Bernard Hodgson (Auth.), Professor Bernard Hodgson (Eds.) - The Invisible Hand and The Common Good - (2004)

Studies in Economic Ethics and Philosophy
Series Editor Editorial Board

Peter Koslowski F. Neil Brady
George Brenkert
Geoffrey Brennan
James M. Buchanan
Thomas Donaldson
Richard De George
Jon Elster
Amitai Etzioni
Michaela Haase
Bernard Hodgson
Yuichi Shionoya
Lee A. Tavis
Philippe Van Parijs
Josef Wieland
Bernard Hodgson
Editor
The Invisible Hand

and the Comn1on Good
With 21 Figures
~Springer
Professor Bernard Hodgson Editorial Assistant
Trent University Anna Maria Hauk M. A.
Department of Philosophy Wiss. Assistentin
Lady Eaton College Forschungsinstitut
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Peterborough, Ontario, Canada K9J 7B8 Gerberstra6e 26
E-mail: bjhodgson@trentu.ca 30169 Hannover, Germany
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The Worst of all the Multitude
Did Something for the Common Good
Bernard Mandeville, The Fable of the Bees
To James Patrick Hodgson
and the memory of
Joan Mary Hodgson

Preface
This volume consists of papers derived from the Ninth International
Conference on Studies in Economic Ethics and Philosophy (SEEP), held at
Trent University in Peterborough, Ontario, Canada, in June of 2002. Let me
take this opportunity to express my appreciation to Professor Peter Koslowski
for his original stimulus, encouragement, and continual assistance in making
the Conference a success. I would also like to thank my Trent colleague,
Professor David Holdsworth, for his steadfast help in the management of the
Conference and the papers resulting from it. I am obliged to Mr. Louis
Taylor of North George Studios in Peterborough for his expert professional
service in preparing the manuscript for printing. Finally, let me gratefully
acknowledge the generous financial sponsorship of the Conference by the
Social Sciences and Humanities Research Council of Canada, and Trent
University's Department of Philosophy and Graduate Centre for the Study of
Theory, Culture, and Politics.
Bernard Hodgson
Department of Philosophy
Trent University
Peterborough, Ontario, Canada
May 2004
Contents
Preface ................................................................................................................ IX
Introduction
BERNARD HODGSON ............................................................................................. 1
Part One
Setting the Problem
Chapter 1
Public Interest and Self-Interest in the Market and the Democratic Process
PETER KOSLOWSKI ............................................................................................. 13
Chapter2
The Invisible Hand and Thinness of the Common Good

RICHARD DE GEORGE ......................................................................................... 38
CONTENTS
Part Two
Constraining the Invisible Hand
Chapter 3
Hiring Invisible Hands for Public Works

EDWARDJ. NELL ................................................................................................. 51
Chapter4
A Market Failures Approach to Business Ethics

JOSEPH HEATH ..................................................................................................... 69
Chapter 5
Abstractions and Conceptual Automata in Economics and Non-Economics

STEPHEN REGOCZEI ............................................................................................. 90
XII
CONTENTS
Part Three
Moral Rights and Market Society
Chapter 6
The Inherent Rights ofF or-Profit Corporations

JOHN DOUGLAS BJSHOP .................................................................................... 121
Chapter 7
Degrees of Property
MICHAEL NEUMANN ......................................................................................... 134
Part Four
The Tyranny of the Invisible Hand
Chapter 8
Understanding Market Theology

JOHN MCMURTRY ............................................................................................ 151
XIII
CONTENTS
Chapter9
General Equilibrium Theory as Normative Ideal Social Order

DENNIS BADEEN ······························ ................................................................. 183
Part Five
Economic Theory and Normative Realism
Chapter 10
The Efficiency of the Non-profit Enterprise: Constitutional Ideology,

Conformist Preferences and Reputation
LORENZO SACCONI ........................................................................................... 207
Chapter 11
Transformational Economics and the Public Good

DAVID G. HOLDSWORTH .................................................................................. 257
Chapter 12
On Economic Men Bearing Gifts and Playing Fair

BERNARD HODGSON ........................................................................................ 279
XIV
CONTENTS
Part Six
Free Hands and Moral Communities
Chapter 13
The Person, the Market, and the Community

TIMOTHYM. TAVIS, LEEA. TAVIS .................................................................. 301
Chapter 14
Social Trust and Modern Economies: The Example of Shopping

TRUDY GOVIER ................................................................................................. 338
Chapter 15
A Reconciliation of the Liberal and Communitarian Debate in the Light of

the Methodenstreit
YUICHI SHIONOYA ............................................................................................ 353
Chapter 16
Voluntary Simplicity: Characterization, Select Psychological Implications,

and Societal Consequences
AMITAI ETZIONI ................................................................................................ 377
XV
CONTENTS
Part Seven
The Global Reach of the Invisible Hand
Chapter 17
Russia's Experiment with the "Invisible Hand"

WILLIAM T. HUNTER ........................................................................................ 409
Chapter 18
Fostering the Common Good in Developing Countries: The Respective

Responsibilities of States and International Businesses- Preliminary Notes
Towards a Political Ethic for International Businesses
FREDERICK BIRD .............................................................................................. 424
Chapter 19
Globalization and the Re-Definition of Democratic Governance: From

Compensatory to Protective Democracy
MARK NEUFELD ............................................................................................... 439
List of Authors ................................................................................................. 457
INDEX OF NAMES .............................................................................................. 459
XVI
Introduction
BERNARD HODGSON
By preferring the support of domestic to that of foreign industry he

intends only his own security; and by directing that industry in such a
manner that its produce may be of the greatest value, he intends only
his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was not part of his intention.
Nor is it always the worse for society that it was no part of it. By
pursuing his own interest he frequently promotes that of society more
effectually than when he really intends to promote it. 1
In the preceding celebrated passage from An Inquiry into the Nature and
Causes of the Wealth of Nations Adam Smith gave classical expression to a
thesis that continues to be of the deepest significance for both social scientific
and philosophical inquiry. We seem to be presented with the statement of a
paradoxical situation that is, nevertheless, of beneficent promise. From the
perspective of the history of philosophy, we would have been led to expect
various principles and arguments defending a moral point of view that is
unique, impersonal, and takes precedence over claims of self-interest which
often conflict with the imperatives of morality. However, from the
perspective of this eighteenth century moral philosopher turned social
scientist, as far as the domain of economic activity within a competitive
market is concerned, the traditional understanding of friction between the
pursuit of self-interest and the establishment of an ethically defensible
common good could be seen to be scientifically nai"ve. If each economic
agent is left free to act in a solely self-regarding fashion to maximise the
satisfaction of his own interests within a perfectly competitive economy,
then, according to verifiable empirical laws, an aggregate outcome will
obtain that is beneficial to all. Though such a consequence not be part of the
intentions of either individual agents or state planning, nevertheless, the
market forces of a perfectly competitive system will lead participants, as if by
an "invisible hand," to a coherent economic order of mutual advantage. Not
ADAM SMITH: An Inquiry into the Nature and Causes of the Wealth of Nations
(1776), New York (The Modem Library) 1937, Bk. IV, Chap. II, p. 423.
BERNARD HODGSON
surprisingly, classical political economy emphasizes that such a competitive

market is also a free market, in Smith's conception a "simple system of
natural liberty." In fundamental terms, individual liberty is seen as the
instrument of social harmony: even though individual producers and
consumers interact only through voluntary exchange, a communal end-state
is secured that exhibits an accordance of each with all.
Clearly, this "general frame" or "underlying vision" of a form of
economic life set forth in the classical tradition is of critical significance for
our times. Three considerations are especially germane: First, it has appeared
to many reflective observers of the North American and Western European
situation that the economic order of a competitive market is increasingly
defining the social order itself- in certain serious ways social relations and
market relations are becoming co-extensive. Secondly, whatever the moral
value of a competitive free market may or may not be, such a "market model"
is actually being introduced into an increasing number of "non- Western"
nation states. Finally, the most politically influential system of social thought
on the current scene, neo-classical economics, offers a theoretical, and some
would say, normative vindication of the practices of competitive market
economies. It is in this light that a group of scholars from several countries
and different disciplines, gathered at Trent University in Peterborough,
Ontario in June of2002 to discuss the problem of the "Invisible Hand and the
Common Good" as the general theme of the Ninth International Conference
on Studies in Economic Ethics and Philosophy. As the papers in this volume
from the Conference sessions will attest, the participating scholars shared
views on the Invisible Hand from a remarkable variety of perspectives,
ranging from explanations of the theoretical modelling of automata in
economic reasoning to an appraisal of the success of the "shock therapy" in
the direct imposition of a capitalist market system on the economy of Russia
subsequent to the collapse of communist governance in the Soviet Union. In
this Introduction, I shall not attempt to summarize the contents of these
essays: they ably speak for themselves. Rather, I shall seek to briefly outline,
from a contemporary vantage point at the intersection of philosophy and
economics, what I take to be some of the foremost conundrums that continue
to challenge us concerning the relation between capitalist market activities
and human well-being.
It is instructive to note that neo-classical economic theory has sought to
both continue the classical tradition of the Invisible Hand and provide a more
rigorous clarification of its moral import. We may refer in particular to the
2
INTRODUCTION
two Fundamental Theorems of Welfare Economics. According to the first,

any perfectly competitive market equilibrium is demonstrated to be "Pareto
optimal;" according to the second "converse" theorem, any Pareto-optimal
social state can be proved to be a competitive equilibrium for some initial
distribution of the ownership of resources. By a Pareto-optimal state is meant
one any movement from which will make some consumer(s) worse off in
terms of the satisfaction of his given desires for market goods and services
(where such satisfaction is measured as his "utility").
The scientific literature is replete with challenges to the theoretical
soundness and empirical relevance of the welfare implications of neo-
classical general equilibrium analysis: at the theoretical level, sceptical
considerations have been addressed especially to the "global stability" of the
equilibrium defined by neo-classical theory - that is to say, whether the
market forces working through competitive price adjustments can be
adequately conceptualised, in mathematical terms, as converging to an
equilibrium state; from an empirical perspective, criticism is particularly
directed to the severely idealized, or empirically improbable, assumptions
deployed to establish a Pareto-optimal equilibrium, such as economic actors
having "perfect information" as to the current and future prices of
commodities and resources. However, it will be appropriate here to assume
such theoretical and empirical objections can be sufficiently answered, in
order to focus more directly on the moral standing of the market economy as
represented by mainstream e'conomics; in any event, the issues of ethical
moment that we shall examine remain significant ones independently of the
strength of the preceding objections, and it is revealing to observe this.
To begin with, it will be useful to further clarify the normative status of
the market order as modelled by contemporary neo-classical theory. Insofar
as capitalist free-enterprise is claimed to be "Pareto-efficient," we should not
be misled, as some have been, into assuming that there is only an
instrumental value, of no real moral significance, to the conclusions of
general equilibrium theory. On the contrary, the equation of general
equilibrium with Pareto optimality addresses the consequentialist dimension
of moral assessment - i.e., one wherein actions or institutional practices are
judged desirable to the extent they bring about an end deemed morally
valuable. In the case at hand, then, a form of economic organization, a
perfectly competitive market economy, is appraised as morally commendable
on the grounds that it is efficiently conducive, in a well-defined sense, to a
good end. But wherein lies the end? In response to this question, neo-
3
BERNARD HODGSON
classical economists have modified the classical Utilitarian answer - the

maximization of total social utility - on the grounds that it involves an
untenable notion of measurable interpersonal comparisons of utility. In effect,
the classical consequentialist criterion is revised through the provision of a
"Pareto optimum" measure of social utility or the common good that is
aligned with the neo-classical principle of consumer sovereignty. More
precisely, the "common good" is defined as the maximal satisfaction of the
totality or aggregate of given individual consumer desires, but as consistent
with the Paretian distributive constraint - again, any movement from such an
end-state would make at least one consumer worse off in terms of the
satisfaction of his de facto wants.
It would be unreasonable not to agree that the consequentialist thesis of
neo-classical welfare economics does go some substantive distance in
providing an important theoretical argument for the moral value of the free
market system - again, assuming the soundness of general equilibrium
theory. Empirically, a general equilibrium expresses a "rest state" for a free-
market economy insofar as the systematic order the competitive market
provides reconciles the intentional activity of individual agents. But this it
does by furnishing a normative consistency at two levels: a) the level of
individual agents wherein the valued goal of particular producers (maximum
profits) is rendered compatible with that of particular consumers (maximum
utility), and b) the level of the economic community wherein the goals of
individual actors are brought into consistency with the social ideal or
common good as understood by a classical liberalist perspective: a
maximization of the aggregate satisfaction of the preferences of freely
interacting individuals (as defined and constrained by Pareto-optimality).
Assuming that such full normative consistency can be realized, the celebrated
"natural harmony of each with all" as conceived by both classical and neo-
classical thought for a competitive free-market economy will be put in place.
Such harmony, moreover, is intended to fulfil moral principle in two
dimensions: i) as we have seen, the modified Utilitarian - consequentialist
one of delivering a Pareto-optimal social state, and ii) the "libertarian" one of
securing such a socially desirable result through the externally unconstrained
free choices of (rational) consumers and producers - unconstrained, in
particular, by state command of market decisions. Let us examine both of
these moral claims more fully.
With respect to the first dimension, we may agree that, other things being
equal, it would be of positive moral value for a political economy to provide
4
INTRODUCTION
maximal satisfaction of the preferences of individuals for material goods in

the "universalist" form of the Paretian standard - i.e. that not all consumers
could increase their utility or preference satisfaction in an alternative
aggregate outcome. And it would be consonant with the generalized
benevolence of most consequentialist ethics to concur with neo-classical
economists that it would be a socially desirable improvement to increase the
utility of some individuals if there were no loss of utility to any other.
However, such consequentialist reasoning is far from the whole moral story.
Serious questions of ethical fairness or distributive justice have traditionally
haunted consequentialist conclusions in moral thought. And the situation for
a capitalist market economy as conceived by orthodox economics is no
exception to this rule; indeed, the bearing of moral justice on the desirable
effects of capitalist market activities is perhaps the foremost concrete moral
problem of our era. It is arguable, furthermore, that neo-classical economic
theory only reinforces the "knots" of the problem. For the first "direct"
theorem further demonstrates that there will be a set of Pareto-optimal
equilibria each member of which is generated by a different distribution of
"original endowments" - i.e. allocation of ownership of factors of production
across the individual members of a particular society. Hence, a final moral
appraisal of the various possible Pareto-optimal social outcomes cannot be
made unless and until a defensible criterion of fairness is provided to
determine an ethically acceptable initial distribution of factor endowments
and, thus, the comparative moral worth of the distinct Pareto-optimal
consequences to which different distributions lead. Unfortunately, the first
theorem is entirely silent in resolution of this problem. Due to a relatively
meagre share of initial endowments, and hence income, an economic actor
may be receiving a similarly meagre proportion of final product, and thus
subjective utility, at a competitive market equilibrium, but which market
share may be clearly reprehensible from the point uf view of distributive
justice. Admittedly, the second "converse" theorem is more promising for
this perspective since it formally guarantees that any Pareto-optimal outcome
in the allocation of produced goods among individual agents within a
particular economy, which outcome is also prescribed by a defensible
standard of moral justice, can be provided by a competitive equilibrium for
some initial distribution of resources among those individuals. However,
actually delivering on this promise for a real-life economy may demand a
political challenge to perhaps the fundamental moral value of a market
economy - that of individual liberty in the sense of freedom from external
5
BERNARD HODGSON
constraint in one's earning horizons and voluntary transactions within the

market system. On the historical evidence, those who hold the lion's share of
resource ownership and thereby an enviable proportion of expected output
are very unlikely to voluntarily redistribute their advantage in factor
endowment in order to comply with philosophical standards of justice. On the
contrary, any significant re-allocation of the ownership of capital resources
would no doubt require the instrument of another political revolution, not the
uncoerced choice definitive of laissez-faire market exchange.
Reference to the freedom of free markets bespeaks, of course, the
classical moral ideal affirmed by advocates of the capitalist market system -
that is, that this system gives expression to "natural liberty" in our communal
economic life more adequately than any alternative form of economic
organization. Again, the fundamental sense of such liberty, in both classical
and neo-classical economic thought, is the "negative" one wherein an
individual economic actor is exempt from external control in acting as he
chooses as long as the consequences of so-choosing do not harm others or
interfere with their similar right to make such choices -- basically, the
conception of freedom understood by the liberal-democratic political
framework allied with classical and neo-classical economic thought. Implicit
in this tradition have been two primary arguments for the moral worth of
such individual liberty in competitive market economies, one
consequentialist and the other of a "natural right" sort. Both of them present
serious philosophical conundrums for any overall assessment of the moral
integrity of the market system and the societies which embed such a politico-
economic order.
We have already elucidated part of the consequentialist case. Respecting
the uncoerced preferences of consumers and the private plans of producers
brings about a (Pareto-modified) maximal satisfaction of consumer desire: as
the economist Tjalling Koopmans remarks ... "the ideal that perfect
competition in some sense achieves efficiency in the maximization of
individual satisfaction runs through the whole of classical and neo-classical
Iiterature." 2 It must be acknowledged, moreover, that the Pareto-efficient
production of an array of goods that did reflect the free choices of individuals
acting on their strongest preferences does, prima facie, constitute a socially
desirable consequence of substantial moral force. Economic freedom, in
2 T. 1. KOOPMANS: Three Essays on the State of Economic Science, New York.

(McGraw-Hill) 1957, p.41.
6
INTRODUCTION
short, intends to be the handmaiden of such collective satisfaction. However,

we have also found that such a prima facie common good may not be so all
things considered, as it is subject to the objection that it is only secured
through indifference to the severe injustice done to those who have access to
very little of the final product due to ownership or control of an exceedingly
small proportion of initial resources.
It is not to be expected, however, that libertarian advocates of the freedom
of free markets have been silenced by this criticism. Rather, recourse is taken
to the incentive structure of market mechanisms in order to rebut the
rationality of recommendations to redistribute either the aggregate final
output or initial factor ownership in a more egalitarian fashion that better
served the demands of moral justice to distribute the goods of a community
among its members according to what is rightly due each member. More
particularly, it is argued that expectation of either redistribution of access to
final output through, say, civil progressive taxation, or of ownership of
capital resources through militant communal activism, would arrest the self-
interested incentives for private material gain of individual entrepreneurs and
workers. But, the reply continues, it is just such self-regarding motivation in
the application of one's own talents to the physical capital at one's command
that supplies the motor force for the productive efficiencies characteristic of
competitive markets. And, of course, without the freedom to exercise one's
own capabilities in productive enterprise, such a motor force will remain
inactivated. It is further contended that the creative capabilities released by
such freedom resolves the challenge of economic injustice, since the
opportunity to use private resources in innovative reshapings of capitalist
production is such that, as a rule, the capitalist free market system will
deliver such a bountiful volume of aggregate output that either everyone will
be materially better off, or at a minimum, the least advantaged will be better
off than their counterparts under different politico-economic orders. Most
importantly, given these prospects, it is concluded that rational men would
assent to the institutional arrangements or "social contract" of competitive
capitalism as essentially just.
Mention of the exercise of one's own capabilities brings to the surface the
other, non-consequentialist case for the moral value of the freedom claimed
for free markets. I refer to an issue which has recently been discussed within
the scope of the principle of "self-ownership." In words of the Oxford
philosopher, G.A. Cohen, the principle states that... "every person is morally
entitled to full private property in his own person and powers. This means
7
BERNARD HODGSON
that each person has an extensive set of moral rights (which the law of his
land may or may not recognize) over the use and fruits of his body and
capacities." 3 In terms of the conceptions of orthodox economics, such a
principle finds its reflection in the criterion of the "value of the marginal
product," which value is calculated as the increase in the revenue from total
output from the addition of one worker of a particular type. Roughly,
according to neo-classical theory, a perfectly competitive market economy
distributes income shares to particular workers in exact proportion to the
contribution his labour makes to overall production. Accordingly. as ethically
interpreted, the market mechanism fully and precisely satisfies an
individual's right to self-ownership: Each individual is receiving an income
or purchasing power which he morally deserves in consistency with this right
-namely, a compensation commensurate with the difference the activation of
his own person and powers makes to the communal output. Put another way,
even if the argument that rational assent to the beneficent results claimed for
markets does not provide a logically compelling case for the justice of
markets, proponents of the competitive market system could revert to the
argument that rewarding participants in productive activity in a measure
equal to the proportion of the product for which their own self and its
capacities are responsible, conforms to a well-established criterion of
distributive justice of allocating social benefits according to merit or desert.
Once again, however, such a viewpoint has spawned its critics who rejoin
that an individual's contribution to the social product will be a function of his
original endowments in external resources and productive talents; however, it
is generally arbitrary to assign moral responsibility for such assets to
particular individuals as they are usually due to social contingencies or
genetic inheritance beyond the capabilities of these individuals to control.
Moreover, the rejoinder continues, insofar as an individual agent within the
capitalist market economy has insubstantial endowments in external capital
or internal talent, he will ipso facto have little access to the "positive" liberty
of moral autonomy, of the freedom to be self-determining for his material
well-being or to be in control of the quality of his economic existence.
The forgoing exposition is, of course, only a brief sketch of some of the
basic dimensions of a philosophico-economic dialectic that lies .at the heart of
contemporary cultural discourse. We are reminded daily in various media that
3 G. A. COHEN, Self-Ownership, Freedom, and Equality, Cambridge, (Cambridge

University Press) 1995, p. 127.
8
INTRODUCTION
the market system is becoming the essential structure of the social order on a
global scale. The papers in this volume attest to the depth and variety of the
moral problems endemic to this prevailing form of our communal life. It is
hoped that the reader will find that the views articulated in what follows
render the problems more amenable to reasoned discussion.
9
Part One
Setting the Problem

Chapter 1
Public Interest and Self-Interest in the Market

and the Democratic Process
PETER KOSLOWSKI
I. The Difficulties of Defining the Public Good and of Finding Out

Whether the Common Good Has Been Realized
II. The Common Good of States and the Common Good of Smaller
Social Groups
III. Acknowledging the Discrepancy Between Intending and
Succeeding in Realizing the Common Good Instead of
Abolishing the Intention to the Common Good
IV. The Skepticism Towards the Common Good as the Result of the.
Conviction of the Inability of the Sinner to Do the Good
V. Modernity as the Emancipation of Self-Interest?
VI. The Necessity of a Synthesis of Public Interest and Self-Interest
in the State and in Business
VII. The Public Interest of Institutions and the Increase of the
Responsibility for the Public Interest to the Degree of the Power
of Those Managing the Institutions
VIII. The Obligation of Managers to Realize the Common Good of
Their Corporations
IX. Thinking in Terms oflnstitutions and Thinking in Terms of
Intentions
Realizing public interest is usually seen as the task of the state and as an
obligation for politicians, not for the managers of large corporations. Public
interest is a concept that is used constantly, that is made concrete rarely and
that is viewed as an empty concept more and more often. It seems to be a
difficult obligation to work for the common good and to consider the effects
of one's own action for the public good in a market society in which every
one has a right to follow his or her self-interest.
PETER KOSLOWSKI
Nevertheless the concept of public interest is indispensable, particularly

indispensable for politics. The right of a politician to follow his or her private
interest and that of her immediate clients in her office is defended by no one.
The role description of the politician incorporates that he or she works for the
public good in her action and not for her party's good. The demand for public
interest is here no empty concept but something like a general clause that
applies to all actions of politicians.
Politicians can consider their self-interest and strive for fame, prestige and
career as a side effect of their intention to realize the public good, but they
cannot view the common good as the side effect of the realization of their
self-interest.
In a market society, the reverse causation is effective it is often said. The
shareholder and the manager of a corporation realize the common good of
public efficiency as a side effect of the pursuit of their self-interest and profit
so that in a market society the demand to realize the common good does not
hold.
According to some schools of economics, the common good is not
realized in the market by intending it but by the working of the invisible hand
of the market that turns selfish interests into efficiency and wealth creation.
The core theorem of the invisible hand theory is that the common good of
efficiency and wealth creation is realized in a market society as a side effect
of the pursuit of self-interest. It is, however, not clear how far this theorem is
taken by Adam Smith as a description of fact or as a normative statement.
The acknowledgment of the task of realizing the public interest as a
normative obligation for politics does not imply that the actual realization of
public interest is always easily recognizable. It is possible that the obligation
to realize the public good is acknowledged - but how does one find out what
is the common good, and how and when it is actually realized under all the
possible options of political action? Authors like Friedrich von Hayek, R. A.
Dahl, 1 and others have raised this objection against the concept of the public
good: One is able to know in the market what is the individuals' self-interest
and from their pursuit of self-interest, the demand and supply relations and
the price signals result which give the market prices for the goods they want.
Cf. R. A. DAHL: "Dilemmas of Pluralistic Democracy: The Public Good of

Which Public", in: P. KOSLOWSKI (Ed.): individual Liberty and Democratic
Decision Making. The Ethics. Economics, and Politics of Democracy, TUbingen
(Mohr Siebeck) 1987.
14
PUBLIC INTEREST AND SELF-INTEREST IN THE MARKET
How should one know, however, which political options realize in fact the
common good if the opinions about the content of the public good diverge, if
interest groups, parties, and social classes have different interests, different
rationalizations •of their interests, and different strategies to make their
interest appear to be the common interest?
I. The Difficulties of Defining the Public Good and of

Finding Out Whether the Common Good Has Been Realized
Roman Herzog, law scholar and former President of Germany, indicates

the difficulties of the definition and realization of the common good and
differentiates three positions of social theory and law in respect to the
common good:
1. the position of the naive conviction of having solved the problem in
Catholic social thought and theory of the state,
2. the totalitarian identification of one's own political position with the
public good from Jacobinism to Leninism, and
3. the position of limiting the concept of the common good and
reducing it to an obliging formula in the Western democracies, to an
obligation that acknowledges at the same time that the question
concerning when the common good is realized or not cannot be
decided.
Herzog writes:
The use of the concept of the common good in theoretical and
practical discourses indicates often that a naive author takes an
unsolvable problem for being solved. That might be true to a great
extent for example for the treatises of Catholic social thought in their
writings of the theory of the state, in which, up to the present, the
common good, the bonum commune, plays an overwhelming role.
All the appeal to the common good is linked to the idea that the person
appealing herself - or her class or party - is able to concretize the
common good in general or in the respective historical situation. This
idea, in the end, is guiding all totalitarianisms from Jacobinism to
Leninism.
15
PETER KOSLOWSKI
Finally there is the position that by using the concept of the common
good a solution is nevertheless consciously renounced for two
reasons; either since one aims at a formula that could unify all the
different opinions (formula compromise), or since one acknowledges
that the finitude and precariousness of human cognition manifests
itself particularly in the political arena of the state. On the resulting
ideology of discussion and careful and piecemeal progress rests the
concept of the public good in Western democracies which mostly
leads even to the complete rejection of the word common good: The
common good is not considered to be something that is absolutely
knowable and to be realized but as something that is a mere task,
something that can be reached only in fragments. (translation by
P.K.)2
It must first be remarked that the self-interest and private good is also not
something "absolutely knowable," but something that can be reached by the
individual only in fragments. Even for the economic theory of self-interested,
utility maximizing action it holds true that the assumption that individual
action realizes the maximization of self-interest must be refuted since in all
actions with far reaching effects it is impossible for the decision maker to
identifY the one and only utility maximizing strategy. 3 It is only possible to
identifY a satisficing strategy. The difficulties in realizing the task of the
public good and the limitations in the identification of the one and only
strategy realizing the common good are not so different from the difficulties
of realizing the task of the maximization of self-interest as it might appear.
The problem of "limited knowledge" about the far reaching consequences of
one's actions holds true for self-interested action and for common good
strategies.
That it is difficult to make the task of realizing the common good
operational has not been overlooked by theorists of the common good. 4 The
2 R. HERZOG: Article "Gemeinwohl II" (The Common Good II), in: J. RITTER
(Ed.): Historisches Worterbuch der Philosophie, Darmstadt ( W iss.
Buchgesellschaft) 1974, vol. 3, col. 256-258, here 257.
3 Cf. A.A. ALCHIAN: "Uncertainty, Evolution, and Economic Theory", in: A.A.
ALCHIAN: Economic Forces at Work, Indianapolis (Liberty Press) 1977. p. 17.
4 Cf. G. GUNDLACH: Article "Gemeinwohl" (The Common Good), Staatslexikon
der Gorres-Gesellschaft, Freiburg im Breisgau (Herder) 6th ed. 1959, col. 737-
740.
16
demand to realize the common good and the acceptance of this demand by
the acting person does not imply that the cognitive means are given to find
out what is the best for the community and to actually choose the best
strategy. The cognitive limitations of finding out the common good do not
exclude the demand to strive for an ever deeper cognition of what is the task.
The simultaneity of the task and of the difficulty of recognizing and realizing
the common good have led to a double phenomenon. As Herzog rightly
observed the task of realizing the common good is indispensable but difficult.
Careful processes of approaching the common good in parliamentary
discourses have, therefore, been institutionalized. The "ideology of
discussion and of piecemeal approaches" corresponds to the actual situation
of human cognition in pursuing the common good.
The actual condition of human cognition in politics is not improved by
decisions and decision ism and also not by declaring the end of the debate as
the experiences of dictatorships show. They also did not realize greater
cognitive resources for recognizing and realizing the common good than the
slow and sometimes tedious parliamentary process and they experienced
additional costs as the suppression of freedom.
II. The Common Good of States and the Common Good

of Smaller Social Groups
It is characteristic for the theory of the common good that it does not
confine the demand for realizing the common good to the state. Every
community or organization has its common good and its task to realize it. 5
The idea of the common good of groups shows that the common good is not
only a concept for the totality of the common good of the whole of state and
society but at the same time it is a totality of totalities that is structured
internally. Every community or organization, be it a business corporation, a
university, a school, is characterized not only by the private interest of each
of those working in them but also by the interest of all working in these
institutions. All are interested in the prospering of their institution and the
continuation of this situation since the continuation of the whole institution,
5 Cf. G. GUNDLACH: Article "Gemeinwohl" (The Common Good), Staatslexikon

der Gorres-Gesellschaft, Freiburg im Breisgau (Herder) 6th ed. 1959, col. 738.
17
PETER KOSLOWSKI
and thereby of all the groups in it, is endangered if certain individuals or

groups in this institution are damaged in their good. The solidarity of the
interests and of the common good of the groups or stakeholders in an
organization makes it impossible to define the good of an organization only
by the good of a single group or only some individuals.
The connectedness or solidarity of the groups and individuals in an
institution holds, however, not only for their connectedness within an
institution. It also concerns, although to a lesser degree, the different
individuals or institutions working in the same field - be this field a shared
profession or a shared industry.
Recent research in business ethics shows that there is a common good of
an industry and of a profession beside the corporate good of the corporation.
The corporations of an industry or the individuals of a profession are
connected in their good prosperity and share a common interest in the well-
being of the industry or profession. If, e.g., certain firms damage the
consumers they damage by doing so the reputation of the whole industry. The
member of a profession like a medical doctor damages the reputation of the
whole profession by damaging a client or patient. By her "unprofessional"
behaviour, she damages not only the consumer or client but also the other
members of an industry or a profession.
On the higher level of the economy of a region or continent, even of the
whole world economy, a similar connectedness of the common goods holds
true. Economies are connected in their common good even if this is so to a
decreasing degree of intensity depending on the measure of remoteness of
groups from each other. No part of humanity can prosper in the long run if
another part of humanity is in desperate need.
The structure and sequence of communities results in a structure and
sequence of the common goods of groups that correspond to the specific
connectedness of the members of these groups. Their common good and joint
interest are caused by the closeness of the humans in their respective groups
and by the subsidiarity of the tasks of groups and organizations. The public
interest of smaller groups and institutions is the subsidiary condition of the
common good of the whole of society and vice versa. The political union or
state can only prosper if the intermediary social institutions like families,
corporations, etc. prosper.
18
III. Acknowledging the Discrepancy Between Intending and

Succeeding in Realizing the Common Good Instead of
Abolishing the Intention to the Common Good
The theory that communities have a common goal, their common good,
and that this common good is to be included in the subjective goal attainment
of the individual members of these groups has been criticized by approaches
of the subjective theory of value. Their critique is that since the human
individuals are completely free to set their goals in the framework of the law
something like a common good does not exist, and there is, therefore, also no
obligation to consider it.
This objection to the public good has some justification insofar as
motivation and success in the realization of the common good are not
necessarily linked. An individual can be disinterested in the common good in
politics and only interested in his or her own interest and can be more
successful and effectuate more good than an individual who strives for the
common good and is not interested in her self-interest but is not able in the
end to realize the common good or her self-interest. A politician who strives
to maximize his self-interest as his first goal can realize the goal of the state,
the common good, at the same time with his self-interest.
The possible discrepancy between intending and succeeding in the
realization of the public good points to the difference between demanding the
realization of the common good in ethics and the readiness of individuals to
make this public interest also their own self-interest. It is not possible to force
individuals to make the goals of the social institutions to which they belong
also their own goal. It is, however, possible to persuade them to do so by
ethics. Plato calls ethics, in his Laws, the persuasion to make the law and the
public interest to be also one's own interest. Organizations have the
advantage over the state that by the labor contract they can oblige their
employees to take over the goals and the values of the organization whereas
the state has no possibility and right to oblige or to force the citizens to take
over the common good, as their good.
It is advantageous for the institution as a whole and for its members that
the right order of motives and goals prevails in them and that the motives of
the members of the organization is shaped by the order of motives and goals
of the organization also in their individual actions. For the politician, the
obligation to realize the common good is not something subjective or
19
PETER KOSLOWSKI
something he can accept or not. For the politician, the duty to act in the
public interest is part of his professional obligations and not only a question
of his subjective morals. If he does not fulfill the duty of acting for the
common good the politician will be removed from his office provided that
the breach of duty can be proven.
The fact that in politics better results of the realization of the common
good are sometimes achieved by the worse motivation and the fact that bad
political results are sometimes the result of the best motives do not discredit
the connection between the success desired and the motives demanded,
between the realization of the common good and the intention to realize it. It
might be better in certain cases to reach a good success with bad motives than
a bad success with good motives. For the justification of social norms,
motives, and expectations of results, for the ethics of social and institutional
norms, the partial or temporary incongruence of motives and results does not
alter the fact that it is even better to reach good results with good motives or
to realize the common good also with the motive of realizing it. The best
state of an institution is the one in which good results are realized with the
good motives to do so.
IV. The Skepticism Towards the Common Good as the

Result of the Conviction of the Inability of the Sinner
to Do the Good
The emphasis on the common good is often seen as a characteristic of the

Catholic tradition of social thought as in Roman Herzog. There might indeed
be a correlation between the anthropologies of the religious denominations
and the concept of the common good. The critical position of renouncing the
concept of the common good and the conviction that motivation and success
in individual action must be separated as well as the emphasis on institutional
rules that take the burden of the right motives from the individual and
guarantee the desired success by the norms of the institution is linked to the
Protestant tradition to a great extent. It is also linked to the Protestant
tradition of the inability of the sinner to do the good. The acceptance or
refutation of the concept of the common good has therefore some connection
to different conceptions of original sin.
20
Particularly Lutheran social theory defends the conviction that the human
is so distorted by sin that he or she cannot intend the common good without
institutional mediation. 6 Individual can only realize the common good if they
are guided by the visible and invisible hand of institutions and by exploiting
the individual self-interest by the institutional organization in which they
work. Since humans have fallen so deeply according to Luther that they are
the slaves of their unfree and selfish will they cannot realize the common
good by immediate intention on it. There is no good to be expected from the
direct intention of humans. Society must be formed by institutions in such a
way that by these institutions it is secured that the common good is realized
as an indirect intention, a dolus eventualis, or even as a side effect that is not
intended at all in the pursuit of the really effective goals which are selfish and
the only ones humans are still able to pursue.
The common good is in this conception only the side effect of the careful
steering of the individual by the right institutions that make sure that selfish
intentions are transformed by the visible or invisible hand of institutional
norms and control mechanisms into the realization of the common good.
Securing the common good by institutions, not by intentions, is seen as
the best solution in the institutionalist tradition influenced by Protestantism
whereas Catholic social thought considers relying on institutions to be only
the second best solution, even under conditions of original sin and the selfish
character of humans. The denominations agree on the assumptions about
original sin and the selfish character of humans but the conclusions they draw
from it differ in degree. 7 The realization of the common good as the side
6 Cf. On the other hand for a Lutheran tradition of common good thinking H.-H.
SCHREY: Article "Gemeinnutz/Gemeinwohl" (Public Interest/Common Good), in:
G. KRAUSE and G. MOLLER (Eds.): Theologische Realenzyklopiidie, Berlin (de
Gruyter) 1984, Vol. 12, pp. 339-346, and the memorandum of the EKD, the
Lutheran Church in Germany, which includes the concept of the common good in
its title: Evangelischen Kirche in Deutschland (Ed.): "Gemeinwohl und
Eigennutz" (Common Good and Self-Interest) - Wirtschaftliches Handeln in
Verantwortung fur die Zukunft; eine Denkschrift der Evangelischen Kirche in
Deutschland, Giitersloh (Giitersloher Verlagshaus Gerd Mohn) 1991.
7 Calvinism, which shaped much of American capitalism, is less pessimistic in its
understanding of free will and the ability of the human to intend the good and to
realize it, but there is a similar distrust in human intention and the belief that
institutional constraints, mainly those of competition in the market and of the
invisible hand of the price system as a system of social control, must transform
21
PETER KOSLOWSKI
effect of self-interest and its prudent transformation by institution is only the

second best solution according to Catholic thinking since even under the
conditions of original sin the best solution is the one in which the individual
intention to the common good and securing the common good by institutions
are working together and realize simultaneously the common interest and the
self-interest.
V. Modernity as the Emancipation of Self-Interest?
The era of modernity is often seen as the epoch of the emancipation of

self-interest in which the demand for a consideration of the common good in
the individual pursuit of interest has become obsolete. Modernity seems to
have no need for the motive of intending to realize the common good. Some
thinkers of Public Choice theory and its model of democracy go so far to say
that even the political order of the democratic state cannot be understood in
categories of the common good but must be seen as the mere result of the
composition of individual self-interested votes and of self-interested
politicians. Public Choice theory is an important innovation if it is understood
as a critical theory of the actual motivation of politicians and as a critique of
the naive idea that politicians have different and per se better motives than
the decision-makers of the private sector. Public Choice theory becomes,
however, problematic if it excludes a priori the possibility that politicians try
to find out and to realize the common good. 8
the selfish intentions into the efficiency and wealth creation or the common good.
Calvin has been originally as pessimistic as Luther about the human free will hut
the younger teachers of Calvinism softened Calvinism's pessimism.
8 James Buchanan, in a recent paper, docs not discard the common good principle
completely but retains it as a regulative principle. He contends that hy the
imposition of the constraint of the non-discimination principle on all political
decisions, politicians would be forced to think about ··approaches of the true
consideration of the common good interest" (my translation of the German
version of the paper). Cf. JAMES M. BUCHANAN: "Gleiche Spieler, anderes Spiel.
Wie bessere Regeln der Politik auf die Spriinge helfen I Mit geeigneten Anreizen
zum Gemeinwohl" (Same players, different game. How better rules help politics
to get started I With the right incentives to the common good), Frankfurter
Allgemeine Zeitung, nr. 80 (3 April 2004 ). p 13 (page ''The Order of the
22
Adam Smith, who is considered by some social scientists the founder of

modernity has stated only as a fact, not as a norm, that it is not from the
benevolence, but from the self-interest of the butcher, brewer or baker that
we expect to get what we need for food. This statement by Adam Smith 9
seems to be interpreted by some of today's economists to be a normative
statement describing how it ought to be. They contend that it is not only a
fact that we depend on the producers' self-interest but it is normatively
demanded that we ought to depend only on the producers' self-interest for
being provided with goods.
From the textual base and from the synopsis of his two works, The Theory
of Moral Sentiments and The Wealth of Nations, it must be concluded that
Adam Smith took his statement only as a statement of fact and not of
normative content. The butcher is free, of course, to provide his services also
for the common good, even for philanthropic or altruistic reasons. The
market cannot rely on these higher motives but it does not exclude them as a
norm that ought or must be followed. The exasperation of the self-interest
theorem to a normative principle would make the "Adam Smith Problem" of
how Smith's ethical and economic theory is compatible, unsolvable. Since
Smith has written both treatises they must be reconcilable in his mind. The
market coordinates self-interested action. The content of the motives of self-
interest is left open by the price system. Common good orientation is as
possible as narrow self-interest, and possible are also mixed motives and an
over-determination of human action by various self-interested and common
good motives.
Economy"). The non-discrimination principle that political desions that

discriminate against certain group or favor interest groups at the cost of all
becomes a constraint on politicians that enables them to take the common good
into consideration. The political process is here seen as a process that includes
the consideration of the common good.
9 ADAM SMITH: The Wealth of Nations, in: The Works of Adam Smith, Vol. 2,
1811-12, Reprint Aalen (Otto Zeller) 1963, Book 7, chap. 2, 21.
23
PETER KOSLOWSKI
VI. The Necessity of a Synthesis of Public Interest and

Self-Interest in the State and in Business
Thinkers of the common good tradition like Thomas Aquinas, Franz von
Baader, or Gustav Gundlach accept no contradiction between public interest
and individual self-interest. They interpret the idea of the public interest as a
mediation between the public and private interest as far as the public interest
can only be understood as the realization of the interest of every member of
society. Since Thomas Aquinas, the concept of the common good fulfils the
function to realize this mediation of the public and the private against
tendencies to realize the common good at the cost of the private or the private
at the cost of the public. The Thomist idea of public interest distinguishes
itself as well from the Aristotelian theory of public good as the good of the
state which dominates the good of the individual as well as from the
individualist theory of methodological individualism that there are only
private goods and no common good.
Gustav Gundlach demonstrates that the public good consists in the deeper
realization of every person and not in the dominance of the public interest
over the personal interest as it is contended in the principle "the public good
is always superior to self-interest."lO
Franz von Baader criticizes Hegel's social philosophy and the Hegelian
idea that the public interest is the "sublation" (Aujhebung) of the private
interest. 11 For Baader, the relationship of public interest and private interest
is not a relationship of sublation of the individual interest in the public
interest but as relationship of a free mutual sacrificing for the common good,
a synthesis of public and private interest in the centre of personal self-
realization. Baader contrasts his personalist social ontology of the centre and
of mutual interpenetration of the universal and the particular, the centre and
the periphery, with the Hegelian social ontology of linear sublation of the
10 Cf. G. GUNDLACH: Article "Gemeinwohl" (The Common Good), Staats/exikon

der Gorres-Gese//schaft, Freiburg im Breisgau (Herder) 6th ed. 1959.
II Cf. for an exposition of the subsidiarity principle as the opposite of the sublation
principle P. Koslowski: "Subsidiaritat als Prinzip der Koordination der
Gesellschaft", in: K. W. Norr, Th. Oppermann (Hrsg.): Subs1diaritiit: Idee und
Wirk/ichkeit. Zur Reichweite eines Prinzips in Deutschland und Europa,
Tilbingen (Mohr Siebeck) 1997, p. 39-48.
24
particular in the general. He rejects Hegel's idea that the relationship of the
general and the particular is the relationship of the sublation or dissolution of
the particular in the universal. He contends that the idea of sublation implies
an ontology of sacrificing the particular for the universal or public. In Hegel,
the individuals must sublate themselves for their self-realization into the
absolute or general and into the common good. They must sacrifice
themselves for the realization of the absolute spirit. According to this
ontology, the absolute spirit, or the general or God, lives on the sacrifice of
the human individual.
Baader illustrates his social ontology by comparing the philosophical and
theological theorems underlying the Hegelian ontology of sublation to his
own ontology of mutualism: God and the human can only be realized at the
same time. This simultaneous manifestation of the absolute and the finite
spirit presupposes that God contracts himself, sacrifices part of his
omnipotence, and opens the space to the human for self-realization. God does
not sacrifice the individual for the universal or for himself. In the same way,
the individual must sacrifice part of her self-interest. In as far as humans
sacrifice their self-interest, God sacrifices his omnipotence. In the same way,
the public interest and the individual interest can only be realized if the public
and social power "sacrifices" part of its power to the goal of personal self-
realization as well as on the other hand the individuals "sacrifice" parts of
their self-interest and include the public interest in their individual striving. 12
If one leaves aside the collectivist theories of the public good that do not
do justice to the individual interest there are at present three approaches to the
relationship of public interest and private interest that dominate the
discussion:
The first model of liberal conflict theory assumes that there is no
definable public interest but only the conflict of individual interest. All
reference to public interest is ideology that conceals its own self-interest by
12 Cf. FRANZ VON BAADER: Ueber den Begriff der Zeit (1818), in: F. v. Baader
Sdmt/iche Werke, hrsg. von Franz F. Hoffmann u.a., Leipzig 1851-1860,
Neudruck Aalen (Scientia) 1963, 2nd reprint 1987, Vol. 2, 47-68, here 44, und
Baader: Vorlesungen i.iber Societatsphilosophie (1831/32), in: F. v. BAADER:
ibid., Vol. 14, 55-160, here 85. Cf. for a comparison of Hegel and Baader P.
KOSLOWSKI: Phi/osophien der Offenbarung. Antiker Gnostizismus, Franz von
Baader, Schelling, Paderborn, Mi.inchen, Wien, ZUrich (Ferdinand Schoningh)
2001, 2nd ed. 2003, 773ff.
25
PETER KOSLOWSKI
referring to ideas of the public interest and is not even aware of their self-
interested character.B
The second theory takes the general and the common interest to be
realized only in the rules and the institutions of the market, but not to be
anticipated in the individuals' strategies and decisions.
The third theory acknowledges the necessity of mediating between public
and private interest not only in the rules of the market and of democracy but
also in the intention, attention and the action of the individuals within the
rules of the game and of the institutions.
This distinction of three types of social theories about public interest is
also present in three different conceptions of the relationship of state and
society. The first theory of the relationship of state and society, the pure
theory of conflict, assumes that neither society nor the state are influenced by
the idea of the common good. The second approach contends that the state or
the legislator must follow the public interest in the legislative process of
determining the rules of the game for the market, but that society and
economy must be free of individual considerations of the common good;
non-governmental institutions need not consider the common good. The third
approach assumes that the striving for the realization of the common good is
necessary in state and economy, that every community or institution has its
public interest, and that this public interest must be considered in the making
of the institutions as well as in the decisions of the people working in these
institutions.
VII. The Public Interest of Institutions and the Increase of

the Responsibility for the Public Interest to the Degree of the
Power of Those Managing the Institutions
It has already been mentioned that the idea of the common good is of
importance not only for the state and government but for every institution.
Every organization and institution possesses its specific idea of the public
13 Cf. R. A. DAHL: "Dilemmas of Pluralistic Democracy: The Public Good of

Which Public", in: P. KOSLOWSKI (Ed.): Individual Liberty and Democratic
Decision Making. The Ethics, Economics, and Politics of Democracy, Tiibingen
(Mohr Siebeck) 1987.
26
interest and has the task to realize the interest of the organization as a whole.
The obligation towards the orientation on the public interest increases with
the increasing impact of decisions and with the decision-maker's increasing
power since the side-effects, the positive and negative side-effects of an
action, increase with the action's impact. The acting persons are obliged to
consider the public interest in those ranges of action that are relevant for the
public interest. The fact that the decision problem becomes more difficult and
complex by the duty to consider the public interest must not imply that the
increasing complexity of the decision frees the decision-maker from the
consideration of its side-effects on the public interest. The increasing
complexity of decision-making only implies that, in judging the success of a
decision in itself and in considering the public good, the difficulty of the task
has to be taken into consideration.
The obligation to include the side-effects of one's decision-making on the
public good increases with increasing power. This increasing obligation to
consider the public good indicates that power itself is a moral phenomenon.
The more power a person possesses the more the person must consider the
side-effects of his or her decision-making. The idea of the public interest
points to this relationship between power and the duty to consider the public
good.
As Roman Herzog has demonstrated 14 it has been Thomas Aquinas who
has introduced two insights to political philosophy by his idea of the common
good: first the insight that sovereignty and the exercise of political power do
not have their criterion of action in themselves but refer to a higher authority
and are therefore constraint in their freedom, and secondly the insight that the
state and the individual are bound by the common good. Thomas Aquinas
starts from monarchy in his theory of the common good and binds the ruler to
an authority outside of the ruler's own will and self-interest. The ruler cannot
only follow his free and sovereign will. He is not only directed by his own
interest but by the higher authority of the common good and is constraint by
it in his will and sovereignty.
The idea of the common good leads to the development of the modern
idea of office. The political office is obliged to realize the common good; it is
not there to increase the power or advantage of the office holder and his self-
14 R. HERZOG: Article "Gemeinwohl II" (The Common Good II), in: J. RITTER
(Ed.): Historisches Worterbuch der Philosophie, Darmstadt (Wiss.
Buchgesellschaft) 1974, vol. 3, col. 256-258, col. 256.
27
PETER KOSLOWSKI
interest. It is not only the self-interest of the state, the raison d 'eta!, or the
sovereignty of the prince or king and his self-interest that matter. The office,
particularly the political office, bears in itself the obligation to good
governance and is bound by the effect of the decisions on the common good.
The idea of office that is derived from the concept of the common good is
not only limited to the sovereignty of the prince or king. It is also valid for
the sovereigns of the modern world, for the voter and consumer, for popular
sovereignty in the political decision-making processes of democracy and for
consumer sovereignty in the economic decision-making processes of the
market. The relevance of common good theory today increases to such a
degree as the temptations for these sovereigns to follow only their self-
interest increase. The political power in democracy and the economic power
of the consumer are under the obligation to consider the common good in
their decisions. Both, the voter and the consumer, must be prepared to
sacrifice part of their sovereignty of completely free decisions in those
situations in which it is demanded by the common good. Also popular
sovereignty is constraint in its freedom ofwill by the common good. 15
Popular sovereignty is not entitled to decide anything it wants or is in its
self-interest. It has no right, e.g., to negate the right of natural or born
members of a political society to be members of this society or cancel their
membership in a community as it is possible in a club. A club is entitled, in
contrast to society, to exclude members by its charter. Political society as the
locus of existence as such is not entitled to cancel membership since
existence is not a predicate. The negation of existence is, therefore,
something different from refusing the right to enter a club.
The idea of office that is concluded from the idea that power is bound by
the public good does not only constrain political, but also economic, cultural,
and religious power. The idea of office shows that power is a moral
15 This need for a constraint on self-interest applies also to the stakeholder theory of
the firm. One might be tempted to think that the stakeholder approach is closer to
the common good idea than the shareholder approach since it includes, ideally,
all stakeholders in the firm whereas the shareholder group is only one group of
the firm. The stakeholders may, however, form coalitions against the
shareholders or form other coalitions against other stakeholders, coalitions that
do not represent the common good of the firm. The shareholders as the outside
controlling institution of the firm may have to enforce the common good of the
firm against stakeholder coalitions that are not in the interest of the long run
survival of the firm.
28
phenomenon and therefore always related to the common good. Not only
political power is an office that is not only defined by the sovereign will of
the one in power and that is subject to what is demanded by the realization of
the common good. The same holds true for the holder of economic, religious,
and cultural power.
The obligation to include the idea of the common good in the individual
decision-making of economic, religious, and cultural power as well as in
those of political power follows from the fact that the individualist decision-
making processes of the market and of democracy cannot function without
such a consideration of the public good since frictions in the economic and
political realm are the consequence if they are based on self-interest only.
The need for the consideration of the common good in the market and in
democracy arises first from the problem of the aggregation or composition of
individual decisions determined by self-interest to a market price and to a
political decision. The phenomena of market failure and of democracy failure
describe such frictions of coordination in the market and in democracy. The
need to consider the common good also arises, on the other hand, from the
fact that the holder of economic and political responsibility are the agents or
fiduciaries not only of the principals that give them the fiduciary power but
also of those, even if so to a lesser degree, that they do not represent but
whose life they influence by their decisions. They must consider the common
good of the institutions which they direct beyond their mere fiduciary duties
to those who gave them fiduciary power, their principals.
VIII. The Obligation of Managers to Realize the Common

Good of Their Corporations
The obligation to consider the common good is not only valid for the
politician. The politician is not only the agent of her constituency and party
but is always at the same time the representative of those who did not vote
for her. Likewise, the manager of a large firm is the fiduciary not only of
those who employed him but also of those who work under his leadership.
The obligation to realize the common good of the institution is therefore also
29
PETER KOSLOWSKI
valid for the manager of the large firm. 16 The manager is not only the agent
of his principals, be they shareholders or single owners, and he has more
duties than those of realizing the interest of the shareholder group in profit
maximization only. He must consider the interest of the other stakeholders as
well when he realizes the legitimate shareholder interest in return on
investment. By maximizing shareholder value, the manager must at the same
time realize the common good of the entire firm. The manager's task to
realize the maximum productivity of the firm cannot be secured by the
market, competition and the price system alone. The manager must realize
productivity even where the power of competition does not force him to do
so as e.g. in imperfect markets or in developing nations. This indicates that
the productivity of the firm is a kind of public good for the firm beyond mere
profit maximization. 17
The decision-maker of an institution cannot dispense him- or herself from
the responsibility for the common good of the institution by pointing to the
fiduciary duty towards the shareholders. The reference to a narrow fiduciary
relationship can include an element of exculpation from responsibility. Every
kind of fiduciary relationship or of acting for the sake of someone else and of
someone else's goals leads to a reduction in the moral obligation since, by the
fiduciary relationship, the responsibility for actions is divided between the
principal and the agent and can be shifted forward and backward between
them.
The danger of such a reduction of the total responsibility of management
for the common good of a firm can be demonstrated in the exaggeration of
the shareholder value principle as the only goal of the firm. The theory that it
is the task of the firm to increase the value of the firm and its shares for the
owner of the firm only and that the management success is measured only by
the attainment of this goal reduces the complexity of the management's
16 Cf. H. ALFORD and N. NAUGHTON: ""Working the Common Good: The Purpose
of the Firm", in: S. A. CORTRIGHT and MICHAEL 1. NAUGHTON (Eds.): Rethinking
the Purpose of Business. Interdisciplinary Essays from the Catholic Social
Tradition, Notre Dame, Indiana (University of Notre Dame Press) 2002.
17 Cf. also L. A. TAVIS: Power and Responsibility: Multinational Managers and
Developing Country Concerns, Notre Dame, Indiana (University of Notre Dame
Press) 1997.
30
obligation towards the common good of the firm. 18 All other goals of groups
of firm members are rendered to be only means for the final end of the return
on the owner's investment. The effect is that the management can exculpate
itself from the responsibility towards the other groups of the firm.
The manager is not only the agent of the owners but at the same time the
steward of all groups in the firm. This distinction between agency and
stewardship holds true even more for the politician who has a democratic
mandate. The politician cannot be seen as the agent of his immediate
constituency only. He must accept that he has the duty of office towards the
common good or of representation of all voters. Politics and management are
an office that does not only include the duty towards furthering the interests
of the principals, be they shareholders or voters or constituency, but that
implies, beside the immediate fiduciary duty towards the principal, a duty of
stewardship towards the common good. The interest of the principal, of the
voter or the shareholder, and the interest of all people concerned, of the total
voting population or of all employees of the firm, must be considered at the
same time. There is no unlimited autonomy of the voter or of the shareholder
as principals to define the duties of their agents, the politician or the manager.
By giving fiduciary power to a member of parliament or to a manager, the
fiduciary of this power, the politician or the manager, cannot be obliged to
neglect the public interest and to realize only the interest of his or her
immediate principals. In the market as well as in politics, the consumer, the
shareholder, and the manager representing them as well as the voter and the
member of parliament representing the voter must understand their right to
decide to be an office that aims at the public interest. The politician or the
manager cannot understand themselves as autonomous lobbyists or
fiduciaries only of that segment of the constituency or the firm that voted for
them or employed them.
The idea of the public good and of the boundness of decision-makers in
government and economic institution by it is not an idea imposed from the
outside and in a normativist way on the principals' and the fiduciaries'
individual self-interest, be they voters and politicians in the political arena or
shareholders and managers in the market. The idea of the common good does
18 Cf. P. KOSLOWSKI: "Shareholder Value and the Purpose of the Finn", in: S. A.
CORTRIGHT and MICHAEL J. NAUGHTON (Eds.): Rethinking the Purpose of
Business. interdisciplinary Essays from the Catholic Social Tradition, Notre
Dame, Indiana (University of Notre Dame Press) 2002.
31
PETER KOSLOWSKI
not impose a situation of heteronomy on them. Rather, the idea of the

common good demands the inclusion of the public interest in the enlightened
self-interest of those who have power to decide. Powerful decision-makers
can only realize their own and tits principals' self-interest if the institutions
they direct are flourishing. Decision-makers cannot reply to the objection that
the public good of their institutions is not realized by replying that they acted
only as agents of her principals. The politician cannot exculpate herself in
cases of government failure by answering she only acted in the interest of the
own voters that gave her their vote. The manager whose firm is becoming
smaller and smaller while it pays high dividends to shareholders cannot
justify his or her action by pointing to the fact that the interest of the
shareholders have been realized.
The idea of the common good implies that the general or total interest of
an institution is fulfilled. The total interest of an institution is to be derived
from the nature of the task of the institution. The neglect of the common
good leads to a violation of the total interest of an institution and therefore to
functional friction and to the incomplete fulfillment of the task of the
institution.
The idea of the common good of an institution shows that institutions
cannot reach their optimal performance and due diligence without
anticipating their common good in the self-interested decisions of the people
acting in them. The interest on the realization of optimal performance and
due diligence leads to acknowledging the inevitable task to consider as well
the common good as the self-interest of its member in the governance of
institutions, be they political or economic. The purely individualistic pursuit
of goals in the market or in democracy without consideration to the public
interest in the individual interests of those who have to make far-reaching
decisions causes sub-optimality of the institution in question, the market or
democracy.
IX. Thinking in Terms of Institutions and Thinking in

Terms of Intentions
It is insufficient and cannot realize the common good to found institutions

on the right intentions and on the will to the common good only. The
32
institutionalizations of the pursuit of the common good must be secured. On

the other hand, institutions cannot and must not renounce the intention to the
common good. It is not for the sake of ethicizing but for the sake of a realistic
view of institutions that thinking in intentions must complement the thinking
in institutions. The "reform of institutions" must be accompanied by the
"reform of intentions." Members of an institution must be informed about the
intention to the common good of their institution and be given the means to
analyze and deliberate the common good.
Ulrich Matz 19 points to the fact that individualist and pluralistic societies
must be aware that they must not create a self-fulfilling prophecy by a
misunderstanding of individualist theories. If individualist social theories
contend that the idea of the common good is incompatible or irreconcilable
with individualist societies this contended incompatibility or irreconcilability
will become a social fact of incompatibility or irreconcilability by the very
process of being contended and imported into the self-definition of the
society in question. Social theories contended and imported into the self-
definition of modern societies become a social fact in the self-affirmation of
these societies. Their presumed analytical character becomes a self-fulfilling
prophecy, a prognostic and normative statement of social theory that society
will and should behave as the theory predicts and prescribes. If
methodological individualism contends that the intention and orientation on
the common good are impossible in societies shaped by methodological
individualism this intention and orientation will become impossible.
The misinterpretation of modern society in this critique of common good
thinking must be criticized. It is the task of social philosophy to make clear
that the mediation between the common good and the individual good is
possible and that the public interest is not only realized behind the back of the
acting persons by the visible hand of institutions or by the invisible hand of
markets. The common good of institutions is realized also in the conscious
intention of the acting persons to the common good of the institutions they
live in. The intention of the acting persons, the visible hand of institution
19 U. MA TZ: "Aporien individualistischer Gemeinwohlkonzepte" (Aporias of

Individualist Concepts of the Common Good), in: A. RAUSCHER (Ed.):
Selbstinteresse und Gemeinwohl. Beitriige zur Ordnung der
Wirtschaftsgesellschaft (Self-Interest and Publik Interest. Contributions to the
Order of the Economic Society), Berlin (Duncker & Hum blot) 1986, pp. 356fT.
33
PETER KOSLOWSKI
building, and the invisible hand of the market must come together and cannot
be substituted for each other.
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37
Chapter 2
The Invisible Hand and Thinness

of the Common Good
RICHARD DE GEORGE
I. The Thinness of the Contemporary Notion of the Common

Good
II. Thicker Contemporary Surrogates for the Common Good
III. The Invisible Hand and the Common Good
IV. The Common Good: National and International
V. Conclusions
The term "the common good" has a long history going back at least to
Plato for whom it means social virtue. For Aristotle it took on a political
meaning. Thomas Aquinas gave the concept its classical form, but in the
process gave it a theological twist, according to which both individuals and
all humanity have a common destiny or end, the attainment of the Summum
Bonum or eternal life with God, to which other ends should be subordinated.
It is this notion that was rejected by modern philosophers from Descartes and
Locke onward, as they denied a common teleological end for all and, from an
individualistic perspective emphasized the importance of the individual
person, whether through a utilitarian calculation or a doctrine of human
rights. 1 Similarly, the resulting individualism represented by modern
philosophy was adopted by modern economists as the presupposition of self-
interested individuals each interacting for his or her own good.
Parallel to these developments, the doctrine of the common good was revived in
the late Nineteenth Century by Pope Leo XIII in his 1891 encyclical Rerum
Novarum and has been continued in Papal social encyclicals since then, as well
as in the writings of such philosophers as Jacques Maritain (The Person and the
Common Good, London (Geoffrey Bles), 1948) and John Finnis (Natural Law
and Natural Rights, Oxford (Clarendon Press), 1980).
THE INVISIBLE HAND AND THINNESS OF THE COMMON GOOD
I. The Thinness of the Contemporary Notion of the Common

Good
If one takes a strictly individualistic view of what it is to be human, then

one is led plausibly to question any notion of a common good, or
alternatively, in the manner of methodological individualism, to reduce any
notion of common good simply to the good of each of the individuals. On
this view, each person has his or her own good, and there is no reason to
believe that their personal goods are the same or common. Anything over and
above the individuals is mythical, a way of speaking, but has no standing
from a moral or any other serious point of view.
Plausible as it might seem, however, this position fails adequately to
consider either the social nature of human beings or the nature of joint
projects that make possible more than is possible for any individual acting
alone. Such an individualism gets right the fact that each individual has moral
worth and that ultimately it is the good of individuals with which we should
be concerned. But it draws too narrow a picture of what has to be considered.
For no human being exists in isolation, and the picture of a radical individual
- a monad existing independently of others - is a figment of one's
imagination. All human beings are born into a community, and from the very
start they are social beings. Human relations are real, not fictions, and they
make a difference and have moral implications. A strictly individualistic
analysis ignores the togetherness of human beings, their interrelations, the
common society in which they operate, the common conditions necessary for
them each to pursue their own good, and the fact of human solidarity. And
once these are admitted, the strict individualism gives way to a more realistic
perspective and the common good makes sense in a way it does not
otherwise. They supply the basis in reality for considering it, as well as the
justification for the moral weight that the common good commands.
Nonetheless, the common good is the good not of society as such or of
some superorder. Radical collectivism, such as we find in Marxism's view of
society, involves the mistaken claim that the social whole is superior to the
individual human beings who make up society. But society does not exist
apart from those who make it up, and society has no independent good of its
own. Radical collectivism is as mistaken in its way as is radical
individualism, which asserts that only individuals are important.
39
RICHARD DE GEORGE
The common good is not the sum of the good of individuals, nor some
final end which all people have in common. Each individual person has
personal ends, some of which overlap with the ends of others. What all
implicitly desire are the conditions necessary for pursuing their ends. Unless
the common good means the good of human beings considered together - a
family, a religion, a country, the human race - it is meaningless. Each of
these consists not only of particular individuals in relation to other existing
individuals, but also to the continuity of the community over time, from
generation to generation, and hence a relation both to the past and to future
members. Each of these communities in part defines its members and makes
them in part what they are. The relations are therefore partially constitutive of
the individuals. 2 It is for this reason that when necessary individuals may be
willing to die for the sake of the community, e.g., in a war of self-defense.
The communities, moreover, carry with them certain values, the preservation
of which is included in the community's common good and shared by each
individual.
II. Thicker Contemporary Surrogates for the Common

Good
Although the term "common good" is absent in mainstream ethical,

political and economic theory, resulting in its current apparent thinness,
secular surrogates for it are present in the literature, and it is these on which I
shall concentrate. Taking the common good in the sense I have suggested we
can distinguish five components or aspects of the common good that find a
voice in contemporary literature under various guises.
One understanding of the common good equates it with public goods.
Parks, roads, common defense, public buildings, and institutions such as
courts, legislatures, and armies are part of what can be called the public good,
since they are specific public goods provided by government from public
funds. Second, there are also common goods that do not require government
funding, such as the air that we breathe and the water that we drink. Although
not supplied by government, they may have to be protected by government if
2 See RICHARDT. DE GEORGE, "Social Reality and Social Relations", The Review
ofMetaphysics, XXXVII (1983), pp. 3-20.
40
abused, and environmentalists have arisen to draw the public's attention to

the need to protect these.
A third component is that aspect of the common good that is not reducible
to goods at all, but that consists of relations, conditions, systems, and
structures. 3 Emphasis on individuals tends to ignore relations and structures
that channel actions and that facilitate, promote, or inhibit certain kinds of
activities. Concern for the common good leads us to evaluate not only
individuals but also the morality of corporate structures, class relations,
working conditions, economic systems, and governmental structures.
Individuals of good will, because of the structures or systems in which they
operate, may be effectively precluded from helping the poor or needy. The
remedy here is not only to urge individual virtue but to change the structures
or systems.
Many in business ethics, among others, have drawn attention to this
dimension.
Fourth, the common good embodies the general conditions that promote
human flourishing of the members of the community as well as of the
community as a whole. These are provided not only through the political
process but also through interactions among private individuals, by groups at
many levels and by the private sector of the economy. Peace, freedom
(especially political and religious freedom), justice, and respect for human
rights are often preconditions for the flourishing of the communities. To
some extent they constitute the moral good envisioned by Plato and Aristotle,
and the peace aimed at by Hobbes. They form the preconditions for the
community to achieve, and for the individuals within the communities to
achieve, the ends that they collectively and individually seek to pursue.
Societies that enjoy peace, freedom, justice and respect for human rights are
societies in which people can flourish. They are values that enhance life and
for which people are willing to sacrifice their lives so that others can live in a
society that has and protects them. Similarly knowledge is only secondarily
and temporarily private and belongs fundamentally to humanity as a whole as
a non-economic good.
Fifth and finally we come to the notion of common good that refers to the
goods that people produce and the goods and services that are traded in the
3 See RICHARDT. DE GEORGE: "Social Reality and Social Relations", The Review
of Metaphysics, XXXVII (1983), pp3-20.
41
RICHARD DE GEORGE
marketplace. It is these that constitute the wealth of nations and are of

concern to the economist.
III. The Invisible Hand and the Common Good
Given this thick understanding of the common good, can a society rely on
Adam Smith's notion of the invisible hand to promote and protect it? In his
famous passage on the invisible hand4 Smith mentions the "public good,"
which might here be understood as "common good" or the good of society in
general. But this in no way means that Smith did not think that government
was necessary to provide for public goods, such as roads and public defense.
Nor does the text provide any reason to think that he denies necessary
conditions for the market to work as he says, especially the condition of
freedom. This is not produced by the market but presupposed by it, and the
market has tendencies built in to try to restrict it, which must be resisted. The
notion of the invisible hand, like that of the common good, has been
interpreted in many ways. It refers in some views simply to the notion of a
free market. In the hands of contemporary economists, it does not play the
same role as in Smith's Wealth of Nations, where the invisible hand requires
cooperation and justice. 5
The contemporary doctrine of the invisible hand and the doctrine of the
common good come from different traditions. The invisible hand is an
economic doctrine, while the common good is a social one. I shall argue that
3 Smith notes that every individual public "generally, indeed, neither intends to
promote the public interest, nor knows how much he is promoting it. ... [ll]e
intends only his own gain. and he is in this, as in many other cases. led by an
invisible hand to promote an end which was no part of his intention. Nor is this
always the worse for the society that it was no part of it. By pursuing his own
interest he frequently promotes that of society more effectually than when he
really intends to promote it. I have never known much good done by those who
affected to trade for the public good.'' Book IV, Ch. I L ADAM SMITH, An
Inquiry Into the Nature and Cause of the Wealth uf Nations, EDWIN CANNAN
(Ed.), Chicago (University of Chicago Press), 1976, p. 477.
4 See, PATRICIA H. WERHANE, Adam Smith and His Legacy for Modern
Capitalism. New York (Oxford University Press), 1991.
42
any attempt to achieve the common good on either a national or a global level
through the invisible hand yields at best only a thin version of the common
good, which reduces it to common goods. The robustness of the first four
aspects of the common good are ignored in favor of the fifth aspect that
enters into economic theory considered as a separate and discrete realm,
divorced from government, history, social customs, political life, and the
many people who cannot take part in the economic process and are left out or
marginalized by it.
In its favor, history has shown that a free market is much better at
processing information efficiently for the benefit of those engaged in
economic activity, and hence in producing general prosperity, than any
centrally controlled governmental system. In this sense the invisible hand
works well. But to the extent that justice is part of the common good of
society, history has also shown that an unregulated market is not always self-
correcting. The transition of Russia in 1991 from a socialist economy to its
present version of some kind of free enterprise shows that the market does
not serve the common good without laws guaranteeing property and other
rights, and without legislation curbing excesses and abuses.
History has also shown that in England, Germany, the United States and
other developed countries legislation was necessary to end child labor, to
eliminate sweat shops, to introduce a minimum wage, to improve working
conditions, to protect the environment, to guarantee consumers their rights,
and so on. The market or an invisible hand did not and could not do these
things. In each case legislation was passed over the opposition of business
interests. This was only possible because of the existence of democratic
governments that were and are, at least to some extent, responsive to the
people. Organized labor, consumer groups and watchdogs, an investigative
press, and a government that is reasonably responsive to public pressure and
concern for the common good are essential. All of these taken together form
what can be called background institutions.
They are lacking not only on the international level but they are also
lacking for the most part in less developed countries. Hence we see in the
developing countries many of the same problems that the developed countries
faced in the 19th and the first part of the 20th century.
Smith spoke of the invisible hand in the context of nations. Whether the
invisible hand operates in the same way in the international context is
dubious because of the absence of the background conditions that make the
theory plausible. Certainly some good is done to those to whom the
43
RICHARD DE GEORGE
multinational corporations supply work. But the global common goods are
not necessarily well served, nor is the global common good.
IV. The Common Good: National and International
We can consider the relation of the common good to the invisible hand by
considering the five aspects of the common good, both on a national and then
on an international level.
First, with respect to public goods -- roads, common defense, courts, a
system of law and order - these are typically provided by the government of
a country, and fall outside of the economic domain of trade and industry in
which the invisible hand operates. Hence the relation is one of the
government making possible the operation of the invisible hand by creating
the preconditions for a free or mostly free market economy. Without the legal
substructure and the peace and security provided by government, free
markets could not operate, and so neither could the invisible hand. Public
goods are typically provided by individual countries and constitute the
infrastructure of an economy and of a society. Many countries have very
primitive infrastructures, and the invisible hand does not operate on a global
level so as to remedy this deficiency. Poor countries typically need assistance
in this area, and the assistance is not provided by market forces but by
political forces. Moreover, although the world economy is now becoming a
global one, there is no effective international body to provide the
prerequisites that the invisible hand needs. International agreements, such as
the law of the sea and international organizations such as the WTO, serve as
surrogates for international law, but are clearly partial, not always effective,
and on the whole insufficient and in need of formation and development.
Second, with respect to common goods (the air, water, land) the invisible
hand has been shown to be ineffective in protecting these adequately.
Regulation and governmental intervention have proven necessary, because
pollution of the goods was not a cost that businesses had to internalize. If,
despite the fact that these are common for all human beings, those who
negatively impact them can be made to internalize the cost of doing so,
perhaps the invisible hand could be brought into play to protect them. But
forcing the internalization requires government or some other agency outside
of the businesses themselves, who have shown they will not internalize the
44
costs unless all do, and so unless all are forced to. How the cost is
internalized, and whether this will be sufficient to in fact control pollution so
that it does not lead to loss of the ozone level or ever increasing rates of
global warming, remains to be seen.
The global common goods (air, water, the ozone shield, and so on) are
clearly vulnerable to depletion and damage. The emissions from one country
can negatively impact others. The issue of how to control pollution globally
in a way that is fair to both the developed and the developing nations is a
question that the market will not and cannot solve. Even if the market were to
come into play by forcing the price of pollution so high that businesses would
control their pollution to the required levels because of market forces, that
will take place only after enormous and irreversible damage has been done.
Extra-market control is clearly necessary. On the international and global
levels the common good is best protected by just international and global
background institutions. The obligation to promote the common good thus
yields the obligation to develop and support such background institutions.
The obligation falls on governments; but it also falls to international business.
The third and fourth aspects of the common good of communities - both
structures and relations on the one hand and peace, freedom, and justice on
the other- are not provided by the invisible hand and in fact are prerequisites
for the invisible hand to operate. For they are presuppositions of a free
market. They cannot be provided by the market, although businesses might
serve as incentives in some parts of the world for governments to attempt to
implement political, religious and personal freedom, and to seek peace.
Taking the common good seriously raises the challenge of rethinking a
good deal of the way we both do business and evaluate it from a moral point
of view. For the common good enters directly into the heart of economic life.
It is co-equal with the principle of justice; and it forces us to rethink the
principle of justice itself as well. To focus on the common good both
nationally and internationally is to see justice not only in an individualistic
but in a communal way. It forces us to reevaluate the international structures
of business, the conditions of trade and other relations between rich and poor
countries and between multinationals and host countries.
Fifth, the aspect of the common good that has to do with providing
society with goods and services, employment and the goods necessary for life
and its enjoyment provides the most obvious candidate for the invisible hand
to operate. But it does so effectively only within the constraints that
guarantee the common good in its other four aspects. The feature of the
45
RICHARD DE GEORGE
invisible hand that Smith commented on was the fact that businesses are not
formed or structured to achieve good for the community in general, and
frequently they fail in the attempt to do so. That is a function of government,
and businesses should not interfere or usurp that function. Business leaders
were not elected to do so and so are not responsible and accountable to the
general public in the way that public officials are. The extent to which the
invisible hand operates in the private sector of the economy is open to debate.
But that the market processes information better and more efficiently than
any governmental body that tries to control the whole of a country's economy
has been clearly proven by history.
The fifth area is also one of great controversy on the international scene.
The doctrine of the invisible hand would bolster the call for open and free
markets throughout the world. But these do not exist at present, nor have they
ever existed. The difference in political and economic power between
countries and between multinational corporations and local business
enterprises in less developed countries does not make for equal conditions of
competition and so for the operation of the invisible hand. The argument for
free and open international markets has thus to be made on other grounds.
A moral obligation of business is to make sure that the dynamism, the
productivity, the individual initiative, and the rewards of the free market in
fact promote the common good and not just the good of some individuals at
the expense of others. This is an obligation of business in general and an
imperfect duty of any particular business. The structures of a free market
economy must be made consonant with an acknowledged responsibility for
the common good. The task has been implicitly afoot in the concern of
environmentalists and in the call for the social responsibility of business. But
we can make the moral responsibilities of business to the common good
explicit, and we can systematically draw out the consequences of recognizing
its responsibilities to the common good.
V. Conclusions
The conclusions that I draw from this concerning the relation of the
invisible hand and the common good are that: 1) the common good in senses
one, three and four supplies necessary prerequisites for the operation of the
invisible hand, and, on the international as well as on the level of many
46
countries, is insufficiently developed and so hinders the operation of the

invisible hand; 2) the invisible hand has not proven effective in protecting the
common good in sense two on either the national or global levels; and 3)
although the invisible hand has some role to play in both domestic economy
and international economies common good in sense five, there are serious
limitations on the national level and even more on the global level.
Implementation of concern for the common good calls for serious and deep
changes in the way business is done. The invisible hand will take us only so
far. The moral requirement for business is to respond as fully and as
imaginatively as possible to a thick rather than merely to a thin notion of the
common good.
47
Part Two
Constraining the Invisible Hand

Chapter 3
Hiring Invisible Hands for Public Works

EDWARD J. NELL
I. Disentangling the Elements in the "Free Market" Interpretation

II. Stability and Dynamics
III. Rationality and Maximizing
IV. Macroeconomics and the Paradoxes of Individualism
V. Harnessing the Power of Markets
VI. Hiring "Invisible Hands" for Public Policy
[As every individual endeavors as much as he can

both to employ his capital in the support of domestic industry, and so
to direct that industry that its produce may be of the greatest value;
every individual necessarily labours to render the annual revenue of
the society as great as he can. He generally, indeed, neither intends to
promote the public interest, nor knows how much he is promoting it.]
By preferring the support of domestic to that of foreign industry he

intends only his own security; and by directing that industry in such a
manner that its produce may be of the greatest value, he intends only
his own gain, and he is in this, as in many other cases, led by an
invisible hand to promote an end which was not part of his intention.
Nor is it always the worse for society that it was no part of it. By
pursuing his own interest he frequently promotes that of society more
effectually than when he really intends to promote it. (Smith 1776,
p.423)
The famous passage introducing the "invisible hand" is reproduced here with
the first two sentences bracketed, and then certain passages below
highlighted. We will first concentrate on interpreting the highlighted
passages, and then look again at the bracketed sentences. The usual
interpretation, of course, stresses the fact that the general good of society
EDWARD J. NELL
unexpectedly results from the pursuit of private self-interest on the part of the
agents. And that is surely important. But if we look just at the phrases
italicized above, we can see another message:
he intends only his own security; and ... he intends only his own gain,
and he is ... led by an invisible hand to promote an end which was not
part of his intention.
The agents pursue their own personal goals, but the processes of the market
lead to an outcome that none intended. Moreover, the process is powerful:
By pursuing his own interest he promotes that of society more

effectually
Agents pursue their goals, but their actions in the market may combine to
produce unexpected overall, or social, outcomes that were no part of their
intentions, and this process may be highly effective.
It is usual to suppose that the "interest ... of society" refers to the common
good, and so it might. But we could give it a more modest meaning- simply
a state of society. The contrast, then, would be between the individual goals
of the agents and the general or social outcome reached, which is no part of
any agent's intention. Smith, of course, was very concerned with the relation
between individual self-interest and the public good. But the point of this
weaker interpretation is to bring out the significance of the invisible hand
itself For this last is the process which combines the activities and pursuits of
the individual agents into an overall outcome, regardless of whether that
outcome is beneficent or not. It is the dynamic of the market, and it can move
towards a good, bad or neutral position - or, indeed, towards no position at
all!
I. Disentangling the Elements in the "Free Market"

Interpretation
This sheds some light on the typical "free market" interpretation of the
"Invisible Hand," which stresses the tendency of the market to move to a
socially optimal position on the basis of private self-interested incentives.
There are several doctrines tangled up here - first, that private self-interest is
52
HIRING INVISIBLE HANDS FOR PUBLlC WORKS
consistent with a socially beneficial outcome, and second, that market

pressures, arising from agents acting in pursuit of their self-interest, will tend
to bring about this outcome. The first actually has two sub-parts; it says that
a market equilibrium exists, and further that it is optimal, in some precise
sense (Pareto optimal). The second then says that the processes of the market
will tend to reach this equilibrium. Left open is question whether there is only
one equilibrium, or many, towards which the market will tend.
The point of disentangling these ideas is to separate out the question of
market dynamics, distinguishing the way the market moves from the issue
over whether or not it moves towards a definite, well-defined equilibrium, on
the one hand, and from whether or not that equilibrium is optimal, on the
other. The point is that the market assembles the actions of a number of
individual agents, and forms them into a force that moves in a definite way,
sometimes towards a well-defined position, as Smith noted, but sometimes
away from such a position, towards nowhere, or to repetitive cycling around
a position, possibilities Smith missed.
Now turn to the bracketed sentences, and consider the question of the so-
called "optimality" of the final position. In Smith's argument the individuals
intend only "that [their] produce may be of greatest value," but end up
making the "annual revenue of the society" as great as it can be, an outcome
that obviously benefits everyone. Later interpretation turned this into
"optimal," specifically "Pareto optimal." But such a linkage may not be
warranted. For Smith the outcome seems to be a collective fulfillment of the
intentions of the individual agents - each is aiming for betterment, and the
equilibrium, indeed, makes everyone better off. The outcome at the level of
the whole may be said to be concurrent with the agents' intentions.
But, as we shall see in a minute, sometimes the market acts to frustrate
the aims of the individuals - everyone attempts to save more of their income,
but the market result is that everyone ends up saving the same or less.
Everyone intends to reduce their debt in relation to their income, but the
result is that debt to income stays the same or rises. Businesses, acting
individually, reduce wages, lowering their costs, but instead of higher profits,
they end up with reduced revenue and the same or lower profit.
Paradoxically, in each case the market moves to a determinate outcome, but
this outcome undermines rather than fulfills the aims of agents. What is at
issue here is the relationship between the working of the system as a whole
and the intentions and actions of individual agents, the "parts."
53
EDWARDJ. NELL
In other words, Smith saw that the Invisible Hand - or Hands - can work
for our benefit in various ways; but we have learned since that these hands
can also- and just as easily - strangle us or pick our pockets! Let's consider
how this can happen, starting with stability.
II. Stability and Dynamics
In the early development of mainstream theory, the tendency of the

market to move towards equilibrium was considered a natural feature of the
equilibrium. A normal equilibrium would be stable; but it was soon
recognized that many equilibria were not normal. The early studies of the
market that had taken equilibrium and stability for granted were seen to be
unwarranted.
The problem first emerged with simple supply and demand models. 1
Using conventionally sloping demand and supply curves, Marshall had
defined stability in terms of supply and demand prices converging in relation
to the movement of a parametric level of output (the day's catch of fish, in
his famous example.) Walras, on the other hand, had outputs adjusting to the
price called out by the auctioneer ("noisy and unconvincing dynamics" in the
words of Edgeworth.)
When supply and demand stood in the "normal" relationship - rising
supply and falling demand curves, as below - the market would react in a
stable manner to either process. Consider the diagram: suppose the auctioneer
calls out a price which is above the equilibrium price. Then at that price, the
amount of supply forthcoming will be greater than the amount that will be
demanded. Excess supply will tend to drive the price down. Suppose it is
below the equilibrium; then the amount demanded at such a low price will be
greater than the amount business can afford to supply- and price will rise.
Now consider Marshall's fishing boats. They dock and deposit a quantity
below the equilibrium amount. Demanders are willing to pay a much higher
price than suppliers require; hence the next day the fishing boats will stay out
a couple of hours longer, bringing in a larger amount. Suppose they overdo it;
then the supply price (indicating marginal costs) will be higher than the price
The diagrams and discussion of supply and demand are based on standard
textbook models.
54
HIRING INVISIBLE HANDS FOR PUBLIC WORKS
the market is willing to pay for that amount. It is too much and the next day
they will bring in less. Eventually they will get it right.
Figure 1
"Normal" Supply and Demand
price
Supply
p*
quantity
But is the normal picture acceptable? Surely, today, if not much earlier,
technologies often exhibit increasing returns . A little thought will tell us that
if supply curves sloped down (as they would with increasing returns) then the
market would be unstable, by one definition or the other, depending on which
curve was the steeper. Consider a diagram with two downward sloping
curves. In a thought experiment, first let the steeper be D and the shallower S.
Then when the auctioneer calls out a price that is too high, quantity
demanded is greater than quantity supplied, so price will be driven up! The
Walrasian process is unstable. But under these conditions, if the amount of
fish brought in were too low, the demand price would be greater than the
supply price, so more fish will be supplied the next trip . The Marshallian
process is stable. Now, continuing the thought experiment, suppose the
55
EDWARD J. NELL
steeper curve is S, and the shallower D; it should be evident that the results
are exactly the opposite. The Walrasian auctioneer will preside over a stable
process, tending towards equilibrium, while the fishing boats will move in
the wrong direction, progressively bringing in too much or too little.
Figure 2
Supply and Demand Curves with the Same Slope (Increasing Returns)
Moreover, if the supply curve were to slope down in a more or less linear
fashion, while the demand curve approximated a hyperbola, the possibility of
multiple equilibria would emerge. The diagram shows two equilibria, each of
which would be stable for one process of adjustment and unstable for the
other! 2
2 If the auctioneer calls out a price that is too high, in the case of the upper
equilibrium, D > S, so the price will rise; it is unstable. But if the auctioneer
called out a price that was too high for the lower equilibrium, S > D, and the
price would fall. At the upper equilibrium, if the fish were too few, demand price
> supply price, calling for more fish - stable. But at the lower equilibrium, too
few fish imply supply price > demand price, calling for still fewer fish- unstable.
56
HIRING INVISJBLE HANDS FOR PUBLIC WORKS
Figure 3
Increasing Returns and Multiple Equilibria
As a final example, it became clear early on that when "supply and

demand" analysis was applied to agriculture, a " time lag" had to be
introduced . Supply emerged all at once, at harvest time; matching it to
demand led to a price, and this price then "called forth" the next year's
supply. Even when supply and demand curves were " normal," this could lead
to fluctuations- the " hog cycle" and the "Cobweb Theorem." The cycles can
be convergent, divergent or steady, depending on the relationship between
the slopes of the supply and demand functions . Studies of agriculture and
primary production have seemed to provide clear examples. Market forces
are indeed powerful, but could work against the general good as easily as for
it 3.
3 Further examination has shown that in more genera l models compet1t1ve

processes may have multiple Pareto optimal outcomes, some or all of which may
be unstable. This is the widely accepted result of the long and detailed
examination of general competitive equilibrium, undertaken by Arrow, Debreu,
Hahn and others.
57
EDWARD J. NELL
Figure 4
The Cobweb Theorem
price
,..SJ
/
/
/
-----------~ So
/ I
/
/
Po
quantity
So instability clearly posed a problem; theoretically, it undermined claims

about the market's optimal tendencies, and, of course, as a practical matter,
unstable markets imposed huge social costs, especially in wartime. Price
controls were one answer, and they work under some conditions, but
normally only for a time. A better answer emerged, especially for agriculture
and primary products, where instability seemed to be greatest. Faced with
potentially unstable markets (often in strategically significant materials)
governments -and at times private groups -established "buffer stocks." The
idea was to stockpile commodities, buying in times of weak demand and low
prices- which would tend to keep prices from falling too much - in order to
sell in times of strong demand and rising prices, which would tend to keep
prices from rising too sharply. Instability could be controlled by drawing on
the forces of the market itself!
58
III. Rationality and Maximizing
Those forces therefore need to be understood properly and realistically, if

policies are to be designed. An important reason for believing that markets
would be stable and optimal is that markets forces were held to be based on
"maximizing behavior." Certainly Smith's agents directed industry so "that
its produce may be of greatest value," but this is much weaker than the
conventional assumption of maximizing behavior, which is said to reflect
instrumental rationality, and provide a foundation for the basic price -
quantity relationships. Demand curves were supposed to be grounded in
utility maximizing, and supply curves in profit-maximizing (each being
elaborated in progressively more sophisticated axioms.
Yet the validity of this approach has been challenged. 4 If the criticisms
are sound, the picture of markets as summing up rational choices may not be
accurate. Instead we may be looking at how markets combine various
patterns of rule-following behavior (Nell 1998). There need be no
presumption that outcomes will be optimal.
For example, Rational Economic Man argued that the rationality
hypothesis was either too strong or too weak to perform its function (Hollis
and Nell 1975). If RC models were given a strong interpretation, then the
conclusions must follow necessarily. So if the agents did not do as the model
predicted, it was the agents who were in the wrong - they were not being
rational. In a slightly weaker version, suppose that the models describe the
average or normal tendency of agent behavior, with rationality only meaning
consistency in reaching the most preferred level. If the agent does not do as
the model predicts, the agent must be inconsistent - unless we dismiss the
case as a deviation from the norm. Either way the model cannot be refuted by
the facts.
But if we adopt too weak a sense of maximizing, we may not have a
unique or precisely defined result; perhaps there could be more than one
algorithm for behavior, or the algorithm may be too loosely defined to yield a
4 Several early theorists, notably Cassels, argued that supply and demand equations
did not need to be derived from "maximizing" choices, and that the proposed
foundations were weak and implausible.
59
EDWARD J. NELL
unique result. So then we cannot discriminate. Many different kinds of

behavior could be compatible with the hypothesis. 5
So, then, if we reject the "microfoundations" approach - that our picture
of the economy must be built on functional relationships grounded in
Rational Choice - what can we say? This is not the place to present an
alternative; it is enough to say that other approaches exist. Broadly speaking
a modern "Classical" picture presents the economy in terms of sectors, each
supplying goods and services which are used in the production of each other,
and to produce the goods and services to satisfY a set of "final demands."
Suppliers earn a rate of profit on the value of capital inputs; if the system is
competitive this rate will be the same in every sector. The final demands arise
from households, businesses, governments, foreign trade, and there need be
no presumption that they are optimal. They may or may not be. This system
has its empirical counterpart in Leontief' s "input-output" tables.
Theoretically, it can be shown that under plausible assumptions there will be
a unique solution for prices, wages and profits, and for quantities,
consumption and growth. There will be plausible conditions for stability -
and plausible cases of instability. Most importantly, it can be adapted to
provide a framework for the theory of effective demand and the business
cycle.
IV. Macroeconomics and the Paradoxes of Individualism
If we set full-blooded maximizing to one side, we can concentrate on the

consequences of agents following various simple rules. That is what
macroeconomics does. In the simplest case - the IS-LM model - there will be
a rule that connects consumer spending to incomes (and some other
variables), another that connects investment spending to consumer outlay
(and interest rates), and some rules connecting the supply and demand for
money to income and interest.
5 The positivist view that the economy is ·"built up" out of individual choices. that
macro is constructed out of micro as molecules are from atoms, is not tenable.
Choices are made in a social context, exercising skills that have been learned, and
using resources that must be replaced. The stable. continued existence of this
social context depends on macro relationships.
60
But the stability of even this simplest macro model is not guaranteed,
either. It has been known for a long time that if the "propensity to invest" out
of income is stronger that the "propensity to save," the result can be runaway
expansion or contraction. Instability, in short. But there is no sound economic
reason why the propensity to invest could not (under some circumstances)
become very large.6
A more important issue in macro, however, may be that of concurrence or
non-concurrence between the aims of agents and the outcomes of the market
process. Earlier we mentioned the Paradox of Thrift, in which attempts by
agents to increase their saving lead to a determinate, stable outcome in which
employment is reduced, and saving is no greater or even less. Let's look at
this carefully.
The "Paradox of Thrift" can be explained with the simplest tools of basic
macro, familiar from the textbooks. The issue arises in the context of the
short run balance between spending and saving. We assume that aggregate
saving (both business and household) increases regularly with the level of
aggregate income. Provisionally, we ignore all other variables. Then we
consider investment, which will also be positively related, though only
weakly, to aggregate income. So the Saving Function is a line that slopes
upward markedly, with saving on the vertical axis, and income on the
horizontal. As income rises, saving rises, at a constant rate. Investment is also
a slightly upward sloping line, but much shallower. Higher levels of income
encourage or warrant higher levels of investment- but the influence is not
strong. (Long-run factors, like technological innovation, are more important.)
Where these two lines intersect, S = I, and the system is at a level of income
such that injections of spending (I) into the circulation equal withdrawals of
purchasing power (S) from it, leaving it in balance - no pressures to expand,
and none to contract.
Now suppose that all agents, fearing a war, or uncertain times, decide
they would like to save more; all then increase their saving at every level of
6 If the propensity to invest outweighs the propensity to save, the IS curve will
have a positive slope. Monetary policy will then correspond to the Walrasian
process, fixing the rate of interest - Alan Greenspan is the auctioneer, calling out
interest rates. Fiscal policy will correspond to Marshall's process. If the IS
slopes down, both processes will be stable; but if the IS has a positive slope,
either monetary or fiscal policy will be unstable, depending on how steep the
slope is in relation to the LM (NELL, 1991, Ch. 18).
61
EDWARD J. NELL
income. Accordingly the relatively steep line, the Saving Function, shifts up.
But it will now intersect the relatively shallow line, the Investment Function,
at a lower level of income and a lower level of saving. The effort of everyone
to save more in the short run has resulted in everyone saving less!
Figure 5
The Paradox of Thrift
S,l
S"
I
v
Other, similar, paradoxes can be identified . In the paradox of debt

reduction, agents individually try to reduce the ratio of their debt to their
income, by paying down debt. (This is equivalent to increasing their saving
ratio; paying down debt withdraws purchasing power from the stream of
circulation.) The result is a proportional reduction of income so that the ratio
is unchanged - unless a lower level of income also reduces investment, in
which case income will be reduced further, and the ratio of debt to income
with actually rise! The agents try to reduce a cost to themselves, only to have
the processes of the market undermine and reverse their action.
Wage reduction deserves to be spelled out in some detail. It is hard to see
in a textbook model, but shows up very clearly in an alternative presentation
(Nell, 1996, 1998). So let's use a diagram, with aggregate output, Y, on the
vertical axis, and employment on the horizontal. The assuming short-run
62
constant returns, the output for every level of employment will be given by Y
= aN, drawn as a line rising from the origin.? The real wage bill will be a line
also arising from the origin, shallower than Y; two are drawn here. The light
one is labeled W', the darker, representing a lower wage rate, is W". (The
slope of W - the angle it makes with the horizontal axis - is the real wage
rate. So a shallower line means a lower wage rate.) For simplicity we will
assume that consumption spending absorbs all and only the wage bill. So W
= C. Investment, then, can be taken as fixed, I. So total demand, abstracting
from Government for the moment, is C + I, a line which will be parallel to
the wage bill, W. (Investment could be assumed to increase as the economy
expanded; in that case C +I would be steeper than W.)
Let the wage bill initially be W" -corresponding to the higher wage rate.
Then the level of output and employment will be those shown by the
intersection of the lighter line C" +I with Y=aN. Now suppose that employer
pressure makes it possible for businesses to reduce the wage rate. This will
lower costs for every employer; it is in the interests of each business to lower
its costs. The new wage bill will be W', and the new aggregate demand will
be C' + I. Both output and employment will be lower. Profits, however, will
be unchanged. (Unchanged, on the assumption that I is the same. But if I is
lower at lower levels of employment and output, then profits will be lower,
too!)
7 Studies of corporate costs provide strong evidence that over large ranges of
production unit costs are constant.
63
EDWARD J. NELL
Figure 6
The Paradox of Wage Reduction
y
Y=aN
N' N" N
(Perhaps we could call these the "paradoxes of individualism," on the

grounds that they arise because of differences between the positions of "the
parts" and "the whole." Individual agents must take their income or revenue
as given, for example, and make the best choices. But for the system as a
whole, income or revenue is a variable, one to be determined, in part, by what
the agents, taken together, do .)
So in modern conditions it is pretty clear that there can be both serious
instability and perverse market outcomes. The system appears to generate
business cycles. The market can make us better off, and certainly has, but it
can also crash, as it frequently has. In particular, inflation has been a constant
presence, or threat; at times it has been endemic. Unemployment has likewise
been pervasive- and both have fluctuated sharply. Only Governments have
had the resources or the power to deal with these problems. In the modern
world - since the advent of Mass Production - the power of the market has
had to be directed and stabilized by Government, something not foreseen at
all by Adam Smith.
64
V. Harnessing the Power of Markets
For Adam Smith, arbitrary grants of monopoly, internal tariffs, and

regulations governing prices and access to markets stood as crucial
Mercantilist barriers to prosperity. Eliminating these would open the way for
the Invisible Hand to carry the economy forward. He simply had no idea that
the Hand could lead us away from the promised land, or to an outcome the
opposite of what the agents intended. Smith was right about the power of
market processes, and was also right that they could be highly beneficial, but
he simply did not see that that same power could work perversely. To prevent
this and to harness the power calls for regulation and direction.
But there are many different ways of regulating and directing markets.
One is through discretionary policy - adapting policy to current conditions.
This has the disadvantage of requiring political decisions every time the
conditions of the market change. At the best of times, this will be difficult,
and when politics is antagonistic, it may well be impossible.
Automatic stabilizers, however, avoid this and provide an example of
how policy can harness the forces of the market. The budget of the central
government is perhaps the best example, and the most relevant here. When
the private sector slumps, unemployment rises, and the central government
must pay unemployment compensation and welfare. So government
expenditures rise. Because incomes are low, however, tax revenues will be
low. Hence a deficit will emerge. But this will stimulate the economy,
preventing the slump from deepening. On the other hand, when the private
sector is booming, tax revenues will be high, while unemployment payments
and welfare will be low. The Government will tend to run a surplus, which
dampens the economy and tends to prevent the boom from running out of
control.
VI. Hiring "Invisible Hands" for Public Policy
So the question is, when faced with undesirable market behavior, can we
design policies that will reverse the direction of the market pressures; making
the Invisible Hands work for us instead of against us. (This is not the only
policy question; our concern here is with market dynamics. The question of
65
EDWARDJ. NELL
the equity of market outcomes, especially the distribution of income and

wealth, is a separate issue.)
Consider a policy design that would harness the forces of the market to
solve the twin problems of unemployment and inflation. (In principle - in
practice there will always be unforeseen complications.) Unemployment and
inflation are cases of market failure, resulting from market processes working
against the public interest - the Invisible Hand picking our pockets, as it
were. They are connected, of course, because a pool of unemployed labor
will tend to act as a drag on wages, dampening inflation. (Neither theory nor
U.S post-War evidence supports the view that low unemployment must lead
to rising wages (cf. Eisner, in Nell and Forstater 2003). If properly trained
and seasoned labor could be supplied to the private sector during a boom, in
conjunction with a surplus that would tend to dampen the boom, this would
reduce inflationary forces. Further, if labor being released by the private
sector in a slump could be absorbed in public works, while providing a
deficit-based stimulus, this would tend to limit the downswing.
So let us put together the principle of buffer stocks, which can stabilize
prices in a particular market, and the principle of countercyclical budgets,
which will tend to stabilize aggregate demand. The idea is to design an
institution - the Employer of Last Resort- which will administer a training
and public works program, expanding in the slump and contracting in the
boom. But this means it will treat labor as a buffer stock, absorbing labor in
the downswing and releasing it in the upswing, always at a fixed wage rate.
This stabilizes the wages, and, in effect, sets a market-enforced minimum
wage. Moreover, since it will offer a job to anyone willing to work, it
guarantees full employment. If workers want a higher wage, they can get a
job in the private sector, or elsewhere in public service. But they have a right
to the offer of a job (not a right to keep it - that they have to earn by proving
themselves at work).
So in hard times, when the private sector is in a slump, the public sector
will absorb labor, training it and putting it to work on public projects- but in
a boom, the private sector will bid labor away from public works. But
because labor is being treated as a buffer stock, wages will not tend to fall
during a slump nor will they rise in a boom (within limits). Moreover, public
works will expand in a slump, increasing public spending when taxes are
falling, thus creating deficits, keeping aggregate demand up; and public
66
works will contract in a boom, when tax collections are rising, allowing the
budget to move into surplusS.
Labor will tend to move back and forth between public and private
employment in response to market conditions, stabilizing the wage rate. Tax
revenues will likewise adjust automatically. To establish the institutions to
make this work will require setting up an administration that will provide
training and assign workers to projects, which they will have to define and
oversee. These projects will include environmental cleanup, simple repairs to
poor people's housing, public health, remedial education, athletic programs
for disadvantaged, inner city services, and many other "public goods." 9 And,
of course, this scheme gives rise to a higher level of aggregate output than an
exactly equivalent (equally expensive) system of unemployment insurance
and welfare (since the unemployed are not put to work, but supported while
doing nothing).
But the main point is that, once established, the Employer of Last Resort
system will work on its own, as if guided by an Invisible Hand.
8 Won't this create the risk of dangerous deficits, and run up a burden of debt over
time? The Federal budget should be set to balance at a high level of private sector
employment. The stabilizing effects of the program will tend to keep it there -
but without generating inflationary pressure. (If such pressure does develop, and
nothing else works, discretionary spending cuts can always be made.) Deficits do
not drive up interest rates or "crowd out" investment; those are myths. They do
have minor effects on bank reserves and financial markets, but these are easily
managed by the Fed and/or the Treasury. As for the long-term, by keeping the
economy at full employment the ELR will raise the rate of growth. So even if
debt accumulates faster, wealth will be growing faster. It will be part of the job
of the administrators of the program to keep these in balance over time.
9 Surely state and local governments will try to fob off their responsibilities onto
the ELR? This happened during the Carter Administration. But it can be
prevented. Among other possibilities, state and local governments could be
required to "bid" for ELR projects and workers. Part of their "bid" would be
demonstrating that their use of the ELR workers would not displace existing
programs and responsibilities.
67
EDWARDJ. NELL
References
ARROW, K., HAHN, F.: General Competitive Analysis, Edinburgh (Oliver and
Boyd) 1971.
HOLLIS, MARTIN, NELL, E.J.: Rational Economic Man, Cambridge (Cambridge
University Press) 1975.
NELL, E. J., FORSTATER, M.: Reinventing Functional Finance, Cheltenham
(Edward Elgar) 2003.
NELL, EDWARD J.: Transformational Growth and Effective Demand, London
(Macmillan) and New York (New York University Press) 1992.
NELL, EDWARD J.: Making Sense of a Changing Economy, New York and London
(Routledge) 1996.
NELL, EDWARD J.: The General Theory of Transformational Growth, Cambridge
(Cambridge University Press) 1998.
SMITH, ADAM: An Inquiry into the Nature and Causes of the Wealth of Notions
(1776), New York (The Modem Library), 1937
68
Chapter 4
A Market Failures Approach to Business Ethics

JOSEPH HEATH
I. The Profit Motive

II. What Justifies Profit?
III. Milton Friedman
IV. A Market Failures Based Code
V. Further Directions
"Business ethics" is widely regarded as an oxymoron. The only way to be

a good soldier in an unjust war is to disobey orders, or maybe even to desert.
Many people believe, along similar lines, that the only way to maintain one's
ethical integrity in business is not to go into business. The reasons for this are
not hard to find. Students are still routinely taught in their introductory
economics classes that in a market economy, when engaged in market
transactions, individuals act out of self-interest - whether it be by
maximizing profits as producers, or by maximizing satisfaction as
consumers. This sets up an almost indissoluble link in people's minds
between "profit-maximization" and "self-interest." As a result, anyone who
thinks that the goal of business is to maximize profits will also tend to think
that business is all about self-interest. And since morality is widely regarded
as a type of constraint on the pursuit of individual self-interest, it seems to
follow quite naturally that business is fundamentally amoral, if not immoral.
The problem is that the association between profit-maximization and self-
interest so often taken for granted is based upon a naive and inadequate
theory of the firm. Profit-maximization and self-interest are not the same
thing, and the failure to distinguish adequately between the two can be a
source of enormous confusion. Business ethics, as a subject, is essentially
concerned with the moral responsibilities of managers. Managers often find
themselves placed in circumstances in which the imperative to "maximize
JOSEPH HEATH
shareholder value" conflicts with their self-interest. Thus there are many
cases in which profit-maximization should be viewed as a managerial
obligation, not as an expression of self-interest.
Because of this somewhat elementary confusion, there has been a marked
tendency in the business ethics literature to dismiss out of hand views that
take the profit motive seriously. In particular, Milton Friedman's classic
article "The Social Responsibility of Business is to Increase its Profits," is
more often treated as a piece of apologetic than as a serious piece of moral
reasoning. 1 This is unfortunate, since the moral laxity on display in
Friedman's work is not so much a symptom of an inadequate normative
framework as it is a consequence of specious economic reasoning. Or so I
will attempt to show.
The more serious consequence of this confusion is the widespread
perception that, in order for business ethics to be genuinely ethical, it must
extend managerial responsibility to groups other than shareholders. This is, I
believe, often the intuition underlying "stakeholder" theories of managerial
responsibility. In this paper, I will argue that such efforts are misguided.
Profit-maximization, understood as an obligation, rather than as an
expression of self-interest, provides a perfectly legitimate platform for the
development of a robust moral code. However, if profit-maximization is an
obligation, the question naturally arises where this obligation stems from. It
is in seeking to justifY the profit motive that we discover that the appropriate
form of managerial responsibility is not to maximize profits using any
available strategy, but rather to take advantage of certain specific
opportunities for profit. In many cases, the set of conditions under which
profit-seeking is permissible is reflected in the legal environment in which
firms operate. I will argue that business ethics is best understood as a set of
additional constraints that preclude legally permissible, but not normatively
justifiable, profit-maximization strategies.
MILTON FRIEDMAN, "The Social Responsibility of Business is to Increase its

Profits," New York Times Magazine, (Sept. 13, 1970).
70
A MARKET FAlLURES APPROACH TO BUSINESS ETHICS
I. The Profit Motive
Andrew Stark's controversial 1993 Harvard Business Review article,

"What's the Matter with Business Ethics?" argued that conventional business
ethics was "largely irrelevant for most managers," because it failed to offer
them any "practical" advice. 2 "Moral philosophy," he argued, "tends to value
altruism, the idea that an individual should do good because it is right or will
benefit others, not because the individual will benefit from it." 3 As a result,
business ethicists have had too little to say about "the potential conflict
between ethics and interests," and in particular, how managers should handle
such conflicts when they arise.
This article had many people nodding their heads in agreement. But to see
just how peculiar the claim is, suppose that the subject had been medical
ethics instead of business ethics. Substitute "doctors" for "managers"
throughout. Now imagine criticizing medical ethics on the grounds that it
fails to offer doctors any "practical" advice on what to do in cases where the
imperatives of patient care conflict with their self-interest. Suppose the
patient doesn't really need an operation, but the doctor could make a lot of
money by performing it anyway. What to do, what to do?
1 would suggest, pace Stark, that we don't need professional ethicists to
tell us where our obligations lie in such cases. Everyone knows that when
there is a straightforward conflict between our self-interest and our moral
obligations, the moral obligations win, at least from the moral point of view.
This is not "ethical absolutism," as Stark maintains, it is simply the logic of
moral justification. The question of when we may be forgiven for
disregarding our moral obligations, i.e., acting immorally, is a separate one,
and is in no way specific to the domain of business ethics.
So why does Stark's argument sound even remotely plausible, whereas a
comparable argument in medical ethics would be dismissed out of hand? The
confusion has two distinct sources. The first arises from the way that
introductory economics is usually taught. The standard microeconomics
textbook starts out with the assumption that individuals maximize utility.
When it comes to particular goods, these utility functions can be represented
2 ANDREW STARK, "'What's the Matter With Business Ethics," Harvard Business
Review (May/June, 1993): 38-48.
3 Ibid. p. 40.
71
JOSEPH HEATH
as a set of indifference curves. These indifference curves are then taken to

provide the supply and demand curves. The thesis that individuals maximize
utility is interpreted to mean that consumers will seek to maximize
satisfaction, and suppliers will seek to maximize profits. Finally, in order to
make the model more "realistic" consumers get aggregated together into
"households, " and suppliers into "firms" - each of which is thought to
maximize some joint utility function.
While everyone understands that "the firm" is something of a black box
in this analysis, the result is still an unhelpful blurring of the boundaries
between the pursuit of self-interest and the maximization of profits. Stark, for
instance, variously describes the conflict that managers face as one between
"self-interest and altruism," "ethics and interests," "ethical demands and
economic realities," "moral and financial costs," "profit motives and ethical
imperatives," and even "consumer's interests" versus the "obligation to
provide shareholders with the healthiest dividend possible."4 Here we see a
clear blurring of the distinction between self-interest, profit-maximization,
and the obligation to shareholders.
We understand implicitly that the professional conduct of doctors is to be
entirely governed by their obligations to their patients, and thus that they are
not permitted to let consideratio ns of self-interest intrude. Profit-
maximization has precisely the same status for managers. To my knowledge,
no one has ever tried to defend the managers of RJR-Nabisco, or Enron, on
the grounds that they were simply acting in their own self-interest. Of course,
if the incentive systems have been properly designed, managers will find it to
be in their interest to maximize shareholder value (in the same way that
doctors generally find it to be in their interest to cure their patients). But this
is accidental and irrelevant from the moral point of view. In the case of a
conflict, the obligations simply trump the relevant set of interests. Where
things get interesting is when multiple obligations conflict, as in the case of a
doctor who can improve a patient's chances of survival by lying to him about
his condition, or of a manager who finds herself able to please investors by
initiating an unnecessarily severe downsizing.
The second major source of confusion stems from the moral status of the
objective sought by managers- profit maximization. The doctor's obligations
to the patient flow quite naturally from the objective, which is to restore the
patient to health. Health is widely regarded as a good thing, and thus the
4 Ibid, p. 44.
72
doctor's actions serve to promote a state of affairs that is morally desirable.

This makes the doctor's actions directly justifiable, even intrinsically
altruistic. Things are more complicated in the case of business. It is not clear
that profits are intrinsically good. Furthermore, when a manager makes a
decision that disadvantages workers in order to benefit owners, the profit
maximization imperative generates a distributive transfer that is by no means
morally sanctioned. In fact, under the typical set of circumstances, the
transfer will be regressive, and thus problematic from the moral point of
view.
The asymmetry arises from the fact that profit maximization is only
indirectly justified. It is useful to note that this problem is one that business
ethics shares with legal ethics. The adversarial trial system imposes upon
lawyers an obligation to do whatever is in their power to defend or advance
the interests of their client, even when these interests are highly refractory to
the concerns of justice. Thus the professional obligations of lawyers often
conflict with the imperatives of everyday morality. What justifies their
behaviour is the fact that they operate in the context of an institution with
differentiated roles. The desirable outcome is a product of the interaction
between individuals acting in these roles, none of whom are actually seeking
that outcome. Justice is best served when there is both vigorous prosecution
and vigorous defence.
Thus the effective trial lawyer "promotes an end which is no part of his
intention." The adversarial system may, for example, maximize acquittal of
the innocent, even though neither the prosecution nor the defence adopts that
as their objective. As a result, neither lawyer's conduct can be justified by the
intended outcome. It is justifiable only through the consequences that the
pursuit of this outcome leads to, when combined with the actions of the
others.
The same can be applied to the case of managers. The manager should
seek to maximize profits for the same reason that the defence lawyer should
seek to have his client acquitted - not because the acquittal of his client
would be a good thing, and even because his client wants to be acquitted, and
is paying the bill, but rather because the adversarial trial system as a whole is
taken to be the best form of institutional arrangement to serve its appointed
function. This is why one cannot do legal ethics without a broader
appreciation of how the legal system as a whole functions, and what valuable
tasks the various roles are thought to discharge. Similarly, one cannot do
73
JOSEPH HEATH
business ethics without some appreciation of what justifies the system of

private enterprise.
Thus the straightforwardly moralizing critique of the profit motive is
jejune (comparable to attacking lawyers for "defending rapists and
murderers"). We need to understand why criminals should be entitled to the
best possible defence, in order to understand the responsibilities of lawyers.
Similarly, we need to understand why corporations should be entitled to
pursue profits, in order to understand the responsibilities of managers.
II. What Justifies Profit?
The right of corporations to earn profits is sometimes regarded as self-

evident. This conviction usually stems from a set of broadly Lockean
convictions, which suggest that individuals come naturally equipped with a
set of property rights prior to the institution of government. Profit-
maximization is then understood as the attempt to augment these holding
through labour input or voluntary exchange - neither of which the state has
any obvious authority to restrict.
The problem with this Lockean view - apart from the fact that the
underlying conception of rights is deeply problematic - is that corporations
are not individuals, they are highly artificial legal constricts. Furthermore, the
corporate organizational form provides individuals with a number of very
tangible advantages that they do not enjoy as private citizens. The most
significant among these is limited liability- the ability to insulate their own
private resources from those of the corporation, so that they cannot be
pursued by creditors in the event of default. Because of this, creating a
corporation is widely regarded as a privilege, not a right. This makes it
legitimate for the state to impose certain obligations, in return for the
privileges granted.
Many of the corporations chartered by the state are non-profit. They are
specifically prohibited from showing more than a modest revenue surplus. So
why permit an exception for other firms? To put it in Marxian terms, why
should society tolerate the private appropriation of the social product?
The answer to this question is somewhat complex. Basically, it is that
society wants to encourage competition between suppliers. This competition,
when combined with competition between purchasers, will affect the prices at
74
A MARKET FAILURES APPROACH TO BUSINESS ETHICS
which goods trade. Under the correct circumstances, competition will push
prices toward the level at which markets clear- i.e., suppliers will not be left
with unsold merchandise, and consumers will not be left with any unsatisfied
demands. When this occurs, it means that society has succeeded in
minimizing the overall amount of waste in the economy. It means that fewer
resources will have been spent producing goods that no one wants, at the
expense of goods that people do want.
Thus the primary reason for introducing the profit motive into the
economy is to secure the operation of the price mechanism. The price
mechanism is in turn valued for its efficiency effects. It allows us to
minimize waste. The formal proof of this is often referred to as "the first
fundamental theory of welfare economics" (hereafter FFT), or else, in a nod
to Adam Smith, the "invisible hand theorem." The central conclusion is that
the outcome of a perfectly competitive market economy with be Pareto
optimal - which means that it will not be possible to improve any one
person's condition without worsening someone else's.
The importance of the price mechanism is often underestimated. Since the
profit orientation of firms definitely has some adverse social consequences,
this can sometimes make it difficult to see what the big gains are that justify
our tolerance for the various abuses. In order to put things into perspective, it
is helpful to consider the difficulties that we would face trying to make
decisions in the absence of a set of prices. This is the situation that planners
often confronted in the former Soviet Union. Imagine that one of your plants
increases its production, so that you now have the capacity to produce an
extra 500 tons of plastic. What to do with this material? You need to figure
out where it is most needed. But how do you decide? Suppose, to simplify
enormously, that there are two possible uses: to make toothbrushes or soup
ladles. The question is, which do people need more of?
In a market economy, these needs will be expressed in the form of
relative willingness to pay. If stores have too many ladles, and not enough
toothbrushes, they will be willing to order more toothbrushes, and pay more
for them. This in turn means that the toothbrush makers will be willing to pay
more for the plastic. Thus if all firms sell to the highest bidder, the resources
will be channelled toward the use for which there is the greatest need. But if
there is not a competitive market for all these goods, not only will firms not
have the incentive to engage in the necessary transactions, but the absence of
prices will make it difficult for anyone even to determine which transaction
should be occurring. Planners in the former Soviet Union used to get around
75
JOSEPH HEATH
this problem by sometimes looking at commodity prices in Western Europe

and North America, and using these figures to do calculations for their own
economy. In fact, they used to joke that in the event of a global communist
revolution, it might be worthwhile to keep Hong Kong capitalist, so that
everyone else would know what prices their goods should be trading at.
The joke has a very serious underlying point. Without prices, you simply
cannot organize a complex economy, whether it be capitalist, socialist, or
communist. And not just any prices will do. There are an enormous number
of price points at which exchanges can occur. In cases where there is only
one supplier or one consumer, this gives one side considerable power to
dictate terms. Under such conditions, there is no reason to expect that the
price level chosen will be the price that clears the market. Thus the price
system will not induce efficiency. But when there is more than one supplier,
or more than one customer, each one is in a position to undermine the
negotiating power of the other. If one supplier insists on a price that is too
high, the customer can go to the competition. The competitor is then able to
make a profit by undercutting the other one's price, making up for it through
a larger volume of sales. The result is a race to the bottom among the
suppliers, in which they competitively underbid one another until the market
clears, and all profit disappears.
Thus the central rationale for having private profit-seeking firms is to
establish competition among suppliers and consumers. This competition
drives prices towards market-clearing levels, allowing society in turn to
generate a more efficient allocation of its resources and labour time.
It should be noted that this concern with competitive markets, and
market-clearing prices, is not simply an abstract philosophical theory about
what might justify profit-maximization. The entire legal structure of the firm,
along with the regulatory environment, has been organized in such a way as
to promote not just competition, but the precise type of competition that is
likely to generate market-clearing prices. This is true of everything from anti-
trust to consumer protection law. In the past decade in Russia, corporations
have been known to maximize profit by blowing up each other's factories
and assassinating each other's chief executives. Much of the massive legal
apparatus that governs corporate behaviour in more mature capitalist
economies is designed to ensure that firms seek to maximize profits through a
much more limited set of strategies - viz. those strategies that are likely to
generate more efficient production, along with a more efficient allocation of
goods and services in the economy.
76
A MARKET F AlLURES APPROACH TO BUSINESS ETHICS
Thus, if we ask what the obligations of managers are, the answer can be
provided quite directly. The function of the market economy is to produce the
most efficient use of our productive resources possible. This can be done,
roughly speaking, by achieving the price level at which all markets clear. The
role of the firm in that economy is to compete with other suppliers and
purchasers for profits in order to drive prices to that level. Thus managers are
obliged to do what is necessary in order for the firm to maximize profits in
this way. Profits show that the balance of "needs satisfied" to "resources
consumed" is positive, while losses show that the resources would have been
put to better use elsewhere. Hence the old saying that if we penalize a man
for making a profit, we should penalize him doubly for showing a loss.
III. Milton Friedman
The approach to business ethics that takes profit maximization as a central

concern is often viewed with suspicion, since it has traditionally been used
more as an apologetic for irresponsible behaviour than as a platform for a
good-faith effort to develop a code of ethics.
As we have seen, in order to be plausible, the profit-maximization
approach to business ethics cannot identify profit-maximization with
individual utility-maximization on the part of managers. The naive version of
the "invisible hand" view, according to which markets miraculously
transform private vices into public virtues, has clearly become obsolete in the
era of professional management.
Thus when Milton Friedman argued that the social responsibility of
business is to increase its profits, his primary emphasis is on the fiduciary
relationship between managers and shareholders. 5 The manager is in a
similar position with respect to the shareholder that the lawyer is in with
respect to a client - he is expected to advance the interests of the principal,
not his own. This requires trust, and hence moral obligation, between the two
parties. And of course, there are many ways in which the lawyer can exploit
this relationship for private gain, as can the manager.
5 M. FRIEDMAN: 'The Social Responsibility of Business is to Increase its Profits"

and MILTON FRIEDMAN, Capitalism and Freedom Chicago (University of
Chicago Press) 1962.
77
JOSEPH HEATH
This makes Friedman's view a genuine code of ethics, and not simply an
apologia for self-interest. However, while Friedman is clear that managers
are subject to genuine moral constraint, he is less than clear about the source
of these obligations or constraints. At one point, he suggests that the manager
is bound to assist the shareholder in the satisfaction of his or her desires, and
that profits just happen to be what most shareholders want. This is clearly
absurd - the manager is not the personal servant of the shareholder. The
shareholder might like to have the manager do his laundry, and if he can
supply appropriate incentives, he may even succeed in getting the manager to
do it. But there is no sense in which the manager is morally obliged to do so,
by the mere fact that the shareholder desires it. The manager's responsibility
toward the shareholder is clearly restricted to the latter's investment returns.
Or, as Friedman puts it when he is being careful, the responsibility of
managers is "to make as much money for their stockholders as possible." 6
However, even this more restricted concept of managerial responsibility
is not enough to explain the source of the obligation. Simply making a
promise is not enough to generate an obligation, in cases where the end in
view is itself not morally justifiable. Promising to help a friend rob a bank
does not generate an obligation to rob the bank. Thus the manager's
obligation to help the shareholder maximize profits must be derivative of the
latter's entitlement to do so. And since it is the FFT that justifies this
entitlement, Friedman's argument derives managerial responsibilities from
the efficiency argument for capitalism on the whole.7
This implicit dependence upon the FFT is discernible in a seemingly
innocuous caveat that Friedman tacks onto the formulation of his central
thesis. Here is what he says:
The view has been gaining widespread acceptance that corporate
officials and labor leaders have a "social responsibility" that goes
beyond serving the interests of their stockholders or their members.
This view shows a fundamental misconception of the character and
6 M. FRIEDMAN: Capitalism and Freedom, p. 133.

7 Friedman also has a parallel argument concerning the role of markets in
promoting freedom. But this line of thinking is, in my view, so riddled with
fallacies that it does not merit serious consideration. Furthermore, it seems fairly
obvious that Friedman's preference for market solutions to almost every social
problem came from his conviction that governments were inefficient and markets
were efficient.
78
nature of a free economy. In such an economy, there is one and only

one social responsibility of business- to use its resources and engage
in activities designed to increase its profits so long as it stays within
the rules of the game, which is to say, engages in open and free
competition, without deception or fraud. 8
Thus he argues that managers must maximize profits, not tout court, but
rather subject to the "rules of the game," and in particular, subject to the
constraint that they do so "without deception or fraud." The fraud constraint
is unexceptional and redundant, since it is illegal. (It goes without saying, for
instance, that one should not profit through theft or murder.) But why not
deception? One is allowed to win a chess game through deception. In fact,
deception is a common feature of strategic interactions. What's wrong with
making money through deception?
The answer cannot be that the general moral imperative against lying is
binding upon managers in all contexts. Everyday morality compels us to treat
others as we ourselves would like to be treated, and yet the last thing we want
a manager thinking about, before declaring a giant year-end clearance sale, is
how she would feel if the competition did the same to her. More generally,
price competition is an interfirm prisoner's dilemma - the outcome is
suboptimal for all the competitors. Many moral norms have as their primary
function the elimination of such collectively self-defeating interaction
patterns. Yet in the case of businesses, we want them to remain stuck in the
prisoner's dilemma. In fact, any agreements designed to eliminate these
outcomes are specifically prohibited by law. So we cannot simply appeal to
the fact that an action is prohibited by everyday morality as grounds for
imposing this same prohibition upon managers, unless we want to adopt the
very strict universalist view that morality does not permit any institutional
differentiation.
Thus the problem with deception, in Friedman's view, cannot arise from
any strict deontic prohibition. The problem with deception is that it violates
one of the conditions needed for the economy to achieve an efficient
outcome. It is these conditions that Friedman is adverting to as well when he
talks about an obligation to engage in "free and open" competition.
The relationship between honesty and efficiency in market transactions
requires very little demonstration. If suppliers lie to consumers about the
8 M. FRIEDMAN: Capitalism and Freedom, p. 133.
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JOSEPH HEATH
character of the goods that they are acquiring, then the prices at which their
exchanges are concluded are not going to reflect the actual need for the good
in question. This will generate inefficiencies in the economy.
To take a very concrete case, consider the so-called "goulash capitalism"
episode in Hungary. Shortly after the transition from communism to
capitalism, Hungary was struck by a wave of lead poisoning. The source of
the epidemic was eventually tracked down to paprika. After privatization,
several paprika suppliers began adding ground-up paint - much of it lead-
based - to the spice, in order to improve its colour. In other words, a
competition developed to produce the best-looking paprika, not the best
quality paprika. Needless to say, if consumers had been properly informed as
to the quality of the goods they were purchasing, they would not have bought
any. Thus the deception perpetrated by these firms resulted in a huge loss of
welfare to consumers. Health authorities eventually had to step in and destroy
the entire paprika supply in the country, in order to eliminate all the
contaminated goods.
This is a case of what economists call "market failure." In order for the
FFT to obtain, a set of very restrictive conditions must be satisfied. These are
referred to as the Pareto-conditions. The state in which all the Pareto
conditions are satisfied is often called, somewhat misleadingly, "perfect
competition." When one or more of the Pareto conditions are not satisfied,
the competitive equilibrium of a market economy will be less than Pareto-
optimal. When a Pareto-inferior outcome is realized, this is referred to as a
market failure.
One of the Pareto conditions specifies that information must be
symmetric. Each party to the transaction must have the same information (not
only about the prices and goods that are directly relevant to the exchange, but
about all other prices and goods in the economy as well). Thus what
Friedman is suggesting, in effect, is that managers have no right to take
advantage of market imperfections in order to increase corporate profits. The
set of permissible profit-maximizing strategies is limited to those strategies
that would be permissible under conditions of perfect competition.
In this view, there is a natural complementarity between law and morality.
As mentioned, the primary function of the legal regulation of the market is to
prevent market failures- both by ensuring that firms do not collude to escape
the prisoner's dilemma that competition imposes upon them, or by preventing
them from displacing costs in a way that is not fully reflected in the price at
which goods trade. In a perfect world, it would be possible to create perfect
80
markets. However, in the actual world, the legal mechanism is a somewhat

blunt instrument. In many cases, the state simply lacks the information
needed to implement the necessary measures (sometimes because the
information simply does not exist, but often because the state has no way of
extracting it truthfully from the relevant parties). Even when the information
can be obtained, there are significant administrative costs associated with
record-keeping and compliance monitoring. Thus the deadweight losses
imposed through the legal mechanism can easily outweigh whatever
efficiency gains might have been achieved through the intervention. This
makes legal regulation unfeasible.
Moral constraints, on the other hand, are subject to no such costs.
Corporations, for instance, are often in a position where they can produce
misleading advertising that stops short of outright falsity. In a perfect world,
advertising would provide nothing more than truthful information about the
qualities and prices of goods. However, the vagaries of interpretation make it
impossible to prohibit anything but the most flagrant forms of
misinformation. Thus misleading advertising stands to false advertising as
deception does to fraud. It is something that would be illegal, were it not for
practical (or perhaps even accidental) limitations on the scope of legal
regulation. Profiting from such actions is therefore morally prohibited,
because it runs contrary to the objectives that the market system was
instituted to promote.
Friedman's view is often rejected on the grounds that it is morally lax. It
basically lets business of the hook on the question of social responsibility.
The above analysis shows, however, that Friedman's argument is not a
Trojan horse for naked self-interest. Despite some confusion, it is clear that
Friedman's managers have genuine ethical responsibility to shareholders, and
that this responsibility is derived from the FFT. The problem is that Friedman
arbitrarily limits the set of obligations to those that support only some of the
many Pareto conditions.
For example, Friedman argues that pollution reduction is one of the
illegitimate responsibilities pressed upon managers in the name of "social
responsibility." But pollution is a negative externality- a cost associated with
some economic activity that is transferred to a third party without
compensation. These externalities exist because the set of markets is
incomplete. We cannot exercise property rights over the air that we breathe,
for example. As a result, while we can charge people for dumping noxious
substances on land that we own, we cannot do the same when they dump it in
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JOSEPH HEATH
the air. For this reason, one of the Pareto conditions specifies that there must
be no externalities. Any corporation that pollutes is essentially profiting from
a market imperfection. This means that there is no difference, from the moral
point of view, between deception and pollution - both represent
impermissible profit-maximization strategies. Friedman's decision to prohibit
deception, while giving the wink to environmental degradation, is arbitrary
and unmotivated.
Figure I shows the basic structure of Friedman's normative framework.
The overall set of profit maximizing strategies is partitioned into three
categories, separating out the immoral and the illegal strategies from the
normatively acceptable ones. The efficiency standard can be used to make
both cuts. The "acceptable/unacceptable" distinction is imposed by the
efficiency properties of the market system as a whole. The set of
unacceptable strategies can then be subdivided into "immoral/illegal" using a
transaction cost or regulatory cost analysis.
Figure 1
Friedman's Normative Framework
Profit maximization strategies
Acceptable Immoral Illegal
e.g. e.g. e.g.

lowering price, pollution, deceptive fraud, theft, embezzlement, false
improving quality advertising advertising
IV. A Market Failures Based Code
The above reflections suggest that there is no reason to think that a

business ethics focused on profit-maximization cannot deal with the
obligations that have traditionally been described under the heading of
82
"social responsibility."9 What so often annoys people about corporations -

and what gives profit-seeking a bad name - is the exploitation of one or
another form of market imperfection. People generally have no problem with
companies that make money by providing good service, quality goods, low
prices, and so forth. In my opinion, if all companies fully internalized all
costs, and charged consumers the full price that production of their goods
imposed upon society, it would be impossible to make the case for any
further "social responsibility" with respect to, for example, the environment.
In fact, one of the major advantages of the market failures approach to
business ethics is that it is the only one that is able to pick out the "right"
level of pollution. There can be no ethical imperative to eliminate pollution
completely, since without some pollution there would be no economy.
Society as a whole must be willing to accept some degradation of the
environment in exchange for the goods produced. What is important is that
the level of pollution be determined by people's actual preferences, not
simply the subset of those preferences that happens to be legally enforceable.
In other words, the cost of production should be the same as the social cost.
This is precisely the state that would obtain if businesses derived no profit
from displacement of costs that markets do not internalize.
What other sort of constraints does this approach impose? Imagine for a
moment a deontically perfect world, in which everyone could be counted on
to comply with all moral requirements. How should an ethical corporation
behave in such a world? The answer is quite simple. The firm should behave
9 In referring to "social responsibility" I am implicitly drawing a somewhat rough-

and-ready distinction between internal and external obligations. A corporation is
usually an organizational hierarchy. Thus the manager is involved with two very
different types of relationships- those with other members of the organizational
hierarchy, and those with individuals outside of it. Employees of a firm are
"inside," for example, whereas customers are generally "outside" - precisely
because the latter are not under the control of the organization in the way that the
former are. Thus environmental issues, consumer relations, business partnerships,
relations with rival corporations and government will all be classified as
"external," and hence as falling under the rubric of "social responsibility." For
the purposes of this paper, I will also classify shareholders as "external." This is
an admittedly crude division of the conceptual terrain, but I think that it does
separate out a set of quite distinct issues, which need to be addressed on their
own terms. For example, I think that a number of fundamental norms of
reciprocity that apply to internal relations do not apply to external ones.
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JOSEPH HEATH
as though market conditions were perfectly competitive, even though they

may not in fact be. The following list of imperatives provides some examples
of the restrictions that this would imply:
I. Minimize negative externalities.
2. Compete only through price and quality.
3. Reduce information asymmetries between firm and customers.
4. Do not exploit diffusion of ownership.
5. Avoid erecting barriers to entry.
6. Do not use cross-subsidization to eliminate competitors.
7. Do not oppose regulation aimed at correcting market imperfections.
8. Do not seek tariffs or other protectionist measures.
9. Treat price levels as exogenously determined.
I 0. Do not engage in opportunistic behaviour towards customers or other
firms.
I think it is clear from this list that, rather than being morally lax, the
market failures approach is actually quite restrictive. In fact, in the real world,
any firm that began to unilaterally respect these constraints would be quickly
eliminated from the marketplace. For instance, the requirement that firms
compete only through price and quality excludes the use of non-informative
advertising as a way of building market share. Advertising, as a form of non-
productive competition, imposes significant deadweight losses on the
economy. For example, Molson and Labatt spend $200 million per year on
advertising. Studies have shown, however, that this competition is zero-sum.
The amount of beer consumed has actually fallen over the years -- thus the
two companies are, at best, simply stealing customers back and forth from
one another. This drives up the price of beer, a situation that is only
sustainable because of market imperfections- viz. the significant economies
of scale in the brewing industry, which constitute an effective barrier to entry.
Assuming that the nuisance value of beer ads exceeds their entertainment
value, this means that society as a whole would be better off if the breweries
stopped advertising. But it would be suicide for either company to do so
unilaterally. The situation is identical to that of a country hoping to escape
from an arms race through unilateral disarmament. Such a situation provides
an ideal occasion for the old "they are doing it, so we have to do it too"
defense of non-cooperation. (This is an argument used in favour of illegality
as well, e.g. when foreign competitors are able to engage in business
practices that would be considered corrupt in the home country.)
84
Of course, the fact that other people are not going to respect their moral
obligations does not undo the obligation for everyone else. It may provide an
excusing condition - a reason why one need not respect one's moral
obligation in this case. At the same time, one is still obliged to do what is
necessary in order to bring about the conditions under which the obligations
could be fulfilled. And it cannot be argued that these demands are too
onerous in principle, since the demands simply articulate the way that
capitalist economies are supposed to function in the first place. Thus it is only
the possibility of unethical behaviour by others that could justify non-
compliance.
There are a variety of different ways in which businesses might try to
bring about the conditions under which they could satisfy these ethical
demands. The first is that they might engage in "experiments in trust," -
build up cooperation through reciprocity over time. We are already familiar
with this process from the dynamic of arms negotiations. Thus, for example,
firms might all agree to scale back their advertising expenditures by a fixed
percentage every year, until they are eliminated completely. Compliance in
the first round of cuts would help to build confidence going into the second.
Firms might also enter into agreements to restrict unethical conduct
outside the framework of formal law. Anti-trust concerns create an
environment in which legislators are very suspicious of such agreements -
especially those that would limit competition. However, it is worth
distinguishing between productive and non-productive forms of competition.
Firms governed by self-interest, given the opportunity to collude, will
eliminate the former, whereas firms governed by moral principles will
eliminate the latter. One can imagine the development of an environment,
through trust-building exercises, in which corporations could demonstrate
their commitment to ethical conduct, and thus earn the trust of legislators. In
such an environment, corporations could enter into binding agreements with
one another to enforce ethical conduct.
Finally, there is the point sometimes made in the literature that firms
which actively profit from market imperfections are, in effect, tempting
legislators and regulators to intervene. And when the state does intervene, the
costs associated with compliance usually leave all of the firms involved
worse off than they had been prior to their exploitation of the imperfection.
Thus companies sometimes pressure one another to respect moral principles
using the "stop it or you'll get us all caught" appeal. This sometimes provides
an incentive structure that is able to secure the desired pattern of behaviour
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JOSEPH HEATH
even in the absence of regulation (although fans of "industry self-regulation"

have a tendency to overestimate the number of circumstances in which such
incentives are present).
V. Further Directions
The market failures approach to business ethics elaborated here shows

that a very robust moral code can be developed out of the idea that the
fundamental obligation of managers is to maximize shareholder value. It has
always been accepted that managers must do so within the framework of the
law. The suggestion here is simply that an ethical manager is one who does
so while respecting not only the letter of the law, but also its spirit- which is
to create the conditions necessary for private enterprise to generate an
efficient allocation of goods and services in the economy.
However, there is a significant complication with this view, one that
merits further discussion. The problem arises from what is known as the
"general theory of the second best," or the "second-best theorem" for short. 10
This theorem shows that in a situation in which one of the Pareto conditions
is violated, respect for all of the other Pareto conditions will generate an
outcome that is less efficient than some other outcome that could be obtained
by violating one or more of the remaining conditions. In other words, while
perfect competition generates a perfectly efficient outcome, a situation that is
as close as possible to perfect competition will not generate an outcome that
is as close as possible to perfect efficiency.
The second-best theorem blocks a line of analogical reasoning that has
long appealed to economists. Everyone understands that Newtonian physics,
for instance, employs a number of idealizations. We also understand that the
more closely the real world resembles these idealizations, the more closely
the objects at our disposal will respect these laws. So while we do not have
access to a frictionless plane, we can often substitute a very smooth tabletop
in order to illustrate a variety of principles. Furthermore, the smoother the
tabletop, the more closely the objects on it will conform to the predictions of
ideal theory.
10 RICHARD LIPSEY and KELVIN LANCASTER: "The General Theory of lhe Second
Best", Review of Economic Studies, 24 ( 1956) pp. 11-32.
86
People sometimes like to extend this sort of analogy to economics.

Perfect competition, according to such a view, is like a frictionless plane. It is
an idealization. But the more closely the real world resembles this
idealization, the more closely the various predictions will obtain. Friedman
is, like many others, tempted by this form of reasoning. He writes, for
instance, that:
Of course, competition is an ideal type, like a Euclidian line or point.
No one has ever seen a Euclidian line - which has zero width and
depth - yet we all find it useful to regard many a Euclidian volume -
such as a surveyor's string- as a Euclidian line. Similarly, there is no
such a thing as "pure" competition. Every producer has some effect,
however tiny, on the price of the product he purchases. The important
issue for understanding and for policy is whether this effect is
significant or can properly be neglected, as the surveyor can neglect
the thickness ofwhat he calls a "line." 11
On the basis of this analogy, we may be tempted to conclude that if
perfect competition generates perfect efficiency, then near-perfect
competition should generate something as close as possible to perfect
efficiency. The second-best theorem shows that this line of reasoning is
unsound. If one of the Pareto conditions is violated, then the closest
approximation to perfect competition will produce an outcome that is less
efficient - and thus worse for society - than some more distant alternative.
This has massive consequences. It means, for example, that if there is even
one trade barrier or tariff in place, then minimizing the number of tariffs will
not necessarily produce the best outcome - we may be better off imposing
some additional tariffs. Similarly, if one sector of the economy is subject to
monopolistic pricing, then having prices in all the other sectors determined
by competition will produce an outcome that is inferior to some other
outcome that would result if these prices were not competitively determined.
Of course, the kind of information that would be required in order to
figure out how to achieve the second-best outcome is almost always
unobtainable. The second best theorem is primarily a limitative result. It
shows us that we cannot use the FFT to derive normative conclusions under
real-world circumstances. Thus the second best theorem basically blocks the
line of reasoning the Friedman develops. It also presents a very fundamental
II M. FRIEDMAN: Capitalism and Freedom, p. 120.
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JOSEPH HEATH
challenge to the market-failures based approach to business ethics being

mooted here. It suggests that ethical behaviour, in the absence of complete
reciprocity, may be bad not only for the firm that sticks its neck out, but for
the rest of society as well.
Of course, this does not mean that the efficiency standard is deprived of
all normative force. It simply means that we cannot make the big sweeping
generalizations that were the stock-in-trade of economists of Friedman's
generation. In particular, it means that the properties of general equilibrium
models are not going to be relevant to the normative evaluation of actual
economies. Moral reasoning in a business context must be a more contextual
affair. We cannot simply adopt the best competitive strategy, then hope that
the invisible hand will take care of the rest. Even if we are in perfect
conformity with both the spirit and the letter of the law, profit-maximization
may still generate an inferior outcome.
There are several responses that suggest themselves at this point. The first
is that the FFT specifies the conditions under which a Pareto optimum is
attainable. But in day-to-day life, this optimum is irrelevant. Every voluntary
exchange generates a Pareto-improvement. It is through these tangible,
incremental efficiency gains that the private market system has established its
merit. Thus, instead of offering a "top-down" justification of profit-seeking -
through appeal to the general equilibrium of the economy as a whole, one
could adopt a more "bottom-up" strategy, which would appeal to the
particular efficiency gains that the firm is able to realize among its
shareholders, its employees, and its customers.
We can think of this approach as a "resource custodianship" perspective.
The ultimate goal of the economy as a whole is to satisfY human needs. The
demand for various goods is an expression, however imperfect, of the
intensity of these needs. The function of the price system is to channel
resources toward the satisfaction of the most important of these needs (not
according to an objective measure, of course, but rather according to each
individual's own assessment of his or her needs). Thus the firm purchases a
bundle of productive inputs in order to satisfY these needs, and profit - when
earned under the correct conditions - is the reward that is enjoyed for having
done a better job at satisfYing these needs than any of its rivals.
Thus we can think of all productive resources as being "earmarked" for
the satisfaction of needs. The managers and shareholders are the custodians
of these resources. Their job is to convert these resources into consumer
welfare - and when they do, they are rewarded with a profit. As a result,
88
whenever the firm uses these resources in a way that does not contribute to
welfare, but rather imposes deadweight losses on the economy as a whole, it
is acting as a poor custodian of these resources.
Using this sort of "bottom-up" reasoning, I believe that all of the
constraints outlined in section 4 could be justified in some form. In this
framework, the Pareto conditions would function as a set of heuristics,
allowing us to determine what sort of conduct, in general, is likely to
constitute an illegitimate source of gain. However, actually making the case
requires a more detailed analysis, one that examines the specific conditions of
the market in question. These remarks are clearly unsatisfactory. The more
general research program, however, is one that I believe has considerable
promise.
89
Chapter 5
Abstractions and Conceptual Automata in

Economics and Non-Economics
STEPHEN REGOCZEI
I. Brief Summary
II. Introduction
III. Moving from Ec to Non-Ec
IV. Openly and Explicitly Acknowledging Abstractions
V. Making Friends with Abstractions
VI. The Misconceptions Surrounding Abstractions
VII. Another Voice Crying in the Wilderness
VIII. But What About Economics?
IX. The Deserts
X. The Canadian Bush
XI. An Ironic Twist
XII. Cellular Automata
XIII. The Japanese Game of"Go''
XIV. The "Invisible Hand" at Work
XV. Langton's Ant Builds a "Road"
XVI. The Original "Invisible Hand" Theory
XVII. Exerting Some Moral Force in Economic Life
XVIII. The Case of Margaret Thatcher
XIX. Redistribution Systems
XX. The Power of Administrators
XXI. Programming and Reprogramming
XXII. Non-Euclidean Geometry
XXIII. There Is No Conclusion
XXIV. Acknowledgements
ABSTRACTIONS AND CONCEPTUAL AUTOMAT A
I. Brief Summary
Critiquing economics may be easy, but reforming it is proving to be very

difficult. This paper proposes that we simply walk away from the current
practice of economics, rather than waste our efforts in futile attempts at
reform.
Economics, as stated by numerous economists, is both boring and
irrelevant, in the sense that it ignores many of the most interesting
components of daily economic life. But paradoxically, this boring and
irrelevant enterprise is also generally considered to be indispensable, at least
for the purposes of public policy. No one has been able to reconcile these
diametrically opposing characteristics as yet.
Furthermore, economics is usually criticized because it accepted
enthusiastically the applied mathematics of 191h century physics. But
borrowing is no longer the main problem today. Much more important is the
fact that economists did not keep up the borrowing habit. They failed to
borrow late-twentieth-century techniques and concepts from fields such as
thermodynamics, quantum mechanics, or automata theory. They missed out
on making good use of analytic tools such as negentropy analysis, cellular
automata, or object-oriented programming. These tools are there, ready to be
used. Economics, as it is currently practiced, is a lost cause. A fresh start is
needed, perhaps under a label such as "non-economics," or perhaps more
explicitly, under an elaborate name such as "brand-new-but-actually-quite-
old-economics." If, on the other hand, we want to allude to the classic case of
Euclidean versus non-Euclidean geometries, we might simply call the new
enterprise "non-standard economics," or "non-ec" for short.
II. Introduction
The central topic of this paper is the importance of abstractions.

Abstractions are all around us. We live in a world saturated with abstractions.
For example, money is an abstraction: it is an abstract substance. As another
example, corporations are abstractions: they are abstract entities, or more
explicitly, abstract legal persons.
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STEPHEN REGOCZEI
The first version of this paper was given at the conference called: "The
Invisible Hand and the Common Good." It is important to pay careful
attention to titles. The "Invisible Hand" is an abstract agent, immortalized by
Adam Smith. The "Common Good" is an abstract substance of political
interest to all of us excepting perhaps the Ayn Randians. Whether the
Common Good is increasing or decreasing is an issue of great significance,
scrupulously monitored by statisticians, and vehemently discussed by
journalists and pundits. It is pointless to pretend that these large-scale
abstractions do not exist. Of course they exist. The only task isto determine
the ontological categories we need in order to properly classifY each one of
these abstract entities.
Abstractions, in the sense of abstract entities and substances, are crucial
ideational and socio-cultural constructs. They determine the world we live in
as social beings. When Berger and Luckmann, and even Searle, talk about the
social construction of social reality, they are not exaggerating. Social and
cognitive reality is exactly what is being created. Facts are made, because
that is what the word "fact" says (facio, facere feci, factum). I am not the first
to note that economics is too important to be left to economists. Or to
corporate businessmen. Or, for that matter, to the journalists who contribute
to The Economist. Concepts and abstractions are tools. They are also
weaponry. If we want to create a better world, we will have to become
experts at using abstractions.
Of all the abstractions in the world, I would like to focus on a set of
abstract entities that I label as "conceptual automata." Conceptual automata
are constructs. They are built up from concepts, and have programmable,
algorithmic behaviours. They can be fully autonomous as independent
agents, or could be directed by other agents outside the system. The well-
known cellular automaton is just one specific kind of conceptual
(computational) automaton in general.
I also look at a class of systems that I have been calling "redistribution
systems." If economics, or economic life, is about the distribution of scarce
goods amongst competing needs, then we can not do meaningful analysis
without using redistribution systems as modelling tools. Neither economics
nor non-economics makes very much sense without using the concept of
redistribution systems. The modelling of everyday economic life has to be
done by including all its richness, and all its human complexity. I believe that
rich, comprehensive models are necessary prerequisites for understanding
what a better world would look like. We need the richness to design a better
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ABSTRACTIONS AND CONCEPTUAL AUTOMATA
world. In brief, there is the hope that better understanding will lead to more
enlightened decisions and actions, and an increase in the Common Good.
Although l am the one who is writing this article on the futility of
economics, urging that we seriously pay attention to "non-economics"
instead, l would like to make clear that l did not invent the term "non-
economics:" orthodox economists did that. I am sure we all noticed in heated
discussions with narrowly-focused, over-specialized, professional economists
that we never get to the "interesting stuff." We never get to examine or even
talk about the most-fundamental issues of actual economic life as it actually
takes place "out-there" in the referent world. We note that when we raise the
most important questions, or topics, or problems concerning economic life,
these concerns are frequently dismissed by traditional economists who say:
"That's not economics!" Fine. If it is "not economics" then let's forget
economics and let's all start studying non-economics instead. We can put our
frustrations to good use. The new project promises to be both relevant and
interesting.
III. Moving from Ec to Non-Ec
Good terminology is crucial when we want to communicate new ideas.

As our knowledge and thinking changes, we have to invent new terms for
new concepts. Traditional economics I have been describing as orthodox, or
standard. Or usual or customary. Or perhaps old-style. Definitely not
outmoded, because it isn't. In fact old-style economics is still very
fashionable. l really do not want to use anything more pejorative. Current
economics is a discipline, like many other disciplines, and its practitioners
are protected by the tradition of academic freedom, just as my work is
protected by the same tradition.
A typical topic, almost always considered to be "not economics," is the
all-important issue: how do people make a living? Anthropology deals with it
extensively but only in the context of what used to be called "primitive"
cultures. Sociology deals with it, in the sense of social inequality and social
classes. Technology Studies deals with it, in that the technologies for
"making a living" are at the center of human existence. Economics refuses to
deal with it. I don't fully understand why. Making a living is at the core of
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STEPHEN REGOCZEI
our everyday economic life. Why would old-style economics not deal with
the essentials of economic life?
Another problem is the concept of "externalities," the standard escape
clause of economists. This kind of avoidance behaviour is no longer
acceptable. We have to talk about externalities. We can not throw garbage
"away," because there is no "away" any more. In the non-standard economics
we are creating, we should take externalities very seriously. Current,
orthodox economics is almost characterizable by the failure to look at
externalities. If externalities are non-ec, then let us start studying non-ec.
As I mentioned above, I have been having difficulties describing this new
and more comprehensive approach to everyday economic life that I would
like to see flourishing and growing. I called the new enterprise "non-
economics," which is an immediately graspable term if you feel that
economics is both boring and irrelevant. On the other hand, if you do not
have that view, the term "non-standard economics" might be better. This
phrase is fairly low-key, very Canadian in fact. It modestly states that there is
standard economics and that there is non-standard economics, and
presumably you are free to choose according to your own preferences.
But these phrases are far too long for everyday work. As I worked on this
paper I found myself abbreviating "ec" as short for economics and "non-ec"
as short for non-standard, comprehensive economics. In the spirit of
ethnographic fieldwork, we have to listen to the customary. As we are
moving from ec to the study of non-ec, I will use these abbreviations when I
need short, direct sentences to communicate a precise point in the argument.
"Non-standard economics" is a phrase that is already used on the Web.
The abbreviations "ec" and "non-ec" (sic, lower-case) are more difficult to
find.
IV. Openly and Explicitly Acknowledging Abstractions
Concepts are basic units of thought. Theories are built up using concepts
as elementary building blocks. Concepts are abstract entities. Their referents
might be concrete physical objects, or they could be other abstract entities or
abstract substances.
For example the concept [quality-of-life] may have as its referent the
actual, observable quality-of-life of some social group, or subculture.
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In modeling economic life, we deal with abstractions at two ontological

levels: at the level of theory, and at the level of the referents "out-there." We
have to be able to deal with abstract entities confidently, or at least
comfortably. Abstractions such as marginal utility, velocity of money, or
aggregate demand are conceptual tools to be used without apologies.
Abstraction-phobia has no place in non-ec although it does appear frequently
in orthodox ec.
Abstract referents "out-there" are socio-cultural constructs. Theories
about them are phrased in terms of concepts we create ourselves. These
theoretical concepts are created by us as needed.
To be successful, we have to make our peace with abstractions. We need
to make them our friends.
V. Making Friends with Abstractions
As mentioned above, the first version of this paper was given at a

conference with the following title: "The Invisible Hand and the Common
Good." The conference was a meeting of the Society for the Study of
Economic Ethics and Philosophy. I take titles seriously. They provide
valuable clues to the abstractions we are dealing with. The term "Invisible
Hand" refers to an abstract agent "out-there." We know that this agent is
being invoked in the context of economic life, because of prior knowledge of
the discourse that grew up around the work of Adam Smith. The concept
[Invisible-Hand] is a concept we use to build theories about the global
phenomena that we observe at the societal level. In addition, we know that
this Adam-Smith-centered discourse also refers to self-interested rational
economic maximizers, again "out-there." There are a lot of actual selfish
agents "out-there" who more or less fit the ideal type defined by a concept
[self-interested-etc ..... ] We also know that the individual behaviours of self-
interested agents somehow coagulate or aggregate to give society-level
phenomena (again an abstraction) such as prosperity or economic crisis.
Continuing with the identification of abstractions, we note that "The-
Common -Good" is an abstract substance. We can't very well consider it a
"thing." It's a substance; it's a quantity. We have to respect that. We have to
keep abstract agents, entities, and substances separate, because of the
grammatical rules that govern the English language. We can't violate these
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grammatical rules without causing great discomfort to readers. Such a neo-

Whorfian observation reminds us how strongly vocabulary and grammar
predetermine our thinking processes. Distinctions between count nouns and
mass nouns are fundamental in English. The two questions "how many?" and
"how much?" mark this distinction. Likewise, agents and inert entities are
distinguished by the questions "who?" and "what?", respectively. So,
selfishness and abstract quality produce the abstract substance, or abstract
quantity: "the-Common-Good." This may seem paradoxical to us, and
certainly might merit quite a few conferences to untangle the paradox.
In working with abstractions, most of the time, we are faced with nothing
more than ontological or taxonomic issues. For example, unicorns most
definitely do exist. But they exist as instances in the category of mythical
beasts. They do not exist (we think) in the category of biological organisms.
Unicorns also exist as images on Canadian banknotes. Thus unicorns,
somehow, are central to the economic life of Canada. I suppose we could
have fun with traditional, orthodox economists on the economic significance
of unicorns, but we shouldn't do it. Not fair.
We could continue along these lines pointing out the abstractions we use
as part of theories, and which refer to abstract agents, entities, and substances
out there. But we must exercise self-control. Almost everything we deal with
seems to be an abstraction. But if abstractions are so pervasive, we might as
well get good at dealing with them, and use them for building better and
more insightful models.
Let us briefly conclude. Abstract entities are closely tied to a theory of
knowledge and a clear grasp of ontology. Most economists of the standard
kind would prefer to stay away from such inquiries.
VI. The Misconceptions Surrounding Abstractions
There are so many misconceptions surrounding abstractions that one

hardly knows where to start with the cleanup. Here are a few.
• Abstractions are grossly oversimplified versions of real things
• Abstractions are impossible to grasp
• Abstractions are irrelevant
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• Serious people deal with hard reality and not with flimsy
abstractions
The term "abstraction" itself is soiled by terminological inconsistencies.
Abstractions are frequently construed as schematics. Schematics are
representations produced by neglecting superfluous features, or aspects, or
properties. An electronics circuit diagram is a good example of a schematic.
Circuit diagrams do simplify, in one sense, but they also contain conceptual
elements that have to be freshly added. Adding conceptual knowledge to
create good, useful abstractions is essential.
It is this last observation that gives us the required insight. Abstract
entities are not merely stripped-down versions of already existing referents.
On the contrary, they are entities that did not exist before. They were brought
into existence through a neutral construction process. During this
construction out of concepts and subconcepts, many attributes were given to
the abstract entity by the creator of that entity. Abstract entities are
conceptual constructs. Something conceptual had to be created. Such a
conceptual structure does not come about just by subtracting qualities from a
concrete entity, or extracting some recognizable parts of it. Cognitive actions
are required.
This is a very difficult point to get across. There is a widespread
misconception that abstraction as an activity consists of "taking-away." The
abstract entity is already there; we just have to "take away" the superfluous,
irrelevant detail. This misconception is expressed by saying things like:
"Abstraction is simplification," or "Abstraction is extraction." The
misconception holds that abstraction is the isolation of essential components
that have been there all along in some physical object, hidden, but now they
are to be revealed by judiciously removing some of the clutter. This view is
very unfortunate.
Abstraction-as-extraction is a seriously misleading conception. In this
view of abstraction creation, we only "take-away" and we do not "add-to."
Actually, to create new abstract entities and abstract substances, we have to
create and add considerable amounts of conceptual machinery. The
conceptual components are not in the referent. They are in the mind of the
observer/analyst. Does that make them "subjective?" In part, yes. Some
commentators may not like this methodological fact, but that is how it is.
Interpretation can not be avoided, no matter how hard the positivists tried.
We are definitely in a post-positivist phase in the evolution of the Zeitgeist.
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Skeptics will just have to overcome their dislike if they want to work
comfortably and amicably with abstractions.
The "abstraction-is-extraction" view is frequently supported by a visual
metaphor: the ladder of abstraction. The visual metaphor of climbing a ladder
from the lower rungs which are more concrete to the upper rungs which are
more abstract appears quite convincing. This ladder metaphor goes back to
Korzybski and general semantics. While general semantics performed a great
service in calling our attention to certain pathologies of language use, the
ladder of abstraction, unfortunately, is not one of its better legacies. It implies
that we have to start on the lower rungs in order to arrive at an abstract entity.
This is just simply not the case. For example a corporation is an abstraction, a
legal fiction, a person-like entity. A corporation is an abstract entity. To
create a corporation, we do not start with a concrete corporation and then
extract and cast off irrelevant concrete features to end up with an abstract
corporation.
VII. Another Voice Crying in the Wilderness
How abstractions come into being is only one of the problems. Much
more serious is that many scholars and practitioners do not consider
abstractions to be really "real." This prejudicial stance can be deadly to
honest inquiry.
Like a voice crying in the wilderness, Marvin Harris castigated his
colleagues in 1964. He points out that their avoidance of abstractions, their
"abstractions-phobia," has numerous absurd and negative consequences.
One noxious consequence ... (of abstractions-phobia] is that we tend to
regard the macro level of familiar, stable objects ... as comprising a realm of
superior reality. Thus we are constantly being told that common-sense things
are "real," while the things created out of the logical and empirical labors of
science are "merely" concepts, abstractions, models, heuristic devices,
reifications, or hypothesized entities. The distinctions implied by these terms
ought, if anything, to be reversed (Marvin Harris: The Nature of Cultural
Things").
Marvin Harris's list of generally "suspect" entities is actually quite
helpful. His list of "concepts, abstractions, models, heuristic devices,
reifications, or hypothesized entities" clearly enumerates precisely the tools
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we need for a better understanding of everyday economic life. In general,

abstractions, in the sense of abstract entities and substances, are indispensable
tools for understanding the world and our social life in it. We should not
hesitate to use abstractions as needed. I try to fight the oppressive effects of
Occam's Razor with a cheery piece of advice of my own. When a suitable
abstract entity is missing from our intellectual toolkit, we should be free to
create one. This piece of advice, we can call it Regoczei's Encouragement, is
seemingly the opposite of Occam's Razor. Actually, it isn't. Occam urges us
to eliminate unnecessary entities. Creating new ones, as needed, is a robust,
pragmatic strategy very much in harmony with Occam's methodological
worldview.
VIII. But What About Economics?
Marvin Harris is an anthropologist. Are we being unfair by projecting his

comments upon economists? Perhaps economists think differently, since
economics is one of the sciences of the artificial (in the sense of Herbert
Simon), together with administration, design, and computer science. Should
we not expect greater acceptance by economists of constructs such as
concepts and abstract entities? Actually, economists are not all that different
from anthropologists. Here is a quotation by Ronald Coase.
Economics, over the years, has become more and more abstract and
divorced from events in the real world. Economists, by and large, do
not study the workings of the actual economic system. They theorize
about it. As Ely Devons, an English economist, once said at a meeting,
"If economists wished to study the horse, they wouldn't go and look at
horses. They'd sit in their studies and say to themselves, 'What would
I do if I were a horse?'. (Soto, p 15)
We can Jearn quite a bit from this quotation. In Coase's view, apparently,
the job of an economist is to study "actual economic systems." This is a very
interesting comment. It implies that economists are systems specialists, and
presumably in addition to knowing quite a bit about systems in general, they
should also be experts in a special class of systems, namely economic
systems. But are economists really systems specialists? Do they take the
systems approach seriously? Do they really accept the abstractions and the
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conceptual frameworks that are fundamental to systems studies? In other

words, is Cease's term "economic system" just an empty phrase? It strikes
one as an inescapable conclusion that economists are not very familiar with
general systems theory, or system dynamics, or systems analysis, or the
simplest models of input-process-output (IPO) units for the flow of money,
gifts, kindness, supplies, knowledge, goods, and services.
For example, on the bookshelves in my office, I have about thirty books
with "systems analysis and design" in the title, and none of them is an
economics book. None of them deals with economic systems. Why not?
Kenneth Boulding, one of the originators of general systems theory was
categorized as an economist, but actually, now that we are looking at
Boulding's work more carefully, he was probably closer to non-economics
than to economics. So if we want to know the difference between ec and non-
ec Boulding is a good place to start.
So I am afraid that Coase is being too kind to his colleagues. Not only do
economists not study economic systems - whether actual or imagined - they
don't even theorize about them! They do not seem to have the systems view
at all. They do not have the wholistic systems approach. And furthermore,
there is no visible evidence that they are going to take systems seriously at
any time in the near future.
Of course not! Why should they? According to Coase, mere theorizing is
contemptible. Can you imagine serious researchers in economic theory
deliberately inventing new abstractions to design better economic systems?
Their ability to publish, and their research funding, is at the mercy of the peer
review. Coase uses the term "abstract," and the way he uses it seems to make
it synonymous with "irrelevant." To a young economist, wanting to take the
major abstractions of our surroundings seriously, Cease's disdain would be
deadly. Even I, a mathematician and a well-established specialist in
conceptual analysis (my academic milieu), cringe at the pejorative use of the
term "abstract."
But this is not all. I have a confession to make. I misquoted Coase. Not in
the first quotation, but in the second quotation. The second time around, I
wrote "actual economic systems." That's "systems" in the plural. In the first
quotation, Coase is talking about "the actual economic system" in the
singular, and with the definite article "the." I don't like this. I can't believe
that there is only one kind of "real" economic system. And that is why I feel
that I have to walk away from economics, and seriously pursue further
insights in non-economics. The last time I looked at the actual world, I
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noticed a great variety of economic life in all the various regions inhabited by
human societies. I do not think that we should squeeze all this variety of
economic life into the procrustean bed of global market capitalism. I want a
humanity-friendly, anthropologically-informed, kinder, gentler non-
economics that actually respects how actual people actually make their living.
So let us explore the variety of economic life, while ignoring the
restrictions of economists.
IX. The Deserts
There are no supermarkets in the desert. There are no shopping malls.

There is no shrink-wrapped food available for purchase. There are no
crowded shelves of bottled water. The middle of the desert is a place where
the obvious assumptions of a market economy break down.
Craig Childs' "The Secret Knowledge of Water" starts with a quiet little
remark: "There are two easy ways to die in the desert: thirst and drowning."
The thirst part is obvious. If one is thirsty in the middle of the desert, the
knowledge of economics does not help. Finding water might be possible;
purchasing water is not. There is no market for water in the desert, no matter
how scarce a good it may be.
In the desert, water is valuable. Drinking water is even better. There is a
distinction. Much of the water one finds is salty, or otherwise contaminated.
Pure drinking water is scarce. In the desert, a person with plenty of drinking
water is a wealthy person indeed. This observation is a key to knowing what
constitutes "true" wealth. In fact we could imagine a general notion of
wealth: a concept of negentropy, that would identifY pure, drinkable water in
the desert as being very high in negentropy. And this brings us to the paradox
of the second item: drowning. The household of the desert is deeply
pathological. Too much water, such surging torrents of excess water brought
by the all too infrequent heavy rains, destroys and kills everything in its way.
There is no way to capture, and store, and to prepare for use the most
valuable commodity in the desert: water. By contrast, in Bermuda, stone
roofs are constructed to catch the rain, channel it, and store the water in
reservoirs for future use. This is not so much a matter of money, but of know-
how. The rains are free, but stored water is what is most valuable.
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X. The Canadian Bush
We go canoeing in Northern Ontario, sometimes for weeks and months.

We carry our own food. Water, fortunately is plentiful. It may not be plentiful
in the future if it gets polluted. Fire and shelter are crucial. We have to
provide these ourselves. There are no motels in the Canadian bush. Our
knowledge, our self-reliance, and above all the accumulated experience of
our tripleader Andy Smyth of Woodstock, NY makes for a very enjoyable,
very challenging, and very satisfYing experience. Our lives are at risk, but our
survival does not depend on the money in our pockets.
What we now do for enjoyment was done in the early days of Canada as a
matter of livelihood. Voyageurs traveled from Montreal into the bush north
of Superior. The furs they brought out, and the trade goods they carried in,
are easy to conceptualize in terms of standard economics. But the secret of
their success, the lump of negentropy that made their trade possible at all,
was pemmican. It is nutritious and compact. It was locally made. It was made
by the natives who knew how to make it. Its making required knowledge that
somehow was free. Lacking the knowledge, there was no way to buy it. The
knowledge was not one of the tradegoods.
To understand the historical exploits of humankind, often we have to
focus on the food technology. Pemmican made the Canadian West accessible.
It was Genoa salami that provided food for sailors on longer sea voyages, and
it was limes that kept Captain Cook's ships free of scurvy. Purchasing such
technology is counterintuitive, yet knowledge of the technology is obvious
wealth. And economics will remain largely irrelevant as long as it has no way
to understand this generalized concept of wealth, this generalized negentropy.
And, of course, if we are discussing the Canadian bush, we can not
neglect mosquitoes and black flies. To them, we as human beings are huge
lumps of negentropy dropped into the bush explicitly to be feasted on. Our
negentropy is transferred to the mosquito and black fly household. Nature's
household is richer. Our presence promotes the well being of a lot of insects.
The main virtue of thinking of negentropy as a form of generalized,
concentrated wealth is precisely because it generalizes. It applies equally well
to the household of humans as to the household of nature. It is wealth, but it
is wealth measurable independently of monetary value.
Actually, market-oriented standard economics has very little to say about
the wealth of nations (Adam Smith notwithstanding), or the wealth of
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humankind for that matter. The negentropy embodied in human communities

is the kind of wealth that has a different kind of existence, one that non-
standard economics should take very seriously.
XI. An Ironic Twist
As stated above, economists have been criticized for borrowing the

applied mathematics from the physics ofthe 19th century. I do not see this as
a big problem. The bigger problem is that the borrowing habit did not
continue.
The mathematics of the mid 19th century was very different from the math
of the late 20th century. The late 20th century was dominated by the digital
processor, commonly known as the "computer." Digital processors were
modelled, conceived, or construed as abstract, conceptual, computational
automata. Finite-state automata, and state-transition automata, cellular
automata were the central research topics that closed the century.
The 19th century was dominated by differential equations. To model
something in terms of differential equations requires the definition of
variables which somehow summarize what is dynamically happening over
time. It was a heroic era of modelling the world in terms of variables. This
preoccupation became so dominant, that even a keen observer like Quine was
caught saying things like "to be is to be the value of a variable." This is an
astounding blindness in face of the surrounding life-world. Variables-
oriented programming in computer science was slowly displaced by object-
oriented programming, and later by the emphasis on software agents, or
softbots.
It is paradoxical, and sad, that orthodox economists took over the
differential equations of the 19th century, but ignored the various
conceptualizations of rational automata that occupied our attention in the last
halfofthe 20th century.
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Figure 1
Generation 1 Generation 2 Generation 3 Generation 4 Generation 5
• ••
•••••
•••• ••••• •••
• •• •••
Five generations in the case of a persisting configuration called "The Glider
in Conway's Game of Life" (after John Costi).
XII. Cellular Automata
If we want to emphasise economic life as a living mosaic, consisting of

huge numbers of economic agents, the conceptual tool we need is the cellular
automaton (Fig. I and Fig. 2).
A cellular automaton is an array of cells, each cell being a finite state-
transition automaton with local state-transition rules and globally persisting
patterns. John von Neumann developed cellular automata (although he did
not name them as such) as part of the effort to describe self-reproducing
machines. Today we see this as pioneering work in artificial life research.
Considering that von Neumann has been dead since 1957, there has been lot
of time available to recognize the usefulness of cellular automata in
economics. That recognition did not materialize. In a cellular automaton,
each cell can be considered as an individual, acting according to his/her/its
local set of rules. While the rules are strictly restricted locally, involving only
the few neighbouring cells of the particular cell in question, the aggregate
behaviour of all of the cells together gives rise to emergent, interesting global
patterns. In fact, we get dynamic displays of a living mosaic. John Conwey's
well-known "game" of "Life" is frequently cited as having put the idea of
cellular automata in the public domain (Fig. I).
Cellular automata provide models for understanding the aggregation-
disaggregation problem in economics. This was always a bit of a mystery.
The local-global inter-relationships have never been understood in standard
economics. The question of how individual decisions made by locally acting,
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rational agents determine the functioning of the global economic system is

one of the long-standing, never satisfactorily solved puzzles in standard,
traditional economics.
Figure 2
The first twelve steps followed by Langton's ant. Square not yet visited are
shown as gray (after Ian Stewart).
XIII. The Japanese Game of "Go"
The Japanese game of "go" helps us to think about cellular automata. Go

is played on the intersections of a 19x 19 grid . The intersections are the cells.
They may be occupied by black stones, or white stones, or left unoccupied .
Once placed, the stones do not move. The object of the game is to surround
with one's own stones more territory than the opponent would. Stones that
are completely surrounded by the opponent's stones are considered to be
captured and are removed from the board.
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These are simple local rules, with unpredictable global consequences. The
manifold connections between local and global patterns are very difficult to
analyze. We do not have appropriate abstractions in terms of which we could
understand go. To give one example of the abstract complexity, we do have
reasonably good computer programs that play chess. But even today we do
not as yet have a good go-playing program.
Cellular automata are there to model complex, emergent, hard-to-analyze
processes and outcomes. Economics tried to understand economic life in
terms of 191h century differential equations. From our computational stance
today, we know that working with equations may not be all that fruitful.
XIV. The "Invisible Hand" at Work
I hasten to assure the reader that I firmly and unconditionally believe in

the usefulness of abstractions. Concepts and other constructs are very much a
part of our real world. When confronted by the concept of the "Invisible
Hand," my inclination is not to deny its existence, nor to obfuscate and ask
whether it "really" exists, but rather to see what good use can be made of it.
There is no longer anything mysterious about the work of the "Invisible
Hand." Nowadays, we even have a term for its handiwork: "emergence."
Patterns, processes, and configurations just arise at the aggregate level even if
there are no causality chains to be established. Things just arise. They
emerge.
XV. Langton's Ant Builds a "Road"
It would be a shame and a grave disappointment if we would only talk

about the "Invisible Hand" without actually seeing how the "Invisible Hand"
plays its role. So I would like to give a very explicit example of the "Invisible
Hand" at work. The example I want to describe is a cellular automaton called
Langton's ant. We start with a grid, with one of the squares occupied by a
small creature, the ant. The ant moves around the grid and changes the colour
of cells according to a set of rules. All the rules are local rules, that is they are
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interpretable in nothing more than the immediate neighbourhood of the

square occupied by the ant.
Figure 3
The "Invisible Hand" Constructs a Road
Regular road-building phase in the journey of Langton's ant after numerous

initial chaotic steps (after lan Stewart).
The ant crawls around, creating several different kinds of patterns, and
eventually it starts constructing a highly regular, cyclical infinite strip of
squares, which looks very much like a road (Fig. 3). The ant knows nothing
more than its small neighbourhood and the local rules for its own behaviour.
Yet it starts creating a huge regular strip, a "highway," a " road" that extends
without limit.
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There is no identifiable causality here. There is no planning. The ant does

not plan to construct a road. The road just emerges, as if shaped by an
invisible hand. This kind of emergent structure is quite common, once we
know how to look for it. Science, at one time, was obsessively concerned
with causality. We now know that this was far too narrow-minded. Emergent
phenomena, structures, patterns, entities, and substances just seem to come
into being. Today we recognize the coming into being of different species as
an emergent phenomenon based upon Darwinian selection rules. We
hypothesize that both the mind and life in general may be emergent
phenomena.
But there is something mysterious, even spooky about the behaviour of
Langton's ant. It builds a road, no matter what the starting configuration is. It
is totally unconcerned with the initial conditions. It is guided by its ultimate
destiny to build a road - guided as if by an Invisible Hand. In this respect, it
is the opposite of the butterfly, of the butterfly effect. The butterfly flaps its
wings, creating unpredictable initial conditions that cause hurricanes on the
other side of the world. The ant is totally indifferent to the starting
conditions. It pursues its destiny, and builds a road every time.
Let us try to summarize this work of the "Invisible Hand" as concisely as
possible. Langton's ant is a creature in a field, which is the cellular
automaton. It is a creature, and it is a self-centered, algorithmic creature. It
does not "intend" to build a road. It does not "intend," period. It is certainly
not instructed to build a road. There is no built-in road building program.
This is a good example to show how wrong it is to say that computers "only
do what you tell them to do." In truth, most of the time they do much less.
But at times, they do surprisingly more. Langton's ant is one of those rare
instances. It is just doing its own thing in a self-centered and algorithmic
way. It will not stop. It is the ultimate minimal example of the self-interested,
rational maximizer that standard economists can only dream about.
XVI. The Original "Invisible Hand" Theory
Whatever interpretations we may place today on the phrase "Invisible

Hand," historically the matter is quite clear. The Invisible Hand was the
benevolent hand of God. God does punish of course, but if there is no
transgression, if we do act morally according to God's laws, then we can rely
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upon the grace of God, and the benevolent works of God's almighty "Hand."
Thus Adam-Smithian economics comes bundled with its own theology and
morality already built in. This set of tacit theological assumptions can remain
tacit - and indeed imperceptible - as long as we only talk exclusively about
the "Common Good." If however we act like good conceptual analysts
should, and we raise the subject of not only the "Common Good" but also of
the "Common Bad," then the discourse suddenly becomes uncomfortable. Is
there an invisible hand that produces the "Common Bad?" Whose hand is it?
Is it the De vi I' s? Are we heading for a Zoroastrian conception of the world as
the battleground from the point of view of non-standard economics, upon
which the Good-god and the Bad-god fight for supremacy? These are
questions and implications that, I think, most economists today would prefer
to ignore.
If there is a "Common Good" in our discourse, then we also have to
include the "Common Bad." The "Common Bad" is not an externality. It is
more like the collateral damage issuing from unrestrained corporate greed.
Of course, in our secular age, it is hard to remember that Adam Smith's
economics was underpinned by the theology and morality of his age. If today
we are reluctant to accept the theological baggage, then we should at least
acknowledge that the work of the '"Invisible Hand," as an abstract
conceptual agent whose might result in good outcomes, or bad ones. What
will happen? Good or bad? What are the probabilities for each? We don't
know. This sounds just about as random as an ordinary coin toss. We need
simulation models, and these models will look like conceptual automata.
XVII. Exerting Some Moral Force in Economic Life
Money is a powerful means of communication. It communicates

approval, or disapproval. Its presence constitutes support; its lack signals
clear discouragement. We genuinely can not rest satisfied with the theories
that we currently have until we can explain how morality plays a central part
in economic life.
At this point, the analysis gets quite complicated. The role of moral
judgements in economilc life is a topic that has generated a great deal of
debate. I hope I am not exaggerating when I say that the whole conference,
and in particular the papers of my good friends and colleagues Bernard
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Hodgson and David Holdsworth, are solidly in the midst of this controversy.
The mysterious workings of ethics in economic life can not be ignored.
There is considerable moral force within an economic system. In general,
how is this moral force brought to bear upon individuals and corporations in
the economic life of a community? We can answer this question using an
abstract entity/agent that we can call a "redistribution system" (Fig. 4).
Figure 4
-
=-::rl-::
-
-----
.. R
-.......
----......
..
.....
a redistribution system
~~
granting agency
--- -
-
=::;~==
-----
government
--- -
- -----
::::;~ ]===
bank
-
- -
- - -
--- ----- --- -----
-~-
-R-
-~-
insurance
-R-
major corporation
An economy as a system of interacting redistribution systems R,

redistributing money or other resources.
The tremendous moral force incorporated within, for example, the

capita list system is exerted through redistribution systems. Banks are
redistribution systems. Banks accept deposits from customers, and then use
these funds to make bank loans. But not everybody can get a bank loan. Only
the righteous, the deserving, the frugal, the clean living qualify for bank
loans. Amazing amounts of moral pressure can be exerted by a bank
110
manager, when the opportunity arises. Money is a powerful means of

communication: communicating approval or disapproval, and regulating
people's lives.
Orthodox economics not only does not explain the mysterious workings
of ethics in economic life, it even tries to deny that morality plays a role at
all. Obviously, if we are reaching for a more comprehensive, non-economics
oriented theory, we have to explain how moral forces are brought to bear to
punish the sinful and the unruly, but also to reward the righteous and the true
believer.
XVIII. The Case of Margaret Thatcher
To pick a specific example, let us think about Margaret Thatcher. When

she stood up to project her convictions, her value structures, I believe that she
was quite effective. How did this work? How did she manage to project her
small-business, shopkeeper, petty-bourgeois, middle-class values? How did
she operationalize her convictions in economic life? We must be able to
identify mechanisms for accomplishing this. It is clear, I believe, that
Margaret Thatcher was very good at what she did. We have to be able to
explain how she did it?
Margaret Thatcher made good use of the power of the purse. She could
not be easily intimidated. She judged potential recipients of government
funds as worthy or unworthy. Money, as we already remarked, is a powerful
means of communication.
In simple terms, if you control a redistribution system, you can impose
your values and your will. You determine from where money will be
collected, and determine who the worthy recipients will be when the money
is distributed (Fig. 4 ). A redistribution system is a programmable - and
reprogrammable! - conceptual automaton. Without understanding such
conceptual automata, neither standard economics nor non-standard
economics can make very much sense.
111
STEPHEN REGOCZEI
XIX. Redistribution Systems
Redistribution systems are active agents that first concentrate, and then
subsequently redistribute resources (Fig. 4). Banks, governments, and
insurance companies are typical and obvious examples of redistribution
systems. But, actually, every household and every individual can be
construed as a redistribution system.
For example, let us consider a corporation. The corporation collects
money, and then redistributes this money to worthy recipients. Loyal
suppliers are worthy recipients. Even most employees can be considered
worthy recipients. The "worthy nature" of an employee is carefully checked
before the employee is hired. Anyone who has looked for a job knows that to
be judged worthy, to be placed on the payroll, depends on a favourable,
wholistic moral judgment that accepts the applicant as a worthy employee. It
is not merely a "commercial" transaction. In fact, we can flatly assert that no
commercial transaction is ever merely a "commercial" transaction. Moral
judgments are never absent from the process. The spending of money
communicates approval.
Corporations collect money through sales of goods and services. This is a
morally demanding task. In order to receive money from customers or
clients, the corporation must first be judged worthy by the public. This is
obvious. We are not going to go around sticking wads of cash into the
receiving hands of unworthy corporations. Successful corporations are to be
judged worthy- and typically there are armies of salespeople, promoters, and
publicists making sure that the corporation is judged worthy to collect
money. Thus both at the disbursement end and the receiving end, moral
judgements are central to the process. Redistribution systems enforce
standards, values, and cultural norms.
In general, we can define a redistribution system as a mechanism of
allocating scarce resources amongst competing needs by first collecting and
concentrating those resources, and then disbursing the resources to worthy
recipients. Who the worthy recipients are gets decided through subtle ways,
governed by the often-tacit values of the deciders. Publicly, however,
allocation policies are always presented as rational, administrative,
bureaucratic decisions. Those that are judged worthy by the administrators
will thrive, and the unworthy will just have to go without.
112
In economic life, the concept of redistribution is the central abstraction.

Markets can be considered as redistribution systems, but most redistribution
systems are definitely not market-like. This makes markets an economic
anomaly. Undoubtedly, there is much work to be done to clarifY these issues.
XX. The Power of Administrators
The power of administrators in controlling the economic life has never

been properly analyzed. Herbert Simon was probably closest to the subject
matter, but even he stepped back and decided to investigate quiet backwaters
rather than the fierce rapids of mainstream economic life.
No one has been more explicit than C. Northcote Parkinson. The
brilliantly humorous surface hides a deep hatred of administrative abuse of
powers. When he writes, Parkinson protests. But while protesting, he does
more than any conventional economist could for giving an accurate, almost
anthropological or ethnographic, description of how administration works.
Being a professional administrator myself, I understand the importance of
good, professional administration. I also understand the well-justified fury of
a Parkinson.
And this brings us to yet another issue that typical, market-oriented,
orthodox economists prefer to ignore. A well-run market requires capable
administrators. This is yet another subject for non-ec.
XXI. Programming and Reprogramming
Programming IBM business computers is not very interesting.

Programming people and corporations is much more intriguing.
Programming, or more precisely reprogramming, a whole economy, or an
entire culture, or even a nation is something truly significant. That is what we
have to be able to do. w,e have to have the capability to change the software
that is running on people. This is nothing unusual. We just have to
conceptualize it the right way. Certainly, at the physical or hardware level the
process is nothing controversial. The human body can be construed as a
113
STEPHEN REGOCZEI
cellular automaton because that is what a human body is at the physiological

level. Each cell is carrying out its local program. It changes state according to
local rules, built into its wetware, responding to state changes in its
surroundings. Each cell is a component in a living mosaic, namely the whole
human body.
Likewise, a nation can also be construed as a state- transition automaton,
definitely at the physical level. At the software level, the circumstances are
quite similar. Advertising is there to reprogram individual consumers.
Customarily, we do not say "reprogram." Instead we "allow people to change
their minds" in response to the new information that is being presented to
them. Repeatedly. Political propaganda is there to reprogram the body politic.
A change of mind by millions in a society definitely qualifies as a state-
transition.
Markets can be conceptualized as large living mosaics that are cellular
state-transition automata. The "automata" term is there to remind us of the
reprogrammable nature of markets. We have to wonder how rational our
proverbial rational, self-regarding, maximizing agent is going to be after all
the reprogramming. At this point, at least, I think we can all agree that neither
the discussion of "free will" nor the examination of "free markets" seems
very relevant. On the contrary. Pre-programmed will, achieved by marketing,
and pre-programmed markets, achieved by vendor-friendly (sometimes called
"business-friendly") publicity is what we are really talking about. Fine, but
considerably more still needs to be said. And it will not be said within
economics. Regrettable as it may be, a typical economist will certainly not
start to analyze how advertising distorts supply-demand relationships, or how
corporate publicity distorts markets. Again, if economics won't study the
problems, then non-ec will have to.
XXII. Non-Euclidean Geometry
We can picture non-standard economics as somewhat akin to non-

Euclidean geometry. We alluded to this in several places above. Non-
Euclidean geometry did not replace or supersede Euclidean geometry. Rather
it offered a different world view, admittedly with some fundamental
philosophical changes. Non-Euclidean geometry offered a new set of
abstractions, which eventually were connected with calculus to provide
114
differential geometry, and tensor calculus. It was tensor calculus that enabled
Einstein to generalize his special theory of relativity. It was differential
geometry that made possible the theory of Riemannian manifolds. New
developments such as non-standard arithmetic, non-standard analysis,
constructive analysis, and hyperintuitionist number theory all add to the
already existing understanding of mathematical structures.
Non-standard economics needs a fresh, new set of abstractions to further
develop the worldview. We would like to design better futures and better
future worlds.
XXIII. There Is No Conclusion
It is easy to criticize economics as an enterprise. It is difficult to imagine

how we could make economics appreciably better, starting with its current
paradoxical state of it beiing both irrelevant and indispensable.
Economic life will go on, somehow, regardless of theories and
analysts/observers. As human geography indicates, different parts of the
world have vastly different experiences for people making a living. There
was a wrong turn in the development in the study of economic life: political
economy overwhelmed economic geography. We still need a new field of
study of how people make a living.
It is an ironic twist. The critique now is not that economists borrowed, but
that they did not keep the borrowings current. The world is much more like
the quivering jelly of quantum mechanics than Newtonian perfect billiard
balls, moving and colliding. If you borrow, borrow the best currently
available.
We are stuck with th'~ standard, orthodox, traditional economics. It seems
so permanent. What should we do with our current economics? Perhaps the
best action is to walk away from it. Ignore it. Start with a new, fresh inquiry.
Start with several new conceptual frameworks, new sets of abstractions, and
new metaphors such as the cellular automata perspective. Then we will see.
There is no conclusion, only work-in-progress.
The shared discourse in the public sphere is filled with the great
abstractions of our age which go by names such as "The Economy," "The
Environment," and "The Corporate World." I would like to add one that to
me seems most important: "Our Surroundings." Our economic life takes
115
STEPHEN REGOCZEI
place in our own surroundings. I also recall Karl Polanyi's remark that we
engage in economic activity mostly for non-economic reasons. Really, the
time has come to take the non-economic components very seriously.
XXIV. Acknowledgements
I would like to express my thanks to Bernard Hodgson, my good friend,

for encouraging me, David Holdsworth for being a good colleague over the
years, and someone with whom I can talk thermodynamics and negentropy,
Magda Havas for years ago asking me the question "What is money?", and
for the tremendous education I have been receiving in the Group Problem
Solving course that Magda and I offer together.
References
CAST!, JOHN L.: Reality rules: picturing the world in mathematics, Volume./ The
fUndamentals, New York (John Wiley & Sons)1992.
CHILDS, CRAIG: The secret knowledge of water: discovering the essence of the
American Desert, Boston (Little, Brown and Company) 2000.
HARRIS, MARVIN: The Nature ofCultural Things, New York (Random House)
1964.
HODGSON, BERNARD: Economics as Moral Science, Berlin (Springer-Verlag)
2001.
MIROWSKI, PHILIP: Machine Dreams: Economics Becomes a Cyborg Science,
Cambridge, (Cambridge University Press) 2001.
SIMON, HERBERT: Models ofmy life, New York (Basic Books) 1991.
SIMON, HERBERT: The sciences ofthe artificial, 3'd ed., Boston (MIT Press) 1996.
SMYTH, ANDY: "Wilderness Way", unpublished manuscripts and oral tradition,
Woodstock, NY, 1986-2003.
SOTO, HERNANDO DE: The mystery of capital: why capitalism triumphs in the West
and fails everywhere else, New York (Basic Books) 2000.
SOWA, JOHN: Conceptual structures: information processing in mind and
machine, Reading, MA (Addison-Wesley) 1984.
II6
ABSTRACTIONS AND CONCEPTUAL AUTOMAT A
STEWART, IAN: "Mathematical recreations: The ultimate in anty-particles",

Scientific American, (July 1994), pp. 104-107.
STRATHERN, PAUL: Dr. Strangelove 's game: a brief history of economic genius,
Toronto (Alfred A. Knopf Canada) 200 I.
WRIGHT, ROBERT: Three scientists and their gods: looking for meaning in an age
of information, New York (Harper & Row) 1988.
117
Part Three
Moral Rights and Market Society

Chapter 6
The Inherent Rights of For-Profit Corporations

JOHN DOUGLAS BISHOP
I. The Problem
II. Utilitarian Argument
I. Production Efficiency
2. System Efficiency
III. Social Contract Argument
I. The Problem
Currently, for-profit corporations have legal rights. Their legal rights are
whatever the courts and legislatures say they are. Wherever Anglo-American
style legal systems pn~vail, the principle behind most court decisions
involving the legal rights of corporations is the principle that corporations are
"persons" for legal purposes. This principle means that in effect corporations
have the same rights as human beings, or at least the same economic rights.
The same-rights-as-people doctrine seems to be a historical accident,
never consciously discussed, voted on, or legislated. There are, so far as I
know, no ethical arguments to support this doctrine, and few economic
arguments. This paper is part of a larger project which uses ethical theory to
establish what the legal rights of corporations ought to be. In a word, what
are the morally legitimate rights of corporations?
The legitimate rights of corporations could be of two types: inherent
moral rights, which are rights that corporations ought to have whether or not
JOHN DOUGLAS BISHOP
the legal system recognises them, and legal rights which are the result of a
morally legitimate legislative process. The current paper considers the first of
these- that is, whether or not corporations have any inherent rights.
There have been numerous ethical grounds given for other forms of
inherent rights, such as human rights and sovereignty rights. These include
natural law arguments, Lockean property arguments, arguments from
freedom, essentialist arguments, utilitarian arguments, and social contract
arguments. Here, I will consider only the utilitarian and social contract
arguments for the inherent rights of corporations. I consider these two
because I hope to show that they are connected in such a way that only in
combination do they establish what rights for-profit corporations ought to
have. If we can establish that corporations do have some inherent rights, then
we will have established that corporations have some rights which ought to
be recognised not only by the law, the courts, and legislative bodies, but also
by CEOs, employees, investors, society and everyone else.
II. Utilitarian Argument
A utilitarian justification of inherent rights for corporations seems like a

promising approach; utilitarianism has after all been used to justify human
rights, why not corporate rights? Any utilitarian approach to corporations
must be based on the fact that corporations produce wealth efficiently.
However, the connection between efficiency and utilitarianism needs closer
discussion before we leap to conclusions about the moral value of efficiency.
In particular, we need to distinguish between production efficiency and
system efficiency. Production efficiency is the maximization of output per
unit of input. By itself, production efficiency does not necessarily promote
human happiness because it says nothing about what is produced, only how it
is produced. System efficiency refers to the efficiency of the economic
system overall, and includes not only the efficient use of resources (that is,
production efficiency) but the efficient allocation of resources to the
production of the right goods and services. If a utilitarian argument is to
work, then which goods and services are the right ones must be established in
terms of human happiness. What we need to examine is how corporations
contribute to both production efficiency and overall system efficiency.
122
THE INHERENT RIGHTS OF FOR-PROFIT CORPORATIONS
1. Production Efficiency
I will assume that for-profit corporations in a competitive environment

achieve a high level of productive efficiency; in fact, they probably achieve a
higher level than any other structure for organizing production. This is not
surprising because corporations are hierarchical command and control
structures whose sole design principle in decision making is efficiency. Any
good MBA text in corporate finance shows in detail the well established
methods (such as NPV) corporations use at all levels to ensure efficient use
of resources. Furthermore, in a competitive environment, corporations which
are less efficient often fail to survive; the more efficient corporations are
selected by this proc,~ss. And the empirical evidence supports these
theoretical arguments· 1 The production efficiency of corporations can be
assumed.
But does production efficiency contribute to human happiness? There are
at least three problems with making such a connection. First, the production
of market exchangeable goods and services is not the only factor in human
happiness; production efficiency does not contribute to and may interfere
with other aspects of life on which our happiness depends, such as love,
friendship, beauty, art, truth, respect, freedom, belonging, etc. That
production efficiency is only one of many human values means that
corporations will need to be constrained. At a minimum, corporate
production will need to be constrained by human rights, and there may be
other more strict constra1ints with a utilitarian justification.
Second, as our examination of the MBA corporate finance text will show,
corporations measure efficiency in terms of dollar efficiency, which, in the
case of labour, is problematic from a utilitarian point of view. If a corporation
reduces every employee's wage by 10%, the corporation's labour efficiency
increases by I 0% in dollar terms, but since "labour" is another name for
human beings, the contribution this efficiency makes to human happiness is
not clear. There may be utilitarian arguments in favour of labour efficiency
when labour is measured by hour or by effort; reducing the production work
The empirical evidence comes mostly from transaction cost economics. See M.
AOKI, B. GUSTAFSSON, O.E. WILLIAMSON (Eds.): The Firm as a Nexus of
Treaties, London (Sage) 1990 and G. R. CARROLL, D. .1. TEECE (Eds.): Firms,
Markets, and Hierarchies: The Transaction Cost Economics Perspective, Oxford
(Oxford University Press) 1999.
123
JOHN DOUGLAS BISHOP
load of humanity seems like a good idea. But are corporations a good way of
achieving this? Perhaps, but this is not clear from the structure or nature of
corporations; it would have to be shown empirically. This problem in
connecting production efficiency with utilitarian values is inevitable as long
as human beings are one of the resources that corporations use efficiently.
A third problem with connecting corporate production efficiency with
human happiness is the problem of what is produced with so much
efficiency. If the wrong goods are produced, then efficiency may be a bad
thing for humanity. This problem cannot be addressed at the level of
individual corporations; we must look at the larger economic system in which
corporations function. Corporate decisions about what to produce depend on
what sells, so it is to the market place, and to the question of system
efficiency of the whole economy that we must turn for an answer.
But before we do, one final comment on production efficiency and human
happiness is called for. The problems of constraints, of the mis-measurement
of labour efficiency, and of which goods are produced may show that
production efficiency is not sufficient to ensure a contribution to human
happiness, yet I think most people are likely to agree that production
efficiency will contribute to human happiness if these problems are solved.
All else being equal, and given a general scarcity of resources, if goods which
contribute to human happiness are produced without harm to people, then the
fewer resources used per unit of output the better. Production efficiency
would likely be viewed as morally acceptable by most people if the economy
as a whole can solve the obvious problems with it. The phrasing of the last
point, "would likely be viewed as morally acceptable by most people," is
carefully chosen to tie production efficiency in with deliberative democracy,
as will be discussed later in this paper.
To the question of the system efficiency of the economy we now turn.
2. System Efficiency
For-profit corporations are imbedded in competitive free markets. Of

course, how competitive and free actual markets are is an empirical question,
and whether corporations contribute to or tend to undermine competition is
an interesting question. But the utilitarian justification of corporations is
intrinsically linked to the utilitarian justification of free markets, so let us
look at this connection.
124
In theory, purely competitive free markets will ensure that producers

produce those goods and services which allow each individual to maximise
their utility given income constraints. Which goods and services are
produced, therefore, is determined by the satisfaction of human desires. From
a utilitarian point of view, we can say that corporations in a free market will
produce those goods and services which most contribute to human happiness,
assuming that human happiness lies in satisfying those of our desires which
can be satisfied with exchangeable goods and services. In this sense, we can
say that free markets are system efficient in ensuring that corporations
produce the right goods.
The ongoing critique of welfare economics has pointed out innumerable
problems with connecting purely competitive free markets with human
happiness. Critics have pointed out that human happiness may not depend on
uncritically satisfying desires, that our desires are deeply affected by other
people, that our desires are often not consistent, that we have desires that are
questionable from ethical and other viewpoints, and that the mode of
production in an economy may create desires (Little 1957; Galbraith 1958;
Hodgson 200 I). Each of these contradicts the assumptions of welfare
economics. The status of an economic theory, most of whose assumptions are
empirically false, has been examined at length by Hodgson; the issue here is
that this sort of critique of economic theory undermines the utilitarian claims
of free market advocates.
A second problem with the connection between utilitarianism and the
theory of purely competitive free markets is that free markets, even if perfect,
promise only Pareto optimal allocation of resources. If system efficiency is
only Pareto efficient, there is no reason to think that this maximises or even
promotes human happiness. Pareto optimality says nothing about the
distribution of wealth, only the allocation of resources; distribution is entirely
dependent on initial endowments and is exogenous to the market. Further, the
theory of Pareto optimality assumes perfect knowledge, zero transaction
costs, well-formed utility curves, and no externalities. If these assumptions
are relaxed, and Hodgson points out that all of them are empirically false,
then there is no reason to think that Pareto optimality will be achieved.
Finally, to connect Pareto optimality to human happiness, one has to assume
that happiness comes from maximising the kinds of desires that are satisfied
by possessing goods and services. This does not allow for many of people's
125
JOHN DOUGLAS BISHOP
"finer" desires, 2 nor does it allow for the ability and desirability of people and
societies to assess, eliminate or cultivate desires. In other words, there are
good reasons for refusing to link human happiness with the economists'
notions of utility. If neither Pareto optimality nor utility is connected with
human happiness, then the system efficiency of competitive free markets
cannot be viewed as morally desirable on utilitarian grounds.
However, even if the theoretical connection of free markets with
utilitarianism is rejected, there is still the empirical question of whether actual
free markets promote human happiness; and here I think, there is a stronger
case. In looking at the historical record, it is hard to separate the effects of
free markets from the effects of democracy, freedom of the press, rule of law,
and other factors, but I accept that constrained free markets are probably the
best form of economic organization currently known given current
production methods (Bishop 2000). The need for constraints has been argued
by many people (for example, see Groarke 2000); Ben-Ner & Putterman list
some "typical" problems which have been attributed to unconstrained
markets. Their list includes:
high levels of crime and violence, family instability, racial tensions

and xenophobia, seemingly intractable poverty and unemployment,
self-destructive behaviours including substance abuse and suicide,
social unconnectedness and depression, and widespread alienation
among the young. (Ben-Ner & Putterman 1998, p.14)
If even some of these problems are the result of free markets, and the New
Zealand experience with deregulation seems to show that at least the
concerns with poverty and suicides are justified (Dobbin 1998), then it is
clear that utilitarianism can support free markets only if they are regulated
and constrained. However, despite this need for constraint, there are reasons
for thinking that the free market will play some role in any economic system
with a utilitarian justification for its legitimacy. These reasons include the
2 "Finer desires" could be similar to the "other-regarding" and "process-regarding"

preferences discussed by Ben-Ner and Putterman - or in any case, such
preferences raise similar issues in that there is no role for them in traditional
economic theory. Ben-Ner and Putterman also refer to Sen's notion of "meta-
preferences," which also have no place in economic theory. A. BEN-NER, L.
PUTTERMAN: "Values and Institutions in Economic Analysis" (Eds.): &anomies,
Values, and Organizaion, Cambridge (Cambridge University Press) 1998.
126
effects of competition on production efficiency, the information supplied by

prices in a free market, the consumer freedom free markets give most people,
and the lack of obvious alternatives.
This conclusion in favour of constrained free markets sounds vague since
we have not specified even in principle what the constraints might be, but for
the purposes of the present paper, it is sufficient. I will argue in the next
section that the need for constraints implies a need for democracy, which has
certain implications for the rights of corporations, but I will not specify in
detail the required constraints on the free market. Such constraints will be a
matter for democratic discussion and decision.
What I want to conclude about inherent corporate rights from this
discussion of utilitarianism is the following:
a) that corporate production efficiency can contribute something to
human happiness, but only if corporations are constrained and only if
they are embedded in competitive free markets.
b) that competitive free markets. can contribute something to human
happiness, but only if certain problems with markets, especially the
problem of economic distribution, can be solved.
III. Social Contract Argument
The social contract approach to the rights of corporations will vary

depending on how one addresses two key questions. First, is the social
contract actual or hypothetical? And second, is the contract between society
(i.e. real people) and corporations, or is it a Hobbesian-like contract amongst
humans who agree amongst themselves to allow corporations to exist, (in
which case corporations would not be parties to the contract)? The first I will
call a society-corporation contract, the second a Hobbesian contract. This
gives us the following four possibilities:
1. actual society-corporation social contract
11. hypothetical society-corporation social contract
iii. hypothetical Hobbesian social contract
IV. actual Hobbesian social contract
Let us consider these in tum.
127
JOHN DOUGLAS BISHOP
i. An actual society-corporation social contract would emerge from

actual negotiations of some sort between representatives of real people and
representatives of corporate persons. If parliaments and other legislative
bodies are viewed as representatives of real people (who, after all, can vote;
corporations cannot), then the process of corporate lobbying over the past
decades might be viewed as negotiations of this sort. If so, then the current
legal rights of corporations might be thought to be legitimated by an actual
society-corporation social contract. There are three problems with such a
view which to my mind decisively show that the legal status quo cannot be
morally legitimated by this argument. The first problem is a question of
history; the current legal rights of corporations have mostly not resulted from
actions of legislative bodies. They have been mostly the result of court
decisions. This includes the all important same-rights-as-people doctrine,
which, in the United States, derives from a Supreme Court decision of 1886. 3
There is no sense in which this and similar decisions were part of actual
negotiations. The second problem is a theoretical concern about the
legitimacy of the results of any such actual negotiations, if any can be shown
to have taken place. Corporations control almost all the productive resources
of society - that is the point of forming corporations. How could "fair"
negotiations take place when corporations hold all the resources humans need
to live? Actual negotiations in such circumstances cannot morally legitimate
anything. Third, corporations may not be able to vote (yet), but it is not true
that corporations cannot or do not take part in politics. Political donations,
directorships for retired politicians, not to mention more nefarious forms of
political persuasion, are too well known to need documenting here. In such
circumstances, the idea of an actual society-corporation social contract
cannot be used to morally legitimate current legal rights of corporations.
ii. One could take a Rawlsian approach to a hypothetical society-
corporation social contract to try to establish what rights corporations should
3 In County of Santa Clara vs. Southern Pacific Railroad Company (I 886), the
Supreme Court did not directly rule on the issue of corporations being persons,
but assumes the doctrine. The judgement says "The court does not wish to hear
argument on the question whether the provision of the Fourteenth Amendment to
the Constitution, which forbids a State to deny to any person within its
jurisdiction the equal protection of the law, applies to these corporations. We are
all of the opinion that it does." P.A. FRENCH, J. NESTERUK, D. T. RISSER:
Corporations in the Moral Community, Fort Worth (Harcourt Brace Jovanovich
College Publishers) 1992, Appendix B.
128
have. Presumably, real people and corporate persons would be negotiating

about the rights of corporations while they are behind a veil of ignorance.
How the veil of ignorance would work if corporations are part of the
negotiations is not clear; do we imagine we do not know whether we will be
real people or corporate persons? How do we imagine being a corporation?
What interests should we assume we would have as a corporation? And
equally to the point, why should we try to imagine being a corporation? To do
so already legitimizes the existence of corporations. And that, I think,
undermines the procedure of a hypothetical society-corporation social
contract; such a procedure assumes the legitimacy of corporate interests as
the basis of proving the legitimacy of corporate rights. Which does not get us
anywhere.
111. A Hobbesian hypothetical social contract approach to inherent
corporate rights would imagine real people, but not corporations, deciding
about the rights of corporations from behind a veil of ignorance. In deciding
about the rights of corporations, these people would have to take into account
the wealth producing potential of corporations, the distribution of wealth
(both as a result of corporate productivity and as a contributing factor in
corporate productivity), the effects of corporate production, and the need for
constraints.
The problem with any such hypothetical social contract approach to the
rights of corporations is that it would require agreement on principles to solve
three issues: it would require ( 1) a principle of production evaluating the
value of production efficiency relative to other human values, (2) a principle
specifying what constitutes system efficiency (e.g. whether Pareto optimality
is necessary and/or sufficient), and (3) a principle of distributive justice.
Generally agreed on principles that specify moral legitimacy in these three
areas are not currently available, and are not likely to be available soon.
There seems to be no way such principles can be established by rational
argument, and there is certainly no agreement on any. Unable to presuppose
principles in any of these three areas, the hypothetical social contract
approach to establish the inherent rights of corporations cannot get off the
ground.
iv. An actual Hobbesian social contract would be the result of actual
deliberations amongst real people; corporations would not be party to the
deliberations, but the results of the deliberations would be to allow the
existence of corporations and to define their rights. The most legitimate form
such actual negotiations could take would be a constitutional deliberative
129
JOHN DOUGLAS BISHOP
democracy. I will not here defend that legitimacy claim, 4 but will assume that
discussion and decisions about the rights of corporations which take place
within a constitutional deliberative democracy are morally legitimate. What I
want to discuss are the implications of this for the rights of corporations.
The first implication is that corporations have no right to take a direct part
in the discussions about the rights of corporations. This is because these are
Hobbesian deliberations; that is, they are deliberations about corporations,
but are carried on by the real humans who are citizens. Further, corporations
should not be able to use their resources to directly influence democratic
deliberations. Corporations own most of the productive resources in our
society, resources which they ought to be using for efficiently producing
goods for sale. We have already established that the moral legitimacy of
production efficiency and free markets is dependent on constraint and
regulation, which can only come from deliberative democracy. If
corporations use their resources to directly influence democratic deliberation,
then the utilitarian grounds for the moral legitimacy of them owning the
resources collapses. This logic leads to the radical separation thesis, which
says that corporations must be kept from directly impacting democracy. This
is a radical thesis - as radical and exacting as the separation of church and
state. It would have major implications for such corporate rights as the right
to lobby, the right to hire retired politicians, the right to make political
donations, the right to own and/or control the media, and even the right to
free speech. All of these are currently the legal rights of corporations, but the
need to protect the legitimacy of the democratic deliberation process means
that they cannot be inherent rights if inherent rights are grounded in an actual
Hobbesian social contract.
The second implication comes from the fact that constitutional
deliberative democracy requires respect for human rights. Since the
legitimacy of any corporate rights is dependent on a system which requires
respect for human rights, human rights must take priority over any and all
4 For recent views on deliberative democracy see: J. BOHMAN, W. REHG (Eds.):

Deliberative Democracy: Essays on Reason and Politics, Cambridge, MA (The
MIT Press) 1997; J. ELSTER (Ed.): Deliberative Democracy, Cambridge
(Cambridge University Press) 1998; and S. FREEMAN: "Deliberative Democracy;
A Sympathetic Comment", Philosophy and Public Affairs, Vol. 29, No. 4 (Fall
2000) pp. 371-418.
130
corporate rights. Further, something similar can be said about the priority of
sovereignty rights over corporate rights.
Thirdly, constitutional deliberative democracy requires the non-arbitrary
rule of law. This has two implications for corporations. It means that the law
must treat all corporations in a similar fashion. The historic practice (which
some people wish to revive) of a corporation's charter placing that
corporation under specific obligations relative to social goals would violate
this constraint. On the other hand, it means that corporations should not be
able to be arbitrary when dealing with employees, investors, customers, or
anyone else. Some sort of due process for corporate actions seems required.
Radical separation, priority of human and sovereignty rights, and non-
arbitrary rule of law are constraints on the rights of corporations that come
from grounding these rights in an actual Hobbesian social contract. However,
there is another side to this grounding, and it is this which ties together the
utilitarian and social contract approaches. When discussing the connection
between human happiness and efficiency (both production efficiency and
system efficiency), we were hesitant; we repeatedly concluded a need for
constraint and regulation, and even then only concluded happiness and
efficiency "might be seen by many people to be connected." Such a
conclusion may make a utilitarian hesitate, but in a deliberative democracy
such a conclusion is strong enough to show production efficiency and system
efficiency can constitute a proper appeal to the common good of the right
form to require consideration by democratic citizens. 5 Because they want to
give priority to other values, the citizens may reject this appeal and decide to
live without corporations, but if they accept this appeal to the common good,
then they both commit themselves to permitting corporations to exist, and
they commit themselves to recognising the legal rights corporations need to
achieve production efficiency and to take part in competitive free markets. In
other words, they must recognise certain "inherent" rights of corporations,
and must ensure that these rights are recognised by law.
This then is the conclusion I have drawn with respect to the utilitarian and
social contract arguments for the inherent rights of corporations. I conclude
that utilitarian arguments cannot by themselves establish that corporations
have any inherent rights, but utilitarian-like efficiency arguments have the
correct form for appealing to the common good in a constitutional
5 On the nature of public reasons, see J. RAWLS: Political Liberalism, New York
(Columbia University Press) 1993, pp. 212-254.
131
JOHN DOUGLAS BISHOP
deliberative democracy. This means that if a deliberative democracy decides

to allow corporations to exist, they ought to recognise as the inherent rights
of corporations those rights which allow efficiency to promote the common
good.
And what are some of these rights? What rights do corporations need to
achieve production efficiency? In the interests of time, I list only some key
ones:
1. the right to control (not to own) productive resources.
2. the right to manage employees. McMahon considers this the key right
that needs to be established (McMahon 1995). This implies a right to
be free from any form of direct "democratic participation" by
employees, as has been argued (McMahon 1989).
3. the right not to have specific social responsibilities imposed on them,
and the right to be free from direct government control.
Just as interesting are some rights of corporations that cannot be justified
by this combination of utilitarian and social contract considerations;
1. corporations do not have the right to vote, to lobby, or to directly
influence political discourse.
2. corporations do not have the right to have the same rights as real
people.
3. corporations do not have the right to secrecy, but probably do have a
right to patents.
The approach I have taken can provide a powerful criterion for deciding
what the rights of corporations ought to be.
References
AOKI, M., GUSTAFSSON, B., WILLIAMSON, 0. E. (Eds.): The Firm as a Nexus of

Treaties, London (Sage) 1990.
BEN-NER, A., PUTTERMAN, L.: "Values and Institutions in Economic Analysis",
in: AVNER BEN-NER, LOUIS PUTTERMAN (Eds.): Economics, Values, and
Organization, Cambridge (Cambridge University Press) 1998 pp. 3-72.
132
BISHOP, JOHN DouGLAS: "A framework for discussing normative theories of

business ethics", Business Ethics Quarterly, 10, 3 (July 2000) pp. 563-92.
BOHMAN, J., REHG, W. (Eds.): Deliberative Democracy: Essays on Reason and
Politics, Cambridge, MA (The MIT Press) 1997.
CARROLL, G. R., TEECE, D. J. (Eds.): Firms, Markets, and Hierarchies: The
Transaction Cost Economics Perspective, Oxford (Oxford University Press)
1999.
DOBBIN, MURRAY: The Myth of the Good Corporate Citizen: Democracy Under
the Rule of Big Business, Toronto (Stoddart) 1998.
ELSTER, JON (Ed.): Deliberative Democracy, Cambridge (Cambridge University
Press) 1998.
FREEMAN, SAMUEL: "Deliberative Democracy; A Sympathetic Comment",
Philosophy and Public Affairs, 29, 4, (Fall, 2000) pp. 371-418.
FRENCH, P. A., NESTERUK, J., RISSER, D. T.: Corporations in the Moral
Community, Fort Worth (Harcourt Brace Jovanovich College Publishers)
1992.
GALBRAITH, JOHN KENNETH: The Affluent Society, London (Hamish Hamilton)
1958.
GROARKE, LEO: "Can Capitalism Save Itself? Some Ruminations on the Fate of
Capitalism", in: JOHN DOUGLAS BISHOP: Ethics and Capitalism, Toronto
(University of Toronto Press) 2000.
HODGSON, BERNARD: Economics as Moral Science, Berlin (Springer) 2001.
LITTLE, I.M.D.: A Critique of Welfare Economics, Oxford (Oxford University
Press) 1957[1950).
McMAHON, CHRISTOPHER: "Managerial Authority", Ethics, I 00 ( 1989), pp. 33-
53.
MCMAHON, CHRISTOPHER: "The Political Theory of Organizations and Business
Ethics", Philosophy and Public Affairs, 24, 4 (1995), pp.292-313.
RAWLS, JOHN: Political Liberalism, New York (Columbia University Press) 1993.
133
Chapter 7
Degrees of Property
MICHAEL NEUMANN
I. Property and Justice

II. Justice in Acquisition
Ill. Degrees of Justice, Degrees of Acquisition
IV. Calibrating Property Rights
V. Applying a Degrees-of-Property Model
VI. Pracitcal Considerations
VII. From Traditional Property to Intellectual Property
VIII. Conclusion
Sometimes people wonder why we should look at the morality of property

at all. Property rights are taken to be legal constructs. Their validity rests, as
Hume suggested, on their utility. In this context it makes little sense to focus
on the specific provisions of property law and ask about their moral
foundation. What has a foundation in morality is the whole system of
property itself: laws, distributions, expectations, conventions. And the
general usefulness of this arrangement is so large a question, so fraught with
uncertainty, that it is almost beyond serious discussion.
This approach made a certain sense when -perhaps I should say, "if' -
property law and its rights are essentially static. It is not clear that there ever
was such a time. Today, however, moral claims are really an important part
of the economic system itself, and of its legal expressions. Many billions of
dollars turn on moral arguments about intellectual property; whole industries
may stand or fall on how judges and legislators decide what moral principles
should be embodied in legislation. Morality is no more peripheral to the
workings of the market than advertising.
Yet for all its importance, the core morality of property has received little
attention, far less than a superficial survey of the vast literature would
suggest. A great deal has been written on the fair distribution and re-
distribution of property once it has been acquired. A great deal has been
DEGREES OF PROPERTY
written on moral constraints to be imposed on the acquisition process. But the

theory of acquisition itself has remained, to a large extent, a gloss on Locke's
view that a property in something is obtained by mixing your labour with that
thing.
Nozick's discussion of Locke in Anarchy, State and Utopia pretty well
typifies the contemporary approach. There are questions about mixing labour:
"If I spill a can of tomato juice and spill it in the sea so that its molecules ...
mingle evenly throughout the sea, do I thereby come to own the sea, or have I
foolishly disseminated my tomato juice? " 1 There is great concern about the
workings of Lockean provisos that constrain the acquisition process: what is
it, after all, to leave "enough, and as good, for others?" And there are
suggestions for improving the proviso, driven by the extent to which authors
try to make it accommodate considerations of distributive justice. The core
acquisition process itself, however, is left to go according to whatever
conventions society finds workable. So morality comes into the picture
mainly in the formulation of restrictions on acquisition, to be expressed in a
proviso that keeps acquisition from wronging others. Thus Nozick formulated
his entitlement theory of justice as follows:
I. A person who acquires a holding in accordance with the principle of
justice in acquisition is entitled to that holding,
2. A person who acquires a holding in accordance with the principle of
justice in transfer, from someone else entitled to the holding, is
entitled to the holding,
3. No one is entitled to a holding except by (repeated) applications of I
and2.
This, says Nozick, compels a very concise theory of distributive justice:
The complete principle of distributive justice would say simply that a
distribution is just if it arises from another just distribution by
legitimate means.2
Just about everything in Nozick's theory except acquisition itself has received
close examination. The "principle of justice in acquisition" has received it in
ROBERT NOZICK, Anarchy, State and Utopia, New York (Basic Books) 1974, p.
175.
2 R.NOZICK, p. 151.
135
MICHAEL NEUMANN
the form of exhaustive arguments about the proviso. All other statements of
the theory have be subject to extensive critique. But acquisition itself hasn't,
for the very good reason that Nozick has no principles of acquisition. He
simply assumes that we will eventually revise Locke's theory so as to
produce them. The process of acquisition, as opposed to the constraints on
that process, are seen primarily as an almost technical matter, not an
appropriate place for great moral concerns. And so it has gone since his
seminal work.
I will argue that this approach is quite wrong. Justice belongs at the core
of property rights, not on its periphery. It must be embedded in the
acquisition process itself, before any constraints on acquisition are invoked
and long before the distribution of property comes into consideration. Only
considerations of justice can legitimate the original acquisition process, and
these considerations shape it in momentous ways.
I. Property and Justice
The support for this claim is both external and internal to the theory of
acquisition. Externally, one might ask what other than justice might
legitimate property rights. Traditional, deontological prescriptions cannot do
so, because they already presuppose legitimate possession: you must not
covet your neighbour's ass because he already has legitimate possession of
the animal. Consequentialist justifications, whether of original acquisition or
of a whole system of property, are similarly insufficient, not because they are
implausible but because they are unstable and uncertain. No doubt at some
point in history, somewhere in the world, our current property arrangements
may have optimal or satisficing consequences. How we would know that they
have such consequences at this moment, I have no idea. And though it may
be impractical continually to revise our system of legal property rights, its
consequentialist rationale must be subject at least to intermittent, often
undetectable failures, for large-scale economic and social reasons beyond our
capacity to determine with any useful degree of certainty. So consequentialist
justifications for any current system of property may exist, but they are not
really available to us. If I have a detectable moral property right to
something, it can only be because I deserve to have that thing, that is, because
136
DEGREES OF PROPERTY
some non-consequentialist principle or consideration of justice implies that I

am entitled to possess it.
There is also support for this view internal to Lockean theories of
acquisition. Locke believed that acquisition involved a mixing of myself with
what is acquired. But it was only the mixing of labour- not, e.g., skin, hair,
or excrement~ that mattered. Why? Certainly these other items are as much a
part of myself as my labour. Or, if me ness is what's wanted, why not mix a
ground-up finger or toe into the soil? (This question also indicates that a mere
extension of self-ownership is not sufficient to create a property right.) The
choice of labour in preference to these substances suggests that it was the
mixing of some meritorious aspect of myself that mattered. This suggestion
is reinforced by Locke's claim that God gave the earth to the industrious. 3
They deserved what they acquired.
Today, conservatives often extend this half-conscious strategy of basing
property rights on justice. They claim that people mix other meritorious
aspects of themselves with the object, such as the willingness to take risks, or
their creative thought processes. As for Nozick, he explicitly specifies, not
only that the proviso is around to impose constraints of justice, but that the
process of acquisition itself should be just: there is justice in acquisition.
II. Justice in Acquisition
Suppose, then, that an acquiSitiOn process is morally legitimate, and

secures a moral entitlement to something, only if that process is just. What
sort of justice would be involved? To address the question, I will use Gregory
Vlastos's convenient typology of concepts. 4 He suggests that we can see the
various sorts of justice as an allocation of goods according to one of the
following formulas:
To each according to
-his need;
3 LOCKE, Second Treatise of Government, Chapter V, section 34.

4 See GREGORY VLASTOS, 'Justice and Equality', in RICHARD BRANDT, (Ed.): Social
Justice, Englewood Cliffs, NJ (Prentice-Hall) 1962, pp. 31-72.
137
MICHAEL NEUMANN
-his work;
-his merit;
-his worth;
- the arrangements he has made.
The last two formulae can have little to do with the morality of property
acquisition. Vlastos's explanation of "to each according to his worth"
concerns that value that persons possess simply in virtue of being people, and
apart from their meritorious qualities. Since this value is intrinsic and equal
in everyone, it is hard to see how it could be central to a theory of property
acquisition: we may have equal human rights to a certain level of material
well-being, and this may require us to possess certain things, but such
considerations can't explain why I, not you, should possess any particular
item. As for 'to each according to the arrangements he has made," this evokes
the fulfilment of contracts. These contracts may well result in the acquisition
of property through transfer, but they cannot easily result in original
acquisition which is, as it were, generally an affair between me and some
object or creation, not between me and another person. Arrangements
between persons involving objects normally presuppose that one party to the
arrangement already has legitimate possession of the object, so some prior
notion of acquisition is needed. So neither worth nor arrangements can be
expected to play a prominent role in determining the moral legitimation of
original acquisition.
So we are left with need, work, and merit.5 This is hardly surprising. Need
always comes up in discussions of the proviso, and left-wing theorists
commonly suggest that need by itself creates entitlements to certain goods.
Others, of course, place emphasis on work and merit. But if these are the only
plausible means to lay a moral foundation for property, then something is
very wrong with Lockean and neo-Lockean notions of acquisition, at least as
they have been interpreted up to now.
5 This may be confusing because, for some people, the work one puts into
something is part of its merit. Not so for Vlastos: if you and I both produce ten
widgets, but yours are better, or produced faster, that's where your merit exceeds
mine. Conceivably but certainly not necessarily, you might deserve something
merely because you possess a certain merit, like kindness, apart from its capacity
to enhance produced goods. Vlastos's scheme implies no contradiction of the
notion that work itself is meritorious; it merely accounts for this sort of merit
separately.
138
DEGREES OF PROPERTY
III. Degrees of Justice, Degrees of Acquisition
My need, work, and merit all admit of degree: I can have more or less
need and merit, work more or less. (Note that these are common-sense
notions and do not involve essential reference to market conditions.) But
according to Lockean theories of acquisition, property does not normally
admit of degree. If you and I play different roles in an acquisitive process for
an indivisible object, then it may be that the proportion of ownership is
divided between us in accordance with one of these principles of justice. But
our combined possession of the item is still an ali-or-nothing affair, just as it
is in the individual case where I alone acquire something. Before external
principles of justice or morality kick in, acquisition procedures typically
confer a complete and eternal entitlement to the thing acquired.
Logically, there is no reason this should not be the case. Perhaps once my
need, work, or merit passes a certain threshold, I am entirely entitled to some
object related to those factors. But this doesn't make any sense in moral
terms. The more I need, work, or merit, the more I deserve; there is no
threshold past which all deserts are equal. If the essence of property right is
justice, and therefore desert, why would my deserts level off in this way?
Why wouldn't my entitlement to an object be less than entire, and correspond
to the degree of desert I had obtained with respect to that object. In practice
we might adopt a threshold convention to simplify the allocation of goods.
But this would be a case of consequentialist considerations trumping
considerations of justice, not an arrangement expressing the role of justice in
the acquisition process itself.
A property right that does not admit of degree should also be
distinguished from an absolute property right. Lockean property rights are
not absolute but presumptive: what I own, I own completely, but I cannot do
whatever I like with it. Though Lockean principles of acquisition place no
restrictions on what I possess, they always await the application of the
restrictions inevitably demanded by moral principles external to the
acquisition process itself. Indeed the "proviso" is a door left open for these
external principles to make their demands. However my rightful possession
of the object normally remains eternal and complete. It is limited in it use, but
possession is still an ali-or-nothing affair: either I have the object, forever, or
I don't.
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MICHAEL NEUMANN
We might also say that, though Lockean property is not unlimited and
therefore might be said to admit of degree with respect to its spatial extent,
that's the wrong sort of degree. True, my labour doesn't get me 100%
property in I 00% of the universe. But it does get me I 00%, of whatever I
work on in the right way, and the spatial extent of my labour bears no
consistent relationship to the desert that labour confers on me. Though my
reward has spatial limits, these don't correspond, and aren't intended to
correspond, to its ultimate value. The plot of land which I acquired through
my labour could over time come to be worth a few thousand dollars, or an
indefinitely large amount. You might have worked just as hard and well, yet
your reward might quickly become valueless. 6 This differential does not, in
Lockean theories, undermine the rightfulness of acquisition. If we both
homesteaded on forty acres, we both get our forty acres, forever. The same
amount of effort produces roughly the same entitlement to roughly the same
amount of stuff. Because Lockean property rights do not admit of degree, that
one of us was much more richly rewarded is of no consequence. We both
completely have what we have, and that's it.
There is, then, a glaring disconnect between the moral basis of Lockean
acquisition and the property rights it confers. The acquisition process can
create a moral entitlement only by appealing to considerations of justice. But
these considerations of justice demand a reward proportionate to the deserts -
the needs, work or merit - of the acquisitor. But the all-or-nothing nature of
Lockean acquisition fails to meet this demand. The reward can be
proportionate to the deserts of the acquisitor only if my property in the
reward is proportionate to my desert for it. If people almost always get an
eternal and entire property in an object, regardless of their degree of desert
for that object, proportionality will rarely be achieved.
IV. Calibrating Property Rights
How then can we bring the acquJsJtJOn process into line with its
foundations? On a practical level, the answer couldn't be simpler - we can't.
6 Note that this might happen in improbable, unforeseeable circumstances, so one

cannot say that my good fortune was somehow the result of my meritorious
rational prudence after acquiring the item.
140
DEGREES OF PROPERTY
Any system that allocates goods among persons has to overcome the ethical
challenge of weighting all relevant moral considerations, and the epistemic
challenge of determining the facts relevant to those weighted considerations.
We cannot expect to meet either challenge in the foreseeable future. Since
systems of property acquisition depend on further progress in these areas, we
cannot yet expect to develop practically adequate systems of this sort. Just as
Lockeans can't come up with a generally accepted proviso or assess all
factual claims relevant to their acquisition process, so we can't come up with
the generally accepted weightings and factual claims needed to establish
precise degrees of property. But this does not change the fact that any
practicable systems of property we construct need to be based on recognized
principles of justice, modified in accordance with collectively practical, i.e.,
consequentialist considerations. To construct these systems, we need to know
what ideal model we're deviating from. So we need to explore how the moral
landscape has changed when we realize that ideally legitimate acquisition
must take account of the fact that the property in what is required can extend
no further than the desert of the acquisitor. And we will find that the moral
landscape had changed quite a bit.
In general and theoretical terms, the main change is that distributive
justice no longer functions as a constraint on property. There is no longer
anything "confiscatory" about it, nor need there be any "proviso" functioning
as an externally imposed limit on the acquisition process. If I no longer
deserve something, that doesn't mean that justice will come along and
constrain my property rights in that thing. In fact that can't happen, because I
never had that extensive a degree of property in it in the first place. When we
learn, for instance, that the prize book you gave me when I was ten is now
worth fifty thousand dollars, it is not as if my property is going to be taken
from me. I will no longer be allowed to have physical possession of the book,
but my ceasing to have that possession does not mean that justice is somehow
trumping my property rights. It is rather that my property right never did
extend to my current possession of the book, because I did not have that
much property in it. I had property in it only to the point where I had received
value from the book in proportion to my merit, and that I never did generate
fifty thousand dollars worth of merit. If confiscation implies the taking of
something I legitimately possess, nothing is confiscated. The item is taken
from me so that it can be assigned to its rightful owner.
141
MICHAEL NEUMANN
Fonnally speaking, degrees of property might be determined in something

like the following manner. The degree of property Pxy that a person x has in
an item y is a function of x's work, merit, and need in relation to y. The
relative weighting of these distributional functions is expressed by the
constants w, m, and n respectively. They add up to 1. Wxy is the work x has
put into y, Mxy is the merit of the work x has with respect toy, and Nxy is
the need x has for y. X's desert in y, Dxy, is the weighted sum of these three
factors. X's property in y is Pxy, and must fall between 0 and I. (Remember
that 1 represents full property in y, and will be unusual for items of large
value.) So
Dxy =[(1-m- n)(Wxy) + (1 - w- n)(Mxy) +(I - m- w)Nxy]
and where Dxy :5:1, (Dxy = Pxy), while where Dxy > L Pxy = 1.
So you can in theory have done more to deserve property than the
property itself can reflect, in which case you might be entitled to some sort of
social compensation.
V. Applying a Degrees-of-Property Model
Very atypical sorts of property may escape this model. If there is such a
thing as property that I have in virtue of my worth, it will be
non-distributional; it doesn't get calculated or enter into the equation. The
property in my body may be property of that sort: it may not matter, for
instance, how much work you put into my body. You may still have no
property in it. On the other hand, non-distributional property is not
necessarily absolute property: if the destruction of the universe would be
prevented by snipping a hair on your head, against your will, your property
right might not extend to such snipping. This means that non-distributional
property rights might in fact be balanced against considerations of work,
need, and merit, but not according to some distributional fonnula.
Building justice into the rules of property acquisition does not solve any
problems of distributive justice. In particular, we will not agree on the
relative weightings of needs, merit and work. These problems now re-
emerge as arguments about whether or not someone has some degree of
property in something. They persist within the theory of acquisition. For that
142
DEGREES OF PROPERTY
very reason, what is eliminated is the conflict between property acquisition

and distributive justice.
Also eliminated, though in a curious way, is the conflict between justice
and free exchange. Nozick and others hold that the patterns of distributive
justice will inevitably and legitimately be disturbed by procedurally fair
bargains that produce new patterns of holdings. But procedurally fair
bargains require that there is something to be bargained away, let's say
between me and you. This something may have come into our possession
through other exchanges, but at some point, someone acquired it. To simplifY
the discussion, suppose that the property we are going to exchange is ours by
original acquisition. Then it follows that we both justly possess what we
have: if we have property in it, it can only be because we deserve to have it
according to the principles of justice. Now after the exchange, I may, sooner
or later, get more utility out of the item than I deserve; the same holds for
you. (This is quite likely when the exchange involves housing or investment
vehicles and quite unlikely when it involves consumer goods.) It will not
necessarily be the case that a beneficial exchange exceeds my property rights,
because there may be some merit, considerable merit, in making the
exchange itself. Trading ability is a meritorious skill and may have earned us
additional desert for the objects acquired. But quite possibly, an exchange
will result in our possessing more than we deserve. In that case, the exchange
will be annulled or in some way modified, because it violates property rights,
which make it impossible to acquire a right in something beyond one's desert
in that thing! Then it is not as if some principle of distributive justice
overrides my property rights. It is rather that I have ended up with something
in which I never had a property in the first place- not to that degree.
As it goes for this "first exchange," so it will go for exchanges dependent
on our first exchange, or other exchanges. Whenever an exchange results in
the possession of undeserved items, something has to give, because you
cannot have any degree of property in something beyond what you deserve.
But for that very reason, an exchange never results in people having property
they don't deserve: since property is rightful possession of an item, that's
impossible. So if we look at property rather than mere physical possession,
exchange will not upset just patterns of distribution; it will merely move
everyone from one just pattern to another. This may in practice involve much
more interference in exchanges than libertarians would like, but they cannot
143
MICHAEL NEUMANN
claim that this interference violates their property rights. On the contrary, it is
dictated by their property rights.
VI. Pracitcal Considerations
In more practical terms, what would degrees of property look like?

When eternal possession of an item corresponds to someone's desert, and
possession is limited only by moral constraints external to the acquisition
process, then that person's property in the item will look like a conventional
property right. This counts as having a I 00% property right. How often this
will occur depends in part on whether justice must compensate for an unfair
"baseline." If I have a head-start in life, perhaps I deserve less in proportion
to my work, merit and needs than you do. The notion of degrees of property
itself is neutral on this issue.
In other cases, property will have a degree less than I 00%. My property
in an item will be less than conventional rights would allow. Lesser property
will have limitations on the manner in which an item may be used, or how
much of it may be used, or the time for which it may be used. These
limitations are not like Lockean provisos; they will not normally reflect the
claims of others, or external moral constraints. It is not, in other words, that
my use is restricted by competing moral considerations. It is rather that the
moral considerations on which my property is established do not extend far
enough to justify such use.
There are many ways other than limitation in time by which I might have
less than complete property in something. I might be forbidden to use it in
certain ways, or forbidden to sell it, or forbidden to pass it on to my heirs, or
forbidden to profit from its sale. And some of these restrictions are in fairly
common use. But these restrictions are almost always a matter of external
constraints on property, of compromise with the claims of other owners or
with various socially beneficial principles. I will look at how degrees of
property work when built into the acquisition process - first at limitations on
land ownership, and then on limitations of intellectual property rights.
I44
DEGREES OF PROPERTY
VII. From Traditional Property to Intellectual Property
Suppose a Lockean case where I work on some unoccupied land; this is

the obsolete paradigm of modern property rights. Even if I put in several
years of hard work, it will in many circumstances seem implausible that my
initial labour could give me eternal title to the land - my "mixing of labor" is
certainly meritorious, but it isn't that meritorious. However, if I continue to
farm the land, I continually put labour into it. This increases the likelihood
that my work, over time, entitles me to possess the farm. (Considerations of
merit may also apply; is my labor productive?) In practical terms, I might be
assigned a high degree of property in my farm based on the expectation that it
will continually require my labor.?
7 This degrees-model of property differs in at least three respects from models

inspired by the neoclassical notion that one's desert is equivalent to the
contribution of my work to the value of aggregate final product. First, the
degrees-model makes it possible to have, in some circumstances, a property in
something based on need alone. This possibility can of course be eliminated by
setting the weighting of need to 0 in the determination of desert. Second, the
degrees of property model breaks down my contribution into distinct elements of
work and merit. In theory this may make no difference, but in practice it could
affect the calculation, because "pure" merit might be assigned far more weight
than "pure" work. A great artist might be supposed to have a very extensive
degree of property in some creation even if that creation didn't take a lot of work
and didn't have an enormous market value. In this case, merit will have made a
contribution to desert that would not be reflected in the marginal-contribution
account of value. Third, and most important, the neoclassical calculation of
desert requires that the value I contribute is closely tied to the market value of
that item. If the house I build will sell for a million dollars more than its raw
materials, then I must have added that much value. Not so in the
degrees-of-property model: the value of my contribution is to be determined by
some assessment of my merit and work in which market values do not play a
decisive role. If, in a different market, that house would have sold for only ten
thousand dollars more, then my desert can be expected to fall somewhere
between the two. Work and merit have to be assessed according to some standard
independent of current market forces - something along the lines of what comes
up in pay equity disputes - and therefore will deviate from a neoclassical
assessment. Here, obviously, a distinction is made between moral and economic
145
MICHAEL NEUMANN
However, there are also reasons why I might have less than a full degree
of property in that land. One has to do with the needs of others: if they need
some opportunity to work the land, or a portion of its products, then I will
never have had title to those opportunities or products in the first place.
Again, nothing is "confiscated" from me; it's just that my work did not
suffice for me to acquire it. Perhaps needs will not limit my property right-
perhaps the bums should work for a living - but such limits are a real
possibility.
Another sort of reason may have to do with the land's increase in value.
My work was not meritorious enough to enable me to get thirty million
dollars by selling the land for condos. So I never had the right to make such a
sale, and my ownership should reflect that fact. I should be constrained from
making more than a much lesser amount by the sale.
There is another possibility- one which, I hasten to say, does not reflect
the realities of farming in most of the world today. Maybe the land does not
increase in value, or not spectacularly. But time passes, perhaps generations
pass. Whether in my lifetime or in that of my heirs, the farm has become a
very prosperous going concern, and the farm's owners are comfortable,
underworked managers. They are coasting, and, over decades or even
centuries, perhaps the farm generates hundreds of millions of dollars' worth
of wealth. The farmers have become, in the fullest sense of the term, "haves,"
largely because my initial efforts have been parlayed into eternal ownership.
Or have they? This is a typical case where property rights may not extend
that far. After a certain point, the desert accumulated in the heroic early days
has been used up, and the additional work put into the farm is not sufficient
to sustain full property in it. There will be many cases involving land,
especially urban land, where this is to be expected, as it is with other
appreciating assets. If and when it is to be expected, a simple way of
expressing the limitation on property in these items would be to think of the
property right as limited in time. As the asset appreciates in value, the right
depreciates in degree. Eventually, barring additional meritorious effort, it
vanishes altogether. In the case of holdings such as stocks, a property right
might be prolonged by meritorious financial management or risk-taking, but
value, and non-utilitarian moral considerations are given their due. From a the
standpoint of justice, it simply isn't plausible that two people who perform the
same work with the same skill and diligence should have different deserts merely
because of their different positions in the market.
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DEGREES OF PROPERTY
here too one would expect that right to run out after a while. When it does,
one might ask what happens to the asset. As a matter of practice, it may
revert to the state. But it may well be that other people, on the basis of need,
gain title to the asset, at least for a time, or that others may acquire the asset
through work or merit.
Remember, however, that we are talking about the moral basis of property
acquisition, not a proposal for property laws. In any practicable legal system,
one could hardly expect landed property to have a nicely tuned expiration
date. Nevertheless it is important to realize that any system which accords
permanent property rights to appreciating assets is likely to run afoul of its
moral foundations unless it compensates for the conflict elsewhere. This has
very real practical consequences, because societies consult their moralities
when establishing the legal framework in which the market must operate.
When we turn to intellectual property, it is the Lockean system that seems
creaky and impractical, and the notion of degrees of property that seems like
a promising replacement candidate. In a Lockean model, it makes sense that
everyone has not only long-term, but eternal intellectual property in what
they write or create: they've mixed their labor more thoroughly in their
creations than has any farmer in a plot of land. It is only the status of copies
of the work that create any real issue. And as Lockean rights extend, it makes
sense that they should be transferred like any others, so that the works of a
great artist might be sold for pennies to make millions for advertisers of toilet
paper.
Degrees of property suggest a view more palatable to those disturbed by
the current system. In the first place, I will acquire in my creations only as
much property as I deserve, that is, as merit and work demand. This at least
opens the possibility of some relationship between intellectual property and
its intellectual merits, which are usually evaluated in terms other than their
market value. Second, since intellectual property can rarely be limited in
spatial extent, it is a prime candidate for limitation in time. Property in a great
original work might last longer than property in a mediocre one, though there
is room for argument here: audience appeal might itself count as a form of
merit. But the most important opening to alternative intellectual property
arrangements would involve debates around the value of popular creations.
Yes, the value of a good song might be quite high, but would it be in the
millions? If not, then property in that song would be extinguished by the very
fact that a certain income threshold had be crossed. The degree of property
147
MICHAEL NEUMANN
you have in an item cannot outstrip your deserts in relation to that thing: you
get as much property in an item as your associated needs, talents, and
activities are worth. So when an artist has got the value out of a creation that
he deserves for creating it, his property in that creation must cease.
Presumably, in such cases, it enters the public domain.
VIII. Conclusion
The notion that all property admits of degree is more a tidying up of

moral considerations than an utterly revolutionary approach. Because the
relative weights of need, merit and work are undetermined, the old
controversies continue. There is still room for dispute about the extent to
which the needs of the have-nots trump the work and merits of the haves. But
what vanishes is the conflict between property and distributive justice. No
longer can it be asked: if I legitimately acquired my property, if I obtained it
playing by your rules, what right have you to make me give it up? The
answer now is: "None: if you have to give it up, it is because your property
rights have run out." Justice does not trump your property rights. Instead,
they never extended past the point where possession runs afoul of justice.
Beyond that point, you never acquired it in the first place.
148
Part Four
The Tyranny of the Invisible Hand

Chapter 8
Understanding Market Theology

JoHN McMuRTRY
I. Understanding Market Theology

II. The Rationalist Religious Origins
III. The Foundational Idea: The Invisible Hand
IV. The Market's Doctrine of System Magic
V. The Taboo Against Economic Self-Determination
VI. The Religio-Moral Metaphysic As Scientific Fact
VII. The Problem of Freedom
Vlll. The Moral Grammar of the Market Doctrine
IX. The Justification by Individual Freedom
X. The Unfalsifiability of the Market Theology's Principles of Rule
XI. The Global Market Theocracy
The long struggle of escape [is] from habitual modes of thought and
expression .... The difficulty lies not in the new ideas, but in escaping
from the old ones which ramify, for those brought up as most us have
been, into the very corner of our minds.
John Maynard Keynes
(Preface, The General Theory of Employment, Interest and Money,
London, 1936.)
I. Understanding Market Theology
A standard critical view of the relationship between capitalism and

religion is that religion is an ideological cover story for capitalism.
Capitalism, it is contended, structures the real world. Religion conceals and
sanctifies it in justifying illusions. Marx most famously pressed this view
JOHN MCMURTRY
with an enlightenment epigram derived from Voltaire: "Religion is the opiate

of the people." 1 He sought, in contrast, to scientifically lay bare the "real
relations of society" underneath.
This paper will explore a deeper possibility - that the classical and neo-
classical market doctrine is itself a religion, and that its "invisible hand"
prescriptions regulate society's economic relations themselves. Beneath the
notice of the social sciences, I will argue, market theory and practice together
depend on a core structure of presuppositions of a necessary and benevolent
design which constitutes an unacknowledged religious metaphysic.
There has, of course, been a long scholarly interest in the relationship
between religion and capitalism, most notably with Max Weber's 1904
classic, The Protestant Ethic and the Spirit of Capitalism. Weber's analysis
highlights the personal-religious code of "time is money" that the U.S.
founding father, Benjamin Franklin, bore as the "spirit of capitalism" over
200 years before the global corporate capitalism of today. The analysis here,
in deep contrast, investigates the non-scientific and impersonal mechanism of
market doctrine as a machine-god idolatry, quite the opposite of Franklin's
folksy religious pragmatism of self-advancement. Weber looks for the
motivating force of will and method behind pre-industrial capitalism's
emergence. I analyse an inherited system of assumption presupposing an
"invisible hand" regulator of world economies, a metaphysics of "iron
necessity," and an inevitabilist market mechanism producing the public
interest independent of human plan - in short, a tacit fundamentalist religion
that regulates beneath consciousness of it. 2
KARL MARx: Writings of the Young Marx on Philosophy and Society eds. L.
Easton and K. W. Guddat, New York (Doubleday) 1967) p. 151.
2 My study of "market theology" began in the early 1980's with the emergence of a
bellicose market fundamentalism adopted by the Thatcher and Reagan
administrations See, for example, "The Market As God" in JOHN McMURTRY:
Unequal Freedoms: The Global Market As An Ethical System, Toronto and
Westport Ct., (Garamond and Kumarian Press) 1998, pp. 57-92. This analysis
moves to the doctrine's system-deciding foundations in economic theory itself.
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UNO ERST ANDING MARKET THEOLOGY
II. The Rationalist Religious Origins
A primary clue to the market religion emerges when one recognises that
the market doctrine's foundational idea of"the invisible hand' is originally a
Deist concept. From the very birth of market doctrine, Adam Smith's
canonical treatise, An Inquiry Into the Nature and Understanding of the
Wealth of Nations, discerns God's regulating purpose at work in the world
underneath the clash of individual wills and interests. 3 His implicitly deist
economics asserts that self-seeking market agents necessarily but blindly
fulfil the common good by the guidance of an unseen design which operates
beyond any goal or control of humanity. Smith's underlying metaphysic has
been so deeply assumed by economic orthodoxy since that it is concealed in
presupposition as an unseen regulator of understanding. Long a defining
frame of mind of market thought and practice, its a priori logos has admitted
of various historical expressions - from tolerance of a mixed-economy
"welfare state" in the post-War quarter century, to an absolutist orthodoxy of
one-right-way economic rule closed to any deviation. The "neoliberal
agenda" has distinguished itself in this chequered history by a militant
certitude of formulaic rule across the world with no "distortion" tolerated. Its
crusade for a "global market" has so prominently featured "market miracles,"
"necessary sacrifices," and "harsh punishments" for disobedience that its
covertly deist metaphysic has come to resemble an Old Testament
fundamentalism.
The deep-structural pattern of regulating thought I lay bare here is not,
then, as with economistic critique, an "ideology" that reflects the economic
base determining it, as the Marxian model proposes. The fundamentalist
religious pattern I disclose is, rather, a meta-framework of understanding
which regulates the perception and understanding of orthodox market
thought and practice as the ruling formula of the common good. It is not a
3 The foundationally regulating principle that the commercial self-seeking of

competing individuals in the micro produces in the macro what is in "the public
interest" resembles Mandeville's Fable ofthe Bees, only without Mandeville's
ironic distance of entymological model. The counter-intuitive inference of the
common good to private selfishness derives its plausibility from characteristics of
select cases which are falsely generalised into a generic cause-effect relationship
of universal necessity.
153
JOHN MCMURTRY
question, then, of a "mask" over economic reality so much as an organizing

mind-set which is blind to the religio-moral metaphysic regulating it.
III. The Foundational Idea: The Invisible Hand
"A theology without God is a contradiction in terms," it might be

objected, "and there is, in fact, no market God." A theism implies the
existence of God, Allah, or a supra-human Ruler, and there is no such
postulate in market theory.
In answer to this objection, we need to keep in mind that a transcendental
ruler of the market is, in principle presupposed by the notion of "the invisible
hand" which, it is believed, always brings the economy's supply into efficient
fulfilment of ("Classical Theory") or mathematical equation to ("Neo-
Classical theory") the rule of market demand. This preordained state is
idealized by such neo-classical mechanics as "equilibrium," and has been
reified for generations as a perfect, but factually false, necessity of Supply =
Demand ("Say's Law"). John Maynard Keynes, a philosopher by training
like Adam Smith, successfully challenged this long-reigning formula of
economic rule, but he has been ignored or vilified for most of the time since.
Only a Depression and War saved him from the fate of heretic during the
years in between.
Throughout the long era of society's dominance by the market religion, a
two-stroke master idea has persisted through alternative formulations: (I) the
necessary operations of "the invisible hand" adjusting market supply to
market demand by natura/laws of motion; and (2) the achievement of what
no human, alone or all together, could ever plan - an optimum social end-
state that could not be better. From the outset, no scientifically qualifying as
if attached to the notion of "the invisible hand" to indicate a metaphoric
purpose. Even when neo-classical "equilibrium" has been admitted as a
theoretical idealization, or "market failures" have been acknowledged, there
is no dint in the strictly regulating assumption that the market's invisible
hand necessarily produces the best of all possible worlds. The transcendental
154
UNDERSTANDING MARKET THEOLOGY
form that is here presupposed as "the Market" is not challenged as a certitude

even by leading moral philosophers of the era.4
Adam Smith explained this equilibriation of supply to demand by "the
invisible hand" in the matter of human lives very succinctly. "The demand
for men, like any other commodity," he explains, "necessarily regulates the
production of men." But this necessity of the invisible hand's ordering of
who lives and who dies is a law of nature. "Every species of animals," he
continues, "naturally multiplies in proportion to their means of subsistence -
(Thus] among the inferior ranks of people the scantiness of subsistence sets
limits to their reproduction - - [which] it can do with no other way than by
destroying a great part of their children. " 5 Market doctrine and theory, it is
true, no longer talks like its classical founder of the necessity for mass
sacrifice of children to the machinations of the invisible hand. It is no longer
socially acceptable, but neo-classical theory has in any case rarefied these
matters into mechanical equations. Yet no principle rules it out, and nothing
in the market has value for which there is no money demand - including
children's lives.
There must be exceptions to this attribution of "social optimum" to
circumstances in which human beings are regularly left to starve if they do
not fetch a price. Can a contemporary doctrine be so unconsciously
homocidal? Surely, more thoughtful neo-classical economists cannot be so
mind-locked. So let us, then, briefly consider the very best candidates of the
learned orthodoxy- Kenneth Arrow and Frank Hahn. We will meet Paul
Samuelson ahead. Frank Hahn explained his doubts to peers about the lead
tenet of the Doctrine over twenty years ago.6 The eminent Kenneth Arrow
acknowledged in the same period near the globalization turn that there may
4 As Bernard Hodgson points out in his paper in this volume, David Gauthier
deems that "coincidence of utility maximization and optimization in [the] free
interaction [of the market] removes both need and rationale for the constraints
that morality provides ... " (DAVID GAUTHIER: Morals By Agreement Oxford
(Oxford University Press) 1986, p. 93.
5 ADAM SMITH: An Inquiry into the Nature and Understanding of the Wealth of
nation, New York (P.F. Collior and Son) 1909, p. 93.
6 FRANK HAHN, "Reflections on the Invisible Hand", Royal Bank Review. No. 144
(April 1982).
155
JOHN MCMURTRY
be "failures of the market" in providing for its own conditions. 7 Yet neither
economic theorist permitted himself to imagine that the social optimality of
market selectors could ever be bettered. In Arrow's representative case, the
market's optimising structure is best understood by formal and mathematical
techniques, even if they "do not study actual economies." He also confides in
passing that market "efficiency" can require publicly subsidized measures to
support the market "where prices are inapplicable." 8 The latter condition has
been in place since Smith.
Frank Hahn, in contrast, seems to challenge the faith at its core. He
openly questions the factual plausibility of idealized market models to
explain the miraculous serendipity achieved by "the hand" of reconciling
"private greed" and "happy social outcomes. " 9 Yet despite near-heretical
wonderments at how the invisible hand works, in particular regarding the
"the co-ordination of intertemporal decisions" to equalise Supply and
Demand, Hahn does not ever imply that anything other than market magic
could work. He worries far more that "Government failure" by "intervention"
will bring much worse consequences. Markets are assumed, unlike any other
social subsystem, to be properly independent of public authority. Hahn thus
cautions delay of any "intervention" by more "argument and thinking," which
he nowhere recommends to the market. He specifically warns against any
"diminishment of the scope of the invisible hand," lest it "kill the hand
altogether."
Hahn's reflections on the invisible hand, then, do not doubt its miracle-
performing role of actually transmuting "private greed" into "happy social
outcomes." Rather, he upholds suspicion of any social meddling by
democratic authority in the invisible hand's supra-human management. He
bravely hints in borderline apostasy (emphasis added) that "in general one
can describe some form of collective or co-operative action which would
improve the lot of everyone. But," he quickly adds, "I will not pursue further
this quite important scent, for there are many more central issues to be
discussed." Hahn's confession could be studied as a sincere searching of the
7 KENNETH ARROW: Collected Papers of Kenneth Arrow: General Equilibrium

Oxford (Blackwell) 1983, p. 151.
8 ARROW, K.: Collected Papers, pp. 127, 152.
9 All quotations and attributions in the next two paragraphs are cited from FRANK
HAHN, "Reflections on the Invisible Hand", Royal Bank Review. No. 144 (April
1982), pp. 1-21, especially pages 9-14.
156
neo-classical soul. But in the end, only the mysteries of the Invisible Hand
remain for him that none has yet fathomed, not any question as to its supra-
human rule.
As with other deifications of ruling systems in the past, only the "vastly
incomplete" nature of our understanding of God is finally asserted. The
regulating article of creed that the market's unlimited growth is for the
common good remains intact throughout, whatever Hahn's pointed doubts
about his peers' models to explain how the Invisible Hand operates.
Consequently, he remains "unconvinced that there are any intrinsic limits to
its beneficence in its unlimited growth" (emphases added). In paradigmatic
substitution of the idealized model's expectations in place of tracked facts,
Hahn specially emphasises that "increase in leisure" and "healthy appetite"
are necessary consequences of the market's limitless and unregulated
growth. 10 General facts the opposite of a priori certitudes elude attention.
That working hours have, in fact, never decreased in market societies if left to
be self-regulating - and in particular since the deregulating Global Market
Crusade began -does not register. That the link between more commodities
and "healthy" disposition is nowhere demonstrated, and shown to be the
opposite in the highest growth markets, is not a reality to deter the certitude
of the received metaphysic. 11 In such doctrinal inversions of the real world
through the lenses of the ruling mind-set, we glimpse the depths of its
pangloss operations in even its most searching mind.
10 FRANK HAHN, "Reflections on the Invisible Hand", Royal Bank Review. No. 144
(April 1982), p. 9.
II "Healthy appetites" for more market commodities has resulted, in fact, in
exponentially increased volumes of global market junk foods and beverages with
the consequence of "over a billion people obese" by 2001, and over half of the
children of Hahn's own society unhealthily overweight, according to University
of London Imperial College researchers, (TIM RADFORD: "Scientists Reveal
Appetite Hormone", Guardian Weekly (August 15-21, p. 9). For general
empirical demonstration that there is no evidence of increase in objective or felt
well-being from increased commodity consumption or market growth, see
ROBERT LANE: The Loss of Happiness in Market Societies, New Haven (Yale
157
JOHN MCMURTRY
IV. The Market's Doctrine of System Magic
The market religion, as we know, was first announced by Adam Smith.

He strikingly revealed that purely self-seeking investors of money capital are
"led by an invisible hand" to achieve, in fact, the opposite of what they aim
at, the common interest. In this reversal of the normal sequence of human
aims and unintended consequences, "the invisible hand" guarantees that
market capitalists are infallibly led to achieve the opposite of what they aim
at, the good of society as a whole (emphases added):
... It is his own advantage, indeed, and not that of the society, which
he [the capital investor] has in view. But the study of his own
advantage naturally, or rather necessarily, leads him- to promote the
public interest. -He intends only his own gain, and in this, as in many
other cases, is led by an invisible hand to promote an end [the public
interest] which was no part of his intention. 12
Note that there is no conditionality to this account, not of time, place,
circumstance, or agent. Investors everywhere at all times, whatever the
investment or the commodity supplied, are "led necessarily to promote the
public interest" by the contrary motivation, self-seeking greed - always,
everywhere, and with all investor gains. No qualification of society is said, is
averred. No account of the meaning of the public interest itself is worthy of
deeper reflection. The Market achieves the common good with no human
participation in planning the certain happy social outcome it ensures by its
Invisible Hand management. We see here not only an unquestioning
deification of the Market. At the more technical level of explanatory logic,
we disinter a doctrine of unintended consequences which is the opposite of
fallibilist reasoning. Unintended effects are no longer apt to bear negative
consequences for reason to avoid by more co-operative forethought. They
are, on the contrary, infallibly positive unintended effects for all societies.
The perfect orchestration of countless changing factors by the apotheosized
Market Hand exceeds the wonders of Yahweh. The causal sequence is
predestined without human reason involved.
12 ADAM SMITH: An Inquiry into the Nature and Understanding of the Wealth of
Nations, Book IV, Chapter II, New York (P.F. Collier and Son) 1909. pp. 351-
52.
158
A metaphysical doctrine of the necessitation of optimal results by not

planning or verifying first is thus asserted which would ordinarily stagger the
scientific mind. But we are dealing here with a metaphysical story-line so
deeply ingrained that the implied predications of a fundamentalist religion go
unnoticed. An omnipotent, omniscient and benevolent Invisible Hand rules.
Like God, the Market is unlimited by any contingency of culture or space-
time.
The absurd entailments of this blind structure of dogma are, however,
blocked by its foundational presupposition. For example, it follows from the
doctrine's magical thinking that "the public interest" is necessarily achieved
by investors competing to sell homocidal weapons, junkfood, and prostituted
children to the market at the lowest price if there is sufficient or growing
demand for them. Each and all's revenues of sale count to the market
calculus as "economic growth" and, thus, more aggregate welfare, and there
is no theoretical qualification to rule against this entailment. In consequence,
the general prescription of "free trade" obliges the greater supply and sale of
such commodities in "free circulation" across borders. It was on this value
basis of the common good, for example, that the mass import and sale of
opium was prescribed by force of gunboats and cannon in the nineteenth
century, with the analogue of cigarettes 130 years later.l3 Similarly, ever
13 Five hundred thousand people die each year in the European Union from
smoking-related diseases, but the disease and mortality figures are graver in the
developing world to which most cigarettes are exported. International
epidemiologist Richard Peto of Oxford University has estimated that smoking is
responsible for 3,000,000 deaths per year world wide, which he predicts will
likely reach I 0,000,000 by 2025. In China alone, Peto estimates that 50,000,000
people will die from smoking-induced diseases at present statistical rates.
Former U.S. Surgeon-General, C. Everett Koop, observes: "I think one of the
most shameful things my country ever did was to export disease disability and
death by selling our cigarettes to the world." Clayton Yeutter, the U.S. Trade
Representative, in striking contrast, thinks within the parametric of the neo-
classical model. and so derives from its principles an opposite conclusion which
bypasses life co-ordinates: "I just saw the figures on tobacco exports a few days
ago and, my, have they turned out to be a marvellous success story." (Figures
and quotations are cited in GLENN FRANKEL: "U.S. Aided Tobacco Firms in Asia
Conquest", from The Washington Post in the Guardian Weekly (December I,
1996)p.l5.
159
JOHN MCMURTRY
more weapons sold to ruling oligarchies to repress their own people has
increasingly boosted "growth" and "value adding" since, to become the
leading commodity of manufacture trade in the world today. Although
weakly prohibited by some states, child prostitution has multiplied
exponentially since the I 980s in the "new deregulated global market" with
little or no critical interest by market theorists.
As innumerable health-depleting commodities and violence
entertainments and weapons systematically replace the "uncompetitive"
organic products and cultures of local societies, revealingly, no problem can
be discerned of the doctrine's coherence as a theory of "welfare
maximization." For greater "welfare" means only that more commodity value
has cleared in the market. Pathological consequences following from the
market's growth need not be engaged because the magic workings of the
invisible hand assure the opposite a priori, the "social optimum," by
competitive market operations. Doctrinal closure to the counter-indicative
facts of life is, in these ways, as confidently presupposed as the motions of
the tides.
Once laid bare, the paradigm discloses what none dares to suspect - its
logic of superstition. Optimum consequences for the common weal are
posited to follow automatically from the guidance of the Invisible Hand, even
if heinous effects in fact follow, because there is no theoretical resource to
recognise them, less so to select against them. Just as a benevolent
disposition for humanity's welfare is known to be built into God's omniscient
plan, so the market doctrine assumes happy outcomes of the Market -
however the evidence of despoiled life systems may demonstrate the
contrary. The difference is that such ill-fare effects cannot be directly traced
to the decision structure of God or Allah, but they can be to the Market's. In
terms of disconnection from reality and deleterious consequences, we
probably confront here the most powerful structure of superstition in history.
If life harms do register to the neo-classical value system, they are
conceptualised as "externalities" - an approximate theoretical correlative of
"the fallen material world" - which, it is supposed in more non-sequitur
substitutes for reality, more private property rights and market transactions
will inexorably correct. 14 Once troublesome negative facts are thus expunged
14 Ronald Coase's just-so story of adjacent farmers' property rights negotiated to

resolve their interpersonal problem of costs (R. COASE: "The Problem of Social
Costs", Journal of Law and Economics 3 ( 1960) pp. 1-44 ). for which in
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UNO ERSTANDING MARKET THEOLOGY
by these set-point operations of the market's metaphysic, only postulated

"equilibriums" and "optimums" remain to appear to the pangloss calculus.
The Invisible Hand does not, however, operate by merely ad hoc miracles
to which previous religions have been typically confined. Now human affairs
are ruled by a magical system which infallibly alchemizes out ofthe dross of
private money-greed the panacea of the public interest. In "the global market
era," these infallibly benevolent outcomes by ever more deregulated
acquisitiveness of "investors" competing to sell is universalized as inevitable
and providential for peoples everywhere - across all societies of vastly
different histories and cultures and with no time horizon, whatever the ill-fare
results in the actually existing world. If, in life reality, civil and ecological
degradation and collapse systemically accompany market reforms across
borders, the "laws" of market supply and demand remain assumed to be
naturally regulated for production of the public interest. "Government
interference" to regulate investors' speculative capital flows or the ruinous
atmospheric emissions of their enterprises is, accordingly, repudiated as
"dictatorial," increasing investor costs and violating consumer freedom, and
thus obstructing the market's necessary promotion of the common good. 15
If state intervention becomes undeniably required to preserve life
conditions themselves, a doctrinal decision sequence follows. The problem is
significant part he was awarded the Nobel Prize in Economics, is typical of neo-
classical orthodoxy's two-step reductionism of : (I) methodological stripping of
social problems to dyadic market transactions, and (2) meta-substitution of an
idealised story for the complexities of reality. These are the instituted ways in
which economic thinking is structured for systematic fact avoidance, and have
become generalised to even United Nations' prescriptions for resolving planetary
ecosystem crises (e.g., INGE SAUL et a/ (Eds), Global Public Goods:
International Cooperation in the 21' 1 Century, New York (United Nations
Development Programme (UNDP) and Oxford University Press) 2000, pp. 491-
93) where "Coase's Theorem" is presupposed as a structure of reality.
15 For example, Eric Schaeffer, head of the U.S. Environmental Protection Agency
until his resignation in February of 2002, reports in the Washington Monthly of
August, 2002 that the "pro-free market" Bush White House and the Energy
Department "undermined any attempt to hold corporations accountable for their
effluent- [and] collaborated with corporate lobbyists to enlarge loopholes in the
country's environmental laws" by JULIAN BORGER, "Washington Diary",
Guardian Weekly, (August 22-28, 2002), p. 6.
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JOHN MCMURTRY
first denied and its identifiers are invalidated as bearers of market-hostile

"negative thinking" or the lunacy of Chicken Little ("the sky is falling in"). If
the problem of "externality" affecting the public interest persists, the experts
reporting it are discounted and, if the issue continues in the public eye, are
publicly attacked. If the problem still persists as evident beyond the
corporately funded doubts of "Science," corrective intervention is prescribed
as acceptable only if it "avoids the heavy hand of government" -the opposite
of the invisible hand. The conditions for action are, then, to "earn the
confidence of investors" and to enlist "the magic of the free market" or, more
specifically, to extend to the affected large corporations new public subsidies,
pollution credits, bid opportunities for privatization of resources, with
willingness-to-pay readings of market signs as the legitimating process for
public concerns. Throughout this regulating doctrinal sequence of resolving
assaults on life conditions themselves by profitable market activities, one
ruling principle holds - to prescribe further market extensions to resolve the
market-driven problems. All roads lead back to Rome, the regulating
certitude of the doctrine that benevolent effects for society are inexorable by
the free and spontaneous operations of the Market's Invisible Hand. That no
trial or proof of the "necessary" market remedies is proceeded with prior to
public subsidisation reveals the ruling repertoire of the superstitious mind-set.
Manna and cargo cults of diverse kinds have, it is true, long bewitched
our kind, but none with a more systematically superstitious cause-effect
metaphysic than the Invisible Hand that infallibly produces the public interest
from the unalloyed greed of surplus-money possessors. Poignantly
propounded as "science," its inner logic is hardly less preposterous than tithes
to Rome to save the world from sin. What is magic if not action at a distance
by an invisible power known to work desired effects with no possibility of
being disproved? Has there, in truth, been a magic thinking ever instituted
which matches the orchestration by the Invisible Hand of numberlessly
diverse and contesting decisions across temporal and spatial divides to
infallibly achieve the common good? "Surely such nonsense cannot be left to
rule the world!" the sober-minded may exclaim. Yet which mainstream
market axiom, principle or economic theorist's work yet calls into question
any part of this structure of thinking?
Our condition in this way becomes an institutionalized thrall, the invisible
prison of a ruling paradigm closed off from its contra-indicative
consequences by a priori postulates of benevolent outcomes by competing
greed within the market's one universal Form. In a non-superstitious
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UNO ERSTANDING MARKET THEOLOGY
paradigm of economic organization, the self-maximizing behaviours of

money-privileged factions would not be assumed necessarily to produce
beneficial social outcomes by the optimising wisdom of a non-human design.
The actual market organization would be systematically tracked in its this-
worldly consequences of life gain or loss, and would be judged and improved
accordingly. This is, however, the road of reason which cannot be taken- as
long as the doctrine entails in principle the abdication of human
responsibility for how we make ourselves and the world.
V. The Taboo Against Economic Self-Determination
A necessary normative prohibition follows silently from the market's

concealed religious metaphysic. This implication is that no human agent
ought to play any role in the intention or the will to bring about what "the
invisible hand" necessarily achieves without human intervention. Only so
long as the eternally serendipitous adjustment of economic supply to demand
by the invisible hand is "not interfered with" can its magic work. Thus
humans are never to form co-operative arrangements which seek to alter or
counteract the invisible hand's rule. Just as religious group-think "leaves it to
God to decide," so too market doctrine demands that human governments
"leave it to the market to decide." In both cases, true believers prophesy
collective ruin as certain if there is violation of the self-regulating order. In
consequence, a converse dogma arises- namely, that the perfectly regulating
design of the market so transcends the capacity of human purpose or will to
aspire to that not even entire societies operating peacefully together can
presume to interfere in the received form of production and distribution
governing their lives. A system prohibition is thus absolutized - a taboo
against all human will that would flout the preordained perfection of the
market God. Thus for F.A. Hayek, any human planning or acting in concert
to modify the price operations of the market's invisible hand is doomed.
Arrogation of economic control by "social plan" or other hybris of social
human self-determination is a "fatal conceit" and the moral equivalent of
blasphemy in the market theology.I6
16 FRIEDRICH A. HAYEK: The Fatal Conceit, New York (Routledge) 1988.
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JOHN MCMURTRY
Adam Smith, we know, makes it very clear that the invisible hand of the
market serves the social good "through no intention" of humanity. Hayek, the
senior statesman of capitalist market doctrine in the contemporary era, goes
further with no demurral from fellow believers. He deepens the abyss
between the market's suprahuman perfection of design and humanity's
incapability of ameliorating its rule by explicitly affirming the certitude of
market capitalism's "transcendent order" to which "humankind owes its very
existence." Humanity, he asserts in the free market's unnoted denial of free
will, "does not have the option of choosing." 17 The "extended order" of the
capitalist market, Hayek warns, proclaims, is a higher order of perfection
than mere human intelligence can comprehend, and to which all peoples must
subordinate their earthly wills. "Thy will (ie., not mine) be done on earth as it
is in heaven" are his words, with his italics, in explanation of market
capitalism's transcendantal authority. In the abject enthusiasm of the
fundamentalist mind-set, he proclaims that capitalism's ruling order "far
surpasses the reach of our understanding, wishes and purposes and our sense
perceptions." !8
VI. The Religio-Moral Metaphysic as Scientific Fact
One crowning meta-assumption remains, however, to astonish the

unbeliever. This structure fanatic frame of thought is assumed to proffer strict
empirical generalisations from objectively established facts and to be the only
scientific form of economic reason that exists. That is why the best-selling
representation of the doctrine is called Economics with no qualification to
17 F.A. HAYEK:The Fatal Conceit, pp. 6-7, 74, 130-31.

18 F.A. HAYEK: The Fatal Conceit, p. 74. It is worth noting that Hayek's original
project was to achieve an hegemony of the market mind-set after the Depression
and World War II had engendered interventions by public authority in the market
to serve social goals linked to life needs. Hayek wrote (emphasis added): "Our
effort differs from any political task in that it must be a long-term effort
concerned not so much with what would be immediately practicable, but with
beliefs which must gain ascendance." See citation by BERNARD CASSEN:
"Europe: Market Not Community", Le Monde Diplomatique, April 2002).
164
suggest that it, not all of economics, is the one and only Economics that
exists.
Yet however God may be named, this one-size-for-all Economics posits a
higher-than-human ruler of human affairs which prescribes commandments
of how humanity must think and act, and its "inexorable laws" are divined as
certain, inalterable, and universally binding. In human society's long coming
of age, social groups' worshipping their own orders as commands of God is
well known. 19 Typically but not necessarily, a dominant sect reaps privileges
from this arrangement, and a public ideology apotheosizes its ruling norms as
eternal, necessary and obligatory. With imperialist regimes, the reigning
order is proclaimed as inviolable for all who live outside the group as well-
the sacred cause of "fighting infidels," or "bringing market freedom to the
world" - with increasingly efficient methods of violence and propaganda to
impose the master order on others. What is most remarkable in the modern
era, however, is that this ancient pattern is not seen through in a scientific
culture. Instead, it is assumed that because we live in "a modern market
society," this absolutization of its norms and their attribution to a
transcendental authority is impossible. No irony could be more fateful.
Beneath the conscious lives of the actors, a cunning of unreason has
developed. The group-mind disposition to deify its own social order has not
been superceded by scientific market doctrine, as supposed. Rather, it has
transmogrified into another form - a form that unprecedentedly deploys
technological science as its tool, rather than, as with collective superstitions
and theological institutions of the past, repudiating material science's vast
instrumental powers as a threat to the stability of orthodox belief. The religio-
moral metaphysics of the market is free from all such impediments. For
scientific technology has long been the fund-dependent servants of its rise to
power- from Galileo's research into missiles and navigational co-ordinates
in the early market states of Italy to genetically engineered foodstuffs and
space-age weapons today. 20
19 Emile Durkheim first proposed the hypothesis that religion could be understood
as social order deifying itself in The Elementary Forms of the Religious Life,
London: (Allen and Unwin) 1915, but he revealingly confined his analysis to pre-
industrial societies.
20 An official publication of Canada's Department of Foreign Affairs and
International Trade, expresses the pattern in microcosm. "The U.S. Military's
Space and Naval Warfare Systems Command sends a clear message to all small
165
JOHN MCMURTRY
Science is the instrument, the Market is God. Yet the new Universal
Church has escaped the enlightenment critique which exposed its
predecessor. Dressed in an engineering-physics lexicon to hide its
fundamentalist metaphysic, and legitimated by the regime's pervasive
regulation of everyday life as "economic necessity," former vulnerabilities of
fanatic dogma are concealed. 21 In this manner, the presupposition of the
market's "invisible hand" links with its this-worldly powers as the invisible
and the visible signs of its benevolent rule. The more the normative order is
globally instituted and people are habituated to its ritualized demands of daily
survival as "without alternative," the more iron and universally necessary the
order is presupposed to be.
Ironically, such a system can become self-fulfilling in the same way as
other ruling dogmas such as the natural servitude of slaves. No alternative is
permitted, and people become conditioned to the only way to survive (as
slaves) or prosper (as masters) - with labour factors of production and
owners of capital the modern era's correlatives of the relationship of ruler
and ruled. Thus when scientific method's demands for intersubjectively
observable invariance of sequence are applied to the market regime, the
saturating operant conditioning of its subjects and its institutionalized
incentives and aversive consequences can eventually enforce the aggregate
conformity which is thought to be produced spontaneously by natural laws.
Like the "eternal" Five Relations of Confucianism with its 3000 rules of
conduct expressing the "Mandate of Heaven," or the patriarchal Yahweh or
Allah of the Middle Eastern Gods with their elaborated universal commands
of every-moment existence, a socially constructed regulating order is, over
time, assumed as transcendentally given, and to be necessarily obeyed - with
harsh punishments for the deviant, and accumulating rewards for the
chosen. 22
telecom and information technology enterprises: it wants to do business with

them", CanadExport, (July 15, 2002) p. I. "Weapons of mass destruction" are
thus assumed to be good by the measure of the market parametric, but cause for
war if not.
21 This process of global prescription and enforcement of an "inevitable" corporate
market regime, "the global free market", is excavated and analysed in Value
Wars: The Global Market versus the Life Economy (London: Pluto Press, 2002).
22 The totem and taboos of "primitive" societies, in contrast, retained a strict
division between "the profane" and "the sacred" which, in the Global Market is
overridden. The market is all.
166
The circle remains closed in the prescribed given in even the "science of
economics," however, because one may not expose its coercively normative
structure on pain of unscientific "value judgement." Only the presupposed
value system is not a "value judgement." In expression of this ultimate modal
confusion, neo-classical practitioners and textbooks invariably proclaim the
"value neutraf' nature of their inquiries, even although an elaborately
institutionalized and strictly enforced value system of private property,
monetary exchange, and rewards/approbations and punishments/
disapprobations commands market actors through every moment of the
system's daily reproduction.
As long as this meta-circle remains closed to its own normative
assumptions and construction, the Market's institutionally prescribed norms
of private appropriation of the social means of production, money-demand
rights over all their products, and rounds of exponential increase and
accumulation of wealth in the possession of surplus-money possessors are
assumed to be the laws of "freedom," and are prohibited from any
"confiscatory taking" in a "free and democratic society." Moral prescriptions
and physical laws are thus conflated as "the inexorable laws of the market,"
which are assumed to structure social reality independent of human choice.
Even Marxists, who detest the system, suppose that its operations are
"independent of men's will," 23 and wait upon the certain outcome of these
very "inexorable laws" by an "inevitable class revolution." This sequence, it
is again believed, is necessary, only here the necessity is to cause workers to
"remake society anew" in the right way. As with other customary
constructions presumed as given by an inalterable design, a religio-moral
system of necessarily happy results endures by its pervasive assumption -
through "inexorable laws" either way.
Once socially constructed norms are thus reified, their necessary validity
is instituted by orthodox theory. Neo-classical orthodoxy thus assumes these
prescribed norms as "empirical laws" which "value neutral science"
discloses. As Bernard Hodgson has shown in judicious internal critique,
however, axioms of neo-classical economic theory are assumed without the
23 Marx most famously uses the phrase "independent of men's wills" in his oft-
reprinted 1859 Preface to A Contribution to the Critique of Political Economy to
describe "the relations of social production into which men enter" in their
material economic organisation.
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JOHN MCMURTRY
evidence to confirm their assumed lawlike nature. 24 In such a theoretical

situation, he argues, only a "nexus of institutional determinants" making the
economic facts conform to these a priori generalizations of neo-classical
theory can provide the factual confirmation required to transform their
normative idealizations into empirically confirmed hypotheses. I propose a
deeper route - examine the norms themselves as socially regulating value
structures, not as empirical laws. Then within the space of reason and choice
thereby opened, think through this prescribed system for how society Jives in
light of its proven life benefits and options. The formula of competitive
market greed as necessitator of the common good by ministration of the
supersensible Hand is magical thinking until it has been life-tested against
alternatives.
This magical metaphysic of neoclassical economics is, however, blocked
from view by an operation that is progressively built into its method -
representation by mathematical formulae whose formally hypothesized
conditions are not, in fact, remotely satisfied in real economies. By this
formal decoupling and reduction of economic analysis, reality is no longer
the object of study. 25 In its place, just-so stories of economic operations are
encoded into self-standing econometric models, and existing actuality is thus
made to disappear. It is dissolved into an a priori normative apparatus
masked as positivist by algebraic notations, and hermetically sealed off from
real economies by linear equations with few or no real referents to
empirically confirm or disconfirm them. 26
24 Bernard Hodgson, Economics As A Moral Science, Heidelberg (Springer-Verlag)

2001. Hodgson's analysis has been of great assistance to this paper's argument.
25 Frank Hahn thus acknowledges of one of neo-classical economics' "very
impressive" analyses that "it is impossible to claim that it applies to actual
economies." "Reflections on the Invisible Hand", Ibid, See FRANK HAHN,
"Reflections on the Invisible Hand", Royal Bank Review. No. 144 (April 1982) p.
10.
26 As the Report of the Commission on Graduate Education states the general
problem: "We might teach the language of mathematics, but not the logic of
mathematics, and end up with the grammar of the discipline rather than its
substance ... [Thus] mathematical economics ... leads to the elimination from the
field of study of the very questions which the real world of economic life
demands that we, as a profession, ask." See citation by PETER J. BOETHKE, "What
Is Wrong With Neoclassical Economics (And What Is Still Wrong With Austrain
168
Perfection of the orthodoxy develops over generations, often in the same

world-renowned scholastic centres as served the former Universal Church.
Yet because interpretation of the invisible hand's operations is open to
contention, these differences are mistakenly misunderstood as testing of the
doctrine. Now as then, the Church has many factions. But none doubts the
benevolent rule of God, or the optimal outcomes of the invisible hand's
operations for the common good. The basic difference in metaphysical
comportment from other fundamentalist religions is that neo-classical theory
adopts a nineteenth-century engineering model of flows and equilibria to
understand the ruling economic Design. Its paradigm can in this way
"scientifically" presuppose economic institutions as given in the way that
physical Jaws are given. They are no longer directly conceived as Jaws of
God, but of Nature, with the order sustained in eternal equilibriation by the
Invisible Hand. With the neo-classical model's template as engineering
mechanics, its Jaws are even Jess open to dispute and contesting
hermeneutics. One cannot interrogate or disobey physical laws.
VII. The Problem of Freedom
Throughout the mechanistic presuppositions and inferences of this theory,

the Market's laws are nevertheless propounded as "the basis of human
freedom." Although it is absurd to assert there is "no alternative" and
freedom of how to live at the same time, there can be no question that the
pervasive cause-effect linkage of the global market to democracy and
freedom has assisted in the selling of market commands. Again we might
consider a parallel here to prior Church method. Just as the adoption of
popular pagan celebrations by the Church became its festive face to the
masses, so contemporary global market doctrine presents itself as democratic,
with festivals of periodic elections occurring under ceremonies of high-end
market selling of competing images and products.
In considering this curious recent equation of the market to the liberating
structure of democracy, we should note that the alleged equivalence of
Economics)?" in: FRED FOLDVARY (Ed.) Beyond Neo-Classical Economics, New

York (Edgar Elgar Publishing) 1996.
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JOHN MCMURTRY
meaning only emerges a century after Adam Smith. Yet the certainty of
democracy as well as the wealth of all nations serendipitously completes the
benevolent powers attributed to the market God, and so incites more
fundamentalist passions of devotion to its rule. With human freedom as well
as material wellbeing necessarily dependent on the market's providence -
both incarnate in every shopper's choice - a darker political converse then
follows as well. Isolation, embargo or invasion must collectively punish
societies who transgress the market's beneficient order of liberty and
prosperity as a solemn obligation of "the Free World" (especially if the
delinquent Other sits on native subsoil resources of oil). The governments of
the "market democracies" have, accordingly, waged the "Cold War" and now
the "war against terrorism without any end in sight" to preserve "the Free
World" from threats to its way oflife.
As the mild and eminent American neo-classical economist Paul
Samuelson counsels in his famous text, evangelical spread of the doctrine is a
duty- if not by war (which there is no reason to suppose he counsels), then
by propagation of the One Truth: "Spread the gospel of economics any way
we can, I say." Samuelson's exhortation is exemplary of the doctrine, as is
his categorical title, ECONOMICS which assumes the one truth a priori. 27
VIII. The Moral Grammar of the Market Doctrine
There are, of course, various versions of the market gospel. Many

adherents to the doctrine explicitly defend and advocate its rule as the moral
command of God -televangelists, the religious right, and recent Republican
U.S. presidents, for example. Others of more scientific temper advocate and
justify it as akin to a natural or biological system, which is understood as an
inalterable and spontaneously providential order of nature. The more
formally inclined suppose it as scientifically self-evident mechanism of
human production and exchange which can be mathematically represented in
the form of number holding sway over the flux. There are diverse visions of
27 PAUL SAMUELSON, WILLIAM NORDHOUSE: "Thoughts On the Forty-Sixth

Birthday Of A Classic Economics Textbook", ECONOMICS. New York
(McGraw-Hill) 2002, p. xxviii. I am indebted to Stephen Regoczei for his
brilliant exposure of this point.
170
the One Truth, contesting sects and hermaneutics at many levels. But what is
in common among the variations on the master structure of thought is an
underpinning set of normative tenets which are not questioned but assumed
as the necessary order of the world. At the highest level of generality, we can
deduce these principles of political-economic creed by the logical method of
transcendental deduction - disclosing the market doctrine's normative
grammar of affirmation and negation by laying bare its regulating
presuppositions.
While morality and normativity itself are assumed by market doctrine to
have been purged from its "value neutral science," what regulates all
orthodox market opinion is a normative syntax in conformity to whose
principles the common good is necessarily produced. To the extent that
anyone or any school or any political party or faction affirms these basic
principles of economic and social morality, they are acceptable members of
the "free market" community of meaning and value. Conversely, to the extent
that individuals, schools or policy formers reject these guiding principles for
"getting the fundamentals right," they are to that extent deviant from or
heretics against the doctrine. Where we find a movement of mind to critical
thought (e.g., to rethink principle (6) below in perceived emergencies), the
thrall of the mind-lock is opened to question. The straightforward test is
whether these principles are implicitly or explicitly affirmed or rejected in
actual judgements and behaviours.
The guiding moral story of the market religion is the ruling cause-effect
theorem analysed in this paper's first section - namely, that competitively
self-interested money-capital investors necessarily produce the public interest
by the equilibriating operations of the invisible hand. The regulating norms
formalised below then follow from this inner logic of understanding as
sustaining subsidiary principles for achieving the common good. Orthodox
market theory and practice express these regulating principles of value set
and judgement by tacitly or aggressively rejecting any policy or position
which violates them. Together these principles constitute the system-deciding
imperatives ofthe market value-set:
(1) Pursuit of maximal monetary assets and control for oneself is: i.
natural, ii. rational and iii. required for economic and social
development;
(2) There is no rightful limit on acquisition of these assets and control,
in particular by state redistribution;
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JOHN MCMURTRY
(3) Freedom to buy and sell in self-maximizing transactions of money

and priced goods is the ultimate basis of human liberty and justice,
and there is no known limit to its rightful universalisation;
(4) The market's money-price system optimally allocates resources and
distributes goods and services in any society, as well as all societies
at once in "the global market;"
(5) Profit-maximization by investors is simultaneously : i. the ultimate
engine of economic advance and social well-being, and ii. is not to
be hedged by state regulation or ownership;
(6) Government interference or intervention in the market is: i. always
bad unless to support market opportunities for private-profit and ii.
is dictatorial in proportion to its reduction of such opportunities;
(7) Individual consumer desires are: i. permanently increasing and
unlimited in their growth, and ii. social welfare is necessarily
increased by greater commodity consumption to satisfy these market
desires;
(8) Growth of production and purchase of priced goods within the law -
"economic growth" - is necessary and desirable with no market
limit to the conversion of planetary and human life-organization into
marketable commodities and technological substitutes for natural
scarcities;
(9) Protectionism of domestic production of any kind is bad and to be
publicly deplored (while politically excepting dominant corporate
sectors);
(10) Whatever facts of life disaster may seem to contradict the necessity
and validity of principles (I) through (I 0) for society's production
and distribution of goods in short supply, these facts only appear to
conflict with the market's production of the social optimum, and can
always be explained and corrected by the more rigorous
understanding and implementation of market principles;
(11) Individuals or arguments which doubt or criticize: i. the supremacy
of the market system, or ii. the inherent efficiency of its production
and distribution of goods, or iii. the freedom of its agents are hostile
to human freedom;
(12) Any and all societies, parties or governments which seek to live by
any alternative or opposed order of economic organization are, to the
extent of their opposition, enemies of liberty to be corrected by all
means available from financial embargo to armed invasion.
172
There are of course many variations of conformity to this regulating

catechism of value-set- from reflex denunciation of deviation as "nonsense"
or "subversion" to silent acquiescence. A generic question, however, tests the
hold of these principles as an unexamined moral absolutism. To what extent
can we identify any market theorist, advocate or politician in office who does
not implicitly or outspokenly conform to all of these principles, or, more
precisely, who repudiates any by the maxim of his/her action or statement?
Exceptions release thought from the closed box.
IX. The Justification by Individual Freedom
A perplexity arises. The primary justification of global market rule is "the

freedom of the individual." The individual is said to be free because the
"consumer is sovereign," and the "investor is free of government
interference." Yet what, exactly, is the choice range of the rationally self-
maximizing market agent. Let us again deploy the method of transcendental
deduction to expose the regulating premises of market theory, some of which
are stated and others presupposed. I will be concise. All agents seek only to
maximize their own preferences ("rationality"). Each's preference-object is
consistent or fixed ("consistency"). No standard of justice or right external to
the market is or can be appealed to within the neo-classical framework of
decision. Each market agent's position is preordained independently of moral
deserving ("original endowment"). All choices and outcomes are confined to
known money-sum equivalents ("comparability"). The preference order of
payoffs or losses is prescribed in advance ("perfect knowledge"). No concern
for the market competitor's interests can, by constraints of the calculus,
influence a decision unless by monetary impact on one's own. No outcome is
related to any relationship or bond of life beyond market transactions. No
payoff received by market agents requires any contribution to the production
of any life-good. Deviation from any of the above by regulating principle is
ruled out a priori.
When we disinter the presuppositions of the market's structure of
individual choice, the question arises: What room for individual autonomy, or
concern for individuated life expression is in truth allowed here? What is the
meaning of the free individual which is asserted? While assuming "individual
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JOHN MCMURTRY
freedom" is certain in the market, the model of the market in principle rules it
out by each of its regulating terms. Individuals in fact disappear, and a
system of aggregation mechanisms takes their place. This is true both
methodologically and substantively. While "responsible individuals" are
pervasively declared as the freely exchanging agents of the market's covert
moral world, corporate "persons," in fact, dominate the globalising market
which is assumed to liberate individuals. These actual market agents are
under law distinguished precisely by their individual non-responsibility for
harms to others (the doctrine of "externalities"), and by their stockholders'
immunity from personal responsibility for corporate malfeasances, crimes or
debts (the law of"limited liability").
What was once the "free market" of Smithean individuals becomes in
these ways the opposite today. Yet none of this radical restructuring of
market agency is represented in neo-classical models, within which the word
"corporate" does not appear. However much the market itself reverses in the
nature of its agents, however oligopolist the control of supply and demand
becomes in factual contradiction to the model's assumptions, neo-classical
axioms continue to assume the individual market agent just as before.
Accordingly, the alleged common welfare is achieved the same way as before
- by the invisible hand regulating individual competition in the market in
which, it is assumed, none influences supply or demand, and the state is
neutral among their interests of size and wealth. Hence the market's
allocation of resources and distribution of goods necessarily achieves the
happy outcome of the social optimum - as the "Fundamental Theorems of
Welfare Economics" now axiomatise this benevolent structure. This
necessary causal sequence was, in fact, never true. Yet, more internally
contradictory, the very properties of the market first annunciated by Adam
Smith and encoded in market models of perfect knowledge and competition
upon which the alleged social optimum depends are, in fact, systematically
violated by the actual global market system. 28
Deep questions thus arise as to the meaning of "the free market" when
none of the conditions of freedom its models assume exists in the world.
More precisely, the free market is not free:
(i) when oligopolist corporations, not natural persons, are the owners;
28 I explain the absolutist prescriptivism of such international trade and investment

fiat apparatuses as the NAFT A and the WTO in Value Wars, London (Pluto
Press) 2002, pp. 111-20,204-19.
174
(ii) when their determination of supply and demand is not ruled out, but
is systemic and increasing;
(iii) when consumer desires are not autonomous or need-based, but are
constructed by the operant conditioning of transnational corporate
conglomerates;
(iv) when control of the means of exchange is not neutral or by savings,
but by unregulated money creation by private bank leveraging and
control of the economy's credit;
(v) when the producers are not owners, but only instrumental factors in
the master story sequence of turning money demand into more
money demand for money investors;
(vi) when exchanges are not negotiated by the transacting agents, but are
prescribed from the central command posts of corporate head-offices
with interlocked directors;
(vii) when regulation and spending by public authority are not impartial
or for required market infrastructure, but are for subsidizing,
licensing and advantaging the most dominant corporations at home
and abroad;
(viii) when most of the volume of global market transactions are not for
the purchase or production of any life good for human individuals or
societies, but for private corporate and syndicate financial leveraging
without productive function. 29
Where does "the free market" in fact exist that is alleged to produce the
common good?
X. The Unfalsifiability of the Market Theology's

Principles of Rule
A religion or theology is not in itself a bad thing. If its values are

protective and enabling of human and environmental life, and believed in as
29 Systematic documentation of these transformations of the classical market system

are provided in JOHN McMURTRY: The Cancer Stage of Capitalism London
(Pluto Press) 1999, pp. 41-5, and Value Wars, pp. 90-6.
175
JOHN MCMURTRY
ultimate ties of commitment, then its source of inspiration, its God, can be as
good as its believers realise these values in the world. But what distinguishes
a fanatic theology from a life-affirming religion is that the fanatic doctrine
postulates an external and absolutist rule that is assumed to be infallible and
closed with harsh punishments enforcing obedience to itsfixedprescriptions.
In the previous section, I defined the command principles of normative
syntax underlying this religio-moral system from which, it is supposed, "the
public interest" or "the social optimum" follows. Together these
presuppositions of orthodox market theory and practice are the moral stays of
the market's One Universal Form - always "the market," never competing
possibilities. As such, the Market is a transcendental universal in terms of
which all existing particular markets must undergo "reforms" to conform to it
"free of distortions" (e.g., by prescribed elimination of social preventions of
capital flight or food security). Consider a defining example. The
International Monetary Fund enforces "system stability" by Ill
"conditionalities" which are prescribed as a monolithically uniform iron bed
to achieve the rectification of "market distortions." These Procrustean
prescriptions are the engineering counterpart of the bleeding remedy to
remove impure elements from the body's flows, and frequently dismantle the
existing life economy and the society's ability to reproduce its own people. 30
30 Joseph Stiglitz, former Chief Economist of the World Bank, describes the
standard pattern of lMF reform of economies as a five-step prescription: (I)
"briberization-privatization" by which corrupt officials (eg., in the former USSR
and Brazil) privatise vast resources like oil, electricity, industrial assets, and
water for a I 0% commission on multi-billion sales; (2) "capital-market
liberalization" or the "hot money cycle" in which foreign bank-backed cash
speculates in currency, real estate and portfolio funds, drains national reserves in
hours or days, and host governments are then required by the IMF to raise
interest rates to 30-80% to tempt back the financial speculators who have
hijacked the country's capital funds; (3) "market-based pricing" or steeply
raising prices on basic life means like food, cooking oil and water, to "squeeze
the blood out of' the poor countries (e.g., Indonesia, Ecuador and Bolivia) until
"social unrest is predictably sparked;" (4) the anticipated "IMF riots" occur to
justify the military solution in which Washington is most internationally invested,
while simultaneously the accompanying flights of capital and public bankrupting
allow foreign corporations to pick otT the remaining assets ''such as mining
concessions or ports" at "tire-sale prices;" (5) "the poverty reduction strategy by
Free Trade" or forced mass imports and "tributes" to foreign corporations
176
"The market punishes hard all those who have not got the fundamentals
right." Perceived as the structure of reality to which all societies everywhere
must conform to survive, the master code of market "laws" is known in
advance to be necessary and desirable for all peoples and cultures without
exception. It is for this reason that society's moral and material ruin has been
assumed certain by orthodox economists since David Ricardo if welfare
assistance to workers disemployed by capitalism defies the "market's laws of
supply and demand." It is a fate as universal and certain, holds Ricardo with
no evident dissent, as "the law of gravitation."3I
Neo-classical orthodoxy agrees. Yet what is ignored is that this socially
constructed order of rule is presupposed as not only physically necessary as a
natural Jaw is, but morally infallible as well. Unlike laws of physics, its
regulating order is held as good as well as necessary - serendipitously
promoting efficiency of resource allocation, the wealth of nations, the public
interest and - in more recent revelations - democracy and human rights too.
Whatever the mass misery in fact follows from market prescriptions, its laws
are assumed to confer the most benevolent outcomes possible by its natural
order. "Poverty reduction" is now also promised as certain from more
"market reforms," even as people become, in truth, poorer and more life-
insecure from radical market restructurings of economies.3 2
Such presupposition of the omniscient beneficence of the market God is
idolatrous theology. Moral absolutism cohabits with positivist science in the
same claims with no notice of the confusion. God-like commandments
coerced by "financial blockade" until domestic markets are open to floods of

foreign U.S. imports and privatizations for foreign tirms. See interview with
JOSEPH STIGLITZ: "The Globalizer Who Came In From the Cold", The Observe,
(October I 0, 200 I).
31 Ricardo says specifically: "The principle of gravitation is not more certain than
the tendency of such laws to change wealth and vigour into misery and
weakness." D. RICARDO: The Principles of Political Economy and Taxation,
London (J.M. Dent and Co.), 1965, p.63.
32 No global statistic shows reduction of poverty numbers since 1980. Even with a
monetary, rather than a life-indicator metric, there continue to be over
150,000,000 people living on less than $1 dollar a day in the world (over 1.2
billion in 2000) than before global "market reforms" were instituted (Overview,
United Nations Human Development Report 2000, New York (Oxford University
Press) 2000, p. 6.
177
JOHN MCMURTRY
operate in a language of cool detachment beneath consciousness of them.

Market perception and understanding throughout is organized a priori by an
absolutist moral grammar which regulates judgement independent of
evidence. This is why neo-classical theory never interrogates, disconfirms or
even tests its assumptions of the market's universal promotion of the
common good. This is why only "efficiency," "productivity," and
"development" can be discerned in "self-regulating market competition"
whatever may, in reality, occur. All of these beneficent outcomes are
assumed to be necessitated in accordance with what is not recognised - a
market deist meta-narrative which is supposed as axiomatic from Adam
Smith through the Primary Theorems of Welfare Economics. In the final
stage of the doctrine, more salvational outcomes join this ruling narrative as
the inevitable denouement of the market's transcendental plot. A this-worldly
transfiguration of society everywhere into a promised land of "wealth,
freedom and democracy" is known to be certain before it happens, just as the
medieval morality play always culminates in the triumph of God's Good over
Evil by adherence to the One True Faith.
What principle of neo-classical theory rules out or disconfirms this inner
logic of its theory? There is none. If there is no principle of the doctrine that
provides for possibility of factual falsification of the defining axioms and
theorems by whose operation the "social optimum" is necessarily achieved,
then we confront an a priori system promising the best of all possible worlds
which rules out all counter-evidence to it. Once adopted as an a priori frame
of value-set and decision, inscribed in equations all testifying to the truth of
the happy-ending plot, the market's meta-narrative is assumed and prescribed
as given as holy writ once was - only in the guise of mathematical science. If
the promised land of harmonious "social optimum" never arrives, this is only
because the market's ideal laws have been flouted or disobeyed. More
"necessary sacrifices" are required to reach the promised land, with IMF
formulae, the same for all cases, minted in scores by neo-classical economists
to ensure "freedom from market distortions." Whatever depletion or
despoliation of social and environmental life conditions then occurs is ruled
out of view as an "externality," or justified as a "price which must be paid."
In this way, the ruling paradigm is never called into question. It is true a
priori.
Not only are rewards and punishments assumed as law-like for whole
societies in accordance with whether they obey or disobey "market laws" and
"what the market decides," but market growth is assumed to be the sole basis
178
for anything of value for humanity to occur at all. Thus the President of
Harvard University and former Secretary of the U.S. Treasury and World
Bank Chief Economist, Larry Summers, has publicly asserted in perfect
expression of this market idolatry "the essential truth" that all "basic value"
- including, specifically, "literacy" - is linked to market growth. "33 His
words deserve pause. Even if a non-market order ranks, in fact, demonstrably
higher than all its market neighbours in nutrition, literacy, healthcare, infant
mortality, longevity and other life indices, it is known beforehand that it
cannot develop anything of human value. It follows further from the market's
moral syntax that a competing economic alternative is not to be tolerated, and
must undergo "market reforms" to become free and blessed. The market God
is, above all, a jealous God. No other economic idea may be put before it.
Beneath observation, the market God comes to surpass the classical
predicates of the traditional Supreme Ruler. For it too is characterised by
omniscience, omnipotence and benevolence, but rules the world directly
without choice of wicked alternative. All is predestined. The supreme rule is
discerned by the mathematical formulae of neo-classical science.
"Optimums" of objective outcomes replace faith in God's love. "Rationality"
of systematic self-seeking substitutes for love of neighbour - with the
invisible hand infallibly transforming the chaos of contending selfishnesses
into the public welfare. In this way, the market's best of all possible worlds
replaces the conditionality of faith in an otherworldly divine grace, while the
certitude of mathematical notations rules out all inhibiting ambiguity or
doubt. Throughout, the incanted terminology of engineering mechanics
replaces traditional prayers and hymns, economists replace priests as the
knowers of the mysteries of the divine design, and symbolic equations
replace Latin as privileged portals to the eternal truths. To compel belief,
market miracles and sacrifices continuously demonstrate the consequences of
market virtue and sin.
Yet an underlying problem is posed. There has been an unmarked tension
between scientific method and deist design since the founding of the doctrine.
Scientific method requires, by definition, that its general claims are
33 Interview of LAWRENCE SUMMERS by JOHN ALLEMANG: "An Intellectual With the

Gloves Off," Globe and Mail (May 24, 2003) p. D I. Notice the robust epithet in
titling the interview with Summers in which he reduces all "basic value" to more
commodities sold.
179
JOHN MCMURTRY
confirmable or disconjirmable by empirical evidence, by their falsifiability as

well as their demonstration by empirical evidence. Yet the axioms of market
theory are not open to disconfirmation or falsification. Even less is their
necessitation of the public interest. Not only is there no impartial test of the
market's success or failure as a form of economic organization, but no
alternative to it of a competing form of economic organization is permitted
with which to compare performance. With no factual state of the world
recognised which can show any regulating market principle to be mistaken,
we are confronted by a dogma that cannot discern its vicious circle. The
closed circle rules out whatever facts could expose it. Thus when whole
societies and continental regions suffer "meltdown" after programs of
"market restructuring," the connection between antecedent changes by the
prescribed market solutions and the systemically disastrous life effects
following their implementation is blinkered out. To raise the issue of "the
colossally failed market experiment" in the former superpower USSR, for
example, has been as unspeakable in public discourse since the early 1990s as
a blasphemy against God in a past era. Most strikingly, relations between
cause and effect are here suspended. Between market prescriptions and
systemically destructive effects for societies falls a curtain of disconnection.
Bad economic outcomes cannot be caused by market prescriptions because
only the optimum can, in principle, follow from them. That is why other
causes for "economic meltdowns" must be found, even though such ad hoc
determinants of the economic catastrophes, like "crony capitalism," are not
defined, not compared across economies, nor factually related to the
economic disasters they are claimed to explain.
The more that market prescriptions fail~ and where have they succeeded
in 20 years of radical global market reforms?3 4 ~ the stricter market reforms
are believed necessary. Beneath the chaos and the distress of victims, there is
one constant - the assumption that the market's design must necessarily
achieve the best of all possible worlds. It is here that we see the logic of
infallibility most clearly at work. To ask, as we do of every other doctrine
34 Since the collapse of the "market miracles" of the Asian Tigers and Brazil,
mainland China's economy has been identified as evidence of global market
success, exemplifying the problem of unfalsifiable general claims of market
success. China's capital flows are directed by the Central Committee of the
Communist Party, not a market condition that has been subsumed or accepted by
any neo-classical model.
180
claiming scientific validity, what evidence might show that any defining
market principle might be false, is not a question that is ever posed by its
adherents -the tell-tale evidence of an unscientific dogma. Formation of any
alternative economic order rouses the furies of destabilisation and war. As
we follow this structure of meaning to its ultimate core, we eventually arrive
at the doorway of an unsuspected general truth. Beneath any notice, the logic
of an unintended world order is stitched into place by the regulating market
group-mind.
XI. The Global Market Theocracy
Theocracy designates a form of governance in which an infallible

authority transcending human agency is represented as the ultimate regulator
of daily life, with all understanding, administration and enforcement of
society's rules and laws tolerated solely by compliance with the higher
ruler's prescriptions. A theocracy becomes totalitarian in proportion to the
extent or totality of its rules over every domain of lived existence.
If we put "the market" or "the global market" into the logical spaces of
these criteria) definitions, we discover an unexpected fit. The market is
prescribed everywhere as the higher regulator of daily life, with its "invisible
hand" known to ensure the common interest in all matters. No alternative or
competing order is tolerated. No democratic legislation is permitted to
replace, modify or override the prescribed order. Individuals who question
the rule of the market are heretics. The recent past of more successful
alternatives is not spoken. If the state was effectively related to other
functions than serving the global market order - for example, ensuring the
security of citizens' lives and their collective self-determination independent
of foreign corporate rule - the memory itself is abolished from public
discussion. A U.S.-led world crusade for a global market order "free of
government intervention" is preached from all pulpits, and moves from one
field of social occupation to the next with the necessity of final solution. 35
35 The famous words of former U.S. Secretary of State, John Foster Dulles, are
worth recalling here: "There are two ways of conquering a foreign nation. One is
181
JOHN MCMURTRY
The globally declared meaning of "the new world order" has been
quintessentially millennarian. Since the public interest is known in advance
to be alone and best fulfilled by market laws, all government must be scaled
back until it efficiently serves the global market and, thus. maximum
productivity and trade, world prosperity, and the freedom of all peoples on
earth.
Is there any recognised limit to this system's reach for total world rule?
We might test the truth of the totalitarian theocracy we face by a set of
questions. Is there any condition placed in market theory on the global
corporate market's unconditional right to enter, appropriate and control the
means of other societies' existence? What world system has ever claimed a
greater totality of life rule? What past religious compulsion to force all
peoples to conform has more systematically attacked other societies'
deviation from the one right way to live? What God has ever been
worshipped more lavishly in its powers to perform wonders, to bring
societies to their knees, or to impose punishments on the undeserving? What
totalitarian absolutism has demanded more sacrifices, imposed its yoke on
more peoples, or stirred a more militant crusade of rule over the world's
peoples by armed assertion of supremacy? What non-human ruler's signs
have been more faithfully studied, recorded, and divined round the clock?
What Supreme Power has ever so violated the natural order, left more
monuments and idols in its wake, destroyed more communities of unbelief by
its armies, or been so unaccountable to human question or continuous
disaster?
If these questions seem to exaggerate the case, then consider. Where is
the line drawn against the market God's ordering of life and death itself
across human cultures and the natural world? Where is there any instituted
limit to the totality and validity of its rule? What catastrophe could prove its
economic ordering mistaken?
I am indebted to the participants in the Ninth International Conference on Studies in

Economic Ethics and Philosophy for their valuable responses to an earlier version of
this paper, in particular to Bernard Hodgson, the organizer, Dennis Badeen, David
Holdsworth, Edward Nell, Stephen Regocsei, Lee and Timothy Tavis, Mark Neufield,
W A. McMullen, Alex Michalos and Trudy Govier.
to gain control of its people by force of arms. The other is gain control of its
economy by financial means."
182
Chapter 9
General Equilibrium Theory as

Normative Ideal Social Order
DENNIS BADEEN
I. Introduction
II. General Equilibrium Theory and Welfare Economics Explained
Ill. Kenneth Arrow's General Equilibrium Theory, Pareto
Optimality and Welfare Economics
IV. Normative Ideal Social Order Explained
V. General Remarks on Marx's Method
VI. The Model of Simple Reproduction Explained
VII. The Model of Capital Accumulation Explained
VIII. Refuting Walras's Law Through the Use of Elements of Capital
Accumulation
IX. Conclusion
I. Introduction
The question concerning neo-classical economics is: How can an

economy inhabited by self-regarding agents operate in an efficient and
orderly manner? Kenneth Arrow's General Equilibrium Theory provides a
mathematically formalized answer to this question. It is a coherent system
and when economic agents act rationally, general equilibrium and Pareto
Optimality obtain. In a sense General Equilibrium Theory acts as a normative
ideal social order guaranteeing that humans can fulfill their nature as beings
of utility in a self-interested manner, while providing for a socially optimal
outcome. However the model, while coherent, is divorced from the realities
of the capitalist economy. Specifically, it is a model of simple reproduction
and as such does not account for the structural logic of capitalist production.
The purpose of this paper is twofold. In the first instance I shall articulate an
DENNIS BADEEN
alternative approach to economic theory, based upon a fundamentally

different ontological and epistemological basis provided by Karl Marx's
method and model of accumulation heuristically' interpreted through Roy
Bhaskar's Critical Realism, in such a way that accounts for and surpasses the
methodological weaknesses of neo-classical economics. The second is to
disrupt the normative ideal social order by including the structural logic of
capitalist production through the employment of Marx's model of "capital
accumulation."
II. General Equilibrium Theory and

Welfare Economics Explained
The equation which describes general equilibrium for an economy with

two individual consumers - a and b, two factor inputs - capital and labour,
and two commodities- x and y is:
(MRTSkl)x=(MRTSkl)y=(MRSxy)a=(MRSxy)b.
In descriptive terms an economy is in general equilibrium if and only if:

the marginal rate of technical substitution2 of the factor inputs in the
production of x is equal to the ratio of the marginal rate of technical
substitution of the factor inputs for y is equal to the marginal rate of
substitution of commodities x and y for customer a which is equal to the
marginal rate of substitution of x and y for customer b. These are the
conditions for a "pure" general equilibrium of production and exchange prior
to the introduction of a price system but are consistent with a price system.
I say "heuristically'" because I do not have the space to discuss the compatibilities
and incompatibilities of Marx's method and Bhaskar's Critical Realism. See
STEVE FLEETWOOD: "What Kind of Theory is Marx's Labour Theory of Value? A
Critical Realist Inquiry," in Capital and Class #73 for a positive argument for the
compatibility of the two approaches, but see JOHN MICHAEL ROBERT: "Marxism
and Critical Realism: Same, Similar, or Just Plain Different," in Capital and
Class #68 which argues for an incompatibility.
2 The marginal rate of technical substitution of capital for labour refers to the
amount of labour that a form can give up by increasing the amount of capital
used by I unit and still produce the same output.
184
GENERAL EQUILIBRIUM THEORY AS SOCIAL ORDER
This simplification represents Arrow's mathematical formalization of

General Equilibrium Theory which itself can incorporate more than two of
each type of the variables of output, factors, consumers, and firms. The
addition of more variables is inconsequential for the present study since
Arrow's general framework remains the same.
III. Kenneth Arrow's General Equilibrium Theory, Pareto

Optimality and Welfare Economics3
The following elements are necessary and sufficient for a general

equilibrium to attain:
In the economy there are two kinds of economic entities which carry out
all economic activity; households or individuals and firms; all productive
activity is carried out by firms. Households possess a) various types of labour
and b) claims to a certain portion of profits from each firm due to any
household's ownership of a proportion of capital resources distinct from its
labour; (a) plus (b), often classified as "original endowments," determine the
total income of households. The value of the commodity bundle chosen by
households does not exceed the income of the individual households. Each
household chooses the most preferred consumption bundle from those
available as consistent with the axioms of Consumer Preference Theory, 4 and
the assumption of consumer sovereignty.s Firms choose from the set of
technically producible bundles according to which set maximizes profits. Due
to the assumption of perfect competition, profit maximization implies zero
pure profits although this at least guarantees a return on entrepreneurial risk.
3 ARROW, KENNETH: "Economic Equilibrium," and "Pareto Efficiency With Costly

Transfers." General Equilibrium Collected Papers: Volume 2, Oxford (Basil
Blackwell) 1983.
4 For a list of the axioms see KENNETH J. ARROW, F.H. HAHN: General
Competitive Analysis, San Francisco (Holden-Day, Inc.), 1971,78-79.
5 Consumer sovereignty may be defined as consumers, uncoerced by external
forces, dictating to the market what goods and services will be provided and the
market providing those goods and services at a price that clears the market.
185
DENNIS BADEEN
As Arrow indicates, under constant returns to scale, there may be bundles

to choose from but the bundle which maximizes profits will be the bundle at
which zero pure profits attain. Negative profits are also possible, but at this
point the firm would shut down. Pure profits are therefore either zero or
negative for each production bundle.
Arrow defines a competitive equilibrium as a collection of nonnegative
prices for all commodities; for consumption bundles of all households; and
production bundles for all firms which satisfY certain conditions:
1) each household chooses that bundle which maximizes utility;
2) each firm chooses that production bundle which maximizes profits
from all technically possible bundles;
3) total consumption by all households cannot be greater than the
initial assets plus the net total production of all firms and;
4) that Walras's law holds: the total value of goods produced and
originally owned is equal to the total value of goods demanded. Any
goods produced which do not fall within this domain are
overproduced goods and given a price of zero and free disposal.
Mathematically formalized, this can be described by the equation:
I Dpq =I Spq + [I S(p=O)q (free goods)].
This is the equation for the absence of "excess demand" in any market
and required for a competitive equilibrium, i.e., all markets clear. This
equation holds only for zero pure profit conditions.
"Competitive" means that households and firms take prices as given and
independent of their decisions. As stated, perfect competition implies zero
pure profit conditions. Lastly, and in this particular formalization, there are
assumed to be no externalities in production or consumption. A negative
externality is a social cost not reflected in the price mechanism of the
economy, for example, industrial pollution. Arrow does account for
externalities in other formulations of General Equilibrium Theory. In the
present study they will be ignored.
Taken from both "Economic Equilibrium" and "Pareto Efficiency with
Costly Transfers," any general equilibrium is said to be' Pareto Optimal if
there is no way of reallocating resources such that even one person is made
better off than before the reallocation without making some other person(s)
worse off. Both better off and worse off are defined in terms of consumer
utility, i.e., the allocation of total consumer utility in the economy such that
186
no consumer can be allocated more utility without at least one consumer

having less utility. According to the first fundamental theorem of Welfare
Economics a competitive general equilibrium will guarantee Pareto
Optimality. Such a competitive equilibrium would occur in a free market, i.e.,
capitalist system. The second theorem states that, under the assumption of the
first theorem, with an appropriate redistribution of original endowments, any
Pareto optimal outcome can potentially be satisfied as a competitive
equilibrium. It should be emphasized here that the level of household's
original endowments is determined by the degree of their ownership of the
factors of production.
IV. Normative Ideal Social Order Explained
One may now see how General Equilibrium Theory acts as a normative
ideal social order. General Equilibrium Theory attempts to answer the
question of how each rational, that is, self-regarding, individual utility or
profit maximizer, pursuing his or her own subjective well being, can lead to a
social optimum in an orderly fashion given that people are naturally rational,
that is, self-regarding maximizers. When general equilibrium, and therefore
Pareto Optimality, is attained, so too is the socially optimal level of human
well-being. The neo-classical realization of Pareto Optimality itself requires
certain elements grounded in the classical liberalism of laissez-faire
economics and capitalist individualism. They consist of the assumptions of
perfectly competitive markets (or free-market competition and zero pure
profits), no externalities in production or consumption, and private property.
In other words, it facilitates the realization of human nature as rational: both
the market and self-regarding utility maximization are grounded in this
version of rationality.
More recently, commentators such as David Gauthier have celebrated
both this version of human nature and the perfectly competitive market as the
optimal means of social interaction. Arguing from a Hobbesian ontology, the
human condition described by the war of all against all in which humans are
not naturally concerned with the well-being of others, Gauthier asserts that
the perfectly competitive market is the most efficient means to coordinate the
activities of self-interested individuals. While the state of nature is based
187
DENNIS BADEEN
upon a war of all against all, or relations of hostility, the market functions as
a social contract, or relations of contract which occur in and constitute the
state of society.6 As a theoretical construct the social contract ideology is said
to govern social relationships as contractual ones. Ideology provides an
idealized explanation of the non-actual, but possible, existence of contracts
based on this notion of human nature; it is also idealized in the further sense
of attempting to provide a normative rationale or justification for certain
kinds of social relations. Gauthier's use of the notion of "contract" is
instructive since it presupposes a "human nature" to be effectively and
optimally fulfilled by the perfectly competitive market. As a contract, human
nature is not determined by social existence:
What contractarianism does require is ... that individual human beings
not only can, but must, be understood apart from society. The
fundamental characteristics of men are not products of their social
existence. Rather, in affording the motivations that underlie human
activity in the state of nature and that are expressed in a natural
hostility, they constitute the conditions of man's social existence.
Thus man is social because he is human, and not human because he is
social. In particular, self-consciousness and language must be taken as
conditions, not products, of society. 7
Relying on Adam Smith, Gauthier argues that if people are left to their
own accord to pursue their own interests, constrained only by the laws of
justice, this competition would harmonize everyone's interests with the social
interest - the invisible hand in which social harmony is realized through
private pursuit of self-interest. The market, as the total ensemble of private
self-interests, aids in fulfilling human nature as beings of utility:
Smith envisioned the "system of natural liberty" as a perfectly
competitive market. The idea of such a market illuminates our
understanding of rational interaction by revealing a structure in which
the divergent and seemingly opposed interests of different individuals
6 DAVID GAUTHIER: "The social contract as ideology", Philosophy and Public

Affairs, 6 (1977) pp. 130-164.
7 DAVID GAUTHIER: "The social contract as ideology", p. 138.
188
fully harmonize. Conceived as an ideal type, the perfect market. ..

guarantees the coincidence of equilibrium and optimality. 8
We may identify two related problems stemming from General
Equilibrium Theory; naturalism or more specifically the ontological and
epistemological foundations of neo-classical economics, and the modeling of
the economy as perfectly competitive with zero pure profits. If economists
are called upon to solve problems of distributive justice then each of these
assumptions must be called into question. In other words it is not enough to
posit an alternative model of the economy but rather one must first reveal the
methodological problems associated with General Equilibrium Theory and
how an alternative paradigm surpasses these problems. Roy Bhaskar's
concept of the "epistemic fallacy" quite neatly captures the problem of neo-
classical economics:
[The epistemic fallacy] consists in the view that statements about
being can be reduced to or analyzed in terms of statements about
knowledge; i.e., that ontological questions can always be transposed
into epistemological terms. The idea that being can always be
analyzed in terms of our knowledge of being, that it is sufficient for
philosophy to "treat only of the network, and not what the network
describes," results in the systematic dissolution of the idea of a world
(or ontological realm) independent of but investigated by science ... It
might be usefully compared with the naturalistic fallacy in moral
philosophy. For just as the naturalistic fallacy prevents us from saying
what is good about, e.g., maximizing utility in society, so the
epistemic one prevents us from saying what is epistemically
significant about, e.g., experience in science.9
Since the distinction between ontology and epistemology is not made in neo-
classical economics the fallacy occurs with the use of a naturalized ontology
outside of social historical determination. The assumptions of utility
maximizing agents and perfectly competitive markets are divorced from the
social and historical ontological structures determining them: asocial human
8 DAVID GAUTHIER: Morals by Agreement, New York (Oxford University Press)

1986, p. 83.
9 BHASKAR, ROY: Realist Theory of Science, New Jersey (Humanities Press Inc.)
1978, pp. 36-37.
189
DENNIS BADEEN
nature is claimed to generate the perfectly competitive market. By doing so,

ontological questions and statements are indeed reduced to epistemological
ones. Before we can speak of utility maximization or perfectly competitive
markets, we ought to know something about the ontological foundations
which generate utility maximization and perfect competition - to the extent
that they are actually generated.
I will now argue that Marx's methodology and accumulation model
supercedes the problems related with General Equilibrium Theory. In the first
instance, there is nothing natural about the utility maximizing agent and the
capitalist order which either contractually or spontaneously, through
exchange, arises. Far from self-interest being an inherent trait of the human
condition, it is produced by a socio-economic order which requires self-
interested individuals to reproduce itself. As indicated by Marx, so called
natural relations geared by self-interest are really socially and historically
determined by a socio-economic order. Before we can speak of the pursuit of
self-interest, we need to know about the economic order in which the pursuit,
as well as the content, of self-interest occurs:
The dependence is expressed in the constant necessity for exchange,
and in exchange value as the all-sided mediation. The economists
express this as follows: Each pursues his private interest and only his
private interest; and thereby serves the private interest of all, the
general interest, without willing or knowing it. The real point is not
that each individual's pursuit of his private interest promotes the
totality of private interests, the general interest. One could just as well
deduce from this abstract phrase that each individual reciprocally
blocks the assertion of the other's interests, so that, instead of a
general affirmation, this war of all against all produces a general
negation. The point is rather that private interest is itself already a
socially determined interest, which can be achieved only within the
conditions laid down by society; hence it is bound to the reproduction
of these conditions and its means. It is the interests of private persons;
but its content, as well as the form and means of its realization, is
given by social conditions independent of all. 10
10 MARX, KARL: Grundrisse: Introduction to the Critique of Political Economy, ed.

by Quintin Hoare and translated by Martin Nicolaus. Baltimore (Penguin Books)
1973, p. 156.
190
Economists speak of the harmonization of interests through self-interested

exchange. The individual and coincidental acts of exchange culminating into
the harmony of the general interest is just that - coincidental. As Marx
correctly observed, there is no necessity to this form of exchange or its
harmonious aggregation. Things may just as easily fall apart if interests are
thought of as mutually annulling. The necessity of this exchange is not to be
found in the exchange itself, or some ahistorical notion of human nature, but
rather in the economic structure upon which the form of exchange and the
content of private self-interest is based. For this reason I refer to General
Equilibrium Theory as a "normative ideal social order" since the notion of
"social contract" is embedded in an ahistorical naturalism and should be
called the naturalist social contract. The term "normative ideal social order"
incorporates a social understanding of the capitalist order. Similarly, there is
no invisible hand as such, or rather the invisible hand of providence must be
brought down to earth and objectively based upon class analysis as
fundamental to the capitalist social-economic order. But first we must briefly
describe Marx's method.
V. General Remarks on Marx's Method
In the Introduction to the Grundrisse Marx distinguishes between three

different yet related aspects of his method. They are the method of analysis,
method of presentation, and historical development.
Scientific inquiry begins with the appropriation of the given empirical
conditions. Unlike empiricism, however, the empirical conditions are not
simply given but must be analyzed in their determinations. Marx uses the
example of the concept of the "population" which is where economists begin
and end their investigations. While for Marx the population is the proper
starting point, the population itself must be broken down into its
determinants, i.e., class composition. Class composition must itself be
constituted upon simpler determinations. As such, science begins with
inquiry into the concrete historical conditions but science does not end here.
Rather, inquiry proceeds from the most abstract concepts moving towards
simpler and more concrete ones. These concepts must then be reconstituted
as a set of internally related concepts:
191
DENNIS BADEEN
Thus, if l were to begin with the population, this would be a chaotic

conception of the whole, and I would then, by means of further
determination, move analytically towards even more simple concepts,
from the imagined concrete towards even thinner abstractions until I
had arrived at the simplest determinations. From there the journey
would have to be retraced until I had arrived at the population again,
but this time not as a chaotic conception of the whole, but as a rich
totality of many determinations and relations. 11
We may note that neo-classical economics, underwritten by a positivistic
theory of science, never gets past the population as a chaotic conception of
the whole. Producers and consumers are assumed in idealized form and then
placed in a further idealized economic context described by perfectly
competitive markets. Surpassing the epistemic fallacy first requires a
distinction between the method of analysis and presentation.
The method of presentation is also characterized by a process proceeding
from the abstract to the concrete. The difference here, however, is that the
analysis, having been completed, the material must be presented as an
unfolding of concepts from the simplest and most abstract to the complex
concrete in thought demonstrating the necessity of the unfolding from one
concept to the next. The final step of the method of inquiry anticipates the
method of presentation. Recall that the method of inquiry initially stems from
the chaotic abstract to the concrete determinants and then back to the abstract
conceived of as a set of relations and determinations:
The latter [ascending movement] is obviously the scientifically correct
method. The concrete is concrete because it is the concentration of
many determinations, hence unity of the diverse. It appears in the
process of thinking, therefore, as a process of concentration, as a
result, not as a point of departure, even though it is the point of
departure in reality and hence also the point of departure for
observation and conception. Along the first path the full conception
was evaporated to yield an abstract determination; along the second,
11 MARX, KARL: Grundrisse: Introduction to the Critique of Political Economy,

p.IOO.
192
the abstract determination leads towards a reproduction of the concrete

by way ofthought. 12
As soon as the concrete real (historical conditions or object of inquiry) has
been appropriated by the mind (knowing subject) it can be presented as a
necessary unfolding of concepts. The concrete in thought, that is to say, the
development or unfolding of the simple into the complex is a process or a
result that presupposes the concrete real. The first movement, the method of
analysis, gathers together the concepts and relations. The second moment, the
method of presentation, moves from the abstract and simple determinations
and reproduces the concrete in thought. But this appropriation of the world in
thought is not to be confused with the real world, or historical development:
The totality as it appears in the head, as the totality of thoughts, is a
product of a thinking head, which appropriates the world in the only
way it can ... The real subject retains its autonomous existence outside
the head just as before; namely as long as the head's conduct is merely
speculative, merely theoretical. Hence, in the theoretical method, too,
the subject, society, must always be kept in mind as the
presupposition. 13
This separation of the real concrete as the concrete substratum presupposed
by the method of presentation is important to keep in mind. The method of
presentation is not a historical unfolding of capitalism, as some have
supposed. "It would therefore be unfeasible and wrong to let the economic
categories follow one another in the same sequence as that in which they
were historically decisive." 14 History is not exhausted by the method of
presentation nor is it reducible to it. The point is that the method of
presentation can only occur once capitalism has taken a firm hold over the
material reproduction of society, i.e., when it is the predominant mode of

p.IOI.
pp.IOI-102.
p.I07.
193
DENNIS BADEEN
production. 15 It is little wonder, then, that Marx chose nineteenth century

England as the context in which to write the three volumes of Capital as it
was the most historically developed form of capitalism. Scientific
presentation then has to do with the ordering of the categories in a way that
does not correspond to historical development. This ordering of concepts
occurs in the volumes of Marx's Capital.
If the volumes of Capital contain the conceptual development of capital,
then how are we to utilize the work as a critique of General Equilibrium
Theory? After all it was argued that the order of conceptual development is
not to be mistaken for historical development, yet class analysis and the
accumulation model of capital are developed in these volumes. We must keep
these things in mind:
I) we are counterposing Marx's theory to General Equilibrium Theory
so we are justified in this sense in remaining in the theoretical realm
yet;
2) we are also arguing that General Equilibrium Theory is divorced
from the realities of the capitalist economy and how it actually
works, while arguing that Marx's model is superior in this sense.
How are these apparent contradictions reconciled?
We argued that Marx's method surpasses the epistemic fallacy. Bhaskar's
notions of generative structures and tendencies may allow us to reconcile this
contradiction by demonstrating the social character of Marx's theoretical
model. While the order of presentation does not correspond with historical
development, Marx's model better articulates the historical reality of the
capitalist economy.
Bhaskar's short description of Critical Realism, as an alternative approach
to science, is as follows:
The real basis for causal laws are provided by the generative
mechanisms of nature. Such generative mechanisms are, it is argued,
nothing other than ways of acting of things. And causal laws must be
analyzed as their tendencies. Tendencies may be regarded as powers
or liabilities of a thing which may be exercised without being manifest
15 What this entails, however. has been a subject of some debate. In general it is
agreed that this includes the commodification of labour power and the separation
of the labourer from the means of production. SeeK. MARx's: Capital, Volume
I, Chapter 6 for a full discussion.
194
in any particular outcome. The kind of conditional we are concerned

with here may be characterized as Normie. Normie universals,
properly understood, are trans factual... statements with factual
instances in the laboratory (and perhaps a few other closed contexts)
that constitute their empirical grounds; they need not, and in general
will not, be reflected in an invariant pattern or regularly recurring
sequence of events ... Once we allow for open systems then laws can
only be universal if they are interpreted in a non-empirical (trans-
factual) way, i.e., as designating the activity of generative mechanisms
and structures independently of any particular sequence or patterns of
events. But once we do this, there is an ontological basis for a concept
of natural necessity, that is necessity in nature quite independent of
men or human activity.I6
Two key concepts can be identified - generative structures and tendencies. A

generative structure is the basis upon which tendencies are said to occur, or
the ground for tendencies. Tendencies can be described as the way in which
these structures manifest themselves when they act; the structures generate
the tendencies. As such, structures and tendencies are normic or universal and
characterized as transfactual. These enduring structures provide the causal
link to tendencies. But these tendencies themselves do not necessarily
manifest as invariant observable patterns. In fact, as tendencies, they may not
manifest at all or, when they do, may go unrecognized as such. Since we are
dealing with open systems or conditions not holding in a closed or controlled
context, i.e., for our purposes social and historical systems, laws require
reinterpretation as tendencies in the manner described - tendencies as the
manifest activity of generative structures which exist independently of
observed patterns of events. As such we may speak of natural necessities
independently of their observation and theoretical articulation by human
beings.
The link between structures and tendencies and Marx's method in Capital
should now be obvious. Structures are said to be enduring. The labour/capital
relation exhibits this characteristic in the sense that it is a necessary structure
that exists throughout the history of capitalism; no matter what stage of
capitalism we speak of it is always there and fundamental. The process of
16 ROY BHASKAR: Realist Theory of Science, New Jersey (Humanities Press Inc.)
1978,p.l4.
195
DENNIS BADEEN
accumulation generates and is descriptive of the tendencies towards the

concentration and centralization of capital and is necessary for the
elaboration of further tendencies. But these structures, once in place, are real
ones in that they have social existence and are not simply theoretical
constructs or idealizations. They generate the phenomena of the world
through the activities of human beings - people are causal agents operating
within the labour/capital relation. As real relations, I will use the term "onto-
generative" structure to denote that we are dealing with social rather than
natural phenomena. Furthermore, the recognition of the social character of
these structures and their tendencies allows us to properly conceive of the
economic order and solve problems associated with it. In other words, real
life problems require real life conceptions of the functioning of the economic
order:
Much social science can be seen to depend upon attempted real
definition of forms of social life which have already been identified
under certain descriptions and are known to all by the agents who
participate in the social activities concerned under those or other
descriptions. Social structures, unlike natural structures, cannot exist
independently of their effects. Thus real definitions of concepts such
as capitalism, democracy, power, love, can only be justified by their
capacity to render intelligible a certain domain of social phenomena. I
suggest that they are falsified by their incapacity to explain in a non-
ad-hoc [I interpret idealizations to be ad hoc] way a range of
phenomena that takes on a special significance for the agents that
participate in the forms of social life they define ... what are the
enduring and transfactually active "mechanisms" of the sciences of
society and man. 17
This corresponds with Marx's notion that "Mankind thus inevitably sets itself
only such tasks as it can solve, since closer examination will always show
that the task itself arises only when the material conditions for its solution are
already present or at least in the process of formation." 18 Now that we have
described our alternative approach to scientific inquiry, we shall attempt a
critique using Marx's accumulation model.
17 ROY BHASKAR: Realist Theory of Science, p. 246.

18 MARX, KARL: Preface and Introduction to a Contribution to the Critique of
Political Economy, Peking (Foreign Language Press) 1976, p. 4.
196
VI. The Model of Simple Reproduction Explained
General Equilibrium Theory, it will be argued, is a model of simple

reproduction in which Walras's Law assumes a strict identity of supply and
demand. The definitive aspect of simple reproduction is that there is no
expansion of the production process in subsequent rounds of production.
Simple reproduction is enabled by two further and related aspects. The first is
that no surplus value is created through production or realized through sale.
The second aspect, as a consequence of the first, is that capital is not
accumulated. The result is that the amount of capital and output remain
constant. This economy can be formally represented as such:
C-M-C'
where C represents a commodity for sale (in this case labour is sold for
wages and the household's original endowment of capital is rented for
dividends), M represents money, C' represents those commodities purchased
by the household which are necessary for the reproduction of the household
and the symbol (-) represents an exchange. One can recognize that in this
representation no surplus value is created, circulation occurs instantly, and
that the economy is driven by the consumption of the households. In the
specific case of General Equilibrium Theory, where no capital market exists
except for original endowments, only consumer goods are produced.
Walras's Law coupled with the assumption of consumer sovereignty
guarantee that consumers will desire all that is produced since production is
geared towards consumers' pre-existing preferences; therefore, markets will
clear.
However the production and realization of surplus value, necessary for
the accumulation of capital, are determining aspects of capitalist production.
The abstraction from these elements leads to a misrepresentation of capitalist
production: representing capitalism as a mode of simple reproduction thus
denying capitalist production itself:
This sphere we are deserting, within whose boundaries the sale and
purchase of labour-power goes on, is in fact a very Eden of the innate
rights of man. There alone rule Freedom, Equality, property, and
Bentham. Freedom, because both buyer and seller of a commodity,
say labour power, are constrained only by their own free will. They
197
DENNIS BADEEN
contract as free agents, and the agreement they come to, is but the
form in which they give legal expression to their common will.
Equality, because each enters into relation with the other, as with a
simple owner of commodities, and they exchange equivalent for
equivalent. Property, because each disposes only of what is his own.
And Bentham, because each looks only to himself. The only force that
bridges them together and puts them in relation with each other, is the
selfishness, the gain, and the private interest of each. Each looks to
himself only, and no one troubles himself about the rest, and just
because they do so, do they all, in accordance with the pre-established
harmony of things, or under the auspices of an all-shrewd providence,
work together to their mutual advantage, for the common weal and
interest of all. .. On leaving this sphere of simple circulation or of
exchange of commodities, which furnishes the "Free-trader Vulgaris"
with his views and ideas, and with the standard by which he judges a
society based on capital and wages, we think we can perceive a
change in the physiognomy of our dramatis personae. He, who before
was the money-owner, now strides in front as capitalist; the possessor
of labour-power follows as his labourer. The one with an air of
importance, smirking, intent on business; the other, timid and holding
back, like one who is bringing his own hide to market and has nothing
to expect but- a hiding.19
Simple reproduction sterns not only from the ideology of social contract
theory but from a surface analysis of capitalism, and an idealized one at that.
Marx's critique of political economy and the accumulation model tells us
another story. The real story of the logic of capital cannot be told from
abstract surface appearance - the chaotic conception of the whole, but must
move to the essential or fundamental aspect of capitalism.
19 MARX, KARL: Capital: A Critical Analysis of Capitalist Production. ed. by

Frederick Engels. New York (International Publishers) 1987 p. 72.
198
VII. The Model of Capital Accumulation Explained
A theory explaining the inherent tendencies of the generative structure of

the capitalist economy must include its determinant elements - specifically
the labour/capital relation, production of surplus value, and the accumulation
of capital. What is necessary is a model of capital accumulation. This model
may be formally represented as such:
M- C {LP,MP} ... (P) ... C' ... M'
where M represents the money commodity used to purchase C - the
commodities used in the production process consisting of; MP representing
the physical means of production; and LP representing labour power, (P)
represents the production process, C' represents the commodities produced
plus their value added due to the extraction of surplus value produced by
labour power (C' >C) and M' which is the money derived from the sale of
the produced commodities (M' > M) and the symbol (-) represents an
exchange.
Unlike a model of simple reproduction, in which production remains
constant through subsequent rounds of production, an accumulation model
accounts for the fact that each successive period of production is distinct
from the last period. It is not simply the case that production is expanded in
each subsequent round: more of the same commodities produced with the use
of a greater amount of capital. As Duncan Foley explains:
But real accumulation always involves a transformation of the process
of production. Capital is not satisfied simply to recreate on a larger
scale what it has already achieved; rather it presses to adopt new
methods of production and to exploit the possibilities of larger scale
production. The extension of capitalist relations of production through
accumulation creates a wider market that can support a deeper
division of labour, larger scale plants, machine production, and so
on ... Thus accumulation is far from being simple repetition of social
production on a larger scale. Behind the monetary aspects of
accumulation there is a fundamental change in the structure and
199
DENNIS BADEEN
organization of capital and equally fundamental changes in the scale

and methods of production. 20
Marx was aware that, in making the distinction between simple reproduction
and capital accumulation, the inherent tendencies of capitalist production
could only be investigated employing an accumulation model. 21
VIII. Refuting Walras's Law Through the Use of Elements

of Capital Accumulation
The structural logic of capitalist production is disruptive or

disequilibrating with respect to the accumulation of capital bringing about
"non-equilibrating"22 tendencies. The harmonies of General Equilibrium
Theory, due to the mathematical gymnastics offered by Walras's Law, ignore
by abstracting away those various aspects of capitalist production
recognizable with a capital accumulation model. Specifically, the assumption
ofWalras's Law abstracts away:
I. the existence of surplus value and hence economic classes or the
onto-generative structure of the labour/capital relation. This justifies
consumer sovereignty and the abstracting away of problems
associated with circulation. Finally the existence of economic classes
20 FOLEY, DUNCAN K.: Understanding Capital: Marx's Economic Theory.

Cambridge, Mass. (Harvard University Press) 1986, pp. 63-64.
21 This is the most basic and abstract conception of the accumulation model. In this
case the two most fundamental tendencies stemming from the systemic necessity
of capitalist production are the concentration and centralization of capital. Marx
notes this on page 586 in chapter 25 of the tirst volume of Capital. More concrete
manifestations of these and subsequent tendencies are developed on page 328 in
chapter 13 of the third volume of Capital. A more elaborate critique of General
Equilibrium Theory would involve these tendencies but is unnecessary for our
current purpose. For another discussion of tendencies see TONY SMITH:
"Systematic and Historical Dialectics: Towards a Marxian Theory of
Globalization", in New Dialectics and Political Economy, lorthcoming.
22 I would prefer to not use the concepts "equilibrium," "disequilibrium," etc.,
because they do not belong to Marx's accumulation model. I have retained these
concepts only because they aid my critique of General Equilibrium Theory.
200
and surplus value invalidate the second theorem of Welfare

Economics and;
2. the structural causes of overproduction are ignored. The only way
that markets will not clear in General Equilibrium Theory is if
consumers do not act rationally. 23
Let us explore each in tum.
The creation and realization of surplus value is necessary for the
accumulation of capital; in this way the inclusion of surplus value in the
model of simple reproduction also reveals the existence of economic classes.
Capitalist production requires the sale and purchase of labour power which
places the class who extracts and retains surplus value in a relative position
of power: the capitalist class. Production is for pure profits, generated by
surplus value, disallowing for the equalization of the ratios in General
Equilibrium Theory. The false coherence of General Equilibrium Theory is
facilitated by the exclusion of the origin of surplus value (labour power) and
consequently surplus value itself:
The surplus value of the capitalist originates precisely from the fact
that he buys from the worker not commodities but his labour power
itself, and this has less value than its product, or - what is the same
thing - realizes itself in more embodied labour than is realized in
itself. But now, in order to justify [pure] profit, its very source is
covered up and the whole transaction from which it springs is
renounced. 24
Concealing social relations aids in the legitimation of capitalism since the
labourer appears as if he owns his surplus value and sells his labour power to
himself. This corresponds with a Lockean conception of natural rights and
labour being the owner of all it produces. Surplus value is returned in the
form of dividends, rent paid by firms to households for the use of
households' original endowments, e.g., capital. The act of concealing social
relations justifies capitalist production not only because it aids in the
harmonious representation of capitalist production but, without the existence
23 I am still assuming that the assumptions associated with production and

externalities still hold.
24 MARX, KARL: Theories of Surplus Value, trans. by G.A. Bonner and Emile
Bums, New York (International Publishers) 1952, p. 99.
201
DENNIS BADEEN
of economic classes, production can be represented as if its function is to

fulfill the pre-existing needs of the sovereign consumers.
The other distorting facet of consumer sovereignty in the model of simple
reproduction is that circulation problems, specifically those associated with
the realization of surplus value, can be abstracted away. There is no structural
necessity which dictates that supply will equal demand, as with simple
reproduction. "As Marx points out against Say, the circulation of
commodities, conceptualized as C-M-C', has no necessity, because a
producer may not find a market and a sale need not be followed by a
purchase." 25 It is not known in advance if the commodity will find its
equivalent in exchange value because it is not the needs of the sovereign
consumer that govern capitalist market operations but the need of the
capitalist class to accumulate capital, accumulation being that systemic
necessity.
Finally, the existence of economic classes has the following implication
on the second fundamental theorem of Welfare Economics. At first sight, a
redistribution of original endowments would be a step in solving questions of
distributive justice. Households may receive a more equitable share of social
utilities because of such a redistribution. In light of the fact that General
Equilibrium Theory is only a theory of simple reproduction, this
redistribution is not ultimately practicable because the capitalist economy
does not function in this manner. The discrepancy in economic power is not
due to any discrepancy in original endowments but rather to the structural
logic of capitalist production itself. For consider that an attempt is made to
redress a discrepancy in economic power, due to capitalist class ownership of
the "lions share" of the original endowments or resources, by redistributing
these resources more equally among the classes. However the accumulation
process, made possible by the extraction of surplus value, leads to the
concentration and centralization of capital. The concentration of capital
occurs when surplus value is reinvested into either more capital, expanding
productive capacity, or newer and more efficient capital. It also encompasses
an increase in the number of capitalists in a given market. The concentration
of capital is descriptive of the competition between individual capitalists. As
a general rule the larger or more productive capitalists tend to either swallow
25 CHRISTOPHER J. ARTHUR: "Hegel's Logic and Marx's Capital". in Fred Mosley

(Ed.) Marx's Method in Capital, New Jersey (Humanities Press International
Inc.) 1993) p. 83.
202
up the smaller or less productive ones or run them out of the market
altogether. Hence capital becomes centralized in the hands of fewer
capitalists. The laws of capitalist production force individual capitalists, as it
were, to develop their original endowments in such a way to become unequal
(greater) than their rivals. Thus the accumulation process and the tendency
for the concentration and centralization of capital would return the
discrepancy in original endowments which itself would re-entrench the
economic power relations. That is to say, due to the existence of economic
classes and surplus value, the economy would move back to the same
economic inequalities in the distribution of original endowments that existed
before the redistribution. It is not the case that a redistribution would solve
problems of distributive justice but rather that the structural logic of capitalist
production, and its corresponding social relations, would have to be
questioned, since an inequitable normative ideal social order cannot be made
more equitable by a redistribution of original endowments.
Yet another aspect which precludes disequilibrating tendencies from
being investigated is the notion of rationality central to Consumer Preference
Theory. General equilibrium and Pareto Optimality will not obtain if
economic agents, specifically consumers, do not act rationally. Again,
centrality of the consumer to the economy is guaranteed by consumer
sovereignty since consumer sovereignty represents all economic activity as
geared towards subjective and social utility maximization which only occurs
if consumers act rationally. Overproduction can occur if the axioms of
Consumer Preference Theory are not adhered to. Most significantly, with a
violation of the non satiation axiom, some consumers would not want more of
the available commodities leading to a form of underconsumption. But the
corresponding form of overproduction, occurring because of
underconsumption, is due directly to the irrational actions of economic agents
and not overproduction due to the structural logic of capitalist production;
overproduction in this sense does not display the structural necessity
previously indicated. Hence, in this model of simple reproduction where
utility maximization is at the center of all economic activity, crises can only
occur if consumers do not behave rationally. But even if consumers act
rationally, the possibility of falling into a state of disequilibrium still exists in
terms of overproduction occurring because of the profit driven accumulation
of capital that is indifferent to the pre-existing needs of sovereign consumers.
Therefore if consumers were the rational agents described by Consumer
203
DENNIS BADEEN
Preference Theory, then, as rational agents, they would have to reject

capitalist production because of its inherently disequilibrating tendencies.
IX. Conclusion
In this paper I have outlined the erroneous ontological and

epistemological foundations of neo-classical economics and how it
contributes to an inadequate model of the capitalist economy in General
Equilibrium Theory. Using Bhaskar's Critical Realism as a heuristic device
to interpret Marx's method provides an alternative philosophical base for
theorizing the logic of capital and a critique of General Equilibrium Theory.
If we are to solve problems of an economic nature, we require an honest and
real conception of economic structures and agents, not fanciful idealizations
which apologize and explain away economic problems as stemming from
human nature and therefore are unalterable with the mantra that capitalism,
while in itself undesirable, is still more desirable than any conceivable
alternative.
204
Part Five
Economic Theory
and Normative Realism
Chapter 10
The Efficiency of the Non-profit Enterprise:

Constitutional Ideology, Conformist Preferences
and Reputation
LORENZO SACCONI
I. Introduction and Motivation

II. The Social Production Game: What Would Happen Without
Ideology?
III. Hypothetical Game, Constitutional Ideology and Its
Motivational Force
IV. Two Distinct Concepts of Preferences of the Self
1. Consequentialist Preferences of the Self
2. Conformist Preferences of the Self
V. The NPE Game with Mixed Preferences
VI. Explicit Moral Code, Reputation and the Endogenous
Development of Trust
VII. The Virtuous Interplay Between Internal Conformist
Motivations and External Reputation of the NPE
I. Introduction and Motivation
What is, if any, the distinctive comparative advantage of the non profit
enterprise? One line of theorizing, which I want to pursue in this paper, is
that the non profit enterprise (in short NPE) is able to attract ideological
entrepreneurs and workers (Rose-Ackerman 1996). "Ideologues" are agents
committed the principles of a given philosophy of service, a "mission" in a
field of provision and distribution of some welfare good or service. In terms
of the idea of "basic institutions" of society (Rawls 1971 ), a "mission" may
be understood as typically the endeavour of providing some "primary goods"
such as health, education, culture, basic income (that is the basis of self-
LORENZO SACCONI
respect) and ideologues are individuals committed to the institutional mission

of providing a "primary good" and its fair distribution.
Within the ideologues' approach the organisational mission is seen as a
value per se, rather than being instrumental to achieving a further good or
satisfying other interests, for example maximizing profit. The ideological
entrepreneur gets directly satisfaction from conformity to the mission or the
philosophy of service of the organisation he runs, even if it may be
detrimental to his/her material personal interest. It is easy to understand, then,
why ideologues prefer a form of enterprise where there is not an owner
claiming the residual. Otherwise the mission would be instrumental to
another goal, the owner wealth. The non profit enterprise corresponds quite
well to this motivational structure, in as much the residual distribution
constraint debars from the outset that the entrepreneur, once the production
inputs have been remunerated, must devolve the residual to satisfy an interest
external to the organisational mission.
The "ideologues" thesis in this sense is complementary, not alternative, to
the "property rights" explanation of the non profit enterprise (Hansmann
1980, 1987, 1988). In fact it says that, due to radical asymmetry of
information between welfare services providers (agents) and their sponsors or
beneficiaries (principals), any design of the contractual relation between the
agent and the principal that gives the agent control on the firm would result in
serious contractual transaction costs borne by beneficiaries, while
nevertheless neither the principals are efficient in exercising control. The
distribution constraint on the contrary significantly reduces the agent's
incentive to embrace opportunistic behaviour toward the beneficiaries, thus
making possible the production of services and goods that requires fiduciary
relationships between principals and agents. This explanation tells us that the
non profits create a more congenial (less inefficient, from the transaction
costs perspective) institutional environment for the efficient production of
welfare goods. However, it must be recognized that the non distribution
constraint is not a panacea, as far as there are many ways in which a rent
could be appropriated by agents (managers, entrepreneurs, etc.) other than the
explicit appropriation of the residual in the legal form of profit. Thus the
"ideologues" thesis provides an explanation of why there are nonetheless
people motivationally ready to refrain form exploiting these opportunities,
who want to stick to their "mission."
Anyway, it is evident that an ideological commitment can imply both
advantages and disadvantages as well to the firm producing welfare goods (I
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THE EFFICIENCY OF THE NON-PROFIT ENTERPRISE
will call it simply social production enterprise or SP in the following). An

obvious disadvantage is a deficit of flexibility and adaptation to changes that
may create business opportunities in fields other than those in which the
original mission was defined. Why advantage?
Here the main thesis of the paper can be suitably anticipated. It is
convenient to split it in four propositions that I will prove in the paper:
Proposition 1: Ideologues, both entrepreneurs and workers, share a
principle of justice meant as the constitutional ideology of the NPE, giving
the ab origine justification of its existence and mission. This is an idea of the
constitutional contract of the NPE from which they derive fiduciary duties
toward the beneficiaries, that is duties that they rationally accept - i.e. a
deontology (see sec. 3).
Proposition II: In so far as players believe in reciprocal conformity to
ideology by all the participants in a "social production game," the
constitutional principle endow players with an independent source of
motivation (a source of utility). I call this conformity-based utility
"ideological," and I understand it as the representation of a preference for
expected conformity to the given constitutional principle (i.e., the preference
to conform given the expectation of a deontological mode of behaviour
pursued by all the participants in the game). In order to differentiate it from
the utility meant as a function of classical preference, I call the classical
concept "material" utility (see sec. 3 and 4).
Proposition JJI: The conjunction of propositions I and II makes possible
to overcome personal incentives to embrace opportunistic behaviour within
the functioning of the social enterprise, so that the proper Non-profit
Enterprise emerges in so far as it can be proved that in the "social enterprise
game" amongst the members of the organisation there exists an
organisational equilibrium minimising transaction costs to the beneficiaries
(see. sec. 5).
Proposition IV: At last, this equilibrium rests on the emergence of an
expectations system of reciprocal conformity to the constitutional ideology.
Not just because expectations support non opportunistic equilibrium
strategies, but simply because beliefs about reciprocal conformity enter the
players' preferences and, by changing the payoff structure, they do "create"
the equilibrium (see sec. 5).
The last proposition makes inherently fragile the organisational
equilibrium that minimises transaction costs to the beneficiaries. As the
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LORENZO SACCONI
existence- not even the selection- of the internal organizational equilibrium

rests heavily on the existence of the appropriate system of reciprocal
expectations, the problem of how we can justify the emergence of the
appropriate system of beliefs must be underlined. Here is where the explicit
moral codes of the Non profit Enterprise enters the scene. I see the code of
ethics - i.e., a set of general and abstract principles with annexed more
concrete precautionary rules of behaviour- as a building block of a repeated
game model - whose stage-game is the typical game of trust played under
incomplete knowledge and unforeseen contingencies (Kreps 1990) within
which a reputation equilibrium between NPE as a whole and its external
stakeholders may be derived (see sec.6, proposition V in particular). Due to
the reputation equilibrium, the expectation that the ideology is conformed to
by the internal members of the NPE is justified. Thus in this paper I explore
at the same time three basic roles of ethics in the NPE: (i) the justificatory
role driven by the constitutional ideology, (ii) the motivational role, driven by
conformist preferences, and (iii) the cognitive role. driven by the code of
ethics, which is the basis for reasonably defining expectations on the carrying
out of commitments in the presence of unforeseen contingencies (Sacconi
2000, 2001 ). At last, I find that they virtuously play interdependent and
mutually supporting roles in the emergence of the efficient NPE (see sec.7,
proposition VI in particular).
My results are clearly indebted to that strand of economic literature that
sees expectations and beliefs about strategic behaviour as directly entering
the utility functions of the players (utilities depend strictly on what the
players believe about the conformity of other players to given strategy
combinations) so that beliefs contribute to create an entirely new set of
equilibrium points of the relevant game (Geanakoplos et al. 1989; Rabin
1993, Bernheim 1994, Sugden 1998a, 1998b ). A first difference with many
of these contributions however can be seen in that I do not attach normative
force to common mutual expectations per se. On the contrary I characterize
directly the normative principle or constitutional ideology of the NPE in
terms of contactarian ethics. It is because the organisational members play an
hypothetical bargaining game, where they rationally agree on the ideal
constitution of the firm, that they then will use ideology to identifYing the
real game behaviours to which they attach ideological utility. In other words,
it is because expected strategies comply with an independent ethical principle
that they get additional ideological utility, whereas the simple fact that
players may commonly expect one another to follow a given rule of
210
behaviour (mostly equilibrium conventions) doesn't imply per se any

additional source of conformist motivation. In this sense my approach may be
seen as moral conformism, not natural conformism (the way I would
understand "normative expectations" according Sugden's approach).
Secondly, I try to work out the philosophical underpinnings of this reform
of the players' utility functions in the NPE game (see sec.4). The notion of
ideological utility is based on conformist preferences. These are preferences
for those actions that are part of states of affairs described in terms of
interdependent actions conforming to an abstract norm or principle, which
become effective once the preferences' holder expects the other players doing
their part in that state of affairs while they expect that the preferences' holder
himself does his part in the same state of affairs. The result is that a player's
ideological utility depends on the expectation of deontological modes of
behaviour followed by all the participants, himself included. True, this type
of preference will result nonetheless based on a function defined over the
material utilities of the players (the Nash Bargaining Function). However,
the form of this function establishes not a goal but only a fairness criterion,
which implies a distributive pattern of utilities depending on an abstract
principle of justice (what players can rationally agree upon under ideally
symmetrical bargaining conditions). Moreover what counts for defining the
ideological utility is that the distance between the ideal state of affairs and the
states of affairs ensuing from actions actually undertaken, be minimized. That
is, what counts is that the players' actions conform to an ideal of behaviour.
The level of preference changes not according to how large is the slice of the
pie that the player gets, but according the to the distance (conformity level) of
the expected actions from that ideal.
Once this not secondary reform is accepted, 1 my explanation of the NPE
- centred as it is on the role of ideology, conformism and moral codes -
results nevertheless consistent with methodological individualism and other
typical rational choices explanations. Here, as in any other individualist
I think that it is essentially coherent with the formal notion of utility as a

representation of a general betterness relation, suggested by JOHN BROOME
(1999), which is much more wider than both the traditional notions of preference
as coherent desire or as revealed preference, and permits the appreciation of its
formal conditions of coherence without tying them up with a particular and
questionable substantial interpretation of the good.
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LORENZO SACCONI
methodological explanation, an economic agent maximises a utility function

of the Self, and her social behaviour can be predicted in terms of some
equilibrium points of a relevant game representing a multiplayer strategic
interaction.
II. The Social Production Game: What Would

Happen Without Ideology?
Let us begin the analysis in a standard economic setting, without any

change in the motivational system of the participants. I suggest that in a
generic social production enterprise (SP in short), providing social welfare
goods, will take place a strategic interaction, which I model in a stylised way
by a non-cooperative game with three players: an entrepreneur, a worker and
an external beneficiary (who consumes the welfare good produced by the
firm). The collective decision problem they face is how to allocate a surplus,
for example the result of a fund-raising campaign or the residual resulting
after costs from the previous accounting period. This surplus can be allocated
amongst different uses: covering extra administrative costs that the
management claims have been incurred or are to be incurred in the next
future, paying a higher wage to the worker as extra-compensation for the
previous period or to induce him to exert extra effort in the next period,
improving the quality and quantity of services to be provided to the external
beneficiary. From a normative point of view, the game could be seen as a
cooperative bargaining game within which the three players attempt to agree
over a conjoint strategy in order to solve both a cooperative problem and a
distributive problem. In fact, on one hand, they must agree in order to make
possible their conjoint contribution to the production and the consumption of
the welfare good, but, on the other hand, each would stay in the joint venture
only if he gets from SE at least what he would also get without cooperation.
(I will give an account of this hypothetical bargaining game in the next
section.)
However, I assume that the actual game played in SP is a non-cooperative
game in which the players do not have to bargain in the proper sense over the
allocation of the surplus. This reflects the assumption that there are not
external institutions or rules that may enforce any bargain that the three
212
players can agree upon, so that if they decide to follow some pattern of
conjoint behaviour, its implementation can only rest on their individual
interdependent strategy choices. This non-cooperative game is also meant to
reflect a situation like the following: the entrepreneur, due to his hierarchical
position of an authority in the firm, simply can announce a higher or lower
level of administration costs in order to obtain that a larger or lower share of
the surplus be devoted to what he declares. At the same time, the worker is
entitled to claim a higher or lower wage because he may give up any gift of
labour (or effort) to the SP, which he gave in the foregoing periods, or
continue to give some labour or extra effort to the firm on a purely voluntary
(not paid) basis. This can be understood as if the worker might ask for the
market-level wage or a wage lower than market-level, in a situation in which
labour has some market-wide bargaining force (so that the market level of
wages in the industry already permits the worker to appropriate a rent) and
the management can not bargain over the decision of the worker to claim
what the market in general would offer to him. In this game, the consumer or
beneficiary doesn't have any real influence on results, and she is simply
subjected to an internal allocation decision made by the members of the firm.
However she receives the effect of the other players' strategic decisions, so
that we can consider her payoffs together those of the other players. 2
Let me illustrate the strategy set of each player, as it is represented by the
matrix game of fig. I.
• The worker's strategy set: given a level of effort, the worker may
choose strategy LW (claiming "Low" wage) or strategy HW
(claiming "High" i.e., market- wage).
• The entrepreneur's strategy set: given an amount of the firm's output,
the entrepreneur may choose strategy LC (asking for covering "Low"
i.e., true - administrative cost) or choose strategy HC (pretending
"High" administrative cost - where high costs represent a level of
rent appropriation by the entrepreneur).
• The beneficiary's strategy set: it is empty, because the beneficiary is
a "dummy" player with no direct influence over the outcomes of the
game. Her payoffs (see payoffs within brackets) however are
determined by the other two players' interdependent choices.
2 For a wider formulation of the three-person game with the beneficiary as a

dummy player, see also GRIMALDA and SACCONI (2002).
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LORENZO SACCONI
From the outcomes depicted in the matrix game of fig. I, it results that if
the players claim high wage and high costs, they appropriate all the surplus
and nothing is left to the beneficiary. If they both moderate their claims, on
the contrary, resources are allowed for higher quality or increased quantity of
welfare goods to the beneficiary.
Figure 1
The SP Game
LC HC
LW
2, 2, (6) 2, 6, (I)
HW 6,2,(1) 4.5, 4.5, (0)
By unilaterally giving up the high claim, each of the two active players
can do no more than allowing very low utility to the beneficiary while
facilitating the counterpart in getting his maximum payoff. Notice that all of
the four outcomes are included in the Pareto set of the game, but quite
evidently the total amount of benefits distributed when both the active
players restrain their claims is higher than in the case in which they claim
their highest payoffs, and also higher than in the case in which one player
takes advantage of the counterpart's moderation. Even though Pareto
efficiency can not aid in discriminating amongst outcomes, it makes sense to
say that by claiming their highest payoffs, players generate an inefficiency in
SP. First of all SP becomes inefficient in terms of total production of welfare
goods provided to the beneficiary, which in fact gets nil. Secondly,
transaction costs borne by the beneficiary when the two active players ask for
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a high wage and high costs are higher than the total transaction costs they
would face whether they renounce to claim such payoffs. In terms of the
Kaldor-Hicks efficiency concept, it would be possible to construe an
hypothetical bargaining with transferable utilities so that the beneficiary
could bribe the two active players in order to convince them to abandon the
"High/High" strategy pair and to make acceptable to them the outcome that
allows maximum benefit to the beneficiary. It would be enough for the
beneficiary to give up a value of 4 of its payoff under the outcome (LW,LC)
in order to compensate the active players, while maintaining nevertheless a
surplus share of 2. On the other part, there is no possible bargain by which
the active players would be able to convince the beneficiary to jump from the
"Low/Low" strategy pair to the "High/High" one. Even though they were
ready to reduce themselves to the same payoff they would get under (LW,
LC), the total amount of the bribe (4) would not compensate the beneficiary
for surrendering the outcome where she would get the payoff 6. Thus the
outcome (HW, HC) is dominated by the outcome (LW, LC) according to
Kaldor-Hicks efficiency.
Of course the reason the non profit enterprise is usually seen as an
institutional solution to the SP problem is that such a Coasian contract
between the beneficiary and the producers of the welfare good is not possible.
The beneficiary may have neither information, nor rationality enough to
bargain over the allocation of the surplus amongst alternative uses internal to
the organisation. If she were able to try, transaction costs would dissipate all
the surplus. Hence it is recommended to establish an organisation endowed
with an internal hierarchy able to implement a fiduciary relationship between
the beneficiary and the producers. This means that the entrepreneur - the
agent who is at the top of the hierarchy - should exercise his authority in
order to assure the firm be managed in the best interest of the fiduciary (i.e.
the beneficiary). 3
It is however apparent from the game matrix payoffs, that the only Nash
equilibrium of the SP game, which is also in dominant strategies, coincides
with the strategy combination (HW, HC). Individual rationality will
consequently push the players to act opportunistically and to claim a high
wage and high administrative costs. Notice that as far as the game is analysed
3 On fiduciary relationships and duties see FLANNIGAN ( 1989) and FRANKEL

( 1998).
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LORENZO SACCONI
only according to payoffs of the active players, the equilibrium is also Pareto
dominant in the two-person small society of one entrepreneur and one
worker. Thus, according to this restricted view of the game, there is not any
principle of social efficiency that, contrasted with the principle of individual
rationality, would give rise to conflicting prescriptions- what on the contrary
typically happens when opportunism is at work (for example in PD-like
situations). The effect, however, within the enlarged society of three players,
is that high transaction costs are borne by the beneficiary (her rent is 0).
What we have seen is how SP (i.e., simply an enterprise that should
produce social welfare goods within a fiduciary relation to the beneficiaries)
degenerates to a for profit: all the surplus is appropriated by the producers
and no part of it is devoted to bettering quality or increasing quantity of
services provided to the beneficiary. This does not exclude, however, that this
degenerate enterprise might take the legal form of a non profit. So many are
the ways in which the non distribution constraint may be circumvented that
there is no reason to expect that the SP will necessarily take the legal form of
a for profit. My description of the game exemplifies just one of them, as far
as the entrepreneur can pretend that administrative costs are higher than they
actually are, and he can do that by abusing his formal position of authority in
the organization. Let it be as it might, the provision of welfare goods will be
undersized. The prevailing "residual-appropriation-seeking" behaviour
implies an organisational failure, which is the counterpart of the typical
market failures in the industry of welfare goods.
III. Hypothetical Game, Constitutional Ideology and Its

Motivational Force
Why does the SP game escape the failure described at the end of the
previous section, and how does it definitely assume the character of an
efficient NPE? In other words why does an NPE emerge such that the
internal members of the organisation accomplish fiduciary duties to the
beneficiary? My answer is that both the entrepreneur and the worker are
"ideologues." I make this point by introducing two assumptions in sequence.
These are meant to capture two distinct roles of morality in the NPE: the first
is the "rational justification giving" role that I want to capture in terms of
216
contractarian ethics. The second is the motivational role, which I will model
by conformist preferences. It is a basic tenet of this paper that these two roles
must be considered as both indispensable but irreducible, one to the other, so
that both should be squarely faced by any intellectually honest endeavour to
explain how morality can play a role in economic organisations. 4
Hp.l: NPE's internal players stick to an ideology. It states that the NPE is
based on an hypothetical "social contract" amongst all the players - the
beneficiary included -affirming an ethical principle of fairness.
The situation has to be understood as if, before playing the actual game,
an hypothetical cooperative bargaining game amongst all the players (the
dummy included) would be played. This game captures the ex ante
perspective according to which the players could agree to join the
organisation in the different roles of entrepreneur, worker and consumer. In
doing that, they look for a justification of their joining the organisation. Thus,
they take an impartial or moral point of view, which means that the decision
of joining must be rationally acceptable from whichever point of view. To
say it differently, terms of agreement must be rationally acceptable under
permutations of the personal or role-relative point of views, so that an
agreement must be invariant when considered under both of the two
apparently distinct perspectives: the perspective of each particular player,
4 This is a point I draw from DAVID GAUTHIER ( 1986), as he makes the basic
distinction between internal rationality of the social contract, what can be
obtained in terms of rational bargaining theory, and external rationality of the
social contact, i.e., the compliance problem, which he attempts to solve by his
"constrained maximisation" theory. While I agree with the contractarian
approach [see SACCONI (1991) and SACCONI (2000)], I do not believe that
Gauthier's constrained maximisation is completely successful [see SACCONI
( 1995)] in explaining rational compliance. This is a reason that looking to a
theory of conformist preference seems appropriate at least in order to explain
certain classes of economic behaviours like the comparatively successful
performance of NPE within the provision of welfare goods, as it asks for a
restraint on the players' individual self-interest. Nevertheless, I agree with
Gauthier that compliance -what in my approach should be called conformity - is
a distinct problem that must be considered separately from the rationally
justificatory force of the social contract as seen in the ex ante perspective which
must be taken by who has to decide whether he would join to a prospective
cooperative social venture.
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LORENZO SACCONI
choosing according to his best payoff, and the perspective of "anybody" -

that is the perspective of whichever player who would consider the problem
of finding an acceptable agreement without any knowledge of his name and
personal role in the game (Sacconi 1991 ).
In fact an impartial perspective is adopted in order to settle the "mission"
and the conjoint strategy of the organisation, which is intended as the one that
would be agreed upon amongst all internal members and the external
stakeholders of the NPE as well. In particular, this perspective is taken in
order to identifY a reasonable and acceptable principle of balancing amongst
the claims of all interested participants, from which internal players derive
the fiduciary duties that the NPE must discharge toward its beneficiaries.
Thus the "social contract" works as a "Constitutional" ideology legitimating
the enterprise as an institution ab ovo.
At the very core of the contractarian approach lies the idea that a fair
distribution can be worked out through a rational agreement for mutual
advantage of all the interested parties. Inclusion also of the beneficiary within
the set of bargaining players is due to the impartial perspective taken in this
justificatory exercise. As it is an example of the justificatory role of ethics, it
disregards the effective influence of the players in the actual game. On the
contrary it considers an ex ante perspective in which the beneficiary would
also have a voice about the terms of agreement on the cooperative venture in
which the beneficiary essentially contributes, as he is the consumer of the
organisation's output. Rational agreement in this hypothetical game thus
requires efficient production of a surplus and its fair distribution amongst
both the internal and external players as well.
Formally this can be modelled as the requirement that NPE distributes the
surplus according to Nash Bargaining Solution for cooperative bargaining
games, i.e., we should pick up the distribution maximizing the product of the
three players' payoffs net of status quo (Nash 1950). Note that the Nash
Bargaining Solution selects always an outcome reflecting the existing degree
of symmetry of the payoff space, which means that if the payoff space is
symmetric the solution is perfectly symmetric amongst the players (i.e., it
splits the pie in equal parts). Consequently the solution is covariant with any
asymmetry in the utility representation of the outcome space. This solution
excludes any discrimination against whichever player (of course the utilities'
product becomes zero if any factor in the multiplication is zero) and always
selects equality in so far as equality is represented in the shape of the payoff
space. In our simple game, maximising Nash product implies choosing the
218
outcome where both the internal players choose the Low strategy allowing
the most part of the surplus to go to the beneficiary5 . In sum, I resort to Nash
bargaining solution as a normative criterion for defining a moral preference
over the outcomes of the original game. I will use it as a sort of "Social
Welfare Function" that orders outcomes according to "distributive justice."
(Remember that all our outcomes are already situated on the Pareto frontier
of our decision problem.)6
With respect to the non-cooperative game of the foregoing section, the
constitutional ideology is what can be called the result of a "pre-play
communication" phase, an ex ante agreement that players endorse before the
beginning of the actual non-cooperative game on surplus allocation. However
the actual (ex post) game is non-cooperative. This means that commitments
on the ideological principle are not binding per se, and there is nothing in the
rules of the game that makes sure that the precepts of the ideology will be
enforced or put in practice by the players. Moreover, due to the payoff
structure of the actual non-cooperative game, we know that players do not
have the appropriate incentives to put in practice the precepts of a
constitutional ideology asking them to leave the most part of the surplus to
5 According to the Nash Product, if d; is the status quo from which a generic party i
may enter the agreement and u; is his utility for any given agreement, then the
rational bargaining solution is the unique point on the convex frontier of the
convex-compact payoff space where the net payoffs of the players (u;- d;) are
such that the value MaxnN;(u; - d;) is obtained (where N is the number of
players). See (Nash 1950, Harsanyi 1977). Notice that in our game the Nash
product is maximised at (L W,LC), while at (HW ,HC) it is nil, due to the
component zero in the corresponding payoffs vector.
6 The idea to base the Social Contract on Nash's bargaining solution was first
given by HORACE BROCK ( 1979). See also SACCONI (1986, 1991, 2000). It is also
adopted in a somewhat different way by KEN BINMORE (1997). I admit that using
here the words "Social Welfare Function" can be misleading, because they
induce one to think that there does exist a sort of super-individual decision maker
whose objective function is defined according to the SWF. That is not the case
however. By this SWF I only mean an ethical criterion of fairness useful to judge
the outcomes of the game. It is not a consequence that a decision maker would
bring about for himself. This should appear a natural interpretation given the
underlying contractarian account of the Nash Bargaining Solution.
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LORENZO SACCONI
the beneficiary. Why then do active players, the entrepreneur and the worker,
comply with their constitutional ideology?
Here my second hypothesis comes in:
Hp 2: The internal NPE players take the expectations of reciprocity in
conformity to their constitutional ideology as a source of utility per se.
There is an intrinsic source of utility in acting according to the ideology in
the event that you believe that, whilst you act according to the ideology, other
players are also conforming to the same ideology, and you also believe that
they in fact expect you are acting according to the ideology whilst they act
according to it. In other words, if the worker is acting in conformity to
ideology (i.e. he chooses LW) and if he believes that the entrepreneur also is
acting in conformity to ideology (i.e. he chooses LC), then the worker gets
additional utility from acting in such a way, which adds to the utility that he
gains from the material outcome of his choice (which depends on the other
party's choice). Symmetrically the entrepreneur gains additional utility form
acting according to ideology if he believes that the worker does the same and
(he believes that) the worker also believes that he acts according to ideology
- that is by choosing LC whenever he believes that (L W,LC) is the current
outcome in which the entrepreneur fares better. Following the theory of
psychological games (Geanakoplos et al. 1989), I hypothesise that there
exists a component of the utility functions of the players, defined on their
strategy choices, which depends on their beliefs about their reciprocal
choices. This is an additional component to be considered as separate from
the utility they gain from material payoffs associated to any outcome of the
game.
Hence, a player who adopts his dominated strategy (L W or LC), which
may obtain only outcomes with low payoffs, as far as he believes that the
counterpart would choose reciprocally the dominated strategy, would gain an
additional amount of utility in as much the outcome (LW,LC) better
conforms to ideology. If this effect is strong enough to overcome the opposite
effect due to material payoffs (i.e., in the balance ideologically based utility
prevails), it can be predicted that the two players' strategy choice will
conform to ideology. In this case the reciprocal behaviour of the players
confirms their reciprocal expectations, so that they will not have any reason
to revise ex post their expectations. Absence of reasons to revise expectations
characterises this outcome as an equilibrium of the psychological game, that
is a system of mutually consistent expectations inducing a strategy choices
220
profile such that expectations are confirmed in practice (Geanakoplos et al.

1989).
IV. Two Distinct Concepts of Preferences of the Self
It should be made clear here what concepts of preferences and utility I am

implicitly employing. This somewhat long section is intended to discuss the
philosophical underpinnings of the reform introduced by Hp.2, which will be
embodied in the formal model of the game in sec.5.
On the one hand, we have in fact preferences and utilities defined over
outcomes of the players' interaction, that is preferences over what happens to
a player under the outcomes depicted by the matrix game of fig. I. On the
other hand, we have preferences and utilities meant as a function of the
beliefs that players entertain about their reciprocal conformity to an abstract
principle or a solution concept for a wide class of games. In the first case, a
player would get utility from the consequences of the outcomes (what happen
to him because of the interaction result), whereas in the second case he gets
utility from beliefs about a mode of behaviour jointly put forward by all the
players, which is viewed in so much as it conforms to an abstract norm or
principle. The second source of utility does not follow from the usual strain
of consequentialist reasoning, whilst it introduces at the basis of utility a
typically deontological argument. It is an intrinsic characteristic of a set of
actions (to be precise, a property predicated about each player's action and
about his expectations, upon which an action is contingent) that gives rise to
the kind of preference under consideration.
As far as a norm is simply rationally agreed upon in the ex ante
hypothetical bargaining game, it is not yet a source of utility. It gets its
motivational force once the player has developed the expectation that the
norm is also reciprocally conformed to by every player in the game, himself
included. This kind of preference may appropriately be called conformism, as
it expresses a desire to see those norms that all have rationally agreed upon to
be complied with by everybody. Moreover, it should be better understood as
moral conformism, because the relevant preference is developed only with
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LORENZO SACCONI
reference to a principle of fairness or an ideology, which is the result of ex

ante unanimous, impartial and rational choices?
In effect, what I am defining are two distinct concepts of personal
preferences, i.e., two types of preferences ol the Self, wherein self-interest or
egoism is only a particular case. Therefore, within the whole model of
individual preference-based rationality, there is room for different kinds of
interest of the Self.
I. Consequentialist Preferences of the Self
First of all, there are preferences of the Self defined over consequences.
Consequences are meant as what happens to some individual under a given
outcome of interaction. These preferences can be defined over consequences
concerning the Self alone and affecting only him-self without any regard to
what happens to any other individual. In this case, the Self is self-interested
7 Here it should become clear the main difference between my approach [see also
GRIMALDA and SACCONI (2002)] and Sugden's approach see SUGDEN (1998a).
According to Sugden in fact there is not any independent normative condition for
what he caJls normative expectations seen as source of additional utility deriving
from the common reciprocal expectation of conformity to the same rule of
behaviour by a set of players. In a game may exist multiple regularities of
behaviour to which are associated coordination equilibriums, which can be seen
as conventions. For each ofthem, a conformist source of utility can develop such
that the convention itself is stabilised even against mistaken deviations by one or
a minority of the players' population members. As far as there are common
reciprocal expectations that players wiJI follow them, and nobody sees any utility
in deviating from it over the expected utility of complete compliance. each rule
of behaviour develops its supporting normative expectations (SUGDEN 1998b ).
That is true - I remark- also to those conventions that are morally repugnant. In
my model, which under this respect is more akin to RABIN ( 1993 ). on the
contrary conformity is an additional source of utility only with reference to an
abstract norm of fairness that has been hypothetically agreed upon by the players.
Rational ex ante acceptation is not sufficient as such to assure that motivational
force is able to overcome akrasia. Nevertheless, it is a necessary condition for a
motivation to act resting on mutual conformity to a norm can arise. In other
words, we do not gain any additional source of motivation by seeing ex post that
a norm has got general conformity and by adhering w it if that norm has not
been ex ante accepted through an impartial agreement.
222
because his preferences would depend only on the consequences happening

to him-self in each state of the world. Quite different would be the case if the
Self would take his preferences not only over consequences occurring to him,
i.e., self-referred consequences, but also over consequences concerning any
other individual.
Actually, strategic interaction generates states of affairs which can be
differently described according to their different characteristics. Such
characteristics can be seen as what happens to the decision maker in a state-
i.e., as the consequences to the decision maker - or what happens to any
subset of individuals or to every individual - that is consequences to
everybody in the same state. In the first case, the characteristics would be
attributes of the single agent him-self (his wealth, leisure, effort, his power,
the manifestation of his creativity and the like), and they result out of a one to
one mapping between the state set and the consequence set held by one
particular individual (the decision maker). In the second case, the
characteristics under consideration would be attributes of some subset of
individuals or whichever individual, and they could be defined by a one to
many correspondence between the state set and the consequences sets borne
by all the concerned individuals.
If a decision maker defines his utility as a representation of preferences
over consequences that concern only him-self, we will have a utility function
that represents his self-interest. I call the underlying preferences of this utility
function personal self-referred consequentialist preferences. However, if the
preferences of the Self are defined over descriptions of the states of affairs in
terms of consequences concerning any subset of individual or every
individual, then the Self is considering extended consequences (impartially
extended in the latter case). This seems the natural way of accounting for a
moral preference of the Self in a consequentialist sense, which will be
represented by some social welfare function. Of course this is not yet a
complete account of utilitarianism. Utilitarianism asks for considering, as the
basis for an impartial preference judgment, not only the consequences to
whichever individual, but also the evaluation of such consequences from the
very point of view of each individual's preferences - which asks at least
implicitly for carrying out interpersonal utility comparisons. Nevertheless
evaluating a state according to the consequences that it attaches to every
individual, means to take an impartial perspective over consequences,
whichever the individual is to whom those consequences might happen. This
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LORENZO SACCONI
is what I call consequentialist personal moral preference. From a purely

formal point of view there is no difference in taking as the basis for a utility
representation the preference ordering defined over the first kind of
descriptions of the state's characteristics, or the preference ordering defined
over the second enlarged kind of descriptions of the same state's
characteristics, even if the moral meaning is quite different in the two cases. 8
2. Conformist Preferences of the Self
Let us come now to the second type of preferences of the Self, which I
call Personal Conformist Preferences. As well as the first type of
preferences, conformist references are also defined over states of affairs, but
these are not described in terms of consequences occurring to any individual
whatsoever, but as patterns of collective, interdependent or conjoint
behaviours, and as beliefs about such modes of behaviour. The elements to be
considered here are in sequence: a) the relevant description of states of affairs
constituting the basis for defining the new type of preferences, b) the
preference ordering over the states of affairs as it depends upon the relevant
description of states of affairs, c) the induced preferences ordering over the
actions set of each individual player, d) the numerical representation of such
preferences by a utility index that I call ideological utility.
(i) The relevant description of states of affairs. At this stage of the
argument, states are primarily characterised as a set of interdependent
actions, conforming or not to a given abstract principle. What we are looking
after in this description are modes of deontological collective behaviours
maintained by the players. I suggest to proceed as follows: first, fix a pattern
of behaviours (a vector of strategies) that is perfectly de ontological because it
fully conforms to an abstract principle of fairness or to a fair criterion of
benefits distribution amongst the interested parties. Call such a state the
ideal. Then, look after the degree of conformity to the ideal displayed by each
state of affairs resulting out of the individual choices actually performed by
8 Harsanyi's "preference utilitarianism" (HARSANYI 1977) fundamentally shows

that the Utilitarian Social Welfare Function, meant as an impartial but
sympathetic moral judgment of an individual, is no more than an extension of
the typical vNM personal utility function, expressing self-referred
consequentialist preference, which, under suitable additional assumptions. is
defined over the extended set of consequences.
224
all the players. l accomplish this task by seeing whether the ideal comes
about through the actual individual choice carried out by each player, given
the choice he expects from any other party. This in fact helps us not only to
say whether an actual state, appropriately described, conforms to the
deontological ideal, but also to impute to each player's action responsibility
for any deviation from the ideal. Thus, what we describe are states of affairs
in terms of combinations of actions and their proximity to, or their deviation
from, the ideal.
Moreover, notice the importance of beliefs in the relevant description of
states of affairs. To say "given" within strategic interaction asks for adding
"according to the player's beliefs," i.e., we look after states of affairs
resulting from the choice of each player given his beliefs about other players'
actions, which in turn is based on what the player believes the other players
believe about the first player's choice. Hence, by describing states of affairs
we describe how far a vector of actual strategy choices, contingent upon the
vector of individual beliefs justifying these choices, is faraway from the
vector of strategy choices defined as the ideal. However in equilibrium -this
is true to Nash's equilibria and also to their extensions as psychological
equilibria- beliefs are confirmed by actual actions. Thus we can understand
equilibrium states of affairs as directly identifYing a set of actually occurring
strategy choices (associated with the "probability one" beliefs justifying
them).
Remember, however, that in order to define fairness we have to look at
the distributions of payoffs, that is distributions of utilities based on the first
type of preferences - i.e., material utilities based on personal consequentialist
preferences. This does not reduce the second type of preferences to the first.
First type utilities are no more than the rough materials of the second type.
What we are interested in about outcomes is how distributed in each state of
affair are utilities for consequences amongst the players in order to learn
whether they correspond to the ideal distribution defined according to an
abstract principle. Nash's SWF (remember what l have said about SWF in
note 3) will describe each state according to the fairness principle. Therefore
we will be enabled to see whether the occurring vector of strategies in any
states determines a payoffs distribution such that a multiplicative function
defined over material payoffs is maximised or not. What matters for the
relevant description of states of affairs are not consequences or material
225
LORENZO SACCONI
payoffs as such, but the description of a distributive property over payoffs -

i.e., how high the product of payoffs is net of the status quo.
Nothing does imply that a state of affairs under this description may be
seen as a consequence which will happen to any particular individual, to all
the concerned individuals - let alone the typical utilitarian fictitious mean
individual- who gets 1/N of the sum of the individuals' payoffs. Under this
description, there is no individual to whom the relevant state of affairs
happens as a consequence. We simply have a distribution saying the ratio
according to which an efficient pie is partitioned amongst different players.
The ratio of the partition or the distribution as such are not consequences to
any player, although they give a criterion (a formal property of the
distribution) according to which the players share the pie - from which they
may calculate the slice that will accrue to each of them as a consequence. In
fact the relevant description of state of affairs - based on the underlying
description of the payoff gained by each player- is no more then an abstract
formal property of the utility distribution (how high the utilities product is
under different outcomes). I take this property to be meaningful in so far as
rational impartial acceptability of an agreement is concerned. In other words
it is relevant in order to know whether the distribution is fair because of the
proportionality of shares to relative needs or to relative marginal variation in
the material utilities of players (Brock I979; Sacconi 2000).
(ii) Conformist preference ordering over states. Any player makes
choices within his strategy set. This means that preferences must be defined
over his set of feasible actions. These preferences, however, are to be derived
from the preference ordering defined over states of affairs as described so far.
Remember that preferences over states of affairs are not defined directly over
consequences, but over acts because of their conformity to an abstract norm,
i.e. a distributive principle. It is apparent that, under these descriptions, acts
are not taken in isolation but as sets of reciprocal acts (strategy vectors). It is
also apparent that the preference ordering over states depends on an objective
measure of any vector of actions conformity to the abstract principle of
fairness as it is built into the description of each state of affairs. The more a
state of affairs conforms to the ideal, the more it is preferred by a player, i.e.,
the degree of expected reciprocal conformity is used as the basis for defining
each player's preference ordering over states. This is the characteristic that I
assume players take as endowed with motivational force in order to say how
desirable a state is. In this sense, at the basis of conformist preferences lies a
226
measure of how much deontology there is in the pattern of behaviour

displayed by all the players in each state.
We may consider nonetheless preferences over states of affairs as
ultimately based on subjective affections of the players (Gauthier 1986). In
fact there is no reason to think that the criterion of preference should be based
on some objective value having an ontological reality out there, completely
independent of the affections, the decision making activity or the judgement
of those who are asked to express their preference. Note that, while
conformist preferences depend on degrees of conformity, that is levels of
deontology built into the description of states, nonetheless deontology is
meant as conformity of actions to a fair distribution principle on which we
have simply rationally agreed. At last rationally agreed principles of fair
distribution are simply meant as what players would accept in an hypothetical
bargaining situation amongst symmetrically rational bargainers, who are all
equally driven by rationality postulates derived from the same principle of
utility maximisation under strategic interaction, but as well equally incapable
to identify their own particular name and role in the game. 9 Each participant
in the bargain seeks to gain as large utility as it is compatible with other
bargainers symmetrical rationality. A fair principle of distribution naturally
follows from the idea of an agreement acceptable by each player under this
assumption of reciprocally expected rationality, an agreement that has to be
recognised rational from whichever player's point of view. Granted general
acceptance by symmetrically rational players, an external impartial observer
would find such terms of agreement as an invariant bargaining solution when
he takes, in turn (i.e., under the permutation of), whichever individual point
of view. Hence it is the idea of rational agreement - grounded on rational
maximisation of the first type of utility under perfectly symmetrical
bargaining conditions - the basis for deriving the principle of fairness.
Therefore, rational agreement defines the value, not the value the reason for
the agreement.
9 HARSANYI ( 1977) states the set of symmetrical rationality postulates from which
the bargaining solution is derived. For the idea of impartiality of bargaining, see
GAUTHIER ( 1986 ). BINMORE ( 1997) shows a bargaining game suitable for ethical
theory based on the players' symmetrical permutation. See also SACCONI ( 1991)
for a different account.
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LORENZO SACCONI
To be clear, let us state the hierarchy within which the different pieces of
the argument should be understood. First of all, for each player I take for
granted the existence of some first order utility defined on possible bargains,
which are initially described in terms of the consequence that each player
gets from them. Second, players accept some terms of agreement concerning
the surplus distribution. This agreement is worked out according to the
fundamentally subjective notion of rational choice under ideally symmetrical
bargaining conditions (this is drawn from the underlying idea that before
playing the actual game, players will participate in a hypothetical bargaining
game solved according to the Nash Bargaining Solution). Third, this
agreement defines a norm for distributing benefits in any game situation of
the kind under consideration. Fourth, I adopt this principle as the ideal term
of reference in order to measure "conformity" of states of affairs - described
as vectors of interdependent actions - to a principle of fairness, and this
introduces my deontological assessment of states of affairs. As from this step,
a preference is no more merely a subjective attitude toward consequences,
but a binary relationship giving rise to an ordering of states of affairs
according to an objective measure of conformity.
The result is a preference ordering defined over states of affairs, which we
hold not just because of our primitive psychological desires for material
utility or preferred consequences, but because it conforms to a rationally
agreed abstract principle. The fact that conformist preferences are based on a
fairness principle derived in turn from a rational bargaining model (over
payoffs distributions) does not make less deontological the reason of
preference at this second level of the argumt:nt. Nonetheless the
deontological nature of these second order preferences does not make them
dependent on values (ontologically) objective in nature or completely
independent of the decision maker's affectivity or activity. Duties are simply
those we have rationally agreed upon in a hypothetical bargaining situation.
(iii) Conformist preference over actions of a single player. At the end
what really counts for determining the result of the game are each single
active player's preferences over his own action set. As the Self's
consequentialist preferences over outcomes induce his personal preferences
over his action set, so much must also be true for conformist preferences of
the Self. Simply these preferences over personal actions are induced by the
conformist preference ordering over states described so far. If a player thinks
that the attainment of a strategy combination conforming to the principle of
fairness is currently feasible due to the other player's predicted choice, then
228
he prefers the action that conforms to the duty - call it the deontological
action - exactly because it contributes to the materialisation of a state of
affairs conforming to the duty.
To state it a bit formally, agent A conformistically better prefers action X 1
than action X2 if A predicts an action Y by the other player 8 that would
bring about a state of affairs S (a strategy vector) that better conforms to the
principle P if chosen together action X 1 than together action X 2 •
This definition, however, hides how important beliefs are to the definition
of personal conformist preferences. It does not account for the fact that a
player, while he does not observe vectors of actions as such, on the contrary
he holds beliefs over other players actions and over other players' beliefs
over his own actions and beliefs. Thus his preferences can be defined over
actions according to whether these actions, together with what he believes
other players will do, and what he believes other players believe about what
he does, contribute to bring about states of affairs that better conform to a
rationally agreed principle of fairness.
To give again a definition a bit formal, agent A better prefers action X 1
than action X 2 if he believes that the other agent 8 will adopt the action Y,
given that he (B) believes that A chooses action X~, so that by choosing
action X 1 (together act Y) agent A believes to bring about a state of affairs S 1
that better conforms to principle p than the state s2 brought about by
choosing action x2.
This definition makes natural explaining personal conformist preferences
of agent A as resting on the existence of a hierarchy of mutual beliefs, within
which any layer of beliefs is justified by a higher order layer of beliefs: 10
Player A will better prefer action X 1 than action X2 if he believes that
(a) Player A's action X" together with action Y, that A believes will be
chosen by the other player 8, brings about a state of affairs better
conforming to principle P than action X2;
(b) Player A's action Xl (which the other player 8 believes A will
adopt) together with action Y that (player 8 believes) A believes
10 Hierarchies of beliefs are typical game theoretical constructions after David

Lewis's account of common knowledge (LEWIS 1968). See MERTENS and ZAMIR
(1985) and TAN and WERLANG ( 1988). They are also basic for the theory of
psychological games (GEANAKOPLOS et al. 1989).
229
LORENZO SACCONJ
will be chosen by the other player B, brings about a state of affairs

better conforming to principle P than action X2 ;
(c) Player A's action XI (which A believes the other player B believes
A will adopt), together action Y that (A believes that player B
believes) A believes will be chosen by the other player B, brings
about a state of affairs better conforming to principle P than action
X2,
and so on (the reasoning can be iterated on expectations about expectations
of every order).
Because, of course, these preferences are also two place relationships, by
assuming that they satisfy the usual assumptions of connectedness and
transitivity, we can derive an usual preference ordering over the strategy set
of player A. 11
(iv) Ideological utility. There is no reason that this preference ordering
should not be represented by an individual utility function. I call it individual
ideological utility of actions as it is based on the individual's conformist
preference ordering on actions. It is derived in turn, first, from how much the
individual believes that other players will conform with a principle, believing
that every other player will also conform to the principle. And, second, from
the fact that, together, the expected actions by the other players and the
individual's action under consideration will bring about a state of affairs that
will better conform to the principle than some other state of affairs brought
about by another individual's action. Given that conformist preference
changes continuously with expected conformity of action combinations to a
principle, the Nash social welfare function (SWF) is a suitable basis for
deriving a quantitative measure of conformity. Ideological utility must be a
direct function of the conformity measure, in terms of the distance between
II As far as conformist preferences can be assumed to satisfy the formal conditions

for being represented by a utility function, I suggest that this is an example of the
betterness relationship proposed by JOHN BROOME ( 1999), which is a binary
relationship expressing whichever reason for saying that in one state of affairs or
action there is "more good" (it is better) than in another. Conformist preference
as betterness relationship (which is a quite formal and non-interpreted notion) is
coherent. Therefore it can be represented by a utility function, even if it does not
correspond in any sense to the typical "desire'' or "revealed'' interpretation of
preference.
230
any strategy combination and the state where the principle results fully
satisfied.
At last, we must ask for what the overall utility function of a player is,
which leads as a whole the decision making of each active player in the
game. It should be the joint representation of the two types of preference,
such that, assuming a plausible condition of decomposability, it may be
reduced to an additive weighted combination of the utility representation
defined over consequentialistic preferences and the utility representation
defined over conformist preferences.
V. The NPE Game with Mixed Preferences
Formally the measure of the conformist component of the players' utility

functions has to be based on a distance. In order to keep things simple, I will
look directly at the value of the Nash SWF for each outcome and I will
express conformist utility for each player as a direct function of the distance
between the value of SWF materialised in each outcome and its maximum
value in the whole game. As it will be seen, this reduces to entering the Nash
SWF values within the utility function ofthe players.l2
12 For a more precise approach to modelling how a measure of conformity enters

the utility function of each player, see GRIMALDA and SACCONI (2002). There we
develop the idea that each player will consider (i) how much distance by his
choice he contributes to create from the maximum SWF attainable value given
what he expects of the other player choice, and secondly (ii) how much distance
will be created by the other player choice from the maximum SWF attainable
value under what the other player expects (and the first expects the second
expects) of the first player choice. If a player thinks in both cases that players
will conform to a certain positive level (which means that each player, when
making his choice, does conform and expects that the other conforms as well) the
value of the index resulting from these calculation will be positive. If at least one
player does not conform at all, the index degenerates to nil. If, according to what
is envisaged by a player, both the players conform to the highest level (expecting
the same behaviour on the other party), the index has value I, which at the end
means that everything rests on a weight A independently assigned to conformity
by each player. In this case the SWF does not enter as such the utility function.
231
LORENZO SACCONI
Let x be the maximum value of the Nash product calculated over the
outcomes of the game. Let moreover y 1,y 2 ,y 3,y 4 respectively be the values
that the Nash product takes at each outcome of the game (see respectively the
top/left, top/right, bottom/left and bottom/right payoffs vectors in the matrix
game of Fig. I). Then, we have the basic information in order to measure how
faraway the result of any combination of actions is from the ideal. A
description of a "state of affairs" according to its conformity to the ideal can
now be made to depend on the distance
(i =1,2.3,4)
The idea is simply to make a player's ideological utility a monotone

decreasing function of this distance for each conditional outcome of the game
- i.e., for each action of a player given each of the expected actions of the
other player. That is the lesser the distance of the actual outcome from the
ideal value, the greater the additional conformist component in the players'
Moreover we can express the interplay between what a player does, given what
he expects, and what a player believes the other party will do, given what he
believes on his own (as seen from the first party). This is a better modelling of
the idea of mutual expectation of reciprocity in conformity. However. the
formalism becomes more complex, while the results and the basic intuition
remain the same. Thus, in this paper I keep to the simpler formalisation, which
seems appropriate to the task of simply illustrating an example. The inelegance of
entering directly the value of the Nash Product within the utility function of a
player (one may wonder what could mean introducing the product of utilities of
different players within the utility function representing each player"s
preferences) could be avoided as follow. Take xMax and xMin to be the maximum
and minimum value of the Nash SWF in the game and y the value of the same
function defined for generic outcomes and Jetting the representation of
ideological utility (as depending upon the distance from complete conformity) to
take the form
U; =A+
XMax_ XMin
Then, in case of complete conformity the ratio is 0, and -I in case of no

conformity at all. Therefore under this modelling all would rest on the weight
QO attached to conformist preference in the player's overall utility function.
232
utility functions. This is provided by considering the following very simple

ideological utility function
u/n =A.[ x- (x- y;)]
(where A. is a non negative real number) which satisfies the condition that the
numerical representation of the conformist preference ordering (coinciding
again with the numerical values of the Nash SWF in the selected outcome)
must preserve the property that "a state of affair" is more preferred than
another if it is less faraway from the ideal. Then if conformity is complete
(both players conform, and hence the distance is nil) the additional
component is maximal in each player utility function. If nobody conforms
(the distance is maximal), no additional component figures in the utility
functions. For an intermediate level of conformity - when only one of the
players conforms- there will be an intermediate additional component in the
utility functions of both the players (this allows that I can get some utility
from your conformity without doing my part) depending on the weight A..
Let us now take an outcome - for example (L W,LC) that is what I mean
as "state of affairs" - and describe it according to both its consequences to
the player i and its conformity to the ideal. Next look at how player i
summarizes all this information through the two types of preference that he
holds - his consequentialist self-refereed personal preferences and his
conformist personal preferences. Following the decomposability assumption
introduced at the end of sec. 4, a natural way to represent all that through
player i utility function is simply taking the weighted additive combination of
the two numerical representations of the two pieces of player's i preference
system for that outcome
U;(LW,LC) = 1t;(LW,LC) +A. [x -(x- YI)]
which I call the player i overall utility function for this "state of affairs,"
where
• 1t; is the player i material payoff for the self-referred consequences of
the strategy vector (LW,LC);
• x is the value MaxTI;(U;-d;) of the Nash SWF defined over the
material payoff space of the game, that is what I call the ideal, taking
(0,0) as the status quo;
233
LORENZO SACCONI
• y 1 is the value of the Nash SWF for the outcome (LW,LC)- i.e., in
our example y 1 =2x2x5 (see fig. I);
• (x- y 1) is the measure of the distance of the actual state of affairs
from the ideal;
• x -(x- y I)= ui is the ideological utility attached to state y l by player
i;
• last, A is a weight (A~O) which says how much conformist
considerations count within the player i overall pref<:rences system.
I do not discard the hypothesis that the weight A may go to infinitum, so
certainly overcoming the material utility of payoffs. But for most of the time
it can be maintained that, in fact, it takes its values in the interval [0, l]
(indeed I do not need to assume more than so to illustrate the present
example). Notice that at outcome (LW,LC) there is the maximum value of
the Nash SWF in the game at hand. Thus x - y 1= 0 and the whole value x,
weighted by A, enters the utility function of player i. 13
How do the players choose a strategy or another? Only a slight adaption
in the rationality rule is required as they will maximise their overall expected
utility. Thus, for example, player I (the worker) will choose L W if
EU 1(LW) = p{n 1(LW,LC) + A[x- (x- yJ)]}+ (l-p){n 1(LWJ-IC) +A [x- (x- y 2 )]}
:2:
EU 1(HS) = p{n 1(HW.LC) + A[x- (x- y 3 )] } + ( l-p){n 1(liW.f-lC) +A lx- (x- y 4 )1}
where p is the probability representing player I 's beliefs over players 2's LC
choice, and 1-p is his belief over player 2's HC choice. To simplify notation
write the four states of affairs (outcomes) (LW,LC), (LW,HC), (HW,LC),
(HW,HC) as s 1, s2, s3, s4 respectively. We know that for player I
n 1(s3) > n: 1(s4) > n: 1(s1) = n: 1(s2)
This in fact follows from the utility representation of outcomes (state of

affairs) according to their consequences to the player 1 and to the
13 Similarly the overall utility of other outcomes of the game can be written. For
example,
Ui(HW,HC) = ni (HW,HC) +A [x- (x- y4)]
is player i overall utility in the state of affairs where conformity is minimal. The
distance from the ideal in this case is at its maximum. in fact y 4 = 4.5x4.5x0 = 0
and (x- y 4) = x. As a result no additional value enters the utility function.
234
consequentialist preference ordering settled by player I over them. Moreover

we know that
[x- (x- y,)] > [x- (x- y3)] = [x- (x- Yz)] > [x- (x- Y4)]
which is the ideological utility ordering of states of affairs, derived from

conformist preferences, which in turn is based on the distance of each
outcome from the ideal. For given material payoffs and probabilities,
representing the player's beliefs on the reciprocal choice of the other player,
we are always able to derive the condition such that a player is indifferent
between his two strategy choices. For example L W gives player I no less
overall expected utility than HW if
A=------------------------------------- -------
p { ( X - (X - y 1)] - [X - (X - y 3)]} + ( J-p) { ( X- (X - y 2)] - [X -( X- y 4)}
It is telling that the strategic variable is the weight A to be given to

conformist preferences, so that if this weight is large enough, the worker will
be ready to choose Low salary even if this strategy is dominated in terms of
material payoffs. Notice the complete symmetry of the game, so that identical
consideration applies to Player 2 (the entrepreneur). Moreover, to keep things
simple, I ignore mixed strategies, and I also assume that A is identical
amongst the two players.
Now let us see whether new equilibria do exist due to these changes in the
utility functions and rationality criterion. In equilibrium, a player will face a
precise choice by the counterpart, which he predicts with certainty (remember
that I disregard mixed strategy equilibria). How do the players reply
optimally to any precise prediction of the other's action? Admitting that
player 2 chooses the LC strategy (and that player I predicts it), player I will
respond optimally by choosing L W if
which is true when
A~ ------------------- A*
235
LORENZO SACCONJ
This is symmetrically true to player 2. For the given values of parameters,

at A* = 0.33 an equilibrium exits where both the players choose their "Low"
strategy, and they predict that the other player is also choosing his "Low"
strategy. At this level of A the value of the ideological utility (which is at its
maximum) overcomes material payoffs that for both the players is higher
under the "High" strategy than under the "Low" strategy. A lower level of A.
however, implies that HW (and symmetrically HC) remains the player's best
reply strategy given the prediction that player 2 chooses strategy LC.
The conditions for player I 's best reply when he predicts that player 2 is
choosing his strategy HC can be calculated similarly. Then he will choose
strategy L W if
that needs
7t 1(s4)- 7t 1(s2)
A.?. - - - - - - - - - - - - - =A.**
[x- (x- Yz)]- [x- (x- Y4)]
The critical weight in this case is A.** = 0.21. Summing up, when A
exceeds level 0.21, player I 's strategy of claiming low wage is his best reply
against an entrepreneur pretending high costs (symmetrically for player 2
claiming low costs). When, eventually, A grows up to 0.33 and over, low
wages becomes also the player I 's best reply against players 2 asking for low
costs, that is starting from level A = 0.33, the "Low" strategy becomes the
dominant strategy of player I (symmetrically for player 2).
By considering simultaneously player I 's and player 2's best replies, the
equilibria in pure strategies of the game under overall utilities are computed.
The equilibrium set of the game, under the given parameter values, is
summarized in Fig. 2.
236
Figure 2
The Equilibrium Set of the NPE Game !4
LC HC
sl is an s2 is an
LW equilibrium as from equilibrium as from
A:<!0.33 0.33>}..:?! 021
s3 is an S4 is an
HW equilibrium as from equilibrium as from
0.33 >}..:?! 0.21 A <0.21
To different levels of A. several equilibria come about due to conformist

preferences. Very low A. (see Fig.2 bottom/right box) implies that only
consequentialist preferences count; therefore maximising material payoffs is
still the only equilibrium of the game. High A. implies (see box top/left) that
conformism strongly counts throughout the players' overall utilities, thus in
equilibrium both players comply with the ideology.
However there are also "strange" equilibria where one player conforms if
the other does not conform (see boxes bottom/left and top/right). This
apparently strange result depends on how overall utility functions are
defined. They admit a player gains unilaterally ideological utility even if he
conforms against an adversary who does not conform. At the same time, a
player can benefit from his ideological utility in the event that the other
conforms even if he doesn't conform, because, in a sense, he profits also
from the other party level of adherence to the common ideology. This
exhibits the possibility that when a player can benefit from his unilateral
conformity, due to his ideological utility, this same fact may also push the
other party to free ride the first party conformity. It may seem realistic that
"ideologues" can be exploited by opportunists. Nevertheless it should be
excluded in my account for conformist preference. Conformism proceeds, in
14 In each box of the matrix is reported the condition over f... such that the
corresponding outcome in the matrix of the normal form game of fig. I is an
equilibrium when the utility functions of the players are meant as their overall
utility functions, including the conformist component.
237
LORENZO SACCONI
fact, not from the idea that compliance as such is a value, but from the quite
different hypothesis that a player will get conformist satisfaction, i.e.,
ideological utility, from believing that compliance is the behaviour generally
spread over the relevant group of interacting players - that is from believing
that when he conforms the other player also conforms IS_
"Strange equilibria" can be avoided by making A an endogenous variable
of the model and, in particular, making it depend on the level of expectation
of reciprocal conformity by each player. Then I assume that A will jump
beyond an upper threshold when the player in fact believes (i.e., he more
believes an hypothesis than the opposite) that the other player will conform to
the ideology, while A will remain below a lower threshold unless the player
in fact believes that the other party will conform to the ideology. 16
Hp 3: If player i (for i = 1,2) believes that the other will conform
(probability p >0.5, i.e., more than indifference) then A is higher than (An
upper threshold) level A.*; if player i does not believe that the other will
conform (probability p:::; 0. 5, no higher than indifference) then A is lower
than (a lower threshold) level A**.
Notice that levels A* and A** are exactly the thresholds I have found as
the conditions first, for the "Low" strategy of a player becoming his best
reply against the symmetrical Low strategy of the counterpart and, second,
for the "Low" strategy becoming the best reply against the asymmetrical
15 This is the main insufficiency of the rough model outlined in this paper, which
follows from the fact that ideal utility reduces to the realisation of social states of
affairs having certain normative properties as a whole in terms of welfare
distribution, independently of who and how many contribute to that. This
deficiency is remedied in GRIMALDA and SACCONI (2002), where expected
conformity is defined in term of how much the agent contributes to reducing the
distance from the best value of the SWF, conditional on what he believes the
other player does, joined to the measure of how much the other player contributes
to reducing the distance from the best value of the SWF conditional on his belief
about the first agent choice, as seen through the beliefs of the first agent. In this
way, ideal utility depends on how much reciprocity there is in the personal
contributions to compliance with the normative principle. Reciprocity in
conformity is then directly modelled.
16 Upper and lower thresholds shall not in general coincide. In correspondence of
the jump A is a continuous but not differentiable function of the probability
assignment of the other player' strategies, an inelegance that at this primitive
level of formalisation can be excused.
238
"High" strategy ofthe counterpart. This means that if a player does not in fact
believe that the counterpart is conforming, he does not attribute very strong
weight to conformist considerations in his preference system, whereas if the
does in fact believe that the counterpart will conform then he feels very
strongly the importance of conformist considerations when settling his
systems of preferences.
For example, taking the point of view of player I, I assume
p(LW) > 0.5 ~A~0.33

p(LW) S 0.5 ~A< 0.21
For symmetrical conditions to apply to player 2, the values of the

parameter A. implying that s2 and s3 are equilibria will never take place and
the equilibrium set shrinks to the only two "plausible" elements sl and s4. It
should be clear that my hypothesis Hp3 is not ad hoc. On the contrary it is
coherent with the very idea of conformist preference meant as a preference
ordering over states of affairs according to the expected "reciprocity in
compliance" attached to them. This can only be seen through the expectations
that players have on the mutual conformity of the other party when the player
himself is planning to conform to the ideology. Therefore, making the weight
that a player assigns to conformism in his preference system rest upon what
he expects from the other party, simply express the very idea of conformist
preference as preference for expected mutual conformity to the constitutional
ideology.
Let us summarise the result I have obtained so far and its limitations.
Under a high enough level of A. an organisational equilibrium exists that
induces the worker and the entrepreneur to claim low wage and costs. It
allows a high level of welfare goods provision to the advantage of the
beneficiary and minimises her transaction costs. Under such an equilibrium
the NPE is entirely trustworthy to the beneficiary. It emerges as the efficient
SP enterprise in so far as it devolves the most part of the surplus to benefit
the beneficiary. However also a second equilibrium still would exist if A. were
low, where both the players do not conform to ideology but appropriate
opportunistically all the surplus. Our final result in fact is that the equilibrium
set of the game includes both an equilibrium of mutual conformity and an
equilibrium of mutual deviance from ideology.
239
LORENZO SACCONI
Notice that this is not the usual multiple-equilibria situation, because the
two equilibria are not simultaneously possible as they rest on a different
particular level of A, which changes with beliefs the players entertain about
reciprocal conformity. Therefore if a value of A occurs that admits the
deviation equilibrium, there is no multiplicity built in the situation, because
then it is the only equilibrium possible. Everything depends upon the players
mutual beliefs. If they mutually expect high levels of conformity from one
another, they both come to assign a high weight A to conformity within their
preference system, and, in turn, this will generate the corresponding
equilibrium and will eliminate the competing one. The second equilibrium,
on the contrary, will emerge as the unique solution in th1~ event that players
do not expect of one another a high level of conformity to the ideology.
Typically in this situation expectations tends to be self-fulfilling. At the end,
introducing a constitutional ideology results in a necessary but not sufficient
condition for the emergence of a socially beneficial equilibrium. Sufficiency
rest upon the emergence of the appropriate system of reciprocal expectations.
VI. Explicit Moral Code, Reputation and the Endogenous

Development of Trust
In this section I suggest that a way out of the non standard multiplicity
problem posed in the foregoing section is provided by a reputation game
between the NPE as a whole and its external stakeholders, that is donors and
beneficiaries. I make the statement that in order to establish trust and
reputation, a code of ethics must be introduced, which is the linkage with the
theory of the NPE ideology put forward in the previous part of the paper.
Let us start from the hypothesis that donors and beneficiaries must decide
whether to establish a relationship of trust with the NPE and that at first
glance, it is not possible for them to trust it. This is the necessary starting
point in order to analytically account for how a self-imposed code of ethics
might affect the endogenous development of trust. The analysis I'm going to
propose will justifY the fifth proposition of the paper after those stated in the
introduction.
Proposition V: Even in absence of complete reliability of ideological
motivations of the NPE's internal members, donors and beneficiaries, trust
240
develops in an endogenous way by virtue of the cognitive function of a code

of ethics that allows the setting up of a game of reputation. In fact, thanks to
reputation effects, a code of ethics is a self-enforcing set of principles and
rules supporting the fiduciary relationships between the NPE and its external
stakeholders.
In order to make sense of a problem of trust, it is necessary to go beyond
the simplest market transactions, characterised by complete information
among parties and parametric choices. The problem is well illustrated by the
"game of trust" in fig. 3 (Kreps 1990). In this game player A, for example a
consumer, can decide whether to trust for not ~ f player B, a firm. Player 8
can decide whether to abuse a or not to abuse ~ a the trust of player A. From
the game tree it is understandable that player B's dominant strategy is to
abuse, so that player A's best reply is not to trust. The sole equilibrium of this
simple game is the strategy pair (~ f, a), resulting in the payoff vector (0,0).
This means that no transaction takes place.
Figure 3
The Game of Trust
2,2)
241
LORENZO SACCONl
Even though this is a basic and very widespread situation, actually

transactions take place normally. If, in fact, the game of trust is played
repeatedly, reputation effects support a result where the transaction takes
place without abuse. First of all, it is necessary to assume that the game
repeats for an infinite number of times and that there is an infinite series of
short-run players A 1, ••• ,An(where n goes to infinitum), each one taking part
tin a single stage-game, while player B is a long-run player taking part in
every repetition of the basic stage-game. Player B's choice set consists of
strategies of the repeated game, which are rules for choosing actions in each
stage-game as a function of each history of the game unti I any stage at which
player B must choose. The payoff functions are the following: each short-run
player (A;) only receives the payoff of the stage game he takes part in. On the
contrary, the long-run (B) player's payoff is meant as an infinite sum of the
payoffs he gets each stage. A crucial assumption is that player B is far-
sighted, that is he does not discount too much the payoffs of future stages
compared to the current stage (i.e., player B 's discount rate 8 for future
utilities is close to I ).17
Players' beliefs characterise reputation games. The long-run player is
perfectly rational (from a strategic point of view) and perfectly informed
about the game, the utilities and modes of reasoning of the short-run players.
Short-run players, on the contrary, are not perfectly informed on the "type" of
player B. By "type" I mean a rule of behaviour that the player B
idiosyncratically follows in each stage game according to what the A;
believes about B. Thus a "type" is a commitment to choose a given action
under the different contingencies of the game - according to what player A;
believes about B. A "type" is strictly related to the action he chooses in each
stage-game. Each player A; takes as possible different 8 player types.
Besides the "rational" type, who always chooses the dominant strategy of the
stage-game, the type who never chooses to abuse, and some types combining
abuse and non-abuse randomly are also possible (for example, the type that
mixes a and ~a with probabilities 0.75 and 0.25 respectively). Thus a
positive prior probability must be attached to all these types by each player A;
(in particular the type who never abuses, called "the absolutely honest," has a
17 For a synthesis of the theory of games of reputation, see FUDENBERG and TIROLE
(1991, ch.9).
242
pos1t1ve probability, even if very small). 18 Probabilities are updated

according to the Bayes rule: each stage conditional probabilities of types
change as a function of evidence produced by how past stage-games have
been played by the long-run player.
Thus Player B's reputation is the probability assigned by each player Ai
at every stage to player B's different types. Reputation to be a certain type
grows as evidences confirming the "type" are collected, but it is drastically
lost with a single observation incompatible with the type (this is obviously
not true for the probabilistic types). Beliefs affect players' strategy choice.
Each Player Ai chooses, according to the expected utility reasoning, between
18 Luciano Andreozzi (private communication) remarked that the result depends

heavily on the types admitted into the analysis and that without restrictions on the
type set the Stackelberg strategy of player B is a mixed strategy combining abuse
and not abuse. Therefore, I make clear in the following the hypothesis that I'm
implicitly assuming in the argument here and elsewhere. See SACCONI 2000,
2001. Even if every B player types (i.e., every probability mixture of the two
pure strategies) could be possible in principle, I do not see any reason that the
players Ai thinking about the B player idiosyncratic modes of playing, should in
fact account for all these mathematical constructions. Only some of these should
reasonably be considered, that is those who "nearly" adopt strategy a and those
who "nearly" adopt strategy ~a. (Equivalently this point can be made by
assuming that only mixed types where the probability mass is nearly all
concentrated on a or ~a have positive prior probabilities according to the players
A Jo· .. ,An). This implies that the player B Stackelberg equilibrium strategy will
not coincide with a mixed strategy that assigns substantial probability to both the
player B pure strategies (a, ~a)- which for the given values of parameters would
be the mixed strategy (2/3a,l/3~a). On the contrary it will coincide with strategy
-·a or some strategies giving very high probability to ~a. In fact in the example
in which the only mixed type is (0.75, 0.25), the Stackelberg equilibrium strategy
of players B is ~a. The reason for skipping more uniform mixtures of the two
strategies is that types must represent commitments. Player A sees B as a player
sticking to the rule of behaviour derived from the "rational" solution of the stage
_game, or nearly so, but on the other hand also admits that he may be committed
to not abusing at all, or nearly so. While these rules of behaviour are
understandable "commitments" it seems to me a "non sense" the utterance that
"player B is committed to act or not to act, with nearly the same probability" or-
to say- with probability (2/3, 1/3). This should be better understood as avoiding
committing oneself at all and remaining free to act arbitrarily.
243
LORENZO SACCONI
fand -j'in the light of the conditioned probability of B's types. During the
first stages of the game, the first player Ai does not trust B because the
expected utility of strategy f is lower than the alternative. Eventually (say
after N periods), however, a short run player (say AN+t) may begin to give his
trust if a series of Ai before him have observed ~a so many time that the
conditioned probability of the "absolutely honest" type results updated to a
level that the implied probability of action ~a reaches the critical threshold
p* where the expected utility of/becomes higher than -:f
Player B's optimal choices bring to consideration the equilibrium
strategies of the repeated game. First of all, player B can decide to choose
always the equilibrium strategy of the stage game, that is always a. To such
strategy the best reply of every player Ai is to go on playing action - j at
every stage. This leads to a repeated game equilibrium, because nobody has
the incentive to deviate from such choices for the whole length of the game.
This in fact constitutes the lower boundary of the set of equilibria of the
repeated game (Fudenberg and Levine I989). Player B, however, has a
different strategy at his disposal, consisting of exploiting his awareness of the
updating mechanism followed by players A 1 , ••• ,An. He can choose to
simulate the behaviour of the "absolutely honest" type until the composed
conditioned probability of action ~a reaches the critical level p*. At this
point he can calculate if it is better for him to continue playing ~a -
consequently inducing over and over choices[ from players Ai after AN+ I - or
to defect by choosing a, whose payoff is 3, the first time, followed by a series
of payoffs 0. If 0 is close to I (that is player B is not short-sighted), then the
infinite sum of payoffs 2, even if discounted, will more than counterbalance a
single chance to win payoff3.
The best reply to such strategy by each short-run player will be exactly
the one foreseen by player B: from period N + I, once action ~a has reached
probability p*, they will trust and will continue to do so until they see a
o
defection. For close to I, simulating the "absolutely honest" type leads to
an equilibrium, which is the upper boundary of the equilibrium set of the
game (Fudenberg and Levine I989). Thus there is an equilibrium profile
within which the long-run player B can build an adequate level of reputation
such that a fiduciary relationship emerges between the long run player and
the short-run players after N periods spent to accumulate reputation.
Let us sum up the hypothesis needed for this result be true. Besides player
B's far-sightedness (8 close to 1), it is necessary that (i) each stage game ends
up with a couple of observable actions by the players, that is B chooses his
244
action in each stage game even when Ai does not trust him (i.e., the stage
game must be considered as a simultaneous move game). (ii) Each player Ai
must be able to observe and learn, without any ambiguity, the result of the
stage game in which he takes part; he must be able to update the conditioned
probabilities of the types and to communicate that probability to the adjacent
player Ai+l· This must be true in particular for every pair of adjacent players
Ai and Ai+l· If each player Ai were not able to observe the result or incapable
of inferring from the observed result the meaning of the action made by
player B (that is to recognize whether action a or -,a has been played), then
reputation would not be up-dated and the mechanism would break down.
Transactions take place in many markets. This suggests that the problem
of trust between parties can be "spontaneously" solved. Even in the presence
of implicit contracts, transactions can be supported by the mechanism of
reputation if such economic situations satisfY the hypothesis of the model
mentioned above. In these cases, trust develops without the settlement of
fiduciary duties, codes of ethics and the like. Fiduciary duties, codes of ethics
and deontology, on the contrary, point out cases in which fiduciary
relationships (Flannigan 1989; Frankel 1999) are not spontaneously
supported by the simple mechanism of reputation.
Social and welfare goods fall just within these mentioned contexts. Let us
consider, for example, the case where player A's position in the game of trust
is taken by a donor, who needs to trust the firm producing welfare goods in
favour of beneficiaries that are completely separated from the donor himself.
In this case, it is obvious that the donor does not observe the result of the
producer's activity, that is to say he does not observe the result of each stage
of the game because the consequences ofthe choice (abusing or non-abusing
the donor's trust by an effective use- or not- of the available resources) falls
on a third party - a case of "credence goods" (Darby and Karni 1973) .
Therefore condition (ii) is violated.
The problem is however much wider than this, as contract incompleteness
is inherent to the provision of welfare goods 19• By contract incompleteness I
mean that the firm's (player B's) action and its expected result are not ex ante
specified, neither explicitly nor implicitly, by contingent clauses on each ex
post possible but ex ante unforeseen state of the world. This is due to the fact
19 On the theory of incomplete contracts see GROSSMAN and HART (1986), HART
and MooRE ( 1999), and also SACCONI (2000).
245
LORENZO SACCONI
that some of these events are genuinely unforeseen by the parties. This means
that, in unforeseen states of the world, firm's commitments have not even
been specified and, consequently, the contract in these cases is simply
"mute." In terms of the reputation model, commitments corresponding to the
various types are not ex ante specified.
Actually, this means that by observing ex post the outcomes, even if this
is possible, players can not understand if player B chooses action a or ~a.
This is not due to simple statistic uncertainty but to the very fact that the
meaning of these acts in those states of the world was not ex-ante specified.
The meaning of an act depends in fact not only on the description of the
payoffs, but also on the description of the state upon which it is contingent.
Take for example an action that contingent upon an ex ante known state,
means "abuse." When seen as depending on unforeseen states of the world,
the sense of the same action may become ambiguous. Even though you
observe the same payoff as before, it does not mean that the action is "abuse"
if the situation differs completely and some features are genuinely
unexpected. 20
Generally speaking, the reputation mechanism depends on the fact that
each player Ai can say about each type that "what had to be done, has been
done" at every stage of the game (Kreps 1990). That is, the player needs to
understand what the commitment requires at each state, and he must be able
to verifY from the outcome at each stage whether the commitment has been
complied with. It is clear, however, that ex ante nothing is specified by an
incomplete contract as far as unforeseen states are concerned. Thus, neither
the ex post description of the outcome nor a mere labelling of the action
might tell him for each type whether in an unforeseen state of the world
"what had to be done, has been done." In this case the simple mechanism of
reputation does not apply.
My thesis is that a code of ethics can fill the gap in the players'
expectations: the code of ethics generates expectations where contract
incompleteness makes commitments mute. 21 A code is a cognitive and
20 This suggests that genuine unforeseen contingencies can not be handled by

means of the hypothesis of "state neutrality" of payoffs, as it is assumed in the
criticism of incomplete contracts theory put forward by TIROLE and MASKIN
(1999).
21 This argument was implicitly suggested by KREPS ( 1990) and developed in
SACCONI (2000, 2001).
246
deliberative device which is built up out of two parts: (i) general and abstract
principles; (ii) preventive rules of conducts. Concerning the first, general
principles identify moral properties associated to abstract and universalizable
characteristics which are not necessarily bound to a complete description of
every concrete contingency that might occur in all the states. Hence, in order
to find out the characteristic identified by a principle, we do not need to look
after a complete and detailed description of all the characteristics of the
possible states of the world. Moreover unforeseen contingencies will always
belong to some degree to the domain of application of a general principle,
although their belonging can be a matter of vagueness. It is exactly the
abstractness of principles that makes possible their application to every
situation, even if these are ex ante unforeseen, while concrete rules,
contingent upon detailed state description, would be simply mute.
Vagueness of course is the price to be paid for being able "to say
something" also about the unforeseen states of the world. But it is worthy to
be paid. The resulting situation is, in fact, completely different from the one
occurring when expectations concerning the unexpected state are completely
undetermined. In this case, we can try to manage vagueness by a measure of
membership of each state into the domain of application of the general
principle. I suggest that a fuzzy membership function, taking its values in the
real interval [0, I] can be defined for each unforeseen state that occurs (or
reveals to be possible ex post), which implies that the domain of application
of a principle must be understood as a fuzzy set. 22
Summing up, whenever our language contained only concrete
descriptions of actions contingent upon ex ante known states, the occurrence
of unforeseen states would make it impossible to say what would be required
by commitments at these states. Quite differently, we can use general and
abstract properties to which unforeseen states adapt at least imperfectly. In
that case, by default reasoning, we may infer that an unforeseen state with a
degree of membership to the principle at least equal to a (for I <a<O) is
"normally" treated as an exemplar of the principle. Thus we conclude by the
same mode of reasoning, even if we have not a complete proof that this is the
case, that a rule of behaviour conforming to the principle must be carried out.
The logic at work here is "default reasoning" as based on fuzzy semantics. It
is the best we can reasonably do in order to face unforeseen contingencies
22 On fuzzy set, see ZIMMERMAN ( 1991 ).
247
LORENZO SACCONI
that testify how limited human rationality is (Reiter 1980; Geffner 1993;
Sacconi 2000, 2001).
The second part of the cognitive device here has just entered the scene. If
a state belongs to the domain of a principle at least to degree a, then we can
conclude, by default, that "normally" in such situations a given practical rule
of conduct does apply. As it is simply a procedure (not an outcome), this
practical rule can be ex ante described without being contingent upon any ex
ante predictions of states or the related outcomes. Therefore we have certain
standardized characteristics, which we can ex post say have been carried out
or not in actual behaviour. What really matters is that a code allows us to
specify ex ante the conditions under which a certain procedure must be
carried out ex post, without any reference to a concrete description of the
details of any state of the world. Such conditions in fact consist essentially in
that a situation, whatever it may be (even if ex ante unforeseen), must
belongs at least to a certain degree to the domain of application of a
principle. Thus it is possible ex ante to undertake commitments and generate
expectations on future behaviours without any detailed knowledge or forecast
of future states of the world, which may be left at least in part unforeseen.23
No doubt, such preventive rules of conduct do not grant utilities
maximization in every state. It is implicit in non-monotonicity of default
reasoning that from vague information we are allowed to conclude that
"normally" cases "such and such" are to be managed according to a certain
procedure, but also that in the presence of additional information those
conclusions may have to be revised. 24 The main point however is that
principles allow at least provisory "completion of the contract" by the
specification of what we may expect in terms of commitments that may ex
ante be determined with reference to certain conditions on the unforeseen
states' degree of membership into the fuzzy-set domain of a general
principle. Rules of conduct will then give a reliable base in order to decide if
"what had to be done has been done."
This allows resorting even under unforeseen contingencies to the
mechanism of reputation effects. The "absolutely honest" type of the firm has
to be replaced by the type who conforms to a rule of conduct when the code
23 See SACCONI (2000 ch .8) and SACCONI (200 I).

24 On Non-monotonic logic, see GINSBERG ( 1987). For an application to game
theory and particularly on problems of equilibrium selection, see SACCONI and
MORETTI (2002).
248
of ethics asks to do that, that is in all the contexts where the ex ante
announced conditions on principles and rules occur. Donors and beneficiaries
can observe what happens (aside from the procedure being optimal in the
case in point) and then evaluate the reputation of the organization. Despite
contract incompleteness, a strategy of compliance with the code of ethics
allows the NPE accumulating reputation.
VII. The Virtuous Interplay Between Internal Conformist

Motivations and External Reputation of the NPE
I can sum up my overall account for the role of ideology in the efficiency
of the NPE. It results from the interplay between the cognitive role of the
code of ethics in supporting the fiduciary relationship of the organization
with its external stakeholders and the motivational role of ideology in
generating conformist preferences amongst active agents inside the
organization itself. The following proposition summarizes it:
Proposition VI: Assume that the same "social contract" model is the basis
for the ideology and the NPE code of ethics. Then, on one hand, the NPE
constitutional ideology, by means of conformist motivations, allows one to
predict the existence of an efficient organizational equilibrium in the
production of a welfare good. On the other hand, a code of ethics allows
predicting a reputation equilibrium in the interaction between the NPE and its
external stakeholders. These two elements mutually support one another as
the one equilibrium contributes to raising the conditions under which the
second equilibrium can be proved to exist and vice versa. Reputation
equilibrium from outside favours the development of mutual beliefs among
the inside members of the organization and brings about the system of
expectations such that conformist motivations become effective (i.e., they
make effective the organizational equilibrium). The other way round, the
reputation equilibrium between the firm and its stakeholders is facilitated by
conformist preferences of the internal NPE members, because at least they
justify positive, even if small, prior probabilities attached to the NPE
"ethical" type.
The argument may be split into six steps. First of all, we have seen that
the NPE is the most suitable institutional form in order to attract ideological
249
LORENZO SACCONI
entrepreneurs and workers. That is the NPE's internal members at least

hypothetically agree on a set of constitutional principles (the ideology) able
to elicit the rational ex-ante acceptance by all the NPE's members.
Second, such hypothetical agreement produces a conformist motivation
among the internal active members of the organization, in that agents develop
a preference in favour of mutual compliance with the ideology they are ready
to accept. The weight of such conformist preference, however, depends on
mutual expectations, and ex ante we can not say whether an expectations
system - such that conformist preferences will be strong enough to bring the
organization on the path of the conformist equilibrium- will develop.
Third, if the previous step is not sufficient in order to predict which
equilibrium is going to emerge from the internal interaction, conformist
utility can grant that every reasonable player assigns at least a small positive
probability to the fact that the firm, as a whole, will conform to its
constitutional ideology. In fact this is simply a function of the positive
probability that each internal (active) player will also conform. 2 5
Fourth, donors' and beneficiaries' level of trust towards the organization
signals that ideology is not sufficient as such to assure that the equilibrium
behaviour of the firm will be consistent with ideology. External stakeholders
are uncertain as far as the type of the organization is concerned (if
conformist, or non conformist). However, step three tells us that existence of
a psychological primitive motivation in favour of mutual conformity to
ideology justifies external stakeholders in assigning a positive, even if small,
probability to a conformist type of the organization in a repeated game,
notwithstanding that in the stage game abusing the donor's and the
beneficiary's trust is the dominant strategy. Such a positive probability is the
basic condition for starting the reputation effects mechanism.
Fifth, an explicit code of ethics works as a substitute for concrete
commitments in contexts characterised by contract incompleteness and
unforeseen contingencies - situations typically requiring fiduciary
relationships between the welfare good's producers and their stakeholders.
25 Possibly someone would find here the risk of a composition failure. But I do not
see why if an external observer would assigns some. even if smalL positive
probability to the fact that each internal member of the NPE will conform, then
he should not also assigns a positive, even if possibly smaller, probability to the
fact that the NPE as a whole will also conform to its code of ethics, which is
based on the same "constitutional contract" ideology.
250
An explicit code of ethics aids in classifying unforeseen contingency

according to their fuzzy membership to general principles taken as an abstract
term of reference (pattern recognition). These principles are the same
principles of fairness we have found at the basis of the NPE constitutional
ideology. The code also allows judging whether, in the presence of an
unforeseen event, some preventive behavioural standard has been complied
with. Such rules of behaviour are seen as obligatory by default once it is
recognized that a state belongs to the fuzzy set defining the application
dominion of the principle up to a certain degree (threshold a.). At last the
NPE's reputation amounts exactly to whether, as each stage of a repeated
game, NPE sticks to its code of ethics.
Sixth, the reputation mechanism implies that an equilibrium of trust
between the organization and its stakeholders does exist, as it is self-enforced
by reputation effects themselves. Thus, under a code of ethics, the
organization has appropriate incentives to assure compliance to its own code
of ethics, in order to support donors' and beneficiaries' trust. Seen from
inside, this fact will mean that all the internal members of the organisation, or
most of them, will strive to assure an appropriate level of reputation toward
the stakeholders by up-holding the organisation's code of ethics. As a matter
of consequence, general conformity to the code will foster the beliefs that
each member entertains about other members' conformity to the ideology as
represented into the code of ethics.
Summing up, different parts of the theory mutually support each other.
The model of internal organisational relationships (allowing for existence of
a conformist equilibrium contingent upon beliefs) is exploited as a
justification of initial conditions for the reputation game model of external
relationships between the organization and its stakeholders. At the same time,
the result of the reputation model of relationships between the NPE and its
external stakeholders is used to complete the solution of internal interaction,
by moving the conformist equilibrium from a merely "virtual" existence to
actual effectiveness.
Reputation models, in fact, usually suffer from arbitrariness in the
assumption that players believe "types" that carry out idiosyncratic
behaviours, which are not even compatible with the current theory of
strategic rationality. In my context, however, there is double justification for
that. On one side, members of the NPE have a constitutional ideology
embodied by the code of ethics, and this justifies that an "ideological type" is
251
LORENZO SACCONI
represented in the mind of donors and beneficiaries as a possible

organisational model of behaviour. On the other side, the mere existence of
conformist preferences gives some psychological basis to the incomplete
"salience" of the ideological type also in the eyes of the external
stakeholders. 26 Therefore, it is no more arbitrary that a reputation model
assumes players will update their conditioned probabilities starting from "a
priori" positive probabilities over NPE "types." Thereafter, the explanation of
how it happens that donors and beneficiaries develop an "effective trust"
towards the NPE may rest on the reputation effects mechanism.
But now the equilibrium in the relationships among the NPE and its
external stakeholders reflects also inside the NPE. As long as the
organization is abiding with its code of ethics, because of the reputation
effects, every player can also predict that players inside the organisation, or at
least most of them, are conforming to ideology. From the assumption that the
organization as a whole chooses the "do not abuse" strategy, then it follows
that the probability of conformist actions on the part of every internal active
player grows up to a certain threshold. For example, in the case of the
entrepreneur, p(LCj--,a) ;::: A* -where A* is the critical value for the existence
of a conformist equilibrium in the game among NPE internal members.
The same reality, the same observable behaviour, can be explained from
two coexistent and compatible points of view. As far as external interactions
are concerned, the organization complies with its code of ethics in order to
26 Let argue us this point a little bit more in depth. The weight A is not fixed
because it depends on reciprocal beliefs between the internal players. I want to
suggest that they are to be conditioned on the simultaneous development of the
external game amongst the NPE and its stakeholders. Were A fixed from the
outset, the equilibrium would definitely coincide with the conformist one or the
non conformist one (the situation would reduce to a standard game of reputation).
But external stakeholders do not need to know (nor could they intrinsically
know) the reciprocal beliefs of the internal players. They can only elicit a
subjective probability distribution from seeing that the NPE has an ideology.
given that this implies conformist preferences, aside from the actual weight the
internal players attach to this component of their utility function. In fact I do not
ask that the external stakeholders are convinced from the outset that this
additional component will be strong enough to dictate full compliance with the
ideology by the internal players. I simply state that ideology and conformist
preference explain why the stakeholders' prior on the compliant the type of NPE
may be positive.
252
support reputation effects toward donors and beneficiaries. But from the
coexistent perspective of an internal game (where beneficiaries are dummy
players), organization members conform to ideology, which is also the
content of the organisational code of ethics, because of their expectations
over their behaviour and the associated conformist preferences. To say that
the organisation as a whole seeks its reputation on one hand, while on the
other hand organisation members act according to their internal motivational
force, given their expectation of mutual conformity, gives two explanations
not contradictory but mutually supporting one another. At last they enlarge
our understanding of phenomena usually seen as falling short of the scope of
rational choice models.
This paper is indebted to a larger research project carried out jointly with
Gianluca Grimalda, and some demonstration and generalisations of the
propositions presented here are more deeply given in our joint work (see
Grimalda and Sacconi 2002). Early versions of this paper have benefited
from comments by Carlo Borzaga, Luigino Bruni, Fabrizio Cafaggi, Johnny
Dotti, Benedetto Gui, Ferruccio Marzano, Marco Maiello. Support by the
MIUR within a national research project on Law and Economics is also
gratefully acknowledged.
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256
Chapter 11
Transformational Economics and the Public Good

DAVID G. HOLDSWORTH
I. Physical Systems and Normative Economics

II. Normative Implications of Thermodynamic Processes
Ill. Rethinking Positive Economics
IV. Economic Processes as Entropy/Evolution
V. Normative Implications for Theories of Production
VI. Evolutionary Explanation, Normative Realism and the Public
Good
Neo-classical economic theory attempts to make contact with the world at

both the cultural and the natural levels of organization. In both cases it does
so by means of assumptions of equilibria and homogeneity, which, recalling
the insights of Georgescu-Roegen, fail to take into account complex
processes of material transformation. Thus, one can generally characterize
neo-classical models in terms of the steady flow of goods from an abstract
external space of resources (Ricardian land - nominally acknowledged to be
the natural environment) to an abstract internal set of consumers (populations
- nominally acknowledged to constitute society). A judicious (some would
say "opportunistic") interpretation of Pareto's welfare theorem is taken to
warrant the minimization of government, the identification of the public good
with taxpayer interests, and the aggressive promotion of markets, not only
markets for goods, but for goods, services, and ideas. In this paper I shall
focus my attention upon the natural resource aspects of this model by
extending and critiquing important elements of Georgescu-Roegen's
approach to economics, an approach grounded in the interpretation of
economic processes as transformations of ordered systems. It will be shown
in what sense these processes are best understood as the production of
wealth, and shown further how this interpretation relates to a normative
DAVID G. HOLDSWORTH
realism which requires that the concept of the public good be reinstated as a
central construct within any future normative economics.
I. Physical Systems and Normative Economics
Orthodox economic theory is aggressively positive. Emerging from the

great traditions of nineteenth century liberal/empiricist doctrine, 1 and rooted
in the earlier liberal theories of Hobbes and Lock, neo-classical economic
thought has been marked by aspects of the contemporary political
imagination, two of which I shall emphasize here: first, economic thinking
has been self-consciously grounded in an analogy with mechanics, seeking to
understand economic processes in terms of an analogy with physical
processes in dynamic equilibrium; second, its defenders have been strongly
influenced by the explicit desire that economics be a positive science, i.e., a
science grounded in observation, with the capacity to make useful
predictions, and untouched in its formation and in its practice by human
value.
In this paper I want to discuss two major challenges to the project of
positive economics. The first is the work of the Romanian economist
Nicholas Georgescu-Roegen, which is a sustained critical attack upon the
emphasis within orthodox economics on the mechanical world-picture. The
second treats the concepts of normative economics from a more general point
The association alluded to here, between liberalism and empiricism, is far more
significant than their mere historical convergence. The intuition that the liberal
individual, in his freedom, has the capacity to pursue knowledge, constrained
only by the empirical limits of experience, is one aspect. The metaphor is also
invested with notions of the free exchange of ideas (in science) not unlike the
free exchange of goods within liberal markets. The idea, in its extreme. is
cognate to that which animates the absurd view that democracy and capitalism
are identical. But at this point in the argument the very notion of constraint upon
our freedom (empirical or otherwise) has been completely abandoned.
Everything is reduced to the absolutely free exchange of goods, services and
ideas. Ironically, the constraint on ideas now arises out of ownership. Despite
these absurd extensions, the convergence of liberalism and empiricism in the
nineteenth century was not accidental and deserves serious philosophical and
critical scrutiny.
258
TRANSFORMATIONAL ECONOMICS AND THE PUBLIC GOOD
of view, informed by the work of Brooks and Wiley (1986) in biological

systematics, but makes connections with the ideas of Georgescu-Roegen
(1971), von Neumann (1945), and Straffa (1960), as well as Bateson (1972).
See also Harries-Jones (1995) for an excellent critical discussion of Bateson's
work- Luhmann (1986, 1995).
Georgescu-Roegen (1971) states very clearly his own project. Concerning
the mechanical analogy and those who promote it he writes:
And these architects succeeded so well with their grand plan that the
conception of the economic process as a mechanical analogue has ever
since dominated economic thought completely. In this representation,
the economic process neither induces any qualitative change nor is
affected by the qualitative change of the environment into which it is
anchored. It is an isolated, self-contained and ahistorical process - a
circular flow between production and consumption with no outlets and
no inlets, as the elementary textbooks depict it. Economists do speak
occasionally of natural resources. Yet the fact remains that, search as
one may, in none of the numerous economic models in existence is
there a variable standing for nature's perennial contribution. The
contact some of these models have with the natural environment is
confined to Ricardian land, which is expressly defined as a factor
immune to any qualitative change ... (p. 2).
Georgescu-Roegen's book is a sustained and detailed argument for the
proposition that we should extend our thinking about economic processes to
models which arise, not from mechanics, but from another body of physical
theory, the thermodynamic theory of heat processes. As such, the book is a
remarkable overview, not only of issues in economics, but of controversies
within the history of physical thermodynamics itself. It would be read
profitably by anyone interested in the concept of entropy, the second law of
thermodynamics, the relation between phenomenological thermodynamics
and statistical thermodynamics, and the emergence of parallel concepts of
entropy in thermodynamics and information theory.
In this paper I shall limit my reflections to two questions: (I) in what
sense, and to what extent, does Georgescu-Roegen's focus on
thermodynamic analogues imply a normative economic theory? (2) in what
way does the resultant normative economics bear on issues within the theory
of production and notions ofthe public good?
259
DAVID G. HOLDSWORTH
II. Normative Implications of Thermodynamic Processes
If, as Georgescu-Roegen claims, not one economic model exists which

treats natural resources in a serious way, what are we to make of this? It is
true, as Georgescu-Roegen says, that economists pay attention to natural
resources, but the focus of their analysis, as reflected in their modelling, is on
production and consumption, which are the key model parameters. But it is
clear that both production and consumption are cultural in a certain sense.
Production and consumption come into equilibrium, at a Pareto Optimal
level, on the assumption that production (supply) can respond, at a given
price, to any given level of consumption (demand). There is, to be sure,
considerable discussion of mechanisms of substitution and replacement,
mediated by modes of technological improvement, 2 but in the end it is
assumed that the natural resources are simply going to be there. The very
concept of scarcity, as discussed in standard economic theory, is just the
discrepancy between production and consumption (between supply and
demand, measured in terms of alternate or opportunity costs) and, as such,
has little to do with what we might intuitively think scarcity to be - the real
absence of material and energy needed to fuel our projects. As Georgescu-
Roegen's reference to the role of Ricardian land makes clear, resources are
identified in the classical economic imagination with land, which is,
according to the Ricardian metaphor, equivalent in its theoretical role to
space- an abstract, limitless entity.3
2 Ricardo had already given the issue of technological innovation (to use a more
contemporary term) serious consideration. He understood, in effect, that
resources were not limitlessly available and also that innovation could slow the
processes leading to a Malthusian disaster. But in the end he was convinced that
the "law of diminishing returns" would dominate and that, after periods of capital
formation, a steady-state was inevitable.
3 I find Georgescu-Roegen's views on "Ricardian Land" to be ambiguous. In his
approach to the theory of production (to which I shall tum below), it is referred to
in passing as an example of the kind of fixed capital which enters unaffected into
economic processes, somewhat analogously to a chemical catalyst. This point
bears directly on my critique in the last section of the paper.
260
An economic imagination touched by thermodynamic analogues might be

more likely to take real resource availability seriously,4 although it is unclear
how fully Georgescu-Roegen followed his own insights (see footnote 4
again). To begin with, such an economic imagination would be more likely to
worry about pollution and material degradation in general because a
conceptual emphasis on the second law keeps the mind focussed on
negentropic effects, both in terms of the necessary transfer of waste heat to
the environment (first law efficiency) and in terms of the reduction of ordered
material into maximally disordered material (second law efficiency). At first
it would appear that the necessary delivery of waste heat to the environment
is the concern of greatest interest, which second-law thinking helps to keep
focussed. But this is not likely the case. Engines which are first-law efficient
can reduce that waste heat considerably, and in any event, if the effect you
seek is space heating, the problem is certainly minimized. The questions
which are harder to evaluate arise when we try to make intelligent decisions
at the level of systems design. A high temperature furnace is both first- and
second-law efficient; but it is not necessarily the best option to bum fuels in
high temperature furnaces if the losses at the transmission and distribution
phase (presumably using electricity as the secondary technology) are large.
From a strictly physical point of view, the switch from first-law to second-
law thinking makes these questions stand out, but this does not automatically
lead to a solution or a decision. The best design of the system clearly depends
on our purposes, and this is why the normative questions enter ineluctably
into our deliberations (Hooker 1989). 5 • 6
4 Both resource and environmental issues might well be emphasized by someone

taking entropy seriously. Resources are themselves the negentropic products of
past complex processes and the environment is the repository of entropic wastes.
This means at least that Ricardian Land is an unsuitable metaphor. But the
environmental ethics being alluded to here does not follow until the normativity
of economics is independently established. I take a different approach to that
issue here, but the reader is recommended to HoDGSON (200 I) for a systematic
assessment.
5 Processes which are 2"d law efficient can still produce usable outputs, i.e.,
negentropic material of value either to humans or to other forms of life. So the
desideratum to maximally degrade material, that is, to achieve 2"d law efficiency
from the system's perspective, cannot be an absolute principle from either an
economic or an ethical point of view.
261
DAVID G. HOLDSWORTH
As I read it, this is the main significance ofGeorgescu-Roegen's book. In

the context of his discussion of the standard interpretation of entropy and its
connection with the concept of order/disorder, he writes:
Within this theoretical framework, it is natural that entropy should

have been redefined as a measure of the degree of disorder. But as
some philosophers and physicists alike have pointed out, disorder is a
highly relative, if not wholly improper, concept: something is in
disorder only in respect to some objective, nay, purpose. A heap of
books, for instance, may be in perfect order for the billing clerks but
not for the cataloguing department of a library. The idea of disorder
arises in our minds every time we find an order that does not fit the
particular purpose we have at that moment. From the viewpoint
advocated in this book, we associate the random order with disorder
because it does not correspond to the analytical order we expect to
find in nature. Nature is ordered only to the extent to which its modes
of being can be grasped analytically, by our Understanding ... (p. 142).
So some of the normative implications of an entropic orientation to
economics already become clear.7 Whereas a purely mechanistic approach to
economic practice tries to treat economics as a descriptive science, concerned
only with an order which is objectively in the world, an entropic orientation
reminds us immediately that different orders can be and regularly are created
by human agency (and non-human agency as well, but this is not the place to
6 Hooker introduces the concept of a "normative blueprint" by suggesting it be

added to standard categories used by energy planners- primary, secondary, and
tertiary resource processes. The normative blueprint maps out our basic values as
they relate to consumption, and, ideally, would influence the design of
engineering and social systems as they bear on the consumption of resources.
7 The point now under consideration contrasts with that already discussed above
regarding the negentropic content of waste (see Footnote 6). Now we are
concerned with the negentropic content of those structures (e.g., institutional
designs) which we put in place for various practical purposes. But the library, for
example, undergoes constant transformations as different books move from
cataloguing to circulation. To move to a more pertinent example, in the
production process one arrangement becomes the input state for a subsequent
stage in the production process. This is already an example of Georgescu-
Roegen's notion of the ·'analytic boundary," applied to a temporal cross-section
of the process.
262
argue that point). This insight arises even within the bounds of standard
equilibrium thermodynamics and is clarified by the statistical interpretation.
Whereas mechanics is concerned with the physics of particular microstates,
phenomenological thermodynamics is concerned with the properties of
macrostates consistent with an unspecified number of possible microstates.
Similarly, a phenomenological economics would be interested in (i.e., be able
to describe) only the gross features of economic processes and of industrial
systems, leaving open and subject to political choice a vast array of design
questions, such as those left open for the design of an electrical system of
generation, transmission, distribution, and end use. It is a relatively short step
from here to the inclusion of end goals within the purview of economic
practice, but the thermodynamic frame introduced and advocated by
Georgescu-Roegen does not get us all the way there. To get to a more ends-
oriented view of economics requires a more radical critique.
The development of an economic theory grounded in the concept of
entropy and its implications would be only the first step to a fully normative
understanding of economics. Georgescu-Roegen does not take us to the next
step, although in places his language is suggestive. In order to fully take into
account the concept of material transformation, it will be necessary to think
through the consequences of non-equilibrium thermodynamics, such as
Prigogine's or some other approach. Prigogine's theory of dissipative
structures is a good place to start (Prigogine 1980; Prigogine and Stengers
1984). Moreover, the undertaking would not be complete without working
through, both generally and specifically for economic theory, the theoretical
connections between entropy and evolution. This would bring us fully into
contact with the work of the historical school and its eventual influence on
the American institutionalists (Veblen 1961), and a revitalization of the
historical/evolutionary interpretation of economics. Such a project would
obviously make contact with much in the earlier ninetheenth century
traditions of economic thought, for it would bring us back to rethinking
carefully the implications of the role of labour as a transformative agency. 8
But more importantly, by revitalizing the evolutionary project, it revisits the
8 However, it would not return us to a Ricardian theory of value-in-exchange as

labour value (see Ricardo, 1963).
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DAVID G. HOLDSWORTH
embedding of values within institutions and rituals and reopens in a new way
the broad question of the relationship between economics and ethics. 9
III. Rethinking Positive Economics
My reflections here stem from my reading of a thesis written at Trent

University by Dennis Badeen (1999). As part of his thesis, Badeen has
developed a general critique of positive economics, in particular, the positive
economics articulated and defended by Milton Friedman in his Essays on
Positive Economics (1966). Badeen argues, fundamentally, that positive
economics fails in its attempt to claim non-normative status because, despite
Friedman's and others' arguments to the contrary, the world in which
contemporary economic practice is expressed is a world which is itself the
normative creation of the liberal/empiricist imagination. Badeen proceeds
with a detailed account of the similarities and differences between the
philosophy of logical positivism, focusing on the ideas of Ayer and Camap.
The analysis brings out an important difference which bears on the issues of
the normativity of economics. Whereas logical positivism consistently
maintains an analysis grounded in that which is given (the basic
observational evidence of a particular scientific practice) Friedman's positive
economics consistently fails to see that the world it analyses is not given (as a
pure Derridean gift), but is created by an active human agency inspired with a
vision ofthe liberal individuaJ.lO
One aspect of Friedman's argument which Badeen refers to is the claim
that all we require of a positive (i.e., non-normative) economic theory is that
consumers behave as though they were perfect utility maximizers and
9 The last point is brought out clearly by the contribution of Professor Shionoya to
this conference. His exploration of the Methodenstreit addresses precisely the
general relationship between economics and ethics, and by revisiting the question
of historical approach, recovers evolutionary metaphors within economic
thought. In the last part of my paper I shall be developing a somewhat different
perspective on the role of evolution for our economic understanding, one which,
as I shall argue, radicalizes the normative content of economics.
10 Indeed, it is created in excess, a point central to Bataille's (1991) general
economy and which, in a quite different sense, will be emphasized by me below.
264
producers behave as though they were perfect profit maximizers. Friedman

offers us an analogy between this situation and the situation in gravitational
theory, claiming that people behave as if they had performed mathematical
optimization routines much as particles behave in the presence of frictional
forces "as if they were in a gravitational field." The core issue here is whether
or not this comparison makes any sense at all. My own first reaction to it was
to say that the feather dropping in air is in a gravitational field, and that this
alone invalidates the analogy because one cannot make such an equivalent
claim in the case of a consumer behaving in a market - at least, not without
invoking independent arguments of a sort Friedman would not countenance.
But this would beg the question from Friedman's point of view if he intends a
strictly positivist interpretation of positive economics since he would deny
that there is a force field in any metaphysical sense in both cases. So I
decided to play the game and reflect on Friedman's idea more carefully. 11
As I understand it, Friedman's analogy generates for him a kind of ironic
dilemma. The gravitational analogy does not seem to work if we try to
interpret it against a charitable reading of Friedman's project but may start to
make sense to the extent that we let go of Friedman's own objectives. It
seems to hinge on the question of conscious awareness and intention. 12
Presumably material particles are not aware of gravitational forces in both the
pure case, when gravity is the only force acting, and in the more complex
case, when frictional forces are also acting. Economic agents, on the other
hand, are aware of many of the forces which act upon them, including any
possible disposition they may have to maximize either utility or profit. 13
Such agents will presumably attempt to minimize cost, maximize output, etc.
even if they do not enter into a detailed optimization calculation every time
they act. If it is true, as positive economic theory seems to presume, that there
is some kind of equivalence between actual behavior and ideal behavior, it is
in part because they have formed the intention to behave the way they do.
The positive intention to maximize utility expresses itself every time a
II The sense in which I use the term "metaphysical" is well clarified by POPPER
(1956) when he explicates the notion of metaphysical determinism, as opposed to
scientific or philosophical determinism.
12 A point which I shall come back to below from a different point of view.
13 Which is not to say that they are perfect maximizers, only that the notion is part
of their deliberation.
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DAVID G. HOLDSWORTH
consumer chooses the product of equal value for a lower price, but it also
expresses itself every time that same consumer hesitates due to some ethical
concern, or non-ethical political concern. A general evolutionary account
suggests that a society in which the behaviors are truly equivalent is one
selected by the indifferent (proximate) forces of adaptation. But in that case
we may not be able to demonstrate the equivalence by empirical means alone.
Our only datum would be the mere fact of our survival. So either we would
have to show in detail, and independent of the evolutionary framing of the
concepts, that there was an equivalence, or, we would have to show on
theoretical grounds that the principles of evolution require that a species be
utility maximizing in order to survive. In the latter case we could infer the
equivalence of our behaviour from the fact of our survival. In the former case
we could infer the survivability of utility maximizing behavior from the fact
of our survival. But both scenarios seem highly unlikely. So what seems most
realistic is that the analogy leads us to the conclusion that individual
consumers and producers are irreducibly embedded within a normative
context of choice and socio-economic experimentation, the intention of
which is to discover the best way of conducting our life as a species. This is
itself already robustly normative (even vaguely Socratic) and presumably
implies that the ideological question, the question whether or not liberal
individualism is survival-fit, must be kept open. Of course it is precisely this
question which Friedman intends to keep closed. My point is - and here is
the irony - opening the question seems to follow from one aspect of
Friedman's own argument. The alternative for him is to argue that none of
this is conscious, that natural selection has nothing to do with the issue, that
the accidental convergence of liberal/empiricist doctrines in the nineteenth
century was irrelevant to the positive facts now revealed by the science of
economics, and that whether or not we survive as a species is simply not the
appropriate question to be asking. But this makes Friedman a metaphysician
of the sort I am sure he would disclaim.
The upshot of all this, in conjunction with Badeen's more general
argument, is that economic theory is at best an account of behavior in a
normatively constructed world. So if the revision of economic theory
suggested by Georgescu-Roegen and others is accepted and my interpretation
of that extension is correct, then economic practice and theory must be
acknowledged to be both internally and externally normative, i.e., it must be
concerned internally with normative questions of systems design, and at least
266
cognizant of the external issues of ends-oriented choice. We must at least ask

the question whether self-interested utility/profit maximizing is survival fit. 14
IV. Economic Processes as Entropy/Evolution
I shall focus on the theoretical relationship between entropy and

information in order to theorize about institutional design. The idea is to
begin by taking seriously the notion that information functions on the
"culture" side of the nature/culture distinction, while energy functions on the
"nature" side. This may seem obvious, but the thesis is not a trivial one, and
is probably - at least strictly speaking - false. It involves at least the
following non-trivial aspect under my intended interpretation: what is at stake
in fully articulating this idea is the reconciliation in both thought and action
of the vexed relationship between the cultural and the natural - between
ethnology and ecology. Gregory Bateson (1972) was the first to undertake
such a project; although this is not precisely his language (indeed, my
wording is inspired by Michel Foucault (1970)- his reflections on ecology
take us several steps down this path.
One consequence of Bateson's ideas is particularly relevant to the
problem of normative economic systems. Bateson argued forcefully that an
adequate understanding of natural ecological systems is not provided by the
framework of the "energy budget." This is not to deny the profound
importance of energy for industrial policy in particular, nor public policy in
general. (See Hooker, MacDonald, van Hulst, and Victor 1990.) But it is to
emphasize its cybernetic over its thermodynamic importance. Natural
systems are not perfect (second-law efficient) engines, and it would be a
mistake to take such engines as the ultimate model or absolute norm for
social planning. The consequence is that institutions must look to features of
natural complex ecosystems other than just first-law and second-law
efficiency. We do not yet know which features to mimic, but adaptability,
14 As I shall argue below, following BROOKS and WILEY (1986), environmental

factors leading to natural selection are likely not dominant. We must also
consider genealogical questions of replication when interpreting economic
processes in evolutionary terms.
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DAVID G. HOLDSWORTH
capacity to respond to external change, and resilience are ecological notions

that come to mind as starting points. The development of this kind of
theoretical understanding of the relationship between human culture and non-
human nature is a necessary first step to the articulation of an adequate
normative, evolutionary theory of economic practice.
I find it useful to borrow here from the language of Niklas Luhmann,
whose work in social theory is thematically similar to Bateson in several
ways. Like Bateson, Luhmann adopts a thoroughly communication-theoretic
approach, one which asks us to fundamentally revise the way we think about
the flow of information. Indeed, the expression "flow of information" is best
reserved for theories grounded in the basic models of Shannon and Weaver
(1949), in which all communication is the transmission of information along
a channel from a sender to a receiver. Luhmann focuses on the processes by
which we increase our own complexity - cognitive complexity by developing
theories and social complexity by designing institutions, for example. I think
of these as just the far-from-equilibrium structures, discussed briefly above,
which come to embody our values, beliefs and practices. Now Luhmann
emphasizes that the objective of increasing our own complexity is to reduce
the representational complexity of the world. That is, we introduce these
increases in complexity into our personal and collective selves in order to
establish intended literal descriptions of the world which render it tractable to
the understanding. Ultimately, however, the success of this activity is
assessed in terms of our survival, as discussed already above. Moreover,
there is no realistic possibility that we would achieve descriptions which are
complete in the sense of constituting homeomorphic pictures of the whole of
reality.I5 There is communication insofar as a "resonance" 16 is established
between the actual extant complexities of the world and the constructed
complexities of our representations. There is resonance to the extent that the
increase in self complexity achieves an approximate homeomorphic
15 This is again cognate to Georgescu-Roegen's notion of the analytic boundary.

We must draw a line somewhere which delimits the problem to be addressed in
any given situation.
16 The metaphor is important, but controversial. Here I must rely on shared
intuitions of the reader, but there is clearly a need to investigate its meaning more
fully. My own approach to the issues it raises starts out from something like
Ricoeur's notion of a "display of representation." See RICOEUR (1977), and
especially the discussion ofthis idea in SCHRAG (1986).
268
embedding into the relevant parts of reality. But this cannot be tested as such,
at least not in a way which is independent of our ongoing experiments with
self-making (autopoiesis).
For the purpose of this paper, what I want to take from Bateson is the
switch in focus from energy budgets to communication. The issue is then
whether or not this approach helps us to answer specific design questions,
such as the example I have emphasized of electrical systems. But there are
other aspects of Bateson's work which are important. Bateson, like other
evolutionary theorists (e.g,. Brooks and Wiley 1986) is concerned with the
relationship of evolutionary biology to ecology. He believed that their
interconnectedness would only come to be properly understood within an
understanding of the biosphere as a communicative rather than a material
unity. The details of this view are beyond the scope of this paper, but the
point is essential to the larger argument and links to my treatment of
evolutionary concepts above and below.
It should be clear that for Bateson especially, and by implication,
Luhmann as well, systems are much more than simple input/output processes,
a reductive definition sometimes encountered in engineering approaches.
Indeed, they are more robustly complex than the kinds of systems
contemplated by von Neumann (1945) and, later, Straffa (1960) in their
respective theories of production processes. Of course, this is already
recognized by conventional ecology, but the emphasis on complexity in
Bateson takes on a more fundamental role. It also draws us into the centre of
the long-standing problem within theoretical biology concerning the
relationship between evolution and entropy, discussed here in terms of far-
from-equilibrium processes. It was already anticipated by my purely logical
analysis of Friedman's argument. The overall image I hope to have
communicated (which I have achieved if you are experiencing any sort of
sympathetic resonance with my discourse) is one of culture-based processes
of complexity increasing self-creation, on the one side, and a nature-based
process of emergent formation of objective complexity on the other side.
In this last section I have talked as though epistemic interests are the only
ones that matter. Insofar as economic processes are about more than
understanding, but also about the satisfaction of a broader range of interests,
there may well be important differences between the formation of complexity
within culture and the formation of complexity within nature. Again, human
self-consciousness and goal directedness is seen, at least intuitively, to be
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DAVID G. HOLDSWORTH
irreducibly relevant. Some may still think that it justifies a categorical

distinction between culture and nature. But it should be equally clear that the
view I have sketched here and attributed to both Bateson and Luhmann,
fundamentally breaks down traditional attempts to establish a boundary
between the two. 17 Therefore, my earlier remarks about information residing
on the side of culture and entropy residing on the side of nature break down.
On this view it is no longer true that information-theoretic interpretations and
thermodynamic interpretations of entropy are just "two different theoretical
perspectives on the same thing."
V. Normative Implications for Theories of Production
In a recent article by Kurz and Salvadori (1998), a critique is proposed of

Georgescu-Roegen's framework. Their critique accepts the thermodynamic
conclusion that economic processes are necessarily unidirectional, but
generally defends the approach to the production function found in the work
of von Neumann (1945) and later of Straffa (1960). For Georgescu-Roegen,
significant problems arise out of what he calls the analytical boundary: he
frequently invokes the slogan "no analytical boundary, no analytical
process." For Georgescu-Roegen the boundary of a process consists of two
aspects: the frontier between the system and its environment, and the
temporal endpoints, which determine the duration. Clearly, he had in mind
discrete production processes in which things crossing the boundary at the
beginning are inputs and things crossing the boundary at the end are outputs.
It seems to me that the notion of the frontier can be interpreted in a way
which anticipates the Bateson/Luhmann approach to systems and
communication, sketched above. But Georgescu-Roegen's account of the
production process opens many questions, especially regarding entropic
value, which his discussion leaves ambiguous. First, he shares with classical
economists a preoccupation with the maximization of productive output.
Second, Georgescu- Roegen 's notion of "funds and services" seems more
adequate than "stocks and flows" from a thermodynamic point of view - a
point which Georgescu-Roegen argues in detail in Chapter IX of The Entropy
17 We encounter once again an illustration of Gcorgescu-Roegen·s problem of the

analytic boundary.
270
Law and the Economic Process (1971). However, it is quite surprising that he
became committed to an account of the production process which takes
Ricardian land seriously as a fund element, i.e., as though there existed real
land which is unaffected by economic activities. Third, Georgescu-Roegen's
approach to the analytical boundary is methodologically problematic when it
is invoked to limit or block any form of self-referentiality. This last claim is
itself controversial; however, it is critical for the approach to evolution
defended below.
The idea that evolution is relevant to our understanding of economic
processes is not new. I referred already to the historical school in Germany
and to Veblen and the institutionalists. Boulding ( 1976) gives us a clear and
simple account of how it might enter in general into our reflections. It is
clear, moreover, that Georgescu-Roegen was interested himself in evolution,
for it is extensively discussed throughout The Entropy Law and the Economic
Process (1971 ). To begin with, he favoured an evolutionary narrative as an
account of the emergence of modern science, introducing such an account
already in Chapter I. Evolution is again discussed in Chapter V, where we
encounter Georgescu-Roegen's characterization of an evolutionary law. He
suggests that an evolutionary law would be "a proposition that describes an
ordinal attribute E of a given system (or entity) and also states that if E 1<E2
then the observation of E2 is later in time than the observation of E/' (p. 128).
As Georgescu-Roegen points out, a notion of complexity, commonly invoked
as a measure in the biological world, does not satisfy this definition since it is
not an ordinal measure. The only law he can think of which does is the
entropy law, the proposition derived from the standard theorem in
thermodynamics that the entropy, S, defined differentially as dS=dQIT, where
Q is the heat and T is the absolute temperature, always increases as the
system moves around a closed loop in phase-space.
This discussion is of great interest to the foundations of biology, indeed,
to the foundations of any theory, including economic theory, that attempts, by
analogy, to interpret phenomena in terms of either entropy or evolution. It is
not surprising, therefore, that theorists who do this kind of work are
frequently interested in questions about the explanation of growth. This is
certainly true of economic theorists, including Georgescu-Roegen, who are
interested in explaining economic growth. I think it fair to say that classical
economics takes very little interest in this problem; growth is just a taken-for-
granted desideratum- that without which human welfare would be at risk. If
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DAVID G. HOLDSWORTH
we are to be concerned at all about notions of the public good (of course,
classical economics has come to suppress such talk) it is served only by
growth. 18
This is the nub of my emerging critique of Georgescu-Roegen. Despite
his eloquent development of the basic principles of an economic theory,
principles which makes qualitative change fundamental and seek to mimic
the full conceptual repertoire of our best science, in the end he shares with
other economists a preoccupation with growth and the best way to run
production processes in order to maximize output. As I mentioned above, he
even seems to turn his back on the implications one surely must draw from
the distinction between Ricardian land, as abstract, unchangeable space, and
the qualitatively complex landscapes which constitute land, both culturally
and naturally. Throughout this paper I have tried to indicate general reasons
why we must take very seriously this complex image of land to heart. But I
have equally emphasized that we can draw no obvious or immediate moral
conclusions about our place within the complex transformative processes
which constitute economic practice.
VI. Evolutionary Explanation, Normative Realism

and the Public Good
In this final section I want to sketch an account of entropy and evolution

which, it seems to me, is more promising and which does have clear
implications for our understanding of the normativity of economics. I shall
first briefly consider the question, opened above, of the explanation of
economic growth and then turn my attention to the question ofnormativity.
The question of explaining economic growth is a legitimate research
question, one that I consider part of the philosophy of science, broadly
construed. Two approaches can be identified which call upon the resources of
thermodynamic theory. The first calls upon the general idea of far-from-
18 In its more injudicious instances one is even extolled to look for ways to actively
"grow the economy." But this is an ironic twist on the question of positive versus
normative economics since extolling growth as something to aim at is one way to
make the theory conspicuously normative. But typically those who use this
bizarre language are from the positivist camp.
272
equilibrium dissipative structures (Prigogine 1980; Prigogine and Stengers

1984). On this account what we explain is not so much growth per se as the
local appearance of organization. It is an explanation only in as much as it
explains the apparent contradiction with the second law by establishing that
systems can locally increase in complexity (i.e., grow) by using available
energy from their environment to incorporate material of low entropy into
their own organization. This can be said to be a negentropic explanation. It is
consistent with orthodox economics insofar as it explains why the growth,
thought to be necessary for the maintenance of human well-being, is possible.
Brooks and Wiley (1986), whose work I have already cited, offer us an
alternative way of thinking about these processes, an approach which may
turn out to be more satisfactory since the kind of explanation which it offers
is broader in scope. There are two major theses in their book which I shall
consider. The first, that evolution can be understood as entropy, not as
negentropy, addresses the current issues; the second, that genealogical factors
are more significant than environmental factors in the mechanisms of
evolution, will address the theme of the normativity of economics.
Brooks and Wiley argue that evolution is to be understood fundamentally
as an entropic process. This seems counter-intuitive on first consideration
since entropic processes, by definition, are those which ultimately lead to the
heat-death of closed systems. Like the negentropic explanation considered
briefly above, the entropic explanation offered by Brooks and Wiley
ultimately applies only to open systems, but on their interpretation both the
maximum entropy of the system (e.g., the entire biosphere of the planet) and
the realized entropy are always different, except at the beginning of
primordial time. At any given time, the difference between the maximum
possible entropy (e.g., maximum biological variation at a given level of
organization) and the realized entropy (e.g., the actually biological variation
achieved at that time) is a measure of organization. On this view, existing
levels of organization have been explained in terms of the constraints on
diversification within biological spaces. This brief characterization of the
Brooks and Wiley argument does not constitute a complete explanation of
economic growth, but it is suggestive. I urge an active critical reading of their
work with a view to developing such an account. Their own words
summarize well what I have so far extracted from their book:
As open thermodynamic systems, living systems might obey the
second law in one of two ways. They might dissipate high entropy
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DAVID G. HOLDSWORTH
matter and energy from themselves into their surroundings. This

would conform to the dissipative structures idealization. Or they might
exhibit spontaneous growth over time. In this case, they would
conform to the expanding phase-space idealization. Biological
systems exhibit both kinds of behaviour (p. 61 ).
It is my contention that human social and economic systems also exhibit both
kinds ofbehaviour.
The second thesis from Brooks and Wiley which I shall consider is
characterized by them as a genealogical mechanism for evolutionary
processes, in contrast with environmental mechanisms. There is an informal
tendency to focus almost exclusively on the processes of natural selection
when we contemplate the mechanisms of evolution. But Darwin himself
already knew that other mechanisms were important. The example Darwin
became interested in is sexual selection, a mechanism which is known to lead
to the production of excess (e.g., plumage of birds) in the sense that the traits
selected for exceed what is required to survive within the environmental
niche where the species finds itself. The genealogical mechanisms which
Brooks and Wiley emphasize can also lead to the production of excess.
Essentially, they are the mechanisms of self-reproduction (auto-poiesis)
which have become topical in the theory of self-replicating systems.
If Brooks and Wiley are right about the relative importance of
genealogical mechanisms in evolution, and it is meaningful, as many now
claim, that institutions and rituals (and many other cultural formations)
function within social systems in a way analogous to genes in biology, then
we seem on firm ground speculating that cultural evolution, like biological
evolution, unfolds in accordance with similar principles. 19 Moreover, if it is
the case (as it seems likely to be) that genealogical mechanisms are more
important than environmental ones in determining the direction of cultural
evolution, then the normative question is opened with a vengeance. For the
institutions, rituals and other cultural formations which encode identities
within the historical trajectories of human development must include a
19 This is not to minimize the philosophical controversies which will continue to

circulate around any attempt to generalize evolutionary principles to non-
biological contexts. One need only consider the debates over evolutionary
epistemology and the divergent strategies which exist to make sense of such a
notion. See e.g., HAHLWEG and HOOKER (1989) and RADNITSKY and BARTLEY
( 1987) for critical overviews of the issues.
274
codification of values, including what we would think of as moral values on

virtually any metaethical theory. 20 And insofar as our practices, including
those which take shape within an economic sphere, constitute the
transmission of these norms and values to future generations, and insofar as
norms and values could have been different, and insofar as our practices
shape and limit the prospects for future human generations and for other
species, then the irreducible normative content of these practices seems to be
firmly established.21
Although I cannot develop the point in any detail, I want to conclude this
paper by returning to the claim, made in the introduction, that what has been
outlined and defended here is a kind of normative realism. The claim is
warranted in at least two ways: first, the realism follows directly from the
naturalism, that is, from the notion that norms (moral and other kinds of
values) are physically embedded within the "normative blueprint" (to again
borrow Hooker's expression) of institutions, etc.; second, and more
importantly, it is related to a version of moral cognitivism- similar to that of
A pel ( 1989) and Habermas (1990) - according to which the processes of
epistemic deliberation (evolutionary theorizing, in this case) are cognate to
processes of moral deliberation. Although this is a thesis for another project, I
believe that the considerations communicated in this paper are suggestive of
this "realist" position.
Finally, it remains to address the issue of the public good. If, as I have
argued, economic processes are irreducibly driven by processes of normative
deliberation, processes in terms of which we dynamically embed moral
values into the design of institutions and public policies, then at the very
least, the notion of the invisible hand has been delivered a serious blow. And
insofar as the institutions and social processes which constitute the
"normative blueprint" are constructed within the public domain through
processes of critical deliberation, then it seems clear that the good being
20 So we come back to an idea which is importantly similar to Hooker's notion of a

normative blueprint. See Footnote 7.
21 Note that from this perspective normative economics and environmental ethics
become virtually identical.
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DAVID G. HOLDSWORTH
served is a public good, in which we all may engage as citizens when viewed
from a political point ofview.22
In summary, I have identified a body of argument which I believe makes
a compelling case for pursuing in a serious way a theory of normative
economics as an essential element of a theory of social and political choice.
Despite the temporary ascendency of the community participation
movement, 23 environmental concerns, and other aspects of a progressive
politics, those developments have been sharply turned back and the practices
of an uncritical positive economics have returned to ascendency with a
vengeance. It remains to be seen whether the actual practices within a global
economic order can ever incorporate the insights of Georgescu-Roegen,
Bateson, and so many other influential normative thinkers, into the
management of economic systems. But our critical reflections on the
theoretical foundations of economics should not duck these profoundly
difficult normative questions.
References
APEL, KARL-OTTO: "Normative Ethics and Stategical Rationality: The

Philosophical Problem of a Political Ethics", in: REINER ScHORMANN (Ed.):
The Public Realm: Essays on Discursive Types in Political Philosophy,
Albany (State University ofNew York Press) 1989, pp.107-131.
BADEEN, DENNIS: On the Limits of Neo-classical Economics in its Modelling of
Human Behaviour, Motivation and Economic Totalities.· Towards a Self-
22 But one last qualification/clarification seems called for. I am not defending here a
simple teleological account of morality. The Habermasian element to which I
have alluded, at least on the interpretation intended, imagines a constitutive
notion of rights within the very principle of rational deliberation contemplated. In
the other project alluded to above, this takes on a decidedly non-Habermasian
turn, however. But this takes us once again beyond the scope of the present
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23 I cite participation movements here with approval even though, following
Habermas (1990) in his response to Tugendhat, I do not take participation as such
to be a significant principle of communicative praxis.
276
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(State University ofNew York Press) 1989.
HODGSON, BERNARD: Economics as Moral Science, New York (Springer) 200 I.
HODGSON, GEOFFREY: "An Evolutionary Theory of Long-Term Economic
Growth", International Studies Quarterly, 40 (1996), pp. 391-410.
HookER, CLIFFORD: "Towards a Philosophy and Practice of Energy Policy
Making", Energy Studies Review, I, 2 (1989), pp. 130-143.
HOOKER, CLIFFORD, MACDONALD R., VAN HULST, R., VICTOR, P.: Energy and the
Quality of Life: Understanding Energy Policy, Toronto (University of Toronto
Press) 1990.
KURZ, HEINZ D., SALVADOR!, NERI: "Fund-Flow versus Flow-Flow in Production
Theory: Reflections on Georgescu-Roegen's Contribution", from
http://www .kfunigraz.ac.at/vwlwww/kurz/information. htm ( 1998).
LUHMANN, NIKLAS: Ecological Rationality, Chicago (The University of Chicago
Press) 1986.
LUHMANN, NIKLAS: Social Systems, Stanford (Stanford University Press) 1995.
POPPER, KARL R.: The Open Universe: An Argument for Indeterminism, from the
postscript to The Logic of Scientific Discovery, (published separately) Totowa
(Rowman and Littlefield) 1956.
PRIGOGINE, ILYA: From Being to Becoming: Time and Complexity in the Physical
Sciences, San Francisco (W. H. Freeman and Company) 1980.
PRIGOGINE, ILYA, STENGERS, 1.: Order out of Chaos, New York (Bantam) 1984.
277
DAVID G. HOLDSWORTH
RADNITZKY, GERARD, BARTLEY, W. W. III: Evolutionary Epistemology,

Rationality. and the Sociology of Knowledge, La Salle (Open Court) 1987.
RICARDO, DAVID: The Principles of Political Economy and Taxation, Homewood
(Richard D. Irwin Inc.) 1963.
RICOEUR, PAUL: The Rule of Metaphor, Toronto (University of Toronto Press)
1977.
SHANNON, C. E., WEAVER, W.: The Mathematical Theory of Communication,
Urbana (University of Illinois Press) 1949.
SCHRAG, CALVIN 0.: Communicative Praxis and the Space of Subjectivity,
Bloomington (Indiana University Press) 1986.
STRAFFA, P.: Production of Commodities by Means of Commodities, Cambridge
(Cambridge University Press) 1960.
VEBLEN, THORSTEIN: The Place of Science in Modern Civilization. and other
Essays, New York (Russell and Russell) 196 I. (See especially "Why is
Economics not an Evolutionary Science").
VON NEUMANN, JOHN: "A Model of General Economic Equilibrium", Review of
Economic Studies, 13, (1945), pp. 1-9.
278
Chapter 12
On Economic Men Bearing Gifts and Playing Fair

BERNARD HODGSON
I. Introduction
II. Altruism and Gift Giving
III. Economic Justice
IV. Conclusion
I. Introduction
Ever since each form of inquiry looked seriously at the thought patterns
of the other, the relation between ethics and economics has been one of
mutual suspicion. On the one hand, it has appeared to moral philosophers that
the market practices favoured by orthodox economic theories were indifferent
to the moral implications of such practices; on the other hand, it has often
enough seemed to economists that the sort of moral commitments
recommended by philosophers would only foster inefficient economic
activities. However, since the early eighteenth century, in a paradoxical, but
deeply significant turn on this perennial tension, economists have argued that
economic actors can themselves secure the moral high ground, even though
doing so by amoral means. Within the classical tradition of modern
economics there is avowed nothing less than a "general frame" or
"underlying vision" of a form of economic life wherein the "simple system of
natural liberty" is taken to give expression to the natural harmony of each
with all. In fundamental terms, private greed is understood to be the
instrument of social harmony: free, but rational individuals, motivated solely
by the concern to maximize the satisfaction of their self-interest, and
interacting only through voluntary exchange, will, nevertheless, attain an
aggregate outcome that is beneficial to all. Though such an outcome not be
BERNARD HODGSON
part of the intentions of the individual agents, nevertheless, the market forces
of a perfectly competitive economy will so allocate resources as to lead
participants, as if by an "invisible hand," to a spontaneous economic order of
mutual advantage. Any other form of economic organization is claimed to
lead to a lesser common good.
It is a basic feature of our contemporary culture that neo-classical
economics continues and sharpens the ethico-scientific frame of the classical
tradition. Put in summary terms, neo-classical general equilibrium theory
implies that if individual producers and consumers are left free to act in a
solely self-regarding fashion to maximize their own profits and utility in a
perfectly competitive market economy, then, as a consequence, the common
good or social utility will be "Pareto" maximized. More precisely, "common
good" is here defined as the satisfaction of the totality or aggregate of given
individual consumer desires, but as consistent with the Paretian distributive
constraint - namely, any movement from such a "Pareto-optimal" state
would make some consumer worse off in terms of the satisfaction of his de
facto wants. Now it is worth observing that some of the foremost architects of
general equilibrium theory have themselves emphasized that the theory
assumes certain highly idealized, or empirically improbable, conditions, such
as entrepreneurs and consumers having complete knowledge of current and
future prices of commodities and factor services; accordingly, Frank Hahn, 1
for one, cautions that such theory would be a problematic basis upon which
to formulate reliable political policy. However, empirical plausibility
considerations have rarely been the first considerations to deter the
theoretical constructions of philosophers. Hence, it has also been among the
pivotal features of current cultural discourse that politically influential
libertarian philosophers, such as Robert Nozick, David Gauthier and Jan
Narveson, have premised their own moral and political theory on a rather
uncritical acceptance of the normative implications of general equilibrium
theory; thus we find Gauthier arguing that the findings of neo-classical
welfare economics demonstrate that a perfectly competitive market society is
politically ideal, indeed that such a social order would not even require moral
constraints because, claims Gauthier, "the coincidence of utility-
FRANK HAHN: "Reflections on the Invisible Hand", Lloyd's Bank Review, 144,
(August, 1982), pp. 1-21.
280
ON ECONOMIC MEN BEARING GIFTS AND PLAYING FAIR
maximization and [Pareto] optimization in free interaction removes both need

and rationale for the constraints that morality provides .... " 2
Now, it is to the contemporary welcome of the invisible hand in the
alliance of neo-classical economics and libertarian moral philosophy that I
wish to direct critical attention in this paper. I shall not raise questions
concerning the empirical realizability of standard equilibrium analysis, as the
problems I wish to address may remain neutral on this matter, and it is
important to see this. However, I do intend to probe issues at the intersection
of the empirical explanatory adequacy and normative legitimacy of the
general conceptual framework of neo-classical thought. In particular, I shall
investigate two internally connected themes: first, the degree to which
altruistic motivations may provide a serious anomaly for theoretical
explanation; and, secondly, whether the distribution of resources and
commodities within the competitive market economy represented by neo-
classical theory can satisfY defensible standards of moral justice. I realize
these are large and complex questions concerning which I can only make
some summary comments here. But I am especially concerned to argue
certain reservations concerning the prospects for a moderated capitalist
economic order. It appears to many erstwhile critics of the ethos of the
capitalist market system that it has become, nevertheless, an unavoidable
social order, with no feasible alternative; in this light, it is understandable that
a good deal of recent theoretical analysis has been directed towards
establishing reasonable grounds for expecting that a "mitigated" capitalism
can sufficiently mitigate economic men such that their behaviour can reclaim
consistency with sound moral principles while continuing to exercise their
preeminent efficiency in the private market. I remain sceptical. In my
judgment, the reforms necessary to rescue the virtue of economic man would
demand deep structural changes within the competitive market system that
are essential to its identity as a socio-economic order. Although I speak
honestly when I say that I too wish that the Tony Blairs of the world could
lead us to the promised land, I am not holding my breath. I shall seek to
warrant my scepticism from the perspective of a philosophical scrutiny of
certain dimensions of orthodox or neo-classical theory-construction about the
capitalist market economy.
2 D. GAUTHIER: Morals by Agreement, Oxford (Oxford University Press) 1986, p.

93.
281
BERNARD HODGSON
II. Altruism and Gift Giving
It is common knowledge that, within a neo-classical framework, human

agency is conceived as that of homo economicus or rational economic man,
the agency of a "self-regarding maximizer," one who is so motivated that he
seeks only the maximization of the satisfaction of his own interests ~ in his
role as producer, that of maximal profits, in his role as consumer, that of
maximal "utility," or the greatest affordable satisfaction from his use of
material goods. For our purposes, it is imperative to bear in mind this dual
capacity of the neo-classical economic actor, not only, as is all too common
in philosophical analysis, his role as a rational consumer.
As consumer, economic man exercises exclusive self-regard to the extent
that, as Wicksteed succinctly put it, his interests are "non-tuistic," that is to
say, the satisfaction of his strongest preferences is in no way parasitic on the
satisfaction of anyone else's preferences. Of course, from an empirical and
moral point of view, respectively, it may be contended that such a theoretical
assumption unduly limits the explanatory scope of neo-classical economics
and triggers doubts as to the amoral or ethically neutral character traits of
economic man ~ independently of whether by some undesigned providence
of nature the exercise of these traits secured socially desirable end-states. For
it is an observable datum of actual patterns of economic behaviour that
individual human beings frequently satisfy their strongest preferences by
acting out of direct empathy for the well-being of others, and it is arguable
that any genuinely moral socio-economic order would require such altruistic
motives on the part of agents functioning within it.
To be fair, economic theorists themselves have engaged in extensive
inquiry into the theoretical modelling of economic behaviour motivated by
such other-regarding affects. Building on the early work of F. Y. Edgeworth, 3
the English economist, David Collard, 4 has provided the most sustained
investigation. The findings of these inquiries are worth summarizing as they
prompt reflection on some profound anomalies within the orthodox economic
conception of the form of our economic life. In technical terms, within neo-
3 F. Y. EDGEWORTH: Mathematical Psychics, (1881), London (London School of

Economics and Political Science) 1932.
4 D. COLLARD: Altruism and Economy: Studies in Non-Selfish Economics, Oxford
(Martin Robinson) 1978.
282
classical consumer theory, altruistic motivations would find expression in

what are classified as "inter-dependent utility functions," which inter-
dependencies are of two basic types, paternalistic and non-paternalistic. In
the former case, to take the simplified situation of two individuals, A and B,
where A is the altruist, the satisfaction or utility A receives from his use of
commodities is, in part, a function of both the satisfaction B receives and the
actual sorts of goods and services B consumes; in the latter, non-paternalistic
case, the utility A obtains is a function only of the level of utility to which B
has access, but where A is indifferent to the kinds of commodities B seeks to
consume or to his preference-orderings among such kinds. If B's strongest
preference is for pornographic films as against classical opera, so be it as far
as A is concerned, although A's happiness will be compromised if B cannot
afford to see the films.
Now let us consider that A begins his rational life as the economic man
we have characterized above. Could he, and others of his kind, start loving B
and the competitive capitalist market continue to function with the efficiency
claimed for it in neo-classical theory? It is significant that those libertarian
philosophers whom we have seen to be the natural fellow-travellers of
orthodox economists, should pay close attention to the answer to this
question. For, not surprisingly, they too have expressed second thoughts
concerning the empirical adequacy and moral legitimacy of affirming entirely
self-regarding human agency. Consider, for example, the final posture of
David Gauthier in Morals by Agreement. We noted above that he views a
perfectly competitive market economy as also constitutive of a utopian
society. And yet, in my view incoherently, Gauthier ultimately finds the
economic men of the classical market less than morally ideal: in their non-
tuism, in their mutual unconcern for each other, they bar themselves from the
deeper levels of human satisfaction that only bonding with others in shared
activities permits. 5 Gauthier does insist that the development of such
affective ties with another person be determined by his own choices, be
expressive of "free affectivity"; nevertheless, unless economic men can
morally evolve into what Gauthier describes as the "liberal individual,"
capable of taking an uncoerced interest in another's interest, then, according
to Gauthier, market society will issue in an equilibrium state of substantively
5 D. GAUTHIER: Morals by Agreement, p. 336.
283
BERNARD HODGSON
lesser satisfaction for its participants than could be provided by such a

society.
But the coherence of the fit here is of the first order of importance. In
making the neo-classical case for the classical thesis of the "natural harmony"
of a unified economic order of mutual advantage brought about by a
competitive free-market, Arrow and Hahn 6 refer to the beneficent
consequences of the self-regarding motivation of a large number of different
individuals enacting private greed. But in so speaking they are not including
the market relations of a person disposed to take a direct concern with
another's well-being, whose love of neighbour would in fact bring arthritis to
the smooth functioning of the invisible hand. And strictly so. For it is
provable within general equilibrium theory that the presence of such altruism,
in the form of interdependent utility functions, would generally undermine
the first theorem of welfare economics -that a (perfectly) competitive market
equilibrium delivers a Pareto-optimal social state. 7
The conundrum remains intractable for the case of paternalistic
preferences defined above. However, for the case of non-paternalistic
preferences a critical paradoxical structure arises in the neo-classical analysis
of altruistic motivations that should have provided a hard lesson for
doctrinaire market theorists and their libertarian philosophic allies: It is
demonstrable for non-paternalistic interdependencies that voluntary gifts of
income or purchasing power from altruists to recipients would secure the
market theorist's own measure of the common good, i.e., Pareto optimality,
whereas market mechanisms working solely through the competitive price
system would fail to do so. 8 But, in these circumstances, to reach even the
neo-classicist's understanding of a socially desirable state, demands that
human agents break out of atomistic market fetters, recognize their essential
connectedness, not separateness, in terms of their ontological identity as
persons, and thereby become capable of conceiving other agents as
something other then classical market-beings - that is, as something other
than competitive rivals. ln other words, since the conventional market
6 See K. J. ARROW and F. H. HAHN: General Competitive Analysis. Edinburgh

(Oliver and Boyd) 1971, p. vii.
7 See, for instance, R. BOADWA Y and N. BRUCE: Welfare Economics, Oxford
(Basil Blackwell) 1984, Chaper 4, Section 2.4, pp. 111-118, for an explanation of
this result.
8 R. BOADWA Y and N. BRUCE: Welfare Economics, pp. 115-117
284
theorist and his libertarian champions would base the moral value of bonding
with others on the subjective utility of satisfying individual desire, then an
expression of such free affectivity by the liberal individual would be self-
subverting - viz., it is demonstrable within the neo-classical modelling of the
capitalist competitive market that such affectivity will issue in inefficiencies
as canonically defined by such modelling. Accordingly, any defensible
understanding of the common good engendered by altruistic interaction
would require that we escape neo-classical theory's ontological prison in
recognizing the relatedness of person's qua persons and thereby displace a
truncated conception of social value as an aggregate of individual utilities. As
against Gauthier's perspective, an individual need not be coerced into
bonding with others in the absence of his freely choosing to do so, if such
relatedness is integral to his original self-identity to begin with. However,
since by nature economic men are bereft of such relatedness, they are simply
the wrong natural kinds to bear gifts successfully.
Or so it seems. For the current neo-classical theory of economic exchange
is heir to an entrenched tradition in the ontological conception of the
economic subject of deeper and darker implications. The "transcendental
clue," if I may borrow a phrase from Kant, to this more ominous theoretical
modelling may be found in Edgeworth's seminal viewpoint that what was
basically at issue in a well-grounded scientific explanation of gift-giving was
not the recognition of economically atypical circumstances of altruistic
motivation, but that altruists were no different in kind from enlightened
egoists in their disposition to drive a hard bargain with the other party in the
game of exchange. So understood, the mathematically precise conditions,
which may involve income transfers between individuals with interdependent
utility functions for a Pareto-optimal equilibrium of exchange, may be
soundly predicted. However, from the point of view of a well-grounded
phenomenology, it may strike one that Edgeworth's conceptualization of gift-
exchange is perversely wrongheaded: it is endemic to the subjective
consciousness of authentic gift-giving that the donor is not rigorously
calculating exactly equilibrating states of interdependent utilities, but freely
expressing an other-regarding surfeit of desire that augurs, if anything, an
agreeable rupture of the reciprocal codifications of commercial, non-gift
285
BERNARD HODGSON
exchange. In the words of the late French philosopher, Gilles De leuze ... "In
the gift ... repetition surges forth as the highest power of the inexchangeable." 9
Not that Edgeworth would have been disturbed by such
phenomenological reports. For Edgeworth, in league with other pioneers in
the construction of the neo-classical theory of consumer behaviour - Jevons,
Walras and Pareto - introduced a reductive, mechanistic reconstruction of
economics that continues to be of immense theoretical and practical
significance. As Jevons tersely put this development, economic theory in
general is to be conceived as the "mechanics of utility and self-interest." 10 In
one of the earliest and most consequential physicalist modellings of a human
science, the principles governing individual behaviour in a market system
were to be construed as special versions of the deterministic extremal laws
governing the motion of an object in any natural system. As it was
empirically necessitated for light rays to take the least time passing between
two points, and for physical systems to react to particular changes by
restoring exact equilibrium at maximum values, so it was necessary for
economic subjects to expend the least effort in moving towards their own
natural end-states of maximum utility or conscious pleasure, or, in exchange,
to reciprocate the utility transfer of another subject by restoring a precise
equilibrium of mutually optimal utility. Insofar as the voluntary gift-giving of
an altruistic subject appears to his consciousness as deliberately breaching
equilibrating processes, this will be sheer phenomenological illusion. Indeed,
in terms of general explanatory categories, for our economic mechanists,
teleology itself is onto logically vacuous: what appears to an economic subject
as full-fledged purposive deliberation and the intentional pursuit of conscious
ends-in-view, is only appearance, that is accurately understood as the causally
necessitated effect of the antecedent psychic forces to which he is subject- in
particular, his sensations of pleasure and pain. Nor need one strain at
interpretation here or engage in tendentious hermeneutics. As Edgeworth
himself bluntly characterizes his research programme in his Mathematical
Psychics, and it is to be remembered that he is here in the process of actually
constructing the canonical theory of exchange, not just philosophically
9 GILLES DELEUZE: The Logic of Sense, trans. by Mark Lester and Charles Stivale,
ed. By Constantin V. Boundas New York (Columbia University Press) 1990, p.
288.
10 W. S. JEVONS: The Theory of Political Economy, 4th. ed. London (MacMillan)
1924, p. 2.
286
commenting on it, "at least the conception of man as a pleasure machine may
justify the employment of mechanical terms and mathematical reasoning in
social science." 11 But economic men need not worry; although pleasure
machines, or what we might call mechanical maximizers, they nevertheless
remain, both in individual choice and market exchange, maximizers: unless
irregular perturbing factors, like governmental price constraints, disturb the
self-equilibrating mechanisms of the market system, the laws of motion of
economic processes will necessarily bring individual consumers and
entrepreneurs to maximal utilities and profits, and the social aggregate to the
mutual advantage of Pareto optimality. What is in operation here might be
instructively labelled the "super invisible hand": although it does really
appear to the consciousness of the individual economic subject that he is
purposively endorsing his own valued end of maximal satisfaction from the
use of material goods and deliberately choosing that action from among his
alternatives which will secure this end, such telic, deliberative conscious
processes are "epiphenomenal," in the sense that they exist, but have no
causal bearing on what end-states do obtain - such states are in fact caused
by an underlying mechanics of pleasure and pain which, albeit uncontrolled
by the agent, nevertheless, in invisible hand fashion, bring about effects that
are benevolent for both the individual and society. Seen as a pleasure
machine, economic man may be the right natural kind to bear gifts in the
sense of channeling the vector of pleasure or "psychic energy" towards
others. But this would be misconceived as the exercise of virtuous character
traits by genuine moral agents, since the conceptual framework of exchange
theory has been divested of the telic vocabulary of purposive deliberation
necessary to conceptualize such moral agency. As the sadly neglected
Thorstein Veblen characterized this neo-classical reduction of a teleological
explanatory system to a mechanistic one, the economic subject is now to be
understood as ... "a lightning calculator of pleasure and pains, who oscillates
like a homogeneous globule of desire for happiness under the impulse of
stimuli that move him about the area, but leave him intact." 12 Nor are these
aspects of the historical foundations of neo-classical theory of only
II F. Y. EDGEWORTH: Mathematical Psychics, p. IS.

I2 T. VEBLEN, "Why is Economics not an Evolutionary Science", (1898), in T.
VEBLEN, The Place of Science in Modern Civilization and Other Essays, New
York (Russell and Russell) I961, p. 73.
287
BERNARD HODGSON
antiquarian interest. As I have argued elsewhere, 13 a close analysis of recent

behaviourist, functionalist and system-theoretic constructions of economic
theory attests to the fact that the replacement of telic language by a
mechanistic counterpart remains the preferred mode of concept formation in
economic science.
III. Economic Justice
If economic men can only commit themselves to altruistic virtue in

illusory ways, perhaps they can at least enact credible principles of moral
justice. If they cannot coherently bear gifts, perhaps they can at least play
fair. After all, the distributive justice with which we shall challenge economic
men concerns principles that specifY a fair allocation of benefits and burdens
among the members of a community and, prima facie, it might appear that
the subjects of neo-classical theory could rationally assent to such principles
independently of their pattern of motivation, irrespective of whether they
were disposed to act only on the basis of self-regarding, or also other-
regarding, desires. Let us see.
A good deal is at stake philosophically in addressing questions of justice.
Of all the moral ideals, the criteria of justice seem rooted in the provenance
of pure reason itself, in the extension of the first principle of rationality,
namely, consistency, to the domain of practical judgment. Most critically, the
imperatives of justice do not permit an individual agent to make exceptions in
his own favour. This practical consistency or impartiality rule is most
compelling when understood as an extension of our basic intuitive
repugnance to avowing a formal contradiction (x is M and x is not M) to
practical contexts bearing on the avower. (For example, I should be allocated
good B in circumstances C but not another person, M, in the same
circumstances). Barring exceptive conditions, from the point of view of
justice, persons as persons are moral equals. Aristotle, characteristically, was
among the first to get to the precise heart of the matter with his general view
that, according to the meaning of justice, equals should be treated equally and
13 B. HODGSON, Economics as Moral Science, Berlin and New York (Springer-

Verlag) 2001, especially Chaps. 6, 7, and 8.
288
unequals unequally but only in proportion to their relevant difference. The

relevant difference, for Aristotle, had to be one of merit or desert.
It is noteworthy that insofar as neo-classical economics speaks at all to
questions of distributive justice, it begins along essentially Aristotelian lines.
All workers (indeed all factor services) are considered to be treated in an
impartial egalitarian manner in that unequal return in income for the service
of different kinds of workers is to be in exact proportion to the unequal desert
of such workers as calculated by the value of their marginal product - i.e., the
increase in revenue from total output from the addition of one worker of that
type. So understood, laissez-faire libertarians have argued that the distributive
share of purchasing power one deserves in a competitive market economy is
according to a well-grounded criterion of that for which one is responsible: a
particular worker freely chooses a certain kind of employment and is due a
return equal to what such productive effort contributes to the aggregate
product. Unfortunately, if there is anything that the history of philosophical
analysis has taught us, it is that we are often skating on metaphysically thin
ice in ascriptions of personal responsibility whose thinness is evident as soon
as we skate further. With respect to the problem at hand, such thinness
becomes apparent once we recognize that someone's productive contribution
will be a function of the external assets and internal resources, the degree of
physical capital and productive talent at his command. And further
philosophical and empirical probing has established for many that the
external assets and productive abilities are for the most part a matter of
uncontrollable social contingencies or genetic luck. In upshot, the conclusion
is drawn that awarding unequal distributive shares according to unequal
marginal product is not to comply with an adequate principle of just desert,
but simply morally arbitrary.
In lieu of such unfounded desert, to what other criterion of distributive
justice might the market actors of neo-classical theory lay claim? To be fair,
standard welfare economics begins a reply to this question in cautious and
sensitive fashion. Let us agree that the neo-classical modelling of a market
economy leads to a Pareto-optimal general equilibrium. However, it is also
demonstrated within neo-classical theory that there will be a set of such
equilibria each member of which is generated by a different distribution of
"original endowments" - i.e., allocation of ownership of factors of
production across the individuals of a particular society. And it is here that
the orthodox claim of mainstream economists to their value-neutrality as
289
BERNARD HODGSON
scientists is invoked. For neo-classicists maintain that a final moral appraisal

of the various possible Pareto-optimal social outcomes of a capitalist market
economy is beyond the economist's provenance as a scientist. Indeed, it is
contended that such an appraisal demands not only an extra-scientific, but an
extra-market judgment of distributive justice by the relevant political
community whose criterion will either legitimate the status quo, or, more
likely, prescribe either I) a more equitable distribution of the final product or
2) a fairer initial distribution of factor ownership, or both.
In my judgment, however, there is a certain methodological sleight of
hand in this official arms-length posture. Neo-classical welfare economists
often speak with a certain forked tongue here. For this is not all that is said:
neo-classicists typically continue with a certain substantive commentary on
the abstract theoretical constructions of equilibrium analysis, and in so doing
seek to entrap market critics in a systemic dilemma. Put concisely, it is
further argued that the basic measures available to a market system in order
to apply communal principles of moral justice to redress de facto distributive
injustice would necessitate severe and intractable inefficiencies as defined by
a free market economy: most particularly, expectation of the redistribution of
either final output or original factor endowments would undermine the self-
interested incentives for material gain of individual entrepreneurs and
workers. Thus, in the straightforward words of economist D. M. Winch in his
Analytical Welfare Economics, "If such attempts are made to superimpose
equity on the competitive equilibrium then its efficiency is jeopardized. If
income transfers are achieved by progressive taxation, then the marginal
conditions of optimality that follow from the motivational assumptions of the
competitive model are violated." 14 Accordingly, such neo-classical
commentary concludes, there is no coherent way, in principle, of integrating
redistributive justice with the allocative efficiency provided by competitive
free markets. But if this is so, the market system is not neutral with respect to
questions of social equity, nor is the conclusion of the commentary a purely
factual scientific proposition without serious normative implications.
Once again, certain contemporary philosophers, in this context of both
libertarian and liberal persuasion, have become fellow travellers with
mainstream economists in endorsing the incentive argument. And their
disposition has been more profoundly wrongheaded. The general objective of
14 D. M. WINCH: Analytical Welfare Economics, Hannondsworth (Penquin Books)

1971, p. 99.
290
such philosophers as, for instance, Thomas Nagel, l5 is to redeploy the

incentive argument, not to express a dilemma for the reconciliation of
efficiency and equity for competitive markets, but to legitimate the expected
consequences of the practice of market institutions as essentially just.
Recently, there has been an attempt to adapt conceptions of Pareto or John
Rawls in an effort to put formally rigorous contemporary dress on what is in
fact perhaps the oldest of the arguments set forth to justify the productive
structures of competitive capitalism. The fundamental premise may be
usefully classified as a displacement thesis, namely, to relocate the traditional
ideal of justice in a socio-economic order from the Aristotelian conception of
the virtue of the individual agents participating in the order to that of the
assent of rational individuals to the rules defining the institutional structure of
the order. For our purposes, the most critical rules, of course, are those
investing radically unequal private ownership of initial resources in a
capitalist market economy: Apparently, rational men would assent to such
unequal arrangements since the incentives to the highly talented to use
private assets in innovative ways would produce such abundant goods such
that, although the final product itself was distributed very unequally,
nevertheless, either a) in Pareto superior terms, everyone's material well-
being would be higher than in alternative forms of economic organization, or
b) in maximin terms, if you were to be one of the worst off, you could expect
to be better off than within other institutional structures.
However, no matter how mathematically fine-tuned variants of the
preceding "master argument" for competitive capitalism may be, and the
technical gymnastics in the literature are wonderful to behold, it strikes me
that the argument is deeply flawed. One way of putting this is to say that in
its very foundation the argument "sins against Aristotle," in not correctly
accepting that, in its root meaning, justice is a virtue, a categorically desirable
dispositional trait of human character in which each individual is inclined to
render unto each other individual what is due him. As Aristotle comments,
"we see that all men mean by justice that kind of state of character which
makes people disposed to do what is just and makes them act justly and wish
15 T. NAGEL: Equality and Partiality, New York (Oxford University Press) 1991,
Chaps. 9 and 10.
291
BERNARD HODGSON
for what is just." 16 On the other hand, if we were to buy into the
displacement thesis, and I use the verb advisedly, then we would be willing
to accept the consistency of the prospect that as long as it delivered Pareto-
superior or maximin results, an entirely just social order could be populated
by entirely unjust individual persons since the latter could rationally agree to
the order. I am afraid that I cannot rationally agree to the displacement thesis:
the displacement thesis is a replacement thesis, a cynical shift from first
principles of justice to a counterfeit of justice. In real-life terms, highly
driven market maximizers, favourably positioned in the possession of
external capital or productive talent, can be, and typically are, completely
indifferent to what is due, as a matter of moral justice, to those who occupy
other kinds of competitive positions. There is no disposition by such self-
regarding maximizers to respect a baseline of equality in their dealings with
other market actors unless a relevant difference in desert of the latter can be
identified to warrant unequal treatment. There is simply the single-minded
pursuit of the greatest obtainable utility or profit by individual market
maximizers; indeed, whatever inequality obtains in the distribution of capital
resources or consumer goods is expected as the foreseeable consequence of
such pursuit. Moreover, even if there were hard empirical evidence that such
single-mindedness would bring about a Pareto superior or maximin outcome,
I cannot see that even universal assent to such expected occurrences could be
construed as pre-eminently rational. For such assent would be established by
deliberately overriding the aforementioned primitive axiom of consistency
demanded of rationality in the practical domain of treating each person as a
moral equal, barring a relevant exceptive condition. Universal assent to an
inconsistent judgment cannot redeem the judgment. Of course, there is
economic method in this moral madness. And, as we shall see, Aristotle, as
was characteristic, diagnosed as precisely as anyone to follow, the exact
reason for the malady.
Clearly, if individual persons were altruistically interested in the interests
of others, there would be less motivation to inequitable interaction in
economic affairs. But it is of considerable significance to recognize that the
primary source for injustice in the political economy, for the disposition in
someone's character to treat an equal person unequally to himself in access to
material goods, is not self-interested motivation per se: in fact, if we were to
16 ARISTOTLE: Nicomachean Ethics, trans. by David Ross, rev. by J. L. Ackrill and

J. 0. Urrnson, Oxford (Oxford University Press) 1980, p. 106.
292
define the economic problem as that of the allocation of resources to

productive processes to meet consumer desires, and the level of such desire
across self-regarding individuals was sufficiently moderate, the economic
problem could be resolved without injustice. Rather, as Aristotle explained,
the unjust man was characteristically motivated by a certain pathological
form of self-interest - that of pleonexia: sheer acquisitiveness, the desire for
more as such for oneself17 . It was this primary affect which gave rise to the
secondary character trait of injustice - of a proclivity to grasp more than
one's fair share of what is due to oneself, and to be indifferent to the original
entitlement to equal shares of other persons as moral equals. Accordingly,
insofar as such pleonexia 1) became unlimited in the individual psyche, 2)
required limited physical resources for its satisfaction, and 3) became typical
of human motivation within the polis, the economic problem would indeed
beget an intractable source of conflict for our communal life.
But just such pleonexia is the fundamental motor force of the agents
turning the wheels of the competitive market machine articulated by neo-
classical economics. In terms of neo-classical consumer theory, the allegedly
rational agent consistently satisfies a non-satiation axiom, viz., he always
prefers more of available commodities. Or as Gauthier accurately puts the
structural logic of this situation ... "Appropriation has no natural upper bound.
Economic man seeks more." 18 Considered as such, economic man would not
be a suitable natural kind to play fair as the acquisitive aggrandizement or
"possessive individualism" driving his choices in the market would render
him increasingly insensitive to moral claims of the just partitioning of
material possessions within the polis. But suppose, qua consumer, economic
man were, in Stoic fashion, to see the moral light, and seek to secure
satisfaction by contracting his desires for material goods, thereby rendering
possible the realization of a stable equilibrium state at which he would have
no motivation to alter his purchasing.
However, if any recommendation for revision would be resisted by
conventional market theory and practice, it would be the recommendation of
stable, restrained equilibrium states for consumers. The rationale for the
resistance, furthermore, reveals the exceptionally critical holistic character of
17 See ARISTOTLE: Nicomachean Ethics (BK. V, Chaps. 1-2, especially 1129a 30ff:
and BK. IX, Chap. 8, 1168b 15ff.).
18 D. GAUTHIER, Morals by Agreement, p. 318.
293
BERNARD HODGSON
neo-classical economics as both scientific theory and market practice. From

this perspective, the theory of consumer demand is best understood as part of
a total theoretical system for both conceptualizing the economic phenomena
it explains and recommending the order exhibited by such phenomena as
conducive to our common good. But such a viewpoint spawns a specific
corollary in terms of a deliberate conservatism in the validation of scientific
theory: in Quine's terms, we have a "natural tendency to disturb the total
system as little as possible." 19 More precisely, if there is a particular
hypothesis that is of prime importance to the credibility of a theoretical
system as a whole, scientists are generally disposed to persist in holding such
a statement to be true. But even more significantly, for our analysis, since
neo-classical theory has special methodological import in its (tacit)
recommendation of an ethically ideal social order, there will also be
considerable, albeit typically unavowed, reluctance for neo-classicists to
concur with shifts in patterns of market motivation that are presupposed by
an entrenched hypothesis at the core of neo-classical theory. Accordingly, let
us view general equilibrium theory as constituting the most comprehensive
articulation of the total theoretical system of neo-classical microeconomics.
With this systemic framework in mind, we may now elucidate the
entrenchment of pleonexia, of insatiable material want, as a symbiosis of neo-
classical theory and competitive market practice.
Basically, as Tjalling Koopmans, one of the leading equilibrium theorists,
aptly clarifies, an efficient competitive equilibrium is to be conceived as a
"balancing bundle of choices" 20 - viz. one wherein the aggregate set of
commodities firms choose to produce exactly matches the aggregate set
consumers chose to purchase. However, within an economy of competitive
capitalism, an essential growth factor is built into the criteria of economic
efficiency. In particular, it is a canon of efficiency for a firm to produce more
output at the same (or less) cost. For in so doing, individual rational
producers maximize the value of their own self-regarding interest - i.e.,
profit. Hence, in order for there to be the requisite balance of choices for a
Pareto-optimal general equilibrium state, there must also be a balancing
pattern of motivation on the part of any consumer, that is, one that can absorb
19 W. V. 0. QUINE: "Two Dogmas of Empiricism". in W. V. 0. QuiNE: From a

Logical Point of View, Cambridge, Mass. (Harvard University Press) 1961, p. 44.
20 T. KOOPMANS: Three Essays on the State of Economic Science. New York
(McGraw-Hill) 1957, p. 41 (my emphasis).
294
any growth in productive capacity on the part of producing firms. But just
such an incentive is to be found in the market's promotion of an insatiable,
unbounded desire for personal consumption - and hence, the antithetical
character of any Stoic moral alternative that a rational agent be willing to
reduce or contract his general level of desire for consumer goods. In short,
the "possessive individualism" uniting entrepreneurs and consumers is
indispensable to the product growth integral to market efficiency.
However, as we observed Aristotle cautioning, such pleonexia or
insatiable desire for more, affirmed by neo-classical theory as essential for
the co-ordination of optimizing market practices, will fatally dissipate a
citizen's commitment to distributive justice as a matter of personal virtue,
indeed will eventually override his natural intuition to sense the primitive
meaning of justice in terms of practical consistency, of conceiving and
treating other persons as equal ends-in-themselves. Of course, if we retain the
historically favoured conception of the economic agent as a "rational"
pleasure-machine, these dissolutions of personal virtue allegedly reappear as
unintended strengths of a laissez-faire market system as a whole, considered
as a similar machine, as a self-regulating, self-equilibrating mechanical
maximizer of aggregate utility output given factor service input. Moreover, it
would be a reductionist lesson from the modelling of deliberative action on
physical motion that the equilibrium of a whole system must follow upon the
self-adjustment of its integrated parts. Most critically, then, if the market
system is to deliver its optimal social order in the "spontaneous" manner
claimed for it, then the variable return to the factor input of labour must be a
matter of "automatic" self-adjustment, not external design. Hence, if
according to some traditional egalitarian conception of moral justice, the
returns to this factor were adjudged unfair, there would be no coherent way
of integrating redistributive justice with the allocative efficiency guaranteed
by the motions of the market machine. It is then unsurprising that recourse is
taken to re-locating the core meaning of justice from that of individual virtue
to that of assent to the expected hedonic consequences assured by the
externally unconstrained mechanisms of the market system. Within this
reductionist perspective, as John Maynard Keynes pointed out, our
understanding of social relations is held captive by one of the epoch-ruling
paradigms of economic society, the "theory of the economic juggernaut...that
wages should be settled by economic pressure, otherwise called "hard facts,"
and that our vast machine should crash along, with regard only to its
295
BERNARD HODGSON
equilibrium as a whole, and without attention to the the chance consequences

of the journey to individual groups. " 21 Of course, Keynes's shrewd comment
on the advocacy of the instruments of self-equilibrating economies should
give us pause here, namely, that its "faith in 'automatic adjustments' is an
essential emblem and idol of those who sit in the top tier of the machine." 22
Moreover, there could be little more apposite recognition of the reasons for
the general contours of our current culture than with the observation that a
complete market society supervenes on a market economy once work and its
exponents are conceived and only conceived as a commodities with
predictable exchange values that automatically adjust within a self-
equilibrating price system. We are almost there.
IV. Conclusion
A complete market society is not, however, a place where many reflective

human beings would wish to be. Nor does an examination of the competitive
market order through the lenses of neo-classical theory-construction about the
order assuage one's doubts about the ethical integrity of the location. Either
the other-regarding agency of altruistic motivation implies an ontology of
internally related agents irreducibly alien to the maximizing monads of
efficiently functioning market economies, or such monads are re-interpreted
as pleasure-machines whose non-deliberative direction of utility to others is
without moral significance. In a similar vein, the most prominent argument
for the moral justice of the competitive capitalist system requires a fraudulent
substitution of anticipated pleasurable consequences of the overall market
structure for the virtue of the individual persons acting within the structure.
However, given the seriousness of the displacement of authentic moral ideals
within our market order, it will come as no surprise that I am not among
those who are confident that we may reclaim moral integrity by a moderate
mitigation of the prevailing political economy. There are, for instance, no
quick fiscal fixes. The only effective reforms will have to be deep structural
21 J. M. KEYNES, "The Economic Consequences of Mr. Churchill", (1925) in: D.

MOGGRIDGE (Ed.): The Collected Writings of John Maynard Keynes, London
(MacMillan) 1972, Vol IX, p. 223.
22 Ibid., p. 224.
296
ones in which competitive capitalism would lose its essential identity. What
would it take? It is a commonplace that often the poets see early and clearly
the most profound fractures of our form of life and what would be required to
heal them. So let them speak. I close with a passage from T. S. Eliot:
All this was a long time ago, I remember,
And I would do it again, but set down
This set down
This: were we led all that way for
Birth or Death? There was a Birth, certainly,
We had evidence and no doubt. I had seen birth and death,
But had thought they were different; this Birth was
Hard and bitter agony for us, like Death, our death.
We returned to our places, these Kingdoms,
But no longer at ease here, in the old dispensation,
With an alien people clutching their gods.
I should be glad of another death. 23
References
ARROW, K. J., HAHN, F. H.: General Competitive Analysis, Edinburgh (Oliver and
Boyd) 1971.
ARISTOTLE: Nicomachean Ethics, trans. by David Ross, rev. by J. I. Ackrill and J.
0. Urmson, Oxford (Oxford University Press) 1980.
BOADWAY, R., BRUCE, N.: Welfare Economics, Oxford (Basil Blackwell) 1984.
COLLARD, DAVID: Altruism and Economy: Studies in Non-Selfish Economics,
Oxford (Martin Robinson) 1978.
DELEUZE, GILLES: The Logic of Sense, trans. by Mark Lester and Charles Stivale,
ed. Constantin V. Boundas, New York (Columbia University Press) 1990.
EDGEWORTH, F. Y.: Mathematical Psychics. ( 1881 ), (reprint) London (London
School of Economics and Political Science) 1932.
ELIOT, T. S.: Selected Poems, London (Farber and Farber) 1954.
23 ELIOT, T. S.: "The Journey of the Magi" in Selected Poems, London (Faber and
Faber) 1954, p. 98.
297
BERNARD HODGSON
GAUTHIER, DAVID: Morals by Agreement, Oxford (Oxford University Press) 1986.

HAHN, F. H.: "Reflections on the Invisible Hand", Lloyd's Bank Review, 144
(April, 1982) pp. 1-2 I.
HODGSON, BERNARD: Economics as Moral Science, Berlin and New York
(Springer-Verlag) 200 I.
JEVONS, W. S.: The Theory of Political Economy, 4th ed., London (MacMillan)
1924.
KEYNES, J. M.: "The Economic Consequences of Mr. Churchill" (1925), in: D.
MOGGRIDGE (Ed.): The Collected Writings of John Maynard Keynes, Vol. IX
London (MacMillan) 1972.
KOOPMANS, T.: Three Essays on the State of Economic Science, New York
(McGraw-Hill) 1957.
NAGEL, THOMAS: Equality and Partiality, New York (Oxford University Press)
1991.
QUINE, W. V. 0.: "Two Dogmas of Empiricism", in W. V. 0. QuiNE: From a
Logical Point of View, Cambridge Mass (Harvard University Press) 196 I.
VEBLEN, T.: "Why is Economics not an Evolutionary Science", (1898), in: T.
VEBLEN: The Place of Science in Modern Civilization and Other Essays, New
York (Russell and Russell) 1961.
WINCH, D. M.: Analytical Welfare Economics, Harmondsworth (Penguin Books)
1971.
298
Part Six
Free Hands and Moral Communities

Chapter 13
The Person, the Market, and the Community

TIMOTHY M.TAVIS
LEEA. TAVIS
I. Human Nature
I. The Drive for More
2. Social Embeddedness
3. Narrative Consciousness
II. The Contractarian Model
I. The Contractual Core
2. The Moral Base of Contracts
3. Participant Motives and Market Outcomes
4. Morality of the Market
5. Role of the Law
6. Contributions of the Contractarian Model
Ill The Communitarian Model
I. Solidarity, Individual and Social Fulfillment
2. Achieving the Individual and Social Good
3. Contributions of the Community-Based Model
IV. Achieving Personal and Social Fulfillment
There is substantial tension between the contractarian and the

communitarian models of society. This paper proposes that each of these
models emphasizes a different characteristic of our human nature. The
personal drive for more is the basis of contractual interactions. Social
embedded-ness leads to participation in multiple overlapping communities. A
person's preference for one model or the other depends upon his or her
narrative consciousness which reflects the complementarity and
contradictions between the drive for more and social embeddedness. The
argument in this paper is introduced with a discussion of these three
characteristics of human nature.
TIMOTHY M. TAVIS, LEE A. TAVIS
Part two outlines a contractarian view where individuals interact through

contracts, and the institutions of society are formed as a nexus of contracts. In
this view, economic objectives and markets dominate with a minimal
economic role reserved for the State and little attention is given to civil
society.
The communitarian model, presented in part three, is a fundamentally
different view. Based on the social embeddedness of the person,
communitarians focus on how that person interacts with others through
family and voluntary organizations expanding to the major institutions of our
society. Morality is at the core of this model, exploring how the person
influences and is influenced by the communities and institutions of which he
is a member.
Objectively, the contractarian and the communitarian models each have
strengths and weaknesses. Each of us assesses the models through his or her
own narrative consciousness. This is the topic of part four.
I. Human Nature
If we think there is a definitive human nature that we can specify in detail,

we are surely wrong. But if we say that there is nothing generally true of
humans, we are also wrong. (Bellah, p.275).
[H]uman beings, while having a good deal of plasticity in the
development of their culture, do not have infinite Jlexibility ... biology
suggests that there are limitations. (Fort, p.49).
We propose three characteristics of human nature based on psychological
observation. We do not offer this list as definitive or exhaustive, and we hope
to avoid debate over the exact nature of human nature by framing these
characteristics in very broad terms. Our argument is that these are
characteristics which seem to be evident in some form in most cultures,
although the specific forms in which these characteristics are expressed often
vary widely. The three characteristics are:
1. Drive for more
2. Social embeddedness
3. Narrative consciousness
302
THE PERSON, THE MARKET, AND THE COMMUNITY
We will discuss each of these three by summarizing examples from the

psychological literature on individuals, then developing the implications for
larger social processes and organizations.
First, however, a word about biological determinism versus free will. In
postulating certain common features of human experience, we are not arguing
that human nature or the characteristics of a particular individual or culture
are predetermined by biological factors. Biology is not destiny. We are
arguing that biology imposes certain inviolable limits (for example, the
inability to fly unassisted) and certain inclinations which can be overcome
but which tend to shape our behavior (for example, the "instinct" for
survival). This view of human behavior as resulting from a mutually
influencing interplay of genetic and experiential factors is consistent with
current thinking in genetics, and offers a more sophisticated analysis of
human nature than the old nature versus nurture debates.
1. The Drive for More
Several psychological traditions have noted that humans seem to exhibit

what Alfred Adler called "the striving for superiority."
It runs parallel to physical growth and is an intrinsic necessity of life
itself. It lies at the root of all solutions of life's problems and is
manifested in the way in which we meet these problems. All of our
functions follow its direction. They strive for conquest, security,
increase ... The impetus from minus to plus never ends. The urge
from below to above never ceases. Whatever premises all our
philosophers and psychologists dream of- self-preservation, pleasure
principle, equalization - all these are but vague representations,
attempts to express the great upward drive. (Adler 1930, p.398).
This is a difficult notion to define precisely; as Adler notes, many have tried.
In some ways, the Gautama Buddha captured it best in his discussion of the
desire which is the root of all suffering. An enormous amount of ink has been
spent through the centuries defining and redefining the nuances and subtleties
of the term "desire," but most Buddhists would agree that the Buddha was
describing some sort of attachment to things for the sake of the individual.
That is, the individual experiences himself as the center of the universe, the
primary reality, and relates with objects, people, ideas, emotions, or other
303
phenomena in terms of their relevance to the enlargement or preservation of

that sense of self.
Freudian psychoanalytic theory seems to identify this drive with the
pleasure principle, and many writers have equated this to the id. However,
this drive seems to underlie the functioning of all three components of the
traditional psychoanalytic model. The id is the seat of the drive for pleasure,
but the ego and superego function largely to preserve the self against the
pressures of the internal and external worlds (see Rieff for an excellent
critique). Later modifications of psychoanalytic theory have recast this
essential drive in other forms. For example, neo-Freudians (e.g., Becker)
typically refer to the individual's intense desire to deny or somehow
overcome death and limitation, while object relations theorists emphasize the
individual's need to develop an autonomous sense of self (see Eagle for a
review).
Adler himself (I 956) saw this drive as an urge to overcome the deep
sense of weakness and inadequacy which we experience as young, dependent
children. He argued that this overcoming can take different forms, depending
on other personality factors, social influences, and circumstances.
The humanistic psychologists, especially Carl Rogers (I 961) and
Abraham Maslow (I 998), described a drive for self-actualization which they
saw as analogous to the natural growth of living organisms. Thus, humans are
organismically oriented toward growth and development, psychologically as
well as physically. One can discern echoes of Adler in the humanist view,
although the humanists see self-actualization as a positive goal where Adler
is more sensitive to moral ambiguity.
Behaviorist theory and research may be the source of the strongest
psychological arguments for the power of the drive for more. An early
behaviorist theory of learning, associationism, was based on the observation
that animals (including humans) tend to associate two events occurring close
together. Pavlov trained dogs to salivate at the sound of a bell by repeatedly
ringing the bell at feeding time. However, learning by association is much
Jess powerful than operant conditioning (Skinner), which rewards or punishes
the animal for producing the targeted behaviors. Operant conditioning has
emerged as one of the most powerful methods of influencing someone's
behavior, even without that person's conscious knowledge that she is being
conditioned (see, for example, Sasmor). In the terminology of this paper, we
could say that the urge to gain pleasure and avoid pain is an expression of the
desire for more.
304
Thomas Hobbes (1994) seems to have focused on this drive in its rawest
form in his anthropology, arguing that this is the true root of all our behavior,
however much we may construct rationalizations. However it is conceived,
most of us would agree that this drive for more is a defining characteristic of
human behavior. It is an important reason for the failure of socialism, or of
any system which assumes that individuals are able or willing to act solely
for the good of the group and against their own interests at all times. Ignoring
basic features of human nature is a sure path to failure in social planning.
On the other hand, if the drive for more is humans' core motivation, if
Hobbes is right, then why does society not repeatedly degenerate into a
Hobbesian war of all against all? The notion of a social contract based on the
recognition of mutual self interest is not an adequate explanation, since there
will always be situations in which one's own Hobbesian self-interest would
be best served by cheating on the contract. Further, how do we explain
altruism and self sacrifice in terms of self interest?
Selfish gene theory (Dawkins) argues that the individual organism's
sacrifice for the survival of other members of its species, and especially close
genetic relatives, is the result of natural selection. While the individual
organism may die, if that death promotes the survival of others who carry
very similar genetic material then that genetic material, including the
tendency to altruistic self sacrifice, will be passed on more often. But this
seems a stretch, especially when we consider that humans are known to
sacrifice themselves for others who are not genetically related, sometimes not
even members of the same racial or ethnic group.
One could argue that such self sacrifice is selfish in the sense that it
supports a self image which is desirable to the person. For example, a soldier
who throws himself on a grenade in order to save his companions (an
incident in Vietnam reported by the news media in the mid-1960s) acted to
support his self image as a good soldier and comrade. But the notion that a
psychologically healthy person would destroy himself for the sole purpose of
preserving an aspect of his self image seems a little implausible.
305
2. Social Embeddedness
According to Ira Progoff:

Adler, Jung, and Rank ... based their work on a social conception of
the psyche in contrast to Freud's insistence, derived from his
connection with eighteenth century romanticism, on the fundamental
conflict between the individual and civilization. (1956, p.55).
Of the three, Adler was the most articulate spokesman for the importance of
social embeddedness in any understanding of human nature. Most Western
psychologists have followed Freud in emphasizing individual, intrapsychic
processes and assuming that the individual can be evaluated as an
independent unit. Adler argued that
[b]efore the individual life of man there was the community. In the
history of human culture, there is not a single form of life which was
not conducted as social. Never has man appeared otherwise than in
society. (1956, p.l28).
Adler's ideas, and the social aspects of Jung and Rank, have been largely
overlooked in American psychology. However, several findings in
psychological and anthropological research support the inherently social
nature of human beings.
Konrad Lorenz ( 1981) noted that across cultures, adult humans are
predisposed to respond to infant facial features with caretaking emotions and
behavior. Sternglanz, Gray, and Murakami ( 1977) used more modern
psychological techniques to verify and extend Lorenz's original observation
across a wide variety of adults reporting different socioeconomic
backgrounds and different degrees of experience with children.
On the other hand, human infants are "genetically pre-programmed to
immediately seek out, register and exuberantly respond to" an emotional
relationship with the caregiver (Balbernie 2000, p.237). Newborns
demonstrate a preference for shapes which resemble human faces (Johnson
and Morton; Easterbrook, Kisilevsky, Muir, and LaPlante), exhibit a
preference for human voices, and in a variety of other ways are "endowed
with complex emotions for a vital intersubjectivity, emotions that estimate
and activate affectionate and alert engagements with caregiving persons"
(Trevarthen 200 I p. 97).
306
Taken together, these findings suggest that adults and infants are
neurologically predisposed to intense emotional relationships at a level more
primal than personal choice. This is not to dispute that appropriate
infant-caregiver relationships sometimes fail to develop for a variety of
reasons; the history of infant abandonment is sufficient evidence of such
failures. The argument is that we are biologically predisposed to participate
in certain fundamental relationships which are necessary for our physical
survival.
Neurology influences social relationships, but social relationships also
influence neurology. "It is now accepted that a baby's emotional environment
will influence the neurobiology that is the basis of mind" (Balbernie 200 I,
p.237). Indeed, "[t]he emotional and communicative precocity of human
newborns indicate that the emotional responses to caregivers must play a
crucial role in the regulation of early brain development" (Trevarthen and
Aitken 200 I, p. 21 ).
Infants experience an astonishing rate of neurological development.
During the first few years of life, each of billions of neurons in the human
brain forms connections to an average of 15,000 other neurons. By the age of
three, an estimated one thousand trillion neural synapses have developed. But
this is only half the story; synaptic pruning begins in early childhood,
accelerates in late childhood, and, by late adolescence has discarded half of
the neural connections. Both the growth and the death of synaptic
connections are guided by the individual's experiences. Emotional, relational
experiences seem particularly crucial to the healthy development of brain
circuits which are important to emotional regulation, impulse control,
language, symbolic thinking, stress tolerance, and the capacity to emotionally
or cognitively appreciate another person's point of view. (See Balbernie
2001; Eliot 2001; Seigell999, 2001; and Schore for detailed discussions of
the processes involved.)
The crucial role of early relationships in healthy neurological
development is demonstrated by the effects of abuse and neglect.
"Impoverished environments appear to have the opposite effect of rich and
varied surroundings. They suppress brain development" (Bownds p.l58).
(See also Glaser 2000; Karr-Morse and Wiley 1997; Nelson and Bosquet
2000; Perry 1997.) The orbitofrontal cortex, amygdala, and temporal lobes
are all negatively affected by deleterious experiences in early childhood;
these structures are vital in the mature brain's functioning in the areas of
307
memory, emotion, motivation, interpersonal relationships, and impulse

control. Further, endocrine responses to stress in early childhood can
profoundly alter the brain's functioning in the areas of memory, anxiety,
depression, information processing, and problem solving (Balbernie 2001;
Seigel 200 I). Unhealthy development may include improper synaptic
connections, excessive synaptic sensitivity, or even atrophy of brain
structures which are underutilized.
Neurology and the social matrix are so intertwined that Robert Wright
( 1996) has stated, "[t]he evolution of human beings has consisted largely of
adaptation to one another."(p. 27) Put another way,
[H]uman beings are equipped at birth with abilities prepared for
sympathetic and cooperative mental life in a society that creates
cultural meanings, seeks to be governed by them, and transmits them
to the young. (Trevarthen 2001, p. 99)
In fact, there is evidence that the neocortex, the most uniquely human part of
the brain, co-evolved with language and social complexity. Both R.J .M.
Dunbar and A. Whiten argue that the development of larger, more complex
social groups encouraged the development of a larger, more complex
neocortex, which in turn encouraged further development of larger, more
complex social groups, and so on. "Hominid evolution may have become a
feedback loop of ever-increasing social intelligence, producing our
ever-expanding brains" (Zimmer 2001, p.272).
Evidence from both ontogeny and philogeny support the social
embeddedness of human beings. But this social embeddedness is not an
abstract thing; we are always embedded in a particular social context
composed of particular social and cultural meanings and mores. As William
Sullivan ( 1982) notes, "[a] social context, moreover, is always and
necessarily a moral order" (p. 173). How are these cultural meanings, to use
Trevarthen 's term, transmitted?
3. Narrative Consciousness
Certainly, a significant portion of this transmission occurs nonverbally, in

the disapproving glance, the affectionate gesture, the parental emotions which
308
even infants seem exceptionally adept at detecting. 1 However, much of our

socialization is too complex to be communicated nonverbally.
The link between verbal communication and socialization is dramatically
demonstrated in autism. Two of the three core features of autism are
"qualitative impairment in social interaction" and "qualitative impairments in
communication" (American Psychiatric Association 2000, p.75). Regarding
the former, autistics seem to lack a "theory of mind," the capacity to imagine
another person's point of view or internal experience. This capacity emerges
in most humans by five years of age and is so basic to our interpersonal
experience that most of us have trouble articulating it, let alone imagining
what life would be like without it. One unusually eloquent autistic, Temple
Grandin, has said that other people are so baffling to her that she feels like
"an anthropologist on Mars" (Sacks 1995). Regarding impairments in
communication, Lorna Wing reports that perhaps 20 to 25 percent of autistics
are completely nonverbal, although some of them can reproduce animal or
mechanical noises quite accurately. Even the most linguistically skilled
individuals in the autistic spectrum often have difficulty with the pragmatics
of speech, that is, the social use of language as opposed to its informational
use. They are often very literal; Wing (2001) gives the example of a young
man who exhausted himself riding subway trains until midnight because his
card said, "valid for travel until midnight" and he thought it was an order.
(p.20)
The study of autism suggests that language and neurology are interrelated
in much the same ways as social relatedness and neurology, and that in fact
there is some deep, as yet unidentified connection among the three of them.
Studies of infant and child language acquisition support this association. As
infants, "[o]ur brains are programmed to recognize human speech, to
discriminate subtle differences between individual speech sounds, to put
words and meaning together, and to pick up the grammatical rules for
ordering words into sentences" (Zero to Three). By the age of one year,
children are able to distinguish and respond to fearful vocalizations in the
absence of facial cues (Mumme, Fernald, and Herrera 1996). However, they
are beginning to lose the ability to distinguish subtle differences in speech
sounds which are not used in the language they hear every day (Werker and
See Walker-Andrews for a summary of the research in this area, and Kahana-
Kalman and Walker-Andrews for more recent discussions.
309
Tees 1984). This is a very preliminary example of the ways in which

language development and neurological development influence each other, a
rapidly developing field in neurocognition. 2 The complex interplay among
language, neurology, and cognition in philogeny and ontogeny is traced by
Gary Cziko, and, as previously noted, R.J.M. Dunbar explicitly ties together
the evolution oflanguage, social complexity, and the neocortex.
So, socialization and language are intertwined, as we would expect given
the ways in which language and neurological development are intertwined.
But how is language used to communicate cultural meanings? Jerome Bruner
proposed two modes of cognition, the first being paradigmatical or logical-
scientific and the second being narrative. The former is more familiar to
academics. This is the mode of propositional logic and argument, of
mathematics and science. This is the sort of linguistic communication seen in
linguistically skilled autistics. The latter has more to do with the
communication of meaning and social patterns. This is the sort of linguistic
communication which is seriously impaired in most autistics.
The difference between autistics' abilities in these two cognitive modes
hints that narrative may be the more important mode for the transmission of
socially relevant information and, in fact, this is the argument made by
narrative psychologists. Dan McAdams (2001) argues that the
"mindblindness" (Baron-Cohen 1995) which characterizes autism applies to
self understanding as well, and that "at the heart of severe autism may reside
a disturbing dysfunction in '1-ness' and a corresponding inability to formulate
and convey sensible narratives of the self' (p.l 05).
Drawing on a large body of evidence in developmental, cognitive, and
personality psychology, McAdams (2001) emphasizes 1the central role of
narrative in the construction of self understanding throughout life, beginning
with "the 1-year-old's emergent understanding of intentionality, the
development of the agential 'I' and the objective 'me' in the 2nd year of life,
2 See, for example, A. NOBRE, K. PLUNKETT; "'The Neural System of Language:

Structure and Development", Current Opinion in Neurobiology, 7, 2 (April
1997), pp. 262-268; K. HIRSCH-PASEK, R. M. GOLINKOFF, G. HOLLICH: 'Trends
and Transitions in Language Development: Looking for the Missing Piece'',
Developmental Neuro-psychology, 16,2 (1999, pp. 139-162); J. R. BOOTH, D. D.
BURNAM: "Development and Disorders of Neurocognitive Systems for Oral
Language and Reading", Learning Disability Quarterly, 24, 3 (200 I), pp. 205-
215.
310
the maturation of a theory of mind in years 3 and 4, and the early

conversations children enjoy with their parents, siblings, and friends as they
co-construct the remembered past" (p.Il6). (It is worth noting that
autobiographical memory, which "helps to locate and define the self within
an ongoing life story" [McAdams, 2001, p.113] seems to emerge late in the
second year of life [Howe and Courage 1997].) This co-construction, along
with an enormous amount of mutual storytelling throughout childhood,
educates the individual in "the norms, rules, and traditions that prevail in a
given society, according to a society's implicit understandings of what counts
as a tellable story, a tellable life" (McAdams 2001, p.112). George
Rosenwald pointed out that "[w]hen people tell life stories, they do so in
accordance with the models of intelligibility specific to the culture" (p.265).
That is to say: "Life stories mirror the culture wherein the story is made and
told. Stories live in culture" (McAdams 2001, p.112).
Narrative self understanding continues to develop in adolescence and
young adulthood as the individual uses newly acquired cognitive tools to
begin constructing a life story which knits together diverse elements of self
experience in a more or less coherent way, providing a sense of meaning and
purpose. This process continues throughout adult life, particularly in the face
of life stages or events which call for redefinition of the self, such as midlife
or divorce. These life stories are "psychological texts that are jointly crafted
by the individual himself or herself and the culture within which the
individual's life has meaning. Our autobiographical stories reflect who we
are, and they also reflect the world in which we live" (McAdams 2001,
p.115).
Dan McAdams notes that narrative ideas have been applied in various
areas within psychology, including developmental psychology (e.g., McCabe
and Peterson 1991), cognitive psychology (e.g., Schank and Abelson 1995),
clinical and counseling psychology (e.g., Howard 1991; Polkinghome 1988;
White and Epston 1999), and industrial-organizational psychology (e.g.,
Pondy, Morgan, Frost, and Dandridge 1983). While narrative may not have
become the new root metaphor for psychology that Theodore Sarbin (1986)
suggested, many psychologists do seem "newly sensitized to the power of
societal myths and cultural narratives in shaping human behavior in social
contexts" (McAdams 2001, p.1 02). It is not necessary to take the position of
George Howard, who argues that stories are the dominant mode of human
cognition and sociocultural interaction and the paradigmatical mode is
311
TIMOTHY M. TAVIS, LEEA. TAVIS
actually a subset of the narrative mode. For our purposes, it is sufficient to

note that issues of meaning, identity, value, and morality are generally and
most powerfully conveyed in narrative and that storytelling "is a fundamental
human activity we all do" (Ruiz 1997). The individual absorbs the narrative
motifs (both structural and content-specific) from his culture, uses them to
tell himself the story of his life, and influences the cultural trove of stories by
telling his own story to others. The role of paradigmatical thought in this
context is to serve as a sort of literary criticism; elucidating but never
exhaustively cataloging the meanings and insights buried in the complex
weave of individual and cultural narratives.
In discussing concepts of narrative and story in this context, it is
important to be clear that our model is not the self-contained, highly
structured, generally immutable pieces of contemporary literature. Our model
is the sort of folk narratives that compose oral traditions. These narratives are
interwoven, loosely structured, and very fluid. They change from telling to
telling, both influencing the life experience of listeners and being influenced
by the life experience of the storytellers. In this context, the emphasis is on
the process of storytelling rather than on the finished product, and the stories
and narratives are rarely if ever finished.
This more folklore-oriented view of narrative is consistent with our
current understanding of the workings of memory. Recent research and
theory suggest that memory is reconstructive. I do not store snapshots, let
alone videotapes, of my experiences. Rather, my experiences are woven into
an associational web, linked to many other elements of past experience.
(There are some indications that this weaving is an important part of the
brain's activity during sleep and dreaming.) When I remember an event, I
actually reconstruct that event according to my understanding of its meaning,
extrapolating from associations and editing the details (and sometimes larger
elements as well) to fit. Memory is not fixed, the passage of time and
repeated acts of remembering can alter my memory of an event drastically.
We could say that remembering is really storytelling.
Sometimes our notions of fixed, immutable texts do not apply to literature
either. For example. Shakespeare's Hamlet is not a single text. There are
several different versions preserved in old documents, and no particular
312
version has prime claim to authenticity. The current authoritative texts are
actually reconstructions which borrow bits from various versions. 3
Researchers have noted several recurring motifs in personal and cultural
narratives; for example, agency versus communion (Bakan 1966; Singer
1997) and redemption versus contamination (Maruna 1997; McAdams and
Bowman 2001). We propose another: The stories humans tell as individuals
and as cultures are often concerned with the complementarity and
contradictions between our drive for more and our social embeddedness.
II. The Contractarian Model
The contractarian model serves well the personal drive for more. Each of
us can pursue our drive for superiority in creative ways through explicit and
implicit contracts with other individuals or institutions. The intersecting
complex of these contracts then forms the market, which translates intense
personal preferences into the material well-being of society.
I. The Contractual Core
In a pure market economy, all economic transactions would be contracted

among individuals, with the interaction of these contracts comprising the
market. Entrepreneurs come into existence in this market only as a means of
assembling groups of contracts in one place, particularly as a means of
managing contracts that are too difficult to formalize. The argument is that
internalizing these contracts from the external market reduces the transaction
cost. R.H. Coase pioneered this concept in 1937: "Now, owing to the
difficulty of forecasting, the longer the period of the contract is for the supply
of the commodity or service, the less possible, and indeed, the less desirable
it is for the person purchasing to specify what the other contracting party is
expected to do .... A firm, therefore, consists of the system of relationships
3 For a brief but fascinating discussion of memory and oral tradition in a very
different context, see J.D. CROSSAN: The Birth of Christianity: Discovering What
Happened in the Years Immediately after the Execution of Jesus, San Francisco
(HarperCollings) 1998, Part II.
313
which comes into existence when the direction of resources is dependent on

an entrepreneur" (Coase, pp.391, 393). Jensen and Meckling ( 1976) articulate
this institutionalization of contracts as a "nexus of contracts" and extend it
beyond the business enterprise:
It is important to recognize that most organizations are simply legal
fictions which serve as a nexus for a set of contracting relationships
among individuals. This includes firms, non-profit institutions such as
universities, hospitals and foundations, mutual organizations such as
mutual savings banks and insurance companies and cooperatives,
some private clubs, and even governmental bodies such as cities,
states and the Federal government, government enterprises such as
TV A, the Post Office, transit systems, etc.
The private corporation or firm is simply one form of legal fiction

which serves as a nexus for contracting relationships and which is also
characterized by the existence of divisible residual claims on the
assets and cash flows of the organizations which can generally be sold
without penmission of the other contracting individuals. (pp.31 0-311)
2. The Moral Base of Contracts
This contractual theory is not a moral void as is so often claimed.

Personal motivation based on values defines the individual's participation in
the contracts that form the market - directly or through market institutions.
Culture frames these personal values that then extend to institutional values.
Trust, for example, is a necessary condition for effective contracts. In this
sense, the culture of a society as reflected in personal morality is the core of
an effective market. This notion of the moral underpinnings in a capitalistic
system is well supported from Adam Smith to the current literature (Smith;
Novak 1991, Fukuyama 1995). For example, the legal obligation of honesty
and promise keeping supports the role of trust in contracting. The law places
limits on both the implicit and the explicit contracts that form the market. In
addition to regulating the performance of contracted provisions, there is a
legal tradition that contracts be negotiated in good faith (Storme 1994,
Gordley 1997).
314
3. Participant Motives and Market Outcomes
Smith presents the idea of unintended consequences which separate the

results of the market from the intent of the participants. While the concept of
unintended consequences does not, in any sense, lessen the importance of
morality among the contracting parties, it argues that the motives of the
contracting parties are not connected to the final results created by the
market. Smith expressed this concept in the metaphor of the "invisible hand."
In The Wealth of Nations, he describes the economically self-interested
individual:
He generally, indeed, neither intends to promote publick interest nor
knows how much he is promoting it. ... he intends only his own
security; and by directing that industry in such a manner as its product
may be of greatest value, he intends only his own gain, and he is in
this, as in many other cases, led by an invisible hand to promote an
end which was no part of his intention. (Smith, as quoted by Muller
1995, p.86)
In his The Theory of Moral Sentiments, Smith sees the market as
providing a relatively even distribution of income in spite of the selfishness
of the rich.
The rich only select from the heap what is most precious and
agreeable. They consume little more than the poor, and in spite of
their natural selfishness and rapacity, though they mean only their
own conveniency, though the sole end which they propose from the
labours of all the thousands whom they employ be the gratification of
their own vain and insatiable desires, they divide with the poor the
produce of all their improvements. They are led by an invisible hand
to make nearly the same distribution of the necessaries of life, which
would have been made had the earth been divided into portions among
all its inhabitants, and thus without intending it, without knowing it,
advance the interest of the society, and afford the means to the
multiplication ofthe species. (Smith as quoted by Muller 1995, p.90).
While Smith uses the term "the invisible hand" only twice in his writings,
it has become a powerful image of the conversion from the nonvirtuous
desire for more on the part of the market participants to a positive market
315
contribution to society. In fact, Smith saw the transition in both directions--

virtuous motives to negative outcomes as well as positive outcomes from
nonvirtuous motives (Muller I 995, pp.85-92).
Smith also applies the idea of unintended consequences to economic
legislation. This is a different argument than the separation of market
participant motives from outcomes. With governmental interdiction, the
regulator hopes to determine market outcomes. In legislated intervention, the
unintended consequences have to do with the complexity of the system where
regulation directed to one issue leads, through the interactions of the system
and the unanticipated reactions of participants, to nonintended outcomes.
Michael Novak captures the systemic complexity well.
In free societies, at least, there are so many agents, intentions, and
actions that the line between intentions and results is too complex for
the human mind to discern in advance. If there is a social order, its
rationality may become apparent after the fact. Its order cannot be
planned or commanded in advance. (Novak 1991, p.89)
Since Smith's time, the economic profession has analyzed the complexity
of market regulatory efforts extensively. In spite of current regulatory
experience and sophistication, the process is still subject to many influences
besides those legally mandated (Viscusi, Vernon, and Harrington 1995,
pp.38-41).
4. Morality of the Market
The market is, indeed, a remarkably complex system. As a structure for

exchange, it is a medium through which transactions related to contracts that
comprise the market determine specific outcomes. The market results depend
on the power of each market participant. The market is thus a neutral
reflection of the power of the participating individuals and institutions.
Although its functioning relies on certain moral principles (see Section 11.2
above), the market itself is amoral, it has no sense of values. The market is
incapable of moral judgment or action; it merely reflects the values which
motivate the decisions of its participants.
In the apparel industry, for example, the exploitation of workers (low
wages, unhealthy and unsafe working conditions, limits on the ability to
organize) is an expected outcome of market forces- the consumer desire for
316
less-expensive apparel set against the global surplus of unskilled labor. As

concerned as we might be for the plight of these workers, the market itself is
neutral to their dilemma. Remediation will take place only when a powerful
market participant, a participant consortium, or a government takes action.
The efforts of economic and financial forces in the creation of efficient
markets result in the neutralization of the power of individual market
participants. An efficient market is one that is competitive in structure where
every participant has equal access to numerous alternatives, and one that
ensures that reliable, uniform data are available to all participants through full
disclosure. In an efficient market, individual participants do not have unique
information nor unique structural power to impose their will on the market,
whether that will be morally good or bad. Adam Smith's disdain for the
mercantile system was based on the disproportional power of the merchants
and manufacturers of his day and their use of that power to create and exploit
market inefficiencies (Muller 1995, pp.79-81 ).
5. Role of the Law
The law as a reflection of the culture and defined by society has multiple
roles in the workings of the market. The first is to support the dependability
of contracts as noted above. The second role is to assure the efficiency of the
market. In the United States, for example, the Department of Justice is
charged with implementing the policy on economic monopoly, while
agencies such as the Federal Trade Commission focus on information in the
product markets, and the Securities and Exchange Commission concerns
itself with information in the financial markets.
A third purpose of the law is to impose social requirements and
constraints on the activities of market participants. This is the only
formalized social influence in the competitive drive of amoral markets.
Again, in the United States, agencies such as the Occupational Safety and
Health Administration are charged with ensuring that the rights of weak
market participants, who are valued by society but unable to protect their
interests, are not trampled by the strong.
Continuing the example of the global apparel industry, many national
governments do not allow independent unions (China) while others do not
effectively enforce labor legislation (EI Salvador). Working conditions in
317
these countries are the result of a lack of determination or power on the part
of the national government to protect this segment of their society.
Conservatives, such as Milton Friedman (1970), support the need for
social legislation. In fact, Friedman goes beyond the law to nonlegal cultural
values: " ... there is one and only one social responsibility of business- to use
its resources and engage in activities designed to increase its profits so long
as it stays within the rules of the game, which is to say, engages in open and
free competition without deception or fraud" (p.32).
6. Contributions of the Contractarian Model
The strength of the market model is that it serves what is often viewed as
a selfish personal drive while, at the same time, enhancing the overall
material well-being of society. The weakness is its singular focus on
economic efficiency as its goal. In this model, morality serves a functional
role in enhancing the effectiveness of contracts. Thus, the goal is narrow but
the implementation of that goal is reasonably effective.
III. The Communitarian Model
The communitarian model responds to the human experience of social

embeddedness, which is every bit as much a part of our nature as the drive
for more. If, as argued above, the individual is inextricably intertwined with
the social groups in which she participates, then it follows that her personal
fulfillment, her individual good, is also intertwined with the common good.
But "intertwined with" does not mean "subsumed under;" there are always
tensions between the person and her social matrix. It is a mistake to attempt
to resolve these tensions in favor of either pole.
Attempts to assert the primacy of the individual cover a wide range. Ayn
Rand's radical denial ofthe legitimacy of any authority beyond the individual
leaves little or no basis for interpersonal intimacy and construes sexual
intimacy as uncomfortably similar to rape. Most forms of individualism stop
well short of Rand, but they must address the dilemma highlighted in her
writing: If the individual is both ontologically and morally primary, then
what is the basis for interpersonal relationships other than mutual interest or
318
coercion? Many liberals will endorse the former and reject the latter. But, as
Emile Durkeim observed, this is a very ephemeral basis for an enduring
social order: "Nothing is less constant than interest .... It can only give rise to
transient relations and passing associations .... Where interest is the only
ruling force each individual finds himself in a state of war with every other"
(pp.203-204). That is to say, attempts to create and maintain a social order
on a foundation of mutual interest will inevitably degenerate into a
Hobbesian war of all against all as individual interests diverge; we end back
at coercion.
On the other hand, attempts to assert the primacy of the social matrix are
equally troubling. The Khmer Rouge stand out as an extreme example of the
negation of individual rights in the name of the common good. Most forms of
communalism do not go as far as the Khmer Rouge, but they still must
answer the question: What are the criteria for subjugating the individual's
needs to those of the social group? The utilitarian calculus attempts to answer
this question, but in order to be persuasive it usually factors in several
nonutilitarian premises regarding individual rights. Marxism and other
systems of state control offer another response, which at this point has been
shown to be both morally problematic and empirically unsuccessful.
Communitarians argue that neither the individual nor the social matrix
has primacy. Rather, we are continually formed and informed by our social
matrix and in turn continually modify it by our actions and interactions. The
communities of which we are a part can be imagined as ever-larger circles,
moving from the intimate communities of family, through formal and
informal communities such as neighborhoods, churches, and civic
organizations, expanding to more formal institutions, and ultimately
aggregating in the large megastructures of the government or the
multinational enterprise. In this model, morality is seen as the expression of
the ongoing process of mutual influence, the cultural conversation, to use
Bellah's (2002) phrase. Most communitarians see this process as teleological
to some degree. However, as we shall see, significant differences emerge
regarding both the degree and the telos.
I. Solidarity, Individual and Social Fulfillment
The relationships between societal agencies and institutions on the one

hand, and the individual on the other, are delicate and intricate. As an
319
intellectual and moral tradition which has wrested with these relationships,
Catholic social thought (CST) may have something to offer to the discussion.
This rich body of work which has evolved over the past 250 years has a dual
advantage. 4 First, it represents the fruits of often very sophisticated thinking.
Second, because of its origin, it keeps us alert to the sort of societal
dominance over individual liberty for which the Catholic Church has been
roundly (and sometimes rightly) criticized.
Catholic social thought stresses the importance of harmony, order,
balance, and solidarity as the conditions of social life which allow individuals
as well as society access to their own fulfillment. Todd Whitmore captures
this relationship well.
The definition that, with some variation, modern Catholic social
teaching provides of the common good is that it is "the sum of those
conditions of social life which allows social groups and their
individual members relatively thorough and ready access to their own
fulfilment" [taken from Gaudium et spes, 26. See also 74 and Mater et
magistra 65, Pacem in ferris 58, Dignitatis humanae 6, Populorum
progressio 42, and Sollicitudo rei socialis 38.] The next question that
arises is that of just what the conditions of fulfillment are. For
Catholic social teaching, the core condition is a kind of unity in
plurality that the documents articulate using the analogous terms of
"harmony," "order," "balance," and "solidarity." The documents bring
these terms to bear on the full range of social relationships, from
employer and worker to church and state to rich and poor. ...
(Whitmore, pp.2-3)
Although Pius XII was the first to use the term "solidarity," it is John
Paul II who develops it most thoroughly, arguing that the descriptive
fact of interdependence--of unity in plurality--carries with it a
normative correlate that bears on the full range of social relationships.
Solidarity "is above all a question of interdependence, sensed as a
4 Catholic social thought is presented in numerous documents authored by

members of the Church's magisterium. For example, since the original
encyclical letter by Pope Benedict XIV in 1740, there have been over 284 letters
from 17 Popes by 1990 (See M. J. SCHUCK: That They Be One. The Social
Teaching of the Papal Encyclicals, Washington, D.C. (Georgetown University
Press) 1991.)
320
system determining relationships in the contemporary world, in its

economic, cultural, political, and religious elements, and accepted as a
moral category. When interdependence becomes recognized in this
way, the correlative response as a moral and social attitude, as a
'virtue,' is solidarity. This then is not a vague compassion or shallow
distress at the misfortunes of so many peoples, both near and far. On
the contrary, it is a firm and persevering determination to commit
oneself to the common good." [John Paul II, Sollicitudo rei socialis,
38-40]. (Whitmore, p.4)
Timothy Fort also stresses solidarity, setting it apart from the other
principles of CST. Building on William Byron's ten core principles of CST
(Byron 1998), Fort identifies three classifications: solidarity, practical
principles and practices that lead to the creation of the common good, and
subsidiarity. The Byron principles which Fort groups as the practical
principles and practices are: human dignity, respect for human life,
association, participation, preferential option for the poor and vulnerable,
stewardship, and human equality. In setting solidarity apart, Fort notes:
"Solidarity conveys an attitude or spiritual orientation ... in addition to and
perhaps prior to the implementation ofthese principles" (Fort 2001, p.26).5
Thus, in Whitmore's definition and Fort's grouping, solidarity is at the
core of CST and the common good. Alternatively, the inculcation of
solidarity in a society is truly a challenge.
Amitai Etzioni addresses the idea of the common good in terms of "the
good society." His communitarian view is based on the communities of a
5 Fort also correctly sets subsidiarity apart from the other principles. Byron
describes subsidiarity where" ... no higher level of organization should perform
any function that can be handled efficiently and effectively at a lower level of
organization by human persons who, individually or in groups, are closer to the
problem and closer to the ground" (Byron as quoted by Fort, p.26).
While Byron applies subsidiarity to the state, it is broader than that. It applies to
any organization. Subsidiarity is a functional variable. It has to do with how we
organize our prudential judgment to achieve the other principles of CST (See
WHITMORE, T. D.: "Catholic Social Teaching, the Common Good, and the Case
of Sweatshops: An Overview," Rethinking the Purpose of Business: An
Interdisciplinary Approach within the Catholic Social Tradition, Steven Cortright
and Michael Naughton, Eds., Notre Dame, Indiana (University of Notre Dame
Press, forthcoming). pp.JI-12).
321
civil society. Given the many definitions of civil society, Etzioni poses two
institutional features. "One is a rich array of voluntary associations that
countervails the state and that provides the citizens with the skills and
practices that democratic government requires. Another is holding of
passions at bay and enhancing deliberative, reasoned democracy by
maintaining the civility of discourse" (Etzioni 1999, p.94).
While this view is common among many who emphasize the role of civil
society, Etzioni poses further requirements on his communities that would
form the core ofthe good society. He criticizes advocates of the civil society
because they "draw no difference among voluntary associations with regard
to any substantive values that are fostered .... They are treated as morally
neutral." Or, at best, any consideration of differences is "limited to their
functions as elements of the civil society rather than their normative content."
Etzioni argues for a communitarianism which goes beyond the civil society
fostering what Adam Smith might call precursors to virtues. He proposes a
concept of a good society which "formulates and seeks to uphold some
particular social conceptions of the good. The good society is ... centered
around a core of substantive, particularistic values" (I 999, pp.94-95).
Etzioni is careful to emphasize that the good society is "a society that
fosters a limited set of core values and relies largely on the moral voice rather
than on state coercion" (I 999, p.l 0 I); in fact, "up to a point, the moral voice
is the best antidote to an oppressive state" (1999, p.92). (Here, he may have
in mind something like Durkeim 's observation above.) But Etzioni
acknowledges that "developing and sustaining a good society does require
reaching into what is considered the private realm, the realm of the person"
and "the means of nurturing virtue that good societies chiefly rely upon are
subsumed under the term 'culture'" and include "agencies of
socialization ... agencies of social reinforcement...[and] values fostered
because they are built into societal institutions" (1999, pp.90-91 ).
CST may be seen as advocating a particular example of the sort of good
society which Etzioni describes. In pursuing these notions of the common
good, the challenge is to find a balance between personal autonomy and the
needs of society - to create a social structure which allows for the values-
based formation of the person, a mechanism through which the person can
express his or her preferences while joining with others to find a set of shared
values and fulfill a social good. As we have argued, a group "good" which
does not adequately foster individual goals is not truly a common good.
322
The challenge will be met through communities ranging from the

intimacy of the family through voluntary organizations all the way to the
large complex institutions of our society. Four approaches will reflect the
extent of thought that has been devoted to this transition: The common good
tradition in Catholic social thought, the communitarian good society;
mediating institutions, and the hypernorms of integrated social contract
theory.
Based on Catholic social thought, Whitmore poses three conditions for
achieving solidarity: egalitarianism, equality of access, and participation.
The question then arises as to what social arrangements best produce
harmony ... Later documents - in a gradual and selective way - shift
to relative egalitarianism: the presupposition that equality best
facilities harmony and that therefore it is inequality that must be
explained .... What is first of all of concern is equality of access to the
conditions of flourishing. The more recent documents interpret this
access as persons' and groups' participation in - as opposed to
marginalization from - the various social spheres. This shift does not
take place to the same degree in all social spheres, but rather primarily
in the economic and political spheres .... The repeated call in the later
documents for society to be so shaped that groups and persons can
indeed "participate in," "share in," or "take part in" its activities is so
frequent that participation itself becomes the new norm guiding
assessment of the health of the common good that, in other words,
groups and persons in fact have access to the conditions of flourishing
(Whitmore, pp.S-6).
CST generally leaves authors and activists to apply these broad concepts to
the social concerns of our day through their own prudential judgment. 6
Among the communitarians, Etzioni is committed to the achievement of
his good society. His community and "community of communities" provide
the means by which the person is linked to the larger society, as distinct from
6 Whitmore, for example, goes on to apply these criteria to working conditions in

the apparel industry.
323
the market which provides the linkage for the contractarian. This linkage is
not without difficulties:
The challenge to the communitarian paradigm is to point to ways in
which the bonds of a more encompassing community can be
maintained without suppressing the member communities. In many
ways, the sociological formation required is similar to what is needed
in the relations between an individual and a single community:
autonomy that is bounded rather than unfettered. And just as
individual rights must be balanced with a commitment to a shared
core of values, so the commitment to one's community (or
communities) must be balanced with commitments to the more
encompassing society. (Etzioni 1996, p.191)
Etzioni argues that the relationship between the individual and society
should be rooted in a "thick shared framework" of core elements: 7
• Democracy as a core value that must be shared across society.
• The importance in the United States of the Constitution and its Bill of
Rights as a guide to these core values.
• A layered loyalty which nurtures a split loyalty between a person's
immediate community and the more encompassing community.
• The combining of one's commitment to his or her "own particular
tradition, culture, and values" (Etzioni 1996, p.204) with a neutrality,
tolerance, or respect for other cultures.
• Recognition that people are members of multiple, overlapping, and
interlaced communities, and limitation of identity politics that stress
differences.
• Recognition of "the importance of keeping dialogue civil and
preventing moral dialogues from turning into cultural wars" (p.208).
• The understanding and fostering of reconciliation as a process that
"deals with affective elements, such as resentment and hate and
associated sociological states" (p.208).
7 As distinct from the common good, as defined in Catholic social thought,

Etzioni's good society is derived through these core elements rather than
religious traditions, or what Fort calls "transcendence" (See T. L. FORT: Ethics
and Governance: Business as Mediating Institution, New York (Oxford
University Press) 200 I, p.160).
324
Compared to the specificity of the market model, these core elements,

dealing with the interaction of human beings, are ethereal and demanding.
We have neither the legally mandated procedures which might be advocated
by Etzioni's "good government" social conservatives, nor the market model's
crisp metrics for measuring outcomes. Nevertheless, Etzioni is determined in
his efforts to achieve his good society in the United States. In his 2001 book,
Next: The Road to the Good Society, he insightfully analyzes the social trends
in this country and poses a remarkably broad range of specific
recommendations on concerns ranging from mental health care, to physical
security, to freedom of speech, to governmental budgetary responsibility, and
many more. This diversity and breadth does not worry him.
I should acknowledge early in this exploration that the road map
outlined here is fuzzy at the edges, somewhat vague, not fully etched.
In effect, this is one of the main virtues of this approach: It points
toward progress but is not doctrinaire or ideological; it is not a locked-
in system. (Etzioni 2001, p.3)
The notion of subsidiarity through governmental devolution and
community involvement is an integral part of these proposals. Most of the
recommendations involve public policy, but not through the expansion of
governmental regulation. He recommends, for example, the use of volunteers
when possible (Etzioni 2001, pp.10-11,62,70), and reliance on a community's
soft moral culture based on dialogue and persuasion rather than hierarchical
dictates in coercive law (Etzioni 2001, p.22). Etzioni supports a lean but
active government continually under the scrutiny of civil society.
Etzioni's determination to achieve the good society is further evidenced
by his founding of The Communitarian Network and, more recently, The
Diversity Within Unity project.
Mediating institutions are another way of addressing the linkage between
the individual's intimate circle and megastructures (Berger and Neuhaus
1996, p.148). Fort applies this concept to the business sector, defining
"Business as mediating institution (BMI) in which the corporate purpose is to
benefit internal constituents of shareholders and employees, so as to mediate
between the larger superstructures of society and the individual" (Fort 200 I,
p.l63). Fort stresses the idea that community requires a small size. "The
driving forces of communitarianism and mediating institutions may be the
same, but the sizing of each of them is quite different because mediating
325
institutions theory is more alert to the need to empower individuals to have

control over the actions that affect them" (Fort 200 I, p.l 07), Mediating
institutions balance individual autonomy and community in part by limiting
their own size.
Fort recognizes the transitional limits of his mediating institution.
"Focusing on how to treat those within the corporate walls says little about
important issues such as environmental degradation" (Fort 2001, p.169). He
proposes that the appropriate use of law and the benefit of recognizing our
lives as communal will result in an understanding of our social and
environmental duties, thus providing a means of carrying through the rest of
the transition.
There is also a good deal of communitarian thought in business ethics. An
interesting approach that addresses the balance between local and global
norms, albeit it in a structure of social contracts, is the integrated social
contract theory of Donaldson and Dunfee (1994). Their point of entry is
community-specific microcontracts through which communities determine
their ethical norms, where the definition of communities includes "firms,
departments within firms, informal subgroups within departments, national
economic organizations, international economic organizations, professional
associations, industries, and so on" (p.263). Stating that these community
norms would be a reflection of cultural relativism and thus lack moral
authority, Donaldson and Dunfee propose hypernorms that would limit the
moral free space of the communities.
Hypernorms, by definition, entail principles so fundamental to human
existence that they serve as a guide in evaluating lower level moral
norms. As such, we would expect them to be reflected in a
convergence of religious, philosophical, and cultural beliefs, and,
indeed, such convergence is a handy clue to use in attempting to
specify hypernorms. Substantial evidence from a variety of
perspectives and sources would be required to establish a hypernorm.
We would caution that particular philosophies or evidence of
widespread practices or attitudes cannot be projected, ipso facto, into
hypernorms (Donaldson and Dunfee 1994, p.265).
These four examples, drawn from a broad array of social thought, attempt
to ensure individual fulfillment along with some broader social good.
Catholic social thought provides a comprehensive, coherent set of principles
to define the common good, relying on prudential judgment for their
326
implementation in the issues and specific situations of our day.

Communitarians, as represented by Etzioni, work to change society through
the communities of the civil society which influence the economic and
political systems. Fort's mediating institutions ensure the empowerment of
the individual in the transition from the person to the system. Integrated
social contract theory anchors its moral norms firmly in the local community
while subjecting them to broader, minimal universal standards. The notion of
subsidiarity is central to all four.
3. Contributions of the Community-Based Model
The strength of the community-based model is the inclusiveness of its

objectives for a more complete range of personal needs and the recognition of
morality's role in shaping the person and society. Attention to this model can
lead to a more vital culture and harmonious society with fewer social
fractures than the market model.
The weakness of this model is the difficulty of implementation. Social
relationships and the personal awareness of social embeddedness become
increasingly attenuated with the formalization and conglomeration of
communities and institutions. The reliance on persuasion and voluntary
choices leaves large uncertainties as to how or if such persuasion will occur.
The emphasis on a core set of moral values combined with tolerance of
diverse values outside of that core set raises questions regarding the basis for
defining of the core values and distinguishing between the two kinds of
values. Concern for the oppressed in various societies forces communitarians
to face very difficult dilemmas when some of the core values seem to come
into conflict with each other.
These may be some of the reasons that so many thinkers are tempted to
give up on noncoercive values-based social planning. One group invokes
Adam Smith and argues that we can each seek our own ends while the
invisible hand almost magically produces the common good without our
moral oversight or self-critical reflection. Another group invokes a variety of
authority figures ranging from Jerry Falwell to Karl Marx and argues that the
state must impose a particular moral system on all members of a society. It is
tempting to take refuge in such simpler solutions. But, as H. L. Mencken
warned, for every human problem there is a neat, simple solution; and it is
327
always wrong. We are better served by holding on to a complex,

contradictory, more realistic perception of the social world .
Marxism in its various forms has been largely debunked as an effective
means of ensuring the common good. The history of morally authoritarian
societies is also dismal. The free market form of capitalism practiced in the
United States and celebrated by advocates such as Michael Novak has begun
to show very worrying stress fractures, including a decay in ethical business
practices (for example, the sort of "gaming the system" which Enron has
made infamous) and decline in allegiance to institutions beyond the self or
one's small circle of friends and family. This disintegration of the social
fabric has reached into the family itself, which Adam Smith saw as the proper
object ofthe individual's self interest. The various relationships in the family,
including spousal, filial, and parental are often described and evaluated in
individualist, even economic terms: What does this relationship offer me, and
is that worth more than what this relationship asks of me?
But this still leaves us with a complicated and often confusing model of
social process and social change, and enormous questions regarding both
definition and implementation.
IV. Achieving Personal and Social Fulfillment
The preferred balance between the contractarian and communitarian

models is shaped by our narrative consciousness, the complementarity and
contradictions between our drive for more and our social embeddedness. This
is a core issue in morality: the relationships between what I want for myself
and what I want for others. In this sense, we agree with Hayek's proposal that
morality is so deeply embedded in the sociocultural matrix that it cannot be
fully articulated. However, we disagree with Hayek's position that this is a
primitive condition and that cultural development involves the emergence of
a morality which is not culturally embedded. Rather, morality is always
embedded in a weave of cultural and personal narratives. Moral systems, like
other uses of paradigmatical cognition in narrative contexts, are articulations
of narrative themes and rely upon those underlying narratives for their
legitimacy.
For example, Kant's deontological ethics appear to be constructed from
pure reason, independent of cultural context. But the underlying narrative
328
upon which Kant's ethics depend for their legitimacy is the Enlightenment
account of human history as the story of the individual coming to recognize
her distinction from her sociocultural contexts and increasingly freeing
herself from those contexts through the power of rational analysis. This is a
powerful story, but it is still a story.
Contractarian and communitarian models of social structure and
functioning can also be seen as articulations of the important themes of
individualism and social embeddedness which weave through our cultural
multinarrative. Contractarian models tend to focus on those aspects of our
cultural narrative which emphasize the individual, including free will, the
sense that a person is more than the sum of his relationships, the validity of
self interest, and the rational aspects of human nature. They warn against the
dangers inherent in an emphasis on the individual's social context,
particularly the loss of individual freedom and identity in subjugation to the
State. Communitarian models tend to focus more attention on the social
aspects of human experience. They recognize the validity of many of the
points made in the preceding discussion of social embeddedness, and worry
about the disintegration of the social fabric and loss of moral orientation
which can result from an excessive emphasis on individual autonomy.
Contractarians and communitarians cannot be neatly aligned under the
drive for more and social embeddedness, but they can be seen as giving
relatively greater weight to one or the other of these two aspects of human
experience. To the extent that the two groups are seen as attempting to
articulate and elaborate cultural themes, they can be seen as potentially
complementary. This does not mean that the tension between them can be
resolved; thematic tension is a requirement for a good story and provides
much of the energy that drives the story forward. However, it does mean that
their competing claims on our paradigmatical analyses and decision making
may be integrated into a larger framework based in the recognition of the
underlying narratives.
Such a framework would allow us to recognize that our choices are never
simply either-or. The contractarian model and the various forms of capitalism
and individualism with which it is associated rely for their legitimacy and
effectiveness on aspects of the communitarian narrative: trust, honesty,
continuity of social conditions, faith in the fruitfulness of one's own efforts
and sacrifices. The communitarian model in its various forms relies upon the
economic vigor provided by capitalist activity and the cultural vigor resulting
329
from the emotional, social, and geographic mobility of the population. Our
task is integration, not dominance. It demands ongoing evaluation and self
criticism, not self congratulation and condemnation of those with opposing
views.
The arguments for social embeddedness and the importance of individual
and cultural narratives in moral development suggest that the answers to our
current cultural and economic dilemma may lie buried in our narratives, both
those of the dominant cultures and those of the cultures which currently exist
on the margins. We would benefit from excavation and searches for new
meanings and insights rather than continued arguments about the primacy of
the artifacts we have already uncovered. History has not ended, and
declarations of the ahistorical validity of our current system separate us from
those narratives which might lead us out of our predicaments.
So, in the end, we return to Adam Smith's original insight, which he
worked out over the years in revisions of The Wealth of Nations and The
Theory of Moral Sentiments: Capitalism is a highly productive and beneficial
economic system if it functions efficiently, but in order to function efficiently
it must be set within a context of social and moral institutions which both
provide the necessary social infrastructure and act as moderators of the drive
for profit and advantage. Without these institutions, unfettered capitalism will
ultimately destroy its own underpinnings. Our current task is to move beyond
argument from all-or-none positions into a cultural conversation in which the
interplay of various languages and traditions may produce new and
unexpected insights. This would be a truly Socratic dialogue (or, more
accurately, a multilogue) in which each position's proponents would be
invested in fully developing the discussion more than in furthering their own
position.
The way forward is not clear; it never is, nor should it be. Our task is not
to define the future, but help to guide it as it assumes shapes we cannot
anticipate. Our moral responsibility is enormous, but our moral power is
much less. We can only clarifY and influence, and wait with Yeats to see
"what rough beast, its hour come round at last, slouches toward Bethlehem to
be born."
330
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337
Chapter 14
Social Trust and Modern Economies: The Example

of Shopping
Trudy Govier
I. What Is Trust?
II. Francis Fukuyarna and Aspects of Trust Pertaining to
Economies
III. Scatter Trust and Shopping
IV. Money, People, and Confidence in Systems
V. A Consideration of Objections to This Account
I. "These cases involve reliance. They do not involve trust"
2. "These cases only involve inductively grounded
confidence. They do not involve trust."
3. "These cases involve pursuit of one's own interest. They do
not involve trust."
VI. Special Mention Goes to George W. Bush: "Shopping and
Flying"
VII. Conclusion
I. What Is Trust?
To trust people is to expect that they will act well, that they will take our
interests into account, and that they are not attempting to harm us. When we
trust, our positive expectations have two basic dimensions: motivation (the
other intends to act well and does not intend to harm) and competence (the
other has sufficient skills and knowledge to be capable of doing as required).
A trustworthy person is one who has both good intentions and reasonable
SOCIAL TRUST AND MODERN ECONOMIES
competence, such that others who assume she will act well in a variety of
contexts are not likely to be disappointed. Trust is an attitude involving
beliefs and expectations, dispositions, feelings, and behavior. Trusting, we
are more likely to allow ourselves to be vulnerable to others, to willingly
depend on others, and to cooperate with them. When we trust we typically
feel relaxed, comfortable, safe, and at ease. Trust also affects our
interpretation of other people, our sense of who they are and what they are
doing.
Our general willingness to trust other people affects and is affected by our
basic conception of human nature and our sense of what sort of world we live
in. The role of trust in our interpretations of our social world and our
responses to people and events is so profound that it often goes unnoticed: by
its nature, trust is something we take for granted. When our expectations are
not frustrated, we tend not even to know that we have them.
Trust goes beyond what evidence supports, though it is often based on
evidence and sometimes on good evidence. Because circumstances and
people change, people are in a fundamental sense free agents, and predictions
about their future behavior cannot be guaranteed correct. In trusting others,
we are allowing ourselves to be at risk. We accept our vulnerability because
we feel confident these people will not let us down. Trust affects the way we
understand other people and interpret what that they say and do. It is an
attitude based on the past and extending into the future; trust reduces the
complexity of the world for us by removing whole ranges of possibilities
from our consideration. Trusting, we confidently assume, on the basis of
partial, not complete, evidence, that the trusted persons will perform as
expected, in such a way that we will not be harmed. We believe in their basic
integrity and reliability and are therefore willing to rely on them. When we
do that, we make ourselves vulnerable to trusted persons; if they do not act as
expected, we may be harmed.
Trust is not an all-or-nothing matter. Though open-ended in that it
involves an indeterminate range of expectations, trust is often relative to
context, so that those expectations involve a certain range of actions on the
part of the other. I might, for instance, trust my dentist to do such routine
work as filling cavities and advising on crown or root canals, but lack
confidence in his advice about the suitability for political office of a
candidate living in his district. Trust can also be a matter of degree: for
example, I may have considerable, though not absolute, confidence in a
friend's editorial judgments about the flow of the manuscript I am developing
for publication.
339
TRUDY GOVIER
Many of us will first consider trust in inter-personal contexts, thinking of

it as an attitude to an individual person whom we know as an individual. If
we think of a formulation, "A trusts B," then "A" and "B" would represent
single individuals standing in some relationship to each other.
Paradigmatically, A would trust B on the basis of relevant experience
stemming from A's acquaintance with B. However, it is also possible, for A
and B to represent persons acting in groups or in the context of institutions. 1
In modern life we are interdependent to an extraordinary extent on other
people who are partial or complete strangers to us. Trust may involve
individuals who have only a slight personal relationship or none at all: there
is a sense in which we may be said to trust persons whom we pass on streets
or encounter in shops and restaurants. Most of us assume most of the time
that the strangers we encounter in daily life are not setting out to maim and
kill us- even after September II. We mostly assume that persons whom we
ask for mundane information will tell the truth, that people who serve us food
in restaurants are not trying to poison us, that drivers will stop at red lights as
the law requires, and so on and so forth. 2 Although impersonal contacts in
such contexts as these have relatively little emotional depth and richness, as
compared to intimate or even collegial relationships, our attitudes to these
strangers are sufficiently similar to count as trust, when compared in logically
relevant ways to inter-personal trust based on knowledge. They involve
reliance, vulnerability, and open-ended expectations of positive (or at least
non-malevolent) action on the part of others whom we presume to be
appropriately motivated and competent to do what we expect of them.
It is such phenomena that are usually described under the title "social
trust."
TRUDY GOVIER: Social Trust and Human Communities, Kingston, Montreal

(MeGill-Queen's University Press) 1997, Chapter 9. Some material in this paper
is drawn from this work and also from TRUDY GOVIER: Dilemmas of Trust,
Kingston, Montreal (MeGill-Queen's University Press) 1998.
2 Notoriously, this claim is not true in all social contexts, and when it is not, the
quality of life is hugely compromised. Laurence Thomas called such trust "basic
trust" and argued for its crucial importance in daily life. He says, ''We would
scarcely order a meal in a restaurant or ask a stranger for the time or walk down
the street without wearing a bullet-proof vest if we thought for a moment that
every stranger in life was out to kill us." LAURENCE THOMAS: "Trust, affirmation,
and Moral Character: A Critique of Kantian Morality", in: 0. FLANAGAN, A.O.
RORTY (Eds.): Identity, Character and Morality, Cambridge MA (Bradford
Books) 1991, pp. 235-257.
340
II. Francis Fukuyama and Aspects of Trust Pertaining to

Economies
Francis Fukuyama is a prominent social theorist who has written at

considerable length about trust and modern economies. So his views deserve
some attention here. Fukuyama argues for the benefits of social trust in
economic contexts. He attends particularly to the size of firms and
corporations generated within a society and to the character of its worker-
management relations. Fukuyama argues persuasively that economic
arrangements do not emerge purely from material circumstances and the self-
interested decisions of individual "rational actors." Rather, they are
enormously affected by history, culture, and social ethics. To the extent that
people share a core of moral beliefs and can trust each other to conform to
basic moral precepts, they can more easily work with strangers, with the
result that their society is more spontaneously sociable. This characteristic
has many advantageous contexts in which cooperation is required. 3
Contrasting "high trust" and "low trust" societies, Fukuyama attends
primarily to industrialized countries: Japan, Germany, the United States,
France, Italy, China, Taiwan, Hong Kong, and Korea. He classifies Japan and
Germany as high-trust societies in which people readily form relationships
with strangers and are able to work and associate with them in a comfortable
and flexible way. France, he says, is a relatively low-trust society, highly
centralized around Paris, hierarchical, and having a lower level of
spontaneous sociability. Southern Italian and Chinese societies (he groups the
People's Republic, Hong Kong, Taiwan, and Singapore together), he deems
to be relatively high-trust. Fukuyama claims that the United States has
historically been a high-trust society but is at present a mixed case.
Describing the economic arrangements in each country and culture at
some length, Fukuyama argues that only in high-trust societies are people
able to form, manage, and preserve large corporations. In low-trust societies,
he says, people are generally unwilling to trust others outside the family, so
that persons who form successful business enterprises are unwilling to extend
their management positions to persons who are not their kin. The result of
this restrictiveness is smaller firms that have a limited capacity of expansion.
Handicapped by their unwillingness to supplement family efforts and talents
by using professional managers, such firms rarely last more than two
3 FRANCIS FUKUY AMA: Trust: The Social Virtues and the Creation of Prosperity,
London (Hamish Hamilton) 1995.
341
TRUDY GOVIER
generations. They are, Fukuyama says, disadvantaged in the global

marketplace. Thus, in an era of global competitiveness, low-trust societies are
at a disadvantage compared to high-trust ones.
Fukuyama argues that a generally higher level of social trust facilitates
the growth of larger and more enduring corporate entities and in so doing
contributes to the growth of those enterprises. In societies not characterized
by relatively high levels of social trust, such corporations require
considerable support from the state. In societies with relatively high levels of
social trust, there is less need for contracts to attempt to spell out every detail
of arrangements and relationships are more likely to persist in the face of
hurdles and problems. Worker-management relations, and hence
productivity, are vastly improved when people are able to trust each other
without being members of the same family.
All this seems plausible enough, and Fukuyama offers detailed figures
and analysis to support his contention. Though I would agree with the general
conclusion that social trust is important in societies and is, in some highly
general sense, a good thing, Fukuyama's account differs considerably from
my own. Our interests and preoccupations are different: Fukuyama is looking
at the macro-picture from the point of view of the success of corporate
enterprises, whereas my own interests have tended to be more general -
corporate activity has not been a prominent preoccupation for me. And I have
focused on the ethics and epistemology of trust, primarily as illustrated by the
actions, beliefs, and choices of individuals in social contexts. 4 And I have
doubts about Fukuyama's highly general distinction between high-trust and
low-trust societies, and his classification of various societies on the basis of
those categories. There are degrees and contexts of trust and distrust. One
may trust or distrust people as discrete individuals, as indefinitely arrayed
individuals, or as operating within groups or institutions. And one may trust
or distrust different people for different reasons. In the light of these
considerations, it seems an enormous generalization to regard the People's
Republic of China as a "high-trust" society compared to, say, France. So
despite the considerable detail of Fukuyama's analyses at many points, I
would be hesitant to endorse his methods.
4 And since I was trained as a philosopher and not as an economic analyst, they use
different methods.
342
III. Scatter Trust and Shopping
As relevant to philosophical discussions of economics, and to the

phenomenon of social trust, we may consider the everyday activity of
shopping. In small villages or towns, people tend to know shopkeepers, and
perhaps even producers, personally, and would have confidence in the
products they purchase because of an individualized trust based on particular
knowledge of these individuals. This kind of personal knowledge is typically
lacking when we shop in large urban centers. We often purchase goods from
large stores where we do not personally know the producers of the goods, the
salespeople, or the managers. We nevertheless buy with confidence in many
such contexts. Many of us go willingly to large supermarkets where we
purchase such items as dairy products, bread, canned goods, meats, and fruits
and vegetables. The most plausible way to make sense of this behavior is to
posit that when we do so, we assume that the food they purchase will be safe
to eat. When we pay for such foods and consume them, trust is involved at
many stages. But this trust is not trust in particular individuals with whom we
have established inter-personal relationships and have expectations grounded
on close experience. It is spread over many people whom we know not at all,
and it has a more abstract and institutional basis.
If meat arrives at my local supermarket in a state fit to eat, that is because
of activities of farmers, farm suppliers, slaughterers, packagers, transporters,
experts and practitioners in veterinary medicine, government regulators and
inspectors, and retail staff and management- and, probably, others. There is
a large range of complex activities and institutions, involving hundreds,
perhaps even thousands, of people, all or nearly all of whom are strangers to
me. Accordingly, there are many contexts in which things can go wrong due
to lack of competence or lack of integrity. When we purchase commodities
for our use - especially when that use involves eating them - we assume, in
effect, that enough of the people and institutions involved in the relevant
activities are sufficiently competent and appropriately motivated to render the
purchased commodity safe for our use. All this is a far cry from being
personally acquainted with a butcher who cuts and sells meat from the farm
of another village man, whom one also knows personally.
Of course there are modern people living in urban centers who choose not
to purchase some products at supermarkets. In the wake of scares about
pesticides, cancer, genetic modification, mad cow disease, foot-and-mouth,
and the like, many people no longer have confidence in significant aspects of
modern production practices. They have come to be sufficiently distrustful of
343
TRUDY GOVIER
established institutions as to believe that the "mainstream" food marketed in

supermarkets will damage their health. When they are urban dwellers, these
people are not able to produce their own food. So they do have to shop - and
they seek outlets specialized so as to address their concerns. They may seek
to contact producers directly.
But these departures, based on distrust of certain aspects of modern food
production, do not refute the point that social trust is an aspect of shopping
behavior. In fact, they serve to reinforce that point. People who have ceased
to trust in significant aspects of production and marketing have changed their
shopping behavior. We can only make sense of shopping for food, paying for
it, cooking it, and eating it on the assumption that persons who do so believe
it to be safe for human consumption.
We trust in a whole range of people whom we assume to be performing
their designated function in a competent and honest way. I call trust in such
contexts scatter trust because of the way it is spread out, or scattered over an
indefinite number of individuals in various roles and contexts. Ann-Mari
Sellerberg, a Swedish sociologist who studied trust and shopping, found that
shoppers were confident about the safety and quality of goods in Sweden.
However, the source of their confidence was different in rural and urban
contexts. Village people felt confident due to their personal knowledge of
shop owners and tradespeople. City shoppers, by contrast, based their
attitudes on institutional factors: consumer legislation, declarations on
packages, and the self-service system. When we can pick goods out for
ourselves, we get the impression that vendors have nothing to hide.
Sellerberg says, "The new consumer legislation, systems of comparisons, the
visibility of goods as well as the general controls of customers - constitute
the 'building stones' of today's confidence relations. These serve - usually
without our thinking of it - as a basis for trust and consequently lead to a
very important quality in modern trade transactions." There is a general sense
among trusting urban dwellers that there is a system that is well-regulated and
functioning: most of these Swedish consumers had a basic attitude of trust
and confidence, believing that on the whole things function properly. Unless
something happens to put them off, shoppers tend to retain this attitude of
trust and confidence. 5
In modern societies there are many contexts in which trust is not
individual but, rather, systemic. To say this is not to deny the existence of
interpersonal trust or denigrate its importance. Interpersonal trust is
5 ANN-MARl SELLERBERG: "On Modem Confidence", Acta Sociologica 25 (1982),

pp. 39-48.
344
fundamental in the family and with colleagues and friends and is arguably the
necessary basis for social trust. But in the modern world it will never be
enough. To live in a complex society without going mad, we must have trust
in systems too.
Trust is also required on the part of the vendor. Modern shopping assumes
that we are able to use credit or cash in order to make purchases. Credit
obviously presumes trust, both in individuals and institutions. If a vendor
accepts a credit card, he or she - or it, in the case of an institution - is
assuming that the customer legitimately possesses the card and that the
credit-card company will reimburse him or her for the cost of the item. The
vendor assumes that the customer has paid his previous bills with sufficient
regularity, that the credit card company will not resist billing, and that if it is
queried, the credit company can be trusted to answer the query honestly and
accurately. The vendor also assumes that the credit company will perform
reliably in other relevant ways. Money transactions are based on tacit trust in
the ongoing functioning of the relevant monetary system. Thus cash too is
based on trust as well- though this may be less obvious. If a vendor accepts
a twenty-dollar bill, she is tacitly assuming that she can at some point
exchange that bill for goods or services equivalent to the value of the
commodity sold. Like so many other instances of trust, this one tends to
become apparent only when it is about to disappear.
IV. Money, People, and Confidence in Systems
Although the relationship between money and trust may be an elementary

matter for many in the present audience, it may be interesting to note some
explorations of this topic. One who has theorized extensively about the
subject is S. Herbert Fraenkl, who derived many of his ideas from the
German sociologist George Simmel. Emphasizing interdependencies in
modern life and the idea that trust is a sort of social glue, Simmel said,
"Modern man requires the services and co-operation of innumerable others
and would be quite helpless without them. Money ... connects him with them
in a non-personal way, and this gives him a feeling of not being beholden to
them. In fact, the development of civilization has made him more dependent
345
TRUDY GOVIER
than ever before on objective bonds with them." 6 Obviously, money is

nothing in itself, apart from the objects, services, or rights to which it gives
access. To accept money in whatever form is to assume that we can exchange
it for something else. For money to perform this function, other people must
accept it as having the capacity to perform it, and that means that those other
people must, in turn, believe that others will accept it. The value of money is
a matter of the general confidence people place in it. The pervasive use of
money and its anonymity and apparent distance from any values of intimacy
or warmth may encourage us to forget how profoundly money depends on
trust. But the relationship is real nonetheless.
In a reasonably sound economy, people generally assume that the money
they receive today will retain its value tomorrow and in the future. The
viability of a currency depends on a web of expectations about what people
will accept and do. Trust and confidence, which are in the final resort
"unprovable," might be said to be the essence of money, because to use
money, we must trust that an indefinitely large number of other people will
continue to believe that it has value. Should they cease to do so, we will have
given something away instead of selling it, and the money we have taken will
not compensate for the goods we have given away. In this respect, the trust
on which the institution of money depends is a form of scatter trust.
The role of systems and institutions as distinct from individuals was
emphasized by Niklas Luhmann in his work, Trust and Power, which was
originally published in German in 1974.7 Luhmann stresses the point that the
modern world is not the traditional small village and in complex societies we
need to trust many other people. Most of those on whom we rely and depend
are persons whom we do not know personally. "It is all too obvious,"
Luhmann says, "that the social order does not stand and fall by the few
people one knows and trusts. There must be other ways of building up trust
which do not depend on the personal element. What are they?" Luhmann's
own answer to this question comes in three surprising components: money,
truth, and legitimate political power. 8 Luhmann argues that these three
aspects all play a role in reducing the complexities of a life in which
6 GEORGE SIMMEL, quoted in S. Herbert Fraenkl: Money: Two Philosophies: The

Conflict of Trust and Authority, Oxford (Basil Blackwell) 1977, p. 24.
7 LUHMANN, NIKLAS: Trust and Power, trans!. by H. Davies, J. F. Raffman, and
Katheryn Rooney, London (John Wiley and Sons) 1979.
8 By incorporating some of Luhmann's observations, I do not by any means intend
to endorse his entire system which, at points, strikes me as unnecessarily obscure
and difficult.
346
innumerable free human agents are interdependent. There is an inevitable

reflexivity in the phenomena of social trust insofar as these devices which,
according to Luhmann, provide the basis of social trust, also themselves
require it. Thus there is considerable circularity in the case. Money solves
certain problems of trust, insofar as it allows us not to rely on the bartering of
goods or services. But at the same time, money requires social trust and
confidence in institutions: its continued value is based on the persistence of
general confidence in the future behavior of others in our society and in the
fundamental institutions and the competence and integrity of those who
administer and function within them. What is at issue is the stability of the
society in which the currency is based or - more accurately - what people
generally believe and assume about its stability.
V. A Consideration of Objections to This Account
1. "These cases involve reliance. They do not involve trust."
For the most part, if we feel vulnerable, and have no confidence that
others will act appropriately, we do not rely on them. For example, if an
absent-minded professor lives next door, I will be unlikely to rely on him to
mail an important package for me. To say that the package is important is to
imply that I need for it to reach its destination and will experience some cost
if it does not. Knowing that this man is absent-minded, I have evidence that if
he is the one charged with mailing my parcel, it may fail to do so. If I depend,
or rely, on him to mail it for me, despite knowing that he is in fact
untrustworthy about this sort of matter, there are two possibilities.
(a) Perhaps for some peculiar reason (for example, illness and absence of
any alternative) I have no other way to even attempt to get my parcel to
its destination so that I have in effect, "no choice." I might, then, rely on
this man without trusting him or even rely on him while, in a relevant
sense, distrusting him. This sort of reliance would be uncomfortable and
would tend to make me feel insecure about what was happening. It
would make sense only given the assumption that there was no better
alternative, all things considered.
347
TRUDY GOVIER
I don't think the shopping model is like this. First of all, most people most
of the time do not feel insecure about the products they purchase. Secondly,
if they did so, in most contexts there would be alternatives. They could do
without the product, buying similar products or substitutes elsewhere. 9
(b) Perhaps I am unthinking and careless when I give my parcel to this

unreliable person. I ask him to mail it for me without stopping to consider
that he is just the sort of person who is likely to forget small tasks of this
kind. Is the case of shopping like this? (It's not that we trust; it's just that
we don't think?) Few people pause to reflect on all the people and
institutions that lie behind that package of ground beef or bag of carrots
they casually purchase in a supermarket or the many way that things
might go wrong, so as to render the items unfit for human consumption.
Most of the time, we tacitly expect things to be all right, never stopping to
think about the matter. We have no relevant beliefs about the background
processes of farming, cleaning, packaging, transporting, and so on.
Strange hypotheses such as the possibility that the carrots are packaged in
a plastic that contains female hormones such as to have adverse effects on
male development are not contemplated at all. The adequacy of the
product is simply taken for granted. Now in one significant respect, this
reliance is different from reliance on the absent-minded professor when
one has temporarily forgotten about his unreliability. After all, we know
the professor is absent-minded, and that could make him forget to mail the
parcel. By contrast, for most of the goods we purchase, it is not the case
that we have known that there is some aspect of their production,
transport, packaging, or marketing that puts us in jeopardy. We don't
know it is so; we assume it is not so. But that is just to say that we trust
implicitly that a range of things will be all right without ever considering
what that range of things involves in the first place. We just assume that
things are "normal" and what's "normal" is all right. But that is just to say
that we trust. In making these assumptions, we are implicitly trusting the
people and the institutions that constitute the normal. This is not a case of
reliance without trust. It is a case of reliance presuming a rather complete
-but relatively naiVe- form of trust.
9 Such comments would not hold true of some sub-groups, and they are, obviously,
open to change, but consumer behavior and, as a result, modem economies would
be in a state of considerable chaos were such lack of confidence to be typical.
348
2. "These cases only involve inductively grounded confidence. They

do not involve trust."
Suppose that you have purchased, say, a particular brand of bread

hundreds of times from a store and consumed it without incident. You have
come to possess inductive evidence that this kind of bread is safe to eat and
thus inductive evidence that whatever processes have preceded its being
consumed by you have not rendered it unsafe to eat. You, accordingly, have
grounds for cogent inductive arguments to the effect that your most recently
purchased loaf of bread will not be toxic. (All this may recall Hume's classic
example about bread being nourishing.) One might argue that if you have
inductive evidence that the bread is safe, you have no need for trust -
scattered or otherwise - in the case. You can confidently buy and consume it
on the basis of your inductively relevant experience.
Obviously any attempt to fully address this objection would lead us into
deep philosophical waters. But the short reply to this objection is that being
in possession of evidence is not incompatible with needing to trust. Evidence
of reliability and safety leaves room for trust about the processes that underlie
them. The evidence does not amount to proof: there is a possibility that future
cases will be different. And yet we extend our belief beyond experienced
cases and are confident that things will be all right in the future. The actions
of people are crucially involved at many stages, and who these people are,
what their competence and motivations are, and how they behave is subject to
change over time. If you buy bread, it is a product of human activities and
when you have confidence in its safety, that confidence presumes the
competence and non-malevolence of the human agents who have been
involved in its production, transport, storage and sale. If the bread has been
safe on many occasions, that gives you inductive evidence that the relevant
human agents have been reliable before, which is to say that you have an
evidential basis for trusting them this time. The inductive support for your
attitudes in such a case does not mean that trust is uninvolved.
To make the point more vivid, imagine that a nation-wide news network
reports that al-Qaeda saboteurs are now rumored to be operating within the
factories that make your favorite brand of bread. If you place any degree of
trust in the network news, you will begin to wonder what sort of things
malevolent persons could do in such a factory. It will quickly become
apparent that your confidence in this bread was premised on the assumption
that the workers were trustworthy people so far as their participation in its
manufacture was concerned. You bought and consumed the bread on this
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TRUDY GOVIER
tacit presumption of trustworthiness - and if that presumption is disturbed,

you will probably cease to do so.
3. "These cases involve pursuit of one's own interests. They do not

involve trust."
Much shopping behavior does indeed involve pursuit of one's own

interest. If I buy bread, meat, fruits and vegetables, I do so because l wish to
eat them and feed them to my family. I have an interest in doing so in order
to enjoy eating them and, still more fundamentally, remain alive and assist in
my fam"ily to do likewise. Analogues of these ruminations about food can
obviously be constructed for purchases, of cars, airplane tickets, clothing,
household products, and other commodities. On a broad conception of
"interest" it is undeniable that most people who make purchases are pursuing
their own interests or what they presume to be their own interests. But that
does not rule out the attitudes, expectations, and dispositions characteristic of
trust. Indeed, trust of those who manufacture and sell the commodity is
presumed in your confidence that possessing and using it will, indeed, be in
your interest.
In saying that we are pursuing what we take to be our interests when we
make purchases, I do not wish to deny the existence of manipulated
preferences, due to advertising and other facts of modern life. Suppose, for
example, that I were to buy a new toothpaste advertised as "making your
smile bright," intending to pursue my interest in being more attractive. In a
broad sense, I would be pursuing my interest by purchasing this product.
Now there are questions that may be raised here. It may be argued that should
I pursue my interest in this way I am indicating that l am a relatively
unenlightened person. My real or genuine interest lies not in a younger,
brighter appearance but rather in more serious matters - improving my
personal relationships or cultivating my knowledge of Kant's philosophy of
history, for instance. Another possibility is that the toothpaste that is
supposed to whiten my teeth will not do so but will instead be injurious to my
health and, ultimately, have adverse effects on my appearance. There are
many situations in which persons who intend to further their own interests
wind up harming themselves, and among these, many situations of consumer
purchase will be included. But none of this shows that trust was not involved:
I trusted the advertising material and the content of the product and believed
it would benefit me. And then it did not. My trust turned out to be misplaced:
350
I let myself be vulnerable and things went wrong. But that is not to say that
there was no trust involved in the case.
VI. Special Mention Goes to George W. Bush:

"Shopping and Flying"
One reason that it is often difficult to theorize about trust is that it tends to
go unnoticed until it is disturbed. By the time we appreciate what we had
trusted, the trust we had confidently and unconsciously felt exists no longer.
For many persons in North America, the events of September 11 provided a
powerful example. The idea that persons filled with hate would seek to
destroy symbols of American culture and power, that substantial groups of
people around the world would adopt an ideology leading them to delight in
the killing of American civilian people was profoundly shocking. The
realization that institutions such as airport security, immigration, the F.B.I.,
and the C.I.A. were not functioning sufficiently well to prevent such attacks
led to an increased sense of vulnerability and fear. In the difficult and anxious
aftermath of these attacks, President George W. Bush called for people to
demonstrate their resistance to hijackers and their support for America by
shopping and flying. The idea seemed to be, "Show them you will not be
intimidated. Support your country. Get right out there and use your credit
card." 10
I find this notion of how to support one's country morally impoverished,
in the extreme. The President's words did not do justice to the actual
behavior of many American people, who responded to the attacks with
courage, heroism, sympathy, and sacrifice. Unlike President Bush, I do not
believe that shopping is the best way to demonstrate one's support for one's
country and its values. Now I have argued here that shopping presupposes
considerable scatter trust and that the very use of money indicates confidence
in the fundamental stability of our society. So it might appear that I am
committed to the view that shopping manifests confidence in basic social
I 0 The CBC program, The Moral Divide, devoted a session to this theme, and I was
a participant in that program, which influenced some of my comments here. I
discuss vulnerability and social trust in the wake of the September II attacks in
an essay entitled "Vulnerability" in my forthcoming book. See TRUDY GOVIER: A
Delicate Balance: What Philosophy Can Tell Us about Terrorism, Boulder, CO
(Westview Press) 2002.
351
TRUDY GOVIER
institutions and that, accordingly, I must in effect support President George

W. Bush on this point. I do not. Spending money on consumer goods
indicates some degree of confidence and trust - but that is not to say that
buying is the best way of demonstrating one's loyalty or support to one's
society in a time of crisis. In my view, generosity, acts of kindness toward
strangers, and cooperation with social activities of rescue and reconstruction
are far better ways to demonstrate one's loyalty to one's society and one's
determination to make it operative again in the wake of a crisis. Furthermore,
unlike President George W. Bush, I believe that, in such a crisis, engaging in
critical discussion about the merits of various responses to the calamity may
also constitute a courageous and constructive contribution.
VII. Conclusion
Economic behavior presupposes social trust, which is confidence in the

general competence and integrity of other human beings acting individually
or within groups and institutions. Competence is partially ethical and
integrity is entirely. The pursuit of one's own interest in the course of
mundane activities such as shopping presupposes a widely dispersed social
trust which, in turn, presupposes confidence in integrity. That in turn
presupposes that people can reasonably trust each other and be trusted and
that they are trained and educated in ways that make this trust and
trustworthiness possible. In addition, this generalized and dispersed social
trust presupposes a general expectation within society that its political and
social institutions are legitimate and will perform well. If these conclusions
are accepted, we should accordingly accept that a commitment to and
confidence in moral values are fundamental for the functioning of modern
economies. The phenomena of social trust suggest that that relationship
between economic behavior and ethics should be taken very seriously indeed.
The invisible hand must move in a moral space. That is a space we may
ignore. But we do so at our peril.
352
Chapter 15
A Reconciliation of the Liberal and Communitarian

Debate in the Light of the Methodenstreit
YUICHI SHIONOY A
I. The Aim of the Paper

II. A Framework of Value and Method
III. Misplaced Controversy in Ethics and the Lessons of the
Methodenstreit
IV. Two Controversies Compared
V. Tonnies's Gemeinschaft und Gesellschaft
VI. Static Theory of Community
VII. Dynamic Theory of Community
VIII. From Schmoller to Schumpeter
I. The Aim of the Paper
This paper attempts to reconcile the current controversy between

liberalism and communitarianism in moral and political philosophy, referring
to the lessons of the Methodenstreit (controversy on method) between
theoretical and historical economists at the end of the 19th century in Austria
and Germany. The Methodenstreit was a confrontation between Carl Menger
and Gustav von Schmoller, or between the Austrian School of Economics
and the German Historical School of Economics; it was alleged as a
controversy about the relative superiority of a theoretical-deductive-
individualistic approach versus an historical-inductive-holistic approach.
There seems to be an agreement among historians of economics on the
negative appraisal of the Methodenstreit. Thus, J. A. Schumpeter's appraisal
YUICHI SHIONOY A
of the controversy was: "In spite of some contributions toward clarification

of logical backgrounds, the history of this literature is substantially a history
of wasted energies, which could have been put to better use." 1 Paraphrasing
what Schumpeter meant, T. W. Hutchison remarked: "In fact the
Methodenstreit was, to a large extent, not a quarrel about methods so much as
a clash of interest regarding what was the most important and interesting
subject to study."2 The two approaches were addressed to separate problems:
Theory was mainly concerned with static economic order with regard to the
allocation of resources in a market system, an order rhetorically described as
established by the invisible hand, while History was mainly concerned with
the evolution of a socio-economic system led by the visible hand from the
viewpoint of social justice.
Although the Methodenstreit itself was a misdirected quarrel, it had a
positive impact on broadening pure economics into economic sociology or
institutional economics. This was made possible by the attempts of
integrating Theory and History through the choice of appropriate umbrella
topics rather than by merely separating them on the principle of the division
of labor. Joseph Schumpeter, Max Weber, and others took the Methodenstreit
seriously and worked out a methodology to extend the frontier of economics:
they finally explored the new frontier of economic sociology. 3
What I mean by the lessons of the Methodenstreit are positive as well as
negative. In the negative sense, it will be argued in what follows that the
current debate in moral and political philosophy may be called another
version of the Methodenstreit and falls into a similarly pseudo confrontation.
In the positive sense, I will argue, the juxtaposition of the two debates reveals
an interface between economics and ethics and raises genuine
methodological questions about the relationship between individualism and
holism. The current controversy between liberals and communitarians results
in the conflicting claims of the economic, political, and social system.
However, what is lacking in this ideally biased debate is the viewpoint of the
historical evolution of the system. The Methodenstreit between Theory and
J. A. SCHUMPETER: History of Economic Analysis, New York (Oxford University

Press) 1954, p. 814.
2 T. W. HUTCHISON: The Politics and Philosophy of Economics: Marxians,
Keynesians and Austrians, Oxford (Basil Blackwell) 1981, p. 196.
3 YUICHI SHIONOYA: Schumpeter and the Idea of Social Science: A Metatheoretical
Study, Cambridge (Cambridge University Press) 1997. Chapter 8. RICHARD
SWEDBERG: Max Weber and the Idea of Economic Sociology, Princeton
(Princeton University Press) 1998.
354
RECONCILIATION OF THE LIBERAL AND COMMUNITARIAN
History provides an important material for thought in this regard. The idea of
"spontaneous order" in the Austrian school and the scheme of "development
stage" in the Historical school represent not a conflicting issue at an abstract
level of methods, but should be integrated in the evolution of the institutional
framework that embodies and implements ideals historically. This is the
positive lesson of the Methodenstreit, crossing the border of economics and
ethics.
II. A Framework of Value and Method
Let me start with an overview of contemporary moral and political

philosophy, including utilitarianism, contractarianism, libertarianism, and
communitarianism. Figure I provides a configuration of the four schools of
thought. On the columns of the figure, two kinds of moral value, i.e., good
and right, are distinguished and either one is regarded as supreme by each
theory; on the rows of the figure, two kinds of scientific method, i.e.,
methodological individualism and holism, are distinguished and either one is
adopted by each theory. The distinction between good and right corresponds
to different objects of moral evaluation, i.e., the behavior of individual agents
and the social institutions. In other words, good and right are the norms
regulating individual behavior and social rule respectively. Since we are
concerned here with moral and political philosophy not with political
advocacy, the two methods of individualism and holism do not refer to
political ontology or ideology. 4 The value concepts in parentheses in Figure I
indicate the key notions of these moral theories.
4 Charles Taylor finds confusion in the liberal-communitarian debate and attributes

it to the confusion between ontological issues (the atomism-holism distinction)
and advocacy issues (the individualism-collectivism distinction). C. TAYLOR:
''Cross-Purposes: The Liberal-Communitarian Debate", in: NANCY L.
ROSENBLUM (Ed.): Liberalism and the Moral Life, Cambridge, MA (Harvard
University Press) 1989. However, I am arguing that the confusion arises from the
failure to separate the research topics, on which a difference of methods depends.
355
YUICHI SHIONOY A
Figure 1
Configuration of Contemporary Moral and Political Philosophy
~ d
Good Right
(A) contractarianism libertarianism

Individualism
(justice) (liberty)
Utilitarianism Communitarian-
Holism (D)
(efficiency) ism (virtue)
In the early 1970s, social contract theory, developed in a new design by

John Rawls, attacked utilitarian theory for the neglect of justice in favor of
aggregate utility. 5 This confrontation, representing a conflict of moral
principles between efficiency and justice (or between maximization and
equality), is analyzed along two axes of coordinates: a confrontation of
values between good and right, and that of methods between holism and
individualism. A question may be raised as to allocating utilitarianism to the
holistic group. Although utilitarianism formally starts with individuals, its
key concept is integrated social utility that is obtained by conflating
individual utilities from a holistic viewpoint.
Then, in the 1980s the advocates of libertarianism and communitarianism
emerged to criticize Rawls's theory for different reasons. Libertarians
regarded the individual rights to liberty as the primary moral value, 6 and
communitarians maintained the common good or collective virtue embodied
in a community as the highest moral end. 7 In our framework, their systems
are also analyzed in terms of the value and method they commit themselves
to. Libertarianism, regarding individual liberty as the primary moral value,
belongs to the right-respecting moral system, while communitarianism,
5 JOHN RAWLS: A Theory of Justice, Cambridge, MA (Harvard University Press)

1971 (Revised edition 1999).
6 ROBERT NOZICK: Anarchy, State, and Utopia, New York (Basic Books) 1974.
7 ALASDAIR MACINTYRE: After Virtue, Notre Dame, IN (University of Notre Dame
Press) 1981. MICHAEL SANDEL: Liberalism and the Limits of.lustice, Cambridge
(Cambridge University Press) 1982. MICHAEL WALZER: Spheres of Justice: A
Defence ofPluralism and Equality, Oxford (Basil Blackwell) !983.
356
emphasizing the common good or virtue as the highest moral value, is

located in the good-respecting moral system. In terms of method,
libertarianism is individualistic, whereas communitarianism is holistic.
Since contractarianism, or social contract theory, explains justice on the
basis of individual rights and thus favors both liberty and equality, it is
exposed to criticism from two sides: contractarians are criticized by
libertarians for their egalitarian claim and by communitarians for their
advocacy of atomistic individual liberty. Communitarians attack not only
contractarians but also libertarians and utilitarians, while libertarians assault
not only contractarians but also utilitarians and communitarians, as the above
figure shows. What is today referred to as the liberal-communitarian debate
denotes the controversy between liberalism and communitarianism, the
former including both contractarianism and libertarianism. A communitarian
criticism of the two types of liberalism focuses on the individualistic theory
of right.
It is interesting to note here that two vacant entries in Figure 1 are in fact
fitted in by two adversaries in the Methodenstreit in the history of economic
thought. As we argue later, entry (A) in the figure should be the Austrian
School of Economics, or the individualistic market theory of the good, and
entry (D) should be the German Historical School, or the holistic
evolutionary theory of the right. By juxtaposing the two debates within a
common conceptual framework, we are ready to develop the lesson of the
Methodenstreit that is applicable to the contemporary liberal-communitarian
debate.
III. Misplaced Controversy in Ethics and the Lessons

of the Methodenstreit
Throughout the I 980s and I 990s communitarian thought, more or less

reviving Aristotelian or Hegelian traditions, was advocated by Alasdair
Macintyre, Michael Sandel, Michael Walzer, and Charles Taylor among
others to criticize the totality of modern liberalism. The key thesis of
communitarianism is that the individual is an "embedded self' in community
life, by contrast with an abstract, autonomous, and atomistic person assumed
in contemporary liberal thought. Communitarians argue, that value is rooted
in the tradition of community and shared by persons as the common good
through communal practices, again by contrast with liberalism, which
357
YUICHI SHIONOY A
emphasizes individual rights and conceives of individuals as the ultimate

origin of value. According to the communitarian conception of person, since
the collective values of reciprocity, trust, and solidarity in community life
shape the identity of persons, it is impossible to conceive of a neutral,
"unencumbered self' that is detached from the tradition and practices of
community and still holds the conceptions of identity, good, and right.
If the above description features the communitarian conception of person,
then what is the conception of community based on it? For communitarians, a
community is not a voluntary association of individuals deliberately chosen
in a vacuum with cartes blanches. It is filled with intrinsic values influenced
by its common language, culture, history, and tradition. The common good of
community is created by these values.
In addition to the theses of person and community, communitarianism
maintains some other important themes, such as historicism, perfectionism,
republicanism, virtue ethics, and local justice, into which I do not enter here.
In analyzing the liberal-communitarian debate, I will focus on the
confrontation between communitarianism and Rawls's contractarianism and
ask whether the two systems of thought are actually conflicting in addressing
the same questions.
The "unencumbered self' in liberal thought, named by communitarians as
their target of attack, is not a description of an actual person but a theoretical
construct for the purpose of deriving principles of justice as fairness, however
it may appear queer and unnaturaL The substance of the notion was originally
designed by Rawls to represent the characteristics of persons under a "veil of
ignorance" in a hypothetical "original position," in which persons are to
decide what principles are agreed upon as ethical and political standards
governing the basic structure of society. Under the "veil of ignorance,"
persons do not know their own identities - race, sex, religion, income, status,
ability, preference, even their conception of the good life - and thus can
equally argue for the benefits of everyone. In other words, the liberal idea of
the "unencumbered self' is a theoretical assumption for deriving a conception
of the right that has priority over the good and enables the coexistence of
multiple conceptions of the good. Therefore, the principle of the right is
neutral and impartial with regard to the good, so that the latter can flourish on
the basis of free choice of individuals under the just structure of society.
By contrast, the "embedded self' in communitarian thought is also a
theoretical construct addressed to different issues, i.e., the explanation of
norms that are assumed to exist in the form of the common good among
members of a community. If there is already some agreement among values
358
on the basis of common culture, history, and tradition, it is not necessary to

seek for principles of justice starting from scratch for organizing a fair system
of social cooperation; rather, a pertinent task of moral and political
philosophy is to account for existing relationships between the individuals
and a society on the presumption of implicit agreement on a rule of the right
and sharing of the good. By contrast, the task of social contract theory is to
explain how agreement can be reached in a broader society consisting of
individuals with different beliefs and identities. Communitarianism is a
theory of the good, whereas contractarianism is a theory of the right.
In accordance with the different issues of society to be addressed, the two
theories adopt different methods of social studies, i.e., individualism or
holism. It is natural that the theoretical assumption of the self differs
depending on whether a theory addresses an order of society with conflict or
with agreement among individuals. But different issues are not exclusive but
complementary to each other. In fact, even liberals do not deny that
individuals may hold common values, while even communitarians may agree
that individuals not only follow tradition and custom but also criticize them
for some reason or other. Both the "unencumbered self' in liberal theory and
the "embedded self' in communitarian theory are instrumental to deal with
different issues.
The liberal and communitarian debate in moral and political philosophy
reminds us of the Methodenstreit in economics between Theory and History a
century ago. Concerning the task of economics, theorists insisted on the
establishment of general characteristics of phenomena in the form of
universal economic logic, whereas historians on the exploration of individual
peculiarities of phenomena. Nowadays it is widely recognized among
economists that there was no contradiction between these two contentions.
The difference between theorists and historians Jay in their interests in
different problems: theorists were concerned about small-scale problems
relating to the process of resource allocation in markets, including
production, distribution, and consumption, whereas historians were interested
in large-scale problems of the development of communities and the evolution
of socio-economic institutions in the historical context. The lesson of the
Methodenstreit is that since the effectiveness of different methods are to be
justified by their fitness to different subject matters, it is not useful to speak
offhand of the superiority of one method over another. The negative side of
the Methodenstreit was best clarified by Schumpeter's methodology of
359
YUICHI SHIONOY A
instrumentalism, which he developed as a solution to the controversy. 8 In the

light of the Methodenstreit, it is of no use disputing about the assumptions of
the self between liberal and communitarian theories that are instrumentally
addressed to different issues.
However, there was a positive side of the Methodenstreit as well; the
debate stimulated theoretical enterprises to extend to wider problems of
historical and ethical developments of society. Immediate positive results
were Schumpeter's economic sociology and Weber's Sozialokonomik,
among others. It is suggested by analogy that liberalism and
communitarianism should be cooperative with each other by putting the
rightful theory in the rightful place, so that they can contribute to the
productive orientation and paradigmatic expansion of whole moral theories.
IV. Two Controversies Compared
On closer examination, I will argue that the Methodenstreit between

Theory and History, on the one hand, and the controversy between
contractarianism and communitarianism, on the other, are quite identical in
form as well as substance. In both cases, the same problems and methods are
at stake. Let me explain by referring to Figure 2, which is structured similarly
to Figure I.
8 YUICHI SHIONOYA: "Instrumentalism in Schumpeter's Economic Methodology",

History of Political Economy, (Summer I 990). See also Y. SHIONOYA:
Schumpeter and the Idea ofSocial Science, Chapter 5.
360
RECONCILJA TION OF THE LIBERAL AND COMMUNITARIAN
Figure 2
Two Controversies in Economics and Ethics
problem
order within system basic structure of system
(theory of good) (theory of right)
(A) (B)
theory of market theory of justice
Individualism
equilibrium (theoretical (contractarianism)
economics)
(C) (D)
theory of common good theory of system
Holism
(communitarianism) evolution
(historical economics)
In Figure 2 the two axes denote problem and method. Two research
problems are distinguished: one is the order within a given social system; the
other is the basic structure of a social system. As for methods, individualism
and holism are distinguished. Although there are differences between
economics and ethics, the two disciplines share the similarities that an inquiry
into the internal order of a system gives a theory of the good, whilst an
inquiry into the basic framework of a system gives a theory of the right.
Thus, economics as a theory of the good develops micro theory of market
equilibrium (A) based on the concept of individual good (utility), and ethics
also as a theory of the good offers communitarian theory (C) based on the
concept of the common good. The former depends on individualistic method,
and the latter on holistic method. Then, as a theory of the right addressed to
the basic structure of society, contractarianism (B) derives a theory of justice
on the basis of methodological individualism; and historical economics
attempted to explain the evolution of communities that should embody the
idea of justice (D). In developing a theory of the right, the German Historical
School adopted holistic method, while Rawlsian ethical theory depended on
individualistic method, contrary to the patterns of theories of the good.
The Methodenstreit in economics was the conflict between (A) and (D),
as a diagonal arrow in Figure 2 indicates. Theoretical economics (A) offered
the individualistic model that explained the equilibrium of demand and
361
YUICHI SHIONOY A
supply under market institutions by resort to the behavior of agents to

maximize utility and profits. By contrast, historical economics (D) tried to
uncover the evolution of ethical and political principles in order to explain
factors constituting the basic structure of economic institutions, as seen
typically in Schmoller's approach. Schmoller advocated not only empirical
method of collecting historical data but also teleological holism as a
heuristics to cope with such a large-scale complex research projectY
It must be added that Menger's standpoint in methodology was not
confined to the static analysis of economy; he emphasized that part of a
socio-economic system was not the result of human calc;ulation and common
will but "the unintended result of human efforts aimed at attaining essentially
individual goals," 10 and maintained that a theoretical approach is still
effective in understanding what is ambiguously designated as the "organic
phenomena." Although this idea anticipated the so-called spontaneous order
paradigm of the Austrian School of Economics, it was rather the essence of
the German Historical School of Jurisprudence, and Menger criticized the
German Historical School of Economics for missing the point of their
predecessors. I will return later to the relevance of this issue to the current
ethical controversy.
The current controversy in ethics is the conflict between (B) and (C), as
shown by another diagonal arrow in Figure 2. Social contract theory of Rawls
(B) provides the principles of justice for the basic structure of society, relying
on the choice of rational individuals behind a "veil of ignorance."
Communitarian theory (C), as a challenger to contract theory, is concerned
about the morality of a community in which the common good has prevailed,
and describes how the individuals embedded in community life support the
institutions by cultivating virtues through a variety of communal practices.
When the two controversies are juxtaposed within the unified framework
of Figure 2, it becomes clear that they have an isomorphic structure with
regard to the research problems and methods. The two debates are not simple
repetition but in reversed orientation: the social contract theory based on
9 YUICHI SHIONOY A: "A Methodological Appraisal of Schmoller's Research

Programme," in: PETER KosLOWSKI (Ed.): The Theory of Ethical Economy in the
Historical School, Berlin (Springer) 1995, pp. 72-74.
I 0 CARL MENGER: Untersuchungen iiber die Methode der Socialwissenschaften. und
der Politischen Oekonomie insbesondere, Leipzig (Dunker & Humblot) 1883.
(investigations into the Method of the Social Sciences with Special Reference to
Economics, trans. by Francis J. Nock, New York (New York University Press)
1985, p. 133.)
362
individualism now formulates principles of justice for the basic structure of

society, whereas the holistic communitarian theory now focuses on the norms
of the common good within a community. Because the standpoints of
economics and ethics are interchanged with each other in the two debates,
some interdisciplinary issues that are not clearly recognized in each debate
will be suggested. Let me explain the issues separately in terms of
comparisons (A) versus (C) and (B) versus (D).
A comparison between the two different theories of the good, i.e., (A) and
(C), reveals that ethics is concerned with the common good distinct from
individual good (utility) in economics, although both theories deal in
common with a rule of the order within a social system. In the debate with
contractarianism, communitarians claim that they have discovered what
should replace abstract principles of justice because the common good has
precedence over individual good. But, I argue, the common good is a moral
order of a limited community within a broader social system, not a universal
moral order that is to regulate a system at large; therefore the communitarian
critique of contractarianism is misdirected. Instead, a gap between (A) and
(C) is a genuine issue that should be taken seriously, and relates partly to the
question of the moral standing of the market. It will be agreed that the market
is not a morally free zone; the play of the invisible hand in the market will
lead to social good only if the common good is embodied and abided by in
the market place, without doubt in addition to the just basic framework of
society. In other words, the moral conditions of market efficiency must be
articulated by the common good, including the virtues of honesty, industry,
responsibility, decency and so on, and must be regulated by the rules of
justice.
A comparison between (B) and (D) also suggests another gap between
ethics and economics in the realm of a theory of the right. There is a genuine
conflict of method between deduction versus induction in reaching a just
institution between (B) and (D), or between Rawls and Schmoller. Schmoller
believed that the historical evolution of economic institutions should be the
theme of economics, and focused on ethical norms as the social determinants
of institutions. It is a mistake to reject his ethical approach by the stereotyped
notion of value-free science, because his approach was framed in a
teleological form that assumes methodological holism. For Schmoller, the
major component of teleology was the principle of justice. With regard to the
relationship between (B) and (D), it will be asserted that the objective and
universal value of justice, viewed statically, is embodied in institutions (e.g.,
the democratic regime in Rawls) and formulated from the agreement among
people in the imaginary "original position;" viewed dynamically, however,
363
YUICHI SHIONOY A
the interactions, conflicting or accommodating, between values and

institutions will bring about the evolutionary process of society, one that is
not only spontaneous but also motivated by political intention. In a
teleological view, the telos of social systems and institutions is generally
considered as self-survival and accounts for the mechanism of their
transformation in terms of the goal-directed behavior of systems (e.g., the
stages of communal developments in Schmoller).
Methodological individualism and holism cannot be compromised if they
are conceived in an extreme form of reductionism. It will be constructive to
admit the interactions between individuals and society. For this purpose, as
Joseph Agassi argues, 11 it is helpful to use not only the axis of individualism
versus holism but also that of psychologism versus institutionalism. By the
combination of the two axes we have "institutionalistic individualism" as the
most interesting case. Admitting the social influences of tradition, custom
and culture on individuals, this standpoint still locates individuals as
decision-makers. The methodology of "institutionalistic individualism" will
shed light on the possibility of the integration of (A) and (C), on the one
hand, and of (B) and (D), on the other.
V. Tonnies's Gemeinschaft und Gesellschaft
As a remarkable attempt of such an integration by the methodology of

"institutionalistic individualism," we should pay due attention to Ferdinand
Tcinnies's sociological work, which intended to overcome the Methodenstreit
by synthesizing theoretical and historical methods. 12 The most important
conclusion of his work was that fashionable cliches about individualism
versus holism were meaningless. Parties in the current debate in moral and
political philosophy seem unaware of the perspective and insight of Tiinnies,
so that they unfortunately repeat the sterility of the Methodenstreit.
II JOSEPH AGASSI: "Institutional individualism," British Journal of Sociology, (June

1975).
12 F. TONNIES: Gemeinschaft und Gese/lschaft, Leipzig, 1887. Community and Civil
Society, trans. by J. Harris and M. Hollis, Cambridge (Cambridge University
Press) 2001.
364
Figure 3
Gemeinschaft and Gesellschaft
~
social
organization individual Social
(psychological) (institutional)
will will
(A) (B)
Gesellschaft rational will
calculation contract
(C) (D)
Gemeinschaft natural will
understanding custom
Although Tennies developed a gamut of complex concepts and multiple

dichotomies, a simplified model will suffice for our purpose. The skeleton of
his work is represented by Figure 3, which is adapted from Figure 2. In
Figure 3, he did not regard four entries (A)-(D) as mutually exclusive
theoretical standpoints, but as coexistent different spheres or functions of
society. Two axes are introduced here again.
Firstly, the nature of human will as a cause of action is distinguished into
"rational will" (Kiirwille) and "natural will" (Wesenwille). An individual
experiences both of them simultaneously. The two kinds of will are defined
in terms of relative degrees of the thought and will elements in decision-
making; "rational will" is a thought process with some element of will,
whereas "natural will" is a will process with some element of thought. The
former is ideal, rational, and goal-oriented will that involves calculation and
choice, whereas the latter is natural, real, and organic will that is determined
by impulse, custom, and religion. As a first approximation, the two will
concepts are characterized in terms of method by individualism and holism
respectively. From the two will concepts, Tennies's well-known dichotomy
of Gesellschaft (society as a mechanical construct) and Gemeinschaft
(community as a natural organism) is derived.
Secondly, Tennies's introduces the distinction between "individual will"
and "social will" as the next step; they can be interpreted to denote the
distinction between psychologism and institutionalism referred to in the
above, allowing for possible interactions between individuals and social
365
YUICHJ SHIONOY A
institutions in decision-making. Viewed from "individual will" as a

psychological causal factor of social relations, Gesellschaft is a mechanical
construct that is chosen from rational "calculation" (A) of independent
individuals. When viewed from "social will" as an institutional causal factor
of social relations, Gesellschaft consists of "contract" (B) based on the
reciprocal benefits of individuals. In other words, the social relationship in
Gesellschaft (e.g., exchange) takes the externally explicit form of "contract"
or convention that will produce mutual benefits for rational, calculating, and
purposeful individuals. As far as there exists a consensus of "rational will"
among individuals, it is possible to assume that the fictitious social entity has,
as it were, "social will," the content of which is "contract." As Tonnies
argued, actual forms of Gesellschaft are an association, the state, and the
world, and the social rules of Gesellschaft representing ''social will" are
contract, policy, and public opinion respectively.
On the other hand, Gemeinschaft, i.e., community, is based on an implicit
unity of original, natural, and real will among individuals. The type of
psychological "individual will" that supports a community is the
"understanding" (C) of the rule of common good; and the institutional "social
will" that governs a community is the prevalence of "custom" (D) as a result
of social sympathy among individuals. In Gemeinschaft, "understanding"
means implicit conformity to the concord that has already existed in the form
of "custom" and belief; thus social will shapes individual will. This causal
relationship between the individual will and social will in Gemeinschaft is
just the opposite of the relationship in Gesellschaft, where individual will
leads to social will. For Tonnies, Gemeinschaft consists of three types of
bond: that of blood, soil, and spirit (or kinship, neighborhood, and
friendship). Its actual forms are the family, villagt~, and town respectively.
The bond of spirit is the highest stage of evolution of Gemeinschaft and is
created by the social practices of religion, occupation, and science.
Tonnies's sociological theory attempted to provide a grand synthesis of
psychology, mind-set, and social institutions to explain the existence and
historical developments of the two basic social organizations, i.e.,
Gemeinschaft and Gesellschaft. Our interpretation of Tonnies' s theory is that
he applied the methodological standpoint of "institutionalistic individualism"
to the two pair concepts of will to avoid extreme reductionism of
individualism and holism. The two types of social organization based on the
two pair types of will not only represent historical stages but also coexist as
agents of different social functions. He showed that natural and rational will
are sometimes linked together, sometimes running in parallel, and sometimes
in direct conflict with each other in the social and historical life of humanity.
366
In light of Ttinnies's theory, the current debate between liberals and

communitarians in terms of "contract" versus "custom," "unencumbered
self' versus "embedded self," or the right versus the good would be entirely
misplaced. The two approaches are to be regarded as addressing different
subject matters in social studies and explaining the bases of different social
organizations.
VI. Static Theory of Community
While Figure 2 in the above indicated the four standpoints appearing in

the two versions of the Methodenstreit, Figure 3 converted it into the four
sociological types according to Tonnies. It was shown that differences in
methods are associated with differences in objects that are addressed by
methods, and that methods are relative to subject matters. However,
Tonnies's argument is a sociological taxonomy and lacks theoretical
explanation of why the four types should exist. In the following I will explain
static and dynamic relationships between the types by using economic and
sociological knowledge.
We begin with a static theory, which will explain the relationship between
(A), (B), and (C) in Figure 2. The market equilibrium theory (A) and the
theory of justice (B) are concerned with the inner mechanism of institutions
(the sphere of good) and the basic structure of institutions (the sphere of
right) respectively. Is it possible for a man or woman to live in this
individualistic world alone? The answer is that human beings have some
reasons to form various communities, which are to be explained by the
holistic theory of common good (C), in between (A) and (B). I refer to the
views of the economist Ronald Coase and the sociologist Niklas Luhmann.
Firstly, according to Coase, there is a cost of using the price mechanism
of markets. It requires various costs ranging from stipulating property rights
to gathering information, negotiating, contracting, and implementing
transactions. These costs are called "transaction costs." When transaction
costs are high, market transaction does not occur. He concludes: "in the
absence of transaction costs, there is no economic basis for the existence of
the firm." 13 If transaction costs exist, however, "the distinguishing mark of
13 R.H. COASE: The Firm, the Market, and the Law, Chicago (University of Chicago
Press) 1988, p. 14.
367
YUICHI SHIONOY A
the firm is the supersession of the price mechanism." 14 The firm is a

community of production.
Secondly, Luhmann argues that trust is a mechanism to reduce the
complexity and uncertainty of predicting the behavior of others. 15 To cope
with these difficulties in actual life, it is necessary to search and gather
information about other persons in question by spending a lot of costs. These
costs can be called "trust costs." In an analogy with Cease's theorem, I would
suggest what might be called Luhmann's theorem: "in the absence of
complexity and uncertainty in social relationships, there is no sociological or
ethical basis for trust and community and people can simply follow general
social rules that embody principles of justice. If trust costs exist, however, the
distinguishing mark of trust and community is the supersession of the sphere
of universal justice."
Trust costs are searching and gathering costs for necessary information. It
is soon realized that stable universal rules are required to dispense people
from trust costs. While legal and social sanctions are external mechanisms for
saving the costs, trust is an internal mechanism for the same purpose. Trust
(or distrust) is a substitute for full information. There will be a limit to the
scope of people in which one can put trust, and this may be called a "safety
zone." The province of a community is defined by a safety zone, which is
protected against social complexity and uncertainty. Thus, Luhmann's
theorem that trust reduces the complexity and uncertainty in predicting the
behavior of others can be interpreted as the statement that a virtue of trust
shared by community members reduces trust costs. Therefore, there is a
reason for various communities (C) besides the firm in between (A) and (B).
There is an interesting analogy between transaction costs in economics
and trusts costs in sociology. According to Cease's theorem, although there is
a wide range of market opportunity and relationship, the benefits of
organization give economic justification to the establishment of firms as a
unit of economic activity, if transaction costs are expensive. Similarly,
according to Luhmann's theorem, although there is a wide range of social
opportunity and relationship, the benefits of trust provide a sociological basis
for a narrow community as the safety zone, if trust costs are expensive. These
two theorems are not only analogous, but more importantly complementary
to each other to explain the coordination of the two approaches we are
concerned with, i.e., contractarianism and communitarianism.
14 R.H. COASE: The Firm, p. 36.

15 NIKLAS LUHMANN: Vertrauen: Ein Mechanismus der Reduktion sozialer
Komlexitdt, Stuttgart (Ferdinand Enke Verlag) 1973 (2nd edition).
368
RECONCILIATION OF THE LIBERAL AND COMMUNIT ARIAN
Since we have seen the economic and sociological reasons why

intermediate units take a middle position in between individuals and society
in the world of complexity and uncertainty, we are now able to speculate on
the relationships between positions (A), (B), and (C) in the Methodenstreit
and the liberal-communitarian debate.
The model of a society constructed by liberalism is twofold: one is a
"market society" or "private society" advocated by libertarians; another is a
"social union" proposed and named by John Rawls. 16 A market society is
solely for the realization of personal aims of individuals and characterized by
free competition and the principle of efficiency. It belongs to the sphere of
the good. The system of thought that is centered on the notion of a market
society and specialized in the analysis of its internal working mechanism was
labeled (A) in Figure 2. A "social union" is a society regulated by Rawlsian
principles of justice and characterized by a cooperative venture for mutual
advantage, which involves regarding the endowment of each as part of jointly
held resources for the benefits of society as a whole. This line of thought was
labeled (B) in Figure 2. It belongs to the sphere of the right. Both models (A)
and (B) describe a large individualistic society characterized by anonymity
and depersonalization, and this is the reason they are classified into the class
ofliberal theory.
Figure 4
Coordination of Market Society, Community, & Social Union
Value Institution
t
(A) market society (efficiency)
sphere of good
transaction costs (Coase's theorem)
t
(C) community and organization (virtue)
trust costs (Luhmann's theorem)

sphere of right
(B) social union Qustice)
16 JoHN RAWLs: A Theory ofJustice, pp. 520-29.

369
YUICHI SHIONOY A
In Figure 4, we locate "community" in the sense of Gemeinschaft and

"organization" in the sense of Gesellschaft at a middle point in between a
"market society" and a "social union" on the institutional axis. Although
community and organization are different by psychological origin as Tonnies
argued, they are fused with each other because both groups are internally
controlled by either custom or command. Members in both groups are
institutionally influenced, so to speak. The function and significance of a
community and organization are articulated by the two theorems we have
discussed: on the one hand, the relationship between a market society and an
organization (e.g., the firm) is explained by the relative magnitude of
transaction costs (Coase's theorem); on the other hand, the relationship
between a social union and a community (e.g., the family, friendship) is
determined by the relative size of trust costs (Luhmann's theorem). In the
sphere of the good and rationality, an organization is established when one
cannot rely on the global market transaction; in the sphere of the right and
justice, a community is justified when one cannot rely on the global network
of justice. In terms of values, community and organization survive between
the principles of efficiency and justice with its own emphasis on virtue
(including trust and cooperation).
VII. Dynamic Theory of Community
In order to discuss the dynamic relationship between (A), (B), (C) and
(D), we need a historical perspective, and this is the question of the evolution
of institutions challenged by Gustav von Schmoller, the leader of the German
Historical School at its zenith, in his stage theory of development.
Schmoller's leading ideas of economic inquiry were history and ethics.
For him, history is the empirical stuff for realistic theory, and ethics, besides
technology, is an important factor for determining the economy and
represents a constituent of institutions. The paradigm of the Historical School
was the historical evolution of institutions. When institutions are considered
as research objects, the ideas of holistic teleology and evolutionism are used.
Schmoller regarded teleology as a heuristic device that supplements an
empirical science when empirical knowledge is not sufficient; it assumes that
individuals behave as ifthey would purposefully serve the ends of the whole.
He applied teleology to the evolutionary process in which ethics and
institutions interact. His teleology provided a methodological foundation for
370
evolutionism. Thus, in the teleological thinking, the aim of institutions is

regarded as their survival and changes of institutions are explained by their
aim-oriented behavior. For him, the institutions consist of three norms, i.e.,
morals, laws, and customs, and morality as the ideal is institutionally realized
by laws and customs. In view of the fact that morality aims at the survival of
human beings, it is the motive power in the evolutionary process of
institutions.
The basic scheme of Schmoller's evolutionary economics can be
described in a simple form. He distinguished three types of social units: the
family, the local community (village, town, state), and the firm. 17 Each type
is based on a different organizational principle: sympathy, kinship, and love
for the family; neighborhood, nationalism, law, and coercion for the local
community; and a contract based on private laws for the firm. What
Schmoller meant by the ethical and social determinants of economic
institutions actually relates to these principles.
Contrary to a self-interest model of economy, historical economics pays
attention to a community in which individuals share common values and the
public interest in pursuing economic activities on the basis of their culture,
history, and tradition. In contrast to the firm as a type of Gesellschaft, the
family and the local community are typical Gemeinschaft entities and not
deliberatively established primarily for economic purposes. In a historical
perspective, from autarkic family economy or tribal economy developed two
contrasting types of organizations. On the one hand, organizations of the
local community such as the village, city, territorial and national economies
were formed for the purpose of controlling economic life and serving the
public interest at different levels of the regional economy. On the other hand,
firms were developed as an organization to pursue private profits and entailed
various institutional arrangements such as division of labor, markets, social
classes, property ownership, and so on. The firm sector did not consist of
atomistic units, but of organized units; specifically, buyers' guilds in the 9th-
11th centuries, vocational crafts in the 13th-15th centuries, merchants'
associations in the 14th-18th centuries, and cartels and labor unions in the
19th and 20th centuries were established. Starting from the fact of
communities rather than from abstract rationality and calculation of
individuals as in model (A), Schmoller could simultaneously deal with these
two contrasting directions of institutional changes, i.e., the polarization of
community into the development of firms in pursuit of market globalization,
17 GUSTAv VON SCHMOLLER: Grundriss der a/lgemeinen Volkswirtschaftslehre,

Erster Teil, Leipzig (Duncker & Humblot) 1900, pp. 53-57.
371
YUICHI SHIONOY A
on the one hand, and the regional communities in pursuit of social control of
the firm sector, on the other. This is the idea of institutional evolution
contained in (D). From this perspective, it is clear that the contemporary
debate between (B) and (C) is a pseudo controversy between static theories at
different levels of norm.
Schmoller's scheme of development in stages from village economy to
city economy to territorial economy to national economy was designed in
terms of the institutions as the carrier of social policy in a wide sense that
worked to control the free play of firms in markets. 18 While the skeleton of
his stage theory of development usually described as the broadening of
regional communities is little interesting, the theme of his theory should be
interpreted as the evolution of social institutions brought about by the
interactions between the private firm sector and the public communities,
between economy and morality, between physical-technical and spiritual-
social factors. Specifically, the control by the guild in city economy, the rule
by the lord in territorial economy, and the social policy by the government in
national economy were attempts at the moral binding of an economy and
market. Social policy at the stage of national economy is nothing but the
welfare state in the contemporary world.
If we see the sources of the well-being of people as market, family, and
the state, the welfare state is defined as the institution based on both de-
marketization and de-familization; in other words, it provides welfare
through the social control of market instead of income earning at market and
caring by family. The above explanation of institutional evolution by
Schmoller (D) shows that social policy has been directed to the welfare state
(B), first, by de-marketization, or a move from (A), and second, by de-
familization, or a move from (C). In other words, Schmoller's theory of
evolution gives a landscape in which the community, starting from (C) and
transforming itself, maintains a balance between the market and the state.
18 GUSTAV VON SCHMOLLER: "Das Merkantilsystem in seiner historischen

Bedeutung: stadtische, territoriale und staatliche Wirtschaftpolitik", Schmo/lers
Jahrbuch, 1884.
372
VIII. From Schmoller to Schumpeter
Thus viewed, Schmoller's historical and ethical approach to economics

can be interpreted as covering the developments of spontaneous order in the
market and of public intervention toward a social order of justice, and as
focusing on the conflicting as well as accommodating relationships between
them. We find that the research program of the German Historical School
proposed by Schmoller contains the political economy of latecomers, and
communitarian ethics. 19 Only from the historical and dynamic perspective of
the socio-economic system (D) were the two static versions of ethics - i.e.,
justice ethics (B) and virtue ethics (C) - made compatible within a
framework of nation-building. To put it differently, in face of the current
conflict between (B) and (C), the strength of Schmoller's approach (D) in the
Methodenstreit should be much more appreciated. This is the feedback effect
from the current debate to the understanding of the past.
For Schmoller, the basic principle of social policy was social justice. His
idea of justice is of course different from that of Rawls. Schmoller did not try
to derive any principles of justice by logical deduction, but claimed the need
of historical research based on the recognition that a conception of justice
grew out of psychological process and was embedded in a moral community.
He gave a comparison of major values in his famous article on justice:
... in the realm of these ideal conceptions the idea of justice, if not the
first and only power, is none the less one of the most important. [T]he
idea of justice which gives each one his share, is confronted in the
field of social policy by some other ideas. These are in the first place
the idea of community, which allots to the whole that which belongs
to it, which regards the promotion of the whole more than the rights of
the parts; in the second place the idea of benevolence, which in its
consciousness of community gives more to the poor man than he can
justly demand; finally, the idea of liberty, which permits each part to
act freely, placing numerous limits upon justice and the community.
19 YUICHI SHIONOYA: "Rational Reconstruction of the German Historical School:

An Overview", in: Y. SHIONOYA (Ed.), The German Historical School: The
Historical and Ethical Approach to Economics, London (Routledge) 2001, pp.
14-16.
373
YUICHI SHIONOY A
That this results in many restrictions upon the exercise of justice we

will here only suggest, not demonstrate.20
It is important to note that in Schmoller's thought, unlike for the current

communitarians, justice was neither identified with nor replaced by the
morality of a community. In other words, Schmoller made a distinction
between the concept of right and that of common good, or between the
principles of social policy and those of communities, but did not regard these
pairs of concepts as incompatible. This is another lesson of the
Methodenstreit that should be applied to appraising the current debate.
As economic liberalization for globalization and industrialization
proceeded, the handicraft sector fell down and the proletariat increased;
consequently economic and social inequality expanded. Schmoller denied
both the night-watchman state view of Manchester liberals and the
totalitarian state view of socialists and chose the third way to solve pressing
social problems. While he laid his hopes on the enlightenment of Prussian
bureaucracy, he emphasized the activities of non-governmental organizations
as an important source of welfare. For him, a measure of social policy was
education, and its goals included the cultivation of public reason of the upper
class based on community and the moral development through self-help of
the lower class. Therefore, when Bismarck's social security system, one of
the sources of the welfare state, was introduced, Schmoller had misgivings
about the combination of the carrot and the stick, that is the public welfare
provision and the repressive regulation of socialists. His thought of social
policy centered on the evolution of communal ethics, rejecting bipolar
thinking in terms of the market and the state.
Schmoller's historical-ethical approach was succeeded by the last
generation ofthe German Historical School, including Werner Sombart, Max
Weber, and Arthur Spiethoff, and brought about different characteristic
analyses of institutions. But jumping over these followers to Joseph
Schumpeter, I want to conclude the discussion.
Although Schumpeter has not been regarded as a member of the German
Historical School, he was greatly influenced by the ideas of the School and
practiced them in a unique way. He examined Schmoller's research program
critically and found in it the basic vision of economic sociology integrating
20 GUSTAV VON SCHMOLLER: "Die Gerechtigkeit in der Volkswirtschaft",

Schmol/ers Jahrbuch, 1881. See GUSTAV VON SCHMOLLER "The Idea of Justice
in Political Economy", trans. by Ernst L. von Halle and Carl L. Schutz, Annals of
the American Academy of Political and Social Science, (March 1894) pp. 27-28.
374
history and theory. 21 Furthermore, he proposed as the practice of economic

sociology a famous thesis of falling capitalism that capitalism has to decay
because it loses moral, psychological, and political supports owing to the
economic success based on innovative entrepreneurial activity. 22 Here I
cannot argue in detail, but I want to point out that his framework of economic
sociology is similar to Schmoller's scheme for the interaction between the
developments of regional communities as the carrier of social policy and the
transformation of the firm sector.
Schmoller had an optimistic outlook for the control of enterprise by social
policy or the welfare state so as to ultimately lead to the economic and social
system of justice. By contrast, Schumpeter presented a pessimistic view that
the Zeitgeist, ethical values, ways of thinking, including social policy, has
paralyzed the entrepreneurial activity of capitalism. Although there are
crucial differences in the experience of world history between Schmoller and
Schumpeter, they hold the same scheme of institutional evolution based on
the interaction between spiritual-ethical and natural-technical factors. Their
scheme constantly demands examining the consistency between value
schema and economic mechanism from the historical viewpoint. The
appraisal of the German Historical School should not be made on the basis of
its particular historical experience, but with reference to its general
theoretical structure. Its theoretical features should be found not only in the
difference of problems and methods compared to mainstream economics, but
also in the differences of problems and methods compared to ethics, as we
have seen in the above configuration of (A), (B), (C), and (D). The important
feature of the German Historical School lies in its historical and ethical
approach to the real system of economy, and constitutes a paradigm beyond
different schools of thought. The ironic question of whether there was really
a German Historical School of economics does entail the answer in the
affirmative that there was a paradigm beyond a particular schoot.23
To conclude: the current debate in moral and political philosophy around
the priority of the common good versus global justice was misplaced because
the adversaries in the debate were concerned about separate research topics,
i.e., an internal versus external order of the socio-economic system, as was
21 YUICHI SHIONOYA: Schumpeter and the idea of Social Science: A Metatheoretical

Study, Cambridge (Cambridge University Press) 1997.
22 JOSEPH SCHUMPETER: Capitalism and Democracy, New York (Harper &
Brothers) 1950 (3'd edition).
23 HEATH PEARSON: "Was There Really a German Historical School of
Economics?" History of Political Economy, (Fall 1999).
375
YUICHI SHIONOY A
the case with the Methodenstreit in economics. The juxtaposition of the two
debates, however, poses challenging questions on the coordination of ethics
and economics in terms of the static and dynamic relationships between (A),
(B), (C) and (D). We have attempted to discuss these questions by resort to
the ideas of Tonnies, Coase, Luhmann, Schmoller, and Schumpeter. This
paper is partly an application of the lesson of the Methodenstreit to the
current debate in ethics, and partly a tribute to the renaissance of Schmoller
who was long regarded as the loser in the Methodenstreit.
376
Chapter 16
Voluntary Simplicity: Characterization, Select

Psychological Implications, and Societal
Consequences
AMITAI ETZIONI
I. Voluntary Simplicity Characterization

I. Introduction
2. Voluntary Simplicity: Three Variations
3. A Comparative Note
II. Psychological Implications
1. Income and Contentment
2. Maslow, the Haves and the Have Nots, and Voluntary
Simplicity
3. Voluntary Simplicity in the Age of Knowledge
III. Social Consequences of Voluntary Simplicity
1. Voluntary Simplicity and Environmentalism
2. Voluntary Simplicity and Equality
I. Voluntary Simplicity Characterization
1. Introduction
The idea that the over-arching goal of capitalist economies needs to be

changed and that achieving ever-higher levels of consumption of products
and services is a vacuous goal has been with us from the onset of
industrialization. It often has taken the form of comparing the attractive life
AMITAI ETZIONI
of the much poorer, pre-industrial artisan to that of the drudgeries of the more
endowed industrial assembly-line worker.
In more recent times, criticism of consumerism was common among the
followers of the counterculture. They sought a lifestyle that consumed and
produced little, at least in terms of marketable objects, and sought to derive
satisfaction, meaning, and a sense of purpose from contemplation,
communion with nature, bonding, mood-altering substances, sex, and
inexpensive products. 1 Over the years that followed, a significant number of
members of Western societies embraced an attenuated version of the values
and mores of the counterculture. For example, studies by Ronald lnglehart
beginning in the early 1970s found that "The values of Western publics have
been shifting from an overwhelming emphasis on material well-being and
physical security toward greater emphasis on the quality of life. 2 These
"quality of life" factors form what Inglehart calls "postmaterialist values,"
and include the desire for more freedom, a stronger sense of community,
more say in government, and so on. The percentage of survey respondents
with clear postmaterialist values doubled from 9 percent in 1972 to 18
percent in 1991, while those with clear materialist values fell more than half
from 35 percent to 16 percent (those with mixed commitments moved more
slowly, from 55 percent to 65 percent). 3 These trends were reported for most
West European countries. 4
Personal consumption, however, continued to grow. For example, in the
USA, between 1980 and 1990, per capita consumer spending (in inflation-
adjusted dollars) rose by 21.4 percent. The portion of consumer spending
devoted to dispensable ("luxury") items, such as jewelry, toys, video and
audio equipment, rose in the same period from 6.78 percent to 8.63 percent. 5
See FRANK MUSGROVE: Ecstasy and Holiness: Counter Culture and the Open
Society, Bloomington (Indiana University Press) 1974, pp. 17-18. 40-41, 198.
Musgrove notes the paradox that although the counter culture is "marked by
frugality and low consumption," it arises specifically in wealthy societies (p. 17).
2 RONALD INGLEHART: The Silent Revolution: Changing Values and Political
Styles Among Western Publics, Princeton (Princeton University Press) 1977, p. 3.
3 PAUL R. ABRAMSON and RONALD )NGLEHART: Value Change in Global
Perspective, Ann Arbor (University of Michigan Press) 1995. p. 19. Similar
shifts occurred in most developed nations (pp. 12-15 ).
4 ABRAMSON and INGLEHART: Value Change, pp. 12-15.
5 STANLEY LEBERGOTT: Pursuing Happiness: American Consumers in the
Twentieth Century, Princeton (Princeton University Press) 1993, Appendix A, pp.
147-163.
378
VOLUNTARY SIMPLICITY
Meanwhile, the personal savings rate of Americans fell from 7.9 percent in
1980 to 4.2 percent in 1990 and has remained near this level ever since.6
Still, the search for alternatives to consumerism as the goal of capitalism
continues to attract people. I focus here on one such alternative, referred to as
"voluntary simplicity." Among those who have employed this term, or have
done relevant studies are Robert Paehlke, a professor of environmental and
resource studies at Trent University in Ontario, Canada; Juliet Schor, a
professor of economics at Harvard University; 7 and Dorothy Leonard-Barton,
of the Harvard University Business Schoo1. 8 Voluntary simplicity refers to
the choice out of free will rather than by being coerced by poverty,
government austerity programs, or being imprisoned, to limit expenditures on
consumer goods and services, and to cultivate non-materialistic sources of
satisfaction and meaning.
As I already have suggested, the criticism of consumerism and the quest
for alternatives are as old as capitalism itself. However, the issue needs
revisiting for several reasons. The collapse of non-capitalist economic
systems has led many to assume that capitalism is the superior system and
therefore to refrain from critically examining its goals, but capitalism does
have defects of its own. Recent developments in former communist countries
raise numerous concerns. Many in the East and West find that capitalism
does not address spiritual concerns - the quest for transcendental connections
and meanings - they believe all people have. 9 Furthermore, as so many
societies with rapidly rising populations now seek affluence as their primary
domestic goal, the environmental, psychological and other issues raised by
consumerism are being faced on a scale not previously considered. For
instance, the undesirable side effects of intensive consumerism that used to
concern chiefly highly industrialized societies, are now faced by hundreds of
millions of Chinese, Indians, and Koreans, among others. Finally, the
transition from consumption tied to satisfaction of what are perceived as
6 Statistical Abstract ofthe United States, I 994, Table 695.

7 See ROBERT PAEHLKE: Environmentalism and the Future of Progressive Politics,
New Haven (Yale University Press) 1989 and JULIET SCHOR: The Overworked
American: The Unexpected Decline ofLeisure, New York (Basic Books) 1991.
8 VICTOR IRWIN: "Living Lightly Can Mean Greater Independence, Richer Lives",
The Christian Science Monitor, (October 21, I 980), p. 20.
9 See, for instance, CHARLES HANDY: The Hungry Spirit: Beyond Capitalism: A
Quest for Purpose in the Modern World, New York (Broadway Books) 1998.
379
AMITAI ETZIONI
basic needs (secure shelter, food, clothing and so on) to consumerism (the
preoccupation with gaining ever higher level of consumption, including a
considerable measure of conspicuous consumption of status-goods), seems to
be more pronounced as societies become wealthier. Hence, a re-examination
of this aspect of mature capitalism is particularly timely and needed. Indeed,
the current environment of rising and spreading wealth might be particularly
hospitable to moderate forms of voluntary simplicity.
This examination proceeds first by providing a description of voluntary
simplicity, exploring its different manifestations and its relationship to
competitiveness as the need and urge to gain higher levels of income is
curbed (Part 1). It then considers whether higher income and the greater
consumption it enables produces higher contentment. This is a crucial issue
because it makes a world of difference to the sustainability of voluntary
simplicity if it is deprivational and hence requires strong motivational forces
if it is to spread and persevere, or if consumerism is found to be obsessive
and maybe even addictive, in which case voluntary simplicity would be
liberating and much more self-propelling and sustaining. The answer to the
preceding question, and hence to the future of voluntary simplicity as a major
cultural factor, is found in an application of Abraham Maslow's theory of
human needs. It finds further reinforcement by examining the "consumption"
of a sub-category of goods whose supply and demand is not governed by the
condition of scarcity in the post-modem era (Part II). The essay closes with a
discussion of the societal consequences of voluntary simplicity.
2. Voluntary Simplicity: Three Variations
Voluntary simplicity is observable in different levels of intensity. It

ranges from moderate levels (in which people downshift their consumptive
rich lifestyle, but not necessarily into a low gear), to strong simplification (in
which they significantly restructure their lives), to holistic simplification.
Downshifters. One, rather moderate, form of voluntary simplicity is
practiced by economically well off and secure people who voluntarily give up
some consumer goods (often considered luxuries) they could readily afford,
but basically maintain their rather rich and consumption-oriented lifestyle.
For example, they "dress down" in one way or another: wearing jeans and
inexpensive loafers, t-shirts, and driving beat-up cars. (Asked "days per week
I can dress casually at my job," 52% of Americans in 1997 answered "any
day;" 18% at least one day a week and only 27% agreed with the statement
380
"can't dress casually at work." 10 The difference should be noted between

people who voluntarily tone down their consumption, as measured by the
amounts they spend on current consumption or save for future consumption,
and those who exchange one set of goods for another whose style is "simple"
but is actually just as (or even more) costly.
Bruce Springsteen, for example, dresses in worn boots, faded jeans, and a
battered leather jacket, and is said to drive a Ford. 11 Henry Urbach reports
that,
... there has been a tum away from ...the "overdesign" of the 1980s
toward a world of "simple" things. Instead of snazzy plates designed
by architects, we have white dinnerware from Pottery Bam. In place
of Christian Lacroix poufs and Manolo Blahnik pumps, we want Gap
t-shirts, and Prada penny loafers. We like sport-utility vehicles,
stainless-steel Sub-Zero refrigerators, Venetian blinds, retro electric
fans, sturdy wooden tables - anything plain. Extravagance has
surrendered to a look that is straightforward, blunt, unadomed. 12
And Pilar Viladas writes,

In architecture and design today, less is more again. Houses, rooms
and furnishings are less ornate, less complicated and less ostentatious
than they were 10 years ago. Rather than putting their money on
display, people seem to be investing in a quieter brand of luxury,
based on comfort and quality.13
Often this pattern is inconsistent and limited in scope, in that a person

adhering to the norms of voluntary simplicity in some areas does not do so in
many others. This moderate form of voluntary simplicity is symbolized by
those who wear an expensive blazer with a pair of jeans, or drive a jalopy to
their 50-foot yacht.
10 The Public Perspective (August/September 1997), p. 59.

II "The Pop Populist", New York Times Magazine, (January 26, 1996), p. 28.
12 HENRY URBACH: "Hide the Money!" New York Times Magazine, (April 13,
1997), p. 8.
13 PILAR VILADAS: "Inconspicuous Consumption", New York Times Magazine,
(Aprill3, 1997), p.25.
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AMITAI ETZIONI
David Brooks notes that, to those who are wealthy, rejecting the symbols
of success is acceptable only "so long as you can display the objects of
poverty in a way that makes it clear you are just rolling in dough. " 14 This
should not be surprising, for there are no widely recognized symbols of
voluntary simplicity, and most people still desire to be recognized as
successful by their community.
While downshifting is moderate in scope, and perhaps because it is
moderate, it is not limited to the very wealthy. Some professionals and other
members of the middle class are replacing elaborate dinner parties with
simple meals, pot-luck dinners, take-out food, or social events built around
deserts only. Some lawyers are reported to have cut back on the billing hours
race that drives many of their colleagues to work late hours and on weekends,
to gain more income and a higher year-end bonus, and to incur the favor of
the firms for which they work. 15 Some businesses have encouraged limited
degrees of voluntary simplicity. For instance, in several work places there is
one day (often Friday) in which employees are expected to "dress down." In
some work places, especially on the West coast, employees may dress down
any workday of the week.
There seems to be no evidence that social scientists would find
satisfactory to show that downshifting is widely practiced in some affluent
societies or that it has risen. There are some scraps of data that can be said at
best to point in these directions.
A study by the Merck Family Fund in 1995 found that 28 percent of a
national sample of Americans (and I 0 percent of the executives and
professionals sampled) 16 reported having "downshifted," or voluntarily made
life changes resulting in a lower income to reflect a change in their priorities,
in the preceding five years. The most common changes were reducing work
hours, switching to lower-paying jobs, and quitting work to stay at home, 17
which may but do not necessarily correlate with downshifting. The same
survey also found that 82 percent of Americans felt that people buy and
consume more than they need, suggesting that voluntary simplicity is viewed
14 P. YILADAS: "Inconspicuous Consumption", p. 25.

15 RITA HENLEY JENSEN: "Recycling the American Dream", ABA Journal82 (April.
1996). pp. 68-72.
16 "Voluntary Simplicity", NPR: Morning Edition, (February 25. 1997).
17 "Choosing the Joys of a Simplified Life", New York Times, (September 21,
1995), p. C:l (Yearning for a Balance: Views of Americans on Consumption,
Materialism, and the Environment, Executive Summary from the Merck Family
Fund).
382
as commendable but not widely followed. Another survey, conducted in

1989, which also focused on sentiments rather than on changes in behavior,
found that three out of four working Americans would like "to see our
country to return to a simpler lifestyle, with Jess emphasis on material
success. " 18
Strong simplifiers. This group includes people who have given up high-
paying, high-stress jobs as lawyers, business people, investment bankers, and
so on, to live on less, often much less income. These people give up high
levels of income and socio-economic status - one former Wall Street analyst
restricts his spending to $6,000 a year. In another case, both members of a
couple quit their jobs as high-paid executives in the telecommunications
industry, and now live only on their savings- about $25,000 per year- and
spend their time writing and doing volunteer work. 19 The New York Times
reports,
Choosing to buy and earn less--to give up income and fast-track
success for more free time and a lower-stress life--involves a quiet
revolt against the dominant culture of getting and spending. Enough
small revolts are now taking place, researchers say, to make [the]
phenomenon ... a major and growing trend of the 90's. 20
Strong simplifiers also include a large number of employees who
voluntarily choose to retire before they are required to do so, and accept less
income and lower pension payouts in order to have more leisure. While it is
clear that the aggregate number of people who retire early is increasing -
some of this increase may well be involuntary as a result of forced retirement
and downsizing - it is not known what the proportion of voluntary vs.
involuntary retirement is. 21 Informal interviewing, including among the
18 "Is Greed Dead?" Fortune, (August 14, 1989), p. 41.

19 "Voluntary Simplicity", NPR: Morning Edition, (February 26, 1997).
20 "Choosing the Joys of a Simplified Life", New York Times, (September 21,
1995), p. C:l.
21 Among men between fitly-five and sixty-four, 85.2 percent were employed in
1960, while by 1990 only 67.7 percent were. See U.S. DEPARTMENT OF
COMMERCE: Statistical Abstract of the United States, 1975, Table 559; 1994
Tables 615,619. The number of persons who had retired by sixty-three doubled
between 1960 and 1990 from one quarter to a half. See "To Many, Early
Retirement Only a Dream", Boston Globe, (October 29, 1995), p. 41.
383
AMITAI ETZIONI
author's colleagues, suggests that a significant proportion of this increase is

voluntary.
Ideas associated with voluntary simplicity are ideologically compelling, if
not necessarily reflected in actual behavior. In I 989, a majority of working
Americans rated "a happy family life" as a much more important indicator of
success than "earning a lot of money" - by an unusually wide margin of 62
percent to I 0 percent. 22 Also, numerous women and some men prefer part-
time jobs or jobs that allow them to work at home, even if better paying full-
time jobs are open to them, because they are willing to reconcile themselves
with earning a lower income to be able to dedicate more time to their children
and be at home when their children are there. 23 People who switch to new
careers that are more personally meaningful but less lucrative also fall into
this category. For instance, a 1997 source reports that "a growing wave of
engineers, military officers, lawyers, and business people ... are switching
careers and becoming teachers."24
People who voluntarily and significantly curtail their income tend to be
stronger simplifiers than those who only moderate their Iifestyle, because a
significant reduction of income often leads to a much more encompassing
"simplification" of lifestyle than selective downshifting of select items of
consumption. While it is possible for both an affluent person to cease
working altogether and still lead an affluent lifestyle, and for someone who
does not reduce his or her income to cut spending drastically, one must
expect that those who significantly curtail their income will simplify more
than those who only moderate their consumption. Once people reduce their
income, unless they have large savings, a new inheritance or some other such
non-work related income, they must adjust their consumption once they
choose to cut their income-producing labor.
People who adjust their lifestyle only or mainly because of economic
pressures (having lost their main or second job, or for any other reason) do
not qualify as voluntary simplifiers on the simple ground that their shift is not
voluntary. One can argue that some poor people freely choose not to earn
more and keep their consumption level meager. To what extent such a choice
is truly voluntary and how widespread this phenomena is are questions not
addressed in this paper. The discussion here focuses on people who had an
22 "Is Greed Dead?" p. 41.

23 "More Mothers Staying At Home", Boston Globe, (Dec(:mber 18, 1994 ), p.
NW:l.
24 "More Career-Switchers Declare, 'Those Who Can, Teach"', Wall Street Journal,
(April 8, 1997), p. 8:1.
384
affluent life style and chose to give it up, for reasons that will become evident
toward the end of the discussion.
In contrast, people who could earn more but are motivated by pressures
such as time squeeze to reduce their income and consumption do qualify,
because they could have responded to the said pressure in means other than
simplifYing (for instance, hiring more help). 25 Moreover, there seems to be
some pent-up demand for voluntary simplicity among people who report they
would prefer to embrace such a life style but feel that they cannot do so.
Gallup Poll Monthly reports that 45 percent of Americans feel they have too
little time for friends and other personal relationships, and 54 percent feel
they have too little time to spend with their children. 26 Twenty-six percent of
Americans polled said they would take a 20 percent pay cut if it meant they
could work fewer hours. 27 Presumably, these people face, or least feel they
face, only two choices: keep their current jobs or possibly face prolonged
unemployment.
The Simple Living Movement. The most dedicated, holistic simplifiers
adjust their whole life patterns according to the ethos of voluntary simplicity.
They often move from affluent suburbs or gentrified parts of major cities to
smaller towns, the countryside, farms and less affluent or urbanized parts of
the country- the Pacific North West is especially popular- with the explicit
goal of leading a "simpler" life. A small, loosely connected social movement,
sometimes called the "simple living" movement, has developed - complete
with its own how-to books, nine-step programs, and newsletters, though
reports suggest that "many persons experimenting with simpler ways of
living said they did not view themselves as part of a conscious social
movement." 28
This group differs from the downshifters and even strong simplifiers not
only in the scope of change in their conduct but also in that it is motivated by
a coherently articulated philosophy. One source of inspiration is Voluntary
25 The rising pressures on American workers are detailed by JULIET B. SCHOR: The
Overworked American: The Unexpected Decline of Leisure, New York (Basic
Books) 1991.
26 LYDIA SAAD: "Children, Hard Work Taking Their Toll on Baby Boomers",
Gallup Poll Monthly (April 1995), p. 22.
27 Telephone survey of I 0 II Americans by the Gallup Organization, January 19-30,
1994.
28 DUANE ELGIN: Voluntary Simplicity, New York (William Morrow) 1993, p. 66.
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AMITAI ETZIONI
Simplicity, written in 1981 by Duane Elgin, which draws on the traditions of

the Quakers, the Puritans, transcendentalists such as Emerson and Thoreau,
and various world religions to provide philosophical underpinnings to living
a simple life. 29 This philosophy is often explicitly anti-consumerist. Elgin,
for example, calls for "dramatic changes in the overall levels and patterns of
consumption in developed nations," adding that "this will require dramatic
changes in the consumerist messages we give ourselves through the mass
media." 30 In 1997, Public Broadcasting Corporation ran a special it called
"Affuenza." It was said to provide a treatment for an "epidemic" whose
symptoms are "shopping fever, a rash of personal debt, chronic stress,
overwork and exhaustion of natural resources." It promised a follow-up on
"better living for less." The Center for a New American Dream publishes a
quarterly report on the same issues called simply Enough! While one can
readily profile the various kinds of simplifiers, there are no reliable
measurements that enable one to establish the number of simplifiers of the
three kinds or to determine whether their ranks are growing. One recent
publication, though, estimates that nearly one out of four adult Americans, 44
million, are "Cultural Creatives," who rank voluntary simplicity high among
their values· 31
3. A Comparative Note
Voluntary simplicity is not a phenomena limited to the contemporary

American society. Indeed, while there seem to be no relevant comparative
quantitative data, voluntary simplicity is somewhat more widespread in
Western Europe, especially on the continent, than in the United States.
(Britain in this sense is somewhere between Western Europe and the United
States.) Many Europeans seem to be more inclined than Americans to
sacrifice some income for more leisure time, longer vacations, visits to spas,
coffee shops, and pubs. This is reflected in these countries' labor laws (which
in turn reflect not merely power politics but are also an expression of widely
held values), which provide for extensive paid vacation times, early closing
hours for shops, closing of shops on Sundays and parts of Saturdays,
subsidies allowing thousands to hang on to student life for many years, as
29 D. ELGIN:Voluntary Simplicity, especially p. 46-53.

30 D. ELGIN: Voluntary Simplicity, p. 201.
31 PAUL H. RAY: "The Emerging Culture", American Demographics (February
1997), pp. 29, 31.
386
well as extensive support for cultural activities. 32 The collective result is that
Western European societies produce less and consume less per capita than the
American society in terms of typical consumer goods and services, but have
more time for leisure and educational and cultural activities that are more
compatible with voluntary simplicity than American society.
By contrast, consumerism seems to be powerful and gaining in many
developing countries and former communist societies where consumerism is
a much more recent phenomenon. In these societies the pursuit of washing
machines, sexy lingerie, and other luxury goods seems to be all the rage.
From China, we hear that "Westernization and consumerism are rushing in so
rapidly that even the Chinese ... are amazed .... American democracy is
nowhere present, but American consumerism is everywhere."33 In Russia, it
is reported that "a new wave of commercialism [is] sweeping the Russian
capital;" one popular store in Moscow has brisk sales of $1,290 gold and
silver seraphim, $529 music boxes, and $1 ,590 plastic yule trees during the
Christmas shopping season.3 4 "Consumerism Is Thriving in Vietnam," where
Honda motorbikes, mobile phones, fax machines, and TVs are now popular
in the cities.35 "You can buy and rent laser discs ... , young people drive sports
cars, jewelry shops are bustling," these days in the once backward country of
Burma.36 And "Despite their obvious affinity for Americana .. .Israelis
increasingly are questioning whether the dizzying construction of U.S.-style
shopping malls and American franchise shops is right for Israel, "3 7 though
they have long lost most of their pioneering spirit and have picked
consumerism with vengeance. In short, there seems to be very strong
differences in the extent to which voluntary simplicity is embraced in various
societies, affected by a myriad of economic, cultural and social factors not
explored here.
32 J.SCHOR: The Overworked American, pp. 81-82.

33 "West Meets East, With A Vengeance", Chicago Tribune, (Sept. 25, 1994), p.
13:2. See also "A Great Leap Forward in Shopping", Los Angeles Times, (Jan. 29,
1996), p. D:l.
34 "Tinsel? Moscow Buys That", Boston Globe, (Dec. 25, 1996), p. A:2.
35 "Consumerism Is Thriving in Vietnam, Luring U.S. Companies Despite Poverty",
Wall Street Journal, (May 13, 1994), p. A7.
36 "Burma Ha Healthy, Up-to-Date Taste for Consumer Goods, Survey Shows",
Wall Street Journal, (Aug. 2, 1996), p. A:IIA.
37 "Ugly Americanization?" Los Angeles Times, (Sept. 2, 1995), p. E:l.
387
AMIT AI ETZlONI
II. Psychological Implications
Whatever the cultural differences, the ultimate question of whether or not

voluntary simplicity can be sustained, and, moreover, greatly expand its reach
among the citizens of various societies depends to a significant extent on the
question of whether voluntary simplicity constitutes a sacrifice that people
must be constantly motivated to make, or is in itself a major source of
satisfaction, and hence is self-motivating. To examine this issue the
discussion next examines to what extent the opposite of voluntary simplicity
- higher income and consumption - is a source of contentment. It then
expands the answer by drawing on Maslow's observations about the hierarchy
of needs.
1. Income and Contentment
Consumerism is justified largely in terms of the notion that the more

goods and services a person uses, the more satisfied a person will be. Early
economists thought that people had a fixed set of needs., and they worried
what would motivate people to work and save once their income allowed
them to satisfy their needs. Subsequently, however, it was widely agreed that
people's needs can be artificially enhanced through advertising and social
pressures, and hence they are said to have, if not unlimited, at least very
expandable consumeristic needs.
In contrast, critics have argued that the cult of consumer goods - of
objects - has become a fetish that stands between people and contentment,
one that prevents people from experiencing authentic expressions of affection
and appreciation by others. Western popular culture is replete with narratives
about fathers (in early ages), and recently of mothers as well, who slaved to
bring home consumer goods - but far from being appreciated by their
children and spouses found, often only late in their life, that their families
would have preferred if the "bread" winners would have spent more time
with them and granted them affection and appreciation (or expressed their
affection and appreciation directly, through attention and attendance, hugs
and pats on the back, rather than mediate that expression by working hard
and long to buy things). Arthur Miller's The Death of a Salesman is a telling
example of this genre. In 1997, Neil Simon was still belaboring this story in
his play Proposals.
388
Social science findings, which do not all run in the same direction and
have other well known limitations, in toto seem to support the notion that
income does not significantly affect people's contentment, with the important
exception of the poor. For instance, Frank M. Andrews and Stephen B.
Withey found that the level of one's socio-economic status had meager
effects on one's "sense of well-being" and no significant effect on
"satisfaction with life-as-a-whole." 38 And Jonathan Freedman discovered that
levels of reported happiness did not vary greatly among the members of
different economic classes, with the exception of the very poor who tended to
be less happy than others. 39 Figures I and 2 show the results of a longitudinal
°
study of the correlation between income and happiness. 4 Figure I represents
the results of interviews conducted I97I-I975, Figure 2 interviews of the
same individuals conducted I98I-I984. These figures demonstrate two
things: first, that at low incomes the amount of income does correlate
strongly with happiness, but this correlation levels off soon after a
comfortable level of income is attained. Second, that during the decade that
passed between the interviews, the individual's income rose dramatically
(note the change in the x-axis categories) but the levels of happiness did not
(the y-axis categories are nearly the same). These figures are included to
emphasize the point that voluntary simplicity is an issue for those whose
basic needs are met, and not for the poor or near poor.
38 FRANK M. ANDREWS and STEPHEN B. WITHEY: Social Indicators of Well-Being:

Americans' Perceptions of Life Quality, New York (Plenum Press) 1976, pp. 254-
255.
39 JONATHAN L. FREEDMAN: Happy People: What Happiness Is, Who Has It, and
Why, New York (Harcourt Brace Jovanovich) 1978.
40 Eo DIENER, Eo SANDVIK, LARRY SEIDLITZ, and MARISSA DIENER: "The
Relationship Between Income and Subjective Well-Being: Relative or
Absolute?" Social Indicators Research, 28 (1993), pp. 195-223.
389
AMIT AI ETZIONI
Figure 1
Income Well-Being for U.S. Time 1
Well-Being
40
+
+
+
39
+
38
37
10 15 20 25 30
Annual Income Categories (Thousands)
Studies of the collective well-being of a country show that economic

growth does not significantly affect happiness (though at any given time the
people of poor countries are generally less happy than those of wealthy ones).
David G. Myers reports that in spite of the persistent belief among many
Americans that more income will make them happier, this does not appear to
be the case: while per capita disposable (after-tax) income in inflation-
adjusted dollars almost exactly doubled between 1960 and I 990, 32 percent
of Americans reported that they were "very happy" in 1993, almost the same
proportion as did in 1957 (35 percent). Although economic growth slowed
since the mid-1970s, Americans reported happiness was remarkably stable
(nearly always between 30 and 35 percent) across both high-growth and low
390
growth periods. Moreover, in the same period, rates of depression, violent

crime, divorce, and teen suicide have all risen dramatically. 41
Figure 2
Income and Well-Being for U.S. Time 2
Well-Being
42
+
40
+ +
+
38
++ +
+
36
-t
+
34
0 20 40 60 80 100
Annuallncome Categories (Thousands)
41 DAVID G. MYERS and Eo DIENER: "Who Is Happy?" Psychological Science, 6

(January 1995), pp. 12-13. See also ED DIENER, E. SANDVIK, L. SEIDLITZ, and M.
DIENER: "The Relationship. Between Income and Subjective Well-Being:
Relative or Absolute?" Socia! Indicators Research, 28 (1993), p. 208.
391
AMITAI ETZIONI
Recent psychological studies have made even stronger claims: that the
more concerned people are with their financial well being, the less likely they
are to be happy. One group of researchers found that "Highly central
financial success aspirations ... were associated with less self-actualization,
less vitality, more depression, and more anxiety." 42
Robert Lane summarizes the results of several studies as follows:
... [M]ost studies agree that a satisfying family life is the most
important contributor to well-being .... [T]he joys of friendship often
rank second. Indeed, according to one study, an individual's number of
friends is a better predictor of his well-being than is the size of his
income. Satisfying work and leisure often rank third or fourth but,
strangely, neither is closely related to actual income.43
Lane reports that increases in individual income briefly boost happiness, but
the additional happiness is not sustainable because higher income level
becomes the standard against which people measure their future
achievements. 44
These and other such findings raise the following question: If higher
levels of income do not buy happiness, why do people work hard to gain
higher income? The answer is complex. In part high income in capitalistic
consumeristic societies "buys" prestige; others find purpose and meaning and
contentment in the income-producing work per se. There is, however, also
good reason to suggest that the combination of artificial fanning of needs and
cultural pressures maintain people in consumeristic roles when these are not
truly or deeply satisfying.
Voluntary simplicity works precisely because consuming less, once one's
basic creature comfort needs are taken care of, is not a source of deprivation,
so long as one is freed from the culture of consumerism. Voluntary simplicity
represents a new culture, one that respects work (even if it generates only low
or moderate income) and appreciates modest rather than conspicuous or
lavish consumption, but does not advocate a life of sacrifice or service (and
in this sense is rather different from ascetic religious orders or some socialist
expressions as in Kibbutzim). Voluntary simplicity suggests that there is a
42 TIM KASSER and RICHARD M. RYAN: "A Dark Side of the American Dream:
Correlates of Financial Success as a Central Life Aspiration", Journal of
Personality and Social Psychology, 65 (1993}, p. 420.
43 ROBERT E. LANE: "Does Money Buy Happiness?" Public Interest (Fall 1993),
p.58.
44 R.E. LANE: "Does Money Buy Happines?" pp. 56-65.
392
declining marginal satisfaction in the pursuit of ever higher levels of

consumption. And it points to sources of satisfaction in deliberately and
voluntarily avoiding the quest for ever higher levels of affluence and
consumption and making one's personal and social project the pursuit of
other purposes. These purposes are not specifically defined other than that
they are not materialistic. Indeed, just as some intrinsically find satisfaction
in work and savings rather than in purchasing power, so some voluntary
simplicity followers find satisfaction in the very fact that they chose (and
have not been forced to choose) a simpler lifestyle, and are proud of their
choice. Moreover, as they learn to cultivate other pursuits, simplifiers gain
more satisfaction out of life-long learning, public life, volunteering,
community participation, surfing the Internet, sports, cultural activities, and
observing or communing with nature. Often, as Elgin puts it, "Voluntary
simplicity [is] a manner of living that is more outwardly simple and inwardly
rich." 45
In each of these areas, some downshifters and even full-blown simplifiers
slip back into consumerism, forever promoted by marketeers. Thus, Internet
surfers may feel that they "need" to update their computer every other year or
purchase various bells and whistles; and those engaged in sports feel they
"need" a large variety of expensive, ever-changing, fashionable clothing and
equipment to enjoy their sport of choice. But a considerable number of
members of the affluent classes in affluent societies - especially, it seems,
societies that have been affluent for a while - find that they can keep
consumerism under control and truly learn to cultivate lower cost sources of
contentment and meaning. They enjoy touch football, a well-worn pair of
sneakers, or take pride in their beat-up car.
An area that needs further study is the tendency of consumerism, when
restrained, to leave a psychological vacuum that needs to be filled. 46 Those
who try to wean themselves off consumerism often need support, mainly in
the form of approval of significant others and membership in voluntary
simplicity groups and sub-cultures. For instance, they may need to learn
45 D. ELGIN: Voluntary Simplicity, p. 25.

46 The addiction of consumption is discussed, however, by TIBOR SCITOVSKY: The
Joyless Economy: The Psychology of Human Satisfaction, New York (Oxford
University Press) 1992. See also BARRY ScHWARTZ: The Costs of Living: How
Market Freedom Erodes the Best Things in Life, New York (W.W. Norton and
Company) 1994, pp. 154-162.
393
AMITAI ETZIONI
gradually to replace shopping with other activities that are more satisfYing
and meaningful. While some find shopping a chore, among the affluent,
shopping is a major recreational activity, often done with peers (if not for
actual consumption but for collection and display purposes, anywhere from
expensive knickknacks to antiques). Numerous teenagers and many tourists
also shop as a major recreational activity. Indeed, one must expect that, for
people who draw satisfaction from shopping per se, to curtail this activity
may initially evoke an anxiety of unoccupied time that needs to be treated by
developing a taste for and commitment to other activities.
The obsessive nature of at least some consumerism is evident in that
people who seek to curb it find it difficult to do so. Many people purchase
things they later realize they neither need nor desire, or stop shopping only
after they have exhausted all their sources of credit. (Reference is not to the
poor, but to those who have several credit cards and who constantly "max"
them out.)
In short, one expects that to convert a large number of people to voluntary
simplicity requires taking into account that constant consumption cannot be
simply stopped, that transitional help may be required, and that conversion is
best achieved when consumerism is replaced with other sources of
satisfaction and meaning.
2. Maslow, the Haves and the Have Nots, and Voluntary Simplicity
Thus far, I asked how difficult it is to sustain voluntary simplicity, given

that it is common to assume that a high level of materialistic consumption is
the main source of satisfaction driving people to work in capitalist societies. I
suggested that evidence, while not all of one kind, tends to suggest that
higher income does not lead to higher levels of satisfaction. Indeed, there is
reason to suggest that the continued psychological investment in ever-higher
levels of consumption has an addictive quality. People seek to purchase and
amass ever more goods whether they need them (in any sense of the term) or
not. It follows that voluntary simplicity, far from being a source of stress, is a
source of a more profound satisfaction. This point is further supported by
examining the implications of Maslow's theory to these points.
The rise of voluntary simplicity in advanced (or late) stages of capitalism,
and for the privileged members of these societies, is explainable by a
394
psychological theory of Abraham Maslow, 47 who suggests that human needs

are organized in a hierarchy. At the base of the hierarchy are basic creature
comforts, such as the need for food, shelter and clothing. Higher up is the
need for love and esteem. The hierarchy is crowned with self-expression.
Maslow theorized that people seek to satisfy lower needs before they turn to
higher ones, although he does not deal with the question of the extent to
which lower needs have to be satiated before people move to deal with
higher-level needs, or the extent to which they can become fixated on lower-
level needs. 48 Some suggest that Maslow's theory has been disproven
because people seek to satisfy their needs not in the sequence he stipulated or
even all at once. This may well be the case, but the only issue relevant here is
if people continue to heavily invest themselves in the quest for "creature
comforts" long after they are quite richly endowed in such goods, and if in
the process their other needs are not well stated (even if they are not
completely ignored). Western culture leaves little doubt that Maslow's thesis,
if formulated in this way, is a valid one.
Maslow's thesis is compatible with the suggestion that voluntary
simplicity may appeal to people after their basic needs are well satisfied:
once they feel secure that these needs will be attended to in the future, and as
they objectively feel ready to turn more attention to their higher needs - even
if their consumeristic addiction prevents them from noting that they may shift
upwards, so to speak. Voluntary simplicity is thus a choice a successful
corporate lawyer, not a homeless person, faces; Singapore, not Rwanda.
Indeed, to urge the poor or near poor to draw satisfaction from consuming
less is to ignore the profound connection between the hierarchy of human
needs and consumption. It becomes an obsession that can be overcome only
after basic creature-comfort needs are sated.
Consumerism has one, often observed, feature that is particularly relevant
here. Consumerism sustains in itself, in part, because it is visible. People who
are "successful" in traditional capitalist terms need to signal their
achievements in ways that are readily visible to others in order to gain their
47 ABRAHAM 1-1. MASLOW: Toward A Psychology of Being, Princeton (Von

Nostrand) 1986. I should note that Maslow's writings are rather opaque and
discursive. What follows is an interpretation of Maslow rather than a direct
derivation.
48 He also does not draw a distinction between pro-social self-expression, for
example arts, and anti-social, for instance abuse of narcotics.
395
AMITAI ETZIONI
appreciation, approval, and respect. They do so by displaying their income by

buying for themselves (or, in earlier days, for their wives) expensive status
goods, as Vance Packard demonstrated several decades ago.
People who are well socialized into the capitalistic system often believe
that they need income to buy things they "need." (Or-that without additional
income they "cannot make ends meet.") But examinations of the purchases of
those who are not poor or near poor shows purchases of numerous items not
needed in the strict sense ("could not survive," "would end up in the street,"
"would starve") but needed to meet status needs ("could not show my face").
This is the sociological role of N ike sneakers, leather jackets, fur coats,
jewelry, fancy watches, expensive cars, and numerous other such goods, all
items that are highly visible to people who are not members of one's
community, who do not know one personally. These goods allow people to
display the size of their income and wealth without attaching their
accountant's statement to their lapels.
In such a culture, if people choose a job or career pattern that is not
income-maximizing and voluntarily simplistic, they have no established
means of signaling that they have chosen such a course rather than having
been forced into it, and that they have not failed by the mores of the capitalist
society. There are no lapel pins stating "I could have, but preferred not to."
Voluntary simplicity responds to this need for status recognition without
expensive conspicuous consumption by choosing lower-cost but visible
consumer goods that enable one to signal that one has chosen, rather than
been coerced into, a less affluent lifestyle.
This is achieved by using select consumer goods that are clearly
associated with a simpler life pattern and are as visible as the traditional
status symbols and/or cannot be afforded by those who reduced consumption
merely because their income fell. For instance, those who dress-down as part
of their voluntary simplicity, often wear some expensive items (a costly
blazer with jeans and sneakers) or stylistic and far from inexpensive dress-
down items (designer jeans), as if to broadcast their voluntary choice of this
life-style. (Which specific consumption items signal voluntary simplicity
versus coerced simplicity changes over time and from one subculture to
another.) Brooks refers to this practice as "conspicuous non-consumption. "49
In this way, voluntary simplifiers can satisfY what Maslow considers another
basic human need, that of gaining the appreciation of others, without using a
high - and ever escalating - level of consumption as their principle means of
gaining positive feedback.
49 P. V!LADAS: "Inconspicuous Consumption", p. 25.

396
This idea is of considerable importance when voluntary simplicity is

examined not merely as an empirical phenomenon, as a pattern for social
science to observe and dissect, but also as a set of values that has advocates
and that may be judged in terms of the values' moral appropriateness. As I
see it, the advocacy of voluntary simplicity addresses those who are in the
higher reaches of income, those who are privileged but who are fixated on the
creature-comfort level; it may help them free themselves from the artificial
fanning of these basic needs and assist them in moving to higher levels of
satisfaction. The same advocacy addressed to the poor or near poor (or
disadvantaged groups or the "have not" countries) might correctly be seen as
an attempt to deny them the satisfaction of basic human needs. Consumerism,
not consumption, is the target for voluntary simplicity.
Oddly, a major development being brought about by technological
innovations makes it more likely that voluntary simplicity may be expanded,
and that the less privileged and have nots may gain in the process. In
considering this development, I first discuss the nature of non-scarce objects
and then turn to their implications for the reallocation of wealth.
3. Voluntary Simplicity in the Age of Knowledge
Developed societies, it has been argued for decades, are moving from
economies that rely heavily on the industrial sector to economies that
increasingly draw upon the knowledge industry.so The scope of this
transition and its implications are often compared to that which those
societies experienced as they moved from farming to manufacturing. One
should note that there is a measure of overblown rhetoric in such
generalizations. Computers are, for instance, classified as a major item of the
rising knowledge industry rather than traditional manufacturing. However,
once a specific computer is programmed and designed, a prototype tested and
debugged, the routine fastening of millions of chip-boards into millions of
boxes to make PCs is not significantly different from, say, the manufacturing
of toasters. And while publishers of books are now often classified as part of
the knowledge industry and computers are widely used to manufacture
books, books are still objects that are made, shipped, and sold like other non
50 ALVIN TOFFLER: Future Shock, New York (Random House) 1970. DANIEL BELL:
The Coming of Post-Industrial Society: A Venture in Social Forecasting, New
York (Basic Books) 1973.
397
AMITAI ETZIONI
knowledge industry products. Acknowledging these examp'les of overblown

claims is not to deny that a major transformation is taking place, only that its
growth and scope are much slower and less dramatic than was originally
expected. Indeed, given this slower rate of change, societies are able to face
the ramifications in a more orderly manner. The main significance of the rise
of the knowledge age is that the resulting shrinking of scarcity enhances the
possibility for the expansion of voluntaty simplicity. This particularly
important point is surprisingly rarely noted. Unlike the consumer objects that
dominated the manufacturing age - cars, washers, bikes, televisions, houses
(and computers) -many knowledge "objects" can be consumed, possessed,
and still be had by numerous others, that is shared, at minimal loss or cost.
Hence, in this basic sense, knowledge defies scarcity, thus reducing scarcity,
which is a major driving principle behind industrial capitalist economies.
Compare, for instance, a Porsche to Beethoven's Ninth (or a minivan to a folk
song). If an affluent citizen buys a particular Porsche (and all other billions of
traditional consumer objects), this Porsche - and the resources that were
invested in making it - are unavailable to any others (if one disregards
friends and family). Once the Porsche is "consumed," little of value remains.
By contrast, the Ninth (and a rising number of other such knowledge objects)
can be copied millions of times, enjoyed by millions at one and the same
time, and it is still available in its full, original glory.
A commentator on a previous draft of this essay suggested that there is a
measure of snobbism in showing a preference for the Ninth over a Porsche.
But this is hardly the issue here; the same advantage is found when one
compares an obscene rap song over a Volkswagen Beetle, or a pornographic
image on the Internet to a low-income housing project. The criterion at issue
is the difference between the resources that go into making each item and the
extent to which it can be copied, consumed, and still be "possessed" and
shared.
True, even knowledge-objects have some minimal costs, because they
need some non knowledge "carrier," have some limited material base, a disk,
a tape or some paper, and most need an instrument- a radio for instance -to
access them. However, typically the costs of these material carriers are
minimal compared to those of most consumer goods. While many perishable
goods (consumer objects such as food or gasoline) are low in cost per item,
one needs to buy many of them repeatedly to keep consuming them. In
contrast, "knowledge" objects such music tapes or movie COs can be enjoyed
numerous times and are not "consumed" (eaten up so to speak). In that sense,
398
knowledge objects have the miraculous quality of the bush Moses saw in
Sinai: it burned but was not consumed.
What is said for music also holds for books and art. Shakespeare in a 99-
cent paperback edition issued in India is no less Shakespeare than in an
expensive leather-bound edition, and above all, millions can read
Shakespeare, and his writings are still available, undiminished, for millions
of others. Millions of students can read Kafka's short stories, solve
geographical puzzles, and study Plato without any diminution of these items.
That is, these sources of satiation are governed by laws that are the mirror
opposite of those laws of economics that govern oil, steel, and other
traditional consumer objects from cellular phones to lasers.
Numerous games but not all are based on symbolic patterns and hence
like knowledge objects are learned but not consumed and have only minimal
costs. Children play checkers (and other games) with discarded bottle caps.
Chess played by inmates using figures made of stale bread is not less
enjoyable than a game played with rare, ivory hand-carved pieces. (One may
gain a secondary satisfaction from the aesthetic beauty of the set and from
owning such an expensive set, but these satisfactions have nothing to do with
the game of chess per se.)
Similarly, bonding, love, intimacy, friendship, contemplation,
communion with nature, certain forms of exercise (Tai Chi for instance, as
distinct from the Stair Master), all can free one, to a large extent, from key
laws of capitalistic economies. In effect, these sources of satisfaction,
relationship based, are superior from this viewpoint to knowledge objects,
because in the kind of relationships just enumerated, when one gives more,
one often receives more and thus both sides (or, in larger social entities such
as communities, all sides) are "enriched" by the same "transactions." Thus,
when two individuals who are learning to know one another as persons and
become "invested" in one another during the ritual known as dating, neither is
lacking as a result and often both are richer for it. (This important point is
often overlooked by those who coined the term "social capital" to claim that
relations are akin to transactions.) Similarly, parents who are more involved
with their children often (although by no means always) find that their
children are more involved with their parents, and both draw more
satisfaction from the relationship. Excesses are far from unknown - for
example, when some parents attempt to draw most of their satisfaction from
their children, and sharply asymmetrical relations are also known in which
399
AMITAI ETZIONI
one side exploits the other's dedication or love. Nonetheless, mutual

"enrichment" seems much more common.
The various sources of non-materialistic satisfaction listed here were
celebrated by the counterculture. However, voluntary simplicity differs from
the counterculture in that voluntary simplicity, even by those highly
dedicated to it, seeks to combine a reasonable level of work and consumption
to attend to creature comfort needs, with satisfaction from higher sources.
The counterculture tried to minimize work and consumption, denying
attention to basic needs, and hence became unsustainable. To put it more
charitably, it provided an extreme, path-blazing version for the voluntary
simplicity that followed. While much more moderate than the lifestyle
advocated by the counterculture, voluntary simplicity, as a result of fostering
satisfaction from knowledge rather than consumer objects, reduces the need
to work and shop. As a result, it frees time and other scarce resources for
further cultivation of non-materialistic sources of satisfaction, from acquiring
music appreciation to visiting museums, from slowing down to enjoy nature
to relearning the reading of challenging books to watching a rerun of a
classical movie on television.
One should note that none of the specific sources of non-materialistic
satisfaction are necessarily tied to voluntary simplicity. One can engage in a
voluntarily simple life without enjoying music or nature, being a bonding
person or a consumed chess player, an Internet buff or a domino aficionado.
However, voluntary simplicity does point to the quest for some sources of
satisfaction other than the consumption of goods and services. This statement
is based on the elementary assumption that people prefer higher levels of
satisfaction over lower ones; hence if higher satisfaction is not derived from
ever higher levels of consumption, their "excess" quest, that which is not to
be invested in pursuit unnecessary of creature comforts, seeks to be invested
elsewhere. It follows that while the specific activities that serve as the sources
of non materialistic satisfaction will vary, some such must be cultivated or
voluntary simplicity may not be sustainable.
III. Social Consequences of Voluntary Simplicity
The shift to voluntary simplicity has significant consequences for society

at large, above and beyond the lives of the individuals that are involved. A
promising way to think about them is to ask what the societal consequences
400
would be if more and more members of society, possibly an overwhelming

majority, engage in one kind or another of voluntary simplicity. These
consequences are quite self-evident for environmental concerns and hence
need to be only briefly indicated; they are much less self-evident for social
justice and thus warrant further attention.
1. Voluntary Simplicity and Environmentalism
There can be little doubt that voluntary simplicity, if constituted on a

large scale, would significantly enhance society's ability to protect the
environment. Moreover, if a significant number of people recast their lives
according to the tenets of voluntary simplicity, even ifthey merely downshift
rather than deeply recast their consumption, they are still likely to conduct
themselves in ways that are more congenial to their environment than they
were when they followed a life of conspicuous consumption.
First of all, voluntary simplifiers use far fewer resources than individuals
engaged in conspicuous consumption. Simple means of transportation, such
as bicycles, walking, public transportation, and even cars that are functional
but not ostentatious, use significantly less energy, steel, rubber and other
scarce resources than the cars that are currently often favored. People who
choose to restore old buildings or move to the countryside, tend, with notable
exceptions, to use fewer scarce resources than those who build for themselves
ostentatious residences, with expansive living rooms, extensive gardens even
in hostile environments (for instance, green lawns next to the sea) and so on.
And, of course, the more one purchases fashionable clothing, the more often
it is discarded while still fully functional, which again "burns up" scarce
resources. From using fewer wrappings to simplifying gifts (especially during
the Christmas season), simplifiers act in ways that are environment-friendly,
on the face of it.
In addition, voluntary simplifiers are more likely than others to recycle,
build compost heaps, and engage in other civic activities that indicate
stewardship toward the environment because simplifiers draw more of their
satisfaction out of such activities than out of conspicuous consumption.
Indeed, studies show that being committed to voluntary simplicity strongly
401
AMITAI ETZJONJ
correlates with being most apt to install insulation, buy solar heating
equipment, and engage in other energy-saving behaviors. 5 1
Elgin's Voluntary Simplicity is rife with environmental concerns terms
"voluntary simplicity" and "ecological living" interchangeably. 52 Other
books on simple living also stress the connection between cutting back on
consumption and helping the environment, including Alan Durning's How
Much is Enough? and Lester W. Milbrath's Envisioning a Sustainable
Society. 53
The converse correlation holds as well. As people become more
environmentally conscious and committed, they are more likely to find
voluntary simplicity a lifestyle and ideology compatible with their
environmental concerns. It should be noted, though, that while the values and
motives of environmentalists and voluntary simplifiers are highly compatible,
they are not identical. Voluntary simplifiers bow out of conspicuous
consumption because they find other pursuits more compatible with their
psychological needs, so long as their basic creature comfort needs are well
sated. Environmentalists are motivated by concerns for nature and the ill
effects of the growing use of scarce resources. Despite these different
motivational and ideological profiles, often one and the same person is both
a simplifier and an environmentalist. At least, those who have one inclination
are supportive of those who have the other.
2. Voluntary Simplicity and Equality
The more broadly and deeply voluntary simplicity is embraced as a

lifestyle by a given population, the greater the potential for realization of a
basic element of social justice, that of basic socio-economic equality. Before
this claim is justified, a few words are needed on the meaning of the term
equality, a complex and much-contested notion.
While conservatives tend to favor limiting equality to legal and political
statutes, both those who are politically left and liberal favor various degrees
51 PAUL STERN: Energy Use: The Human Dimension, Ne\\< York (W.H. Freeman
and Company) 1984, pp. 71-72.
52 D. ELGIN: Voluntary Simplicity, New York (William Morrow) 1993.
53 ALAN DURNING: How Much Is Enough?: The Consumer Society and the Future
of the Earth, New York (W. W. Norton) 1992; LESTER W. MILBRATH:
Envisioning a Sustainable Society: Learning Our Way Out, Albany (State
University of New York Press) 1989.
402
VOLUNTARY SIMPLlCITY
of redistribution of wealth in ways that would enhance socio-economic

equality. Various members of the left-liberal camp differ significantly in the
extent of equality they seek. Some favor far-reaching, if not total, socio-
economic equality in which all persons would share alike in whatever assets,
income, and consumption are available, an idea championed by the early
Kibbutz movements. Others limit their quest for equality to ensuring that all
members of society will at least have their basic creature comforts equally
provided, a position championed by many liberals. The following discussion
focuses on this quest for socio-economic and not just legal and political
equality, but on basic, creature-comfort equality rather than on a more
comprehensive equality. (The debate about whether or not holistic equality is
virtuous, and if it entails undercutting both liberty and the level of economic
performance on which the provision of creature comforts depends is an
important subject. However, this subject need not be addressed until basic
socio-economic equality is achieved, and this has proven so far to be an
elusive goal.)
If one seeks to advance basic socio-economic equality, one must identify
sources that will propel the desired change. Social science findings and recent
historical experience leave little doubt that ideological arguments (such as
pointing to the injustices of inequalities, fanning guilt, introducing various
other liberal and socialist arguments that favor greater economic equality),
organizing labor unions and left-leaning political parties, and introducing
various items of legislation (such as estate taxes and progressive income tax),
ultimately do not have the desired result - namely significant wealth
redistribution - in democratic societies. The most that can said for them is
that in the past they helped prevent inequality from growing bigger. 54
Moreover, in recent years, many of the measures, arguments, and
organizations that championed these limited, rather ineffectual efforts to
advance equality could not be sustained, or have been successful only after
they have been greatly scaled back. 55 Moreover, for these and other reasons
that need not be explored here, economic inequalities seem to have increased
in many parts of the world. The former communist countries, including the
USSR and China, where once a sacrifice of liberties was associated with a
54 JOSEPH A. PECHMAN: Federal Tax Policy, Washington, DC (The Brookings

Institution) 1987, p. 6.
55 For instance, note the changes in the Labour Party in the United Kingdom and
the Democratic Party in the United States in the mid-1990s.
403
AMIT AI ETZIONI
minimal but usually reliable provision of creature comforts, has moved to a

socio-economic system that tolerates, indeed is built upon, a much higher
level of inequality, one in which millions have no reliable source of creature
comforts. Numerous other countries, which had measures of socialist
policies, from India to Mexico, have been moving in the same direction. And
in many Western countries, social safety nets are under attack, being
shredded in some countries and merely lowered in others. All said and done,
it seems clear that if basic socio-economic equality is to be significantly
advanced, it will need to be helped by some new or additional force.
Voluntary simplicity, ifmore widely embraced, might well be the best new
source to help create the societal conditions under which the limited
reallocation of wealth needed to ensure the basic needs of all could become
politically possible. The reason is as basic and simple as it is essential: To the
extent that the privileged (those whose basic creature comforts are well sated
and who are engaging in conspicuous consumption) will find value, meaning
and satisfaction in other pursuits, in those that are not labor or capital
intensive, they can be expected to be more willing to give up some consumer
goods and some income. The "freed" resources, in turn, can be shifted to
those whose basic needs have not been sated, without undue political
resistance or backlash.
The merit of enhancing basic equality in a society in which voluntary
simplicity is spreading diverges from those that are based on one measure or
another of coercion in several ways. First, those who are economically
privileged are often those who are in power, who command political skills, or
who can afford buying support. Hence, to force them to yield significant parts
of their wealth has often proven impractical, whether or not it is just or
theoretically correct. Second, even if the privileged can somehow be made to
yield a significant part of their wealth, such forced concessions leaves in their
wake strong feelings of resentment that have often lead those wealthy to act
to nullify or circumvent programs such as progressive income taxes and
inheritance taxes, or to support political parties or regimes that oppose wealth
re-allocation.
Finally, the record shows that when people are strongly and positively
motivated by non-consumeristic values and sources of satisfaction, they are
less inclined to exceed their basic consumption needs and more willing to
share their "excess" resources. Voluntary simplicity provides a culturally
fashioned expression for such inclinations and helps enforce them, and it
provides a socially approved and supported lifestyle that is both
psychologically sustainable and compatible with basic socio-economic
equality. A variety of public policies, that seek to transfer some wealth and
404
income from the privileged to those who do not have the resources needed to
meet their basic needs, have been recently introduced. A major category of
such policies are those that concern the distribution of labor, especially in
countries in which unemployment is high, by curbing overtime, shortening
the workweek, and allowing more part-time work.
Another batch of policies, which seeks to ensure that all members of
society will have sufficient income to be able to satisfy at least some of their
basic needs, approaches the matter from the income rather than the work side.
These policies include increases in the minimum wage, the introduction of
the earned income tax credit, and attempts at establishing universal health
insurance, as well as housing allowances for the deserving poor.
In short, if voluntary simplicity is more and more extensively embraced
as a combined result of changes in culture and public policies by those whose
basic creature comforts have been sated, it might provide the foundations for
a society that accommodates basic socio-economic equality much more
readily than societies in which conspicuous consumption is rampant. 56
56 The author would like to acknowledge Frank Lovett for his help with the research
for this paper and David Karp and Barbara Fusco for their editorial comments. I
am particularly indebted to comments by Professor Edward F. Diener and David
G. Myers.
405
Part Seven
The Global Reach of the Invisible Hand

Chapter 17
Russia's Experiment with the "Invisible Hand"

WILLIAM T. HUNTER 1
I. Introduction
II. The Experiment in Tenns of Efficiency
III. The Experiment in Terms of Equity
IV. The Experiment- A Success or a Failure?
I. Introduction
The implosion of the former Soviet Union clearly constitutes one of the
defining moments of twentieth century history. However, to describe it as the
defeat of communism by capitalism is not only to over-simplify the
complexity of the situation, but also to imply that capitalism will succeed
where a centrally planned economy failed.
The failure of the centrally planned economy to provide a wide range of
consumer goods that were remotely equal in quality to those in the West was
certainly one of the factors contributing to the demise of the system. While
resources were poured into the defense and space sectors, other areas of
manufacturing were judged to be less important, and as it became more
difficult to hide this disparity between the First and Second Worlds, pressure
built up for perestroika, or restructuring. The inefficient productive
The author would like to thank the following people for helpful comments and
suggestions: Aznan AbuBakar, Craig Anderson, Tony Atkinson, Stephen Bland,
Franklyn Griffiths, Eric Helleiner, Dorothy Hunter, Martha Hunter, John
Micklewright, James Orbinski and Yuri Zharikov. The author, of course, retains
complete responsibility for the final product.
WILLIAM T. HUNTER
mechanism and the wasteful use of capital were evidence that the centrally
planned economy was not solving the allocation problem successfully.
Of course the rejection of the communist model was not simply an
exercise in economic restructuring, but also a change in the political system
from dictatorship to democracy. The closed system which allowed for no
criticism was replaced by glasnost, or openness, and while Gorbachev hoped
to achieve reform under the one party system, it ultimately proved impossible
to contain these forces within the old, corrupted Communist party.
There is a widespread impression in the West that Russia now has both
capitalism and democracy. It is clear that there have been enormous changes
in both the economic and political spheres, but it is also clear that the system
which has evolved thus far in Russia is very different from the capitalism and
democracy that are characteristic of the West. It is difficult to analyze the
changes in politics and economics in isolation from one another, and
moreover it is dangerously incomplete to consider only the economic changes
in resource allocation and to ignore the effects on the distribution of income.
I want to argue that thus far the Russian experiment with market
capitalism has been a failure in terms of income, primarily because of a lack
of capital and in particular institutional capital, but that there may be
offsetting gains in terms of economic freedom.
II. The Experiment in Terms of Efficiency
The explicit introduction of market forces at the beginning of 1992,

means that there has now been a decade of experience with this
"experiment." Liberal reformers such as Yegor Gaidar and Anatoly Chubais
were given relatively free rein, and in the debate over the speed of change
the shock therapists got the upper hand and moved quickly on their agenda of
stabilization, privatization, liberalization and democratization.
Stabilization meant macroeconomic stabilization, and its achievement
was neither quick nor equitable, as the country suffered a cumulative decline
in GDP of over 40% from 1991 to 1996, rapid inflation, and devaluations
which decimated the real value of any wealth held in rubles and fixed
incomes such as pensions. Just when the economy appeared to be turning
around, the financial meltdown of August 1998 brought further devaluation,
accelerating inflation and personal and corporate bankruptcies. More
recently, however, there has been improvement in the macroeconomic
410
RUSSIA'S EXPERIMENT WITH THE "INVISIBLE HAND"
variables with some economic growth, lower inflation and an improved

balance of payments, due in large part to the resurgence of oil and gas prices.
(See Figure 1 -Russian Economic Indicators, 1990-2000.
Figure 1
Russian Economic Indicators, 1990-2000
Indicators 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
Growth: change -4.0 -5.0 -14.5 -8.7 -12.7 -4.1 -3.5 0.8 -4.6 3.2 6.5
inGDP
Gov. Balance -31.0 -18.9 -7.3 -10.4 -6.0 -8.9 -7.6 -8.0 -1.0
as%ofGDP
Gov. Expenditures 58.4 43.0 45.1 38.5 41.9 42.9 39.7 36.0
as%ofGDP
Inflation: annual 53 92.7 1526 875.0 311.4 197.9 47.8 14.7 27.6 86.1 20.7
change in
consumer prices
Unemployment: %of 0.1 0.8 I I 2.2 3.2 3.4 2.8 2.6
labour force aged 15-59
Unemployment: 16.2 18.6 18.6 16.9 22.4 21.6 20.2 20.8
aged 15-24
Real Wage: 109.1 102.4 68.9 69.1 63.7 45.9 52.0 54.5 47.2
1989=100
Income Distribution: 0.289 0.398 0.409 0.381 0375 0375 0388 0.374
Gini coefficient
for Income
Source: UNICEF: "A Decade of Transition", Regional Monitoring Report

Number 8, Florence (UNICEF Innocenti Research Centre) 200 I.
The first attempts at privatization involved a voucher scheme with each

citizen receiving shares representing their part of the ownership of the state
assets. Most sold their vouchers to speculators or lost them in fraudulent
pyramid schemes. Employees and managers were given controlling
ownership of many state enterprises but in most cases were unable to turn
these around into profitable companies. "The rapid privatisation of state
property between I 993 and I 995 moved over I25,000 enterprises into private
hands, but it did not create effective corporate governance or place effective
limits on state interference." 2 The really valuable assets were the companies
2 EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT: Transition Report

1998, Annex 1.1, p.l5.
4I I
WILLIAM T. HUNTER
that exploited the country's vast natural resources and they eventually came
under the control of the "oligarchs" after a number of rigged auctions, the
most notorious of which was the Loans for Shares scheme of 1995. This has
been singled out by Chrystia Freeland as the most crucial misstep in the
flawed capitalist revolution, and moreover as the "faustian bargain" by which
Yeltsin ensured his re-election in 1996.3
Liberalization meant freeing prices to be set by markets and removing
tariffs on trade. This was accomplished to a significant degree and relative
prices began to have some resemblance to those in the western economies.
However, this does not mean that competitive forces were allowed to work
freely, as monopoly forces continued to dominate both internal and external
trade.
As for democratization, there was certainly a move in that direction, as
elections were contested by parties, and the people were allowed to vote
freely. However, evidence of corruption in the electoral process and the
almost complete control of the national media, and in particular television, by
the party ruling in the Kremlin, gives rise to skepticism about the
genuineness of democratic reform. There were reports in the Moscow press
of large-scale fraud in Vladimir Putin's presidential election victory. Apathy
amongst the electorate has given rise to stories of ballot stuffing to achieve
the required minimum turnout of 50%, and significant numbers of those who
bother to vote choose the "none of the above" option. Geoffrey York
commented, "Today, Russian elections are routinely marred by cynicism,
bribery, fraud, apathy and frequent state control of the outcome. " 4 He could
well have added violence to his list.
The faith of the shock therapists in the magic of markets has not been
borne out. The idea that one only needs to "get prices right" and have a law
of contract and that markets will do the rest seems nai've. It ignores the
institutional capital that is integral to any capitalist system. Russia in 1991
had had virtually no experience with markets and none of the regulatory
apparatus that accompanies them. True entrepreneurial ability is usually in
short supply in any society, and this was undoubtedly particularly true in
Russia where initiative had been suppressed under Communist rule and
people learned to do what they were told, no matter how stupid that might be.
3 CHRYSTIA FREELAND: Sale of the Century- Russia 's Wild Ride from Communism
to Capitalism, Toronto (Doubleday Canada) 2000, Chapter 8.
4 GEOFFREY YoRK: "Corrupt Russian elections turning voters into cynics", Globe
and Mail, (January I, 2002), p. A8.
412
Entrepreneurial skill was largely confined to trading or else it found its outlet
in illegal activities and the exploitative manipulations of the oligarchs.
No observer of the Russian economy fails to comment on the pervasive
corruption. It can appear in many forms. Perhaps the best known stories
concern the extortion and violence connected to the mafia, but from another
point of view they are providing a system for enforcing contracts that the
state is unable to provide. The average citizen is confronted with corruption
every day. It may be the traffic policeman who arbitrarily stops your car and
only gives you back your license after you pay a bribe. Or it could take the
form of paying a fee to satisfy one of a myriad of regulations. Many of these
regulations do not provide any protection for anything, but operate like
tollgates to provide income for the officials enforcing them. The country
does not lack regulations, but rather access to equal treatment before the law
for the average citizen.
It is questionable that there exists in Russia at the present time sufficient
conditions for a capitalist market economy to function effectively. The need
for these has been recognized by even the most right-wing economists, for
example von Hayek. In discussing his The Constitution of Liberty, John
Cassidy writes:
Capitalism has proved remarkably effective at raising living standards,
Hayek argued, but its success wasn't automatic; it depended on the
existence of a generally accepted set of social norms (among them the
sanctity of private property), a system of law reflecting these norms,
and a government that enforced the laws fairly, rather than
discriminating arbitrarily among individuals. If any of these things
were absent, economic development would be stymied. 5
More recently, Amartya Sen has written:
In the economic difficulties experienced in the former Soviet Union
and countries in Eastern Europe, the absence of institutional structures
and behavioural codes that are central to successful capitalism has
been particularly important. There is need for the development of an
alternative system of institutions and codes with its own logic and
loyalties that may be quite standard in the evolved capitalist
5 JOHN CASSIDY, "The Price Prophet", New Yorker, (February 7, 2000), p. 50.
413
WILLIAM T. HUNTER
economies, but that are relatively hard to install suddenly as a part of

"planned capitalism. "6
One of the explanations for the relatively faster and more successful
economic transitions which have been experienced in other formerly
communist Eastern European countries such as Poland, Hungary and the
Czech Republic may be that they still have some residual of the institutional
capital left from their history with market economies in the period up until
the end of the Second World War, whereas in Russia there had been only
limited experience with these market forms before the Revolution, well
beyond the recollection of anyone living today. It is clear that the necessary
institutional capital to make markets work their magic does not yet exist in
Russia, and it might be argued that establishing the rule of law is of greater
importance now than creating true democracy. It is unlikely that Sen would
agree with this latter contention, however.?
If there is insufficient institutional capital for a market system, other
forms of capital are also in short and decreasing supply. Financial capital
flowed into the country before the financial collapse in August 1998, but not
much of it went into direct investment in productive facilities. China, by
contrast, received a great deal more direct foreign investment than Russia
over the last decade of the twentieth century. It is not only the money that is
required but the new technology that accompanies it. Moreover, much of the
financial capital left again after the 1998 debacle, and, as well, Russians
themselves took huge sums of money out of the country throughout the
period. A 1998 study, co-authored by John Whalley of the University of
Western Ontario and Leonid Abalkin of the Economics Institute of the
Russian Academy of Sciences, estimated that $200 billion left the country
between I 992 and I 997, 8 and a frequently-quoted figure since then puts the
capital flight at $15 billion annually or more than a billion dollars per month.
In addition to the financial capital outflow there is significant human
capital leaving the country as those with mobility, typically the better
educated, head for greener pastures. The performing artists and athletes are
typically the people one hears about, but more and more Russian students are
receiving professional training outside their country and remaining there after
they get their qualifications, while those with marketable skills still in the
6 AMARTYA SEN: Development as Freedom, New York (Anchor Books) 2000, p.

264.
7 See A. SEN: Development as Freedom, Chapter 6.
8 GEOFFREY YoRK: "Flight of Russian capital helped sink ruble. study says". Globe
and Mail Report on Business, (Friday, September II. 1998). p. B I.
414
country seek to emigrate. A big difference between Russia and Third World
countries lies in the much higher education of the populace, but while this
was seen at one time as a positive factor in the prospect for economic
development, it has been diminished in the face of this outward migration
and statistics of declining population and lower life expectancy. It has been
predicted that the current population of around 140 million could fall to as
little as 80 million by the year 2050.
The financial infrastructure necessary for a successful market system to
function is another area where the institutional capital is deficient. One of the
legacies of the collapse of central planning was the total absence of banks.
Since, under communism, capital was owned by the state and allocated by
central planners, there was no need for a capital market, while companies all
kept accounts with the central planning authority, and there was no need for a
clearing system for intercorporate payments except in international trade.
After the collapse there were minimal restrictions on starting up banks, and
by 1998 there were thousands of commercial banks in Russia. Many of these
were just shells set up to monetize state assets and facilitate capital flight, but
there were also a wide range of new institutions offering their services to an
unsophisticated public.
The financial collapse of August 1998 was a crucial misstep in the
development of a capitalist system in Russia. It destroyed much of the wealth
of the nascent middle class and turned Russia into a pariah in international
capital markets. Faced with chronic budget shortfalls, the country at first
printed money to finance them, which lead to rapid inflation, and in order to
stabilize prices it then turned to borrowing on financial markets. From 1996
to 1998 it borrowed some $15 billion dollars on the international markets as
well as issuing a lot of domestic debt denominated in rubles. Short term
treasury bills under one year, called GDKs, and longer term debt, known as
OFZs, by October 1996 exceeded the total stock of ruble deposits in the
banking system, and by 1998 were yielding annual interest rates in triple
figures. The explanation for the high rate on domestic debt was not only the
increasing supply of it issued by a government desperate for money, but also
the fear that the ruble would be devalued. This fear was, of course, justified,
as the country's balance of payments deteriorated in the face of low energy
prices and an overvalued currency. The government was using its tax money
to pay interest on the debt and was unable to meet its payrolls and make
welfare payments. International investors attracted to the high rates on ruble-
denominated debt bought them but protected their returns in dollar terms by
415
WILLIAM T. HUNTER
entering into forward exchange contracts with the banks. An IMF loan in July
of 1998 only postponed the inevitable, and on August 17, 1998 the
government defaulted on its domestic debt, put a moratorium on principal
repayments of foreign debt, and devalued.9
Banks that had borrowed or accepted deposits denominated in $US
dollars and then invested the proceeds in GDKs and OFZs were subject to a
double whammy as their assets were worthless while their liabilities in US
dollars multiplied in line with the devaluation of the ruble. Moreover they
lacked the foreign currency to honour their forward contracts in US dollars.
Many of the banks were bankrupt but stayed in business, while depositors
were unable to get their money. A properly regulated financial system would
not have allowed institutions to back foreign liabilities with domestic assets,
would have ensured that they had sufficient assets to honour forward
contracts, and would not allow companies to stay in business that could not
meet their liabilities. There have been many accusations, extending to
Yeltsin's family, of people both profiting from the high rates on domestic
debt, and getting out before the crash because of inside information.
Ordinary Russians experiencing contact with banks for the first time were
understandably disenchanted and returned to keeping any savings that
remained in US currency. There was by 1998 virtual dollarization of the
Russian economy, as this currency which held its value was used more and
more in everyday commercial transactions. The government moved to halt
this trend by a decree that all transactions should be in rubles, and now some
prices are quoted in "equivalent units" (i.e., equivalent to a US dollar), which
at the time of payment are converted into rubles at the official exchange rate
for the day decreed by the central bank.
The balance of payments greatly improved after the 1998 financial
collapse, as the successive devaluations of the ruble made Russian goods
more competitive and helped both to curb imports and promote exports.
However, the major force behind the improvement was the rise in the price of
oil and gas, as Russia continues to depend mainly on exports of natural
resources to balance its trade. While there are also exports from the defence
and space industries, the country continues to import most of its consumer
goods and much of its food.
This brief discussion of deficiencies in the financial infrastructure is only
one of the areas in which the institutional capital is inadequate. The
agricultural sector defies restructuring, and harvests continue to fall well
9 See EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT: Transition

Report 1998, Annex 1.1, pp. 12-9 for a concise summary.
416
behind potential. The tax system is inefficient and inequitable. Small

companies face taxes which would eliminate more than I 00% of any profit
and which drive them into the underground economy in spite of the threat of
raids from zealous tax police, while larger companies appear to be able to
negotiate their own terms. The result is a system that routinely fails to collect
taxes due and one which penalizes initiative and induces tax avoidance and
disrespect for the law. Another underdeveloped area is that of what has come
to be called "civil society," as NGOs flounder and there is little evidence of
voluntary contribution to society.
Declining income, inflation, and successive devaluations, even though
arrested in recent years, make it difficult to argue that capitalism has brought
great benefits to the Russian economy in macroeconomic terms. Moreover,
the financial and human capital exodus, failure to modernize the
manufacturing sector or reform agriculture, the ongoing destruction of the
ecosystem, the underdeveloped institutional infrastructure and widespread
corruption do not lead to the conclusion that capitalism has greatly improved
resource allocation. It is true that the shops are full of goods, and there are no
longer line-ups to purchase goods, but this is mainly because there are so few
people who can afford them. The clientele for the new supermarkets stocked
with exotic goods from around the world, as well as the now plentiful
restaurants which range from McDonalds to traditional Russian grandeur, is
mainly composed of New Russians and expatriates. This is the same group
who provide the demand for the burgeoning private education and private
medicine sectors.
III. The Experiment in Terms of Equity
This brings us to the question of who are winners and losers under the
experiment and to consideration of the changes in income distribution. Many
observers of income distribution in Russia under communism pointed to one
extremely prosperous group of nomenklatura, or party officials, in contrast to
the great body of the population between whom differences in income were
relatively small. The benefits to the upper class were very real, if not highly
visible to the majority of the people, and consisted of perquisites such as the
ability to go to special shops and to have more elaborate summer homes and
vacations. On the other hand, the general population enjoyed access to cheap
417
WILLIAM T. HUNTER
basic food, free housing, a virtual guarantee of employment, free medical

services, free education, cheap summer vacations, day care and camps for
children. While free marketeers may wish to argue about the costs in terms of
a lack of choice, the provision of this minimum standard of living for the
whole population, given the state of affairs at the time of the Revolution,
represents a not inconsiderable achievement. A much more telling criticism
would be the degree to which it was not uniformly distributed geographically,
but limited largely to urban dwellers.
When it comes to equality of income, there is a general presumption,
which I share, that greater equality is preferable to less equality. Thus one
would hope to see the people at the top with less of a material advantage over
the group at the bottom, while recognizing that complete equality is simply a
theoretical limit. There are different measures of inequality; one measure
used is decile ratios, or the comparison of the top 10% of the population to
the bottom 10%, and another popular measure of income equality is the Gini
coefficient, which gives the variation from complete equality as shown by
Lorenz curves, with the lower the number the more equal the income
distribution (0 for complete equality and 1 for complete inequality).
Turning to decile ratios based on earnings, figures for Russia of 3.33 in
1989 put it at the high end of the centrally planned economies but at the low
end in comparison with OECD countries. Data for the early 1990s are
problematic, as many workers at state-owned enterprises were put on short
term or went unpaid.
Nevertheless, that ratio moved above 8 in 1992 and to over 15 in the next
year, changes which the authors note "seem almost to defy credulity." 10 The
number had settled back to around 10 by 1997 which still placed it way in
excess of those found in OECD countries (e.g., the figure of 4.2 for Hungary
in 1997 was comparable to that in Canada.) 11
Gini coefficients in the mid-1980s give a figure for Russia of 0.24, which,
while marginally above other socialist Republics such as Czechoslovakia and
Hungary is well below the OECD average of 0.30 and below that of Norway
(0.25), widely regarded as the most egalitarian of the advanced western
economies. 12
10 JOHN MICKLEWRIGHT and J.S. FLEMMING: "Income Distribution, Economic

Growth and Transition", in: A.B. ATKINSON AND F. BOURGUIGNON (Eds.):
Handbook ofIncome Distribution, Vol. I, Amsterdam (Elsevier) 2000, p. 895.
11 J. MICHLEWRIGHT and J.S. FLEMMING: "Income Distribution", p. 896.
12 J. MICKLEWRIGHT and J.S. FLEMMING: "Income Distribution", Table 3, p. 870.
418
There was a huge jump in the Gini coefficient for income inequality
between 1992 and 1994, as it went from 0.289 to 0.409, and while it has
since settled back to a figure around 0.375 (see Table 1), this is at the top of
the OECD range and roughly comparable to the United States. As the authors
of the study note, "there can be little doubt that this is now a very unequal
country." 13
Theoretical models would lead one to expect a more unequal distribution
of income following the introduction of market reforms, as the necessary
restructuring causes unemployment. Ironically, in the Russian case there was
not that great an increase in unemployment as managers continued to operate
factories even without a demand for their products, while the government
acquiesced by providing funds. However, without revenues, firms could not
continue to pay wages, at least in money, and the government's fiscal
problems eventually precluded its filling the gap, and earnings did fall. As
well, the social safety net unravelled, with fixed incomes such as pensions
decimated in real terms by inflation, wages unpaid for government workers,
dwindling resources for health and education, and the forces of law and order
inadequate to deal with increasing violence. The one positive aspect for many
people was to acquire ownership of their apartments that were previously the
property of the state, but this too was a mixed blessing. In the big cities this
accommodation was in demand and commanded real value, but in those cities
which the communist government had created based on an industry that was
no longer viable, there was not much value to lodging. The market model for
restructuring would suggest that labour migrate to the cities where industry
was viable, but while those who could do so were willing to move, many
could not hope to realize enough money for their apartments to allow them to
resettle in the bigger cities.
It is hard not to conclude that shock therapy brought a tragic decline in
the majority of the population's standard of living, and equally difficult to
conclude that things have greatly improved after this initial shock, and this is
particularly so if one considers those who live outside the big cities. On the
other hand, evidence could be adduced to argue that there are lots of people
prospering under the new regime. The traffic-snarled streets of Moscow have
more than their share of Mercedes and BMWs as the upper income stratum
engages in ostentatious "conspicuous consumption." The nouveau riche may
not be entirely nouveau, however, as it is widely believed that the privileged
13 .1. MICKLEWRIGHT and .I.S. FLEMMING: "Income Distribution", p. 910.
419
WILLIAM T. HUNTER
members of the old Communist party have been able to transfer their wealth
into the new era. Clearly the mafia as well have profited from illegal
activities.
Whatever the source of their riches, these "New Russians" in their gated
communities watched over by bodyguards are widely regarded as criminals
and despised by others less fortunate. Proponents of free markets might try to
argue that these rewards are in line with their marginal revenue product, or
that economic rewards provide the necessary incentive for people to become
involved in market activities, but this is scarcely credible in the Russian
environment. The limited experience with a market system means that there
is a very limited appreciation of what kind of behaviour is permissible, and
there is not much progress in providing a body of laws regulating market
relations. Moreover, to those who have been raised on an ethic of equality, it
is unacceptable for one group to prosper by buying cheap and selling dear,
regardless of the implications for market efficiency.
The higher income group is very visible while a majority of the people
who had a reasonable standard of living under the previous system are
threatened but powerless. While one would expect the introduction of market
reforms to increase the inequality of income, if this occurs in a Third World
country where the average level of income is already low and the distribution
of income terribly unequal, it would be regarded as contrary to true
development but not likely to be a threat to the success of the experiment.
This might not be true in a country where the average income was reasonably
high and its distribution relatively equal.
In analyzing income distribution one has to consider the effects on both
efficiency and equity and often these are conflicting assessments. In the case
of Russia, however, it is difficult to argue that the changes in income
distribution have really increased efficiency. Rewarding corruption can surely
not be considered to provide useful incentives or to increase the supply of the
right kind of entrepreneurial activity. Certainly it does nothing to create the
climate of trust which is a necessary prerequisite for market capitalism. The
financial system has similarly not developed in a way that evokes confidence
and has both discouraged savings and served as a vehicle for capital flight,
rather than as a more efficient mechanism for allocating scarce capital. If one
turns to considerations of equity, and makes the assumption that greater
equality is inherently better than increased inequality, there can be no doubt
that the introduction of capitalism has made things worse.
Looked at through the prism of income distribution, then, capitalism has
not proved a better system than communism for Russia. The judgment from
the point of view of resource allocation is at best mixed, with some
420
improvement as a result of relative prices that more closely reflect underlying

costs and a reduction in the shortage of goods, but failure thus far to provide
the mechanism for modernizing manufacturing or reforming agriculture. The
shortcomings of the infrastructure, particularly in finance and taxation, have
been noted, and the monumental degradation of the environment that took
place under communism has not been arrested under capitalism.
IV. The Experiment- A Success or a Failure?
On the basis of this description of the economy following the introduction

of market forces in 1992 it seems impossible to argue that the experiment has
been a success, however qualified. Does it follow that it can be labelled a
failure? Jeffrey Tayler might say yes. He claims Russia is finished, and while
he meant by this that the country is finished as a Great Power, he also saw it
as destined to weaken economically. 14 However, the problem with labelling
the experiment as a failure is that it implies that it will be abandoned, and this
does not seem likely, at least in the near future. Certainly a return to a
centrally planned economy is not in the cards. Some type of market economy
will survive, and the discussion thus far has perhaps created too sharp a
dichotomy between a centrally planned economy and a pure market
economy.
Transitologists might argue that the whole process takes time, and one
should not focus on the short term pain. Moreover there are signs of progress.
Economic growth has recently been reported to have been 6.5% in 2001
which compares favourably with most countries in the world. In June of2002
the news came out that the United States has designated Russia as a market
economy. 15 While the Russians may have found this gratifying, it was not
stated what the basis for reaching this conclusion was. Economic growth after
so many years of decline is, of course, welcome, but it continues to be based
mainly on the exploitation of natural resources and the sale of military
equipment, rather than the development of an efficient manufacturing sector.
It is, of course, impossible to argue against the proposition that it will take
14 JEFFREY TAYLER:"Russia is Finished", Atlantic Monthly, (May 2001), pp. 35-52.

15 The Globe and Mail, Friday, (June 7, 2002), p. Al6.
421
WILLIAM T. HUNTER
more time, but none of the evidence to date indicates that the market
economy is even moving in the right direction.
If the introduction of market reforms has led to a decline in income for
the majority of the people and there is at least rudimentary democracy, the
question must arise as to why the people do not vote to return to the previous
system. The Communist Party does advocate at least some reversal of the
reforms and does have significant support, but it has not been able to regain
power and the demographics make it unlikely that it will gain sufficient
support in the future as its strength lies mainly in the older populace.
The answer to this conundrum lies in consideration of freedom, and
Amartya Sen has given us a brilliant analysis of this in Development as
Freedom. While the main thrust of his argument concerns development in the
Third World, the central idea of his approach concentrates on the deprivation
of freedoms that are intrinsically important, as opposed to the traditional
emphasis on income which is only instrumentally significant, and this has
application to the Russian case as welJ. 16 Particularly important in this
context are the freedom to exchange goods, the freedom to move and to
emigrate, and the freedom to own property. Sen suggests that economists
have concentrated too much in their discussions of inequality on inequalities
in income and not enough on economic inequality in the more fundamental
sense of capability deprivation. 17
It is clear that the majority of Russians, and particularly the younger
generation, do not want to give up these economic freedoms. 18 The emphasis
on economic freedoms may help to explain another apparently paradoxical
situation, as Putin continues to enjoy widespread support in spite of the
restrictions which are increasingly being placed on personal freedoms, and in
particular on the freedom to dissent in the media. It was suggested earlier that
the rule of law might now be more important than democracy, and Putin's
apparent determination to establish it may explain his popular support, as
people seem willing to accept some restriction on their freedom if corruption
can be curbed and a rule of law established that will provide access to equal
treatment before the Jaw for the average person. Corruption was present
under communism and cannot be blamed on capitalism, but it was argued
above that a properly functioning economy requires institutional capital and a
climate of trust, and if the system can evolve in this respect perhaps the
16 A. SEN: Development as Freedom, p. I 14.

17 A. SEN: Development as Freedom, pp. 107-8.
18 See, for example, GEOFFREY YoRK: "Past for Russians holds no future", Globe
and Mail Report on Business, (Monday, December 24. 200 I), p. A I 0.
422
experiment will yet prove a success. "The overall achievements of the

market are deeply contingent on political and social arrangements .... The far
reaching powers of the market mechanisms have to be supplemented by the
creation of basic social opportunities for social equity andjustice." 19
While a consideration of the importance of economic freedoms seems a
better explanation for the acceptance of reform than reliance on the
traditional stereotype of Russian endurance, this hope may well be coupled
with a vision of the country's return to its former position of power as a
consequence of increased spending on defence. However, fiscal constraints
will mean that establishing the military as a priority reduces funds for the
provisioning of public goods like health and education that are already
underfunded. To prioritize defence will simply replicate the mistakes of many
third World countries.
Weighing increased economic freedoms against inferior economic
performance may provide some rationale for not declaring the experiment a
failure. As Sen notes, "Even that great critic of capitalism Karl Marx saw the
emergence of freedom of employment as momentous progress." 20 Perhaps
the Russians are right when, with their characteristic black humour, they say
"everything Marx told us about communism was false, but everything he told
us about capitalism was true."
19 A. SEN: Development as Freedom, pp. 142-3.

20 A. SEN: Development as Freedom, p. 113.
423
Chapter 18
Fostering the Common Good in Developing

Countries: The Respective Responsibilities of States
and International Businesses- Preliminary Notes
Towards a Political Ethic for International
Businesses
FREDERICK BIRD
I. Introduction
II. Pursuing the Common Economic Good in Developing Countries
III. The Responsibilities of States for Common Good in Developing
Countries
IV. The Responsibilities of International Businesses in Developing
Areas for Fostering the Common Good
I. Introduction
A) Purpose of essay: I am writing this essay in order to sketch outlines for the
kind of political ethic that I think should guide the interactions of
international businesses with respect to the governments of developing
countries. I end by spelling out several basic civic duties and responsibilities
for these firms. I begin by examining the special social and economic
conditions characteristic of developing countries. I argue that these
businesses should manage their operations so that they help to promote and
not undermine the common good of these societies. In the process, these
businesses necessarily will be involved in various ways with the governments
of these countries. I argue that it is not enough for these businesses to guide
their interactions with the governments of developing countries by a thin
FOSTERING THE COMMON GOOD IN DEVELOPING COUNTRIES
ethic that primarily disallows illegal payments and direct involvement in

partisan politics. A more full-bodied ethic is called for. 1
B) Basic questions: What political, economic, and businesses policies and

practices are most likely to foster the common good in developing countries?
In particular, what role should national governments play in promoting the
common good in these countries? Correspondingly, what responsibilities do
international businesses have in these areas for promoting the common
good? 2
These questions become more complicated when we recognize the
following: one, the governments in many developing countries may well be
under-financed, subject to cronyism, and expected to undertake task beyond
their capacity; and, two, international businesses located in these countries
may narrowly define their interests and see their operations in these areas
primarily as marginal sources of revenue.
C) Assumed historical context: Economically developing countries differ
dramatically amongst themselves in their cultural traditions as well as in the
degrees to which they have established effectively functioning economic,
physical, political, and social infrastructures. Economically, developing
countries typically possess little capital accumulation within the industrial
sphere. At the same time, these areas exist within a larger global economy in
which other countries have vast capital accumulations and highly developed
infrastructures. Furthermore, these developing countries may be markedly
influenced by diverse multinational enterprises with great wealth and political
influence. These developing countries thus seek to augment their wealth
within a larger context where their power and capacities remain marginal or
modest in comparison to other more economically developed countries and in
comparison to many of the foreign-based international businesses operating
within their jurisdictions.
The research on which this paper is based was made possible by a grant from the
Social Sciences and Humanities Research Council of Canada. I have benefited
from the collaborative efforts of a team of two dozen researchers located in more
than a dozen countries.
2 Throughout these preliminary notes, I will focus only on the common economic
good. I realize the common good takes into account as well various cultural and
social goods that are broader and more multi-dimensional than economic
considerations. However, these notes just look at common economic goods.
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FREDERICK BIRD
It is important to take this historical setting into account. Marx referred to

this as the stage of primitive capital accumulation. Rostow describes this as
the stage both prior to and co-incident with economic take off (Rostow
1961 ). Clearly, the current economic setting of developing countries differs
markedly from that of more fully industrialized countries. It differs as well
from the historical situation within the North Atlantic countries that began to
industrialize several centuries ago (Chua 2003). Moreover, each country or
area possesses its own particular circumstances, shaped in part by geography
as well as history.
D) How I will proceed: This essay is divided into three parts. In the first, I
seek to set forth ways of identifying the common economic good in
developing countries. In the second, I discuss the responsibilities of states to
foster this good. In the third part, I then consider the responsibilities of
international businesses to foster this good both through their own business
operations and in relation to the responsibilities of governments. As I focus
on the latter, I attempt to spell out the basic ingredients for what might be
described as a feasible and compelling political ethic of these tirms.
II. Pursuing the Common Economic Good in Developing

Countries
A) In general terms: Sen argues that we can understand the common good in
terms of increased freedom (Sen 1999). I'm not opposed to this argument but
will focus on a more tangible target. Countries advance their common
economic good, I argue, to the degree that they reduce the extent to which
households in these areas suffer from poverty (understood as material
deprivation) and raise their standard of living. In this essay, I focus primarily
on this minimal economic good (cfUNCTAD 2002).
B) Examples:
I. India, 1870-1900: As Mike Davis has recently demonstrated, India
suffered from devastating hunger that resulted in millions of deaths during
the last thirty years of the nineteen century. Using liberal economic rhetoric,
British political administrators enforced economic policies that greatly
aggravated the economic plight of Indians. In the name of opening up
426
markets, the British policies undermined traditional Indian economic

practices. Clearly the common good was not well served by these supposedly
market-oriented policies (Davis 2001).
2. Many developing countries, 1980-2000: Several newly industrializing
counties (NICs) like South Korea, Taiwan, Malaysia, Singapore, and
Thailand have done quite well during the last two decades of the twentieth
century. The economic growth within China has been extraordinary (cf Evans
1992; Wade 1992). However, many African counties and some Latin
American countries have become economically much worse off during this
period. Many sub-Saharan counties have decidedly lower per capita incomes
at the end of the century than they had twenty or thirty years earlier.
Whatever governmental and business policies have been adopted in these
areas, the economic well-being of many of these countries has deteriorated.
The economic common good of these countries has not been well served.
3. Other developing countries, 1970-2000: The economic progress of
many other developing countries has been more mixed. The overall per capita
household incomes have risen in countries like Mexico, Colombia, South
Africa, and Indonesia - but new wealth has been very unevenly distributed.
While some portions of the population have gained greater wealth, others
have become comparatively worse off. Throughout the past thirty years,
economic inequality has increased among the developing and developed
countries. It is not clear to what extent the common economic good has been
advanced in these countries.
C) Pursuing the common good by reducing poverty: Depending on the

setting, poverty can be reduced through the following general policies:
1. Protecting people from various natural, economic and political shocks,
disasters, and deprivations: droughts, disease, wars, government predation,
economic crises, etc. (cfWorld Bank, 2001)
2. Reducing the forms of poverty occasioned by structures that
marginalize particular households, classes, regions, etc. as a result of un- and
under-employment, discrimination, unbalanced tax and welfare systems, etc.
3. Reducing poverty occasioned by absence of sufficient economic
productivity. In the remaining of this section, I will elaborate ways to
increase overall productivity by fostering economic development.
D) Pursuing the common good by fostering economic development: That is,

fostering the common good by developing economically more productive
427
FREDERICK BIRD
ways to utilize given natural and human resources. Several initiatives seem to
have decisive importance.
1. Develop viable local economic infrastructures: These include as a
minimum the following:
a. Local webs of commerce. It is important to facilitate the
development of trade and commerce between and among various rural
and urban areas, to foster the growth of local merchants, artisans,
farmers, workshops, and factories and the lively transactions among
them. The development of local commerce has often preceded modern
industrialization (see Braude] 1980, 1982, 1984; Weber 1961, chapters
14-21, 25). Local commerce is typically fostered by the dispersion
rather than concentration of business enterprises. In a number of
settings contemporary investments in developing areas have functioned
to undermine or stifle rather than foster local commerce. Note well: if
local commerce is going to develop, then local households and firms
must be able to develop and augment their spending powers (cf
Chossodovsky 1997, introduction; Wade 1992).
b. Viable local financial institutions. Some local systems of credit
(e.g., local micro-credit systems).
c. Local systems of transportation and communication as well as
local utilities (for power, water, sewage). This includes the
development of roads, railroads, canals as well as cell phone or
telephone networks. These items constitute the basic features of
physical infrastructures. When they are developed, they facilitate local
commerce.
d. Reliable local systems to protect the rights of property and
contract. This includes land and property registries, court procedures,
etc. Legal and administrative offices required to maintain property and
contractual rights are indeed costly (see Holmes and Sunstien; see as
well de Soto 2000; cf Weber 1997, part II, chapter Vlll, sections ii and
iii, on the creation oflegal norms and the forms of creation of rights).
e. Sufficient access to public and/or private insurance. To help
manage risks associated with industrialization through the development
of social insurance, unemployment insurance, pensions, property
insurance, etc.
2. Develop viable local social infrastructures: These include as a
minimum the following.
a. Viable local systems of elementary education.
428
b. Minimally adequate systems of social welfare, e.g., workman's

compensation, unemployment benefits, access to some healthcare, etc.
c. A minimum extent of social peace or a manageable degree of
social unrest.
3. Foster greater productive capacity: Increases in productivity occur for
a number of reasons related to all of the following:
a. The development of efficient and effective sources of energy,
b. The accessibility of effective and appropriate technology,
c. The development of skills and capacities of workforces by means
oftraining programs, apprenticeships, and education, and
d. The effective organization ofworkforces.
All of these factors are important. Increases in productive capacity may be
blocked by the inability or failure to develop any of these factors. The
inability to raise financial resources, either through investments or credit, has
often seriously impeded development. Still, all ofthese factors are decisive. 3
E) When countries gain windfall wealth, they often find it more difficult to
pursue the common good in spite of their increased per capita wealth:
1. Windfall wealth is wealth generated by accidental or chance sources
such as access to precious metals or valued mineral resources, sudden
changes in property values, the spoils of military conquest, and the like.
2. Examples: Spain in 16th century; some oil producing countries in 20th
century, etc. Another example: the short term wealth produced by short term
mines or isolated but wealth-producing enterprises not integrally connected
with the larger local economy (e.g., the problem of economic bubbles).
3. Problematic character: This windfall wealth aggravates the pursuit of
the common good in part because such wealth tends to be concentrated in few
hands. Reliance on windfall wealth has a distorting impact on the
development of basic economic institutions, such as, for example, regular
systems for collecting taxes. Because of their pursuit of windfall wealth,
people do not put as much effort into the development of ordinary systems of
commerce (see Auty 1993, Auty 200 I, Ascher 1999). Furthermore,
3 Modern economic markets in commodities, labor, and finance have only emerged
as industrialized societies have developed workable social and economic
infrastructures. This point has been variously argued by Karl Polanyi and by
current institutional economists.
429
FREDERICK BIRD
governments in areas affected by windfall wealth tend to focus their energies

on protecting and consuming this wealth, often in lavish public projects,
rather than fostering the development of adequate economic and social
infrastructures. Partly as a result, the pursuit and protection of windfall
wealth fosters corruption.
III. The Responsibilities of States for Common Good in

Developing Countries
A) States bear a major responsibility for promoting the common economic

good:
1. They are responsible for helping to develop viable social and economic
infrastructures, and for encouraging the growth in productive capacity.
2. To develop these infrastructures and capacities, states must see to it that
considerable assets are fostered, secured, and invested appropriately. This
requires a major effort at capital accumulation.
3. Developing different features of these infrastructures and capacities
requires quite different kinds of public interventions. Fostering local
commerce is likely to call for quite different public actions than those
required to build education infrastructures or road systems or well-grounded
systems of property rights. States need to find ways of balancing these quite
different interventions.
4. Some states may need to guard against the unbalancing impact of
windfall wealth.
5. The situation of states in currently developing countries differs both
from the situation of currently developed countries and the situation of the
developed societies prior to their industrialization. Each situation is different.
6. Typically states have found various ways of working with businesses to
develop these infrastructures and productive capacities. This was true in 17th-
19th centuries in Europe and North America (North 1966, chapters 2, 8, 10)
and it has been especially true for the newly industrialized countries of East
Asia (Japan, China, South Korea, Malaysia, Taiwan) (see Wade 1992; Evans
1992)
430
B) The state's resources in developing countries for realizing these objectives

are, even under the best conditions, frequently limited and over-taxed. State
offices variously respond to these situations:
/. Developing adequate social and economic infrastructures are costly. It
is expensive to develop roads, schools, reliable court systems, employment
offices and the like. Rights cost: even the so-called civil rights, such as the
rights of property and contract, require sufficient tax monies to establish and
protect them. The same is true of other civil rights. The problem is that
governments in developing countries characteristically lack the tax base to
support these programs adequately. Developing adequate tax bases requires
further economic development and this development, in turn, often becomes
difficult to accomplish without adequate infrastructures.
2. Administrative offices of the state are more likely to operate in keeping
with traditional patrimonial models than with those associated with what
Weber referred to as "rational bureaucracies." They lack sufficient numbers
of effectively trained, competent, professionally motivated staff. Hence, staff
members find it frequently difficult to address effectively the diverse
responsibilities that they face.
3. In order to address, as well as they can, the task they face, those
staffing government offices frequently fall back upon conventional patterns
of reciprocity with which they are familiar. For example, they do favors for
others in exchange for favors solicited and received. They may also adopt
more questionable practices.
4. In order to address these tasks and enhance their own private aims,
government offices may also act in a predatory manner with respect to
particular constituencies or resources. The current discussions regarding
varied rents and rent-seeking behaviors are very interesting regarding these
matters. (see Khan and Jomo 2000; Maxfield and Schneider 1997) Certainly,
some of these behaviors are not appropriately criticized as corruption: they
remain ways of governing using mixtures of systems that are patrimonial,
reciprocal, communal, bureaucratic, and professional.
5. Government offices in many developing countries may be both
vulnerable and predatory: vulnerable to being seized and dominated by
particular interests and predatory in relation to valued resources or other
vulnerable populations.
6. In order to realize their objectives, governments may variously work
with businesses as suppliers, contractors, and partners. These arrangements
43I
FREDERICK BIRD
may be subject to the range of dangers associated with the ways special
interests protect themselves.
C) States within developing countries need to find ways of protecting their

economies from forces or factors likely to undermine their patterns of local
commerce as well as the development of their own economic and social
infrastructures.
IV. The Responsibilities oflnternational Businesses in

Developing Areas for Fostering the Common Good
A) Fundamental responsibilities of international businesses in developing

areas:
I. One, businesses are responsible for pursuing their own good. The good
of businesses is not simply what benefits their owners or shareholders.
Rather, this good is a composite of the objectives they seek to realize by their
operations - which include diverse ends including maintaining and
expanding markets, providing adequate returns on investment, etc. - as well
as the conservation and expansion of their overall assets, which includes their
natural, social, and human assets as well as their productive and financial
assets (see Bird 200 I; Bird 2003). As a result, if firms truly pursue their
good, they also pursue the good of their various constituencies or
stakeholders. In this way they may variously work to protect and further the
interests of the suppliers and employees in ways that directly benefits
members of the larger society.
2. Two, in keeping with basic assumptions about fair or just exchanges,
international businesses should act to return to the societies in which do they
do business values equivalent to those they receive. In so far as they draw
upon and utilize the human, social, and natural assets of societies, they
should correspondingly add to the total assets of the communities and
societies in which they operate.
In order to engage effectively in their productive and/or commercial
operations, international businesses require the backing of administrative and
legal offices of governments to guarantee contracts, adjudicate conflicts,
provide police protection, register properties, and so forth. In countries where
432
governments are weak or have not fully developed and fully staffed their own
institutions, international businesses may appropriately be called upon to help
governments develop these capacities. Businesses are called upon to utilize
their own resources in order to help governments develop particular
capacities both because it is just to return values back to the governments for
the access to resources and the public order which governments provide them
and because such corporate investment in government skill development is,
in turn, in corporate self-interest. The challenge is how to make these
corporate investments in the public order in ways that avoid influence
peddling. This is a complex and important issue, and how businesses
undertake these kinds of initiatives varies considerably with the situations
and resources of governments.
3. Three, international businesses should act responsibly with respect to
local and national governments. In the remainder of this essay, I will
especially focus on this theme, which I will refer to as the political ethic of
businesses.
B) Outlines for a politic ethic for international businesses in developing

countries: This ethic can be discussed in relation to three different but
complementary themes in relation to the basic duties, contractual obligations
and possibilities, as well as civic responsibilities of firms.
1. Basic duties of firms as organizational citizen: As organizational
citizens, international businesses, as a basic minimum, are expected to obey
the laws of both host and home countries. The following are basic duties.
a. To obey local laws.
b. To avoid direct involvement in national and local partisan political
processes. Although businesses should be allowed to lobby
governments, they should avoid, as well, even indirect involvement in
partisan political activities. To be sure, what counts as partisan
activities is much easier to determine in multi-party states, than in
single-party or no-party states. Businesses should work to support or
oppose policies rather than groups or individuals seeking to gain or
maintain power.
c. To make or take no bribes. Businesses must exercise responsible
judgments with respect to other non-budgeted payments that assume the
form of facilitation fees, tips, reciprocities, and gifts so long as these
payments remain transparent and socially acceptable in local cultures.
433
FREDERICK BIRD
Determining when to make these payments and when not to is not a

simple matter.
d. To honor basic civil, political, economic, and cultural rights as
these are spelled out in national and international covenants.
e. To pay fair taxes. To guard against clever accounting practices
whereby they over-charge themselves for supplies purchased
internationally from other divisions of their companies and thereby
reduce not only their apparent profits but also the real taxes. Public
concern about unfair transfer pricing has diminished in recent years,
even though the problem remains extensive and not easily policed.
2. Fundamental obligations as contractual partners: International
businesses often enter into various kinds of contractual relations with
governments. They supply governments with goods. They contract with
governments to provide services or supplies. They develop partnership
arrangements with government agencies. They may co-own petroleum
companies or port facilities or utilities. In all of these cases, businesses
possess additional obligations as contractual partners. These include the
following.
a. To honor contractual obligations,
b. To critique and lobby governments and government agencies in so
far as these initiatives are called for in order both, one, to maintain or
appropriately modifY contractual relations; two, to honor basic duties;
and, three, to pursue other civic responsibilities spelled out in the next
section. Because of their contractual relations, businesses may be in a
position to critique and oppose government policies in much more
powerful ways than many individual citizens or citizenship groups.
What kind of influence might firms such as Anglo-American in South
Africa, or Talisman in Sudan, or Royal Dutch/Shell in Nigeria have
exerted to limit or oppose oppressive policies in these countries? In
modest ways a number of international firms that adopted the Sullivan
Principles in South Africa in the 1970s and 1980s opposed and
moderately violated Apartheid policies. It is clearly important to
consider the ways businesses can effectively, legitimately, and
responsibly use their contractual relations with governments to raise
public policy concerns.
As contractual partners, businesses are in position to exert influence
on governments in ways quite differently than ordinary citizens or even
many locally organized citizens. These contractual relations may work
434
in ways that at once strengthen the effectiveness of governments to

govern well and facilitate business interests in ways that foster
economic development to the benefit of the larger society. When these
relationships work this way, they might well be described, as they were
by the former president of Malaysia, as "smart partnerships." However,
these contractual relationships also may allow businesses to exert
special influence and to gain special benefits.
3. Civic responsibilities as corporate powers: to act justly and to maintain
or work to develop civic order: In addition to these basic duties and
contractual obligations and responsibilities, international businesses possess
as well a range of civic responsibilities. The basic responsibilities can be
stated as principled obligations. However, since the means of fulfilling these
obligations differ dramatically between countries, firms are called upon to
exercise discretion as they determine the particular practices and policies they
will pursue.
a. The basic civic responsibilities offirms in keeping with principles
ofjustice in exchanges (commutative justice). The basic idea here is as
follows. In exchange for the assumed public goods which make
business practices viable - existing social and economic infrastructures
- businesses have several identifiable responsibilities. Most
importantly, they are called upon to strengthen and foster local
commerce and, in so far as possible, therefore, to use local suppliers.
In many developing areas, physical infrastructures are thus far poorly
developed. In these settings, international businesses are also
challenged to explore ways to connect their own efforts to address their
needs for these facilities and structures - their needs for electricity,
water, sewage disposal, communication systems, roadways - with
collaborative projects that will result in addressing these needs at the
same time for communities and regions in the area of their operations.
That is, these firms can and should explore ways as a business interest
to meet their own requirements for power, water, transportation and
communication infrastructure by working with local businesses and
governments to establish these services and facilities for the larger
community as well. They may in the process have to help organize the
partners with whom they will eventually partner in these operations.
In many developing areas, social infrastructures are underdeveloped.
Governments do not have the tax base to fund unemployment schemes,
435
FREDERICK BIRD
workmen compensation programs, old age pensions, health clinics, and

the like. As a result employees working for international businesses in
developing areas are economically vulnerable in ways that no workers
are in industrialized countries with modern social welfare systems. The
question then arises as to the extent of responsibility these international
firms may have to limit or reduce the economic insecurity of their
workforces in so far as by attracting people to leave traditional work
settings, these workers are now less able to access traditionat family
and village based social welfare provisions. The issues here are not
simple since many people seek out work in urban areas and new work
sites because of the extent of rural poverty. Nonetheless, in exchange
for their labor, these international businesses may well owe their
workers not only decent wages but also practical provisions to address
the heightened economic vulnerability associated with wage labor.
b. Civic responsibilities for social investments. In the broadest sense,
in so far as international businesses benefit from the existence of public
order, then they possess the corresponding responsibilities to work to
foster and sustain that order. Accordingly, businesses may support
various civic projects, not only in order to enhance their reputation and
to elicit the support of local communities but also to strengthen the over
all sense of public order, which in itself is an asset that facilitates the
operations of businesses. Where such order does not exist, as in areas of
social discord, the social costs of doing business are greater.
4. Special responsibilities of.firms in situations of civil conflict: There are
special responsibilities for international businesses in situations of aggravated
civil conflict, such as in Sudan, Colombia, South Africa under Apartheid,
various areas in Indonesia, and the Democratic Republic of Congo. In these
situations, it is often difficult to identify anything like a shared understanding
of the common good. Different parties hold different views, which in some
settings they are defending with violence.
First question: Do international firms by their operations aggravate the
situation? Do they disproportionately strengthen the position of a particular
side or party? Depending on the settings, it may be appropriate for firms to
withdraw or to aid particular parties. Minimally, they are expected to foster
the common economic good of the people and not just the governments.
Hence, there are, no doubt, settings in which businesses are called upon to
criticize governments, to work to change existing laws, to dissent from
436
government policies, and/or to civilly disobey. International businesses are

not called upon to determine their positions completely on their own: rather,
they are called to act in consort with local groups who are their constituents.
References.
ASCHER, WILLIAM: Why Governments Waste Natural Resources: Policy Failures

in Developing Countries, Baltimore (John Hopkins University Press) 1999.
AUTY, RICHARD M.: Sustaining Development in Mineral Economies: The
Resource Curse Thesis, London (Routledge) 1993.
AUTY, RICHARD M. (Ed.): Resource Abundance and Economic Development,
Oxford (Oxford University Press) 2001.
BIRD, FREDERICK: "Good Governance: A Philosophical Discussion of the
Responsibilities and Practices of Organizational Governors", Canadian
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BIRD, FREDERICK: "The Value-Added Approach to Business Ethics", Zeitschrift
fur Wirtschafts- und Untenehmenethik, 4, 2 (2003).
BIRD, FREDERICK: "Causes and Remedies for Global Poverty", unpublished paper,
2004.
BRAUDEL, FERNAND: The Structures of Everyday Life: The Limits of the Possible,
translated by Sian Reynolds, New York (Harper and Row) 1980.
BRAUDEL, FERNAND: The Wheels of Commerce, translated by Sian Reynolds, New
York (Harper and Row) 1982.
BRAUDEL, FERNAND: The Perspective ofthe World, translated by Sian Reynolds,
New York (Harper and Row) 1984.
CHUA, AMY: World on Fire: How Exporting Free Market Democracy Breeds
Ethnic Hatred and Global Instability, New York (Doubleday) 2003.
CHOSSODOVSKY, MICHEL: The Globalization of Poverty: Impacts of IMF and
World Bank Refiorms, London (Zed Books Ltd.) 1997.
DAVIS, MIKE: Late Victorian Holocausts: El Nino Famines and the Making of the
Third World, London (Verso) 2001.
DESOTO, HERNANDO: The Mystery of Capital, New York (Basic Books) 2000.
EVANS, PETER: "The State as Problem and Solution: Predation, Embedded
Autonomy and Structural Change", in: STEPHEN HAGGARD, ROBERT R.
KAUFMANN (Eds.): International Constraints, Distribution Conflicts, and the
State, Princeton (Princeton University Press) 1992.
HOLMES, STEPHEN, SUNSTEIN, CASS R.: The Cost of Rights: Why Liberty Depends
on Taxes, New York (W.W. Norton & Co.) 1999
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FREDERICK BIRD
KHAN, MUSTAQ H., JOMO, K. S. (Eds.): Rents, Rent-Seeking and Economic

Development: Theory and Evidence in Asia, Cambridge (Cambridge
MAXFIELD, SYLVIA, SCHNEIDER, BEN ROSS (Eds.): Business and the State in
Developing Countries, Ithaca (Cornell University Press) 1997.
NORTH, DOUGLASS C.: Growth and Welfare in the American Past, Englewood
Cliffs (Prentice Hall) 1996.
POLANYI, KARL: The Great Transformation, Boston (The Beacon Press) 1944.
ROSTOW, W. W.: The Stages of Economic Growth: A Non-Communist Manifesto,
Cambridge (Cambridge University Press) 1961.
SEN, AMARTYA: Development as Freedom, New York (Random House) 2000.
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD): The
Least Developed Countries Report 2002: Escaping the Poverty Trap, Geneva
(United Nations) 2002.
WADE, ROBERT: Governing the Market: Economic Theory and the Role of
Government in East Asian Industrialization, Princeton (Princeton University
Press) 1992.
WEBER, MAX: Economy and Society, edited by Guenther Roth and Claus Wittich,
Berkeley (University of California Press) 1978.
WEBER, MAX: General Economic History, translated by Frank H. Knight, New
York (Collier Books) 1961.
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Opportunity, Empowerment, and Security, Washington, D.C. (World Bank)
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438
Chapter 19
Globalization and the Re-Definition of Democratic

Governance: From Compensatory to Protective
Democracy
MARK NEUFELD I
I. Introduction: Beyond Boolean Operations

II. Globalization: A Neo-Gramscian Perspective
Ill. Globalization and Democratic Governance: From Compensatory
to Protective Democracy
IV. Conclusion
I. Introduction: Beyond Boolean Operations
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The relationship between "globalization" and "democracy" has become a
central topic of discussion not only in popular political discourse, but in
academe as well. Determining the nature of the relationship, however, is not a
straightforward matter. To date, most discussions have framed this question
This paper draws upon MARK NEUFELD: ''Theorising Globalisation: Towards a

Politics of Resistance - A neo-Gramscian Response to Mathias Albert", Global
Society, 15( I) (200 I).
MARK NEUFELD
in terms consistent with standard "Boolean Operators" (and, not, or),

consistent with three possible positions:
i) globalization and democracy
In this view, the two are assumed to be two-sides of the same global
political-economic coin. That is, globalization (framed in the terms of neo-
liberal economics) and democratization (framed in terms of liberal-
democratic politics) are understood to be proceeding hand in hand,
characteristically with globalization viewed as the independent, and
democracy the dependent, variable.
ii) globalization not democracy
In this view, globalization and democratization are understood to be two
distinct and independent processes, with neither necessarily implying the
other. Their coincidence is understood to be the product of policy choices,
themselves made possible by the fact that, being independent variables, there
is nothing inherently incompatible between the two.
iii) globalization or democracy
In this view, globalization and democracy are in fundamental conflict. As
such, human society is understood to face a choice: either we choose
globalization, with its attendant concentration of power - political, economic,
social and cultural - in the hands of the managers/owners of multinational
corporations, or we choose democracy, with power firmly in the hands of the
people.
In terms of the orientation of this paper, it is view number three which is
closest in spirit. However, all three views, including the last, suffer from the
same fundamental problem - that is, all three view the relationship of
globalization to democracy in non-dialectical fashion. Approaching the
question of their relationship in a dialectical way has three consequences?
First, a dialectical approach allows for the recognition that globalization,
democracy, and other structures and processes- e.g., the state -do not exist
2 For a fuller reflection on the relevance of dialectical thought for re-orienting the
study of world politics, see M. NEUFELD: "The 'Dialectical Awakening' in
International Relations: For and Against", Millennium: Journal of International
Studies, 26(2) (1997), pp. 449-54.
440
GLOBALIZATION AND DEMOCRATIC GOVERNANCE
as such, that is, outside of human history. As historically emergent entities,

they can and do take different forms, depending on context (e.g.,
globalization from above - neoliberal form; globalization from below -
democratic socialist form). As a consequence, the question of the relationship
of democracy and globalization can be answered only on the basis of an
analysis of the specific form of each in existence at any given moment in
historical time and place.
The second recognition deriving from a dialectical formulation of the
issue is that framing the question of the relationship of globalization and
democracy as one between two distinct variables (whether as independent-
dependent, mutually independent but compatible, or incompatible) can blind
us to the possibility that the one might already imply a particular conception
of the other.
Finally, a dialectical approach to the question of globalization-democracy
brings with it attentiveness to contradictions. It is important to signal,
especially for those unfamiliar with dialectical thought, that what is meant
here are not "logical" contradictions (i.e., a=b; a=c; b#), but rather
"relational" contradictions. Most generally, by relational contradiction is
meant "oppositions which are both necessary for, and yet destructive of,
particular processes or entities. "3 It is the assumption of the unsustainability
of the aforementioned oppositions over time that orients dialectical thought
toward the exploration of resulting crises and the ways in which these might
resolve themselves.4
These insights are fundamental to the interpretation being offered here.
Specifically, it will be argued that the dominant form of globalization - neo-
liberal "globalization from above" in the current context implies, in turn, a
particular form of democracy, and that, furthermore, the shift from one form
3 See ROBERT L. HEILBRONER: Marxism: For and Against, New York (W. W.
Norton) 1980, p. 39.
4 A good analogy can be made with a person addicted to a narcotic. The narcotic,
in this case, is both sustaining (allows the person to get through the day) and
destructive (in terms of health effects, indebtedness, anti-social behaviour, etc).
Accordingly, over time one can have a reasonable expectation of a qualitative
change -e.g., either the person will kick the habit and no longer be a drug addict
or die. One cannot predict with any certainty which of these possibilities will
come to pass - one can only say, given the contradictions, that the status quo is
unsustainable and that fundamental change will come about in time.
441
MARK NEUFELD
of democracy to another can be understood to be one of the defining

characteristics of [neoliberal] globalization. In order to understand this
argument, however, it is necessary to see the shift in the form of democracy
in relation to the other fundamental shifts that collectively define
globalization. It is, accordingly, to a review of these other shifts that I now
turn.
II. Globalization: A Neo-Gramscian Perspective
Before moving to a discussion of the changes globalization implies, it is

necessary to indicate the theoretical framework which will guide that
discussion. The underlying framework is the neo-Gramscian approach to the
study of global political economy. 5 This approach is distinguished by its
rejection of the base-superstructure metaphor in favour of the perspective of
"totality" characteristic of Western Marxism, 6 by its analysis of world order
in terms of the Gramscian notion of hegemony, by its attentiveness to the
mutually-determining relationship between material capabilities, ideas, and
institutions, 7 and by its recognition of the politico-normative content of all
theorizing.
5 The leading contributor to the development of a neo-Gramscian approach is

Robert Cox. See his Approaches to World Order, ed. by Timothy J. Sinclair,
Cambridge (Cambridge University Press) 1996. For other examples of neo-
Gramscian analysis ofwor1d order, see STEPHEN GILL (Ed.): Gramsci, Historical
Materialism and International Relations, Cambridge) Cambridge University
Press) 1993. For a critical over-view of neo-Gramscian theorizing from a
mainstream perspective, see RANDALL D. GERMAIN and MICHAEL KENNY:
"Engaging Gramsci: International Relations Theory and the New Gramscians",
Review of International Studies 24(1) (January 1998), pp. 3-21; from a radical
perspective, see M. NEUFELD "Democratic Socialism in a Global (-izing)
Context: Toward a Critical Research Programme", unpublished paper ( 1998).
6 See MARTIN JAY: Marxism & Totality: The Adventures of a Concept from Lukacs
to Habermas, Berkeley (University of California Press) 1984.
7 Understood as a mix of consent and coercion, the former achieved through a
combination of ideological legitimation and real concessions to subaltern classes.
See ANTONIO GRAMSCI: Selections from the Prison Notebooks, edited and
442
Shift /: Globalization involves a change at the level of work/production

from "fordist-taylorism" to "flexible hyper-taylorism."
First, globalization involves a change at the level of the mode of social
relations of work/production, the latter being understood to be two sides of
the same coin. The earlier form of work/production, popularly associated
with Henry Ford, was typically characterized by mass production organized
around the assembly line. This form of work/production involved economies
of scale achieved through large plants and huge warehouses. This period also
coincided with the birth of "scientific management" - particularly associated
with the time-motion studies of Frederick Taylor - a practice very still very
much in its infancy. Finally, this form of work/production also lent itselfto a
particular form of consumption- specifically, mass consumption of largely-
uniform goods (Henry Ford famously remarked that people could have his
cars in any colour they wanted, as long as it was black) and affordable to the
workers involved in their production.
The 1970s, however, marked a shift to a qualitatively different form of
work/production. With a heightened concern with producing for niche
markets came a new focus on flexibility. The direct outgrowth of that new
focus was an emphasis on limited production runs, involving quick shifts
from product line to product line. Instead of large production centres
featuring unionized works, "contracting-out" to largely unregulated home
workers, often working at piece-rate wages, began to take a more and more
central place. At the same time, technological advances have allowed for a
micro-managing of workers' behaviour (from counting key-strokes of
secretarial staff to monitoring seconds on- and off-line in call centres) has
allowed the application of the principles of "scientific management" at a level
Taylor, equipped with his stopwatch and clip-board, could hardly have
imagined.
Finally, this shift has been accompanied by an ideology which denies the
structural conflict between labour and capital (for example, in terms of the
images of "teamwork" or "firm as family"). In exchange, firms seek
translated by Quintin Hoare and Geoffrey Nowell Smith, New York

(International Publishers) 1971, passim. For its relevance for the study of world
order, see ROBERT Cox: "Gramsci, Hegemony and International Relations" as
well as R. Cox: "Social Forces, States and World Orders: Beyond International
Relations Theory", in: T.J. SINCLAIR (Ed.): Approaches to World Order,
Cambridge (Cambridge University Press) 1996.
443
MARK NEUFELD
concessions from labour, in the name of enhancing their competitiveness in

the "global market place," to increase flexibility by contracting out important
services to a growing class of peripheral, unprotected workers and to enhance
productivity through the intensification of work. It is this shift from "fordist-
taylorism" to "flexible hyper-taylorism."8
Shift II: Globalization involves a shift from a "liberal" to a "hyper-
liberal" world order.
The second fundamental change that can be identified is at the level of
world order. Here again it is important to distinguish between different forms
of world order. The capitalist world order established after 1945 through
Bretton Woods was a "liberal" one. As such, it involved an "international
economy" in which economic relations were between national units, and in
which states regulated the flow of goods and capital across their borders,
either individually, or collectively, through state-created and directed
international institutions. This liberal world order, however, has been
supplanted by a hyper-liberal one, in which the market is not only central (as
it was during the liberal world order) but increasingly omnipresent (in that
market forces determine exchange not only in goods and services, but in
currency values as we11).9
The implications of this shift can be seen clearly in terms of the role of
international regulation. In the liberal world order, calls for regulation of
capital in the interests of under developed countries (e.g., New International
Economic Order; Code of Conduct for Transnational Corporations), if not
fully implemented, were at least raised. In the hyper-liberal order, regulation
involves not codes of conduct for business, but codes of conduct for states in
which the latter are obliged to work to create favourable conditions for the
former (e.g., North American Free Trade Agreement, APEC, MAl).
In sum, the international economy between states has been replaced by a
world economy in which the latitude given to individual states to regulate is
8 See JEFFREY HARROD: Power, Production and the Unprotected Worker, New
York (Columbia University Press) 1987. See also ROBERT Cox: "passim", in: T.J.
SINCLAIR (Ed.): Approaches to World Order, pp. 97-101.
9 The growth of financial markets is one of the more striking elements in this
transformation. See ERIC HELLEINER: States and the Re-emergence of Global
Finance, Ithaca (Cornell University Press) 1994.
444
greatly constrained. This constitutes the second defining element of

globalization.
Shift Ill: Globalization involves a change in the form of state, from a
welfare/mediator state to the national competitiveness/forced-adjustment
state.
The third fundamental change involves a change in the "form of state."
This argument is not to be confused with one which postulates a shift from a
"strong" to a "weak" state, or from "more" to "less" state. The dominant form
of state in the core countries in the post-war era was that of the "welfare
state." What distinguished this form of state was the understanding that the
role of the state was to mediate between two different sets of obligations -
those from capital, which required freedom of movement and access of
markets, and those from its citizens, who required employment opportunities
and social welfare provisions. Accordingly, state action was two pronged,
marrying a foreign economic policy designed to reduce barriers to the flow of
goods across borders (e.g., GATT) with a Keynesian domestic economic
policy committed to the goal of high (if not full) employment. Accompanying
this economic policy was domestic social policy in the areas of health,
education and welfare designed to cushion any short-term adjustments that
might be required. Indeed, the obligation of states to citizens was even
extended to include a sense of obligation to the citizens of other states visible
in Official Development Assistance (ODA).
This form of state, which predominated in the core countries in the post-
war period, has been supplanted by that which Hirsch has termed the
"national competitiveness state." 10 What characterizes this second form of
state is the fact that it recognizes no obligations except those to capital. Its
task is no longer to mediate between the conflicting needs of capital and its
citizens, but rather to force its citizens - and by extension, those of other
states - to adjust their needs and behaviour in accordance with the
imperatives of global competition conducive to the interests of capital. The
consequences of this shift can be seen in the subordination of national policy-
making to international agreements (noted in our discussion of Thesis II), the
dismantling of social programmes, and the state's abandonment of its
responsibility for job creation. One can note as well the systematic reduction
10 See JOACHIM HIRSCH: Vom Sicherheitsstaat zum nationalen Wettbewerbsstaat,

Berlin (ID Verlag) 1998.
445
MARK NEUFELD
of development assistance coupled with the imposition, by means of core

state-controlled international institutions (IMF, World Bank), of similar
adjustment requirements on dependent states (e.g., Structural Adjustment).
In sum, it is the shift from the welfare/mediator state to the national
competitiveness/forced-adjustm ent state that stands as the third defining
element of globalization. 11
Shift IV: Globalization involves a degradation of shared community
identities which can facilitate collective action in favour of a generic
American mass culture entailing an ideology of "possessive individualism. "
A fourth fundamental shift involves the nature of collective identity. One
can note here the virtually universal influence of corporate-promoted
American mass culture, promulgated by means of advertising and the
products of the entertainment industry (movies, television). The consequence
of this cultural imperialism is that traditional community identities built
around a shared distinct cultural heritage are being supplanted by a
nondescript American (i.e., Mickey-Mouse; McDonalds) culture.
The ubiquitousness of American cultural symbols around the world - and
the power they exert on popular consciousness, young and old - are often
commented upon. 12 What may not be sufficiently appreciated, however, is
II See ROBERT Cox: Power, Production and World Order, New York (Columbia
University Press, 1987, Chapter 7. Cox refers to the shift in the sense of
obligation discussed here as the "internationalization of the state" which he
describes as follows: "First, there is a process of interstate consensus formation
regarding the needs or requirements of the world economy that takes place within
a common ideological framework (i.e., common criteria of interpretation of
economic vents and common goals anchored in the idea of an open world
economy). Second, participation in this consensus formation is hierarchically
structured. Third, the internal structures of states are adjusted so that each can
best transform the global consensus into national policy and practice, taking
account of the specific kinds of obstacles likely to arise in countries occupying
the differently hierarchically arranged positions in the world economy" (p. 254).
12 In this regard, one can recall Cuban President Fidel Castro's suggestion that
Mexican children are more familiar with Mickey Mouse than with their national
heroes [LINDA DIEBEL: "Fidel, Mickey go head to head", The Toronto Star, (Dec.
14, 1998)]. I am not qualified to judge the veracity of this suggestion in regard to
Mexico - in the case of Canada, however, it is certainly accurate.
446
that American cultural icons are merely the form. The content of this culture,
not its form, poses the greater threat. For what it promotes is the ideology of
"possessive individualism." In Macpherson's terms, possessive individualism
involves the following assumptions:
I) Man, the individual, is seen as absolute natural proprietor of his
own capacities, owing nothing to society for them. Man's essence is
freedom to use his capacities in search of satisfactions ....
Freedom ... comes to be identified with domination over things ... [t]he
clearest form of [which] is the relation of ownership or possession.
Freedom is therefore possession. Everyone is free, for everyone
possesses at least his own capacities.
2) Society is seen, not (as it had been) as a system of relations of

domination and subordination between men and classes held together
by reciprocal rights and duties, but as a lot of free equal individuals
related to each other through their possession, that is, related as
owners of their own capacities and of what they have produced and
accumulated by the use of their capacities. The relation of exchange
(market relation) is seen as the fundamental relation of society.
3) Finally, political society is seen as a rational device for the

protection of property, including capacities; even life and liberty as
considered as possessions, rather than as social rights with correlative
duties. 13
The consequences for public life of the ideology of possessive

individualism go far beyond a lack of appreciation for indigenous heroes or
historical myths. Possessive individualism is an ideology which, once it
achieves the status of "common sense," makes virtually all community
identities - and the collective actions deriving from them - difficult if not
impossible to sustain.
Finally, as noted above, a dialectical conceptualization of the dimensions
of globalization involves an attentiveness to "relational contractions." While
13 C. B. MACPHERSON: Democratic Theory: Essays in Retrieval, Oxford (Clarendon

Press) 1973, p. 199.
447
MARK NEUFELD
an in-depth analysis of the simultaneously life-giving and life-destroying

processes that can be identified within these dimensions of globalization is
beyond the scope of this paper, it is possible to suggest general possibilities
as follows:
i) work/production
Mass production involves an alienating form of work, in the shadow of

which the promise of cooperation, teamwork and flexibility are appealing to
many workers; however, the resulting "lean-ness" leads in turn to
intensification and greater insecurity of work, provoking its own forms of
resistance.
ii) world order
The high degree of mobility of capital is vital for the ability of capital to
discipline those who might actively resist its agenda; the same mobility,
however, has proven to be so destabilizing ofthe global economy, that calls
for the regulation of capital movement can be heard even from within the
global elites.
iii) form ofstate
Cut-backs and dismantling of social programmes to deal with the

ostensible crisis in state finances have been made possible by appeals to the
masses that sacrifice now is needed to ensure the living standards of their
children and grandchildren; however, the resulting gap in living standards
already visible and sure to increase with time is leading to the recognition
that not all children and grandchildren will benefit equally from the
restructuring of the state, and that the costs of restructuring are borne
unequally in gender terms as weii. 14
14 On the gendered dimensions of the "re-constitution of domestic enclaves," see

JANINE BRODIE: "New State Forms, New Political Spaces", in: ROBERT BOYER
and DANIEL DRACHE (Eds.): States Against Markets: The Limits of Globalization,
London (Routledge) 1996, pp. 383-98.
448
iv) community identity

The growth of global mass culture, built around the assumptions of
possessive individualism, make community-based strategies of resistance
which are dependent on shared collective identities increasingly problematic;
however, the inherent unpersuasiveness of an ideology that affirms that
people who are deficient in the basics required to live a fully human life are,
nonetheless, already free (in that they possess their own capacities) opens the
door to critical public examination of the ideology of global mass culture and
its eventual rejection in favour of collective identity and collective action.
Having set the general context, we turn now the main subject of this paper
-the theme of globalization and democracy.
III. Globalization and Democratic Governance: From

Compensatory to Protective Democracy
In addition to the four dimensions of globalization discussed above, it is

the argument of this paper that globalization can also be understood in terms
of a fundamental shift in the discourse and practice of democracy. This
theme, moreover, can be addressed in terms of both domestic and foreign
policy. To begin, different generalized modes of democracy must be
distinguished. The form of democracy which prevailed in core states in much
of the post-war period can be termed "compensatory democracy." It was
distinguished, at least in part, by a diachronic understanding of democratic
governance. Democracy was seen, not as a given system existing at a single
point in time, but as a process, stretching back into society's past - where
today's democracy was understood as the result of past improvements - and
forwan;l into society's future - in which liberal democracy was viewed as a
means of continuing improvements.
There is no need to portray this earlier version of democracy as a fully-
functioning form of "participatory democracy." 15 Mass participation was
largely limited to periodic elections in which voters were limited to an elite-
15 On participatory democracy, see C.B. MACPHERSON: The Life and Times of

Liberal Democracy. Oxford (Oxford University Press) 1977, Chapter 5.
449
MARK NEUFELD
managed choice between a narrow range of platforms of mainstream parties,

all committed to one variant or another of welfare-state Keynesianism.
Notwithstanding this limitation, however, this earlier conception of
democracy did exhibit a willingness to address the inequities produced by
market-society. 16
Specifically, it was seen as vital to the practice of democracy that the state
intervene to redress the inevitable inequalities produced by market forces.
Democracy was understood to involve "social citizenship" where citizens
could expect to be "compensated" by the state in those realms where the
market failed to provide what was necessary. l7
More recently, however, the discourse of compensatory democracy has
been supplanted by that of "protective" democracy. This conception of
democracy, reminiscent of l91h century theorizing, allows no space to the
idea that democracy might involve compensation for market failure, or that
democratic citizenship might have a social-welfare dimension. Rather, as
Macpherson notes,
it is nothing but a logical requirement for the governance of inherently

self-interested conflicting individuals who are assumed to be infinite
desirers of their own private benefits. Its advocacy is based on the
assumption that man is an infinite consumer, that his overriding
motivation is to maximize the flow of satisfactions, or utilities, to
himself from society, and that a national society is simply a collection
of individuals. Responsible government, even to the extent of
responsibility to a democratic electorate, [is] needed for the protection
16 It has been argued that, among advanced capitalist states, the United States has
been particularly unreceptive to the notion of "social citizenship." Even here,
however, the discourse of social citizenship is in evidence, for example, in the
civil rights campaigns of the 60s and 70s, and in the affirmative action
programmes created as a result (e.g., busing). See NANCY FRASER and LiNDA
GORDON: "Contract Versus Charity: Why is there no social citizenship in the
United States?" Socialist Review, 22 (December, 1992), pp. 45-67.
17 It is clear that it was this form of democracy being lamented by the authors of the
key report of that subject commissioned by the Trilateral Commission as an
"excess of democracy." See MICHAEL CROZIER, SAMUEL P. HUNTINGTON, and
Jon WATANUKI: The Crisis of Democracy: Report on the Governability of
Democracies to the Trilateral Commission, New York (New York University
Press) 1975.
450
of individuals and the promotion of the Gross National Product, and

for nothing more. IS
In contrast to the earlier diachronic understanding of democracy, the

"protective" view is an unambiguously synchronic one. Now democracy is
reduced to a process which exists in a given moment in time. In politico-
economic terms, protective democracy is distinguished by a strict separation
of the economic and political spheres, with the former responding only to the
logic of the marketplace, and the latter restricted in its role to allowing that
logic to proceed without interference. Like its immediate predecessor,
protective democracy also reduces the meaning of mass participation to
taking part in "free and fair elections" every few years in which voters
choices are limited to an elite-managed choice between a narrow range of
platforms of mainstream parties. 19 What is different, however, is that the
earlier consensus on the need to redress the negative effects of the market has
been replaced by a new one based on an agenda of "deficit reduction" and
"tax relief' to be achieved through the progressive dismantling of the welfare
state. 20
18 The Lifo and Time of Liberal Democracy, p. 43

19 It is in this regard that previous neo-Gramscian formulations have been less than
adequate. Stephen Gill's discussion of the current form of democracy as
"Schumpeterian" or William I. Robinson's framing the issue in terms of Dahl's
notion of"polyarchy" both obscure the fact that the forms of democracy existing
before and after the shift identified here with globalization both conform to the
image of limited, elite-managed democratic governance. What has changed- and
what is captured neither by Schumpeter's or Dahl's conceptualizations of
democracy - is the larger politico-economic agenda shared by political elites in
their respective context. See STEPHEN GILL: "Globalization, Democratization, and
the Politics of Indifference", in: JAMES H. MITTELMAN (Ed.): Globalization:
Critical Reflections, Boulder (Lynne Reinner) 1996, pp. 205- 28 and WILLIAM I.
ROBINSON: Promoting Polyarchy: Globalization, US Intervention, and
Hegemony, Cambridge (Cambridge University Press) 1996, respectively.
20 There are also changes at the level of public discourse. In Canada, for example,
where neo-liberal discourse is virtually uncontested in the mainstream media,
government spokespersons no longer refer to the country's "citizens" as their
constituency, but rather to the country's "tax-payers." A detailed exploration of
the significance of this shift is beyond the scope of this paper. It is worth noting,
however, that "citizen" is a dichotomous category - one is a citizen or one is not,
and if one is, one is (in theory) equal to all other citizens in rights and power.
451
MARK NEUFELD
The significance of the shift to a protective understanding and practice of

democracy extends beyond its implications for domestic politics of core
states. It is also relevant to core state foreign policies and, by extension, to
the kind of world order emerging under the influence of globalization. As
was noted above, one of the distinguishing characteristics of the neo-
Gramscian approach is its employment of the notion of "hegemony" to
analyse the current world order. As Cox has noted,
"Hegemony" is used here in the Gramscian meaning of a structure of
values and understandings about the nature of order that permeates a
whole society, in this case a world society composed of states and
non-state corporate entities. In a hegemonic order these values and
understandings are relatively stable and unquestioned. They appear to
most actors as the natural order of things. They are the intersubjective
meanings that constitute the order itself. Such a structure of meanings
is underpinned by a structure of power, in which most probably one
state is dominant but that state's dominance is not sufficient by itself
to create hegemony. Hegemony derives from the ways of doing and
thinking of the dominant social strata of the dominant state or states
insofar as these ways of doing and thinking have inspired emulation or
acquired the acquiescence of the dominant social strata of other states.
These social practices and the ideologies that explain and legitimize
them constitute the foundation of the hegemonic order. Hegemony
frames thought and thereby circumscribes action. 21
In this regard, the framing and circumscribing of democratic thought and
discourse in terms of the precepts of protective democracy can be understood
as an effort by core-state elites to solidify and stabilize the hegemony which
safeguards their positions of power and privilege. What is equally significant,
however, is the possibility that a similar strategy is being enacted in world
order terms through the foreign policies of core states.
"Tax-payer", in contrast, is a category involving a sliding scale- one can be more

of less of a tax-payer, and, by extension, the more taxes one pays (as a function
of wealth or income) the greater one's claim to the attention of government
decision-makers.
2I R. Cox: "Multilateralism and world order", in: T.J. Sinclair (Ed.): Approaches to
World Order, pp. 5 I 7- I 8.
452
The centrality of "democracy promotion" is an increasingly prominent

feature of core state foreign policy discourse and practice. From political aid
to elements of civil society in dependent states, to the monitoring of
elections, to calls for respect for liberal human rights norms, core states have
made the extension of "democracy" a cornerstone of the New World Order.
Nor does it come as a surprise that the conception of democracy being
promoted is that of protective democracy. Indeed, it can be argued that the
promotion by core states of "low-intensity democracy" (LID) is fast
supplementing - if not replacing - the traditional strategy of "low-intensity
conflict" (LIC) as a means of shoring-up unstable elite allies in the South. 22
As in the case of the other four dimensions of globalization discussed
above, the form of democratic governance termed here "protective
democracy" suffers from its own contradictions. Specifically, the acceptance
of the protective conception of democracy legitimizes the notion that capital
is not to be subject to "political interference;" however, the accompanying
inability of governments to meet public needs for secure employment and
adequate social programmes leads to a growing disenchantment with
politicians, parties, and liberal-democracy generally, thus reducing its
legitimizing power.
In short, the contribution of this form of democratic governance to a
stable, hegemonic order is limited. It is, perhaps, for this very reason that
efforts are being made in the current context to shore up democracy's
legitimizing power by affirming, in the face of considerable contrary
evidence, that globalization is compatible with the notion of accountability of
elected representatives to citizenry _23 Equally significant, is the newly
elected Bush administration's efforts to link the notion of democratic
citizenship not with the guarantee of basic social services from the state, but
with the hope of receiving charity from more affluent members of society. 24
22 On this, see ROBINSON: Promoting Polyarchy. For a critical examination of

Canada's role in this process, see MARK NEUFELD: "Democratization in/of
Canadian Foreign Policy: Critical Reflections", Studies in Political Economy 58
(Spring 1999), pp. 97-1 19.
23 See, for example, Canadian Finance Minister Paul Martin's January 24, 2001
speech to the Royal Institute of International Affairs, available at
www .tin.gc.ca/newseO I /0 1-009e.html.
24 See GEORGE W. BusH: "Rallying the Armies of Compassion", (January 2001), at
www.whitehouse.gov/news/reports/faithbased.html.
453
MARK NEUFELD
IV. Conclusion
Dick Geary, a leading historian on the Weimar Republic, has made the
following observation about elite hostility to Germany's early 201h century
liberal-democratic experiment:
... the Weimar Republic, however imperfect it may have been, was a
social welfare state which introduced a vast expansion of social
welfare provision and in particular a system of unemployment
insurance, all of which had to be paid for through taxation.
Furthermore the Weimar years saw the introduction of statutory
collective wage agreements and compulsory and binding arbitration,
which until 1930 normally favoured labour in industrial disputes.
Those industries with problems of profitability claimed that such
measures destroyed their competitiveness and left them bankrupt; and
they associated such measures with the political structures of Weimar,
in which industry had to compete with the SPD [social democrats] and
the trade unions for influence .... This was why [the business elites]
described state economic policy as "cold socialism" and the state itself
as a "trade union state."25
Accordingly, in Weimar Germany, it was the industrial elite's position

that Social Democrats and Trade Unions could be tolerated only if the latter
accepted the principle that the running of the economy should be left "to
those who knew best." Notes Geary,
This last point is crucial to [the] whole account of the tortured
relationship between industry and democratic structures in the Weimar
Republic: industry was not prepared to accept the rights of any other
institutions or social group to interfere with "the economy." 26
It is, no doubt, the reason so many members of the industrial elite found
Hitler's anti-democratic public commitments enunciated in his 1932 speech
25 See DICK GEARY: "The Industrial Elite and the Nazis in Weimar Germany", in:
PETER D. STACHURA (Ed.): Nazi Machtergreifing, London (George Allen &
Unwin) 1983, p. 95.
26 GEARY: "The Industrial Elite", p. 90.
454
to the Industry Club - to "rescue Germany from Socialism" and to respect the
right of "management to manage"- so appealing_27 The resonance with
current realities is much less so.
For contemporary students of world politics, theorizing globalization is a
central task. An understanding of globalization - both its rhetoric and reality
- is vital for making sense of the world we inhabit as we enter the 21st
century. This is no less true for critically-oriented scholars, whether of
modernist or post-modernist inclination. What compels our interest in the
question of globalization is also that which bridges the modernist-
postmodernist divide within critical social theory: the shared "concern to
facilitate a politics of resistance among the globally disenfranchised." 28 And
without an adequate understanding of the origins and meaning of
globalization, no effective politics of resistance is possible. Appreciating the
significance of the shift in the form of democratic governance - and its
internal contradictions - is a central part of achieving such an understanding
and, by extension, facilitating an effective politics of resistance among the
globally disenfranchised.
27 See A. HITLER: "Address to the Industry Club (1932)", in: ANTON KAES, MARTIN
JAY, and EDWARD DIMENDBERG: (Eds.), The Weimar Republic Sourcebook,
Berkley (University of California Press) 1994, pp. 138-41.
28 JIM GEORGE: Discourses of Global Politics: A Critical (Re)lntroduction to
International Relations, Boulder (Lynne Rienner) 1994, p. 200.
455
List of Authors
DENNIS BADEEN, Ph.D. Candidate, Social and Political Thought
Programme, York University, Toronto, Ontario, Canada
FREDERICK BIRD, Professor of Religion, Concordia University, Montreal,
Quebec, Canada
JoHN BISHOP, Professor of Business Administration, Trent University,
RICHARD DE GEORGE, University Distinguished Professor of Philosophy,
University of Kansas, Lawrence, Kansas, U.S.A.
AMITAI ETZIONI, University Professor and Director, The Institute for
Communitarian Policy Studies, The George Washington University,
Washington, D.C., U.S.A.
TRUDY GOVIER, Independent Philosopher, Calgary, Alberta, Canada
JOSEPH HEATH, Associate Professor of Philosophy, University of Toronto,
Toronto, Ontario, Canada
BERNARD HODGSON, Professor of Philosophy, Trent University,
DAVID HOLDSWORTH, Assistant Professor of Environmental and
Resource Studies, Trent University, Peterborough, Ontario, Canada
WILLIAM HUNTER, Independent Economist, Peterborough, Ontario,
Canada
PETER KOSLOWSKI, Professor of Philosophy, Free University Amsterdam,
Amsterdam, The Netherlands; Fellow, International Center for
Economic Research (ICER), Turin, Italy
JOHN MCMURTRY, Professor of Philosophy, University of Guelph,
Guelph, Ontario, Canada
EDWARD NELL, Malcolm B. Smith Professor of Economics, Graduate
Faculty of Political and Social Science, New School University,
New York City, New York, U.S.A.
MARK NEUFELD, Associate Professor of Political Studies, Trent
University, Peterborough, Ontario, Canada
MICHAEL NEUMANN, Professor of Philosophy, Trent University,
STEPHEN REGOCZEI, Associate Professor of Computer Science, Trent
University, Peterborough, Ontario, Canada
LIST OF AUTHORS
LORENZO SACCONI, Professor of Economics, University of Trento,

Trento, Italy; Director, Center for Ethics, Law and Economics,
University Cattaneo- LIUC, Castellanza, Italy
YUICHI SHIONOYA, Professor Emeritus of Economics, Hitosubashi
University, Tokyo, Japan
LEE A. TAVIS, C. R. Smith Professor of Finance, Mendoza College of
Business, University ofNotre Dame, Notre Dame, Indiana, U.S. A.
TIMOTHY M. TAVIS, Independent Psychologist, Singer Island, Florida,
U.S.A.
458
Index of Names
Page numbers in italics refer to names found only in footnotes or citations.
Abalkin, L., 4 I 4 Buddha, 303

Adler, A., 303, 304, 306 Bush, G. W., 161,338,351,353
Agassi, J., 364 453
Andreozzi, L., 243 Byron, W., 321
Andrews, F. M., 389 Calvin, J., 21, 22
Aquinas, T., 24, 27, 38 Carnap, R., 264
Arrow, K., 57, 155-56, 183, 186, Carter, J. E., 67
284 Cassels, J. M., 59
Ayer, A. J., 264 Cassidy, J., 413
Baader, F. von,24-25,34 Castro, F., 446
Badeen,D., 182,264,266 Childs, C., 101
Bateson, G., 259,267,268,269, Chubais, A., 410
270,276 Coase, R. H., 99, 100, 160, 313,
Bayes, T., 243 367,368,369,370,376
Becker, E., 304 Cohen, G. A., 7, 8
Beethoven, L. van, 398 Collard, D., 282
Bellah, R. N., 302, 3 I 9 Conwey, J., 104
Benedict XIV, 320 Cox, R. A., 442, 443, 444, 446,
Ben-Ner, A., 126 452
Bentham, J., 197-198 Cziko, G., 310
Berger, P. L., 92, 325 Dahl, R., 14, 26,451
Bhaskar, R., 184, 189, 194, 195, Darwin, C., 108,274
196,204 Davis, M., 426
Binmore, K., 219, 227 Dawkins, R., 305
Bird, F., 432 De George, R., 40, 41
Bishop, J. D., 126 Debreu, G., 57
Blahnik, M., 381 Deleuze, G., 286
Boulding, K. E., 100, 271 Descartes, R., 38
Brock, H., 219, 226 Devons, E., 99
Brooks, D., 382, 396 Diener, E. F., 389, 391, 405
Brooks, D. R., 259, 267, 269, 273, Donaldson, T., 326
274 Dulles, J. F., 181
Bruner, J., 310 Dunbar, R. J. M., 308, 31 0
Buchanan, J., 22 Dunfee, T. W., 326
INDEX OF NAMES
Durkheim, E., 165 Gundlach, G., 16, 17, 24

Durning, A., 402 Habermas, J., 275, 276, 442
Eagle, M. N., 304 Hahn, F., 57, 155-157, 168, 185,
Edgeworth, F. Y., 54, 282, 285- 280,284
286,287 Harris, M., 98,99
Einstein, A., 115 Harsanyi, J. C., 219, 224, 227
Elgin, D., 385, 386, 393, 402 Havas, M., 116
Eliot, T. S., 297 Hayek, F. A. von, 14, 163-164,
Emerson, R. W., 386 328,413
Etzioni, A., VII, 321- 325, 327 Hegel, G. W. F., 24, 25, 202, 357
Falwell, J., 327 Herzog, R., 15, 16, 17, 20,27
Foley, D., 199 Hirsch, J., 445
Ford, H., 381,443 Hitler, A., 454, 455
Fort, T., 128,302,321,324,325- Hobbes, T., 41, 127, 129-131,
327 187,258,305
Fraenkl, S. H., 345, 346 Hodgson, B., 110, 116, 125, 155,
Franklin, B., 152 !67,168, 182,261,288
Freedman, J., 389 Holdsworth, D. G., I, 110, 116,
Freud, S., 304, 306 182
Friedman, M., 69-70,77-82,87- Hooker, C., 261, 262, 267, 274,
88,264-266,269,318 275
Fukuyama, F., 314,338,341-342 Howard, G., 311
Fusco, B., 405 Hutchison, T.W., 354
Gaidar, Y., 410 Inglehart, R., 378
Galileo, 165 Jensen, M. C., 314
Gauthier, D., 155, 187-188, 189, Jevons, W. S., 286
217,227,280,281,283,285, John Paul II, 320
293 Jung, C. G., 306
Geary, D., 454 Kafka, F., 399
Gorbachev, M.S., 410 Kaldor, N., 215
Govier, T., 182 340, 351 Kant, 1., 285, 328-329, 350
Gramsci, A., 439, 442, 451, 452 Karp, D., 405
Grandin, T., 309 Keynes, J. M., 151, 154,295-296,
Gray, J. L., 306 445,450
Greenspan, A., 61 Koop, C. E., 159
Grimalda, G., 213,222,231,238, Koopmans, T., 6, 294
253 Korzybski, A. H. S., 98
460
INDEX OF NAMES
Koslowski, P., I, 14, 24, 25, 26, Nagel, T., 291

31,362 Narveson, J., 280
Kurz, H. D., 270 Nash, J. F., 211,215,218-219,
Lacroix, C., 381 225, 228, 230-234
Langton, C., 90, I 05-108 Nell, E. J., 59, 61, 62, 66, 182
Leo XIII, 38 Neufeld, M., 439,440,442,453
Leonard-Barton, D., 379 Neumann, J. von, 104,259,269-
Leontief, W., 60 270
Lewis, D., 229 Novak, M., 314,316,328
Locke, J., 38, 74, 122, 135-141, Nozick, R., 135-137, 143,280,
144-145, 147,201 356
Lorenz, K., 306, 418 Ockham, W. of, 99
Lovett, F., 405 Packard, V., 396
Luhmann, N., 259, 268-270, 346, Paehlke, R., 379
367-370, 376 Pareto, V., 3-6, 53, 57, 75, 80-82,
Luther, M., 21, 22 86-89, 125-126, 129, 183, 185-
Macintyre, A., 356, 357 187,203,214,216,219,257,
Macpherson, C.B., 447, 449, 450 260,280-281,284-287,289-
Mandeville, B., 153 292,294
Marshall, A., 54-55, 61 Parkinson, C. N., 113
Marx, K., 39, 74, 151,152, 153, Pavlov, I. P., 304
167, 183-184, 190-191,192, Peto, R., 159
193, 194-196, 198,200,201, Pius XII, 320
202,204,319,327-328,423, Plato, 19, 38, 41,399
426,442 Polanyi, K., 116, 429
Maslow, A., 304,377, 380,388, Popper, K. R., 265
394-396 Prigogine, 1., 263, 273
Matz, U., 33 Putin, V., 412,422
McAdams, D., 310-311,313 Putterman, L., 126
McMahon, C., 132 Quine, W. Van 0., 103,294
McMurtry, J., 152, 175 Rand, A., 92, 318
Meckling, W. H., 314 Rank, 0., 306
Mencken, H. L., 327 Rawls, J., 128,131,207,291,
Menger, C., 353, 362 356,358,361-363,369,373
Milbrath, L. W., 402 Regoczei, S., 99, 170
Miller, A., 388 Ricoeur, P., 268
Murakami, M., 306 Rieff, P., 304
Myers, D. G., 390, 391, 405 Rogers, C., 304
461
INDEX OF NAMES
Rosenwald, G., 311 Stackelberg, B., 243

Rostow, W. W., 426 Stark, A., 71, 72
Sacconi, L., 210, 213, 217, 218, Sternglanz, S. H., 306
219,222,226,227,231,238, Stiglitz, J., 176, 177
243,245,246,248,253 Straffa, P., 259, 269-270
Salvadori, N., 270 Sugden, R., 210,211, 222
Samuelson, P., 155, 170 Sullivan, W., 308, 434
Sandel, M., 356, 357 Summers, L., 179
Sarbin, T., 311 Tavis, L. A., 30, 182
Say, J.-B., 154, 202 Tavis, T., 182
Schaeffer, E., 161 Tayler, J., 421
Schmoller, G. von, 353, 362-364, Taylor, C., 355, 357
370-376 Taylor, F., 443-444
Schor, J., 379, 385, 387 Thatcher, M., 90, Ill, /52
Schumpeter, J. A., 353-354, 359- Thomas, L., 340
360,373-376,451 Thoreau, H. D., 386
Searle, J. R., 92 Tonnies, F., 353, 364-367, 370,
Sellerberg, A.-M., 344 376
Sen, A., 36, 126,413-414,422- Trevarthen, C., 306, 307, 308
423,426 Urbach, H., 381
Shakespeare, W., 312, 399 Veblen, T., 263,271,287
Shannon, C. E., 268 Vlastos, G, 137, 138
Shionoya, Y, 264, 354,360,362, Voltaire, F. M.A. de, !52
373,375 Walras, L., 54-55, 61,183, 186,
Simmel, G., 345, 346 197,200,286
Simon, H., 99, 113 Walzer, M., 356, 357
Simon, N., 388 Weaver, W., 268
Skinner, B. F., 304 Weber, M., 152, 354, 360, 374,
Smith, A., 1-2, 14, 23,42-43,46, 431
52-53, 59, 64-65, 75, 92, 95, Whalley, J., 414
102, 109, 153-156, 158, 164, Whiten, A., 308
170, 174, 178, 188, 314-317, Whitmore, T. D., 320-321, 323
322, 327-328, 330 Wicksteed, P. H., 282
Smyth, A., 102 Wiley, E. 0., 259, 267, 269, 273
Sombart, W., 374 274
Spiethoff, A., 374 Wiley, M.S., 307
Springsteen, B., 381 Winch. D. M., 290
462
INDEX OF NAMES
Wing, L., 309

Withey, S. B., 389
Wright, R., 308
Yeats, W. B., 330
Yeltsin, B. N., 412,416
Yeutter, C., 159
York, G., 412,422
463
P. Koslowski (Ed.) P. Koslowski and A. F0llesdal (Eds.)

Ethics in Economics, Business, Restructuring the Welfare State.
and Economic Policy Theory and Reform of Social Policy
X, 178 pages. 1992 VII, 402 pages. 1997
ISBN 3-540-55359-2 (out of print) ISBN 3-540-62035-4 (out of print)
P. Koslowski andY. Shionoya (Eds.) G. Erreygers and T. Vandevelde (Eds.)

The Good and the Economical: Is Inheritance Legitimate?
Ethical Choices in Economics and Management Ethical and Economic Aspects of Wealth Transfer
X, 202 pages. 1993. X, 236 pages. 1997
ISBN 3-540-57339-9 (out of print) ISBN 3-540-62725-1
H. De Geer (Ed.) P. Koslowski (Ed.)

Business Ethics in Progress? Business Ethics in East Central Europe
IX, 124 pages. 1994 XII, 151 pages. 1997
ISBN 3-540-57758-0 ISBN 3-540-63367-7
P. Koslowski (Ed.)
P. Koslowski (Ed.)
Methodology of the Social Sciences, Ethics,
The Theory of Ethical Economy
and Economics in the Newer Historical School.
in the Historical School
From Max Weber and Rickert
XI, 343 pages. 1995
to Sombart and Rothacker
ISBN 3-540-59070-6
XII, 565 pages. 1997
A. Argandoiia (Ed.) ISBN 3-540-63458-4
The Ethical Dimension of Financial Institutions
A. F0llesdal and P. Koslowski (Eds.)
and Markets
Democracy and the European Union
XI, 263 pages. 1995
X, 309 pages. 1998
ISBN 3-540-59209-1 (out of print)
ISBN 3-540-63457-6
G. K. Becker (Ed.) P. Koslowski (Ed.)
Ethics in Business and Society The Social Market Economy.
Chinese and Western Perspectives Theory and Ethics of the Economic Order
VIII, 233 pages. 1996 XII, 360 pages. 1998
ISBN 3-540-60773-0 ISBN 3-540-64043-6
P. Koslowski (Ed.) Amitai Etzioni
Ethics of Capitalism and Critique Essays in Socio-Economics
of Sociobiology. Two Essays with a Comment XII, 182 pages. 1999
by )ames M. Buchanan ISBN 3-540-64466-0
IX, 142 pages. 1996
ISBN 3-540-61035-0 P. Koslowski (Ed.)
Sociobiology and Bioeconomics.
F. Neil Brady (Ed.) The Theory of Evolution in Biological
Ethical Universals in International Business and Economic Theory
X, 246 pages. 1996 X, 341 pages. 1999
ISBN 3-540-61588-1 ISBN 3-540-65380-5
j. Ku~uradi (Ed.) A. Labrousse and J.-D. Weisz (Eds.)

The Ethics of the Professions: Institutional Economics in France and Germany.
Medicine, Business, Media, Law German Ordoliberalsm versus
X, 172 pages. 1999 the French Regulation School
ISBN 3-540-65726-6 IX, 384 pages. 2001
ISBN 3-540-67855-7
S. K. Chakraborty and S. R. Chatterjee (Eds.)
Applied Ethics in Management.
Towards New Perspectives F. Vandenbroucke
X, 298 pages. 1999 Social justice and Individual Ethics
ISBN 3-540-65724-X in an Open Society.
Equality, Responsibility, and Incentives
P. Koslowski (Ed.) XIII, 305 pages. 2001
The Theory of Capitalism ISBN 3-540-41636-6
in the German Economic Tradition.
Historism, Ordo-Liberalism, Critical Theory, G. Brennan, H. Kliemt and R. D. Tollison (Eds.)
Solidarism Method and Morals
XII, 577 pages. 2000. in Constitutional Economics.
ISBN 3-540-66674-5 Essays in Honor of james M. Buchanan
XVI, 571 pages. 2002
P. Koslowski (Ed.)
ISBN 3-540-41970-5
Contemporary Economic Ethics
and Business Ethics
H. H. Nau and B. Schefold (Eds.)
IX, 265pages. 2000
The Historicity of Economics.
ISBN 3-540-66665-6
Continuities and Discontinuities
of Histrical Thought
L. Sacconi
in 19th and 20th Century Economics
The Social Contract of the Firm.
X, 245 pages. 2002
Economics, Ethics and Organisation
ISBN 3-540-42765-1
XV, 229 pages. 2000
ISBN 3-540-67219-2
J. Wieland
M. Casson and A. Godley (Eds.) Standards and Audits
Cultural Factors in Economic Growth for Ethics Management Systems
VIII, 244 pages. 200 I VIII, 253 pages. 2003
ISBN 3-540-66293-6 ISBN 3-540-40206-3
Y. Shionoya and K. Yagi (Eds.) P. Koslowski, C. Hubig and P. Fischer (Eds.)

Competition, Trust, and Cooperation Business Ethics and the Electronic Economy
IX, 252 pages. 2001 IX, 248 pages. 2004
ISBN 3-540-67870-0 ISBN 3-540-22150-6
B. Hodgson
Economics as Moral Science
XIV, 380 pages. 2001
ISBN 3-540-41062-7

Bernard Hodgson (Auth.), Professor Bernard Hodgson (Eds.) - The Invisible Hand and The Common Good - (2004)

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Bernard Hodgson (Auth.), Professor Bernard Hodgson (Eds.) - The Invisible Hand and The Common Good - (2004)

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Studies in Economic Ethics and Philosophy

Series Editor Editorial Board

The Invisible Hand

Cataloging-in-Publication Data applied for

ISBN 978-3-642-06109-7 ISBN 978-3-662-10347-0 (eBook)

Printed on acid-free paper - 42/3130 - 5 4 3 2 1 O

and the memory of

Joan Mary Hodgson

Setting the Problem

The Invisible Hand and Thinness of the Common Good

Constraining the Invisible Hand

Hiring Invisible Hands for Public Works

A Market Failures Approach to Business Ethics

Abstractions and Conceptual Automata in Economics and Non-Economics

Moral Rights and Market Society

The Inherent Rights ofF or-Profit Corporations

The Tyranny of the Invisible Hand

Understanding Market Theology

General Equilibrium Theory as Normative Ideal Social Order

Economic Theory and Normative Realism

The Efficiency of the Non-profit Enterprise: Constitutional Ideology,

Transformational Economics and the Public Good

On Economic Men Bearing Gifts and Playing Fair

Free Hands and Moral Communities

The Person, the Market, and the Community

Social Trust and Modern Economies: The Example of Shopping

A Reconciliation of the Liberal and Communitarian Debate in the Light of

Voluntary Simplicity: Characterization, Select Psychological Implications,

The Global Reach of the Invisible Hand

Russia's Experiment with the "Invisible Hand"

Fostering the Common Good in Developing Countries: The Respective

Globalization and the Re-Definition of Democratic Governance: From

List of Authors ................................................................................................. 457

INDEX OF NAMES .............................................................................................. 459

By preferring the support of domestic to that of foreign industry he

surprisingly, classical political economy emphasizes that such a competitive

two Fundamental Theorems of Welfare Economics. According to the first,

classical economists have modified the classical Utilitarian answer - the

maximal satisfaction of the preferences of individuals for material goods in

constraint in one's earning horizons and voluntary transactions within the

2 T. 1. KOOPMANS: Three Essays on the State of Economic Science, New York.

short, intends to be the handmaiden of such collective satisfaction. However,

3 G. A. COHEN, Self-Ownership, Freedom, and Equality, Cambridge, (Cambridge

Setting the Problem

Public Interest and Self-Interest in the Market

I. The Difficulties of Defining the Public Good and of Finding Out

Nevertheless the concept of public interest is indispensable, particularly

Cf. R. A. DAHL: "Dilemmas of Pluralistic Democracy: The Public Good of

I. The Difficulties of Defining the Public Good and of

Roman Herzog, law scholar and former President of Germany, indicates

II. The Common Good of States and the Common Good

5 Cf. G. GUNDLACH: Article "Gemeinwohl" (The Common Good), Staatslexikon

and thereby of all the groups in it, is endangered if certain individuals or

III. Acknowledging the Discrepancy Between Intending and

IV. The Skepticism Towards the Common Good as the

The emphasis on the common good is often seen as a characteristic of the

effect of self-interest and its prudent transformation by institution is only the

V. Modernity as the Emancipation of Self-Interest?

The era of modernity is often seen as the epoch of the emancipation of

Adam Smith, who is considered by some social scientists the founder of

Economy"). The non-discrimination principle that political desions that

VI. The Necessity of a Synthesis of Public Interest and

10 Cf. G. GUNDLACH: Article "Gemeinwohl" (The Common Good), Staats/exikon