SOCIO·ECONOMICS: AN INTERDISCIPLINARY APPROACH

SOCIO-ECONOMICS: AN INTERDISCIPLINARV APPROACH Ethics, Institutions, and Markets

Beat BOrgenmeier University of Geneva

Translated by Kevin Cook

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SPRINGER SCIENCE+BUSINESS MEDIA, LLC

Library of Congress Cataloging-in-Publication Data Biirgenmeier, Beat. [Plaidoyer puor une economie sociale. English] Socio-economics : an interdisciplinary approach : ethics, institutions, and markets I Beat Btirgenmeier ; translated by Kevin Cook. p. cm. Translation of: Plaidoyer pour une economie sociale. Includes bibliographical references and index. ISBN 978-94-010-5317-4 ISBN 978-94-011-2966-4 (eBook) DOI 10.1007/978-94-011-2966-4

1. Economics. 1. Title. II. Title: Socioeconomics. HB71.B8713 1992 33O-dc20

91-40613 CIP

Copyright © 1992 Springer Science+Business Media New York Originally published by K1uwer Academic Publishers in 1992 Softcover reprint ofthe hardcover lst edition 1992 AII rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form orby any means, mechanical, photo-copying, record ing, ar otherwise, without the prior written permission of the publisher, Springer Science+ Business Media, LLC.

Printed an acid-free paper.

Translation and adaption of the original version published in French under the title "Playdoyer pour une economie sociale" © Economica, Paris.

CONTENTS

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

vii

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

Part I Economic theory - Going round in circles? . . . . . . . . . . . . . . . . . . . . .

7

Chapter 1:

The links between economic theory and practice ..... State intervention: a theoretical debate .. . . . . . . . . . . . Empirical observation of economic reality ..........

9 9 13

Chapter 2:

The fragmentation of economics .................. Institutionalist criticisms . . . . . . . . . . . . . . . . . . . . . . . . . The controversy over methodology. . . . . . . . . . . . . . . . . Basic assumptions .................. . . . . . . . . . . . .

27 28 33 37

Chapter 3 :

The instrumentalization of economics . . . . . . . . . . . . . . Mathematics and economic theory. . . . . . . . . . . . . . . . . The development of quantitative methods. . . . . . . . . . .

45 45 49

Economic policy in crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

53

Chapter 4:

55 55 59

Part II The role of the state in economic theory ............ The origins of liberalism . . . . . . .. .. .. . . . .. .. . . . .. . Liberal theory and economic reality. . . . . . . . . . . . . . . .

Contents

vi

Chapter 5:

The all-pervading state. . . . . . . . . . . . . . . . . . . . . . . . . . . Instruments of economic policy ................... Admission of failure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . The search for a miracle cure. . . . . . . . . . . . . . . . . . . . . .

73 73 81 88

Chapter 6 : The threat of institutional paralysis ................ 93 Collective decision-making mechanisms. . . . . . . . . . . . 93 Economic theory and bureaucracy . . . . . . . . . . . . . . . .. 102 Part III A new approach

107

Chapter 7: Economics and the social sciences .... . . . . . . . . . . . .. 111 The export of economic thinking .................. 112 Economics: a social science. . . . . . . . . . . . . . . . . . . . . .. 120 Chapter 8:

The meaning of productivity . . . . . . . . . . . . . . . . . . . . .. Economic interpretations of productivity. . . . . . . . . . .. Private-sector and public-sector productivity. . . . . . . .. Social change and new motives. . . . . . . . . . . . . . . . . . ..

129 130 142 146

Chapter 9:

The environmental debate . . . . . . . . . . . . . . . . . . . . . . .. 153 Economic theory of the environment .. . . . . . . . . . . . .. 154 Beyond the economic dimension. . . . . . . . . . . . . . . . . .. 167

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 175 Bibliography. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 181 Subject index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 187

Foreword

This book is intended as a warning against the kind of hard-core liberalism which blames state intervention for the disappointing results achieved in matters of macroeconomic, competition and social welfare policy. In calling attention to the social dimension of economics, the book stresses the need for an ethical yardstick which can only be provided by an interdisciplinary approach to the economy. One current school of thought claims to have bridged the gap by portraying economics as both positive and normative. However, this interpretation is inadequate. The positive aspect of economics, reflecting an approach common in the natural sciences, is based on observable facts. It highlights causal relationships and seeks to analyse economic mechanisms on the basis of available information. This has led to an emphasis on purely deductive methods, which form the basis for many of the conclusions in mainstream economics. This current of thought is typified by the neoclassical school, which takes as its main premise the much-disputed hypothesis of economic rationality. Human behaviour is deemed to be rational when consumers maximize their satisfaction and producers their profits, subject to the constraints of income and production costs respectively. Optimal strategies for both consumers and producers can best be determined by the mechanism of market forces. This leads to the important conclusion that maximum economic welfare is the result of individual strategies, and that society does not exist as a separate entity but is merely the sum total of individuals behaving rationally. The key here is efficiency.

viii

Foreword

The normative aspect of economics involves value judgements. It is therefore based on a subjective portrayal of the facts and considers the economy as it should be, using criteria which can only be identified by the collective decision-making mechanism of political choice. Economic theory acknowledges that each economic agent is perfectly free to express value judgements, and thus there may conceivably be as many different points of view as there are agents. If one point of view is to prevail, it can only be the majority view, identified as such by a democratic process. Here the key is equity, embodied in laws and regulations which represent an institutional codification of society's moral and ethical judgements. This rough outline of the positive and normative aspects of economics provides a conceptual link between efficiency and economics on the one hand, and equity and politics on the other. From this point of view, the market economy is indissociable from democracy - neither is conceivable without the other. Accordingly, strict application of the principles of the market economy and political democracy should eliminate the need for a separate ethical approach to economics; ethical issues can be taken into account simply by sustaining both of these collective decision-making mechanisms. Despite this essential conclusion, which is central to the functioning of Western industrial society, recent years have seen a rapidly growing need to introduce ethical considerations into economics. This is because both the boundary between the normative and positive aspects of economics and the distinction between efficiency and equity are unclear, for the following reasons: 1. The distinction between the normative and positive aspects of economics and their linking with politics and economics respectively are, of course, gross oversimplifications. Political logic displays certain rational traits, and value judgements play an undoubted part in economic behaviour. A great deal of rhetoric - some would say ideological bias - has gone into presenting positivism as the only rational standard for human economic behaviour. Not only is the definition of economic rationality a tautology, but human behaviour and institutions quite definitely influence one another. The definition of economic behaviour is tautological in that a deductive approach is used to obtain results compatible with the economic rationality on which much of economic policy is based. This is not to say that the hypothesis of rational economic behaviour is wrong, or to deny that it has profoundly influenced our understanding of how society functions. However, it does mean that economic models based on this hypothesis are bound to treat social issues as mere problems of constrained optimization. Not only is this likely to

Foreword

ix

result in circular reasoning, but inherent in the market model are value judgements that are not separate from the economic sphere but specific to it. We can then no longer relegate the normative aspects of economics to the political sphere and treat economics as a scientific discipline in the pure positivist tradition. Were ethics nothing more than the expression of value judgements, there would still be a place for it in economics. As for the influence of economic behaviour on institutions and vice versa, it must be acknowledged that institutional critics of the market model have not succeeded in diverting the mainstream of economic thought. Mainstream economics is eager to prove the existence of economic laws that are independent of place and time. In contrast, an apparent common thread in institutional criticism, and the basis for socio-political approaches to the economy, is the idea that economics is culturally determined and cannot be viewed in isolation from Western cultural history. Once again, were ethics nothing more than a cultural phenomenon, there would still be a place for it in economics. 2. The notion of the market as an efficient allocator of factors of production is tending to be extended to areas other than economics. Ceaseless intellectual effort has gone into attempts to apply economic reasoning to such fields as law, politics, sociology and medicine, on the principle that efficiency must be achieved before there can be any question of equity. Such attempts indicate a wish to see production constraints take priority over all other social, or even ethical, considerations. Clearly, however, the market is merely one of a number of collective decision-making mechanisms. Others include the democratic process and the civil service. Comparing these mechanisms, one can observe a tendency for decisions to be reached not by market forces or by the democratic process, but by private or public bureaucracies. This shift towards a more administrative form of collective decision-making has caused a change of attitude. Not only are there new groups of voters, but society's image of the economy has changed, transferring the emphasis from efficiency to equity. The market mechanism has begun to make way for more political decision-making mechanisms in which problems of organization have supplanted problems of trade. This development is made easier by the neoclassical misapprehension of the role of the state, and by the problems of redistribution of income and wealth that are inherent in the functioning of any market economy. Neoclassical theory sees growth as the answer to problems of equity, and suggests that optimal growth will achieved by the operation of individualism in a harshly competitive market. Politics, on the other hand,

x

Foreword

proposes to deal with problems of equity by creating conditions conducive to the development of solidarity. In a society characterized by numerous market failures and a lack of solidarity, the emergence of bureaucratic mechanisms and the need for an ethical yardstick are thus inevitable. There is thus a place in economics for an ethical component which reflects particular value judgements or a particular culture and is backed up by the various collective decision-making mechanisms society has established. All that is necessary is to acknowledge that economic theory is essentially normative and that it is merely one part of the social whole. Should ethics then be assigned a universal value and also be approached in positivist terms? An example of such an approach is the demonstration of the universal nature of human rights. If ethics is indeed an inherent feature of human nature, then the hypothesis of rational behaviour needs to be supplemented by an extra dimension. Failing this, a positivist approach to values will exclude them from the scope of economics, relegating ethical standards to the field of theology or political philosophy. This must be avoided at all costs. In order to ensure ethics a lasting place in economic reasoning, the hypothesis of economic rationality should not be rejected (since the strategies consumers and producers use to maximize their utility and profits respectively reflect essential motives in human behaviour), but it should be developed further. Economic agents act emotionally as well as rationally. Emotional intensity thus adds a moral dimension to economic and social actions and is at variance with scientific interpretations based on the principle of causality, which reduce emotionality to the level of what has been termed "hallucinatory reality". To quote Claude Olievenstein (1988, p. 191): "What is unspoken, particularly with regard to morality or ethics, cannot be written off as hallucinatory - human memory is too powerful for that. We thus have the astonishing situation in which part of reality is kept, as it were, under cover. Things which exist but cannot be fitted into a logical interpretation are either censored or, at best, contemptuously relegated to the nether world of the social sciences ... ". Attempting to rethink contemporary economic theory along these lines doubtless involves an unprecedented intellectual challenge; yet such an approach may well be the only way to help economics out of the positivist impasse it is in. The methodological obstacles are enormous. Economics has only managed to bypass the normative issues by adopting an abstract conceptual approach to society, based on deductive reasoning. For a

Foreword

xi

complete view of social reality, economics must open itself up to other disciplines - yet such an interdisciplinary approach is inevitably more inductive. Despite the fact that all problems are essentially interdisciplinary, knowledge has hitherto progressed through specialization. Our education system can scarcely be said to have encouraged diversity, but it is worth recalling Plato's story (Blumenberg, 1987) in which the philosopher Thales fell down a well while gazing at the heavens. A Thracian servant girl made fun of him for having his head in the clouds and failing to see things that were right under his nose (and feet). Although nowadays Thales is famous and the servant girl is not, both of them had a point. A socio-economic approach to contemporary problems necessitates an inductive review of contemporary economic theory in the light of knowledge acquired in other disciplines.

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At the time when this book was first written (in French), the Society for the Advancement of Socio-economics had not yet been founded and I was not aware of the socio-economic groundswell in the United States or of some of the writings that had led up to it. Such blissful ignorance spared me any disheartening sense of going over old ground, allowing me to write this book as a personal account of my own malaise after years as a teacher of mainstream economics. Many people helped me with their criticism and suggestions, but my special thanks are due to: Claude Raffestin, Charles Roig and Peter Tschopp of the University of Geneva; Pascal Bridel of the University of Lausanne; Xavier Greffe of the University of Paris I, Pantheon-Sorbonne and the Ecole Nationale de I'Administration; Jacques Silber of the University of Bar-Ilan; and, last but not least, Amitai Etzioni of George Washington University, who encouraged me to have the book published in English (with the help of the Hans Wilsdorf Foundation). Finally, this project would not have seen the light of day without Zachary Rolnik's efficient editing, Kevin Cook's competent translation, and the untiring secretarial assistance of Huong Nguyen.