Kuznets, 1955, p. 27). Kuznets (1963, 1955) in focusing attention on the long-term growth process, interrelated to the secular trends in income inequalities, produced the “inverted U-curve hypothesis”. Basically, the hypothesis is that as an underdeveloped country advanced and developed the tendency was toward a greater inequality of income distribution. But a country reached a point of inflection as it experienced transformation to mature and advanced stages of modern economic growth. The tendency was then toward a greater equality of income distribution. Kuznets then tentatively concluded and offered an hypothesis (not a statement of a “law”) that the “. . . size distribution of income . . . is more unequal in the less developed countries than in the developed countries . . . ” and that the long-term record “. . . shows that the inequality in the size distribution of income in the developed countries has narrowed over time . . . ” (Kuznets, 1963, p. 68). This hypothesis is schematically shown in Figure 2. The inverted-U hypothesis has stimulated a good deal of discussion and has produced a sizable literature in response[2]. The first half of the curve dealing with the experience of the LDC world is amply covered in the literature and has received a mixed assessment (Anand and Kanbur, 1993; Stallings and Peres, 2000; Todaro, 1989). But our concern is not over the validity of the U-hypothesis for the LDCs, but rather relates to the experience of income distribution for the US as an exemplar of a developed or advanced country (AC). Our paper does not deal with the issue of how inequality promotes or holds back the processes of economic growth, a basic problem which is also discussed in the literature (Aghion et al., 1999). Our paper rather deals with the alternative impact of Modern Economic Growth on income distribution. Given

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Figure 2. The hypothesis of the inverted U-curve

a greater democratization of the political process, as an expected concomitant to Modern Economic Growth, it would be logical to assume that a greater equality of income distribution would be forthcoming. Kuznets in formulating the inverted U-curve hypothesis evidently made this underlying assumption. The limited focus of this paper relates primarily to the American experience which took place during the 20th century, from the 1920s to the present. And, in turn, how the empirical record for this period interrelates to the conception and theory of cultural lag. In terms of the Ogburnian methodology (Figure 1), the growth process moves ahead as the independent variable (line 1) and the distribution of income (line 2), as the dependent variable lags behind. And therein rests the connection of the U-curve hypothesis to the concept and theory of cultural lag. What then is the empirical record in this regard? Our analysis will deal with three basic time periods. The first time period is demarcated by the years 1920-1929. The second covers the time period from the 1930s up to the early 1970s. And the third relates to the period marked by the early 1970s up to the late 1990s. Table I indicates that the period marked by 1920-1929 manifested a growing inequality of income distribution. For the top 5 percent the percentage share of income increased from 25.76 to 31.88. And for the top 1 percent the comparable increase in inequality was from 13.64 percent to that of 17.15 percent. This period is also analyzed by Ryscavage, “With the return to political power of the Republicans in the 1920s, the sentiment toward business improved” (Ryscavage, 1999, p. 137). The 1920s was marked by a return to a policy polarity of laissez-faire as a reversal to the policies of a “command economy” spawned during exigencies of WW I. As a result, the increase of the Gini index which took place during this period of the “roaring twenties” was indicative of an increase in income inequality. Estimates of the Gini coefficient during the period of the 1920s indicate an increase from 0.454 (1923) to that of 0.490 (1929) for all households. Other estimates of the Gini coefficient are given at 0.544 for the year 1932 (Ryscavage, 1999, pp. 154-6). In any event, the estimates of the Gini coefficient that increased during the period of the1920s indicate that the increases in income inequality were significant. Also of significance is that this upsurge in

1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946

Top 1 percent 13.64 16.15 15.58 14.02 14.69 15.74 15.77 16.46 17.18 17.15 15.88 15.57 15.65 14.76 14.08 13.58 14.46 13.96 12.75 13.12 12.87 12.32 10.70 9.95 8.98 9.37 9.58

Top 5 percent 25.76 31.70 30.39 28.08 29.06 30.24 30.21 31.19 32.06 31.88 31.34 32.03 32.99 31.73 30.26 28.77 28.82 28.20 27.62 27.77 26.83 25.67 22.47 20.86 18.68 19.27 19.96

Source: Kuznets, S. (1953), Shares of Upper Income Groups in Income and Savings, National Bureau of Economic Research, NY, 635

inequality, indicative of maladjustment (see B Figure 1) took place in a milieu of a laissez-faire policy orientation. For the period marked by the years 1930-1946, a reversal took place, in that income distribution became more equal. For the top 5 percent the percentage decreased from 31.34 for the year 1930 to that of 19.96 for the year 1946. And for the top 1 percent the percentage for the year 1930 of 15.88 dropped to 9.58 for 1946 (Table I). The shares of the two lowest quintiles rose from 13.5 percent in 1929 to 18 percent for the years (average, 1944, 1946, 1947 and 1950). And for the share of the top quintile comparable figures indicate a decline from 55 to 44 percent, and for the top 5 percent a decline from 31 percent to that of 20 percent (Kuznets, 1955, p. 4). Consequently, for the period marked by the years 1929-1950 the tendency was for income distribution to become more equal (Figure 3). One of the reasons for this growing equality of income is that while the economy during this period experienced the Great Depression and a no-growth syndrome, it also experienced the “Golden Years” marked by WW II to 1950s and on to the 1960s. Overall, a consensus view is that there was “. . . a dramatic and pervasive shift toward more equal incomes between the Wall Street crash and the Korean War” (Williamson and Lindert, 1980, p. 83). This has been viewed by Arthur Burns, among others, as a solid vindication of free enterprise in the context of mature stages of capitalism

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Table I. Share of income received by top 1 percent and top 5 percent (years 1920-1946)

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Figure 3. The hypothesis of the inverted U-curve: anomalies

(Burns, 1954, p. 137). This “social revolution” manifest in a continuity of the New Deal policies appeared to confirm Kuznets’s hypothesis that mature stages of growth promote a greater equality of income distribution. This period appeared as a virtuous circle, “. . . lower inequality would foster growth, which in turn would reduce inequality” (Aghion et al., 1999, p. 1616). Figure 4 depicts a period of transition. For the period, marked by the years 1947-1973 the Gini coefficient dropped from 0.376 for 1947 to that of 0.356 for the year 1973, again a confirmation of the inverted U-curve hypothesis that greater equality of income distribution fosters growth. Consequently for the period between 1930 and

Figure 4. Family income inequality: Gini coefficient 1947-2001

1973, the distribution of income became more equal. After 1973 given a change in political power and policy, income distribution became decidedly unequal. The Gini coefficient moved from 0.356 (1973) to 0.434 for the year 2001. (Mishel et al., 2003, p. 53). In summary, Figure 4 shows that for the US, the distribution of income was characterized by an anomalous deviation from what was to be expected, given the inverted U-curve hypothesis. The growing inequality of income for the period 1973-2001 is even more dramatically shown in Figure 5[3]. The period of 1961 to circa 1969, in the context of policies associated with the Great Society, was marked by an increase in greater equality of income going from 16.6 to 18 percent for the bottom 40 percent of the poor, to that of a decrease for the top 5 percent, going from 16.6 percent in 1961 to 15.6 percent in 1969. In 1980, the poorest 40 percent share was equal to 16.9 percent and for the 5 percent richest the percentage equalled 14.6 which was equal to a 2.3 percentage spread difference. By 1984, again in the milieu of Reaganomics and a return to a more rigorous laissez-faire policy orientation, the gap was closed with the poorest 40 percent receiving a 15.9 percentage share and the top 5 percent receiving a 15.4 percentage share. During the 1980s and even more so into the 1990s, the momentum inherent in the policy switch to that of Reaganomics became evident and is clearly shown in Figure 5. By 1999 the unequal distribution of income characterizing the Reagan era was dramatically carried over into the Clinton era as well with the income

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Figure 5. Share of aggregate income 1960-1999: (poorest 40 percent and richest 5 percent)

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share of the poorest 40 percent receiving percentage share of 14.2 percent compared to the top 5 percent receiving a percentage share of 20.3 percent. And, further, given the policies currently being directed by neoliberalism and the Washington consensus, with the $1.35 trillion tax rebate allegedly going primarily to the top 1 percent of the wealthy, the inequality of income distribution can only be expected to increase. In fact it is estimated that 25 percent of Americans will get no tax refund at all according to a recent study by the Citizens for Tax Justice (Rosenbaum, 2001). Consequently, in terms of long-run considerations, it appears that while economic growth conceptualized in purely economic terms may serve in the long run as a necessary condition for a potentially greater equality of income distribution, it is not sufficient. From Figure 3 the periods demarcated by the 1920s and the early 1970s to 1999 are indicative of anomalous results. “It is not the mere fact of growth per se that determines the nature of distributive benefits” (Todaro, 1989, p. 167). And “. . . economic, demographic, and policy changes have rendered obsolete the view that economic growth is the major factor determining how many people are rich and how many are poor” (Danziger and Gottschalk, 1995, p. 10). Therefore, might one conclude that given the Kuhnian anomalies apparent for the 1920s and the period demarcated by the early 1970s to the present that the U-curve hypothesis no longer holds and should be rejected. It is our view that this position is not quite correct and constitutes a misinterpretation of what has come to be interpreted as the U-curve hypothesis. In the first place Kuznets did not set out to formulate and then to prove an inexorable, immutable law (the Ricardian desideratum) relating economic growth with income distribution. Kuznets had an aversion to “. . . the economic literature, partly in connection with the generalizations of the classical and Marxian schools . . . to derive invariant ‘laws’” (Kuznets, 1963, p. 1, 1955, p. 27). Kuznets put forth the hypothesis more as a question, not as a law. In his presidential address before the American Economic Association in 1955, Kuznets raised two basic questions: one related to income inequality to the increase or decrease in economic growth, and secondly, “What ‘factors’ determine the secular level and trends of income inequalities?” (1955, p. 1). Further, Kuznets did not conceptualize economic growth in simple economic terms but rather, and throughout his overall contributions to the literature, conceptualized economic growth as a complex process. “First, do the changes in the scope and structure of the economic process that accompany economic growth and constitute its essence also affect the growing income of its population?” (Kuznets, 1963, p. 1). Modern Economic Growth was wrought in the crucible of a “scientific epoch” and was manifest in vast economic and concomitant socio-political structural transformations of society. Kuznets not only dealt with the social as well as the economic but he also conceptualized a dynamic analysis in social terms: “The major preoccupation of dynamic economics is the study of changes in social phenomenon which take place in the course of time” (Kuznets, 1930, p. 432). Kuznets put forth a very tenuous “hypothesis” and stated: “I am acutely conscious of the meagerness of reliable information presented. The paper is perhaps 5 percent empirical information and 95 percent speculation, some of which is tainted by wishful thinking” (Kuznets, 1955, p. 26). Further, while “. . . the discussion yields no determinate answer . . . depends on the relevant balance of factors . . . ” and in

anticipation of the experience of the period marked by the early 1970s to 1999, Kuznets adds, “Nothing in the argument so far excludes . . . a rise in the share of upper income groups . . . ” (Kuznets, 1955, p. 11). Given a variety of “factors” Kuznets felt that it was logical to expect that an extrapolation of the record from 1929 into the 1950s would continue. But he did not submit such a continuity as a certainty. Granting “all other conditions being equal,” as ceteris paribus assumptions, income distribution should become more equal in the ongoing dynamics of modern economic growth. If this did not take place, as the anomalies seem to indicate, then how to explain a growing inequality which Kuznets, himself, considered to be a conceivable possibility? But such an explanation in turn is predicated on theory. Which theory then is relevant to explain the complexities of the processes of Modern Economic Growth vis-a-vis income distribution? Kuznets’s hypothesis, which appears more so as an unanswered question, has laid down a gauntlet: how then to explain why income distribution has not become more equal as modern economic growth advances in a milieu characterized by an alleged democratic polity? How has this question, of relevant theory choice and consequently policy as well, been met by economists in the past as well as the present? Rashomon economics: which theory to choose? The given paradigm chosen is important in determining which conception and theory should be applied in economic analysis. Such paradigmatic boundaries in turn determine the questions asked, the problems raised and the policies offered as to resolution. It is obvious that a given theory in economics cannot be separated from its concomitant policy derivative (Bell and Kristol, 1981, p. viii). Rashomon, the film directed by Akira Kurosawa, dealt with a rape which in turn was rationalized by the victim, the bandit-rapist, the witnesses and each according to their own framework (paradigm) for analysis. Each gave an alternative explanation and interpretation which best suited their own interests and self image. Though conceivably, they could and should do better, economists could easily make a duplicate film and win Oscars. For looking at the same issue under analysis economists, using differing paradigms, have historically demonstrated a great proclivity to come up with a whole variety of explanations and conclusions, as well as policy recommendations. Discussions on income distribution bear no exception. For example, currently in the study of economic history there are two basic alternative paradigms that may be applied. We speak here of the new economic history (better perhaps designated as neoclassical economic history) on the one hand versus traditional economic history (associated with institutional economics) on the other. On the issue of the profitability of slavery or the role of railroads in American economic development, the answers offered by the neoclassical economic historians are diametrically opposed to that put forth by the traditional economic historians. Granting that the economists applying the alternative paradigms are equally competent and intellectually gifted, a reasonable assumption, the conclusions reached and policies recommended are consequently based upon the different paradigms and theories applied. The question then becomes which theory is relevant to the issue being analyzed. The query of this paper does not relate to the profitability of slavery or the relation of railroads to economic development. But rather our concern is directed to the relevancy of a given paradigm of economic analysis used in the explanation of how

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the process of economic growth impacts and relates to income distribution. Consequently, which paradigm should be applied and which theory is relevant to analyze this question? As we have noted above, according to Ricardo (1912, p. 1) the determination of laws of income distribution is the “principal problem of political economy”. According to Lebergott, modern mainstream analysis of income distribution started with Pareto. The Pareto coefficient presented, as a “law”, the position that income distribution is a function of growth advancing faster than population (Lebergott, 1976, p. 144). And from this it has become somewhat of “. . . an axiom of neoclassical economists that economic growth is an effective redistributor of income” (Hughes and Cain, 1998, p. 551). Williamson (1991, p. vii) has written a good deal in the area of income distribution and applies “. . . a framework that has unified much of his work is a compatible general equilibrium model . . . . This neoclassical tradition . . . .” As one might expect, his conclusions in assessing “Market Forces Versus the Fisc” are consistent with the neoclassical framework: “In short, pre-fisc market forces have been at the heart of twentieth century egalitarian trends among industrial countries” (Williamson, 1991, p. 13; Williamson and Lindert, 1980). Consequently, that market forces prevail tends to discount the need for prerequisite fiscal policy and governmental intervention. Kuznets, by comparison, focused on the relevancy of institutional change: “. . . the recent narrowing of income inequality observed in the developed countries . . . ” included “. . . institutional changes concerning social security and full employment” (Kuznets, 1967, p. 67). Kuznets did not treat the growth process in purely economic terms as would be the case in the neoclassical paradigm, but took an “. . . eclectic view, stressing economic, political, and social factors as explanations of the statistical regularities that he had observed (Anand and Kanbur, 1993, p. 25). Kuznets is categorized as an “Economic Historian’s Economist,” and granting his Veblen-Mitchell heritage, as “. . . ever an American Institutionalist” is, consequently, correctly classified as a traditional economic historian (Kapuria-Foreman and Perlman, 1995, p. 1546). John S. Mill drew an important distinction between the natural forces related to the laws of economic production and distribution, by comparison, which was predicated on political laws and culture. “The laws and conditions of the production of wealth, partake of the character of physical truths. . . . It is not so with the Distribution of Wealth. That is a matter of institution solely. The things once there, mankind, can place them at the disposal of whomsoever they please, and on whatever terms . . . . The distribution of wealth, therefore, depends on the laws and customs of society” (Mill, 1899, pp. 196-7). Therefore, whereas the physical and economic laws relate to production, distribution relates to politics. And politics relates to power. Galbraith states that “The distribution of income in the modern economy derives ultimately from the distribution of power” (Galbraith, 1996, p. 65). Whereas the paradigm of institutional economics focuses on the issue of power, the neoclassical paradigm avoids the issue. Neoclassical economists speak in terms of monopoly power and direct attention to market power and pricing policy, but they avoid the relevant issue of political power. Galbraith, in line with the paradigm of institutional economics, used his presidential address before the American Economic Association to draw attention to the issue of “Power and the Useful Economist.” It is Galbraith’s position “. . . that economics divorced from considerations of the exercise of

power is without meaning and certainly without relevance” (Galbraith, 1983, p. xiii, 1973). Many definitions of power are available in the literature. It is frequently argued that power basically relates to the capacity to control and dominate others in order to make them behave and submit to ways which usually benefit the user of power, but not necessarily always beneficial to those being dominated. Granting that a relevant analysis would require a paradigm addressed to the issue of political power, and not simply confined to the purely economic, the neoclassical paradigm can be viewed as not being relevant to the issue at hand – the issue of power and income distribution. John S. Mill also addressed the issue of power elites in relation to distribution, “The rules by which it (distribution) is determined, are what the feelings of the ruling portion of the community make them . . . ” (Mill, 1899, p. 197, parentheses added). In the context of the New Industrial State, the primary institutional locus of power resides in the MNCs as the “Master Institution”. The two periods which we have noted previously, i.e. the 1920s and the 1980-1990s, were both characterized by a movement toward a laissez-faire policy polarity and a free-market ideology. The 1920s have been termed the “Great Illusion” primarily due to the fact that while the American economy appeared sound, it was wrought with internal structural weaknesses (Scheiber et al., 1976, pp. 333-52). The illusion of ongoing prosperity promulgated during the 1920s was short-lived and culminated dramatically with the Great Depression of 1929. Perhaps an even “Greater Illusion,” was to assume that the return to laissez-faire policies during the 1920s would service the provisioning of a greater equality of income distribution. As we have seen, the 1920s was characterized by an increase in inequality of income distribution. The 1980s, as the Great Illusion revisited, also constitute a return to a laissez-faire polarity and were marked by a strong reversal of ameliorative social policies and government participation directed toward humanistic goals that characterized the New Deal. The policies of the New Deal resulted in a period of improvements in income distribution for the period marked by the 1930s to the early 1970s. Reaganomics has produced greater inequalities of income distribution, which do not bear any semblance of social justice oriented toward a greater equality of opportunity and equity. The increased inequality of income distribution appears unabated and portends to increase further with the current administration now in place. And as noted previously, equality of opportunity resides in more than improved equality of income distribution. It also concerns discrimination based upon class, race, gender, sexual orientation, as well as the more generalized domain related to the influences of heredity versus the environment, and on. The question is ultimately then who controls these policy decisions, and does the overall laissez-faire policy orientation serve as a concomitant to the public purpose? A public purpose directed toward the achievement of social justice. We find that the Gini coefficient now reaching the level of 0.428 for 1999 is comparable and approaching the 1929 figure of 0.490 (Ryscavage, 1999, p. 155). The US is returning to levels of income distribution that characterized the 1920s, a period considered to represent a high level of income inequality. New Deal legislation continues to serve as a base in terms of policies promoting objectives such as social security. Policies oriented toward basic human rights and entitlements are now being continuously submitted to attack under the guise of enhanced efficiency through privatization. As a result and on the pessimistic side, “Income policy has become a

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major policy concern. The rise in inequality . . . suggests the possibility of eventual political repercussions . . . . Will events such as the Los Angeles riots of 1992 become a feature of the American scene?” (Ryscavage, 1999, p. xiii). Given the institutional perspective of Kuznets, it is obvious that income distribution is intimately related to “policy decisions” (Kuznets, 1955, p. 9). James K. Galbraith states that his “. . . book is a reflection on the power of economic policy, particularly its power to achieve an evil result . . . where the evil concerned is a rise in the inequality of economic incomes one can easily find the sources in political decisions” (Galbraith, 1998, p. xv). To Kuznets, the subject of income distribution in relation to the complexities of the processes of economic growth was of such importance that he made it the “central theme” of his presidential address before the American Economic Association. Kuznets’s commentary on the subject is noteworthy especially given the holistic and interdisciplinary focus of our paper in the context of the dynamics of culture evolution. “For the study of the economic growth of nations, it is imperative that we become more familiar with findings in those related social disciplines that can help us understand population growth patterns, the nature and forces in technological change, the factors that determine the characteristics and trends in political institutions, and generally patterns of behavior of human beings – partly as a biological species, partly as social animals. Effective work in this field necessarily calls for a shift from market economics to political and social economy” (Kuznets, 1955, p. 28, italics added). Cultural lag theory: relevancy and conclusions Ricardo assumed that income distribution was to be explained as a function of economic laws. John Stewart Mill, by comparison, argued that whereas economic production might be relegated to economic laws, that economic distribution related to institutional laws, politics and power. Consequently, the hypothesis of Kuznets arguing that income distribution would become more equal is predicated on the assumption of a continuity of a polity characterized by a greater participatory democracy that was inherent in the New Deal. The shift from the “mass democracy” characterizing the New Deal to the neoliberalism and the Washington Consensus characterizing the current period has consequently voided the expectations which would have logically emanated and followed from Kuznets’s inverted U-curve hypothesis. Given the laissez-faire policy orientation of the neoliberalism that dominates the current period, and little government intervention concerning the promotion of a greater equality of income distribution, we can anticipate a return to the “Great Illusion” characterizing the 1920s. And from this we can expect a return to Polanyi’s prognostications as de´ja` vu (Polanyi, 1944). Income distribution is not a function of economic laws, but is rather a function of real-world power politics. Explanation therefore, requires a socio-cultural analysis that focuses on the theory and conception of cultural lag. How then to introduce political economy into the paradigmatic boundaries of mainstream economic theory. By drawing attention to a “complex of processes” which relate to the anthropological conception of culture as “that complex whole,” Kuznets consequently also introduces into his analysis of the processes of modern economic growth, the dynamics of cultural evolution (Kuznets, 1955, p. 9). And evolution in turn

mandates a process of structural transformation (Dugger and Sherman, 2000, p. 7). It is arguable that a theory of income distribution should be formulated in the complexities of the dynamics of culture evolution in order to make the paradigmatic boundaries of theory permeable and relevant to political economy. And in so doing to go beyond the strict analytical confines of neoclassical economics and the neoliberal ideology. Further, that the concept and theory of cultural lag is relevant as a framework to delineate the problem of distributional injustice as well as to prescribe ameliorative policies in the form of institutional adjustment. The dynamics of culture evolution constitute the basic theme of our analysis. That dynamic is not synchronized and appears in the form of cultural lags. The cultural lags addressed in our paper relate to culture writ large and embrace the whole of our economy. Our specific analysis has been directed to the maladjustments associated with the growing inequalities of income distribution. The concept and theory of cultural lag lays bare the need to achieve institutional adjustment in the form of new social technics, as new policies, in order to ameliorate the problem. And thereby, in the process, to serve the cause of social justice predicated on the achievement of a greater equality of income distribution. Closer to home and interrelated to the problem of cultural lag at a different level pertains to the “Queen of the Social Sciences,” the science of economics itself – mainstream economics itself manifests a cultural lag in need of institutional adjustment. The thrust of our paper is that economics must introduce the dynamics of cultural evolution and the concept and theory of cultural lag into its paradigmatic boundaries as a framework relevant to the quest of social justice. Two stellar exemplars of institutional economics apparently would also agree. “Cultural lag has become a familiar concept and need not be elaborated upon. Much of this cultural lag consists in reliance on notions that have been retained too long as ‘general laws’” (Kuznets, 1965, p. 80). “That the majority of economists still cling to their traditional analysis is to Veblen merely the latest illustration of the cultural lag in social theory – a lag readily accounted for by the institutional approach” (Mitchell, 1964, p. xlviii). Notes 1. Ogburn claimed not to have read Veblen on the issue of cultural lag and that he was more influenced by Marx. In the Marxian framework, Figure 1 could also be interpreted in terms of the Hegelian dialectic. Instead of interpreting the logic and sequence as going from: adjustment to maladjustment to adjustment, the sequence might also be interpreted as going from: thesis to antithesis to synthesis. 2. The literature is replete with references to Kuznets’s “inverted U-curve hypothesis, for a brief search, note: Aghion et al. (1999), Anand and Kanbur (1993), Braulke (1983), Braun (1991, 1988), Seligson (1984), Stallings and Peres (2000) and Todaro (1989). 3. The income inequality discussed in this paper is based on the US Census Bureau figures and those of Mishel et al. (2001, 2003), which are also based on the US Census Bureau. An often-asked question is – is the increase in income inequality sensitive to income definitions? We refer the reader to Mishel et al. (2001, 2003 especially Chapter I) “The Census Bureau’s primary definition of income is pre-tax, post-cash-transfer money income, which includes earnings (including self employment), interest, dividends, pensions and rental income, as well as cash transfers from government programs such as public assistance (welfare benefits) and Social Security” (Mishel et al., p. 68). However, this definition leaves out certain income components; so the Census Bureau provides alternative measures of

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income definitions. The Mishel team selected 4 of the 15 measures for analysis. They found that “Whether or not we adjust by family size, look at pre-tax or post tax income, or add in the value of various other income sources, including capital gains and food stamps, there is nothing . . . to suggest that alternative measures lead to alternative conclusions regarding the trend (italics added) toward more inequality” (Mishel et al., 2001, p. 72). We concur.

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Ryscavage, P. (1999), Income Inequality in America: An Analysis of Trends, M.E. Sharpe, New York, NY. Scheiber, H.N., Vatter, H.G. and Faulkner, H.U. (1976), American Economic History, Harper & Row, New York, NY. Seligson, M.A. (Ed.) (1984), The Gap Between Rich and the Poor, Westview Press, Boulder, CO. Sen, Amartya (1992), Inequality Re-examined, Russell Sage Foundation, New York, NY. Solomon, R.C. (1990), “Justice and the passion for vengeance”, in Solomon, R.C. and Murphy, M.C. (Eds). What is Justice? Classic and Contemporary Readings, Oxford University Press, New York, NY. pp. 292-304. Stallings, B. and Peres, W. (2000), Growth, Employment, and Equity, Brookings Institution Press, Washington, DC. Tilman, R. (1987), “Some recent interpretations of Thorstein Veblen’s theory of institutional change”, Journal of Economic Issues, Vol. 21, pp. 683-93. Tilman, R. (1990), “Dewey, Ayres, and the development of institutional economics”, Journal of Economic Issues, Vol. 24, pp. 963-79. Todaro, M.P. (1989), Economic Development in the Third World, Longmans, New York, NY. Veblen, T.B. (1961), The Place of Science in Modern Civilization, Russell & Russell, New York, NY. Veblen, T.B. (1996, 1904), The Theory of Business Enterprise, Transaction Publishers, New Brunswick, NJ. Veblen, T.B. (1997, 1923), Absentee Ownership, Transaction Publishers, New Brunswick, NJ. Williamson, J.G. (1991), Inequality, Poverty, and History, Basil Blackwell, Cambridge, MA. Williamson, J.G. and Lindert, P.H. (1980), American Inequality: A Macroeconomic History, Academic Press, New York, NY.

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Economics and religion

Economics and religion

Globalization as the cause of secularization as viewed by Adam Smith James E. Alvey

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Massey University, Palmerston North, New Zealand The University of Tokyo, Japan Abstract Purpose – In the Western world the voices calling for a secular society have grown ever louder over the last three centuries. This paper seeks to return to one of the founders of modernity for guidance. Adam Smith advocated globalization on economic and moral grounds. Design/methodology/approach – A discussion focusing on those calling for a secular society and, in addition to these normative advocates, various social scientists have propounded the “secularization thesis”; after analysing history from a purportedly positive view, they have argued that “modernization” leads to a secular society. Recently globalization has been seen as another cause of secularization. At the same time, the revival of various religions has cast doubt on these claims. Findings – Smith did not see secularization as an inevitable consequence of globalization. Further, despite his awareness of the arguments of the advocates of secular society (and contrary to some commentators like Minowitz), he rejected their advice. For him, a secular community was neither a necessary nor a desirable consequence of globalization. Originality/value – Provides a viewpoint on some of Adam Smith’s thoughts and ideas. Keywords Globalization, Economics, Religion, Society Paper type Viewpoint

Introduction Community has been the topic of much recent discussion. This is a fruitful turn in intellectual circles. In this paper we turn the focus of this discussion to religion and to the suggestion that this aspect of community is being attenuated by a range of factors, most notably by the forces of globalization. The structure of the paper is as follows. In the remainder of the first section we will sketch some of the secularization literature and then the globalization literature. The second section returns to the views of one of the founders of modernity, Adam Smith (1720-1790), to see what light he can shed on these issues. The third section draws some conclusions about the fate of faith in modern commercial community. This paper is a revised version of an article to be published in Chinese in the Taiwanese journal Societas. It also draws from Alvey, 2003a. The author wishes to thank Societas and Ashgate Publishing Company for permission to reprint. The author wishes to thank the two anonymous referees for useful comments on an earlier version of the paper; only some of these comments could be incorporated into the revision. The author wishes to acknowledge the financial support of the Japan Society for the Promotion of Science under which he is a Postdoctoral Fellow for Foreign Researchers.

International Journal of Social Economics Vol. 32 No. 3, 2005 pp. 249-267 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290510580797

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“Secularization” is a term whose meaning has been contested. Generally, it refers to a diminished public (and perhaps private) role for religion in society (Wallis and Bruce, 1992, p. 11). The literature on secularization has a long lineage. The first modern advocate of a secular society was Pierre Bayle (1647-1706). Many Enlightenment thinkers were directly influenced by Bayle and adopted his secular aspirations; one example was David Hume, Smith’s contemporary. In later years, thinkers tended to be more indirectly influenced by Bayle. For example, Karl Marx was deeply influenced by Ludwig Feurerbach, who was a disciple of Bayle’s. Marx, of course, openly advocated atheism. These days, Western political theorists often just assume that there should be a secular society. The collective efforts of the advocates of secularization, and modernization itself, have greatly impacted on society. The empirical evidence for secularization has been extensively studied by social scientists, especially sociologists. After World War II, this work was incorporated into “modernization theory”. “Drawing heavily on the work of Marx and . . . Weber and Durkheim, modernization theory posited that industrial development followed a coherent pattern of growth, and would in time produce certain uniform social and political structures across different countries and cultures” (Fukuyama, 1992, p. 68; see also pp. 351-2). “The modernization theorists of the past three decades (from Weber by way of Talcott Parsons and Edward Shils to Daniel Lerner, Alex Inkeles, and many others) largely accepted the view of the modern world as a space of shrinking religiosity” (Appadurai, 1996, p. 6). Consistent with this trend, sociologists of religion actively promoted the secularization thesis – that modern society has indeed become increasingly secular and that this trend would continue; the lack of religiosity in Europe was a glimpse into the future for non-Europeans (Davie, 2000). Another way of stating it is that “the secularization thesis asserts that modernization . . . brings in its wake (and may itself be accelerated by) ‘the diminution of the social significance of religion’” (Wallis and Bruce, 1992, p. 11). The strong religiosity in the USA was portrayed as an “exception” (presumably a temporary one) to the pattern of secularization in the “modern” states. Let us briefly restate “the orthodox model” of secularization, as presented by Wallis and Bruce. They state that three factors lead to secularization: social differentiation, societization and rationalization. “Social differentiation is the process by which specialized roles and institutions are developed . . . to handle specific features or functions” such as education, health care, welfare, and so on, all of which were previously united under one (religious) institution (Wallis and Bruce, 1992, p. 12). Societization is the process by which life becomes organized less by “close-knit, integrated, small-scale communities” and more by larger units, such as the “nation” (Wallis and Bruce, 1992, p. 13). Rationalization refers to the increasing influence of rational and empirical exploration; this manifests itself in various ways, including the development of technology (which reduces “uncertainty and thereby reliance upon faith”) and the rationalization of theology and ethics (Wallis and Bruce, 1992, p. 14). Secularization theorists even influenced theology itself. By 1965 the theologian Harvey Cox could pronounce that “The age of the secular city, the epoch whose ethos is quickly spreading into every corner of the globe, is an age of ‘no religion at all’” (Cox, 1965, p. 3). Of course, over the last 25 years there has been some clear evidence of a revival of some forms of religion, notably of Islam and some types of Christianity (Gellner, 1994; Beyer, 1994, pp. 114-34, 160-84; Beyer, 1999, pp. 292-3). Consequently,

a more nuanced and ambivalent tone has entered into the analysis of the current reality and the prognostications about the future (Beyer, 1994, 1999). Indeed, from the early 1990s, some commentators began to argue that the secularization found in Europe was actually the exception to the norm (Davie, 2000). One author has even declared the death of the secularization thesis (Stark, 1999). Now let us turn to globalization. Like the term secularization, “globalization” has been defined in various ways. “[G]lobalization is a contested concept” (Robertson and White, 2003b, p. 2). Generally it refers to “world-compressing trends” (Robertson and White, 2003b, p. 2). In recent times, “globalization” has become a popular term and the topic of a considerable literature[1]. The term may be new but the essence of what it refers to is not: globalization is “a very long term process, extending back through thousands of years” but it accelerated from the late nineteenth century (Robertson and White, 2003b, p. 8). Similarly, some have seen “[g]lobalization theories . . . [as] developments of the fundamental modernization thesis” (Beyer, 1994, p. 8). A major cause of modernization is economic change and globalization has been an integral component of this process. One effect of globalization has been the weakening of the economic autonomy of so-called “nation-states”.[2] Of course, globalization has impacts well beyond the economic structure. According to Appadurai (1996, p. 21), presumably because of globalization, the “nation-state” is entering a “terminal crisis”; the weakening and potential collapse of this institution has many political and military consequences. Also, some commentators have seen globalization as a force for “homogenization” (Barnet and Cavanagh, 1996; Hetata, 1998), or “creolization” (Lechner, 2003), of culture in the broadest sense, including religion. To the extent that “creolization” refers to a cultural melting pot under the heat of modernization, the same secularizing forces mentioned by Wallis and Bruce are at work: globalization tends to bring secularization. Going back beyond World War II one can find a clear statement of the thesis in Karl Marx[3]. For Marx, history moves in a series of stages towards the ultimate atheistic, global, communistic society. The materialistic foundation of Marx is evident in his view that the “mode of production” determines the division of the stages of history; the other features of society (such as law and religion) are lumped together as “superstructure” and are regarded as epiphenomena (Marx, 1954, p. 83; Marx, 1975, p. 102). The mode of production, or economic base, actually has two components: the forces of production (technology, human skills and so on) and the relations of production (class relations resulting from the ownership of the means of production). History’s driving force is the change in the forces of production[4]. As these forces advance, eventually tension arises with the change-resisting superstructure. Class struggle arises and intensifies; after a revolution a new superstructure and set of class relations arise; a new stage of history begins (Marx, 1975, pp. 159-60). In the capitalist epoch the mode of production becomes more capital-intensive and the scale of production constantly increases; the market becomes increasingly global. After the socialist revolution that overturns capitalism, the society gradually shades into communism; society loses its oppressive superstructure, including religion, which upholds the position of the ruling class. There is no autonomy for the state; in the communist world at the end of history there is a global culture, including a uniform acceptance of atheism. Marx certainly presents us with “the globalization leads to secularization thesis”.

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This thesis was implicitly adopted and modified by neo-Marxists and other proponents of the secularization thesis. In many ways, the fate of the “globalization leads to secularization thesis” is linked to that of the general secularization thesis. Hence, recent debates in the latter have been reflected in the former. One such debate concerns the relative weight given to the threats and opportunities that globalization presents for religion (Beyer, 1994). If secularization is not inevitable, the outcome of globalization depends partly on the strategies adopted by the particular religion and partly on the type of religion itself (Beyer, 1994, pp. 28-32). As the nation-state weakens, a clear threat arises for territorially based religions. On the other hand, great opportunities emerge for these religions to become global; religions which are already global may gain considerably. There is now greater potential for the globalization of religion. The empirical evidence also undermines the “globalization leads to secularization thesis”. The following quotation from Appadurai (1996, p. 7) is apposite: “There is vast evidence in new religiosities of every sort that religion . . . may be more consequential than ever in today’s highly mobile and interconnected global politics”. Another commentator says that: The notion of secularization as a straightforward loss for religion of all societal influence does not apply to global society as a whole . . . . It may be that globally, at the level of individual involvement and orientations, religion is as strong or weak as it has ever been (Beyer, 1999, pp. 293-4).

The shift in opinion about the fate of religion has also influenced thinking in international relations. In response to the end of the Cold War (and Fukuyama’s end of history thesis), Samuel Huntington suggested that the new environment allows for the revitalization of religion and that old religions would form the basis of a new “clash of civilizations” (Huntington, 1996). This paper cannot address the vast literature on secularization or that on globalization. Our more limited purpose in what follows is to stand back somewhat from the debates found in these overlapping literatures and gain some perspective from the vantage point of one of the most profound proponents of modernity, Adam Smith. Adam Smith’s view of globalization and secularization Adam Smith has been called a founder or “charterer of commercialism” ( Justman, 1993, p. 56; see also pp. 3, 26, 29, 55, 71, 87; Cropsey, 2001, p. 120). At the beginning of the modern era he saw perhaps more clearly than we can the trajectory of what we call capitalism. As a political economist he was an advocate of one variety of what we call globalization. This is hardly surprising given his seminal role in the founding of the discipline of economics (Canterbery, 1976, p. 2). Yet people often forget that he was also a moral philosopher, historian, sociologist, literary critic and linguist. It is in the role of political economist, however, that Minowitz claims that Smith revealed his true views: promoting an atheistic science and advocating the secularization of society, thus anticipating some central elements of Marx’s doctrine (Minowitz, 1993, pp. 1-14, 235-58; Fitzgibbons, 2003, p. 63). We will address a range of questions below. From the normative perspective of a moral philosopher, did Smith propose secularization or the end of piety? As a social

scientist he looked for long historical patterns and applied those that he found to his projections into the future. In this role what predictions did he make about religion? Would globalization promote the emergence of a secular society? Our first task, however, is to present some justification for studying Smith as a globalization theorist.

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Smith as a social scientific observer and analyser of globalization Smith wrote over 200 years ago when the Industrial Revolution was just beginning. What are his credentials as a globalization theorist? Was Smith really aware of the global tendencies of commercialism? What role does commerce, and material factors in general, play in history? Smith’s social scientific analysis of the globalizing tendencies of commercialism is primarily set out in his second book, The Wealth of Nations. Smith (1976b, p. 364) was aware of the flightiness of capital: “The capital of the wholesale merchant” has “no fixed or necessary residence anywhere”; it shifts around “according as it can either buy cheap or sell dear”. Sometimes the great owners of capital can be induced to stay in a country where profit rates are low, however, if they are given considerable political power, as was the case in Smith’s day in Holland. This exception would soon vanish, however, if the republican form of government should cease. The end of their political rule would lead the Dutch merchants to “remove both their residence and their capital to some other country, and the industry and commerce of Holland would soon follow the capitals which supported them” (Smith, 1976b, p. 906). The flightiness of capital clearly impacts on national prosperity. A proper understanding of globalization leads to theorizing about how wealth accumulates. In Smith’s (1976b, pp. 10, 25) view, one of the principal causes of economic growth is the division of labour. This is limited by the extent of the market. Removing various impediments to trade in domestic markets would allow the size of the market to expand and with it the division of labour. Similarly, removing impediments to international trade would promote the division of labour within the trading countries and also globally. Smith (1976b, p. 407) commented as follows on the early stages of the international division of labour: “the commerce of a great part of Europe in those times (from the time of the Crusades) . . . consisted chiefly in the exchange of their own rude, for the manufactured produce of more civilized nations”. Of course, this embryonic stage of the international division of labour arose even though there were significant obstacles to trade of all types (Smith, 1976b, pp. 397-8). Shortly, we will discuss Smith’s advocacy of international free trade; his policies would further promote specialization domestically and globally. Next, let us turn to how this analysis fits with Smith’s view of history[5]. Like Marx, Smith uses a materialist perspective in dividing the stages of history. In his scheme of history there are four stages: hunting, shepherding, agricultural and commercial (Smith, 1976b, pp. 689-94). Perhaps Smith’s (1976b, pp. 376-427) most sustained presentation of history is to be found in his treatment of Europe in the period after the Fall of Rome. Here he places a good deal of stress on material factors in the progress of history: “the silent and insensible operation of foreign commerce (globalization) and manufactures gradually brought about” the end of feudalism, one variety of society found in the agricultural epoch (Smith, 1976b, p. 418). In Marxian terms, Smith places a lot of emphasis on the changes in the economic base. Yet he makes it clear that other factors are involved as well – such as the lay-lord’s vanity and fascination with

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finely-crafted objects, which led to obsessive purchasing (Smith, 1976b, pp. 418-9) – in the gradual undermining of the power of the feudal lay-lords; the autonomy of these lords had held back the arrival of the commercial epoch. Globalization would be driven by economic factors but there would be complications due to various psychological factors and perhaps even chance (Smith, 1976b, pp. 707-8). While Smith could not have imagined all that has transpired since his day, he seems to have understood the basic principles of globalization (Forman-Barzilai, 2000; Buchanan and Yoon, 2002; Machan and Chesher, 2002, p. 170, n. 1). From the perspective of Smith as a social scientific analyst, we turn to him as a normative theorist, beginning with his moral theory. Smith’s moral theory[6] Smith’s theory of human nature and morality is largely presented in his first book, The Theory of Moral Sentiments. How does morality arise? Is religion central to its establishment? How is morality refined over time? How is it inculcated? What role does religion play in the maintenance of morality? A few comments need to be made here about Smith’s view of human nature. He assumed that certain universal characteristics of human nature exist (Smith, 1976b, pp. 28-9; Smith, 1980, p. 121; Young, 1997, p. 42) and on the basis of these characteristics morality develops. Smith gives short shrift to those, like Rousseau (1964, pp. 101-41), who had suggested that there was a pre-social state of nature. Humans are social creatures and desire to be believed, to persuade and to seek agreement (Smith, 1976a, pp. 21-2, 129, 336). According to Smith (1976a, p. 111), all humans live in society and it is not long before the first humans start to compare the appearance and actions of others in the group. This soon leads to a second stage when individuals discern that they are themselves being observed and evaluated, physically and morally (Smith, 1976a, pp. 111-2). At this stage the innate desire to seek approval is activated and we “become anxious” as to what others think of us, and how far “we deserve censure or applause” (Smith, 1976a, p. 111). We imagine ourselves in the position of the observer or spectator, even of our own actions: in “the imagination we place ourselves in his [the spectator’s] situation” (Smith, 1976a, p. 9). We sympathize with the imagined views of the spectator. For Smith (1976a, p. 10), sympathy has a special meaning, differing from compassion: it refers to “our fellow-feeling with any passion whatever”. Given this special meaning, let us return to Smith’s presentation of human development where humans act as spectators of themselves. The person, in his imagination, divides himself into two persons: one is the judge and the other is the person whose action is judged (Smith, 1976a, p. 113). We try, vicariously, to judge ourselves through the eyes of a spectator. From the perspective of the spectator “we either can or cannot entirely enter into . . . the sentiments and motives which influenced [the action]” (Smith, 1976a, p. 110). Hence, we either approve or disapprove of our own action. In judging the actions of another person an analogous process applies. The third stage in maturity is to gain even greater distance from our own biased evaluations, by transforming our notion of spectatorship. We try to gain some perspective or distance from our own action: We endeavour to examine our conduct as we imagine any fair and impartial spectator would examine it. If, upon placing ourselves in his situation, we thoroughly enter into all the

passions and motives which influenced it, we approve of it, by sympathy with the approbation of this supposed equitable judge. If otherwise, we enter into his disapprobation, and condemn it (Smith, 1976a, p. 110 emphasis added).

In this case we sympathize with an ideal standard: we transform the partial spectator into the “impartial spectator”. By judging ourselves by the latter standard, we attempt to free ourselves from our partiality to ourselves. The same standard applies in judging the actions of others. We strive for “harmony and concord” of the emotions of the actor and the spectator (Smith, 1976a, p. 22). In striving for this concord, the actors have to moderate the pitch of their own emotions to that level which is acceptable to the spectator. The emotions of these socialized individuals have to be modified not by the views of a biased observer, but by the views of a third, ideal, or imaginary person. The subjective sentiments of actors can be compared to this more “objective” standard. Observation of the conduct of others, over long periods of time, leads humans to form “general rules concerning what is fit and proper” (Smith, 1976a, p. 159). The “general rules of morality” thus arise out of sympathy (which is based on imagination), notably sympathy with the imaginary “impartial spectator” (Smith, 1976a, p. 159). So is morality culturally relative? Smith is a conscience theorist and hence there is a moral standard beyond mere public opinion. Indeed, “[t]here are certain principles established by nature for governing our judgements” (Smith, 1976a, p. 128). The “Author of nature”, God, gave us conscience (Smith, 1976a, p. 77). We cannot escape from “the demigod within the breast”, “conscience, the inhabitant of the breast, the man within, the great judge and arbiter of our conduct” (Smith, 1976a, pp. 131, 137). These demigods are also called the “vicegerents of God within us” (Smith, 1976a, p. 166). If the vicegerents are authorized by one god, it seems unlikely that their rulings will diverge significantly. We would have found out more about Smith’s views on these themes had he finished his planned book on jurisprudence[7]. In the final paragraphs of the Theory of Moral Sentiments he prepares the readers for that book (Smith, 1976a, pp. 340-2). Here he tells us that there is one ultimate standard of morality and law: “natural jurisprudence” refers to “the general principles which ought to run through and be the foundation of the laws of all nations (Smith, 1976a, p. 341 emphasis added). This cosmopolitan standard, of course, emerges only over time. This story has clear relevance for the historical progress of human beings and human society and also Smith’s own advocacy of globalization. Next, let us turn from the standard of moral action to the practice of moral action: from theory to application. Acting virtuously is easiest if it is the spontaneous response to the actor’s own tender, moral sentiments; unfortunately, people often lack these sentiments (Smith, 1976a, p. 162). On the other hand, if the person was “virtuously educated”, he will always strive to act as if he had them (Smith, 1976a, p. 362). This might mean that the motive of action is just “a reverence for the established (general) rules of duty” (Smith, 1976a, p. 362). Smith implies that this “virtuous education” is moral education in the home and in the churches. In the best case, therefore, the moral sentiments automatically lead us to moral action. In the second-best case, “virtuous education” as a child provides us with the rules of life which we follow rigidly. In the third-best case – where we either lacked such education or were corrupted by “bad company” (Smith, 1976a, p. 224) – we have to rely upon the surveillance of actual, interested (as opposed to partial) spectators to

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guide us when we are actually or potentially deviating from the general rules of morality. In short, for Smith, morality “on the ground” evolves over time. He suggests that the ultimate standard of morality is fixed; it is given by the cosmopolitan, impartial spectator (Smith, 1976a, pp. 136-7). This type of spectator, however, can only be imagined once globalization begins and thus the widespread adoption of this standard “on the ground” in actual communities will only be possible after globalization is well advanced. In order for the evolving standard to lead to virtuous action, a considerable role is allocated by Smith to active community participants, such as churches. More will be said about the role of churches and religious sects shortly. Before doing so, however, we should now develop further the reasons for Smith’s advocacy of one type of globalization. Smith as an advocate of one type of globalization Smith wrote at a time when one type of globalization already prevailed: mercantilism[8]. He rejected this as a deviant variety and called for an overthrow of these nationalistic policies; his advocacy of free trade was “revolutionary” at the time (Hutchison, 1978, p. 19). Smith advocated this second type of globalization on economic and moral grounds. What were his economic arguments? What were his moral arguments? Perhaps the former arguments are well-known but the latter probably are not. Although we have claimed that Smith advocated globalization, his book which primarily addressed economic themes did not have “globalization” in the title. An Inquiry into the Nature and Causes of the Wealth of Nations still pays some regard to the old political structures (nation-states) but his approach is dominated by cosmopolitanism (Minowitz, 1993, p. 2). Smith’s economic analysis is cosmopolitan and his policy advice is designed to integrate all states into a global commercial system that was free of mercantilism. The starting point, therefore, should be Smith’s analysis of trade. For him, trade was beneficial for both parties: “trade which, without force or restraint, is naturally and regularly carried on between any two places, is always advantageous . . . to both” (Smith, 1976b, p. 489). This is true for domestic and international trade. Trade is viewed as what we now call a positive-sum game (Fusfeld, 1999, p. 160). Smith’s nationalistic opponents, the mercantilists, saw trade as a zero-sum game: what one party gains is the loss for the other (Hollander, 1987, p. 19; Fusfeld, 1999, p. 160). In more recent times, neo-Marxist and other structuralist commentators have viewed international trade as a system of exploitation: “international trade is plunder of the majority of the people, especially in the South [the Developing Countries]” (Hetata, 1998, p. 276; Balaam and Veseth, 2001, pp. 67-86). Smith rejected explicitly or implicitly both the mercantilist and neo-Marxist views; for him voluntary exchange signified that both parties gained. He advocated economic growth and rising living standards for the population as a whole, whilst the mercantilist view was that the cost of production, especially wages, had to be held down in order to promote the all-important surplus on the balance of trade (Smith, 1976b, p. 99; Hollander, 1987, p. 21). Free trade, whether in the domestic or in the international sphere (when combined with a range of other factors such as peace, and law and order), would bring about the desired outcome by voluntary means.

The often-mentioned “trickle-down effect” is developed by Smith (1976b, p. 22). The international division of labour is desirable as a means to increase economic growth in all of the participating countries. For Smith there are moral dimensions of commercialism in general and globalization in particular, at least when these are not perverted by monopoly and mercantilism. There is a range of moral causes and consequences of commercialism. Let us begin with the causes of trading. As some recent commentators have shown (Young, 1997, pp. 55-77), Smith explains the origins of trading by reference not to calculation but to benevolence. The earliest societies were comprised of very small, autarkic households within which benevolence would prevail. The close, intimate relationships of household members comprise the innermost sphere in what has been called the “spheres of intimacy” in Adam Smith (Nieli, 1986)[9]. Beyond the household there are other people who were encountered regularly, occasionally or never; as the social “distance” increased, the level of intimacy decreased, and with it the extent of benevolence. For Smith, the origins of trade are to be found in gift-giving between autarkic households. As there was no economic need for exchange, gift-giving was symbolic of good-will between friends. Over time, gift-giving became routine, guided by the moral virtue of gratitude (the virtue “of which the rules are most precise” (Smith, 1976a, p. 174; Young, 1997, p. 62)). Gift-giving was eventually transformed into a calculative activity between people who knew each other; clearly, a diluted benevolence still applied in this type of exchange. The benevolence of relationships within the household could be extended in a diluted way to outsiders through trade: “Commerce . . . among individuals, [is] a bond of union and friendship” (Smith, 1976b, p. 493; Young, 1997, p. 61). According to this style of interpretation of Smith, the market price represents a sort of just price (Young, 1997, pp. 61-2, 77; Fitzgibbons, 1995, p. 176); commerce can convert all trading partners, even strangers, into friends. Young calls “[t]he friendship/gifts/self-interest/persuasion/exchange nexus” Smith’s (1997, pp. 63-4) benevolent model; by contrast, “slavery, colonialism, monopoly, and international trade based on the mercantile policy” is called Smith’s malevolent model. The former is the model that Smith adopted himself (Young, 1997, pp. 206-7). There are other moral aspects to competitive commercialism and economic growth. They require, to give a few examples, the virtues of industry, prudence, circumspection and frugality (Smith, 1976a, pp. 166-7, 242; 1976b, p. 340; Young, 1997, pp. 164-5). They also have direct moral effects: they increase the independence, honesty and punctuality of the people (Smith, 1978, pp. 333, 486-7, 538-9; Montesquieu, 1989, p. 48). By increasing incomes, the indirect moral effect of economic growth is that people no longer have to abandon their old and their young (Smith, 1976b, pp. 10, 89-91; Young, 1997, pp. 165-6, 169-72). Whilst some critics of commercialism may find it a strange notion, Smith suggested that commerce improves the morals of the people. Now let us turn to globalization in particular. Globalization requires meeting those from other countries and reaching agreements with them on the goods to be traded, and so on. As one becomes familiar with these foreigners an awareness increases of other cultures and other ways of doing things. In the mercantile version, the response is hostility and force. In the free-trade version the ways of foreigners become less strange and a bond of friendship develops; these foreigners can be incorporated into the middle range of the “spheres of intimacy”.

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In other words, under free-trade globalization, by promoting cosmopolitanism, the standard of morality insensibly develops towards the perspective of the cosmopolitan impartial spectator; by widening the circle of humans with whom one can sympathize, people are morally perfected by globalization[10]. Taken together with the general moral effects of competitive commercialism, free-trade globalization provides a considerable degree of human perfection for a wide range of people (Smith, 1976a, p. 63; Fitzgibbons, 1995, p. 145). Smith also drew a linkage to international relations. International trade was potentially a means to peace; free trade produces a “bond of friendship” among nations (Smith, 1976b, p. 493). By contrast, mercantilism, and the associated policy of trading monopolies, would lead to the promotion of national hostilities and eventually cause war (Smith, 1976b, pp. 467-8, 493, 660, 852). Smith’s advocacy of free trade coincided with his pacific view of the goals of international relations. Smith’s cool view towards war and nationalism also applies to colonialism (which was often associated with mercantilism). For Smith, the European empires were immoral and economic failures (Smith, 1976b, pp. 593-5; Fitzgibbons, 1995, p. 174). At the brink of war with the American colonies, he called for a political union between the colonies and Britain; and after the War of Independence began, he argued that the most advantageous British strategy would lead to “the dismemberment of America” (Smith, 1976b, pp. 616-26; Smith, 1987, p. 384). In our own times, critics of globalization may suggest that powerful states (like the USA) use globalization as a means of exploitation; even if there is no legal empire there is a sort of neo-colonial empire. This view is espoused by neo-Marxists, like Modern World System theorists; the latter claim that the globe comprises three types of states – the “core”, the “periphery” and the “semi-periphery” – where the “core” states (including the USA) can exploit those states outside of the “core” through unequal exchange (Balaam and Veseth, 2001, pp. 79-81). As was mentioned earlier, for Smith international trade leads to mutual gain. By contrast, empire and imperialism are unlikely to yield mutual benefits for the colonial power and her subjects. In short, in Smith’s view, free-trade globalization produces various benefits. For individuals, it produces mutual benefits for the participants, cosmopolitanism and moral improvement; for countries, it contributes to economic growth and friendship and peace between nations. Thus, Smith recommended one type of globalization for various reasons, and even the “economic” reasons had “moral” aspects. Now let us turn to Smith’s views on religion in the light of the existing and projected commercialism. Smith’s views on the role of religion in the context of commercialism and globalization[11] Smith saw the advance of commercialism as productive of both benefits and costs. Our primary concern in what follows is to elaborate the moral problems produced by that advance. In this environment how can religion play a positive socializing or moral role? What are the ideal religious institutions in the commercial society (the final stage of history)? Commercial society tends to increase the size of cities. Of course, urbanization is often seen today as one of the consequences of globalization. The large, perhaps cosmopolitan, city may have considerable moral advantages (by refining one’s notion of spectatorship) but Smith was troubled by some of its potential moral costs. In this

light Smith’s discussion of the poor man from the country who moves to a large city takes on considerable significance. When the poor man resides “in a country village” he will be known and his conduct will be observed; he will have a moral “character” which will require upright conduct to be maintained in such a small community (Smith, 1976b, p. 795). Upon moving to a “great city”, however, such a man is likely to be lost in the obscurity and anonymity of the new environment; he may drift towards vice unless he participates in the right sorts of groups or associations which will “observe and attend to” his conduct (Smith, 1976b, p. 795). Smith only suggests one such group that will do the job: a religious association; religion has “a constructive role to play in character formation. . . countering this source of corruption in commercial society” (Griswold, 1999, p. 273; see also p. 275). By becoming a “member of a small religious sect” his behaviour will be “attended to” (Smith, 1976b, p. 795). It has to be small in order for closeness of contact to be maintained and behaviour really monitored. Smith does not think that large Churches, especially those stressing theological or philosophical abstractions, can do the appropriate socializing role. There is then, for Smith, a need for small sects. How can a sufficient supply of these vigorous small sects be actualized in large cities? Smith says that the answer is the disestablishment of the church (establishment means that the Church theology is enforced by the state). The need for sects will be met through the supply generated by disestablishment (Smith, 1976b, pp. 792-3)[12]. In Smith’s best regime, where disestablishment has occurred, the citizens will not be atomized individuals, their conduct will be “observed and attended to”. Smith was committed to large societies because of their viability, but he had to “provide against the moral disadvantages of mass society by simulating the conditions of small republics” (Cropsey, 2001, p. 96, n. 88). In Smith’s somewhat communitarian (Smith, 1976a, p. 233; Winch, 1978, p. 170, n. 3) best regime, people are perfected through associations with others in groups[13]. There is a side-effect of disestablishment which Smith was aware of and sought to remedy: the strict nature of most of the sects (Smith, 1976b, p. 796). He was concerned that once the problem of depravity was overcome, the problem of “rigorous and unsocial sects” would arise (Smith, 1976b, p. 796). There was a role for government here to overcome the “melancholy and gloomy humour” of the sects; it had a duty to “correct . . . the morals” of the sectarians by a certain type of education (which is more than vocational but less than what we would call a liberal education) and by promoting the “frequency and gaiety of public diversions” (Smith, 1976b, p. 796; see pp. 784-8). These policies would complement the moralizing effects, that were mentioned above, of competitive commercialism in general and free-trade globalization in particular. Smith thought that, without the support of the state, religious competition would lead the various sects to make “concessions . . . to one another”; the more absurd would wither away and this might, over time, reduce “the doctrines of the greater part of them” to something like a “pure and rational religion” (Smith, 1976b, p. 793). The long-run consequences would be “philosophical good temper and moderation with regard to every religious principle” (Smith, 1976b, p. 793). Even though Smith praises the learning and decency of the Presbyterian clergy in Switzerland and Scotland in his own day, because they were established at the Canton or national level, they were not his ideal (Smith, 1976b, pp. 809-13; Black, 1999, p. 213). He states that the closest thing to his ideal was to be found in his day in the

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North American colony of Pennsylvania (Smith, 1976b, p. 793). “[I]n Pennsylvania, . . . the law in reality favours no one sect more than any other, and it is there said to have been productive of this philosophical good temper and moderation” (Smith, 1976b, p. 793). Smith’s approach contrasted with that of many of his contemporaries who openly attacked religion. For example, Hume advocated the retention of an established Church because it would weaken religious faith (Hume, 1983, pp. 133-6 quoted in Smith, 1976b, pp. 790-1). Others promoted different policies but shared Hume’s goal. Consider Montesquieu’s (1989, p. 489 cf. pp. 155-66, 325-33) view that the “way to attack religion is by favour, by the comforts of life, by the hope of fortune, . . . by what makes one forget it [religion]” in the light of his eulogy of the commercial spirit in England. This type of materialistic secularization is what Minowitz (1993) attributes to Smith. Actually, Smith seems to rule out the possibility that “social conditions can be structured . . . [so] that religion ceases to be a felt need” (Griswold, 1999, p. 276; see also pp. 286, 291). As an Enlightenment philosopher, Smith was hardly a religious “enthusiast” or zealot (Smith, 1976b, p. 793). He wished to see the competitive marketplace for goods and services extended to include religion. The effect of this competition would be to smooth out the religious extremes and the generation of a more moderate and rational religion. Nevertheless, he saw religiosity as inevitable and a diluted version of religion was a desirable component of decent commercial societies of the future. For example, along with parents, Smith saw religious sects playing a major role in moral education. Griswold (1999, p. 292) comments that Smith “would find the demise of religion itself to be a matter for grave concern, especially if it were to occur in the context of a modern commercial society”. Before closing our main presentation of Smith’s analysis of religion, let us consider how religion links with his view of history.

Smith’s views on religion in the light of his teaching on history We saw earlier that Smith presented history as being driven by material factors but with various other factors also having an impact. Does religion have a role to play in determining the path of history? Is it an independent variable? A little background on what Smith saw as the preconditions for the commercial epoch, is required at this point. Most of these preconditions are related to domestic and international security; “tolerable security”, in turn, was only possible if several other conditions were met (Smith, 1976b, p. 256). First, there needed to be peace and the rule of law (Smith, 1976b, p. 910). Second, religion had to be properly ordered so that it did not threaten the rule of law or domestic peace (Smith, 1976b, pp. 800-2). Hence, the transnational, highly political, Catholic Church had to be drastically weakened; this will be discussed shortly. Third, individuals with considerable political, military and legal autonomy from the sovereign needed to be greatly restrained. In feudal Europe the lay-lords in the rural areas had such autonomy; restraining them would often lead to royal absolutism (Smith, 1976b, p. 415; 1978)[14]. Fourth, in addition to these political, legal and religious factors, foreign commerce would also be required (Smith, 1976b, pp. 418, 422). The appearance of large-scale foreign commerce really showed that security had been achieved; opulence would soon follow, along with the transition to the commercial epoch.

In the light of this theory, let us turn to Smith’s presentation of the historical transition to the commercial epoch in Europe, concentrating on the fourth factor. The rise of foreign commerce seems to have occurred in England during the reign of Elizabeth I (1558-1603) (Smith, 1976b, p. 424). Some countries had progressed faster to this stage than had England. Smith refers to France having achieved “a considerable share of foreign commerce near a century before England was distinguished as a commercial country” and he specifically refers to this as having been achieved by the time of “the expedition of [King] Charles the VIIIth [of France] to Naples”, an event that occurred in 1494-1495 (Smith, 1976b, p. 425). Even earlier, the city-states of Italy engaged in extensive foreign commerce: “The cities of Italy seem to have been the first in Europe which were raised by commerce to any considerable degree of opulence” (Smith, 1976b, p. 406). Owing to their role as “commissaries” of the armies of the Crusades to “the Holy Land”, the Italian “republics” of “Venice, Genoa, and Pisa” were propelled to the commercial stage sometime between the 12th and early in the 15th centuries (Smith, 1976b, p. 406)[15]. We can now turn to the religious counterpart to this economic history of Europe. Smith has an interesting but relatively brief account of the history of Roman Catholicism[16]. His account is important for three reasons. First, Catholicism was a superstition that greatly opposed reason (Smith, 1976b, pp. 802-3). Second, it had undermined the rule of law and peace in Europe for centuries and thus held back the progress of commercial society (Smith, 1976b, pp. 800-2). Third, Smith’s account should tell us more about how developments there aligned with the Marxian superstructure/base dichotomy and the corresponding materialist view of history. After four centuries of almost unassailable power in Europe, by the beginning of the 14th century Smith suggests that the Catholic Church began to decline as a temporal and spiritual authority; it was “by the natural course of things, first weakened, and afterwards in part destroyed” (Smith, 1976b, p. 803). What he means by “the natural course” is “[t]he gradual improvements of the arts, manufactures, and commerce” (Smith, 1976b, p. 803). In addition to these material factors, there are other causes (the same psychological factors that undermined the lay-lords, namely vanity and the fascination with finely-crafted objects) which led to the collapse of the “temporal power of the clergy” (Smith, 1976b, p. 803). The “spiritual authority” soon followed, when the clergy were unable to provide “charity and hospitality” on the scale that they had previously and the people became “disgusted by the vanity, luxury, and expense of the richer clergy” (Smith, 1976b, p. 804). It was in this decayed state that Catholicism came to face its greatest challenge: the Reformation, which began in 1517. In Marxian terms, change in the superstructure completes the transition to the next stage of history. Hence, the period from 1517, perhaps throughout the rest of the century, should mark the shift to the commercial epoch. Unlike the Marxian theory, for Smith, the Reformation occurred after the various Italian city-states and France arrived at the commercial stage. Contrary to Minowitz (1993), Smith does not follow the view of religion as a mere epiphenomenon advanced by Marx and other materialist advocates of secularization theory. Religion can play an important role in history. It was one factor impeding the rise of commerce but the power of the lay-lords was also important and the latter influence persisted longer. So Smith’s view of history was more subtle than Marx’s and many other materialists. Let us now turn to some concluding remarks.

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Conclusion Smith was aware of the dynamism of commercial society and its globalizing tendencies. He saw evidence of it being misdirected by nationalism, mercantilistic commercialism and imperialism. There was another type of globalization which avoided these forces; this variety Smith supported on economic and moral grounds. His analysis of religion suggests that it can and should play a positive role in commercial, and increasingly globalized, society. Smith indicated that his religious ideal could be found in Pennsylvania. What did Smith predict about the future of religion in commercial societies? Did he think that global convergence towards the Pennsylvanian model was likely? Was Marx’s global secular society a likely outcome? What about homogeneous belief in a global religion? By introducing many sects into the “nation-state”, globalization would apparently have the same effect as disestablishment. Does this mean that globalization effectively brings about the Smithian ideal even without disestablishment? Are there any pessimistic paths for the future? Is there any autonomy for the state? Some support for the global convergence, or homogenization, thesis can be found in Smith’s view of what was even then a global religion: Roman Catholicism. As we saw, Smith said that Catholicism as a whole (across the globe) had declined. What is even more interesting is the social scientific prediction that he makes based upon his study of the long sweep of European history. The strength of “arts, manufactures, and commerce” leads Smith to predict that Catholicism “is now likely in the course of the next few centuries more, perhaps, to crumble into ruins altogether” (Smith, 1976b, p. 803). This strong dose of material causation leaves open the optimistic possibility that the former, and soon-to-be-former, adherents of Catholicism were, and will be, converted to more rational (Protestant?) religious sects along the lines proposed in the discussion of disestablishment. Despite this particular possibility, Smith was actually pessimistic that this convergence to his ideal would become the norm. The cosmopolitan standard of morality may be glimpsed, only to be undermined by the self-interest of religious or other leaders. Smith suggests that once religions become established, the church becomes wealthy and the leaders become more learned (Smith, 1976b, p. 789). At the same time, the clergy neglect their preaching zeal and lose popular support; they become vulnerable to attacks from “enthusiasts” or zealots (Smith, 1976b, p. 789). Once actual attacks occur, by “popular and bold, though perhaps stupid and ignorant enthusiasts”, the established church is unable to defend itself and has to call in the support of the state; the clergy “call upon the civil magistrate to persecute, destroy or drive out their adversaries” (Smith, 1976b, p. 789). The result is a movement away from the ideal towards religious persecution. So what would result from globalization? Smith does not spell this out clearly. Nevertheless, it seems to follow from the preceding analysis that under conditions of domestic religious monopoly, globalization may lead to more enthusiasm (greater fanaticism) and superstition (irrationalism). With this sketch in mind, let us briefly consider Smith’s social scientific predictions on the future of religion and evaluate their success. First, Smith ruled out as practical possibilities both a global secular society and the convergence of religious belief to a single global religion. These were ruled out by the uniform human longing for justice

in the first case and the variable human customs, tastes, and imagination in the second. With the possible exception of Western Europe, these predictions have been validated. Second, let us examine whether the USA serves as an enlargement of the Pennsylvanian model. In the USA the separation of church and state became a central tenant of the regime. That country today is also the centre of globalization forces. While various religious sects, including “fundamentalist” types, have not become moderate and reasonable (Beyer, 1994, pp. 114-34), many of the Pennsylvanian features that Smith discussed and favoured can be found there today. For example, a large number of vibrant religious sects exist there and religious belief is high. Hence, Smith’s prediction seems to have been moderately successful there. Third, as indicated previously, writing in 1776, Smith predicted the end of Roman Catholicism within a “few centuries”, even if it was established in various countries (Smith, 1976b, p. 803). His wording in this passage (“likely” and “perhaps” are mentioned) is a little vague on this point, nevertheless there does not seem to be any sign of this result. Fourth, we should consider Smith’s views on non-Christian religions. His view on the fate of these religions is not explicitly stated. Nevertheless, let us take further our suggestion regarding the pessimistic path of globalization where a domestic religious monopoly prevails: the exposure to other religions increases fanaticism and irrationalism. One might suggest that this is what transpired recently in Islamic countries. The reality may be more complicated. It may be that what happened there (and also in cases of Christian “fundamentalism”) was the rise of views opposing the central features of modernity itself. While “global culture . . .[is] the culture of modernity”, fundamentalism strives for “communual and societal identity” and a return to a “highly integrated and closed” society (Lechner, 2003, pp. 136, 138). In addition, fundamentalism often opposes social differentiation and rationalization. The three causes of secularization that arise from modernization, mentioned in the introduction, are opposed[17]. To some extent, the revival and radicalization of Islam appears to be a global movement brought on, in part, by a strategic rejection of the apparently secularizing tendencies of modernity: “fundamentalism . . .[is] a form of antimodernism” (Lechner, 2003, p. 136). The impetus may have been globalization itself; a global religion may have rebelled against the scientific, technological, bureaucratic, and rationalistic impulses of globalization. To the extent these were the factors, the initial cause of the revival of Islam differed from Smith’s projections. Nevertheless, one goal of the Islamic revival is enforcement by the state of fundamentalist beliefs. Once the state is brought back in as the enforcer of religious belief, a secondary cause of the revival of Islam enters; at this point Smith’s pessimistic projection resumes its validity[18]. Fifth, the previous point raises the question of whether fanaticism is actually the norm once established religions confront globalization. The confrontation of established churches in Western Europe may be instructive. Two points about the European situation are of interest. First, there is the often-mentioned lack of religiosity in the European population. Until recently it was the religiosity in the USA that was seen as exceptional, but it may be that the real anomalies are in contemporary Europe; only there is secularism advanced (Davie, 2000). Second, even though they were established, at least in recent times, the European churches did not persecute non-adherents. The established churches received some benefits from the state but

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they did not act, or could not act, as a religious monopolist by requiring persecution of their opponents. This restrained monopoly power was not anticipated by Smith[19]. It may be that this middle position (between a religious market with a ruthless monopolist and a market with many small players acting in a perfectly competitive manner) best brings about the secular society sought by secularizers. Smith does not have a satisfactory analysis of these European cases. While the secularization theorists may have a better fit with their theory here, their analysis is generally less satisfactory. What are the implications for modern community founded on commercial ideals? For Smith there is an interplay between global and local factors. Clearly there are important global factors at work, as seen in his prediction of the demise of Catholicism. On the other hand, I have suggested that Smith’s analysis leaves some room for state autonomy. The establishment and disestablishment of the church is a matter for the state and the decision made will have enormous religious, moral and social consequences. Whilst there is a materialist component in Smith’s work, his view is more subtle than that of many materialists. For Smith, secularization was not an inevitable consequence of globalization. Further, he was aware of the arguments of the advocates of secular society, yet he rejected their advice. For him, a secular community was neither a necessary nor desirable consequence of globalization. At least one type of globalization provides an opportunity to move towards Smith’s ideal but it may not be actualized even there. Whilst his social scientific predictions of the future of religion achieved mixed success, the contemporary revival of various types of religiosity would probably come as no surprise to him. Notes 1. The term “globalization” gained currency “about 1980” (Robertson and White, 2003b, p. 1). A useful introduction to the literature is Robertson and White (2003a). 2. The “state” is the entity accepted in international law as the territory of a country. The “nation”, or “people”, usually has established racial or cultural characteristics. The early modern goal of having the state boundaries coincide with that of a “people” was rarely achieved in practice. 3. The following paragraph draws from Alvey (1987). 4. One referee was concerned about my misrepresentation of the subtlety of Marxists and other materialists throughout the paper and especially as far as this suggests a simplistic account of history. I acknowledge that many materialists now permit the influence of factors other than material ones. 5. This paragraph draws from Alvey (2003b). 6. This section draws from Alvey (2001). 7. After Smith’s death, two sets of student notes from Smith’s lectures on jurisprudence were found. These are now called Smith’s Lectures on Jurisprudence in the Glasgow Edition of the Works and Correspondence of Adam Smith. 8. Mercantilism was an economic doctrine and a set of nationalistic economic policies. While its economic theory was weak, its policies (aimed at encouraging exports and discouraging imports) have been remarkably resilient over the years. One referee questioned the appropriateness of the label “globalization” for mercantilism, given that nationalism was the foundation of the doctrine; presumably, in this view, nationalism is set in opposition to cosmopolitanism. I suggest that the outward orientation of mercantilism (exports

9.

10. 11. 12. 13. 14. 15.

16. 17.

18. 19.

and imperialism; contrary to a closed economy aiming at self-sufficiency) partly justifies the label. Buchanan and Yoon (2002) contrast the Smithian and the subsequent Ricardian models of globalization. The most intimate relations are with one’s self and one’s family (Smith, 1976a, p. 219). Next, there are cousins who, unlike the family members, have usually lived separately (Smith, 1976a, p. 220). Then come intimate friends, occupational colleagues, residential neighbours, and those who have acted with benevolence towards us (Smith, 1976a, pp. 223-4). The final group that Smith mentions are those within the “nation-state” (Smith, 1976a, pp. 227-8, 237). The extent of benevolence diminishes as you move outward through these “spheres” (Smith, 1976a, p. 140). Of course, this leaves open the possibility that those beyond the “nation-state” with whom one has contact can enter into the spheres of intimacy, probably in the third sphere. Cosmopolitanism allows for a softening of moeurs. This is another improvement in character that commerce produces. This section of the paper draws from Alvey (2001); see also Griswold (1999, pp. 266-92). Recently, rational choice theory has investigated religion. “Supply side” theory has been used to explain the difference in the religiosity found in the USA and Europe (Davie, 2000). Smith is aware of the tension between individual rights and community that has been discussed by recent theorists. Absolutism did result in many countries; in Britain it began with the reign of the Tudors (Henry VII ruled England from 1485 to 1509) (Smith, 1978, p. 264). The period of the Crusades began with the First Crusade (1095-1101) and persisted until at least 1669. The Crusades were initially directed to the “conquest of the Holy Land” but the purpose of the Crusades changed over time. Hence, the period that Smith refers to is not clear historically or in his account. Similarly, the date by which these Italian cities entered the commercial epoch is unclear historically and in Smith’s account. Nevertheless, Smith’s reference to them as “republics” suggests that he has in mind the period before Pisa’s subjugation by Florence (in 1409), or even the period before Pisa began its decline following its naval defeat by Genoa (in 1284). This account is discussed in Alvey (2003b). The political units that are the focus of such fundamentalist movements these days are often much larger than those small communities that were discussed in the introduction (consider the size of modern Iran, for example). The separation of church and state has not been accepted in Islamic countries. Turkey may be an exception. In addition, these days, with mass migration to Europe, the real challenge to these churches may come from non-Christian religions which Smith may not have anticipated. The revival of Islam may mean that religiosity will increase on average in Western Europe. The response may be an increase of Christian bigotry and politicization of religious issues (a clash of civilizations within European countries) or a slow secularization of the Islamic immigrants.

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International Journal of Social Economics Vol. 32 No. 3, 2005 pp. 268-269 q Emerald Group Publishing Limited 0306-8293

Book review The rationality of trust Trust and Trustworthiness Russell Hardin Russell Sage Foundation New York 2002 Russell Hardin is one of the most respected scholars in political science and rational choice theory. His book is a summary of his decade long preoccupation with trust research. He has been a key figure in the Russell Sage Foundation monumental Trust project. His present book is a groundbreaking achievement, which gives a highly consistent and systematic account of trust and related phenomena. Russell Hardin proposes to make a clear distinction between trust and trustworthiness. Trust is a cognitive act: A trusts B to do X. Trustworthiness is the moral quality of agent B with whom A interacts about doing X. The distinction between trust and trustworthiness has wide-ranging consequences. Most of the arguments about trust in the contemporary literature are misplaced or simple wrong because they confuse trust with trustworthiness. For example, many scholars claim that trust is declining in our societies and more trust is better than less trust in a society. But, as Hardin points out, it is trustworthiness, and not trust, which is needed in a well-functioning society. Distrust might be a rational strategy if you deal with unreliable, i.e. untrustworthy partners. Hardin criticizes the concept of social capital as it is used by Coleman, Putman and Fukuyama who believe that trust is social capital or an element of social capital. Instead he argues that it is not trust, but social relationships or networks of exchangers that constitute social capital. Such relationships – argues Hardin – enable people to undertake cooperative endeavours. These relationships ground trust amongst those that participate in them. They do so because people in networks have incentives to be trustworthy to others thus making it beneficial to trust one another in various undertaking. Hardin’s main theoretical innovation is the concept of “trust as encapsulated interest”. On this account, A trusts B because A thinks that it is B’s interest to take his or her own interest in the relevant matter seriously. It means that B values continuing the relationship with A and thus takes A’s interest into account as part of his or her own interest. That is, B encapsulates A’s interest in his or her own interest. The major weakness of Hardin’s theory comes from its strength, i.e. the exclusive application of the rational choice theory. Hardin’s model requires that agents base their trust on the calculated interests of others only. Although it works in many cases there are important cases where it does not – for example, if your trust in your mother is simply based on calculated interest you might have a poor and breakable relationship with her. If your trust in a huge multinational company is motivated by the expectation

that your interest is incorporated in the company’s own interest, you might be easily dissatisfied or even cheated. Duty and love might have their own role in determining trust. We might arrive a richer account of trust presupposing that my trust in you can be based on the belief that you encapsulate my interest in yours, or you fulfil your duty towards me or that you love me, or any combination of these motives. The other shortcoming of Russell Hardin’s model is that it disregards the competence (or professional) aspect of trust. You might be trustworthy, but not competent to do what I expect from you. It is not rational to trust someone who is not capable to satisfy your needs whatever trustworthy he or she might be. We want to interact with doctors, lawyers, administrators who are not only trustworthy but also competent professionals. I suggest that the two necessary conditions of the rationality of trust are trustworthiness and competence. To develop trust in agents who are trustworthy but incompetent or non-trustworthy but competent or non-trustworthy and incompetent is a failure of rationality. Russell Hardin distinguishes among different societal levels of trust relationships, namely interpersonal, group, and organizational. The great challenge is to develop a right model of trust in large-scale organizations like multinational companies, which manage milliards of interactions with various stakeholders on a daily basis. How can we trust multinational companies or governments? Hardin notes that interest is not readily generalized from individual to group or higher levels. In the encapsulated-interest account we must know that the agents or the institution act on our behalf because they wish to maintain their relationship with us. That is not easy for large-scale organizations in business and politics. Russell Hardin has made fascinating explorations into the huge “continent of trust”. Other explorations are welcome too. Laszlo Zsolnai Business Ethics Center, Budapest University of Economic Sciences

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