Ethics and the Market

Much existing economic theory overlooks ethics. Rather than situating the
market and values at separate extremes of a continuum, Ethics and the
Market contends that the two are necessarily and intimately related.
This volume brings together some of the best work in the social eco-
nomics tradition, with contributions on the social economy, social capital,
identity, ethnicity and development, the household, externalities, inter-
national finance, capability, and pedagogy. Proceeding from an examina-
tion of the moral implications of markets, the book goes on to explore
such themes as the institutional arrangements of social economies, indi-
vidual and household decision-making, and economic development in a
global context.
Ethics and the Market illuminates the diverse and dynamic theoretical
approaches that are employed in social economics, reflecting on their con-
tinuously evolving relationship with neoclassical economics. This book will
prove vital reading for students and academics in the fields of Economics,
Sociology, Gender Studies, and Public Policy.

Betsy Jane Clary is Professor of Economics at the College of Charleston in

South Carolina, USA. Wilfred Dolfsma is both an economist and philo-
sopher and is affiliated with Erasmus University Rotterdam and Maas-
tricht University, the Netherlands. Deborah M. Figart is Dean of
Graduate Studies and Professor of Economics at the Richard Stockton
College of New Jersey, USA.
Advances in social economics
Edited by John B. Davis
Marquette University
This series presents new advances and developments in social economics
thinking on a variety of subjects that concern the link between social values
and economics. Need, justice and equity, gender, cooperation, work, poverty,
the environment, class, institutions, public policy and methodology are some
of the most important themes. Among the orientations of the authors are
social economist, institutionalist, humanist, solidarist, cooperatist, radical and
Marxist, feminist, post-Keynesian, behaviouralist, and environmentalist. The
series offers new contributions from today’s most foremost thinkers on the
social character of the economy.
Published in conjunction with the Association of Social Economics.
Books published in the series include:

Social Economics The Social Economics of Health

Premises, findings and policies Care
Edited by Edward J. O’Boyle John Davis

The Environmental Consequences Reclaiming Evolution

of Growth A Marxist institutionalist dialogue
Steady-state economics as an on social change
alternative to ecological decline William M. Dugger and
Douglas Booth Howard J. Sherman

The Theory of the Individual in

The Human Firm Economics
A socio-economic analysis of its Identity and value
behaviour and potential in a new John Davis
economic age
John Tomer Boundaries of Clan and Color
Transnational comparisons of inter-
Economics for the Common Good group disparity
Two centuries of economic thought Edited by William Darity Jr and
in the humanist tradition Ashwini Deshpande
Mark A. Lutz
Living Wage Movements
Working Time Global perspectives
International trends, theory and Edited by Deborah M. Figart
policy perspectives Ethics and the Market
Edited by Lonnie Golden and Insights from social economics
Deborah M. Figart Edited by Betsy Jane Clary,
Wilfred Dolfsma, and
Deborah M. Figart
Ethics and the Market
Insights from social economics

Edited by Betsy Jane Clary,

Wilfred Dolfsma, and
Deborah M. Figart
First published 2006
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
Simultaneously published in the USA and Canada
by Routledge
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Routledge is an imprint of the Taylor & Francis Group, an informa
business
© 2006 Selection and editorial matter, Betsy Jane Clary, Wilfred
Dolfsma and Deborah M. Figart; individual chapters, the
contributors
This edition published in the Taylor & Francis e-Library, 2006.
“To purchase your own copy of this or any of Taylor & Francis or Routledge’s
collection of thousands of eBooks please go to www.eBookstore.tandf.co.uk.”
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic, mechanical,
or other means, now known or hereafter invented, including
photocopying and recording, or in any information storage or
retrieval system, without permission in writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
A catalog record of this title has been requested

ISBN10: 0-415-39461-9
ISBN13: 978-0-415-39461-1
Contents

List of illustrations vii

Notes on contributors viii
Preface xiv
Acknowledgments xvi
List of abbreviations xviii

1 Introduction 1
BETSY JANE CLARY, WILFRED DOLFSMA, AND
DEBORAH M. FIGART

PART I
Morality and markets 9

2 The moral embeddedness of markets 11

JENS BECKERT

3 Creative destruction and community 26

JON D. WISMAN

4 Borrowing alone: the theory and policy implications of the

commodification of finance 41
GREG P. HANNSGEN

5 Teaching the ethical foundations of economics: the

principles course 55
JONATHAN B. WIGHT
vi Contents
PART II
Redefining the boundaries of economics 67

6 The normative significance of the individual in economics:

freedom, dignity, and human rights 69
JOHN B. DAVIS

7 The impact of identity on economics 84

MIRIAM TESCHL

8 The relationship between consumption and production:

conceptualizing well-being inside the household 98
ELIZABETH OUGHTON AND JANE WHEELOCK

9 Social economy as social science and practice: historical

perspectives on France 112
DANIÈLE DEMOUSTIER AND DAMIEN ROUSSELIÈRE

10 France and Québec: the progressive visions embodied in

different social economy traditions 126
CAROLE BIEWENER

PART III
Social economies in transition 141

11 Accounting for societal externalities 143

LAURA MCCANN

12 Ethnicity, democracy and economic development: a pluralist

approach 161
MANUEL BRANCO

13 A gender-aware approach to international finance 175

TONIA L. WARNECKE

14 Social capital and the capability approach: a social

economic theory 191
ALEXANDRE L. BERTIN AND NICOLAS SIRVEN

Index 204
Illustrations

Figures
2.1 Typology of moral action in market exchange 13
8.1 The social relations of household provisioning 101
8.2 The relationship between household endowments and
individual well-being 104
11.1 Hog farming in Worth County, Missouri 150
11.2 Optimal output with environmental and societal
externalities 153
11.3 Optimal output when net societal externalities change
sign as output level increases 153
14.1 Exchange entitlement mapping with social capital 197

Tables
13.1 Female representation in the IMF and World Bank 184
13.2 Female representation in regional development banks 184
13.3 Female representation in UNCTAD 185
Contributors

Jens Beckert studied sociology and business administration at the Freie

Universität Berlin and the New School for Social Research in New
York. He received his Ph.D. in Sociology from the Freie Universität in
1996 and his Habilitation in 2003. He was a Visiting Fellow at Princeton
University in 1994–5 and at the Center for European Studies at
Harvard University in 2001–2. He was Associate Professor of Sociology
at the newly founded International University Bremen before becom-
ing a full Professor at the Georg-August-University Göttingen. His
book, Beyond the Market: The Social Foundations of Economic Effi-
ciency, was published by Princeton University Press in 2002. His many
other publications on economic sociology have appeared in the Journal
of Economic Issues, Theory and Society, Zeitschrift für Soziologie, and
Kölner Zeitschrift für Soziologie und Sozialpsychologie.
Alexandre L. Bertin is a Ph.D. student at the Centre d’Economic du
Développement at University Montesquieu in Bordeaux, France. His
main fields of interest are development economics and poverty, with a
particular focus on capability and non-monetary micro approaches. His
field research is in Guinea, where he works in collaboration with geo-
graphers, anthropologists, biologists, and sociologists on an inter-
national development program. His publications deal with issues such
as well-being, welfare, poverty, and capability. He teaches courses in
macroeconomics, microeconomics, and statistics. He has also taught
African decision-makers about the economy, in a Frend foundation for
development based in La Rochelle.
Carole Biewener is Professor of Economics and Women’s Studies at
Simmons College, Boston, MA, USA. She received her B.A. from Dou-
glass College and her Ph.D. from the University of Massachusetts,
Amherst. She teaches courses in economic development, gender in
development, women and work, feminist economics, and social justice.
She is also coordinator of the interdisciplinary minor in social justice.
She is particularly interested in issues relating to economic difference.
Building on her previous work on the French Socialist government’s
 Contributors ix
monetary and financial policies in the 1980s, her current research is
focused on community development and social economy projects in the
United States and Canada with an emphasis on progressive finance
initiatives.
Manuel Branco is Associate Professor of Economics at the University of
Évora, Portugal, and is currently the Head of the Department of Eco-
nomics. He graduated in Economics and in Geography from the Uni-
versity of Paris 1, Panthéon-Sorbonne, and received his Ph.D. in
Economics from the École des Hautes Études en Sciences Sociales, also
in Paris, France. He joined the University of Évora in 1989 and since
then has taught several courses in the fields of development economics
and the history of economic thought. His main research interests
concern the political economy of development and underdevelopment
and the interaction of economic and non-economic factors in the devel-
opment process, more specifically with respect to ethics, democracy,
culture, and inequality. His latest publications, both coauthored,
include Underdevelopment as Cultural Resistance or Culture as Resis-
tance to Underdevelopment and Animal Health and Production in a
Development Perspective.
Betsy Jane Clary is Professor of Economics at the College of Charleston,
South Carolina, where she teaches courses in the history of economic
thought, economic history, monetary theory, and honors economics for
the Honors Program. Her current research interests include the relation-
ship between ethics and economics, religious socialism in Germany in the
1920s, and relationships between individual freedom and order in society.
She has published in the Review of Social Economy, the Forum for Social
Economics, and numerous book chapters. She is a past President of the
Southwestern Social Science Association (SSSA), the Southwestern Eco-
nomics Association, and the Women’s Caucus of the SSSA. She serves on
the editorial board of the Review of Social Economy and is Program
Secretary of the Association for Social Economics.
John B. Davis is Professor of History and Philosophy, University of Ams-
terdam and Professor of Economics, Marquette University. He is the
author of Keynes’s Philosophical Development (Cambridge, 1994) and
The Theory of the Individual in Economics (Routledge, 2003). He is a
co-editor with Wade Hands and Uskali Mäki of The Handbook of Eco-
nomic Methodology (Elgar, 1998) and a co-editor with Warren Samuels
and Jeff Biddle of The Blackwell Companion to the History of Eco-
nomic Thought (Blackwell, 2003). He has published in the Cambridge
Journal of Economics, Economic Journal, Review of Social Economy,
Review of Political Economy, History of Political Economy, Economics
and Philosophy, European Journal of the History of Economic Thought,
Journal of Economic Methodology, and other journals. He is a past
x Contributors
President of the History of Economics Society, past Chair of the Inter-
national Network for Economic Method, and the Editor of the Review
of Social Economy.
Danièle Demoustier is Professor of Economics and Director of the
Research Group in Associative and Cooperative Socio-Economics
(Equipe de Socio-économie associative et coopérative) at the Institute
of Political Studies in Grenoble, France. She is a member of the
National and International Scientific Councils of the International
Center of Research and Information on the Public and Cooperative
Economy (CIRIEC) and a member of the editorial boards of the
Annals of Public and Cooperative Economics and the Revue Interna-
tionale de l’Economie Sociale. Her current research centers on two
diverse topics: the effects of the enterprises of the social economy on
urban and local development; and the history of social economic
thought. She is the author and editor of several books on worker coop-
eratives and social economy, including Les Cooperatives Ouvrières de
Production (1984), L’économie Sociale et Solidaire (2001), The Enter-
prises and Organizations of the Third System in the European Union
(2001), and Economie Sociale et Développement Local (2004).
Wilfred Dolfsma is both an economist and philosopher and holds a Ph.D.
in Economics. He is employed by the Erasmus University Rotterdam
and Maastricht University, the Netherlands. His research interests
concern the interrelations between economy, society, and technology.
He has published on various aspects of consumption and the formation
of preferences, media industries, feminist economics, as well as on glob-
alization and the developments and effects of intellectual property
rights (IPR). He also does research in the history and methodology of
economics. He has co-edited, with Charlie Dannreuther, Globalization,
Social Capital and Inequality (Edward Elgar, 2003), and authored Insti-
tutional Economics and the Formation of Preferences (Edward Elgar,
2004). His co-edited Reading the Dynamics of the Knowledge Economy
is forthcoming (edited with Luc Soete). His articles have been pub-
lished in the Review of Social Economy, Journal of Economic Issues,
Journal of Economic and Social Geography, International Journal of
Social Economics, and Feminist Review. He is 2005–6 Research Fellow
at the Netherlands Institute for Advanced Studies (NIAS), and Co-
editor of the Review of Social Economy.
Deborah M. Figart is Dean of Graduate Studies and Professor of Eco-
nomics at the Richard Stockton College of New Jersey. She is coauthor
(with Ellen Mutari and Marilyn Power) of Living Wages, Equal Wages:
Gender and Labor Market Policies in the United States (Routledge,
2002) and coauthor (with Peggy Kahn) of Contesting the Market: Pay
Equity and the Politics of Economic Restructuring (Wayne State Uni-
 Contributors xi
versity Press, 1997). Among her edited volumes are Living Wage Move-
ments: Global Perspectives (Routledge, 2004), Working Time: Inter-
national Trends, Theory and Policy Perspectives (Routledge, 2000),
Emotional Labor and the Service Economy (Sage Publications, 1999),
and Women and the Economy: A Reader (M.E. Sharpe, 2003). She has
published numerous papers and essays on labor market issues. She is
President of the Association for Social Economics and a Co-editor of
the Review of Social Economy.
Greg P. Hannsgen is a Resident Research Associate at the Levy Eco-
nomics Institute of Bard College, Annandale-on-Hudson, New York.
He is Editor of the Report and many other Institute publications,
including policy briefs on such topics as the War on Poverty, a proposal
for a world currency, and the American Model for economic policy. He
is conducting research on macroeconomics, money, and social eco-
nomics. His publications include “Minsky’s Acceleration Channel and
the Role of Money,” in the Journal of Post Keynesian Economics,
spring 2005. Hannsgen received a B.A. in Economics from Swarthmore
College, a Master’s degree from the Humphrey School of Public Affairs
at the University of Minnesota, and an M.A. and Ph.D. (2002) in Eco-
nomics from the University of Notre Dame, where his dissertation ana-
lyzed how the money supply is determined – by the central bank or by
the activities of firms and commercial bankers.
Laura McCann is Assistant Professor of Agricultural Economics at the
University of Missouri-Columbia. Prior to taking that position, she
spent four years as a Lecturer at the University of Western Australia.
She received her Ph.D. in Agricultural and Applied Economics from
the University of Minnesota. Her research concerns non-point source
environmental policy evaluation with an emphasis on the associated
transaction and administrative costs, and the determinants of those
costs. One of her recent publications in this area is “Transaction Cost
Measurement for Evaluating Environmental Policies” (with Bonnie
Colby, Bill Easter, Alex Kasterine, and K.V. Kuperan) in the March
2005 issue of Ecological Economics.
Elizabeth Oughton is a Visiting Research Fellow at the Centre for Rural
Economy at the University of Newcastle upon Tyne. Her research
interests include rural development, food systems, and the household
economy. Previous research has been concerned with paid and unpaid
aspects of household provisioning and natural resource use in both high
and low income countries. She has worked in India, Jordan, Central and
Western Europe. She is currently involved in developing conceptual
and methodological work on interdisciplinarity, and in organic and low-
input food systems in Europe. She has published in geography, rural
sociology, rural development and socio-economics.
xii Contributors
Damien Rousselière is a Ph.D. candidate and Lecturer in Economics at the
Institute of Political Studies in Grenoble, France. He is a member of the
Research Group in Economics of the Service Industries at the LEPII-
CNRS (Economic Laboratory on Production and International Integra-
tion-National Center for Scientific Research) and a member of the
Research Group in Associative and Cooperative Socioeconomics
(ESEAC, Institute of Political Studies, Grenoble). He was a Visiting
Fellow at the Center for Research on Social Innovations (Ecole des Hautes
Etudes Commerciales de Montréal) in 2004–5. His dissertation, based on a
regulation school approach, is a comparative study between Québec
(Canada) and France on social economy (cooperative and nonprofit enter-
prises) in the performing arts and creative industries. His interests in social
and institutional economics include the economics of worth, the history of
economic thought, service industries, and cultural economics.
Nicolas Sirven received a Doctorate in Economics from the Centre for Devel-
opment Economics (University Montesquieu in Bordeaux). He works in
the field of development economics, with a special interest in social issues.
Most of his publications deal with social capital and human well-being. His
approach to economics is both theoretical and empirical/practical. For
example, he recently completed a study in Madagascar in 2002 to investi-
gate people’s abilities to cooperate among social networks. For 2005–6, he
holds a post-doctoral position in Cambridge, UK, at the Capability and
Sustainability Centre-Von Hegel Institute, under the direction of Flavio
Comim, where he works on the concept of social capability.
Miriam Teschl is Fellow of Robinson College and College Lecturer at the
University of Cambridge, UK. She studied Economics at the University
of Graz in Austria and Economics and Philosophy at the University of
East Anglia in the UK and at the GREQAM, University of Aix-
Marseille in France, where she also obtained her Ph.D. on “The Iden-
tity of the Economic Agent” under the supervision of Alan Kirman.
Her research focuses on the representation of the economic agent from
the point of view of the philosophical question of personal identity and
its consequences on welfare evaluations.
Tonia L. Warnecke is a Ph.D. candidate in Economics at the University of
Notre Dame in South Bend, Indiana. Her most recent paper analyzes the
influence of various social and fiscal policies on gender roles and women’s
labor force participation in Spain. In 2005, she received a research and
travel grant from the Nanovic Institute for European Studies in order to
attend a statistical workshop held by the Luxembourg Income Study. Her
dissertation explores the ways that family and tax policies affect women’s
employment in the oft neglected regions of Southern and Eastern Europe.
In other research, she is also investigating the gender determinants and
effects of part-time and contingent work.
 Contributors xiii
Jane Wheelock is Professor of Socio-economics in Sociology and Social
Policy at the University of Newcastle upon Tyne, where she has worked
since 1992. She has been researching the ways in which household liveli-
hoods relate to the lives that women and men lead since 1985. Her
research explores the theoretical interconnections between the paid and
unpaid work and understandings of the household. Much of her work
has strong policy implications, including the significance of gender and
the importance of formal and informal childcare in underpinning work
strategies. Key publications include: Insecure Times: Living with Insecu-
rity in Modern Society, co-edited with J. Vail and M. Hill (Routledge,
1999) and Work and Idleness: The Political Economy of Full Employ-
ment, co-edited with J. Vail (Kluwer, 1998). She has three grown chil-
dren and one grandson.
Jonathan B. Wight is Associate Professor of Economics at the University
of Richmond, Virginia, where he teaches courses in economics and
international studies. He was raised in Africa and Latin America. He
received his M.A. and Ph.D. degrees in Economics from Vanderbilt
University and his B.A. degree from Duke University. Prior to attend-
ing graduate school, he spent a year in service with the Jesuit Volunteer
Corps in Portland, Oregon. His current research focuses on the ethical
foundations of capitalism. His academic novel, Saving Adam Smith: A
Tale of Wealth, Transformation, and Virtue (Prentice-Hall, 2002),
explores the interplay of morals and markets for economic efficiency.
Other writings include numerous journal articles and the coauthorship
of a book on the mind–body link in health care economics, The Medical
Offset and Public Health Policy (with J.L. Fiedler, from Praeger, 1989).
He was the recipient of the University of Richmond’s Distinguished
Educator Award in 2002.
Jon D. Wisman is Professor of Economics at American University in
Washington, DC. He teaches graduate courses in the history of eco-
nomic thought and economic methodology. At the undergraduate level,
he has recently taught principles of macroeconomics, European eco-
nomic history, American economic history, economic development, and
labor economics. He has published in a wide variety of economic jour-
nals, including the Journal of Social Economics, Journal of Economic
Issues, Social Research, World Development, Review of Political
Economy, International Journal of Social Economics, Review of Social
Economy, Peace Review, and Revue d’économie sociale, as well as con-
tributed numerous book chapters. He edited Worker Empowerment:
The Struggle for Workplace Democracy (1991). At present, he is
working on a book tentatively titled: We All Must Work: Creative
Destruction and the Pursuit of Happiness. During 2002, he served as
President of the Association for Social Economics.
Preface

Many economists, when asked about the relationship between economics

and other fields, frame their views in terms of the economics imperialism
movement of the 1960s and 1970s when democracy, government and poli-
tics, crime and punishment, marriage and fertility, discrimination, the law,
religion, and other non-economic subjects were explained with neoclassi-
cal tools in a methodological individualist manner. There was great confi-
dence for a time in the belief that other disciplines had failed to
adequately explain these subject areas, and it was thus widely assumed
that the economic method would provide advances that could not be
achieved with the methodologies of these other disciplines (Radnitzky and
Bernholz 1987). An important test of this assumption was whether those in
political science, psychology, sociology, anthropology, and other social
science fields agreed that the application of the economic method to those
fields produced gains in understanding. It is clear today, however, that the
great majority of practitioners in those fields reject the view that the eco-
nomic method applied to these subject areas offers progress, so that what
has in fact happened is that the economics imperialist movement has
simply created a parallel universe of interpretations of these subject areas
primarily only of interest to economists professionally interested in pro-
moting the expansion of economics.
But there was a further, unanticipated effect of the economics imperial-
ism movement. The suggestion that the economic method could be
applied outside economics invited the response that non-economic
methods might equally be applied to economics. This “reverse imperial-
ism” movement (Frey and Benz 2004) is most strongly associated with the
introduction into economics of ideas from psychology (behavioral eco-
nomics), biology (evolutionary economics), and most recently neuro-
science (neuroeconomics), but also finds important expression in the
recent re-invigoration of thinking about the application of ethics to eco-
nomics (social economics). This volume, Ethics and the Market: Insights
from Social Economics, collects some of the most recent and most inno-
vative contributions to this last field. As part of the new reassessment of
the nature and status of economics in the last two decades (Davis 2006), it
 Preface xv
might be termed a new social economics because, rather than having the
goal of defending some small place for ethics vis-à-vis an expansionist,
positivist economics, the view shared by contributors to this volume is that
standard neoclassical thinking offers little compared to an analysis that
sees ethical thinking as pervasive in economic life.
There is a difference, however, between this new social economics and
the other new movements that have recently emerged in economics. By
and large, these other new movements offer a natural science vision of the
social economic world. While there are valuable gains to be made in eco-
nomics by incorporating insights from cognitive psychology, biology, and
other natural science fields, that the social economic world is one in which
normative value plays a central role implies there are limits to what can be
achieved in re-making economics along natural science lines. This volume
shows just how much more can be achieved with a broader, more human-
istic vision of society and the economy.

John B. Davis

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

Social economics, an interdisciplinary field that bridges the social sciences

and the humanities, is the study of the economy in the context of social,
cultural, and political institutions, recognizing the role of ethics, morality,
identity, and society in economic theory. Social economists endeavor to
broaden the scope and methodology of economics and support research
and analysis on policies to eradicate poverty, unemployment, hunger,
inequality, and discrimination. We value the pursuit of economic justice
and promote an economy that values human beings and allows individuals
to live with dignity.
The Association for Social Economics (ASE), founded in 1941, spon-
sors a World Congress approximately once every three years where acade-
micians and practitioners gather to explore issues central to social
economics. This volume is a compilation of some of the papers originally
presented at the Eleventh World Congress of Social Economics held in
Albertville, France, in June 2004. The chosen theme of the World Con-
gress was the role of social economics in analyzing increasing globalization
and the insights social economics might offer to address the benefits, as
well as the costs, involved in this globalization. Participants from Europe,
North America, Asia, Africa, Australia, and New Zealand presented
papers and participated in plenary sessions and roundtables. Of the papers
presented at the conference, those that were submitted for inclusion in this
volume underwent rigorous review by the editors and were selected on the
bases of their quality and of the likely contribution to the social economics
paradigm. In the review process, the editors recognized the underlying
theme of ethics across the various papers and the place of ethics in eco-
nomic theory and practice as the dominant thesis of the contributors.
Ethics and the Market: Insights from Social Economics presents important
scholarship and offers new contributions to social economics.
This volume benefitted from the contributions and help of many indi-
viduals. Elba Brown-Collier, Secretary of the ASE, along with the editors,
served as a member of the program committee of the Eleventh World
Congress and maintained all of the records and correspondence of the
Congress. John B. Davis serves as the editor of the series in which this
 Acknowledgments xvii
volume appears and helped bring the project to fruition. A number of
people at Routledge, among them economics editor Robert Langham and
editorial assistant Taiba Batool, have provided exceptional help. We hope
that this volume stimulates both a greater interest in social economics as a
branch of inquiry and activism to eradicate injustice and promote well-
being, goals inherent in our philosophy and mission.

Betsy Jane Clary

Wilfred Dolfsma
Deborah M. Figart
Abbreviations

AAEA American Agricultural Economics Association

ASE Association for Social Economics
CDs Certificates of Deposit
CDEC Corporation de Développement Économique Commu-
nautaire
CEO Chief Executive Officer
CRIDA Centre de recherche et d’information sur la démocratie et
l’autonomie
CRISES Centre de recherche sur les innovations sociales en
économie sociale
DIES Délégation interministérielle à l’innovation sociale et à
l’économie sociale
ESOPs Employee Stock Ownership Plans
FDI Foreign Direct Investment
FRB Federal Reserve Board of Governors
GM General Motors Corporation
HMO Health Maintenance Organization
IMF International Monetary Fund
OECD Organization for Economic Cooperation and Develop-
ment
PSU Parti Socialiste Unifié
UN United Nations
UNCTAD United Nations Conference on Trade and Development
USDA/NASS United States Department of Agriculture, National Agri-
cultural Statistics Service
WEDO Women’s Environment and Development Organization
1 Introduction
Betsy Jane Clary, Wilfred Dolfsma, and
Deborah M. Figart

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

In contrast with most economists, who believe that ethical considerations

do not and should not interfere with market processes, the contributors to
Ethics and the Market: Insights from Social Economics argue persuasively
that ethics and the market are intimately and inextricably related. Much
economic theory does not include ethics as part of economic behavior,
and, in most economic models, ethical considerations, like psychological
motivations, habits, or customs, are treated only in general and all are
purged from the market and from economic behavior. This view neatly
reflects the way many economists believe ethics should be involved in their
own work: not at all. These economists aim to pursue a value-free concep-
tion of academic work in which the science of prediction is separable from
political or ethical visions of what should be. The unsustainable nature of
this view is laid bare in this volume. At the level of market processes as
well as at the level of economic theory, the contributions in this volume
demonstrate the role of ethics in the market. For social economists within
the heterodox economic tradition, ethics, morality, identity, and social
values permeate economic practices, even when they go unacknowledged
or are explicitly disavowed. The economic sphere is embedded within the
larger social sphere, and “the economy” and “society” are not viewed as
separate or at least separable spheres of life activity (see, for example,
Dolfsma et al. 2005).
Rather than situating the market and values at separate extremes of a
continuum, Ethics and the Market contends that the two are necessarily
and intimately related. In a similar vein, Irene Van Staveren (2001) has
noted that mainstream economists neglect the mutual interdependence of
three values: freedom, care, and justice. Instead, they have focused on the
market as a sphere characterized by freedom to the exclusion of other
2 B.J. Clary, W. Dolfsma, and D.M. Figart
values, which are relegated to separate spheres of interpersonal relations
and the state. Though one may contest this particular characterization, her
analysis points to the need for broader discussions (see, for example,
Davis 2003), even if the strictures of Occam’s Razor would then be vio-
lated (Hirschman 1988).
Among the few prior contributions to this discussion, most tend to start
from the standpoint of one of the extremes, ethics or the market. For this
reason, an in-depth account of either of the extremes is neither presented
in this introduction nor in any of the chapters. Not only are introductions
or elaborations of such views readily available – the reader may refer to
Charles Wilber (1998) for one on ethics, for instance – such an approach
may soon end up in one extreme attempting to incorporate the other
without changing much itself, or even reflecting on itself. A case in point is
Kurt Rothschild’s scholarship in Ethics and Economic Theory: Ideas,
Models, Dilemmas (1993). Rothschild does provide a relatively early crit-
ical assessment of the relationship between economic theory, scientific
objectivity, and ethics. In addition, the author argues that it is very difficult
for the economist to study “laws” of economics without even touching
ethical questions; economic theories, despite claims of objectivity, either
implicitly or explicitly have aspects that have ethical implications. Leland
Yeager (2001), similarly, writing from an institutional economic perspect-
ive, argues that economics without ethics is sterile, calling for economists
to be aware of their ethical position/standpoint. Nevertheless, Yeager’s
approach to the issue is starting squarely from one of the perspectives,
attempting to understand ethical considerations from the perspective of
the market, or vice versa, as an add-on (see also Anderson 1995; Hamlin
1996).
In contrast, this volume does not study ethics from the perspective of
economics or deconstruct the ethics within economics, but aims to actually
integrate the two. In doing so, it is necessary to formulate the implications
of ethical considerations for economic concepts, by, for example, looking
at the concept of the individual as more than homo economicus. If and
when this means that core concepts need to be fundamentally rethought or
replaced, so be it. In addition, different macro- and microeconomic topics
can and need to be related to ethics, as it matters what perspective is
taken. In actual fact, then, we sympathize with the admonition of
Shoshana Grossbard-Shechtman and Christopher Clague (2001) that the
discipline of economics needs to be expanded, so that economists can draw
from related fields such as sociology, political science, industrial relations,
social psychology, and business/management. Taking the next step toward
building a new and more useful theory/paradigm, our argument, implicit in
the remainder of this volume, is that reaching this goal might only be pos-
sible by first understanding how the market and ethical concerns are con-
ceptually related. Any prior belief that a “science” such as economics or
the academic study of ethics needs to be value-free is incorrect. Values will
 Introduction 3
permeate boundaries, and we had better acknowledge this (see Wilber and
Hoksbergen 1986) if our theories are to be of any use and benefit.

The volume and the chapters

Economic orthodoxy is increasingly under fire from multiple directions,
and some leading figures in the field acknowledge that fundamental con-
cepts might have to be seriously reconsidered. One angle from which sus-
tained criticism has come is that of social economics. Social economics has
a coherent framework to offer, one that has been developed and used for
considerable time and which provides economics, as well as other social
sciences, with a rich source of insights in the opening decade of the twenty-
first century. This volume brings together some of the best work in the
social economics tradition. The chapters are selected from nearly 100
separate contributions to the Eleventh World Congress of Social Eco-
nomics, in Albertville, France, in June 2004. What ties the contributions
together is the issue of how ethics and the market are connected.
Three key themes are illuminated, corresponding to the parts of the
volume. In broad strokes, the three parts of Ethics and the Market
proceed from an examination of the moral implications of markets, to
reflections on transformations in economic theorizing, to transforma-
tions in the institutional arrangements of social economies themselves.
The first part of the volume interrogates the central institution of main-
stream economic theories: the market. Market mechanisms are contextu-
alized by examining the relationship between economic forces and
morality, community, social capital, and ethics. The second section of the
volume analyzes transformations within both the dominant economic
paradigm and that of social economy. These contributions treat indi-
vidual and household decision-making in a much richer and more com-
prehensive way than in neoclassical economics. The chapters in this
section also suggest that social economics is a diverse and dynamic theo-
retical approach, whose relationship to the dominant paradigm has been
continuously redefined. The final section showcases some of the empiri-
cal research conducted by heterodox social economists that focuses on
economic development in a global context.
Part I, “Morality and markets,” explores how moral and ethical ques-
tions can be incorporated into the study of political economy. Does the
expansion of market relations, via globalization and the deepening depen-
dence on market mechanisms via commodification, undermine moral and
ethical behavior, or does it not? In Chapter 2, Jens Beckert examines the
effects of morally motivated behavior on market outcomes and claims that
these are “ambivalent.” Actors in economic context behave by moral con-
viction if they act in accordance with some principle that is oriented
toward the well-being of others or the common good, and such behavior is
followed even if it demands forgoing additional personal profit (or utility).
4 B.J. Clary, W. Dolfsma, and D.M. Figart
The extent to which morality plays a role for market exchange is widely
contested, not only within economics but within sociology as well. While
economists in the neoclassical tradition see moral action as blocking
economically efficient outcomes, economists from other, heterodox, theo-
retical traditions presume that the logic of self-interest must be moderated
by morality for the “common good” or even for the functioning of markets
themselves. Both positions are also found in sociological thinking. Beckert
critically examines the following questions. Does morality hinder eco-
nomic efficiency or is morality a necessary condition for markets to
operate? Which problems, exactly, can be resolved through morally motiv-
ated behavior? And what limitations to economic efficiency are caused by
morality? While a social mechanism can help overcome market failure, it
can also have negative effects.
Jon Wisman’s chapter assesses the forces within the growth and devel-
opment of capitalism that threaten communities and the ensuing costs of
such “creative destruction.” Social economics is uniquely positioned to
evaluate the meaning and nature of community. The author explores both
the contemporary plight of community and the potential for its renewed
strength. In the subsequent chapter, Greg Hannsgen analyzes this issue in
more detail with an application to banking. Hannsgen asks how personal
and social relationships foster trust that might facilitate banking transac-
tions. He claims that one should not see such transactions as a pure com-
modity in the sense defined in textbook economics. Changes in the way
both consumers and firms borrow money have implications for governance
and equality of access to credit. Marketization of commercial lending, by
depersonalizing economic processes, may eliminate some of the biased
practices that were fostered by personal ties between borrowers and
lenders. The “rituals of banking” may interfere with efficient market out-
comes. On the other hand, marketization may increase risk, since personal
relationships were a means of obtaining information. The author con-
cludes that new financial arrangements are not necessarily more or less
stable than the old financial order; the key to stable and democratic insti-
tutions lies in appropriate governance.
Jonathan Wight, in Chapter 5, concludes the opening section. Wight
explores the extent to which markets can create the kind of society we
want by focusing on the ethical foundations of economics, making a strong
claim that this topic should be presented explicitly in the courses we teach.
Wight discusses how the content of a principles course would change with
modeling ethical conduct in markets, developing the example of the treat-
ment of the global economic system. Would and, if so, how would effi-
ciency arguments change when ethical approaches to globalization are
duly considered? The author asserts that understanding the ethical
foundations of economics is a crucial skill in a student’s toolkit. The devel-
opment of critical thinking, for instance, ultimately requires the cultivation
of individual moral judgment, and that judgment goes beyond simple
 Introduction 5
categories of “right” versus “wrong” as the classics teach us. The authors
in this opening section are not of one mind on this question.
Alternative perspectives about the prospects for transcending the hege-
mony of neoclassicism in the economics discipline and differing concep-
tions of social economy as an alternative paradigm are presented in Part
II, “Redefining the boundaries of economics.” A hallmark of the neoclas-
sical framework – the individual – is conceptually scrutinized. Social eco-
nomics starts with a socially embedded individual. The chapters included
in this section expand the notion of the socially embedded individual and
address such questions as how we are to conceive of individual identity;
what sort of framework for evaluating the well-being of individuals within
households is appropriate; and how we account for the existence and
actions of organizations and institutions that are commonly referred to as
part of the “social economy” or “third sector.”
In the opening chapter of the section, John Davis contends that the
limits of the rational individual as economic agent are seen as undermining
the legitimacy of mainstream formulations. He provides a basis for the
consolidation of social economics as an alternative. Specifically, Davis
observes that we are in the midst of an historical transition in economics,
with neoclassical economics being increasingly pushed aside. In particular,
he argues that the fact–value distinction appears to have entered upon a
qualitatively different chapter in its history. Davis terms this a “destructive
phase,” in which it works to eliminate neoclassicism’s past value commit-
ments in vague anticipation of a coming creative phase when a new set of
dominant values will be promoted, again under the false cover of neutral-
ity. The author’s objective is to provide a diagnosis of the current destruc-
tive phase of the fact–value distinction in terms of the breakdown of the
atomistic conception of the individual, and then advance an alternative,
viable conception of the individual as socially embedded. Davis takes an
explicit stand in relation to what an individual is (and ought to become) as
he develops a model of identity. Miriam Teschl then provides a contrast
with Davis in Chapter 7. According to Teschl, (some) economists do not
fail to represent an economic agent with an identity, but these models do
not explicitly account for her identity. The concept of the homo economi-
cus has only an implicit model of identity, a model that can be brought to
light and made explicit. Making identity explicit in our models is an issue
to be taken seriously within economics, because the way economists model
the economic agent’s identity will affect (the modeling of) behavior and
choices. Further, and very importantly, the identity model may shape
social policy recommendations.
One area to which such profound discussions relate is the household.
Elizabeth Oughton and Jane Wheelock’s contribution in Chapter 8 in
large part follows the previous discussion, yet the authors extend it by ana-
lyzing how consumption and production are intimately related in social
contexts. Consumption is often considered a good, providing positive
6 B.J. Clary, W. Dolfsma, and D.M. Figart
utility, with spending income a proxy for obtaining well-being. In contrast,
involvement in production is a disutility, a sacrifice of well-being. The
orthodox economic calculus assumes that both consumption and produc-
tion are governed by formal rationality. But if we look at production and
consumption in terms of social relations, then we can introduce substan-
tive rationality as an additional analytical tool. A social economics
perspective views consumption and production holistically, as
complementary rather than oppositional. Both incorporate social rela-
tions, so that both can be understood in terms of social relationships.
Drawing on Amartya Sen and others, the authors provide a conceptual
examination of the creation and distribution of intra-household well-
being.
The meaning of the term “social economy” (économie sociale) has
evolved and has remained contested over time, especially in France.
Danièle Demoustier and Damien Rousselière put into perspective current
policy debates taking place in France most pressingly, but elsewhere as
well, by returning to the history of the constitution of “social economy” as
a social science and as a set of “social practices.” The phrase “social
economy” was used in classical political economy in the early nineteenth
century, and contributions to the field from the social-Christian tradition
of the followers of Henri Saint-Simon and from scientific socialism are also
significant. Social economy, the science as well as the set of practices, has
thus changed over the last century and more. Social economics, once
defined as simply a broadening of traditional political economy, has now
become, the authors claim, an alternative perspective in its own right.
Carole Biewener (in Chapter 10) extends the argument, if only in a geo-
graphical sense. Biewener addresses the alternative vision embodied in
different “social economy” traditions in France and in Québec, Canada,
utilizing two texts representative of two different, though related, tradi-
tions: Alain Lipietz’s For the Third Sector: The Social Economy and Solid-
arity and Louis Favreau’s and Benoit Lévesque’s Community Economic
Development: Social Economy and Intervention (titles translated into
English). Biewener compares how each defines the boundaries, contours,
and character of that which comprises the social economy by considering
how the social economy is understood in relation to the “state” and the
“commodity sector.” Both the French and Québécois traditions offer
significant, exciting, and vibrant economic alternatives to market capital-
ism that encompass an important range of social and economic activity
and that offer improved criteria for shaping economic activity.
Macroeconomic questions concerning how to shape economic develop-
ment, both locally and globally, are addressed in Part III, “Social
economies in transition.” The process of liberalized development currently
“in fashion” – and promoted by international agencies such as the World
Bank – may trample over local institutions and culture. The authors in this
section highlight the dangers of policies built on a narrow economic vision,
 Introduction 7
from the erosion of the fabric of rural life in the United States to the
pathologizing of ethnic diversity in Africa, and from indifference to the
gendered impacts of financial crises to the appropriation and dilution of
the concept of social capital. The authors provide substantive analytical
tools for reconceiving policy analysis that utilize insights of social eco-
nomics. Building on and developing broader conceptions of market
mechanisms, the chapters consider the many implications of economic lib-
eralization and homogenization on the social and physical environment. In
Chapter 11, Laura McCann develops a novel theoretical approach to
welfare economics that calls for an evaluation of “societal” externalities.
She argues, specifically, that the increased agricultural productivity experi-
enced during the twentieth century has had tremendous benefits for both
farmers and for society as a whole, but it has also resulted in unintended
effects on the environment and on rural communities. While the environ-
mental externalities have been extensively studied by economists, societal
effects have been largely ignored. McCann argues that these effects can be
incorporated into economic analyses using the techniques that have been
developed for non-market valuation of environmental goods.
Introducing cultural factors along with economic factors in the develop-
ment process, Manuel Branco follows with a critical analysis of the
concept of “culture” and its use. Ethnic diversity in Africa and other
developing regions supposedly inhibits the development of strong, demo-
cratic nation-states. Branco asserts that not only does this approach posit a
universalist trajectory for development; it obscures the cultural diversity
that is also present in advanced industrial countries. The author offers that
his defense of culture should not be mistaken for radical relativism or the
consecration of difference. Instead, principles of consociational democracy
as a foundation for a pluralist development policy offer a “third way”
between the dominant, neoclassical model within development studies
that ignores difference, on the one hand, and the particularistic
fundamentalism that depoliticizes the development process on the other.
Tonia Warnecke’s chapter follows with an adept summary of feminist cri-
tiques of economic liberalization policies, positioning her within the het-
erodox finance literature. She argues that growing numbers of financial
crises, fueled by liberalization, which have aggravated the poverty
problem, particularly among the world’s women, might be attributed to an
incomplete and biased framework. Using Sen’s capability approach,
Alexandre Bertin and Nicolas Sirven conclude the volume by providing a
rigorous framework to evaluate the role that social capital plays in poverty
reduction. Their purpose is to find an analytical framework that could
support a strict definition of social capital and preclude the limitations of
the World Bank’s more traditional analysis using this term.
In the final chapter, Ethics and the Market: Insights from Social Eco-
nomics returns to its central theme of how to structure social institutions
to create an economy that enhances well-being. This volume, then,
8 B.J. Clary, W. Dolfsma, and D.M. Figart
emphatically argues, as in John Dewey’s Democracy and Education, that
we should not define ethics or morals too narrowly “giving them, on the
one side, a sentimental goody-goody turn without reference to what is
socially needed, and, on the other side, overemphasizing convention and
tradition so as to limit morals to a list of definitely stated acts” (1966: 357).
Ethics is not synonymous with religion. The ethical and the social are
intimately related: ethics, moral attitudes, are not isolated considerations,
left to ponder on during leisurely Sundays afternoons, if at all. The social
and the economic are, in turn, connected. Contributions to this volume
make this clear in theoretical as well as in empirical ways.

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

Morality and markets

2 The moral embeddedness of
markets
Jens Beckert

What role does morality play for market outcomes? For most sociologists
the functioning of markets is closely connected to the moral conduct of
economic actors. This position is expressed, for instance, by the French
sociologist Émile Durkheim (1984) who argued that purely self-interested
behavior cannot produce stable exchange relations. Only through the “non
contractual conditions of contract” do actors feel effectively bound to the
contractual obligations they have agreed to. The moral code stops actors
from exploiting their exchange partners through opportunistic behavior.
This way morality supports the functioning of markets by reducing trans-
action costs. Another sociological classic – Max Weber (1984) – made
morality a cornerstone in his explanation of macroeconomic development:
for him the emergence of modern Western capitalism had an indispens-
able basis in the moral doctrines of Protestantism. Wolfgang Streeck
(1997: 198) followed this idea by introducing the notion of “beneficial con-
straints,” meaning that the performance of an economy “may be improved
by the surrounding society retaining and exercising a right for itself to
interfere with the choice and pursuit of individual preferences.”
However, the conviction that markets need a moral basis has not gone
undisputed in sociology (Luhmann 1986, 1988). But more than sociolo-
gists, economists have challenged this position. Most famously the model
of the “invisible hand” expresses the connection of public virtue to private
vices and thereby disconnects market outcomes from morally motivated
action. “It is not from the benevolence of the butcher, the brewer, or the
baker that we expect our dinner but from their regard to their self-
interest” (Smith 1976: 18).1 A famous contemporary expression of the
unwanted consequences of morally motivated behavior in markets is
Milton Friedman’s (1973) dictum that the social responsibility of business
is to make profits. According to Friedman, any deviation from profit maxi-
mization is itself morally problematic since the moral task of economic
actors is to maximize economic welfare.
While economists standing in the neoclassical tradition see moral action
orientations as blocking economically efficient outcomes, economists from
other theoretical traditions presume that the logic of self-interest must be
12 Jens Beckert
moderated by morality in order to allow for the “common good” or even for
the functioning of markets itself. The institutionalist tradition, and also the
new microeconomics, sees norms, values and trust as indispensable elements
of the functioning of markets (Arrow 1973). There are situations where self-
ishness should be held back by moral principles to achieve superior out-
comes. The reason is that markets themselves are “morally unreliable”
(Offe 1989). Morality is certainly not the only mechanism by which market
failure can be corrected. Morality does play, however, an important role for
overcoming free-riding and for solving principal–agent problems.
These brief remarks give an impression of the essentially contested role
of morality for market outcomes. The conflict is not one that separates acad-
emic discipline; it runs through disciplinary lines. My intention in this
chapter is to critically examine these positions: Does morality hinder eco-
nomic efficiency or is morality a necessary condition for markets to operate?
Which problems exactly can be resolved through morally motivated behav-
ior? And which limitations to economic efficiency are caused by morality?2
The question of the effects of morality on markets is not only of acade-
mic interest. It is also from the background of recent corporate scandals
that morality in business – or the lack thereof – has become a pressing
issue in public debate. Have corporate managers become more selfish?
What institutional or moral safeguards are needed to prevent the excesses
that brought companies like Enron and Worldcom to bankruptcy?
What I will argue is that the contested role of morality has its causes in
the indeed profoundly ambivalent consequences that morality has on
market outcomes. Morality allows for the emergence and stabilization of
market exchange, but it is also an action orientation that can block
exchange relations that are economically beneficial. I intend to contribute
to a better understanding of this ambivalence by introducing a taxonomy
that distinguishes four different forms of morality-based behavior and try
to understand what consequences derive from these types of morally
motivated action. The four forms I will discuss I call “cooperation,”
“group solidarity,” “blocked exchange,” and “altruism.” There is a fifth
type that I will call “Trojan altruism.” It plays a special role since it does
not reflect moral behavior but makes parasitic use of morality by pretend-
ing to be beneficial to others while being in reality selfish.
By morality, I mean that actors act in accordance with some principle
that is oriented (also) toward the well-being of others or the common good
and is followed even if it requires forgoing additional personal profit or
utility. Amartya Sen (1977) has called this action orientation “commit-
ment.” With reference to the terminology introduced by Robert Frank
(1990), one can formulate: to act morally, an actor must be willing to
engage in “irrational behavior without regret.” “Irrational behavior”
refers to decisions that deviate from individual utility maximization. The
“lack of regret” implies that the behavior was chosen not simply by miscal-
culation of outcomes but by a deliberate choice.
 The moral embeddedness of markets 13
My argument is not that the observation of inefficiencies due to moral
orientations of actors gives justifications to change these expressions of
value rationality. Instead, the argument is that economies operate within
the context of a moral universe that resists the logic of economic efficiency
and that at times this resistance is itself a precondition for market
exchange, while at other times it produces inefficiencies.

A typology of moral behavior in market exchange

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

Ego

Non-beneficial Beneficial

Non-beneficial Blocked exchanges (Trojan altruism)*

Alter-ego Group solidarity

Beneficial Altruism Cooperation

Figure 2.1 Typology of moral action in market exchange.

Note
Trojan altruism is not a form of moral behavior, but uses morality in a parasitic way.
14 Jens Beckert
the actor himself. This behavior, which is actually immoral, I will call
Trojan altruism.

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

Group solidarity
A closely related type of morally guided behavior affecting markets is
“group solidarity.” It is based on the pooling of resources. Group solid-
 The moral embeddedness of markets 15
arity differs from “cooperation” by drawing a boundary between those
actors covered by the moral obligations and those not covered by these
obligations. Through this boundary of exclusion – or network closure
(Coleman 1990) – group solidarity achieves an ambivalent status as the
moral principles are only coordinating behavior within the group. Behav-
ior can be non-moralistic, purely self-interested with regard to the con-
sequences of decisions for outsiders. Solidarity is a non-universalistic ethic
(Bayertz 1998).
Looking at social relations within the group, “group solidarity” has
characteristics similar to “cooperation.” It is a mechanism for improve-
ment of one’s own situation and that of other group members by overcom-
ing free-riding. Solving free-rider problems is a precondition for the
effective pooling of resources. In modern capitalist economies, the union
movement is probably the most relevant empirical form of group solid-
arity. Unions enhance the workers’ power positions in the industrial con-
flict by credibly threatening to withdraw a significant amount of labor from
the production process that cannot be substituted for in the short run.
Unions do have the instrumental goals of negotiating better wage settle-
ments, working conditions or greater job security. However, as Claus Offe
and Helmut Wiesenthal (1985) have shown, membership mobilization by
unions cannot rely exclusively on rational instrumental motivations, but it
must also appeal to a moral obligation to participate, even if unions want
to serve nothing “but the member’s individual utilitarian interests” (Offe
and Wiesenthal 1985: 183).
Commitment-based behavior leading to the pooling of resources can
have positive consequences for the instrumental goals of the group
members. Its role in market efficiency, however, is highly contested. From
a market-liberal perspective, union solidarity amounts to a cartel that
increases prices for labor and thereby leads to inefficient equilibria. Based
on this claim, unions are seen as being responsible for unemployment.
This argument, however, does not go unchallenged. According to more
institutional based approaches in economics (and sociology), unions do
play a constructive role in markets and general economic welfare by
helping to institutionalize industrial conflict, forcing companies to invest
into their competitiveness and increasing consumer purchasing power
(e.g., Streeck and Schmitter 1985).
The positive role of group solidarity has also been demonstrated in
research on ethnic economies (Portes and Sensenbrenner 1993). Here
network closure can help overcome market failures that arise through dis-
crimination. This can be exemplified by ethnic economies in the USA. In
order to be able to start a company, some immigrant groups, who do not
have access to American capital markets, come together in rotating credit
associations, pooling their assets and using them in turn to finance their
individual businesses. This makes the creation of firms, that can otherwise
not be established, possible. Though these associations rely on intense
16 Jens Beckert
reciprocal monitoring of their members, they are also based on the moral
implications of belonging to the same ethnic group. At the same time, non-
members of the ethnic group are excluded from the benefits and thereby
discriminated against through ascriptive criteria. This shows the purely
self-interested side of group solidarity with regard to non-members.
Community or family-based network closure is, however, by no means
unequivocally positive for the economic well-being of the members of the
solidaristic community. If moral codes demand that economically success-
ful family (or community) members support less successful members by
transferring resources, these resources are not available for individual
business investments. As observed by anthropologists, this can inhibit eco-
nomic development and gives rise to avoidance strategies by which suc-
cessful entrepreneurs try to circumvent family obligations. One interesting
strategy has been observed in indigenous villages in Ecuador. Male owners
of garment and leather artisan shops convert to Protestantism. By doing so
the entrepreneurs “remove themselves from the host of social obligations
for male family heads associated with the Catholic Church and its local
organization” (Portes and Sensenbrenner 1993: 1339). In more general
terms, this supports Max Weber’s claim that one of the chief causes for the
success of modern Western capitalism was that Protestantism guided eco-
nomic exchange away from the close connectedness of economic affairs to
social obligations.
Weber (1986) alluded also to a further problematic consequence of dis-
tinguishing between a morality within the group and an external morality
that is characterized by pure utilitarianism. He found this type of particu-
larism in societies adhering to Confucianism and saw in it the reason for
general mistrust becoming a dominant feature in all business relations
reaching beyond the group’s boundaries. Not morality as such but a moral-
ity that is only valid for the family and the clan was a factor that prevented
the development of extensive exchange relations.

Blocked exchange
The third type of morally guided behavior in markets I will call, using a
term introduced by Michael Walzer (1983), “blocked exchange.” Blocked
exchange refers to the prohibition or restriction of the monetary exchange
of certain objects or services based on moral codes. It is the opposite of
cooperation where the function of morality is to enable market transac-
tions. Blocked exchanges prevent the market exchange of certain goods
and services by keeping them outside the market realm.5 Which transac-
tions are blocked changes historically and differs between societies. There-
fore, it is not possible to make a finite list of goods and services to which
exchange restrictions apply. Two economically crucial fields where such
changes have occurred are the limitations of charging interest for lending
money and the abolition of slavery. Cultural differences can be seen in
 The moral embeddedness of markets 17
religiously motivated taboos on the consumption of certain food products
like pork.
Despite historical and social variance, it is possible to list categories of
goods that are likely to be restricted from monetary exchange in modern
societies. One category is exchanges that affect the human body. It is pro-
hibited to buy another person (slavery and adoption). The commercial
sale of body parts for medical reasons is mostly forbidden (organ
markets); in many countries, women are prohibited from carrying a child
to term for another, infertile woman (reproductive medicine); and the sale
of sexual services is restricted and even prohibited in many countries
(prostitution). A second realm is the market exchange of political influ-
ence and offices. The purchase of political decisions is called corruption
and as such is illegal. The third realm are legal claims and obligations that
cannot be purchased or sold. There is no market for trading criminal pun-
ishment. The rights to vote, to freedom of expression, or to freely exercise
one’s religious beliefs are all non-marketable.6
In general terms, blocked exchanges are characterized by the separa-
tion of the goods or services that are connected to “sacred” (Durkheim)
social values from the “profane” sphere of the market. It is not instrumen-
tal rationality that motivates exchange blockages but rather value ration-
ality (Weber), i.e., the belief in the value of an action independent of its
consequences for oneself or for others. As Durkheim has argued, the act
of establishing such taboos is an important aspect of the identity of a social
group. This implies that blocked exchanges cannot be explained by their
contribution to economic efficiency. The idea that political decisions and
human beings cannot be bought might have positive economic con-
sequences. Nevertheless, the justification for prohibiting corruption or
abolishing slavery is not based on an economic rationale but rooted in
social values that discredit corruption and slavery on moral grounds.
Even if norms cannot be explained functionally, it is possible to ask for
economic consequences of restrictions on specific exchanges since they do
not have merely moral relevance, but have functional consequences for
the economic system as well. According to Weber’s theory of rationaliza-
tion, the (originally religiously motivated) decoupling of exchange from
moral obligations was one of the crucial preconditions for the develop-
ment of a modern, functionally differentiated economy. The dissolution of
religious restrictions on money-lending, the decoupling of exchange from
particularistic privileges, and the development of modern labor markets
were among the most important developments in this process. A case for
positive economic effects stimulated by the decoupling of economic
exchange from moral restrictions has been analyzed by Viviana Zelizer
(1979) in her research on the development of the life insurance industry in
nineteenth-century America. This industry was originally blocked by
moral objections, primarily expressed by women, who refused to receive a
“premium” for their husband’s death. For many years, this moral
18 Jens Beckert
conviction blocked the development of an effective financial instrument
for the economic protection of widows.
It is not possible here to show the consequences of blocked exchanges
in detail. This would demand a close discussion of each morally motivated
restriction on market exchange. What I want to illustrate briefly, however,
is that the economic effects of blocked exchanges show profound ambiva-
lences with regard to individual welfare and macroeconomic efficiency.
While the aforementioned examples point to negative economic con-
sequences, examples for positive economic effects from restrictions of
market exchange come easily to mind. Such effects can be attributed to
the blockage of the purchasing of political decisions, as can be seen from
the examples in corruption-ridden countries. Also, the restrictions on the
use of labor power – for instance the prohibition of child labor – have
positive economic implications regarding the future productivity of
children.
One complication with regard to welfare effects derives from the
following paradoxical effect that has been observed in the market for
blood (Titmuss 1971). The blood market – and possibly other markets for
goods taken from the human body as well – has an atypical supply curve.
The introduction of an exchange market for blood does not leave the
supply of voluntary blood donations unaffected; where blood supply
becomes a commercial activity, donors feel less responsibility to continue
donating it. Hence, monetary compensation leads to a reduction in volun-
tary supply. This result, which contradicts economic reasoning, cites eco-
nomic reasons for organizing blood donations as a gift.
Finally, the prohibition of markets for moral reasons might have unin-
tended side-effects that must be examined. One important aspect is that
the prevention of markets gives way to the emergence of illegal markets
that have consequences usually seen as socially and individually negative.
Such markets emerge when not all actors submit to the morally demanded
behavior. This can be observed not only in the case of (illegal) markets for
organs. The prohibition of prostitution undermines the protection of
illegal sex industry workers and makes them especially vulnerable; the
prohibition of certain narcotics leads to the emergence of drug dealers,
crime and serious problems for public health. Through these effects, the
morally motivated prohibition of markets shows profound moral and eco-
nomic dilemmas.

Altruism
The fourth type of morally motivated behavior relevant for markets is
“altruism.” Altruism is defined by a voluntary self-commitment to behav-
ior based on value that inflicts costs on oneself for the benefit of others.
Altruism has several forms. The most economically significant one is the
voluntary inclusion of otherwise externalized costs. This is the core arena
 The moral embeddedness of markets 19
of business ethics, fair trade, and socially conscientious consumer choices.
If companies voluntarily abstain from hiring child labor, pay living wages,
and protect the natural environment in which they operate their plants,
they increase their costs (i.e., their shareholder’s or customer’s costs) for
the benefit of stakeholders like their employees and neighborhood
communities. By now, voluntary codes of conduct have led to the estab-
lishment of an international standard on social accountability (SA 8000).
Some large retailers purchase only from manufacturers that comply with
the SA 8000 standard (Biggart and Delbridge 2004). This can be seen as an
indicator for an increasing “moralization of markets.”
It is, however, debatable to what extent compliance with standards of
social or environmental accountability does indeed reflect altruism. Com-
panies might simply attempt to avoid conflicts with important stakeholders
by complying with social accountability standards or create an image as
socially conscientious businesses as an effective argument in their market-
ing strategies. If profit strategies motivate the compliance of companies to
standards of social and environmental accountability, their behavior is not
covered by the notion of altruism. While the significance of altruism in
business behavior is ultimately an empirical question, two theoretical
points can be made. First, the market mechanism limits the possibility of
altruistic choices that cannot be turned into increased revenues. Managers
in a market economy are structurally forced to orient their decisions
towards profit-making. Any other behavior will lead to a loss in profits and
a reduction in market share. Second, the role of the market mechanism
does not imply that decisions are determined by the market. Most organi-
zations do have significant slack to allow for inefficient decisions without
jeopardizing the survival of the company. Moreover, if one assumes that,
under conditions of complexity and fundamental uncertainty of outcomes,
managers cannot identify optimal strategies, the perspective of market
determination of business decisions is flawed. Under such conditions man-
agers will base their decisions on culturally legitimated conceptualizations
of rationality. This constitutive role of culture allows for the introduction
of ethically motivated decisions into firm behavior despite market pres-
sures towards efficiency (Beckert 2002b).
Whether an expression of genuine altruism or not, the addition of
moral considerations into the market does change the way business is con-
ducted. Pressure to find ethically reflective strategies develops mostly as a
result of investor and consumer choices. Investment fund managers might
invest only in companies that have progressive policies towards gays and
lesbians or that comply with standards of social accountability. An inter-
esting example is also the rising field of Islamic banking. Here investments
are only made to companies that comply with “Islamic values” (see
Biggart and Delbridge 2004: 39). This is a form of altruism on the
investor’s side if the investor must assume that his investment will have a
lower return because he or she forgoes more lucrative alternative
20 Jens Beckert
investment opportunities. Consumers show altruistic action orientations,
for instance, by buying more expensive goods from a neighborhood store,
instead of purchasing from Wal-Mart, because they believe in the value of
having neighborhood stores. Consumer boycotts on the other hand
express condemnation of certain business practices by consumers. Con-
sumers are willing to avoid a product or store in order to support practices
that comply with their values.
But what are the economic consequences of such altruistic, value-
directed allocations of capital and consumer purchasing power? They are
costly for the investor or the consumer in monetary terms. One pays a
higher price for bread in the local grocery store compared to purchasing it
from Wal-Mart. One does without apples from South Africa if they are
produced under Apartheid conditions, even if they are better value
economically. One invests in certain mutual funds even though one
expects a lower rate of return compared to alternative investment
opportunities. These are counterpreferential choices if one assumes self-
ishness is the standard for economic choices.7
The story becomes more complicated once attention is shifted to the
producing firms, countries, and traders that are subject to the value-based
consumer and investor choices. A shift in allocation of investment capital
and consumer purchasing power due to altruistic decision-making is bene-
ficial only to those companies, industries or countries that are favored by
the social values. It is economically detrimental to those parties which are
negatively discriminated against. Looking at macroeconomic con-
sequences, the loading of economic exchange relations with value orienta-
tions that are followed through altruistic decisions may be problematic as
well. They might lead to a particularization of exchange that undermines
competition. It contradicts the functional differentiation of the economy,
or its detachment from substantial value convictions that makes economic
exchange non-discriminatory and inclusive. If decisions are based on altru-
ism, capital is not allocated exclusively under criteria of economic effi-
ciency. Moreover, any judgment of altruism must consider that, given the
complex interrelations within the economy, effects may be highly unspe-
cific and contaminated by unintended consequences that may outweigh
their positive intentions (Luhmann 1993: 136). Boycotts may also hurt
those actors whose interests will be protected.8 Altruism can have similar
non-intended effects as the blockage of exchange does.

Trojan altruism
A further way in which morality can enter markets I want to call “Trojan
altruism.” This is not a type of moral behavior, but refers to the strategic
use of substantial value orientations for one’s own benefit and at the cost
of others. Trojan altruism is deceitful. There are several examples that
stand at least under suspicion to form cases of Trojan altruism. The first
 The moral embeddedness of markets 21
one is food aid to Third World countries. Food aid increases supply in
local markets, causes the depreciation of prices and thereby drives local
producers out of the market. It can also contribute to a change in demand
by influencing the taste of consumers and thereby decreasing demand for
local crops. The dependency created through the destruction of local agri-
cultural production is at the same time beneficial to food exporting coun-
tries in the developed world.
The suspicion of Trojan altruism also plays a role in current political
discourse about standards of social and environmental accountability in
global production systems. Codes of social accountability are increasingly
honored in business transactions with Third World suppliers. Prison labor,
child labor, sweatshop working conditions, and pollution of the environ-
ment are prime issues. The definition of the codes of conduct takes place
mostly in the North. This opens the possibility that the enforcement of a
seemingly morality-based standard – for instance the policy not to buy
products made through the use of child labor – is in fact a hidden enforce-
ment of a competitive disadvantage for Third World countries, implying
additional hardship for the poor. In many countries, child labor is a crucial
source of family income and low wages are one of the few competitive
advantages of the economies of the South. The same argument can be
made with regard to standards of environmental protection. To make this
point more systematically: Altruism might reflect a paternalistic definition
of interests of the South by people in the North that have little to do with
the interests people of the South actually have. This suspicion of paternal-
istic definition of interests became an important dispute between non-
governmental organizations (NGOs) from the North and the South in the
anti-globalization movement in recent years.

Conclusion
What can we learn from the proposed distinction of types of moral behav-
ior in markets? The argument pursued in this chapter was that the role of
morality for market outcomes is deeply ambivalent. Market liberal objec-
tions to any type of coordination devices with the exception of self-interest
don’t do justice to the problems emerging from unequal initial endow-
ments, monopolistic market structures, external effects, free-riding, and
principal–agent problems. This, on the other hand, does not imply that
morality-based decision-making can be seen as unequivocally positive for
the efficiency of market outcomes. Morality might be discriminatory to
outsiders, hinder the functional differentiation of the economy, and block
markets that would be beneficial for at least some market participants.
These profound ambivalences disqualify all positions of unqualified
rejection of morality as an action orientation of market participants.
However, they also point to the benefits of demoralization of market
exchange. The typology introduced in the chapter identifies different
22 Jens Beckert
implications of morality for the efficiency of market outcomes for the dif-
ferent types. Mostly positive effects can be attributed to cooperation, i.e.,
moral behavior in the context of problems associated with free-riding and
principal–agent situations. In these situations, ethical codes are one
mechanism by which market failure can be avoided and more efficient out-
comes achieved. By contrast, exchange blockages appear profoundly
ambiguous, as they represent values in a society. As an ideal type, their
enforcement is independent of their consequences for personal utility and
macroeconomic welfare effects. They can nevertheless contribute to eco-
nomic well-being, by, for instance, blocking the purchase of political
decisions (corruption). They can, on the other hand, prevent the func-
tional differentiation of the economy and might result in unintended con-
sequences such as the emergence of illegal markets. While it might be
politically decided to reduce the scope of markets by legally blocking the
exchange of certain goods and services, these non-intended consequences
must be reflected in any consequentialist moral judgment of such restric-
tions. Altruism transports substantial value orientations into the realm of
the economy as well. Its evaluation depends on the values that are enacted
but also on the unintended effects it causes. Altruism can give moral justi-
fication to redistributive policies and thereby help to integrate the issue of
equity into a market economy. Group solidarity has ambivalent con-
sequences, too. It can lead to the cartelization of market exchange and it
excludes outsiders. On the other hand, it can also help stabilize markets,
reduce power differentials between different social groups, and help to
pool resources for investments that would otherwise be unobtainable.
Finally, Trojan altruism is a parasitic use of morality that does not find
moral legitimation. Its effects are clearly negative, based on the criterion
of Pareto-efficiency, since it aims at gaining advantages at the cost of the
other side of the exchange.
While the typology does not lead to unambiguous distinctions with
regard to the welfare effects of the four specific forms of commitment-
based behavior, it does provide insights into the specific problems that are
characteristic for the different types. Moreover, it indicates that the moral
embeddedness of the economy is not a dysfunctional relic from premodern
times but rather an integral part of the efficient functioning of markets. At
the same time, the role of morality in the market cannot be reduced to its
economic functions. The observation of inefficiencies due to moral orien-
tations of actors does not itself give justification to condemn these expres-
sions of value rationality. Instead, these inefficiencies demonstrate that
economies work within the context of a moral universe that itself cannot
be reduced to criteria of economic efficiency. The ambivalence of morality
for market outcomes is due to the fact that markets necessarily operate
within a social field in which economic and non-economic values merge.
This can be beneficial to economic outcomes or inhibit economic effi-
ciency. The theoretical insight emerging from the ambivalent role of
 The moral embeddedness of markets 23
morality on markets is that no economy will ever be “only economic” even
if this inhibits some of its economic functions.

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

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3 Creative destruction and
community
Jon D. Wisman

The bourgeoisie, wherever it has got the upper hand, has put an end to all
feudal, patriarchal, idyllic relations. It has pitilessly torn asunder the
motley feudal ties that bound man to his “natural superiors,” and has left
remaining no other nexus between man and man than naked self-interest,
than callous “cash payment.” It has drowned the most heavenly ecstasies of
religious fervour, of chivalrous enthusiasm, of philistine sentimentalism, in
the icy water of egotistical calculation.
(Marx and Engels 1848: 475)

The more that is in the contracts, the less can be expected without them;
the more you write it down, the less is taken – or expected – on trust.
(Hirsch 1976: 88)

During most of human history, we have lived in communities with fairly

high degrees of permanence. Almost everyone born in a community died
in that same community. Within these sites of socialization, individuals
found their identities and sense of self-worth. Indeed, for most of human
history, individuals could not conceive of themselves as existing outside
their native communities. Banishment was a fate worse than death.
Of course, communities were periodically disrupted, even destroyed.
They were ever threatened by wars, nomads, famines, and plagues. But
once catastrophe passed, if spared total destruction, communities tended
to reform and maintain their essential character until struck by the next
catastrophe.
Over the past few centuries, a new menace has evolved to threaten
communities: capitalist economic growth. Unlike earlier threats, however,
this new menace not only disrupts communities relentlessly, it erodes their
very foundation.
Marx was the first to grasp fully the community-destroying character of
capitalism. He saw, in fact, how capitalist development totally transforms
all aspects of social life. As he put it (along with Engels), under the regime
of capitalism, “all that is solid melts into air” (1848: 476). Not only are the
processes of production and distribution of economic output constantly
 Creative destruction and community 27
revolutionized, but all other domains of life are also continually trans-
formed. Villages die while cities grow; traditional families fade away as
individuals become more independent of traditional ties; old ideas and
values are delegitimated by growing science, and new ideas and values
more consistent with new evolving social structures. In the apt terminol-
ogy of Joseph Schumpeter, capitalism is a dynamic system of “Creative
Destruction” (1962: 83).
However, capitalism’s creative destruction has not been very creative in
generating new institutions that might substitute for the social and psycho-
logical functions of traditional communities. This has led many critics to
advocate various controls upon or limits to capitalist expansion. But such
measures, if not carefully crafted, would come at a high cost, for it is this
process of creative destruction that has made capitalism the most dynamic
long-run, wealth-creating system history has ever known. It has enabled
those countries that have adopted capitalist institutions to achieve ever-
rising material standards of life. It has also brought greater political demo-
cracy and greater freedom of self-determination to the overwhelming
majority of those who live in these societies.
This chapter is motivated by the fact that the forces threatening
communities are gaining strength. It is the nature of capitalism’s creative
destruction that it builds upon itself, that over the long haul, its pace
continually accelerates. This is especially evident in the wake of the fall of
Eastern European socialism. Eastern European socialism provided an
important form of military, economic, and ideological “friction” slowing
the advance of capitalism. Today, with the disappearance of such friction,
the spread of capitalism into every corner of the globe is speeding up. At
the same time, the pace of technological change continues its acceleration.
The result is that the process of creative destruction is becoming strikingly
more robust. Accordingly, communities can be expected to come under
increasingly intense assault. The tendency of capitalism to undermine
communities and the values associated with participation in them is espe-
cially problematic for social economists, for whom material prosperity is
necessary but not sufficient for human flourishing.
Below I explore the contemporary plight of community. The sub-
sequent section examines the meaning and nature of community. Atten-
tion is then given to the specific character of the forces that are eroding
modern communities. The chapter concludes with a brief discussion of the
potential for renewed strength for communities as capitalism continues to
evolve.

The character of community

It is not easy to find a clear, widely accepted definition of community. For
instance, 50 years ago, sociologist George Hillery, Jr. (1955) found 94 dif-
ferent definitions of community in sociological literature. Yet most of
28 Jon D. Wisman
these definitions, as well as those that have come forth since, have emphas-
ized three elements: area, common ties, and social interaction (Lyon 1987:
5; see also Karp et al. 1977: 65). The very looseness implied by these three
elements is an advantage. If humans need some form of community for
their socio-psychological well-being, presumably, many differing forms of
community might enable this need to be fulfilled.
The presumption that humans need some form of community is
grounded in a point made by Aristotle when he defined humans as zoon
politicon, as political beings. Aristotle’s claim is supported by archeology
and evolutionary biology. We have always lived in groups. Through evolu-
tion – both biological and cultural – we have been selected to live together
in social groupings. These groups have always given us our identity and
our sense of worth.
In the evolution of the human species, sociability was selected, as were
other traits, because it provided a survival advantage. Living in groups
enabled economies of scale (although quite limited in the hunting and
gathering stage) in both production and defense. In production, for
instance, concerted coordination with others in hunting could significantly
increase average individual success. Sharing of output could provide a
form of social security. And in defense, obviously, numbers count.
But what sort of behavior might be expected from individuals within
groups? Individuals could be expected to help others. By behaving in a
manner appreciated by others they would stand a greater chance of receiv-
ing assistance in turn and consequently surviving and passing on their
genes. That is, natural selection would favor those who struggle for social
approbation. Consequently, individuals would strive to be appreciated. Or
as Adam Smith, widely known as a proponent of homo economicus, put it
in his Theory of Moral Sentiments (1759), they need to be loved.1 To
achieve this love, individuals will work hard, be generous, even heroic.
Community, then, might be understood as that social phenomenon that
enables people to establish supportive reciprocal relationships. It provides
a social context within which their activities can be appreciated such that
individuals may feel worthy and possess a sense of identity and belonging-
ness. It is not surprising, then, that the three elements of area, common
ties, and social interaction have generally been designated as defining
characteristics of community.

The anatomy of modern community destruction

The first comprehensive study of community and its decline is found in the
work of Ferdinand Tönnies. Tönnies (1887) distinguished between pre-
capitalist Gemeinschaft social orders and capitalist Gesellschaft ones.
Gemeinschaft (typically translated as community) social orders are charac-
terized by personal social relationships, bound by tradition and a strong
sense of social belonging. Gesellschaft (typically translated as society or
 Creative destruction and community 29
association) social orders, by contrast, are composed of rational, self-
interested individuals joined together by contractual (whether market or
legal) relationships. Many sociologists believe the analysis built upon this
Gemeinschaft–Gesellschaft distinction to be “one of the most extensive,
consistent, and powerful bodies of theory sociology has ever developed”
(Lyon 1987: 103–4).
The decline of Gemeinschaft and the rise of Gesellschaft was conse-
quent to capitalist economic development. Economic progress permitted,
and for defense required, ever larger social units. Interpersonal relations
became less face to face, less personal and more abstract. Interpersonal
relations also became more overtly self-interested. In traditional or
Gemeinschaft social orders, roles are given by birth status and the breadth
of behavior requiring conscious calculation of self-interest is fairly narrow.
Moreover, conscious pursuit of self-interest is ideologically suppressed.
Traditional religions typically depicted self-interest as sinful. Individuals
are instructed to treat all others as brothers and sisters, to be charitable.
However, the rise and spread of markets reward conscious self-interest.
Indeed, in the marketplace, it is necessary to be not only self-interested,
but self-interested in a rational, calculating manner. The reason is that
competition in market exchange forces all participants to strive to get the
best deal. Those who are clever in exercising their self-interest become
richer. By contrast, those who enter the market with charitable sentiments
towards their trading partners get the lesser deal. If they persist, they will
be ruined. So, too, will the irrational. Thus, as markets come increasingly
to mediate between individuals, conscious self-interested behavior
becomes increasingly the norm. Little wonder, then, that most traditional
religions have viewed markets with suspicion, if not downright hostility.
Note, for instance, Ecclesiasticus, 27:2: “As a stake is driven firmly into a
fissure between stones, so sin is wedged in between selling and buying.”
It is an open question whether expanding markets actually make indi-
viduals more self-interested, or simply more aware, and therefore more
rational and calculating in their expression of self-interest. Whatever the
case, individuals, viewing others’ behavior as self-interested, feel a certain
remove from them. In their widely acclaimed study of American society,
an attempt to update de Tocqueville’s classic study of Americans, sociolo-
gists Robert Bellah and his colleagues (1985) noted that “the purely con-
tractual structure of the economic and bureaucratic world is becoming an
ideological model for personal life . . . and complete psychological contrac-
tualism leads to the notion of an absolutely empty relationship” (127, 139).
Or as psychologist Barry Schwartz (1994) has put it: “love, friendship,
family, education, meaningful work, and political freedom – lose much of
what makes them so good when the market gets too close to them” (22).
Expanding markets have also brought greater geographic mobility.
This, of course, represents an advance in human freedom. However, it also
tends to weaken community. As people increasingly relocate to other
30 Jon D. Wisman
regions or distant neighborhoods, children learn at tender ages that
becoming strongly attached to others is followed by considerable pain
when physical separation occurs.
In stable communities, individuals might do good deeds for others with
some expectation, even if only faintly felt, that good deeds might be done
in return. However, if there is a considerable amount of geographic mobil-
ity, such reciprocity is less likely to work. There is an increased likelihood
that those assisted may move away and thus not return the favor. From a
self-interested standpoint, then, helping others becomes less rational.
Indeed, extensive experimental research suggests that, for cooperative
behavior to thrive, individuals must expect that those in whom they have
invested trust will be present in the future to return the trust (see Axelrod
1984).
Within traditional societies, social status was given by birth; status was
ascriptive. Those born serfs would remain serfs for life. So too would their
superiors remain superiors. Traditional societies offered few ways in which
status might change. Moreover, it was important to know and stay in one’s
place. Social sanctions helped ensure that individuals would do so.
The rise and spread of markets eroded ascriptive status. In market
society, status becomes performative. Those who are successful in market
transactions can become richer and thereby improve their social standing.
The unsuccessful find their social status falling. Within market society, ver-
tical or social mobility becomes possible.
Vertical mobility, however, is corrosive of community. Those who rise
in status leave behind their old friends, and perhaps even their families, as
they seek new acquaintances who possess higher status. Indeed, their old
friends and family may be embarrassments to them insofar as they reveal
their former lower status. Thus where there is a high degree of vertical
mobility, people might be expected to form less permanent personal rela-
tionships.
It has also been argued that economic dynamism makes it more “expen-
sive” to spend “friendship” or even “family” time with others. That is, eco-
nomic dynamism increases the subjective value of time. Fred Hirsch
(1976) suggests that the central reason for this is that growth increases the
value of alternative ways to “spend” time. As productivity brings higher
returns to work, leisure, and hence time for family, neighbors, and friends,
becomes more expensive. That is, time spent leisurely with others becomes
more expensive as the monetary value of time increases.
Two other forces also act to increase the subjective value of time as eco-
nomic growth continues. As Staffan Linder (1970) argued in The Harried
Leisure Class, higher income means more consumption which itself takes
increasing amounts of time. Hirsch (1976) notes how the quest for “posi-
tional goods” – those that are limited in supply, such as the best home
locations, ocean-front vacation homes, elite school educations, and the
best jobs – absorbs increasing amounts of time. In both instances, as “free”
 Creative destruction and community 31
time becomes scarcer with a higher value, less time is available for friend-
ship.
Yet another way in which capitalist economic growth has been destruc-
tive of community lies in the divided interests of capital and labor. Marx
argued that the very essence of capitalism is that the producers – the
workers – are separated from ownership and control of the means of pro-
duction. Indeed, he identified the rise of capitalism as the traumatic social
transformation in which this separation of workers from tools and
resources occurred. And once workers no longer owned or controlled the
means of production, their interests were at odds with those of owners –
the capitalists. The fundamental struggle was between employer and
employee. Capitalists, forced by competition to seek the highest profits
possible, would strive to squeeze the greatest work from workers for the
least pay, whereas workers would struggle for higher pay, greater eco-
nomic security, and more control over their own lives. Marx attempted to
demonstrate that the separation of capital and labor and their consequent
conflict resulted in far broader social consequences in terms of both the
nature of politics and ideology.
For well over 200 years, the interests of labor have been pitted against
those of capital, both within the firm and in the political arena, over such
issues as the length of the working day, the intensity of the work pace, the
introduction of new technology, workplace safety, the right to organize
into unions, immigration, international trade and – over the past 50 years –
the appropriate uses of fiscal and monetary policies. Although some of the
issues have changed, the fundamental tension between the interests of
capital and labor have continually been in evidence, albeit ignored by
contemporary mainstream economics (see Wisman 1992).
This has been especially true with regard to communities. In order to
maximize profits, the interests of capital may relocate their plants in search
of lower wages. In the United States, during the 1970s and 1980s, such
plant relocation accounted for a significant shift of economic activity from
the “frostbelt” (northeast and north central states) to the “sunbelt” (the
south and southwest). Today, plant relocation to avoid organized and
high-wage labor has increasingly become international, to countries where
labor is unorganized, wages low, and repressive governments keep
workers relatively passive. The export of jobs abroad has begun to affect
certain portions of the service sector as well, especially for data processing
and phone service support.
The local economies of the abandoned communities are devastated as
unemployment soars and other local businesses suffer loss of demand for
their products. In addition, the infrastructure such as roads, sewage
systems, local school buildings and so forth, that was built to support the
plants and their workers is often left to decay (for an extended discussion,
see Bluestone and Harrison 1982). This represents a significant waste of
society’s scarce capital. And, of course, workers who are vulnerable to
32 Jon D. Wisman
losing their employment and being forced to seek employment elsewhere
are understandably less likely to invest heavily in their communities.
Plants also shop around in search of the most lax environmental regula-
tions. To the extent that communities yield by lowering their environ-
mental standards, members feel less attached to the community and thus
less resistant to moving to healthier and less blighted areas.
The divided interests of capital and labor also set in motion a dynamic
that militates against community within firms. Ideally, workers within a firm
would have an interest in helping each other on the job, in sharing skills and
knowledge, and in cooperating in ways that are often essential not only for a
sense of community, but also for high productivity. Such sharing is what
might be expected from people who work together. But the divided interests
of capital and labor within conventional capitalist firms reduce the potential
for community and productivity gains that such cooperation would yield. In
such firms, it is not irrational for a worker to view all other workers as
potential enemies, not only as candidates for potential promotions,2 but also
in terms of job security, since each will prefer that others be laid off first
should hard times come. Where there is job insecurity, it is in each worker’s
self-interest not to share production knowledge and skills, lest in doing so
others are provided with an advantage when the interests of capital choose
which workers to let go. Needless to say, such tensions are hardly conducive
to the sentiments that underlie community.
Within the United States at present, the greatest threat to community
for the majority of the population may well be the increasing inequality
that has accompanied the movement toward a more unfettered form of
capitalism over the past 30 years. Societies have always been somewhat
segregated by income, with neighborhoods reflecting income and wealth
levels. Yet to a certain extent, all income levels made use of the same
public goods. Thus, they all had some interest in the quality of public
goods such as schools, public safety, and parks. Indeed, these public spaces
had a democratizing effect as the cultural and educational advantages of
the rich could “rub off” on all others.
But the greatly increased inequality over the past 30 years has afforded
the well-off greater potential for walling themselves off from the rest of
the population in gated communities, private clubs, and private schools for
their children. For them, as Robert Reich points out, communities are
increasingly becoming commodities, sought out and purchased like other
commodities, “marketed, evaluated, and purchased like any other” (2001:
198). This, of course, intensifies the segregation of the population accord-
ing to income and privilege. It is, as Christopher Lasch (1995) put it in the
title of his last book, The Revolt of the Elites. And because of the rich’s dis-
proportional political power, support for public services such as schools,
parks, and public safety is eroded. That is, the institutions enabling
community for the majority of the population are weakened, while the
potential for community for the rich has increased.
 Creative destruction and community 33
A vicious cycle is launched. Poorer public services prompt increasing
numbers to opt out of the public sphere, to gate themselves into protected
communities, further weakening support for public goods, prompting yet
more exits. The children of those unable to afford exit receive ever poorer
educations, amass ever less human capital, and thus qualify for yet poorer
paying jobs, rendering the distribution of income yet more unequal.
Community for the few comes at the cost of weakened community for the
many. Further, Richard Wilkinson (1996) has found that greater inequality
not only reduces social cohesion, but also increases stress.

Traditional communities’ downside

The disintegration of community did not, of course, begin with the rise of
capitalism. It has been proceeding at least since more complex social
organization became possible in the wake of the adoption of agriculture
about 10,000 years ago. Agriculture permitted larger social groupings,
which meant in turn the fusing of languages, religions, and cultures gener-
ally, and hence the devaluation of the specific identity of each smaller,
more personal grouping. But these forces operated so slowly as to be all
but imperceptible. Capitalism sped up this process dramatically. Thus, this
devaluation ever continues as horizontal and vertical mobility lead indi-
viduals out of their native groupings, whether these be village, town,
nation, religious community, or even family. For many, this process has
been, and remains, deeply painful.
Although many communities were destroyed without the willing partic-
ipation of their members, others have witnessed disintegration by the free
choice of members for a better existence. They have voted with their feet.
Moreover, although traditional groupings may have provided for basic
human psychological needs, the costs were never low. Such groupings
required conformity and left little personal space. They could be stifling.
This is aptly captured in a German saying at the end of the middle ages as
the rise of commerce and towns came to erode traditional communities:
Stadtluft macht frei (town air makes you free).
The disappearance of traditional communities can be seen as both
tragedy and opportunity. The tragedy is obvious: humans lose an import-
ant anchor for identity and meaning. From their membership in traditional
communities individuals drew a sense of self-worth, they found grounding
for self-esteem. On another level, age-old traditions were irrevocably lost,
and such losses to the cultural richness of humanity are akin to the decline
in biological diversity as species of plants and animals disappear. Just as
once a biological species becomes extinct, it is lost forever, so once a cul-
tural tradition disintegrates, it can never be regained.
On the other hand, traditional cultures are domains of unfreedom.
Their character faces the individual as do objects of the natural world.
That is, just as humans face nature as independently given, so too do they
34 Jon D. Wisman
face traditional culture. Traditional cultures exist outside the will of indi-
viduals. Individuals do not choose to be members of such domains. Mem-
bership occurs as an accident of birth, and there is no good reason to
presume that the practices of such cultures are good and just. They may
promote or they may impede the fullest happiness of the culture’s
members. They may be extremely repressive (Brint 2001: 17).
The disappearance of traditional communities presents humans with
the potential for a new freedom. They might freely struggle to create new
communities that best fit their needs. They might substitute “elective” for
“natural” communities. They might examine past traditions to learn what
practices promise them fullest happiness. Although humans may never be
fully free of the past, they are increasingly empowered to no longer be
mere passive victims of an arbitrary past.
To some extent, this is precisely what has occurred in modern societies.
As traditional cultures disintegrated, people have sought a sense of
community in a wide variety of social institutions, from their workplaces
and neighborhoods to sports teams and clubs. However, social observers
suggest that the replacement institutions that might promise to provide
most with a ready and rich sense of belonging, a source of identity and
self-worth, have not significantly evolved. Many such observers continue
to inform us that a lack of a sense of community is suffered by most in
modern society. Sociologist Suzanne Keller (1988), for instance, argues
that “The desire for belonging, security, and connectedness in the mass
society is not assuaged by privatism, consumerism, and the pursuit of self-
interest, and the euphoric spectacles of the mass media provide at best an
illusion of togetherness” (173).
There is, however, some debate as to whether members of modern
society suffer from a lack of community. Larry Lyon (1987) points out that
“there is virtually no direct, empirical evidence to support the claims of
individual isolation, alienation, and anomie that are supposed to accom-
pany a movement toward a more Gesellschaft-like society” (103). Never-
theless, as Lyon goes on to point out, there is reason to believe that this
may be, at least in part, due to the definition and the difficulty in testing.
The fact is that given our biological-cultural evolution, it would be quite
surprising if humans were found not to need community. And given the
fragmented character of modern society, it would also be surprising if ade-
quate community is enjoyed by most modern peoples.

Toward renewed community

Might there be means for adequately replacing the socio-psychological
functions of earlier communities? Governmental efforts at community
development have been made in the United States, especially during the
1950s and 1960s. These efforts were typically targeted at disadvantaged
areas. They were meant, in Lyon’s words, “to battle the effects of modern-
 Creative destruction and community 35
ization by transforming socially isolated, politically impotent individuals
into organized, territorially based neighborhoods pursuing common goals”
(1987: 109). These efforts, however, have met with only very limited
success.
It has also been suggested that voluntary organizations such as
churches, professional organizations, labor unions, and charities replace
and meet the same socio-psychological needs as traditional communities.
People become, as Melvin Webber (1963) has put it, “more closely tied to
various interest communities than to place communities” (29, cited in
Lyon 1987: 111). Lyon, however, believes that this claim is questionable,
on the grounds that, whereas “voluntary organizations can provide a
measure of Gemeinschaft, the territorial community seems certain to
remain a primary basis for the psychological community” (1987: 111).
In 1995, in a much discussed article, Robert Putnam even found that
participation in local groups has been falling over recent decades (1995).3
Following on work done in the 1980s (Bourdieu 1983; Coleman 1988), he
adopted the somewhat economistic term social capital to capture commun-
ity. Social capital is: “the idea that individuals and groups can gain
resources from their connections to one another (and the type of these
connections). These resources can be used to produce certain goods”
(Paxton 1999: 89).4 Using different methodologies, others who have
attempted to measure social capital have come up with conflicting results.
However, in a recently published book, Putnam has mustered new data to
suggest that he was far more on the money than he had earlier suspected
(2001).5
When examined against the backdrop of the past several centuries, it
may be difficult to generate a great deal of optimism concerning the regen-
eration of community. Yet there is some ground for optimism. There does
appear to be increasing realization that the erosion of community is a
problem. Robert Bellah et al. found “all the classic polarities of American
individualism still operating: the deep desire for autonomy and self-
reliance combined with an equally deep conviction that life has no
meaning unless shared with others in the context of community” (1985:
150). Yet, the authors’ findings conclude that “There is a widespread
feeling that the promise of the modern era is slipping away from us” (1985:
277). Should this be true, it could have dangerous political consequences.
Evidence suggests that in a “mass” society where individuals are “atom-
ized” or without a sense of belongingness that accompanies membership in
communities, people are more vulnerable to manipulation by charismatic
leaders and the mass media, and hence more readily attracted to totalitar-
ian movements (Kornhouser 1959).
There is some evidence, however, that in wealthy Western societies
values are changing in a manner that suggests greater attention might be
given to policies that promise to renew communities. Sociologist Ronald
Inglehart (1990) has found that robust economic growth following World
36 Jon D. Wisman
War II generated a shift from materialist to postmaterialist values, from
“an overwhelming emphasis on material well-being and physical security
toward greater emphasis on the quality of life.” He defines postmaterial-
ists as follows: “Postmaterialists, according to our reasoning, are Postmate-
rialists precisely because they take economic security for granted” (1990:
5, 238). Inglehart defined the materialist values as relating to physiological
needs, specifically those having to do with physical and economic security.
These values encompass the following categories: a stable economy, eco-
nomic growth, stable prices, strong defense forces, a low crime rate, and
maintenance of order. By contrast, postmaterialist values relate to social
and self-actualization needs and have to do with belonging and esteem, as
well as intellectual and aesthetic values. They include the following cat-
egories: a less impersonal society, more of a say in job and community,
more say in government, free speech, ideas matter, and beautiful cities and
nature.6
Such a change makes intuitive sense to an economist. That is, from the
point of view of economics, it is reasonable to expect that declining mar-
ginal utility would eventually accompany the accumulation of ever more
material goods, and that those things sacrificed, such as community and
leisure time, would thereby increase in relative importance.
Community is not, of course, the only desirable end that has suffered as
humanity has sought greater material abundance. So too did the quality of
work. It is understandable that, in a world of pinching scarcity, work
quality would be traded off for higher income. However, with affluence,
workers might be expected eventually to seek more meaningful and fulfill-
ing work, especially given the centrality of work to human happiness. As
Robert Lane (1991) has noted: “It is in work, not in consumption and, as
research reports show, not even in leisure, where most people engage in
the activities that they find most satisfying, where they learn to cope with
their human and natural environments, and where they learn about them-
selves” (235).
Moreover, there is a strong sense in which community and work go
together. In their extensive interviews of Americans, Bellah et al. found
them in agreement that “two of the most basic components of a good life
are success in one’s work and the joy that comes from serving one’s
community. And they would also tend to agree that the two are so closely
intertwined that a person cannot usually have the one without having the
other” (1985: 196). A demand for more meaningful and fulfilling work
would have positive consequences for the regeneration of community,
especially if it entailed greater participation in decision-making and
ownership.
Such participation appears to be slowly evolving. There are two basic
reasons for this. Given our material abundance, workers cannot be as
easily motivated either by the fear of privation or merely the lure of higher
salaries. Second, modern technology, combined with the heightened speed
 Creative destruction and community 37
of technological change, increasingly requires that workers be generalists
who are continually educated on the job to stay current, and who must
increasingly make coordinating decisions with coworkers.
Greater participation in the workplace would encourage community in
two broad ways. Such participation would generate a greater sense of
community within the firm, reducing the gulf in the divided interests of
capital and labor. And the firm’s workplace meets the three most common
characteristics that sociologists have offered in definitions of community:
area, common ties, and social interaction. Second, greater participation
could be expected to increase workers’ commitment to the firm, and by
extension, the larger community. Greater democratic participation in the
workplace might augment social capital – the civic organizations and social
networks that generate higher levels of trust that in turn facilitates greater
cooperation for mutual benefit. Much like human capital, when a certain
level of social capital is attained, it tends to be self-reinforcing and cumula-
tive (Coleman 1988). People’s willingness to “invest” in their communities
could be expected to be inversely proportional to the likelihood that they
will leave the community or directly proportional to the length of time
they are likely to remain (Verba and Nie 1972; Elden 1981). If greater
worker participation results in more stable firms, then communities would
be less vulnerable to the twin enemies of plant closings and worker
mobility.
Changes in the workplace that favor the renewal of community are, for
the most part, coming forth spontaneously with changes in values and the
character of capitalism. Nevertheless, some of the momentum toward
greater workplace participation has come from legislation (motivated by
these changing values) that provides tax incentives for firms to grant
workers a share of ownership. Between the initial legislation in 1974 and
the late 1990s, these Employee Stock Ownership Plans (ESOPs) grew to
include almost nine million workers owning close to 9 percent of all US
corporate stock.
Whether further legislation encouraging worker participation will be
forthcoming is an open question. But it should be noted that, although
workplace democracy has generally been associated with the left end of
the political spectrum, it is fully consonant with the values of the right:
private property, markets, and democratic self-determination. Indeed, one
of the most conservative members of Congress, Republican Dana
Rohrbacher of California, has proposed “ESOPs plus plus,” whereby tax
advantages would be created for firms to provide over 50 percent owner-
ship to workers, with 90 percent worker participation, and with full worker
voting rights, one vote per worker (“Will America . . .” 1999: 4).
The revival of community is essential for the creative construction of an
economy in which material development is a precondition for human
development rather than an end in itself. Forces are in play favoring
community regeneration. But whereas the contemporary evolution of
38 Jon D. Wisman
capitalism appears to favor greater worker participation and the commun-
ity enhancement this promises, other aspects of capitalism’s creative
destruction continue to work to the detriment of community. Ultimately
the future potential for further regeneration will depend upon the future
evolution of social attitudes favoring measures supportive of community.

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

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

Do bankers and their borrowers really accomplish anything when they

meet over games of golf? If so, what will be the effects of an emerging
financial system in which such social ties are replaced to a great extent by
arm’s-length business relationships?
Most economists would acknowledge that some sort of change is under
way in the way consumers and firms borrow money. Bonds now account
for two-thirds of non-financial business debt outstanding, compared to
one-half as recently as 1985 (Federal Reserve Board of Governors 2003;
Bassett and Zakrajšek 2003). The number of new commercial and indus-
trial bank loans has been falling monthly (Economagic 2003; Bassett and
Zakrajšek 2003). This trend parallels the increasing dominance of Freddie
Mac and Fannie Mae in the mortgage markets. These “government-spon-
sored enterprises” that package mortgages into bonds for sale to the
public now guarantee or own roughly half of the mortgages outstanding in
the United States.
Taken together, these trends represent a commodification of finance.
There are several reasons why traditional bank loans differ from pure
commodities. The characteristics of commodities are discussed below, but,
briefly, several features of bank loans differentiate them from commodi-
ties. One important difference is that bank borrowers are offered an inter-
est rate that is set by the bank – not the market – and that may be lower
for “good customers.” Firms with an ongoing relationship with a bank may
receive favorable treatment. In return, they may pass along information to
their banks to which an “arm’s-length” lender might not have access. Ties
between borrower and lender partly take the form of personal relation-
ships and social interaction and not simply business letters and contracts.
They may be governed by norms of reciprocation, rather than specific
quid-pro-quos. To the degree that bank finance is, to use a sociological
term, “embedded” in ongoing personal relationships, it is not a commodity
(see Mirowski 1990; Anderson 1993).
On the other hand, the increasingly prevalent forms of finance based
upon securities do not rely as heavily on close personal relationships. Con-
sider some characteristics of bonds. Publicly issued securities are traded in
42 Greg P. Hannsgen
anonymous public markets by firms and securities owners who do not have
any intimate knowledge of the issuer. Investors are indifferent between
two bonds with the same risk–return profile. Some securities, especially
mortgage-backed securities, are traded as members of a broad, generic
category rather than as the obligations of particular persons or firms.
Generally, members of a class of bond trade at similar values, as would
two different bushels of wheat of the same quality. The owner of a bond
typically has little personal contact with the firm or bank that originally
issued the security and may hold the bond for a very short period of time.
Often a bond is held as part of a very diverse portfolio, so that the owner
has only a small stake in the profitability of the issuing firm.
Though banks are heavily involved in finance when it comes to under-
writing securities or originating asset-backed securities, their relationship
to borrowers is fleeting; when banks generate securities, they are in the
position of purveyors of a commodity rather than long-term partners of
enterprises. Because of the need to market their loans and bonds, banks
must always act with one eye on financial markets rather than payoffs that
might be gained in the course of a long ongoing relationship.
This chapter discusses the policy implications of a shift to less personal
forms of finance. If bankers are discriminatory in forming relationships, a
reduction in the personal aspects of obtaining loans might be desirable in
many respects. An example would be an improvement in the fairness of
the lending process. But not all goods are best treated in an impersonal
way. There are perhaps equal concerns surrounding the rise of bond
finance. One such area is governance. Commercial banks often monitor
firms’ activities and can exert some control, ensuring that their funds are
not misused. Owners of bonds, having a more distant relationship with
borrowers, do not have the information and leverage needed to discipline
borrowers in this way. Second, the changing form of finance may have
implications for equality of access to credit. Since investment increasingly
takes the form of securities purchases, it matters whether women and
minority-group members are excluded from debt markets.
This chapter finds that there exist no grounds on which one can argue
that commercial bank loans should generally be preferred to securities
sales – or vice versa – from the point of view of efficiency, governance, or
equality of access. The well-known attributes of bank and financial market
lending, respectively, are less economically functional than many
observers believe. The main duty of a lender is to assess risk, and neither
banks nor markets can surmount the biases and irrational aspects of esti-
mating risk. Risk is always gauged within a framework of convention and
is subject to racial and other biases. Nevertheless, the fairness and effi-
ciency of the lending process is potentially subject to improvement.
Several existing institutions point the way toward such improvement, but
to simply reverse course and return to traditional commercial banking
would be a retrograde step. Making the financial sector truly rational will
 Theory and implications of commodification 43
require policy-makers to think seriously about race, gender, and class and
about the distribution of power.

What do banks do?

The recent changes in finance fit the general pattern of commodification
identified by Elizabeth S. Anderson (1993) and other experts on the differ-
ences between economic and non-economic goods. We would like to know
what is at stake, from a policy perspective, in this commodification. What
has been lost with the move toward securities finance will depend upon
what banks actually do when they make loans and how they go about it.
Two groups of economists who have studied this issue are the imperfect
information school and the social economists. I examine the views of these
groups, concentrating on the social economists, and then suggest some
extensions in the following section.

Imperfect information
Economists and sociologists generally agree that the role played by com-
mercial banks has something to do with their ability to counter dishonest
borrower behavior and deal with risk (Stiglitz and Weiss 1981; Bernanke
1983; Bernanke et al. 1999). In a pathbreaking paper on the role of banks
in the Great Depression, Bernanke (1983) argued that banks are unique in
their ability to lend to small “idiosyncratic” borrowers who did not have
access to the bond market. Banks are able to intermediate between their
depositors and small borrowers because they are specialists in making
certain money is lent to “good” borrowers. Their techniques include
“developing expertise at evaluating potential borrowers; establishing long-
term relationships with customers; and offering loan conditions that
encourage potential borrowers to self-select in a favorable way”
(Bernanke 1983: 263).
In the view of Bernanke and other New Keynesians, commercial banks
are experts in reducing the costs associated with various forms of risk that
arise in an environment of asymmetric information. The purpose of banks
is to deal with unobservable characteristics of the borrower and his or her
endeavors. Banks may solve the problem of asymmetric information by
requiring collateral, setting a below-market-clearing interest rate, and/or
establishing a long-term relationship (Stiglitz and Weiss 1981; Townsend
1982).
To their credit, the imperfect-information Keynesians recognize the
importance of bank credit, vis-à-vis other forms of lending. They argue that
the relationship between the bank and its client is important and that such
relationships, not just the interest rate, are crucial to the functioning of the
credit market. This group of Keynesians, then, offers one possible answer
to the question of what might be lost with the decline of commercial and
44 Greg P. Hannsgen
industrial lending by banks. Their answer is that problems of asymmetric
information will re-emerge unless some institution replaces the role of
banks in assessing potential borrowers. The investment bank that origi-
nates a security need not concern itself with the true creditworthiness of a
borrower. The holder of the security is only concerned about its value
until the security is sold. So, even if it were possible for the parties
involved to develop long-term business relationships, such ties would not
yield any economic benefit. But, even in drawing attention to the unique
role of commercial banks, the New Keynesians have not adequately theo-
rized about the social aspects of lending.

Social economists’ insights into banking

An alternative view of what is at stake in the waning of commercial bank
business loans is suggested by a different group of researchers. Recently,
social economists and sociologists have begun to investigate the properties
of bank credit, particularly its social aspects. A number of findings have
emerged. First, borrowers who have long-term relationships with a certain
bank tend to be able to borrow at lower interest rates than those who do
not purchase multiple services from one bank or do not have long-term
ongoing relationships with a bank. Second, particular bankers are often
“friends” of a sort with their customers and customers’ families, and they
feel they can trust those customers more than others. Third, borrowers of
high social station or with connections to powerful individuals often enjoy
unusually good access to credit. Fourth, race and gender matter in the
lending process. Fifth, the availability of credit to a firm is partly influ-
enced by the presence of bankers on the firm’s board of directors and by
the school from which the Chief Executive Officer (CEO) graduated.
Finally, bankers often make use of third parties – with whom they are tied
by religion, ethnicity, or nationality – to verify the honesty of a borrower
(see Uzzi 1999; Guseva and Rona-Tas 2001; Keister 2002; Ferrary 2003).
Most or all of these findings, indicating that access to credit depends
upon personal characteristics and relationships, conflict with the character-
istics of a market good described by philosopher Elizabeth Anderson:

The norms governing market relations are impersonal, suitable for

regulating the interactions of strangers. Each party to a transaction
views his relation to the other as merely a means to the satisfaction of
ends defined independent of the relationship and of the other party’s
ends. . . . Because market transactions can be completed so as to leave
no unpaid debts on either side, they leave the parties free to switch
trading partners at any time. The impersonality of market relations
thus defines a sphere of freedom from personal ties and obligations.
Impersonal freedom also implies that one need not exhibit specific
personal characteristics or invoke special relationships to gain access
 Theory and implications of commodification 45
to the goods traded on the market. Money income, not one’s social
status, characteristics, or relationships, determines one’s access to
commodities. The impersonality of the market has been evolving for
centuries, and, in some cases, notably regarding discrimination on the
basis of race, ethnicity, gender, and sexual orientation, it still has a
long way to go.
(Anderson 1993: 145)

In Anderson’s terms, commercial banks do not act as purveyors of a com-

modity. When those with a longstanding relationship to a banker – per-
sonal or businesslike – are able to obtain loans at special interest rates,
Anderson’s conditions fail to hold in some respects.
For instance, consider her criterion that in a true market system banks
need not have special relationships with those to whom they lend money.
A contrary case is provided by Guseva and Rona-Tas (2001):

Reliance on existing networks of trust allows Russian banks to issue

cards to families and friends of top bank executives . . . Another solu-
tion is to stretch direct, personal ties. Trust is transitive. Friends and
relatives of banks’ top executives and long-term customers often
recommend potential cardholders, both formally and informally.
(639)

Furthermore, banks and their customers do not interact as strangers; they

often know both their clients and their families quite well. One bank rela-
tionships manager related that “on the golf course, at a ball game, or the
theatre, they [borrowers] will let their guard down more often. We
exchange information – not like a marriage – more like dating” (Uzzi
1999: 488). Banks see their relationships with customers as more than
instruments to achieve their private ends. The relationships themselves
have value to both partners, a finding of two researchers:

The optimization is not a strict economic one because it integrates

both a psychological and a social dimension. When a client declares
bankruptcy, the banker does not only see the failure of a client but
also the failure of a friend . . . The nature of these exchanges is not
purely economic. They are symbolic and social, too.
(Ferrary 2003: 689)

The embedding of commercial transactions in social attachments pro-

motes the benefits discussed above by enacting expectations of trust
and reciprocal obligation that actors espouse as the right and proper
protocols for governing exchange with persons they come to know
well.
(Uzzi 1999: 483–4)
46 Greg P. Hannsgen
What is the role of all these social influences on access to credit? Some
clearly serve no ends other than the prejudices of the lender. Do some of
the social aspects of credit ensure honesty or serve any other economic
function, or do they merely amount to nepotism, elitism, and racism?
According to evidence gathered by social economists and sociologists,
bankers believe that the types of social strategies enumerated here help
them make sure loans are paid back – the problem cited by the imperfect-
information Keynesians. (Of course, as the social experts acknowledge,
these strategies have their own drawbacks.) In fact, close relationships
ease the flow of information. According to one “relationship manager”:

A relationship on a social basis tends to break a lot of ice and develop

a relationship that’s more than cold facts, interest rates, and products.
It’s an emotion-based bond . . . that’s so important to have . . .
[because] the customer will let us know about problems early, so we
can correct them.
(Uzzi 1999: 488)

Also, in many cases, honesty is enforced by the threat of ostracism

(Ferrary 2003: 688). A businessperson who does not act in good faith may
find it difficult to do business anywhere in the community.
Sociologists emphasize the economic function even of partnerships that
take on a fraternal guise. “Exchange partners share the belief that these
motives, coupled with access to private information, can enlarge the pool
of potentially beneficial transactions that are not available through market
means” (Uzzi 1999: 484). Thus, while relationships between bankers and
businesspeople may draw upon motives that are normally not considered
economic, some believe the end result is economically beneficial to all
parties involved. In one author’s words, socially embedded ties both
“create unique value” and “motivate exchange partners to share the
value” (Uzzi 1999: 483, emphasis in original).
The sociological studies of banking cited here indicate an aspect not
emphasized by imperfect-information Keynesians or most other econo-
mists: personal and social relationships of trust, and not just business rela-
tionships, are involved. They help solve informational problems without
formal contracts, collateral, credit rationing, and so on. These relation-
ships are not only “dyads” of two firms, but groups of people with multiple
ties. These social relationships permit the free flow of information, and
they also help ensure honesty by putting “social capital” at stake. But the
friendships involved often take on a logic and purpose all their own, reori-
enting business activity partly toward social ends (the desire and compul-
sion to reciprocate the favors of a friend), rather than profit maximization.
Most of these benefits of relationship finance do not carry over to a com-
modified world. Originators of securities do not benefit from information
about the true creditworthiness of a borrower over the long term, since
 Theory and implications of commodification 47
their involvement ends very quickly. They are also less concerned with
enforcing repayment. Any inside information the bank may have is
useless, because securities purchasers place little credence in information
offered by a bond “salesperson.” For this reason, there is little point in
developing relationships in the first place.
The important things to note about the social view of banking are: (1)
that social economists and sociologists agree that the main function of
banks is to help ensure the selection of “good” borrowers and their repay-
ment of loans; (2) that sociologists emphasize the role of non-economic
relationships, such as friendships, in which business partnerships are
embedded; and (3) social economists cite the importance of other aspects
of relationships than the flow of information, such as social pressures, that
help ensure honest behavior.

Some qualifications and a social theory of risk

Existing theories of banking set forth by imperfect-information Keyne-
sians and social economists clearly show that commercial banking is not
merely the sale of certain services on a market. But both groups leave
some issues unexamined. Below I elaborate and offer an alternative, social
theory of risk.
First, good friendships are characterized by honesty. But often, intimate
relationships drive people to keep some bad news unspoken, if revealing it
might bring shame. For example, many people are more likely to give per-
sonal information to their psychologists, with whom they have a strictly
professional relationship, than to close friends. In addition, by the time
banker and client become friends, it may be too late to stop a project. If a
pair of individuals has a great deal invested in a particular project (includ-
ing their emotions), it may be in their interests to keep problems to them-
selves. Another reason honesty is less likely to prevail than one might
think is the fact that the businessperson and the banker are often drawn to
one another by commonalities or relationships that predate whatever
loans are granted and that tend to transcend business matters. Both parties
are privy to much information even before a transaction is formally con-
sidered, and the banker is as likely to be a co-conspirator as a whistle-
blower. A system of kickbacks, for example, is most likely to be successful
when there is trust among the businesspeople involved in the scheme (see
Granovetter 1985: 491–2).
When business relationships are governed by the norms of personal
relationships, the relationship might come to take precedence over the
business venture itself. If the banker and his or her client are enjoying one
another’s company too much, they may not be productive when they meet.
Further, while commodification of a good, such as sex, may rob it of its
essence, some goods actually are commodities and are best seen in that
light (Anderson 1993: 180–1). This can be the case particularly if one party
48 Greg P. Hannsgen
to a relationship uses a pretext of genuine care to strengthen his or her
economic position vis-à-vis the other party. One thinks of certain corpora-
tions that use a paternalistic stance toward their employees to extract
more effort or gain consent to exploitative conditions. Also, many sales-
people encourage their customers to think of them as friends, so that they
become reluctant to slam the door or refuse an offer. If “personal”
banking fits into the same category as these situations, it may enable the
banker or client to gain the upper hand and appropriate value rather than
create it.
Unexplored in the literature is that the rhetoric of “value-creation” may
be misleading, in that oftentimes relationships come about because prod-
ucts are tied together in such a manner as to share rents that would other-
wise be reaped by stockholders or consumers. Banks often provide needed
loans as a compensation for other (more profitable) business (Atlas 2003).
This form of marketing is illegal, and at best it is a form of anti-competitive
behavior; at worst it amounts to a form of bribery. Clearly, there is a dif-
ference between sharing the benefits of honest behavior and this sort of
mutual backscratching.
It may also be that socializing between banker and borrower is merely a
cultural expectation or a form of conspicuous consumption, in no way
necessary for whatever business is transacted. Even in this case, an indi-
vidual who declines to socialize may risk losing a loan, but the loss would
merely reflect the fact that norms of conduct had been violated. Playing
golf, enjoying a drink at happy hour, or attending a baseball game may
simply serve a social function or mark the participants as members of an
elite group.
All of these observations suggest that, while relationships between
bankers and their business customers are an important factor in lending
activities, they are not always economically functional. In fact, they may
represent an inefficiency or a waste of resources. Business may be thor-
oughly mixed with pleasure, but no clear causal relationship may exist
between the two.
From a policy perspective, this section has thus far demonstrated that
some of the rituals of banking may be less useful than some people
believe; the world might not suffer too much if they were eliminated in
favor of more anonymous forms of lending. However, the anecdotal evid-
ence gathered by Ferrary (2003) and Uzzi (1999) that socializing acts as an
enforcement mechanism should be taken seriously. The view propounded
here is that form does not merely follow function.
An alternative way of viewing the “relationship” aspect of banking, and
one that may encompass some of the ideas expressed by imperfect-
information and social economists, is to see the attribution or perception
of risk as social to the core, following the contours of social groupings and
arising from social interactions, rather than individual choice (Douglas
1992; Dymski 1998). First, perceptions of risk tend to be shared by social
 Theory and implications of commodification 49
groups or by an entire culture. Groups of people tend to regard other
groups as bearing risk, with individual characteristics being a secondary
consideration. One thinks of caste societies, in which members of some
groups are believed to contaminate others merely by touching them. Often
these sorts of beliefs are fostered by a kind of mass hysteria, as, for
example, in the case of the early reaction to the AIDS epidemic.
The same risk may be regarded as more or less threatening, depending
upon its social context. In particular, risk among socially connected indi-
viduals may be underestimated or regarded as acceptable. In many cul-
tures, people use other family members’ plates without washing them, but
would never do the same with strangers’ or even friends’ dinnerware.
Certain neighborhoods in the United States are dangerous and susceptible
to public-health problems; this phenomenon is certainly in part a self-
fulfilling prophecy. One observer points out that “cultural values and
social location have always provided the materials for self-serving con-
structions of epidemiological risk. The poor, the alien, the sinner have all
served as convenient objects for such stigmatizing speculations” (Charles
Rosenberg, quoted in Douglas 1992: 36).
Second, socially shared notions of risk are not inculcated in a process
separate from, and prior to, doing business. The acquisition of knowledge
about risk is accomplished at the “nineteenth hole” (in golf) and other
informal gatherings. Mary Douglas’s critique of modern theories of risk
perception is as follows:

Public perception of risk is treated as if it were the aggregated

response of millions of private individuals. Among other well-known
fallacies of aggregated choice, it fails to take account of persons’ inter-
action with one another, their advice to one another, and their persua-
sions and intersubjective mobilizations of belief.
(1992: 40)

Or,

embeddedness [of business relations in social ones] changes actors’

motives rather than treats them as immutable. While RMs [relation-
ship managers] may build networks to gain access to private informa-
tion, enacting a relationship also attenuates the narrow aims that may
have motivated it originally.
(Uzzi 1999: 500–1)

Trust develops between particular individuals in an ongoing process as

business takes place (Granovetter 1985).
To extend these observations to policy questions, commercial banking, in
drawing businesspeople into intimate relationships, may create as many
problems as it solves. If banking draws its strengths from social relationships
50 Greg P. Hannsgen
and commonalities, by nature it will exclude certain individuals who do
not enjoy the needed social connections. If attributions of risk are cultur-
ally relative, it may be better to allocate credit on a more anonymous basis
through an institution such as the bond market.
Also, the institutional features of banking, to the extent that they con-
tribute to certain forms of bias in the assessment of risk and the allocation
of credit, may be subject to debate or criticism. If banking relationships
are used for risk reduction as much as risk perception, then relationships
may create creditworthiness, rather than the converse. The proper institu-
tional framework might encourage the formation of needed relationships
that would not otherwise exist. Banks that hired loan officers from more
diverse socio-economic, racial, ethnic backgrounds might find that the
potential for profitable business existed in some hitherto neglected places.
Not all useful business relationships are to be found at golf courses.
Consider some examples in which risk is perceived and handled in an
unconventional institutional context. The Grameen Bank of Bangladesh
has demonstrated that extremely poor borrowers who lack credit in almost
all societies can be reliable, at least given the right kind of institutional
support. Compartamos, a similar Mexico City financial institution lending
to very poor women, has a default rate of just over two percent (Weiner
2003). It is interesting to note that this organization uses some of the same
social techniques as more traditional banks. When the bank opens for
business in a new town, officers seek out the most highly respected women
to obtain advice on establishing a lending institution. This phenomenon
can also be observed in industrialized economies; studies indicate that
small business loans granted under the Community Reinvestment Act are
just as profitable on average as regular loans (Thomas 2002: 22).
These examples of the social theory at work show that commercial
banks are not very effective or evenhanded in discerning risk. They are
biased toward groups from which their customer base has traditionally
been drawn. They accept certain cultural givens, such as the notion that
the elite are more likely to pay money back to the bank. Having done all
this, they fail to recognize their own biases, insisting that their risk-control
techniques are objective and scientific. As a result, they fail to offer disad-
vantaged borrowers the same sort of embedded relationships that allow
more conventional businesses to flourish.

Conclusion and policy implications of commodification

What are the policy implications of the marketization of finance, in light of
the skeptical interpretation of banks’ role offered above? Is marketization
a development to be encouraged? Clearly, some of the most important
implications of the sea change in banking are related to governance. Secu-
rities owners may be too far removed from the activities of a corporation
to prevent insiders from engaging in fraud or managing poorly. The
 Theory and implications of commodification 51
danger of lax governance has been illustrated recently by a string of
corporate scandals. On the other hand, some might argue that investor
capitalism, more than banker-dominated capitalism, can potentially
support the dynamism and efficiency of firms. These observers assert
that this role for investors could be ensured if firms’ activities were made
visible to outsiders, perhaps by assiduous accountants and regulators.
Increased transparency would also help ensure that securities were
priced correctly, helping to improve efficiency. Well-informed traders
could impose discipline on corporate managers by selling shares of
poorly performing companies (Rajan and Zingales 2003). It is therefore
in the interests of good governance, in this view, to eliminate cozy
banker–borrower relationships, which often allow inefficient activities to
go unchecked.
This argument about governance depends upon the risk-assessment
abilities and other knowledge of securities holders. But Keynes (1936: ch.
12) showed that securities pricing is not rational. Investors never operate
with full knowledge of the prospects of a company or how it should be
managed. The technology stock boom of the 1990s is just one example. If
investors lack the information to price stocks rationally, it is hard to see
how they can ensure proper management, even with adequate accounting
standards. In comparison, bankers have a wealth of information at their
disposal and are not as skittish as securities holders, partly because their
investments are illiquid.
The social theory of risk provides support for the Keynesian argument.
Douglas (1992) believed that scientific measures of risk are often as unreli-
able as those of traditional societies and might have been skeptical of the
ability of a particular new form of finance to solve the problem once and
for all. Both Keynes and Douglas argued that the perception of risk was
based largely upon convention and mass psychology, as well as the bias of
the perceiver. The degree of risk of a future project is in principle unknow-
able. Whether through a securities market or a commercial banking
system, risk is always dealt with through social means. No particular forms
of finance, in the abstract, can claim any special ability to solve the
problem of risk, or of governance. Some authors have argued that indi-
vidual investors are more willing to take risks on innovative ideas and
startup entrepreneurs than are traditional banks. Banks often make
decisions by consensus and have a great stake in maintaining their reputa-
tions; therefore, according to some, they are biased toward established,
conventional projects. It is only in a highly idealized, and probably unat-
tainable, financial system that ordinary individuals could issue bonds. (A
related institution, the venture capital market, has recently shown its
limitations.)
This casts doubt on a second purported benefit of securities finance: the
notion that competitive securities markets somehow democratize the allo-
cation of capital. Proponents of this view often cite cases such as
52 Greg P. Hannsgen
the Grameen Bank (Rajan and Zingales 2003), but, as we have seen,
institutions of that type rely on many of the strategies used by relationship
bankers, rather than the arm’s-length relationships touted by these
proponents.
One rather radical solution to the governance and access problems
associated with marketized lending would be to enhance the relationship
of firms with their workers as a replacement for their dealings with
bankers, by allowing workers to carry a dual role as investors. This
approach would offer the same kind of checks and balances, long-term
perspective, and intimate relationships and would have the added advant-
age of introducing the views of individuals from working-class back-
grounds. Workers may be the only group to know more about a firm than
its bankers. They have a vested interest in a firm’s success and would have
an interest in preventing wasteful or greedy behavior by managers.
Workers, like traditional banks, would not dump their investment based
upon their animal spirits. They might be willing and able to help see a firm
through hard times because they are rooted in their companies and share a
stake in their long-run success. An ongoing process of worker involve-
ment, much like bank involvement, could go beyond the provision of
finance to an improvement in governance.
Finding ways to give workers equity interests in firms would provide
more financial stability. Greider (2003) has described some successful
company turnarounds executed with the help of capital from union and
other pension funds. This approach would aid effective governance
without simply moving backward to a world in which traditional bankers,
with their hidebound traditions, held enormous economic power.
What worker ownership and bank capitalism have in common is the use
of “voice” rather than “exit” as a means of control (Hirschman 1970).
Securities holders who believe that a firm is poorly managed can exit (or
threaten to exit) by selling their positions. But insiders such as workers,
who cannot readily exit, can provide input through the use of voice in
decision-making. Much as in a marriage, many problems can be solved
short of the threat of separation.
Another implication of securitization involves Community Reinvest-
ment Act regulations, which require that all banks set aside some of their
loans and investments for under-served groups and areas (Thomas 2002).
Potentially, these rules go beyond governance to allow people from
diverse backgrounds to start their own firms. Studies show that these laws
have been somewhat successful, but they are subject to certain types of
bank evasion.
One such form of circumvention is to meet the letter of the law by
investing in securities, certificates of deposit (CDs), and mutual fund
shares backed by certain forms of loans to disadvantaged firms and con-
sumers – the kinds of commodified instruments emphasized here – rather
than by direct lending. Often these instruments are bought and sold
 Theory and implications of commodification 53
several times in order to gain multiple credits for the same underlying
investment (Thomas 2002: 14). Unfortunately, this type of investment
deprives the borrower of the type of ongoing relationship with a major
lending bank that is such a key to obtaining additional services, as bankers
lose interest in minority firms once they have met their legal requirements.
Moreover, some of the investments recently acquired by major banks fall
on the borderline between “subprime” and “predatory” loans. The latter
involve unfair terms and are sometimes granted with the anticipation that
the borrower will default. The lender has no stake in the success of the
borrower, since failure is anticipated from the beginning. This argument
illustrates that the type of relationship that exists between a banker and its
customer may reflect economic power. Disempowered people may find it
difficult to form beneficial relationships. Good policy should be aimed at
compensating for inequalities of power.
In sum, a “sea change” has taken place in how firms and homebuyers
obtain finance. Some scholars, including many social economists and soci-
ologists, have argued that the old system, in which people knew the
bankers intimately, was functional because it allowed lenders to have a
peak at inside information as to the viability and legitimacy of a project.
Others argue that it is the new system that achieves the greatest efficiency
and should therefore be promoted by policy. The thrust of this chapter is
that both forms of finance can be either functional or dysfunctional (espe-
cially in their handling of risk) and the means exist to make them more
functional. In the current system or in any conceivable reformed system,
social relations will form the basis for both types of finance. Rather than
attempting to dismantle “relationship finance” in the name of some
utopian system free of social influences, efforts should be made to make
both forms of finance – relationship-based and commodity-based – more
stable and democratic.

References
Anderson, E.S. (1993) Value in Ethics and Economics, Cambridge, MA: Harvard
University Press.
Atlas, R.D. (2003, March 19) “Corporations in Survey Say Banks Tie Loans to
Other Business,” New York Times, p. C4.
Bassett, W.F. and Zakrajšek, E. (2003) “Recent Developments in Business
Lending by Commercial Banks,” Federal Reserve Bulletin, December: 477–92.
Bernanke, B. (1983) “Nonmonetary Effects of the Financial Crisis in the Propaga-
tion of the Great Depression,” American Economic Review 73 (3): 257–75.
Bernanke, B., Gertler, M., and Gilchrist, S. (1999) “The Financial Accelerator in a
Quantitative Business Cycle Framework,” in John B. Taylor and Michael Wood-
ford (eds), Handbook of Macroeconomics, Vol. 1C, New York, NY: Elsevier,
pp. 1341–90.
Douglas, M. (1992) Risk and Blame: Essays in Cultural Theory, New York, NY:
Routledge.
54 Greg P. Hannsgen
Dymski, G. (1998) “Disembodied Risk or the Social Construction of Creditworthi-
ness,” in Roy Rotheim (ed.), New Keynesian Economics, New York, NY: Rout-
ledge, pp. 241–61.
Economagic (2003) “Commercial and Industrial Loans at All Commercial Banks,”
www.economagic.com/em-cgi/data.exe/fedstl/busloans1.
Federal Reserve Board of Governors (FRB) (2003) Flow of Funds Accounts of the
United States: Annual Flows and Outstandings, tables L.101, Washington, DC:
FRB.
Ferrary, M. (2003) “Trust and Social Capital in the Regulation of Lending Activ-
ities,” Journal of Socio-Economics 31 (6): 673–99.
Granovetter, M. (1985) “Economic Action and Social Structure: The Problem of
Embeddedness,” American Journal of Sociology 91 (3): 481–510.
Greider, W. (2003) The Soul of Capitalism, New York, NY: Simon and Schuster.
Guseva, A. and Rona-Tas, A. (2001) “Uncertainty, Risk, and Trust: Russian and
American Credit Markets Compared,” American Sociological Review 66 (5):
623–46.
Hirschman, A.O. (1970) Exit, Voice, and Loyalty: Responses to Decline in Firms,
Organizations, and States, Cambridge, MA: Harvard University Press.
Keister, L. (2002) “Financial Markets, Money, and Banking,” Annual Review of
Sociology 28: 39–61.
Keynes, J.M. (1936) The General Theory of Employment, Interest, and Money,
New York, NY: Harcourt.
Mirowski, P. (1990) “Learning the Meaning of a Dollar: Conservation Principles
and the Social Theory of Value in Economic Theory,” Social Research 57 (3):
689–718.
Rajan, R. and Zingales, L. (2003) Saving Capitalism from the Capitalists: Unleash-
ing the Power of Financial Markets to Create Wealth and Spread Opportunity,
New York, NY: Crown Business.
Stiglitz, J. and Weiss, A. (1981) “Credit Rationing in Markets with Imperfect
Information,” American Economic Review 71 (3): 393–410.
Thomas, K. (2002) “CRA’s 25th Anniversary: The Past, Present, and Future,”
Working Paper no. 346, Annandale-on-Hudson, NY: Levy Economics Institute.
Townsend, R. (1982) “Optimal Multiperiod Contracts and the Gain from Endur-
ing Relationships under Private Information,” Journal of Political Economy 90
(6): 1166–86.
Uzzi, B. (1999) “Embeddedness in the Making of Financial Capital: How Social
Relations and Networks Benefit Firms Seeking Financing,” American Soci-
ological Review 64 (4): 481–505.
Weiner, T. (2003, March 19) “With Little Loans, Mexican Women Overcome,”
New York Times, p. A8.
5 Teaching the ethical foundations
of economics
The principles course
Jonathan B. Wight

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

When we analyze the source of humor, one ingredient is surely incon-

gruity, the juxtaposition of opposites. So when Tom Lehrer, the consum-
mate Harvard mathematician, openly calls for plagiarism, this is funny
because it is exactly the opposite of what we expect – it is absurd. And yet,
from the viewpoint of modern economics, is plagiarism really so absurd?
We teach our students to maximize short-term profits (in a moral
vacuum). We drill them that producers minimize private costs of produc-
tion (without reference to ethical codes of conduct). We expect economic
agents to operate with atomistic selfishness, assuring them that this will
magically produce the greatest good for society (ignoring Adam Smith’s
ethical foundations for the invisible hand). Why should we doubt that
these messages, communicated over the decades, would not take root?
It is personally efficient for students to plagiarize. Time is scarce, and
filching allows term paper production costs to be minimized and the poten-
tial output of a grade to be maximized. Professors, incidentally, are better
off when students plagiarize because they will enjoy reading superior papers
than otherwise.1 Future employers may be none the worse, since much of
what is relevant to a worker’s future productivity will be learned on the job.
And what manager would not be thrilled with employees who know how to
develop shortcuts in production? The student who plagiarizes is merely
playing the part economists have written: she has become homo
economicus.2 What then, is so bad about plagiarism?
This chapter attempts to resurrect economics from this dismal por-
trayal. Modern economists understand intuitively (even if they fail to
56 Jonathan B. Wight
teach about it) the role of ethical behavior in human endeavors. Two cen-
turies ago Adam Smith likened human society to an “immense machine,”
in which virtue supplies “the fine polish” on the wheels (1982 [1759]: 316).
In business, as in academia, honesty promotes dynamic efficiency gains.
Cheating and fraud do the opposite. Smith called vice the “rust” that
causes the wheels of society to “jar and grate upon one another.”
Beyond the instrumental benefits of observing and modeling ethical
conduct, there is another, perhaps more compelling, reason for instructors
to address ethical concerns in the economics classroom. While many
courses in economics impart a high level of technical training, the develop-
ment of critical thinking ultimately requires the cultivation of individual
moral judgment (Fels and Buckles 1981; Nelson 1989; Stapleford 2000).
The exploration of moral questions in various realms of life is at the core
of the liberal arts experience. One such question concerns the merits or
demerits of a global economic system. There is good reason not to leave
this analysis to the arts, anthropology, or philosophy alone. Economists
have a comparative advantage in understanding economic trade-offs and
in framing choices upon which human decisions are made. Yet a narrow
economic efficiency argument for trade by itself is insufficient to resolve
any debate about globalization. Economists must recognize and confront
alternative goals and ethical approaches if they are to contribute to this
discussion. It is noteworthy that, when Milton Friedman made his famous
declaration that the social responsibility of a business was to make as
much money for its stockholders as possible, his argument is couched in
terms of efficiency, equity, and morality. A key assumption was that busi-
nesses would operate within a social system in which “Some key [moral]
institutions must be accepted as ‘absolutes,’ not simply as instrumental”
(1962: 167).
This chapter thus argues that economics instructors should engage their
students in critical thinking exercises which entail aspects of moral inquiry.
The objective is not to teach students what is “right” and “wrong” but to
sensitize them to ethical questions that arise in carrying out both positive
and normative economic analyses.3 The chapter concludes with examples
of short teaching modules that can achieve some of these objectives.

Historical roots
The usual starting point for discussing the ethics of globalization is with
Adam Smith, who as professor of moral philosophy studied the principles
of economic activity and the humans engaged in it within a broad political,
social, and ethical landscape (Pack 1991; Young 1997). The Wealth of
Nations (1776), for example, can be read at two levels: as a scientific text
on wealth creation and the distribution of income resulting from special-
ized production and international market trading; and as moral inquiry
into these outcomes and the ethics of self-interest. Smith’s earlier volume,
 The principles course 57
The Theory of Moral Sentiments (1759), is a study not just of self-interest
but of social interests broadly conceived, including the motivations for
altruism, loyalty, trust, and most importantly, self-restraint based on
ethical considerations and commitments. In other words, it is a treatise on
the deliberations of a moral agent. In a Journal of Economic Literature
survey, Keith Tribe concludes that:

The Smithian conception of self-interest is not an injunction to act

egoistically and without moral scruple, safe in the knowledge that by
doing so the public good would somehow or other result: it is embed-
ded within a framework of social reciprocity that allows for the forma-
tion of moral judgment.
(1999: 621)

Central to Smith’s moral judgment about globalization is his concern

for justice. In The Wealth of Nations, for example, Smith refers to this
subject on average about once in every seven pages; in Moral Sentiments
he addresses it on average once every other page or so.4 Smith’s system
cannot function without this normative foundation. Smith notes that
“Justice . . . is the main pillar that upholds the whole edifice. If it is
removed, the great, the immense fabric of human society . . . must in a
moment crumble into atoms” (1982: 86). Smith’s concept of justice mainly
refers to the prevention of unwarranted violence against others and the
widespread adoption of a set of fair rules governing interaction (e.g.,
trade). Commutative justice is thus the critical issue for Smith’s economic
and social system, although at times he does advocate public policies for
distributive justice (Young and Gordon 1996; Verburg 2000).
It is thus hardly surprising that the rise of interest in ethics in economics
is paralleled by a surge of articles and citations on Adam Smith. Citations
to Smith’s The Theory of Moral Sentiments, the book addressing the moral
foundations for micro behavior, grew from under ten per year in the early
1970s to roughly four times that by the late 1990s (Wight 2002a). While
justice is central to Smith’s conception of markets and wealth, it is a rare
economics professor who spends much time on this. In the twentieth
century, the rise of positivism led economists to press for scientific objec-
tivity – subsuming moral problems under a “normative” label which could
be walled off from pure economics. To many modern authors, however,
including several Nobel Laureates, ethical matters infuse economics and
cannot be surgically extracted without killing the patient (see, for example,
Boulding 1969; Hayek 1974; Wilber and Hoksbergen 1986; Etzioni 1988;
Evensky 1993; Piderit 1993; Buchanan 1994; Young 1997; Vickers 1997;
and others). Amartya Sen argues in On Ethics and Economics (1987) that
any sanitized separation of positive and normative analysis is impossible
and undesirable. It is impossible because the process of science requires
making investigative decisions which are value-laden. It is desirable to
58 Jonathan B. Wight
have investigators who are conscious of their ethical steps and alert to
implications that arise from them. Hausman and McPherson (1993) pro-
duced a survey on this subject in the Journal of Economic Literature,
“Taking Ethics Seriously: Economics and Contemporary Moral Philo-
sophy,” followed by a book, Economic Analysis and Moral Philosophy
(1996). Deirdre McCloskey summarizes the critique of dogmatic positiv-
ism in The Rhetoric of Economics when she writes: “Modernism promises
knowledge free from doubt, free from metaphysics, morals, and personal
conviction. . . . What it is able to deliver is . . . the metaphysics, morals, and
personal convictions of the scientists” (1998: 152).
To summarize these arguments, moral concerns infuse the study of eco-
nomics. Having a greater ethical awareness could make students better
economists, both in terms of becoming self-conscious of their own values
brought to the investigation and in terms of understanding and modeling
the economic behavior of moral agents. Beyond this, as will be elaborated
below, ethical judgments are an essential component of critical thinking.

Issues for teaching

The consideration of ethics is central to a liberal arts education (Wilber
1999) and vital for those students pursuing careers in business (Wight
1999). Simply knowing the so-called positive economics of a situation is
inadequate for decision-making. Requiring students to take a final position
on public issues is essential for increasing awareness about the ethical
implications (Emami 1999). The importance of this can be illustrated by
the wrongful death judgment against General Motors (GM) in 2000. A
jury levied $4.9 billion in punitive damages against the company for a
faulty fuel-tank design on the Chevy Malibu (later lowered to $1 billion).
Compared to alternatives, the chosen design put the occupants at greater
risk from fire or explosions in a rear-end collision. The “smoking gun” that
outraged the jury was an internal memorandum detailing that GM engi-
neers had advance knowledge of the problem. Engineers noted it would
cost $8.49 per car to fix the problem, but that wrongful death lawsuits
could be settled for only $2.40 per car. Following standard cost/benefit
analysis, they adopted the “efficient” private solution, the defect was not
corrected, and the buying public was left uninformed of these details.
Real economic choices (like this one) frequently entail trade-offs
between intersecting and conflicting moral demands. Simple rules for
short-run profit maximization fail to serve us unless they are encapsulated
within a wider context of ethical claims (some of which are certainly eco-
nomical). Ethical literacy can enhance the way economic theory is used for
analyzing private and public problems – and economic theory can add
depth to ethical discussions. As an example of the latter point, the enor-
mity of the award in the Malibu case may reflect the jury’s uninformed
consideration of the economic trade-offs (e.g., between safety and afford-
 The principles course 59
ability) that do in fact exist when building cars. This is why both economic
and ethical literacy must combine to clarify economic choices.
In the 1970s, Rendigs Fels (joined later by Stephen Buckles) produced
a useful text for introducing students to such critical-thinking exercises.
The Casebook of Economic Problems and Policies: Practice in Thinking
(5th edn, 1981) provides a delineated and standard process through which
public policy questions may be analyzed. These are: (1) to state the
problem; (2) to list all the competing goals and policy options which may
be relevant; (3) to analyze each policy option in light of the stated goals;
(4) to evaluate (rank) the policy options based on the student’s own value
judgments about the worth of the goals achieved; and (5) to reach a
decision based on these ethical, as well as economic, findings.
Fels and Buckles do not stress enough, it seems to me, the obvious
ethical judgments which also arise in steps 1-to-3 of a public policy analy-
sis, but this is a minor drawback. A benefit of the public policy approach to
teaching economics is that efficiency is always viewed as one of several
competing virtues in the public policy sphere. A well-rounded decision-
maker would never stop analyzing a problem simply because Option A
was found to be the most efficient. Such an analysis would be incomplete if
it failed to consider implications for fairness, equity, freedom, and other
values relevant to the issue under discussion. This requires ethical analysis
and a moral decision.
Regrettably, many teachers think their job is done once they have used
economic analysis to uncover the most “efficient” outcome – apparently
unaware of (or unconcerned about) the normative basis for how “effi-
ciency” is defined in the first place. As Fels and Buckles note, “values
cannot be science-free and science cannot be value-free” (1981: 112). The
overriding but unconscious bias economists give to efficiency is itself a
moral value (Viner 1984: 119; Hausman and McPherson 1993: 675).
Many conventional teachers would no doubt defend their actions by
arguing that economists can do little to enhance ethical training, and class-
room time is better spent on an analysis of efficiency since that is the econ-
omist’s area of comparative advantage. By analogy, a medical student
should not be burdened with discussions of medical ethics: class time
would be better spent teaching the future surgeon a new and better tech-
nique for removing the appendix. Such criticism might be valid if the
diminishing returns to specialization were not so pervasive from an under-
graduate’s perspective. In the liberal arts, as in business schools, excessive
technical training and the absence of normative inquiry is cause for
concern.
In The Wealth of Nations, for example, Smith notes that the person
“whose whole life is spent performing a few simple operations . . . has no
occasion to exert his understanding.” Such a person becomes, over the years,
“as stupid and ignorant as it is possible for a human creature to become”
(1981: 782). Smith quite pointedly decries the worker’s productivity gain
60 Jonathan B. Wight
acquired at the expense of his intellectual and social virtues. By failing to
address the moral dilemmas that shape public policy debates, students are
left with perhaps extraordinary technical skills in economics but may be
thoroughly unprepared for life and work.5

Ethics modules in economics courses

One approach is to introduce short ethical modules into economics
courses, with the content and methods for introducing students to ethical
inquiry suitable for students at various levels. This can be done without
excessive use of class time. Four techniques are discussed here: an in-class
game, public policy essays, the use of the visual arts, and the use of a
novel.

In-class game
The “Robinson Crusoe Game” may be played on the first day of class in
Principles, Intermediate Micro, or other classes that emphasize solutions
to scarcity. It is important to play the game before students have had time
to develop alliances or expectations. Without advance warning, I break
students into groups of four to five students. Each group is given one
minute to introduce themselves and to pick a leader. I toss each group
leader a candy bar and tell them: “You are stranded on a desert island.
Walking on the beach today you found this candy bar. You have five
minutes to determine what to do with it.” There is usually a moment of
shocked silence, followed by what turns into a spirited discussion. Virtu-
ally all leaders consult their groups, and most of the time leaders divide
the candy bar equally among the members of the group. When I ask stu-
dents why they selected this allocation method, they are usually puzzled by
the question because the answer to them is all too obvious: it is fair.
This first-day experience sets the tone that economics is concerned with
allocation under conditions of scarcity. It highlights the importance of
values, especially equity, that play a part in the allocation outcomes within
traditional societies or family groups. Students can readily understand that
social relations (here, group identity and social harmony) play an import-
ant part in some choices, supplementing the selfish individualism model of
traditional theory.6 Adam Smith’s Theory of Moral Sentiments provides
the theoretical foundation for understanding the formation of social iden-
tity (and is developed more formally later in the course).
This game creates a fruitful starting place from which to examine non-
market allocation mechanisms and the values they hope to serve. From
here it is an easy lead-in to discussing purely egalitarian systems such as
the family structure, and to move on to command economies and the costs
and benefits of these in terms of material incentives and other values such
as freedom and efficiency. From the beginning, students see the global
 The principles course 61
market system as an alternative to other social arrangements. When we go
on to discuss the standard international trade model in a few days, stu-
dents have a stronger basis for understanding the relevance of efficiency in
raising average standards of living; yet they are aware of distribution of
income and other problems that this entails.7

Public policy essays

One relatively easy way to introduce ethics into the classroom is to assign
short public policy essays. Using the format suggested by Fels and Buckles
(1981), students analyze the economic content of a controversial public
issue based on newspaper accounts. But in addition to standard analysis of
incentives and efficiency, they are also required to map out the conflicting
moral values that underlie the issue. Finally, they are asked to endorse a
particular policy that serves their moral values.
While virtually any public policy issue will work for this exercise, a
focus on health care, which is controversial, is particularly useful in high-
lighting the many conflicting goals of policy. For example, one issue con-
cerns a terminally ill three year old boy whose family’s Health
Maintenance Organization (HMO) denies a request for a possibly life-
saving surgery. The operation offers just a small possibility of saving the
boy’s life, yet costs $250,000. Students first identify relevant goals at stake:
fairness to this family, to other HMO families, to potential HMO families,
and to other parties; allocative efficiency in consumer spending and
resource use; technical efficiency in terms of saving the most lives;
freedom of private corporations to make decisions; and other considera-
tions students deem important. Then they analyze how each goal is
affected by allowing, or not allowing, the boy’s operation. Their final
decision entails a careful personal valuing of these different outcomes.
The power of economic thinking is manifestly evident as students think
of hidden repercussions and unintended consequences of each decision.
More importantly, students come to recognize that their decision is ulti-
mately a moral reckoning: an assessment of right and wrong action. It is
important to emphasize to students that their grade in this exercise is
based on the quality of their analysis, not in their final weighing of values.
Economics is seen as a vehicle for understanding public policy analysis,
not the end in itself. Even after repeating this injunction numerous times, I
still get students who admit that they chose the “efficient” solution simply
because this was a course in economics! Such unconscious biases are likely
to be widespread.
This particular health care essay encourages students to use a conse-
quentialist model of ethical decision-making (e.g., utilitarian), in which the
costs and benefits of different actions are assessed, and the action with the
largest net benefit is chosen. It is appropriate at this point in the course to
introduce students to two other ethical approaches in Western philosophy:
62 Jonathan B. Wight
the deontological system of duties (Kantian); and the Aristotelian system
of virtuous character. In most courses there is not time to do each justice,
but even a brief outline can provoke great insight for students who previ-
ously may have assumed that only the consequentialist approach was
acceptable in economics. The issue of alternative ethical approaches can
be brought alive by asking students to put themselves in the shoes of a
doctor working in a for-profit HMO. I ask them whether the doctor should
act so as to maximize the company’s profits? If so, could the interests of
the patients and doctors at times be in conflict? How are such conflicts
resolved? At this point I hand out a copy of the Hippocratic Oath, in
which doctors swear to place the patient’s interests first (ahead of profit).
Such duty-based notions of ethics resonate strongly with students, who, as
noted earlier, have a strong bias towards behaviors that adhere to prin-
ciples which are “fair” and can be justified as such. On the other hand, the
consequentialist approach of cost/benefit analyses can make students
appreciate other ethical dimensions of HMO’s decisions, especially when
large costs or benefits are hidden or unintended.
The brief elaboration of ethical systems provides students with some
handholds for understanding their own ethical approaches which they
utilize in other essays. Another possible public policy essay on health care
concerns the shortage of human kidneys for transplant, caused by a
government price ceiling. Should a free market be allowed? Again, stu-
dents are expected to carefully discuss the anticipated effects of a market
on technical and allocative efficiency, as well as ramifications for equity,
freedom, public safety, and other goals. They then must utilize an ethical
system to reach their own decision.

Films
Using the arts to teach garners student interest and there is also a com-
pelling pedagogical rationale for their use (see Wight 2006). Films provide
a vehicle in which economic choices and policies can be studied within a
social, political, and ethical framework. The Grapes of Wrath, Wall Street,
Erin Brockovich, and Mr. Smith Goes to Washington are engaging films
that address economic concepts while questioning “right” and “wrong”
behavior. To avoid using up class time, students review selected movies
outside of class and earn extra credit points by providing a one- to two-
page analysis of each. As with the public policy papers, movie analyses
include not only the economic issues of efficiency and equity, but also an
evaluation of other values (e.g., morality, freedom, and so on). The point
here is to arouse the students’ “moral imaginations” (to use Adam Smith’s
phrase) in thinking about issues in economics. The purpose is not to teach
students the “correct” ethical response, but to provoke them to consider
alternatives and to reach a conclusion for themselves.
 The principles course 63
A novel
Finally, over fall or spring break students read my own short academic
novel, Saving Adam Smith: A Tale of Wealth, Transformation, and Virtue
(Wight 2002c). This book addresses the formation of individual moral con-
science within a global market system. The adventure story makes for easy
reading, as Adam Smith comes back to life and travels across America;
Smith’s own writing provides much of the dialogue. The novel can be used
to explore various ethical concerns such as: the moral foundations for
global capitalism, the role of moral agency in enhancing economic effi-
ciency through social relations and trust, and the role of self-actualization
in the operation of business. The book provides links between The Wealth
of Nations and The Theory of Moral Sentiments.
Students read the book outside of class (it takes an afternoon) and
write a short essay on it. One essay asks them to examine the “greed is
good” philosophy of Bernard Mandeville and others in the context of what
Smith wrote on this subject. They compare and contrast Smith’s views with
those of the character Gordon Gecko in the movie Wall Street. Students
apply this debate to recent financial scandals and are asked to identify the
role that moral agency plays in the “invisible hand.” Students thus come to
understand that the founder of economics saw moral institutions as part of
the structure in which businesses operate and moral imagination as an
instigator of social and economic evolution.

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

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

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66 Jonathan B. Wight
on Economic Education, Allied Social Science Association meetings, 4–6
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Part II

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

Neoclassical economists have long employed the fact–value distinction to

advance one set of moral values for economics at the expense of all others
under the false cover of value-neutrality. I term this stage in the history of
the distinction its creative phase reflecting its successful use in creating one
dominant set of values for economics. But we now seem to find ourselves
in the midst of an historical transition in economics itself with neoclassical
economics being increasingly pushed aside by an array of new research
programs that bear little or no resemblance to it (Davis 2006). Thus, in
what may be a recurring cycle, the fact–value distinction appears to have
entered upon a qualitatively different chapter in its history, though one
ultimately no less misleading than the last. I term this its destructive phase
in which neoclassicism’s value commitments are exposed and its reputa-
tion as a value-neutral science rejected in arguments made by proponents
of the new research programs, each of which is said to be value-neutral but
each of which like neoclassicism seeks ultimately to advance new sets of
values for economics under the false cover of value-neutrality.
Of course, those who reject the fact–value distinction are neither bound
by this cycle of deception and manipulation, nor precluded from reasoned
discourse about values in economics. My goal here, then, is to provide one
diagnosis of the current destructive phase of the fact–value distinction in
terms of the breakdown of the neoclassical atomistic individual concep-
tion, and then advance an alternative, viable conception of the individual
as socially embedded, which supports values contrary to those I fear are
set to emerge in the new research programs in economics in the wake of
the breakdown of the atomistic conception. My point of entry is personal
identity analysis applied to the conception of the individual in economics
(Davis 2003).
The first and second sections of the chapter use personal identity analy-
sis to examine the traditional neoclassical and socially embedded indi-
vidual conceptions respectively. The balance examines the normative
implications of the socially embedded individual conception in a discus-
sion I characterize as an investigation of “the normative significance of the
individual.” The third section interprets personal identity in terms of
70 John B. Davis
personal integrity, and then takes up the connection between personal
integrity and dignity. Dignity is thus first explained in its personal aspect in
terms of the sense of self-esteem or pride individuals may possess. But
dignity also has a closely associated social aspect that involves the basis
society provides for this sense of dignity individuals may possess. The
chapter’s fourth section examines dignity in relation to self-respect, and
specifically in terms of the Kantian idea that human dignity depends upon
having a capacity for claiming human rights. The fifth section turns to
social-economic policy, and discusses the idea of a decent society as one
which does not undermine human dignity through the existence of institu-
tions that humiliate individuals. The final section ends with a comment on
the current phase of the fact–value distinction in economics.

The neoclassical atomistic individual conception

The neoclassical conception of the individual is subjectivist in defining the
individual as no more than a collection of preferences. The idea that indi-
viduals are atomistic beings – or that their individuality is a matter of what
they are apart from others rather than what they are in relation to others –
follows from the form this subjectivism takes that requires that prefer-
ences are always the individual’s own preferences and no one else’s prefer-
ences. I have previously argued that the “own preferences” definition of
the individual is circular and vacuous, and that it cannot establish that
individuals are separate and distinct beings (Davis 2003: ch. 3). Establish-
ing that individuals are separate and distinct beings involves successfully
addressing the first of two tests I have argued any conception of an indi-
vidual must pass in order to provide a viable account of personal identity
in economics. I termed this test the individuation test, and then further
required that any viable conception of the individual also be able to satisfy
what I termed the re-identification test – the idea that for whatever the
conception of the individual at issue one must also be able to show that the
individual thus understood is re-identifiable across change.
I will not review my arguments regarding why the neoclassical subjec-
tivist conception of the individual fails both the individuation and re-
identification tests, and does so in ways that seem in principle
irremediable. Rather, here I simply focus upon how I believe the subjec-
tivist conception has failed – a failure, interestingly, that is largely
accepted by many contemporary mainstream economists – and what the
implications of this failure are for the destruction of traditional neoclassi-
cal values. The main point is that the neoclassical conception that made
individual distinctness or independence depend on understanding indi-
viduals subjectively also eliminated this very basis on which individuals
were seen to be distinct from one another. Thus, the representation of
choice now dominant in economics, which involves nothing more than
maximization of a formal objective function, applies equally well to any
 The significance of the individual 71
type of agent, whether it be the single individual, a collection of individuals,
an animal or collection of animals, non-living machines programmed to
implement maximizing operations, or even cyborg agents made up of an
amalgam of living, non-living, human and animal parts (Mirowski 2002).
Alternatively, there is nothing in the current understanding of choice that
requires it apply to any type of agent in particular. In effect, then,
contemporary economics has lost its criteria for distinguishing human indi-
viduals or indeed any types of agents as distinct and independent beings.
The moral values this development destroys are individual sovereignty
over choice, freedom as associated with choice, and the idea of the indi-
vidual as a moral center of the economy. For all the complaints one may
have against neoclassicism and against the promotion of these values to
the exclusion of other equally important moral values, these values have
been historically progressive and essential to the modern ideals of demo-
cratic society. But current mainstream economics is no longer in a position
to defend and promote these values, because it has abandoned its former
theoretical basis for understanding individuals as distinct independent
beings. What values, then, might the current destructive phase of the
fact–value charade be about to put in the place of these? Of course, it is
necessary to be speculative about this, but we might begin by asking what
failing to distinguish between human individuals and machines implies. Or
we might ask what simply failing to distinguish between different distinct
human beings implies. A systems-based rationality that lacks any ontology
of human individuals and that advances vague ideas of the “greatest good”
may ultimately frame the way in which moral values for economics are
elaborated in the future. Moral systems that invest no moral significance in
individuals are no stranger to the twentieth century, and have often been
associated with totalitarian political systems. Neoclassical economics, with
its emphasis on individual choice, has generally contested these systems,
despite its beginnings in utilitarianism, which has sometimes served as a
prop to authoritarian political views. The rise of “scientific” formalist eco-
nomics within the body of neoclassical economics in the last two decades,
however, seems to signal the end of this defense of the individual as nor-
matively significant. I do not mean to say that current mainstream eco-
nomics or economists are authoritarian, merely that they no longer offer a
defense of individuals as they once did.
I hope these very brief remarks help to make apparent why I have
emphasized the importance of the concept of personal identity in eco-
nomics. The applicability of the concept to the field is not immediately
obvious (Davis 2003). What I wish to emphasize here is the close relation
between one’s conception of the individual, or lack of one, and the norm-
ative views one thinks appropriate to understanding economic life. From
this perspective, the breakdown of the neoclassical conception of the indi-
vidual is accordingly not just central to understanding economics’ status as
a science, but also central to understanding the normative posture of
72 John B. Davis
economics in contemporary society. Thus, in what follows, I seek to fill the
gap left by the slide of neoclassical economics into a new agent-ambiguous
mainstream economics by setting out a possible alternative future for eco-
nomics and its normative agendas based on an alternative conception of
the individual associated with heterodox economics.

The heterodox socially embedded individual conception

The heterodox conception I employ – taken to reflect a number of differ-
ent contemporary approaches – explains individuals’ personal identities
non-subjectively in terms of relationships between individuals. Individuals
are socially embedded in their relations to others, and this is what para-
doxically creates their individuality, independence, or distinctness. I say
“paradoxically” because many heterodox economists are skeptical that
there even is a conception of the individual as a distinct being appropriate
to heterodox economics, rather arguing that the broad sweep of the tradi-
tion is holist, and that individuals play but a modest role in understanding
social forces and institutions. Thus, the first step in laying out the socially
embedded individual conception is to show how individuals understood in
this way can indeed be individuated or distinguished from one another, or
pass what I call the individuation test. Two related but slightly different
ways of showing this involve emphasizing individuals’ capacity for forming
collective intentions (Davis 2002, 2003) and their capacity for forming
commitments to others (Davis forthcoming).

Collective intentionality and individuation

Collective intentionality analysis is the theory of how individuals form
intentions when using first-person plural or “we” speech (Gilbert 1989;
Tuomela 1995). Philosophers have traditionally explained individual inten-
tions as if they were always formulated in first-person singular or “I”
speech terms (e.g., Anscombe 1979), but of course “we” speech is as
prevalent as “I” speech, and individuals clearly express intentions using
“we” speech. What is interesting about “we” speech as compared to “I”
speech, however, is its more demanding success conditions. When an indi-
vidual says to others, “we will do such-and-such,” it is incumbent upon
that individual to gauge whether others will go along with what has been
said. In contrast, “I” speech is easier, since it is only the individual’s own
intention that is involved, and thus the main burden is simply on effective
communication.
It should be emphasized that in both cases, however, we are only
talking about individual intentions. That is, a we-intention is not a group
intention, since properly speaking groups are not cognitive beings that can
form intentions. A we-intention, rather, is an individual’s expression of an
intention which that individual ascribes to a group in using “we” language
 The significance of the individual 73
in reference to members of that group. To get a sense of what this means
for thinking of individuals as socially embedded, note that whereas we
might thus say that an older holistic tradition explains the social nature of
individuals by embedding individuals in social relations, the non-holistic
we-intention approach makes it possible to explain the social nature of
individuals by embedding social relations in individuals. What, then, is the
significance of this for thinking about the personal identity of socially
embedded individuals?
When individuals successfully express we-intentions, they apparently do
two quite different things at one and the same time. On the one hand, they
constrain themselves by adjusting what they say to incorporate how others
look upon whatever their shared we-intention is about. On the other hand,
they engage in this self-constraining behavior freely in virtue of the fact
that intentional behavior is always free behavior. (It makes no sense to say
someone else can make me intend something.) Of course, one can be
involuntarily constrained by others, but only individuals can freely con-
strain themselves. Recall, then, that the first personal identity test, the
individuation test, requires that, for any conception of the individual, it
must be possible to show that individuals thus understood are distinct
from one another. This test is satisfied for the we-intention interpretation
of the socially embedded individual conception. When individuals express
we-intentions, and freely constrain themselves, they effectively self-
individuate themselves or self-distinguish themselves from others. We
might understand this to occur at two levels. First, when individuals
merely consider expressing a we-intention, they single out and compare
themselves to those to whom their expression of a we-intention would
apply. Second, their actual expression of a we-intention has a performative
quality in the effect it has of distinguishing themselves in relation to those
to whom it applies. Thus, the way in which individuals are members of
social groups explains how they sustain individuality in those groups.

Commitment and individuation

A parallel argument regarding how socially embedded individuals can be
shown to be distinct from one another can be elicited from Amartya Sen’s
conception of the individual who makes commitments to others, which he
associates with a “self-scrutinizing and reasoning” aspect of the self (Sen
1985, 2002; see, for example, Davis forthcoming). Since his well-known
“Rational Fools” paper, Sen (1977) has argued that individuals have a
special capacity for forming commitments to others, and that the exercise
of this capacity is unrelated to the satisfaction of their own welfare goals.
Commitment, I thus suggest, operates in much the same way as indi-
viduals’ expression of we-intentions in that when individuals make com-
mitments to others they bind themselves by those commitments yet do so
freely. As with we-intentions, others cannot force an individual to make a
74 John B. Davis
genuine commitment; only individuals themselves can make genuine com-
mitments. Thus, Sen’s “self-scrutinizing and reasoning” conception of the
individual is one in which individuals also self-individuate themselves, and
pass the individuation test. Sen’s individual is a socially embedded one in
that it involves individuals being independent and distinct precisely in virtue
of their capacity to make commitments that tie them to others (Sen 1999).

The re-identification test

Passing the individuation test, however, is only half of what is required for
establishing whether a particular conception of the individual explains per-
sonal identity. Also required is that an individual seen to be distinct in
some way can also be shown to be re-identifiable in that same respect
through a process of change. Thus, if we take individuals to be distinct and
independent beings in virtue of their having a capacity to express we-
intentions or form commitments, do they indeed sustain this capacity
across the change in their lives? One way we may understand this process
of change that is specifically appropriate to seeing individuals as socially
embedded is in terms of the constant variation in one’s social affiliations
with others. Individuals are embedded in an almost endless variety of
social affiliations over their lifetimes, and it is accordingly fair to ask
whether they sustain a capacity to freely express we-intentions or form
commitments to others, or rather come to do these things unfreely, and
thus become “oversocialized” (Granovetter 1985) beings who fail to self-
individuate themselves over time. What I am referring to is whether indi-
viduals retain a special kind of freedom specifically reflective of their being
social beings. Freedom has often been defined in negative terms of the
individual’s independence from others; here freedom is rather defined in
positive terms of the individual’s relation to others. If individuals sustain
this specific type of freedom over their lifetimes in the sense of at least
being able to regularly exercise it, then on the analysis here they may be
said to have personal identities over their lifetimes.
I think, however, that a fair evaluation of the state of many individuals
in the world today leads to the conclusion that many people are not able to
regularly exercise this kind of freedom across their lives’ many changing
social affiliations. They are, as it were, gradually beaten down by pressures
from others to conform to group dictates, and thus become “oversocial-
ized” beings who increasingly fail to freely use “we” speech and form
genuine commitments to others. They use the language of “we,” but not
freely; they may claim to make commitments, but really follow the lead of
others. In effect, their native capacity to do these things does not develop
into a sustainable capability that would justify our attributing personal
identities to them. In the case of the embedded individual conception,
whether or not individuals actually have personal identities, I thus argue,
is contingent upon the way the social world is organized, specifically on
 The significance of the individual 75
whether social relationships in all their variety are generally organized so
as to promote individuals developing a capability to freely express we-
intentions and form commitments across their continually changing and
diverse social connections. The embedded individual conception thus pro-
vides us with an understanding of personal identity as an individual poten-
tial, then, but does not guarantee that individuals will actually be able to
have personal identities. This implies that on this conception of the indi-
vidual, personal identity becomes an object of social-economic policy.
In order to be more concrete about what this policy might involve, in
the balance of the discussion here, I accordingly set out which moral
values underlie this particular conception of the individual as a socially
embedded being. I understand this project as a characteristically social
economic one, in that those who may be placed in this tradition have con-
sistently distinguished themselves from other economists, both heterodox
and orthodox, in their enduring concern with the nature of the individual
and the normative significance of the individual in economics (e.g.,
O’Boyle 1998; Lutz 1999; George 2001; Danner 2002; van Staveren 2001).
By “normative significance of the individual in economics” I mean those
values specifically associated with the moral autonomy and dignity of indi-
viduals in economic life, together with the implications which these values
possess for our thinking about the organization and moral character of
economic systems. A special concern with the normative significance of
the individual in economics, then, represents one particular entry point
into the normative evaluation of economics and economic life. I have
chosen this particular entry point because it is my judgment that modern
history has made the individual a moral focus, and because that moral
focus may be in jeopardy at the current point in time – certainly in eco-
nomics and perhaps more widely. From this overall perspective, my exami-
nation of personal identity in economics is meant to provide a systematic
foundation for investigating the normative significance of the individual in
economics. Essentially, until one has a viable conception of the individual,
it seems that one’s investigation of the individual’s normative significance
must be limited and incomplete. However, I believe the socially embedded
individual conception advanced above provides a viable conception of the
individual, and thus in the following sections I outline a structure of norm-
ative ideas that hopefully begins to provide a more complete account of
the normative significance of the individual based on this particular con-
ception. The subjects I take up are: integrity and dignity, dignity and self-
respect, and the idea of a decent society.

Integrity and dignity

A distinction can be made between personal integrity and moral integrity,
where personal integrity refers to the coherence of a person’s character,
and moral integrity refers to whether a person’s character is virtuous
76 John B. Davis
(McFall 1987). Personal integrity appears more fundamental than moral
integrity in that moral integrity presupposes personal integrity, and one
can have a personal integrity without having moral integrity. Here I am
first interested in personal integrity as close in meaning to the idea of per-
sonal identity. Personal identity, as I have explained it in connection with
the socially embedded individual conception, concerns whether individuals
are able to maintain a distinctness or independence across their many, dif-
ferently demanding social relationships. We may understand this to be a
matter of personal integrity if distinctness from others also involves indi-
viduals having an internal coherence. Conversely, individuals who lose this
internal coherence, though they may still have personal identities in terms
of having a sustained capacity for expressing we-intentions and forming
commitments, may be fragmented and center-less. Personal integrity, it
might thus be said, is a somewhat stronger way of looking at personal
identity as if from the inside out, or in terms of how one’s relations and
commitments to others cohere with one another from the point of view of
individuals themselves.
One influential interpretation of personal integrity as internal coher-
ence is that of Henry Frankfurt who sees persons as having personal
integrity when they are able to regulate their first-order desires by their
second- or higher-order desires (Frankfurt 1971). Individuals’ internal
coherence on this view is a matter of their having a unitary, hierarchical
organization to their different, possibly competing desires. Another
leading interpretation of personal integrity as internal coherence that is
closer to the identity approach here is Bernard Williams’ understanding of
personal integrity as the product of individuals’ identity-conferring com-
mitments (Williams 1973, 1981). Individuals make various commitments to
others (sometimes just to various social causes), and this gives them each a
personal integrity in terms of those commitments with which they identify
most strongly. Further, when an individual’s different commitments con-
flict, the stronger ones dominate, and these then become the commitments
responsible for conferring a sense of identity on the individual. Note, then,
how Frankfurt and Williams’ understanding of personal integrity as under-
lying identity helps expand our personal identity view of individuals as
active beings. On that view, individuals are active beings in having a capac-
ity for expressing we-intentions and forming commitments to others. But
from the Frankfurt–Williams personal integrity perspective, this capacity
should also be seen as simultaneously at work in individuals’ construction
of or conferral of personal identities upon themselves.
Personal identity, then, is not just something that can only be seen from
the inside out, or from the point of view of individuals themselves in terms
of their sense of what coherence or personal integrity they may or may not
possess. Individuals actively invest in their personal integrity by way of the
ties and commitments they make to others, and thereby engage in a kind
of reflexive self-construction of themselves. This can be reasonably inter-
 The significance of the individual 77
preted to include the idea that they are always in a process of self-
evaluation – or “self-scrutiny” as Sen puts it (1985, 2002) – since any
process of self-construction presumably needs some sort of accompanying
stocktaking activity in which one forms a view of oneself in order to evalu-
ate the effects of one’s actions upon one’s identity. Put differently, when
individuals are engaged in actions that affect their identities, their accom-
panying self-evaluation or self-scrutiny provides them an understanding of
themselves, or makes them reflexively conscious of themselves. That is,
they acquire a self-consciousness.
This sense of self that individuals have provides a basis for how we might
think about individual dignity. The concept of dignity is central to many
contemporary views regarding the moral autonomy and independence of
the individual, but is often not very clearly explained. One complication in
explaining dignity is that it has both a personal aspect and a social aspect
which are linked together in a manner that is not immediately transparent.
Thus, it is one thing to speak of individuals having a sense of dignity, and
another, though nonetheless related thing to speak of there being a social
basis for their having a sense of dignity. Avishai Margalit suggests one way
of linking these two aspects of dignity in terms of the concepts of self-esteem
and self-respect: “Dignity is similar to pride. Pride is the expression of self-
esteem; dignity is the expression of the feeling of respect persons feel
toward themselves as human beings. Dignity constitutes the external aspect
of self-respect” (1996: 51). Dignity, pride, and self-esteem are similar on the
personal level. But elsewhere Margalit goes on to distinguish self-esteem
and self-respect, arguing that “self-esteem is a ranking concept [that] relies
on the beliefs people have about their own achievements,” while self-respect
is a matter of “belonging” which one has in virtue of some social member-
ship (Margalit 1996: 46–7). Thus, self-esteem is a matter of one’s own
opinion and feelings about oneself as compared to others, while self-respect
is a matter of how one believes one is entitled to regard oneself in virtue of
being an equal member of some social constituency. That is, self-esteem is
better associated with the personal aspect of dignity, while self-respect is
better associated with the social aspect of dignity. Indeed, self-esteem and
self-respect do not always go hand-in-hand in that one might have the one
without the other (Sachs 1981).1 But one important basis for individuals
having pride, dignity, and self-esteem, as Margalit indicates in the passage
above, is whether they feel entitled to self-respect. That is, the social side of
dignity underlies and supports the personal, self-esteem side. This thus
necessitates our giving special attention to the social side of dignity in terms
of its basis in the concept of self-respect.

Dignity and self-respect

According to most commentators, when we speak of self-respect in terms
of how one is entitled to regard oneself in virtue of being an equal member
78 John B. Davis
of some social constituency, we enter the social normative domain of
human rights. Immanuel Kant is a main source of this understanding as,
for example, when he states that “the dignity of humanity” requires that
we not “suffer [our] rights to be trampled underfoot by others with
impunity” (Kant 1983 [1797]: 99). The principle continues to be widely
accepted, and is central to much thinking about human dignity today. For
example, the United Nations (UN) “Universal Declaration of Human
Rights” associates dignity and human rights by beginning with a mutual
“recognition of the inherent dignity and . . . the equal and inalienable
rights of all members of the human family” (United Nations 1948). Why,
then, does having certain fundamental rights make it possible for one to
have dignity and self-respect?
Joel Feinberg sets out the basic case for this connection, first in terms of
the personal side of dignity and then in terms of its social side. In the
former respect, “the activity of claiming” one’s rights, Feinberg argues, is
what gives individuals a sense of personal dignity, and leads to their
expression of this sense of dignity (Feinberg 1970: 257). But, of course,
individuals are not always active in claiming their rights, and, more seri-
ously, barriers may also exist to their claiming their rights. Thus, to fully
understand human dignity one must go beyond whether individuals simply
express claims to their rights to also speak of individuals having some
socially “recognizable capacity” to assert claim to their rights. “What is
called ‘human dignity’ may simply be the recognizable capacity to assert
claims. To respect a person, then, or to think of him as possessed of human
dignity, simply is to think of him as a potential maker of claims” (Feinberg
1970: 252). Being invested with a capacity to make claims of one’s rights,
moreover, is the product of a social arrangement that makes the individual
a member of a community. Not only must a system of rights be in place,
but they must also be guaranteed to all individuals to whom they apply if
we are to say individuals have a capacity to claim their rights. Social mem-
bership as an established or institutionalized status thus underlies the
capacity to make rights claims, plus the self-respect which then flows from
this capacity, and finally the sense of dignity individuals possess as a result.
One mark or sign of whether individuals have this capacity, feel self-
respect, and maintain a sense of dignity is whether individuals feel resent-
ment or indignation should they be unfairly treated by others or have their
rights infringed. Resentment and indignation, from this perspective, are
socially justified feelings of outrage experienced by individuals who have
an accepted status as members of a community with rights in that
community.
Human dignity, therefore, involves a self-respect that comes of being an
accepted member of a community equal in certain basic rights. Returning
to the issue of individuals’ personal identity in economic life, possessing
dignity and self-respect, we may now add, involves individuals having a
personal integrity. Individuals have a personal integrity to the extent that
 The significance of the individual 79
they are able to organize and create an internal coherence for themselves
in their changing and varied interactions with others. In ordinary ways of
speaking, they are typically said to be self-directed and in a state of self-
control. Certainly this sort of quality is additionally needed to fully
describe human dignity (Meyer 1989). Of course there have always been
individuals who are self-directed and in self-control without having the
benefits associated with being accepted members of a community (having
rights that justify self-respect and help create a sense of dignity). However,
such individuals usually have a stoic quality about them that tends to be
rare and exceptional. More commonly, individuals are self-directed and in
self-control when they have the self-respect and dignity that comes of
having established rights in a community. Thus, to make having a personal
identity an object of social-economic policy requires that we think of this
identity in terms of individuals having a personal integrity supported by a
system of rights that generates self-respect and human dignity.
Let me therefore summarize from all this what seem to be the main ele-
ments involved in a normative focus on the individual in economics. First,
to make the individual a focus at all requires we operate with a satisfactory
conception of the individual, where in personal identity terms this is a
matter of how individuals may be seen to be sustainably distinct beings.
Socially embedded individuals may be seen to be sustainably distinct in
virtue of possessing a self-individuating capacity for expressing we-
intentions and forming commitments to others. What this personal identity
view isolates in specifically normative terms is a special kind of freedom
exercised across one’s lifetime of many changing social affiliations.
Second, when we think of personal identity as personal integrity, we
suppose that being an individual also involves having an internal coher-
ence. Having a sense of the internal coherence in one’s life in turn gives
the individual a sense of dignity. Integrity thus introduces dignity as a
second value in the normative characterization of the individual. Third,
however, whether individuals have dignity depends very much on whether
they feel justified in this regard, and this is a matter of whether they have a
socially accepted capacity to claim rights. Dignity in this regard is a matter
of having justified self-respect. Human rights thus constitute the third key
value associated with a normative characterization of the individual.
Therefore, for the socially embedded individual conception, freedom,
dignity, and human rights produce a structure of values that provide an
account of the moral autonomy and independence of the individual.
Central to this conception of the individual is the idea that individuals are
able to reflexively engage in a process of self-evaluation whereby their
object of attention is themselves as subjects. In normative terms, this
reflexivity takes the form of dignity that constitutes the value link between
the values of freedom and human rights. Dignity is a reflexive concept
both in its personal aspect as self-esteem or pride and in its social aspect as
self-respect. The former arises out of personal identity, freedom, and
80 John B. Davis
personal integrity; the latter arises out of membership in a community and
human rights. The three values together explain the normative significance
of the individual, but dignity plays the central role.

Dignity and the idea of a decent society

To say that dignity is a central value is also to identify a normative point of
entry for social-economic policy. In neoclassical and current mainstream
economics, efficiency is the normative point of entry that guides policy
prescription. The goal of efficiency recommendations is of course to elimi-
nate inefficiency. What, then, is the goal of policy recommendations that
make dignity a central value standing between freedom and human rights?
Conversely, what is it that we wish to eliminate in the interest of promot-
ing human dignity? Margalit (1996) defines humiliation as the violation of
human dignity, and defines a decent society as one whose institutions do
not humiliate people. In contrast, a civilized society is one in which people
do not humiliate other people, and violate their dignity. A civilized society
is of course to be preferred to a decent society, but realism recommends
we make at least decent societies our aim, and thereby focus on the cre-
ation of non-humiliating, dignity-enhancing institutions if we are to make
the moral autonomy and independence of the individual central to our
normative thinking about economics.
What, then, does humiliation involve? If we think in terms of its mani-
fest effects on individuals, we might begin by noting that when individuals
are humiliated they are made to feel ashamed or caused to have a sense of
shame about themselves. That is, humiliation targets individuals’ pride and
self-esteem. But I suggest that systematic humiliation, as the product of a
set of social institutions, has a deeper object, namely, reducing individuals’
self-respect. Self-respect, recall, has its basis in the status of belonging and
membership in a community, whereas self-esteem is a function of how
individuals see themselves relative to others (Margalit 1996: 46–7).
Accordingly, institutions that humiliate individuals, such as systems of
racial or ethnic discrimination, or household structures that are gender-
biased, have the effect of denying individuals membership in a community
or reducing their status in a community – in their own eyes. Of course,
some stoic individuals may maintain a sense of self-esteem despite the
existence of humiliating institutions. But assuming that self-esteem for
most individuals depends in important ways on their community status and
thus on their self-respect, humiliating institutions work to undermine
human dignity by attacking most individuals’ self-regard in this most fun-
damental way.
Put in terms of personal identity, humiliating institutions undermine
individuals’ personal integrity or their sense of identity. I argued above
that, on the socially embedded individual conception, whether individuals
have personal identities is a matter of whether they are able to sustain a
 The significance of the individual 81
capacity (have a capability) to freely constrain themselves to the terms of
participation in the many social groups to which they belong. Humiliating
institutions, then, by attacking individuals’ self-respect, also work to
undermine individuals having personal identities. Or, since having a per-
sonal identity involves being able to exercise freedom in this way, a system
of humiliation also works to limit individual freedom. Societies, of course,
have many institutions. The character of a society, accordingly, can be
seen to be a matter of the balance of humiliating and non-humiliating
institutions it possesses, and the extent to which a society’s institutions
humiliate individuals can be seen to be a matter of the number and sever-
ity of humiliating institutions it possesses.
Making human dignity a central value of social-economic policy, then,
means changing social institutions to eliminate humiliating institutions. In
this respect, a dignity-based social-economic policy is like efficiency-based
policy, since both aim to change institutional arrangements. But a dignity-
based social-economic policy involves a more complex value structure in
that it combines a specific kind of freedom necessary to personal identity
and personal integrity with a reliance on human rights as a guarantee of
community membership. There are advantages and disadvantages to
operating with a more complex value structure such as this. The main dis-
advantage is the simple appeal that one-dimensional efficiency recommen-
dations offer is not available when we focus on human dignity. The main
advantage is that emphasizing human dignity enables us to begin with a
key result of modern history regarding what is normatively important in
human society – namely, the dignity and moral autonomy of individuals –
and then understand the logic behind that result in a reasonably persua-
sive way. Having a reasonably persuasive way of understanding the norm-
ative importance of the dignity and moral autonomy of individuals, it
seems, may be particularly important at the current time in history if one
principal defender of the individual – neoclassical economics – is either
giving up that defense or leaving the stage altogether. With these conclu-
sions in mind, I return to the fact–value distinction to comment on its
current phase and possible future.

The creative phase of the fact–value distinction

While heterodox economists might hope that mainstream economics will dis-
abuse itself of the fact–value distinction in the future, a more realistic view is
to suppose that it will remain in good standing for the majority of economists.
Thus, I suggest that the more important work for heterodox economists is to
work to counter the logic of the distinction by emphasizing the value commit-
ments of economics, and contesting them where they are unacceptable.
Today this means exposing the “turn in economics” (Davis forthcoming) by
charting the new directions economics is currently taking, and then exhibiting
the new value commitments these new directions involve. I suggested at the
82 John B. Davis
outset that the new directions economics is currently taking involve a
destructive phase of the fact–value distinction in the undermining of old neo-
classical value commitments. This process is really the obverse of a new cre-
ative phase in which new value commitments appropriate to a new
economics will be elaborated. But just as the new directions in economics are
yet to become very clear, so the value commitments that will attend these
new directions are also yet to become very clear.
This stage in the development of economics thus seems to offer
opportunities to those who reject the mainstream economics vision, since in
the emerging mainstream value-interregnum there exists space for promo-
tion of social values that are arguably more humane and more in keeping
with a fuller normative understanding of economic life. My arguments here
make the individual an entry point, first in terms of personal identity analy-
sis and second in terms of a focus on dignity as a central value. This focus is
in part strategic, since neoclassical economics has enjoyed a wider appeal for
years in virtue of its emphasis on the individual. Heterodox economists of
course reject the neoclassical view conception of the individual, but more
important it seems to me is mainstream economics’ increasing lack of inter-
est, even abandonment of individuals as a conceptual and normative focus.
The heterodox opportunity, then, is to take over the individual as a focus,
though on terms that are (normatively) more acceptable. To the extent that
the wider appeal of economics is in its defense of the individual, it may be
that the coming creative phase of the fact–value distinction may be success-
fully built upon a genuinely comprehensive understanding of individuals,
rather than upon a vision of society in which individuals do not count.
Indeed, in such circumstances it might even transpire that economists will
come to question the fact–value distinction itself.

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

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7 The impact of identity on
economics
Miriam Teschl

Within the philosophical tradition of personal identity, Derek Parfit’s

(1986) puzzling cases are quite famous. He invents imaginary stories such
as a person being teletransported from Earth to Mars. A scanner records
and afterwards destroys the brain and body of the traveling person, and
sends this information by radio at the speed of light to a machine on Mars
that makes an exact organic replica of this person out of new matter. This
travel takes a few minutes during which the person on Earth loses con-
sciousness after having entered the teletransporter and pushed a green
button to start the scanning process. It is in the replica that the person will
regain consciousness on Mars. The interesting question now is: if the
person entering the teletransporter were ourselves, would we push the
green button and think that the replica is ourselves?
Parfit’s suggestion is that these puzzling cases help us find out what
makes us consider that we remain the same person: “We discover our
beliefs about the nature of personal identity over time” (Parfit 1986: 200).
This is indeed an intriguing question. Once we start thinking about the
nature of personal identity or the nature of our self, we come soon to the
point where we have to reconsider the person as an organic entity, a think-
ing being with certain desires and aims, traditionally said to possess a soul,
self, or similar (metaphysical) things. Are we all these aspects at once, are
we a metaphysical being, or can we simply be reduced to organic functions
of the body and the brain? Once we answer these questions, we will also
discover that according to what we think we are, we will see ourselves con-
fronted with a different space of possible actions, with different possi-
bilities to change ourselves or the world around us, or even with different
aims to strive for.
The subject of identity or self has received some attention in economics.
Economists either critically evaluate the relationship of a person to her
social identity (Sen 1999, 2004) or model the influences of social identity
on people’s behavior (Akerlof and Kranton 2000, 2002). However, it is
John Davis’ merit to have brought the philosophical discussion of people’s
personal identity into economics (2003). He explains that philosophers
look out for a criterion of “identification” to distinguish people from each
 The impact of identity on economics 85
other at one moment in time, and that this criterion should also serve as
“re-identification” of the selfsame individual over time. He then applies
these two criteria to the neoclassical and mainstream conception of the
economic agent and claims that it fails to present a view of a continuous
and distinct person. He proposes his own conception of a socially embed-
ded individual. In this view, each individual has the capacity to freely self-
impose specific group memberships, which distinguishes her from others.
If the individual has achieved the capability of consistently self-imposing
memberships, she can be re-identified through time. However, many
people may not have this capability. Social policies may have to be
directed so that individuals learn to distinguish themselves from others.
Davis’ contribution to economics is that he takes an explicit stand in rela-
tion to what an individual is and thus develops his own conception or
model of identity.1
In this chapter, I will argue, contrary to Davis, that economics does not
fail to represent an economic agent with an identity, but that the economic
agent is based on implicit models of identity. These models can be brought
to light. We then have, following Parfit’s example, to analyze if these
implicit models of identity fit with our beliefs of the nature of identity or the
self. However, this means that we, as economists, must become aware of our
beliefs according to which we measure a model’s “fitness” to represent an
adequate identity model. Once we take a stand, as Davis did, and formulate
what we believe a person is, we have to decide if we think that a model that
fails to represent our belief is still a “good model” with which economic
analysis can be done and which, arguably, influences social policy decisions.
To guide our beliefs about identity or the self, I suggest looking at
philosophers who engage in the analysis of personal identity. However,
philosophers not only guide and stimulate our thought about identity and
what it means to be a person. Philosophical accounts of personal identity
can also serve as a tool to detect the implicit identity models in economics.
That is, if we compare philosophical models of identity with economic
models, we will recognize parallels between the ways in which philo-
sophers and economists see the person. I will indicate these parallels
between the philosophical and the economic conception of the individual.
However, even philosophers have no ready-made answer concerning per-
sonal identity. One also has to explore the coherence and subtlety of the
philosophers’ ways of thinking. But this helps us become aware of our
beliefs about identity, which then can enrich economic theory. Thus,
making identity an explicit aspect of analysis is an issue to be taken seri-
ously in economics. The particular characterization of the economic
agent’s identity will have consequences on the representation of people’s
behavior and choices. Furthermore, according to the identity model
adopted, social policy recommendations will differ.
In the next section, I will introduce the philosophical discussions of
personal identity by looking at Harry Frankfurt’s (1971) paper “Freedom
86 Miriam Teschl
of the Will and the Concept of a Person.” Frankfurt tackles the question of
what makes a person a person. Second-order desires form a person’s will,
and are the characteristic feature of being a person (Frankfurt 1971: 7).
Frankfurt’s ideas have indeed received attention within economics.
Hirschman (1984), notably, links Frankfurt’s ideas to the conception of the
economic agent by comparing it to the standard model and its develop-
ment made by George Stigler and Gary Becker (1977). I then explore
Terence Penelhum (1971), who extends Frankfurt’s reflections to consid-
erations about being a self-identical individual over time and, more specifi-
cally, to the issue of conflicting desires within the individual. Penelhum’s
approach can be compared to the economist’s renewed interest in people’s
conflicting desires represented in terms of their “hyperbolic preferences”
such as in Roland Bénabou and Jean Tirole (2002). And finally, I will
analyze a very recent paper by Pierre Livet (2004), who discusses the pos-
sibility of changing one’s identity over time given conflicting desires and
incoherencies between different aspects of one’s identity. I will also
compare Livet’s identity model to Bénabou and Tirole’s conception of the
economic agent. The last section concludes with a short discussion of the
outcome of our search and understanding of identity models within
economics.

Evaluation of preferences
Frankfurt begins his paper with the claim that simply identifying a person
with an entity to which one ascribes some form of consciousness and some
corporal characteristics is not identifying a person at all because “there are
many entities besides persons that have both mental and physical proper-
ties” (Frankfurt 1971: 5). The essential difference for him between a
person and some other entity is the structure of a person’s will. He draws a
distinction between first-order desires, or what people want, and second-
order desires, i.e., what people want to want. However, a second-order
desire does not yet say anything about the person’s will or effective desire
that guides her behavior. A person might have a second-order desire
without experiencing any first-order desire: a physician who treats drug-
addicted patients might want to have the desire for taking drugs in order
to better understand drug addicts without really wanting to take drugs.
But a second-order desire can turn into a person’s will or second-order
volition if she desires that a specific existent and experienced first-order
desire becomes her motive of action. The person’s second-order volition is
fulfilled when the person is indeed moved by the desire she wants to have.
It is not fulfilled if the person is moved by some unwanted desire. Then,
“what he wants at that time is not (in the relevant sense) what he wants to
want” (1971: 10).
Frankfurt calls “wantons” (1971: 11) those beings that have first-order
and even second-order desires, but no second-order volitions. That is,
 The impact of identity on economics 87
wantons do not care by which desire they are driven. But a wanton is nev-
ertheless rational by deciding how to do what she wants to do. However,
she will not establish any desirability over her wants themselves. A person,
on the other hand, employs rationality to evaluate the different desires by
which she is driven and to decide over their respective desirability. Thus,
what distinguishes a person from a wanton is not reason, as such, but will.
A drug addict therefore who does not care about taking drugs or not
taking them is a wanton. On the other hand, a drug addict, who knows
herself to be driven by her addiction, but wants to be guided by the desire
not to take drugs, is a person with the will to refrain from taking drugs. But
this person is only an unwilling addict because, finally, she is driven by a
desire that is not her will and takes the drugs (1971: 12). Thus, whereas the
unwilling addict identifies through her second-order volition with a specific
first-order desire, namely the one to refrain from taking drugs, the wanton
addict has no identity other than the first-order desires (1971: 13).
Thus, for Frankfurt, a person is a being endowed with the capacity to
reflect and to evaluate her own desires. But what actually are these desires?
First-order desires seem to be unrefined drives, inclinations, and urges, and
nothing indicates that desires might be linked to some form of joyful living.
Second-order desires distinguish themselves from first-order desires only by
being desires about them. These second-order desires though seem to be
desires without power. Only those that become second-order volitions will
have the power to turn first-order desires into effective desires of action. But
Frankfurt does not explain when and how second-order desires turn into
second-order volitions and thus start differentiating persons from wantons.
“[T]he essence of being a person lies not in reason but in will” (1971:
11) writes Frankfurt. This means that wantons have no means to differen-
tiate between different desires. One might say that they have no stand-
point, be it moral, social, personal etc., according to which they would
make a distinction between their wants. Persons have a will that decides
which of the first-order desires should be the effective one. This will could
be considered to be a specific standpoint from which people judge their
desires. However, where do these standpoints come from? Of course, we
can imagine that the will has some moral or social origin. However, a com-
plete account of the person would then require that the person is able to
step back and to evaluate her second-order volition. Otherwise this person
would be a “second-degree wanton” who does not care about the desir-
ability of her will. This idea of yet even higher-order desires could prolong
Frankfurt’s approach indefinitely. Frankfurt (1971: 16) acknowledges this
difficulty but claims that common sense ensures that the individual finally
identifies with some higher-order desire. But even if this response would
give a satisfactory argument, we might claim that people do not choose
their identification once and for all. Desires probably change over time
and with them people’s identifications. How can we then re-identify the
person as the same person if her identifications changed in the meantime?
88 Miriam Teschl
Interestingly, Albert Hirschman (1984) brought Frankfurt’s discussion
into economics exactly because he claims that it might be adapted to
account for people’s changes in their preferences. He accounts for two
types of preference changes. One is an unreflected change in people’s pref-
erences understood as people’s tastes. Following Frankfurt’s terminology,
Hirschman names these changes wantons (1984: 89). He claims that stan-
dard neoclassical economics only accounts for wanton changes. On the
other hand, there may be reflected changes in people’s preferences. These
changes are preceded by the formation of metapreferences and “much
argument has obviously gone on within the divided self . . .” until these
changes have been made (1984: 90). These changes refer to people’s
values and not simply to their tastes.
Given this distinction between wanton and nonwanton changes in pref-
erences, Hirschman understands Stigler and Becker’s (1977) attempt to
avoid the simplistic notion of preference changes in standard neoclassical
economics. However, Stigler and Becker transform people’s changes in
preferences to changes in their behavior influenced by a modification in
their price and income structure. Hirschman therefore concludes that they
do not account for Frankfurt’s idea of reflective evaluation. “May I urge,”
he says, “that changes in values occur from time to time in the lives of indi-
viduals, of generations, and from one generation to another, and that
those changes and their effect on behavior are worth exploring – that, in
brief, de valoribus est disputandum?” (1984: 90).
Hirschman does not propose an alternative model of an individual with
the capacity to change his values. This is unfortunate because his enthusi-
astic reference to Frankfurt does not seem to be justified given that Frank-
furt actually did not consider any change in values (or the will) over time.
Furthermore, Hirschman’s claim that economists focused on wanton-pref-
erence changes seems peculiar. Standard economics assumes it is dealing
with unchanging preferences because it does not have a framework that
allows an account for changes in preferences (Stigler and Becker 1977: 76).
Traditional economists leave changes in preferences to be explained by
sociologists or biologists. What Stigler and Becker, therefore, want to
introduce is an economic framework in which people’s behavior is not a
simple outcome of wanton preferences, but the outcome of economic tools
such as changing prices and incomes.
However, they do not simply take price and income changes as the
source of changes in people’s behavior. Their main innovation is that,
whereas in traditional theory, people are supposed to express their prefer-
ences on standard market goods and services, Stigler and Becker’s
economic agents express preferences over household-produced “com-
modities,” such as health, social standing and reputation, and pleasures of
the senses “that [people] produce with market goods, their own time, their
skills, training and other human capital, and inputs” (1977: 77; see also
Becker 1996: 5). Thus, Stigler and Becker claim that market goods and
 The impact of identity on economics 89
services are means to produce one’s own preference satisfaction. People
express preferences or tastes over commodities. What matters are not
those means, which may vary over time according to price and income, but
the satisfaction of tastes, which they suppose not to change over time and
among persons. “On this interpretation one does not argue over tastes for
the same reason that one does not argue over the Rocky Mountains – both
are there, will be there next year, too, and are the same to all men” (1977:
76). It appears, therefore, that even Stigler and Becker develop some sort
of higher-order approach in which they distinguish simple goods from
higher-order goods or commodities. And indeed, where Frankfurt sees
common sense in people’s eventual identification with certain desires,
Stigler and Becker put forward the Rocky Mountains in order to stop
short any sort of evaluation or reflection on those commodities. However,
the difference between Frankfurt and Stigler and Becker is that the latter
are producing a model of a rational drug addict where the former only
sees an unwilling one. That is, it appears to be more coherent in Stigler
and Becker’s approach not to revise one’s tastes than not to revise one’s
will in Frankfurt’s identity model. The economic agent of the former
always behaves rationally whereas the latter might find himself torn apart
by competing interests and drives. However, it is also evident that Stigler
and Becker’s rational agent is dependent on many external or exogenously
given factors, such as prices and income, but also the agent’s endowment,
his anticipation of future utility, and thus his time preference, and his price
elasticity of demand. Evidently, social policy measures will vary according
to the model of identity employed. Frankfurt’s model would demand the
provision of means that help the individual to live according to his will
whereas Stigler and Becker’s model demands, for example, long-term
changes in price structures to which the individual can rationally react.

Processes of achieving outcomes

Frankfurt’s ideas have, of course, had some philosophical responses. One
of these is Terence Penelhum’s “The Importance of Self-Identity.” Penel-
hum adds some interesting aspects to Frankfurt’s considerations, espe-
cially by introducing the concept of self-identity. “Roughly, as I
understand this very vague notion, someone has achieved self-identity (or
‘found himself’) if his choices and aspirations are integrated in a certain
way. This sort of integration is achieved if the desires that move him to act
are desires that he acknowledges and wishes to be moved by . . .” (Penel-
hum 1971: 669). Consequently, if one may achieve self-identity by integra-
tion, one may also become self-alienated if this integration fails to happen.
If a conflict of desires arises, a person can follow different patterns of
behavior. She can, first of all, take an evaluative stand towards herself and
recognize the elements that produce the conflict. Consequently, she can
either strengthen her will by not giving in to the dominant desire, but to
90 Miriam Teschl
the one she chooses to have, or, she can change her will so that it coincides
with the desire that is driving her. Second, the person could also try not to
solve but to conceal her conflict. In that case, she engages in some form of
self-deception, for example, by not admitting to herself that she acts
according to a desire that she does not want to have. The person could
also admit being driven by a specific desire but attribute the cause of this
desire to some external factor or influence. Penelhum calls the first of
these two patterns of behavior in case of conflict the “truthful” or “authen-
tic response,” the second the “dishonest” or “inauthentic response” (1971:
670–1).
The solution of conflicts takes time. But once the conflict is solved,
people might feel like “a new man” and they may look back with “dis-
taste,” “remorse” or “embarrassment” about their previous inauthentic
responses (1971: 672). On the other hand, it can also happen that conflicts
cannot be solved even though a person truthfully tries to do it. Then the
individual is looking back into her past pre-conflict “personality” with
some sense of pleasure and would prefer it to her present situation. Thus,
solving or not solving conflicts may engender “marked changes in person-
ality.” Depending on the kind of conflict or on the outcome of the conflict,
an individual will identify more with her past or present personality.
Indeed, “[t]he alienation one can feel toward one’s past personality and
actions, though not logically identical, can generate responses analogous
to those generated by divisions within one’s present personality” (1971:
672). However, a person can also identify herself with some intended
future personality that she hopes will already have successfully resolved a
present conflict. But with whatever aspects the individual identifies herself,
those with which she does not identify are equally part of her. To take
identification as the sole criterion for a person’s identity would therefore
be not only a very subjective matter but also too volatile as a continuous
criterion because it changes over time according to successful or unre-
solved conflicts. It thus is important to have a criterion of identity “against
which the truthfulness of a person’s explicit or implicit judgments about
himself can be measured: a standard, one might roughly say, or psycholog-
ical objectivity” (1971: 673). This criterion, Penelhum says, can be a
person’s bodily continuity. Even if the person does dissociate herself from
past actions and desires and does not identify herself with them any more,
there is no reason to think that non-identification is a criterion for non-
identity. All identifications and non-identifications reside in the same
body.
Penelhum’s approach thus adds substantial ideas to Frankfurt’s paper.
First of all, it leaves behind the rather crude distinction between persons
and wantons. Here, people do not only take an evaluative stand towards
their own desires, but they also engage in self-deception or behave deliber-
ately like a wanton. A Penelhumian drug addict, for example, is not simply
an unwilling drug addict but is able to acknowledge her addiction and to
 The impact of identity on economics 91
undertake a treatment. On the other hand, she might equally deny being a
drug addict or attribute her addiction to external circumstances and con-
tinue to live with this self-destructive behavior. Thus, Penelhum’s person
does not have some sort of “magic will” but engages in more or less
serious elaboration of internal conflicts (probably) with the aim of achiev-
ing self-identity.
In fact, one of Penelhum’s weaknesses is that he does not elaborate in
more detail why people should solve their desire-conflicts. He claims that
being self-identical does not yet imply “contentment” (1971: 670). Indeed,
the person might feel embarrassment and remorse about her inauthentic
responses to conflicts in the past once she resolves them. But has a person
really resolved her conflicts if she feels guilty about them? A person might
have resolved a desire-conflict against a certain background or according
to a specific moral or social standpoint. But if she feels remorse and
embarrassment about her past personality, did she really solve her desire-
conflict? One might indeed assume that in this case, the standpoint in
question according to which she assesses her internal quarrel created a
new level of conflict. Hence, a second level of evaluation would be needed
to evaluate not only her immediate conflicts but also those associated with
different points of assessment. This, therefore, would mean that a person’s
identifications concern a broader view of their personality, including
meaning or justification they give to their life as a whole and not simply to
their resolved conflicts at a moment of time. Again, non-identification
alone is certainly not a criterion for non-identity. However, if a person is
concerned with self-identity, her body alone, as Penelhum suggests, is cer-
tainly not a sufficient criterion to account for her continuous identity over
time. It seems that both aspects contribute to a person’s identity.
Penelhum’s concept of the person touches certain aspects that have also
been considered by economists. The concern regarding self-deception,
especially, begins to find some echo in economics. One form of economic
self-deception is associated with the assumption that people have strong
preferences for the present. This translates into self-control or weakness of
the will problems. People thus have to engage in self-deceiving strategies
to make sure that they will keep their motivation to execute some tasks
when the moment arrives to do them.
Economists Roland Bénabou and Jean Tirole (2002), for example,
present a standard utility-maximizing individual who is concerned with the
benefit he may achieve if he engages successfully in a certain activity at a
later moment of time. However, the individual will do this activity only if
he is confident enough about his ability to successfully complete the task.
But he does not know his ability exactly. The individual’s weakness of will
is represented in terms of quasi-hyperbolic preferences, which means that
the individual’s marginal rate of substitution between two periods
suddenly increases at the moment of carrying out a certain action. Hence,
if at the moment he should undertake the task he is not confident enough
92 Miriam Teschl
about his ability, he will procrastinate and continuously postpone carrying
out the activity. Bénabou and Tirole divide the individual into three time
slices, referring respectively to the pre-undertaking-task self (self 0), the
undertaking-task self (self 1) and the benefit-receiving self (self 2). Prior to
doing the task, the individual (self 0) receives a signal (or looks out for a
signal) about his (self 1’s) ability. The individual then takes a critical stand
towards his own desires and abilities and decides what to do with the
information about his ability that will either positively or negatively affect
his level of self-confidence. The main aim is to receive a benefit, that is, to
experience contentment at a later date. However, to successfully achieve
contentment, the individual can give himself authentic or inauthentic
information about his true ability. When the individual is confident
enough to do the task, any positive information about his ability will be
“vacuously” beneficial to him and does not change his behavior or motiva-
tion to do the task. But if the individual is not skilled enough to do the job,
he will make sure to remember correctly the information about his ability
because it would be better to be less confident and not to undertake the
task. The individual will, however, try to forget the information he
receives if it would suppress his self-confidence to such a degree that he
will start postponing the job, even though his ability would be high enough
to undertake the job successfully. Therefore, whereas in the first two cases,
authentic information is always beneficial for the individual, in the last
case, the individual is better off being inauthentically informed because
otherwise he would procrastinate and demonstrate weakness of will.
Bénabou and Tirole thus consider how the individual would behave if
he wants to achieve contentment but knows himself to be prone to pro-
crastination. In that case, Penelhum’s individual would assumingly like to
achieve self-identity by trying to modify his desire to procrastinate. It thus
seems that one of the differences between Penelhum’s and Bénabou and
Tirole’s individual is that one tries to integrate different selves whereas the
other is some multiple self, changing his identification through time from
self 0 who wants to undertake a certain task, to self 1 who has a tendency
to procrastinate and not to undertake the task, to self 2, who finally enjoys
contentment if self 1 has been successful. However, Penelhum would say
that the change in identification is not yet a reason not to consider the
individual as the same individual through time. It suffices to have an iden-
tity criterion to which those different identifications refer. Penelhum
thinks it is the body. In Bénabou and Tirole’s approach it can be con-
sidered to be the person’s ability, which is given and remains constant
throughout time.2
The key difference between Penelhum’s and Bénabou and Tirole’s con-
ception of the person seems to be the aim the person is striving for.
Whereas Bénabou and Tirole’s individual achieves some benefit once he
successfully accomplishes some specific task, Penelhum’s individual
achieves some benefit once he solves his internal conflicts. The first maxi-
 The impact of identity on economics 93
mizes some utility; the latter maximizes his integration or “sense of iden-
tity.” Bénabou and Tirole’s individual chooses to act in order not to pro-
crastinate and not in order to resolve his desire to procrastinate. But this is
exactly what Penelhum would call an inauthentic response to internal
desire-conflicts, which leads to self-alienation rather then self-identity. The
difference with the economic agent, furthermore, is that Penelhum’s indi-
vidual is not only interested in the outcome, but also in the process of
getting there. People feel integrated if they are in harmony with their
desires and if they achieved harmony in an “authentic” way. This means
that the outcome of their actions will affect people’s sense of identity, but
that people’s sense of identity will also affect the outcome; the way in
which internal conflicts are solved to achieve self-identity will have con-
sequences on people’s behavior. Taking into consideration the importance
of self-identity will arguably have effects on social policy measures to the
extent they might differ from simple utility maximization under given cir-
cumstances. Indeed, not all individuals will want to manipulate their
memories in order to achieve the best possible outcome, but would want
to overcome their tendency to procrastinate. Hence, we might believe that
processes and the way one achieves outcomes matters in a person’s life
and that the feeling of self-identity is an important ingredient in terms of
what it means to be a person.

Identity and change

Over the years, there have been many philosophical contributions trying
to explain personal identity by finding the right criterion that allows the
person to be re-identified through time. Penelhum proposed bodily con-
tinuity as the criterion of identity. But this seems to be an insufficient crite-
rion if identification and self-identity matter. Identity seems to require
more than bodily continuity.
Indeed, philosopher Pierre Livet (2004) argues that one identity crite-
rion alone is too weak to account for personal identity over time. He thus
proposes to consider a combination of different criteria. Furthermore, he
argues that a characteristic feature of what it means to be a person is that a
person has the capacity to change herself over time. A model of identity
must then bring together two a priori mutually exclusive aspects, namely
invariance and change. Only the integration of what Livet calls different
“identity functions” offers a satisfying account of personal identity. The
identity functions that Livet proposes are organic identity, mnemonic
identity, identity of personality, and social identity. Together, these iden-
tity functions contribute to a continuous identity of the selfsame person
over time.
Organic identity accounts for the continuity and change of a person’s
body. In this body resides all other identity functions. First of all, it con-
tains a person’s mnemonic identity. Mnemonic or psychological identity
94 Miriam Teschl
consists in the various memories a person retains of her experiences over
time. The identity of personality describes a person’s character or tem-
perament. It can be represented by a list of priorities (or preferences)
according to which the person acts. Finally, social identity can be thought
to be represented by a list of social positions in various social domains that
the person occupies and with which the person identifies herself. Thus, all
these four aspects, namely body, memories, personality, and social iden-
tity, contribute to a continuous identity of the same person. However,
these four criteria or identity functions do not remain the same over time.
They change, but not all of them will change at the same time. While some
of them change, others will remain unchanged and this thus forms a chain
of changed and unchanged identity – criteria that account for a person’s
continuity over time.
But how can it be explained that a person has the capacity to change, at
least to some degree, herself? Livet assumes that a person can “influence”
the continuity of her identity by changing particular aspects or “identity
functions.” For example, a person might want to change her body by
fasting and dieting. She can also willingly influence to some degree the
content and quantity of her memories. She could also decide to change her
personality or her social identity. However, there must be a reason for a
person to change particular identity aspects of herself. Without a reason,
no change will be willingly induced. Livet argues that a reason for change
will be a certain conflict between her personality and her social identity.
Indeed, a person might act either according to her personality or character
and follow her personal priority-order. Or she might adopt priorities asso-
ciated with her social identity or social status. It therefore might happen
that consequences of certain actions that are carried out on the basis of
this person’s personality or list of priorities “hurt” her social identity, or
vice versa. For instance, a person might feel uncomfortable with certain
social norms associated with her position in a particular social domain.
This distress will be a reason for change. She might thus act on the basis of
her personality or priority order and change her social positions (by
changing her job, living in a different town, etc.). This means that the
person adopts the point of view of the “hurt” identity aspect and tries to
change the identity function that is at the origin of the felt uneasiness.
Once she changed her social position, she re-established coherence
between the different aspects of identity functions and achieved, as Penel-
hum would say, integration and self-identity.
Personal identity thus is the interplay between the different identity
functions that guarantees a person’s continuity over time. The principle of
change implies that one identity function remains unchanged while being
the originator of change in the remaining identity functions. Hence, per-
sonal identity has been “decoupled” into two levels, one that guarantees
re-identification and one that allows for change. This “decoupling” is the
reason why Livet does not have to invoke higher-order systems to under-
 The impact of identity on economics 95
stand continuity and change in personal identity. Their difficulty was that
they could not explain why and how higher orders change other than by
supposing a yet even higher order of preferences or desires. In Livet’s
model however, personality and social identity do have the power to influ-
ence each other and to change personal identity over time. No higher
order comes into play.
How does Livet’s model of identity blend with the economic model? It
certainly is not applicable to Stigler and Becker’s model, which considers a
stable preference ordering for commodities and is thus in opposition with
Livet’s approach, which argues that revision of preferences (or identity
aspects) is possible. What about Bénabou and Tirole’s model in which the
individual tries to modify his memories according to his tendency to pro-
crastinate? We might indeed conceive of a person with a given identity of
personality who has the preference or priority to achieve a certain benefit.
Knowing her weakness of will, the personality function of the person will
try to modify her mnemonic function in order to make sure that she will at
a later date complete a specific task that is necessary to achieve the desired
outcome. Self 0’s personality identity will therefore distort the information
about her ability to assure that self 1 does the action. But even though the
mnemonic identity between self 0 and self 1 changed, both temporal
phases belong to the same person as the remaining identity functions and
especially the identity of personality did not change.
However, in a modified version of their model, Bénabou and Tirole
introduce the idea that not only the memory of a received information can
be modified by self 0, but that at the moment of doing the task, self 1 real-
izes that self 0 might have modified the information and will not take it at
face value. “The resulting structure is that of a game of strategic communi-
cation between the individual’s temporal selves” (Bénabou and Tirole
2002: 875), which will decide about the outcome of doing or not doing a
specific task. In Livet’s terms, this means that self 0 modifies her
mnemonic identity based on a given personality identity. However, self 1
may distort the mnemonic function once more, as she may not take her
memories for granted. But on what basis can she do this? One might
assume that self 1 modifies her memories again on the basis of her person-
ality. But her personality did not change over time. Presumably, only a
change in personality would constitute a good reason to change once again
the person’s memories on the basis of her personality. But nothing obvious
changed between self 0 and self 1 other than that time has passed.
However, if it is the passage of time that makes the personality suddenly
change, then this change can be considered as ad hoc and would introduce
a discontinuity in the person’s identity. In this case, the change in person-
ality could not be assured by a chain of re-identification of unchanged
identities, which were at each time the originator of the respective changes
in the other identities. Self 0 and self 1 do not seem to represent two tem-
poral phases of the same individual. It appears that this time we are in fact
96 Miriam Teschl
confronted with a multiple self rather than with a coherent and continuous
person. Indeed, Bénabou and Tirole’s claim that their model “allows us to
unbundle the ‘self that knows’ from the ‘self that does not know’ ” (2002:
885) seems to bring an end to the continuity of personal identity of a self-
same individual.
Bénabou and Tirole’s model gives insights into welfare analysis by
helping to ascertain when it would be better for an individual to apply a
strategy of active self-esteem maintenance and to manipulate memories or
to accept who you are (2002: 902) and stick to authentic information. These
are certainly interesting aspects to consider and present a new domain of
research within economics. However, their policy recommendations are
founded on a very specific view of the identity of the individual and on the
way the individual changes herself over time to come to terms with her
weakness of will. Rather than present an individual who is able to change
the source of her internally felt incoherence between different temporal
selves that belong to the same person, this model depicts the strategies of
competing selves whose only coherence comes about via self-deception by
manipulating memory contents. An important aspect of what it means to be
a person is an individual’s internal coherence: being capable of changing the
self to overcome detrimental desires without self-deception. Social policies
should recognize this and enhance exactly this capacity of change.

Conclusion
Looking at the philosopher’s way of dealing with questions of personal
identity and what it means to be a person helped us to recognize that even
economists implicitly engage in a more or less developed model of identity.
However, it has also made it clear that formulating explicit models of iden-
tity within economics would have consequences, not only on how to model
people’s behavior, but also on social policy measures to be based on those
specific perspectives of the person taken. From the standard neoclassical
utility-maximizer, to Stigler and Becker’s contribution of stable preference
orderings over commodities to Bénabou and Tirole’s characterization of a
time-inconsistent economic agent, we saw that the economic agent falls
short in, first, being an individual who is able to reflect on his values or
preferences, and, second, in being an individual who is also concerned
about the process of achieving a certain desired outcome and not only in
the outcomes themselves. In some cases, we might add a third shortcoming:
the economic agent is represented as a multiple self, a self for each desire,
who can achieve coherence only by playing strategic games among those
selves. These three shortcomings could be considered to be contrary to fun-
damental beliefs about what we think a person is and how his identity
evolves over time. It would therefore be of interest to engage in economic
research based on a model of the economic agent that takes account of our
beliefs about a person’s identity over time.
 The impact of identity on economics 97
Notes
1 For a discussion and critique of Davis’ identity model see Luchini and Teschl
(2005).
2 Of course, one could also imagine that the ability changes according to the fre-
quency with which the individual engages in a certain activity. This would add a
further layer of difficulty in re-identification.

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Becker, G.S. (1996) Accounting for Tastes, Cambridge, MA: Harvard University
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Bénabou, R. and Tirole, J. (2002) “Self-Confidence and Personal Motivation,”
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Davis, J.B. (2003) The Theory of the Individual in Economics: Identity and Values,
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Frankfurt, H. (1971) “Freedom of the Will and the Concept of a Person,” Journal
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8 The relationship between
consumption and production
Conceptualizing well-being inside
the household
Elizabeth Oughton and Jane Wheelock

This chapter aims to develop the social economics paradigm with respect
to the household as an institution.1 Our earlier empirical work on vulner-
able household livelihoods has uncovered the facts, both that consumption
capabilities may be important in demonstrating fitness to participate in
production activities, and that production activities in small business
households may provide consumption benefits, for example to those who
see themselves as entrepreneurs. This chapter is based upon the presump-
tion that the fundamental economic problem is provisioning the household
(Polanyi 1957). It explores the extent to which well-being within the
household comprises production as well as consumption elements. In what
ways does this help us to understand the interdependencies between the
well-being of individuals and of the household? We go about exploring
this question through closer examination of the interaction between the
instrumental and intrinsic values of work.
Certainly well-being incorporates values with respect to the way we (or
I) go about being-and-doing-in-the-world, arising from the paid and
unpaid work required for a household livelihood. We suggest, then, that
finding a space for intrinsic motivation (doing something for its own sake)
is an essential component of well-being. In conventional economic terms,
consumption is considered a good, providing positive utility, so that spend-
ing income becomes a proxy for obtaining well-being. In contrast, involve-
ment in production is a disutility, a sacrifice of well-being. The orthodox
calculus assumes that both consumption and production are governed by
formal rationality. When people behave by the rules of formal rationality
they are calculating the best way of meeting given needs by quantifiable
means; they are behaving according to instrumental values (Weber 1968).
But if we look at production and consumption in terms of social rela-
tions, then we can introduce substantive rationality as an additional ana-
lytical tool. As we have said elsewhere, “Substantive rationality is the use
of particular values to determine actions” (Wheelock and Oughton 2001:
136). When people act in terms of substantive rationality, there is space for
intrinsic values to be included. A broader theoretical perspective views
consumption and production holistically, as complementary rather than
 Conceptualizing well-being in the household 99
oppositional. Both production and consumption incorporate social rela-
tions, so that both can be understood in terms of social relationships; rela-
tionships that are embodied in work.
This chapter will look at the interconnections between the formal, cal-
culative rationality seen as typical of (alienated) labor market relations,
and substantive rationality. In orthodox economic terms, substantive
rationality is often seen as the blueprint for relations inside the household
(see, for example, Reid 1934; England 1993). We want to suggest that it is
more appropriate to investigate the mix of formal and substantive ration-
ality which guides people’s actions in both market and household spheres.
One way of exploring what might otherwise be a very abstract discussion is
to focus on the ways in which household and individual well-being interact
in terms of caring. Caring is a key household activity that can use a varying
mix of internal domestic and outsourced market resources, and is of fun-
damental concern to feminist economics (Folbre 1994; Himmelweit 2000).
Examining the creation and distribution of intra-household well-being
requires consideration of (gendered) power relations as well as interde-
pendencies of well-being inside the household. In concluding, we aim to
contribute to the discussion (e.g., Gasper and van Staveren 2003; Iverson
2003) on constructing a bridge between Sen’s capabilities framework
(which provides a basis for evaluating inter-household well-being) and its
application to the distribution of intra-household well-being.

What is household provisioning?

We begin with household provisioning (or householding) as this is at the
heart of the economy and it is central to the social economist’s construc-
tion of the economic problem. Stanfield provides a clear exposition of this
approach, drawing on Karl Polanyi. Polanyi offers an understanding of
market society as the spread of formal market rationality, where the
breakdown of social relations “lies in the lethal injury to the institutions in
which . . . social existence is embodied” (Polanyi 1957: 157). The function
of the economy is to provision society, with the economy as an instituted
process which secures social reproduction. J.R. Stanfield (1986) emphas-
izes the substantive nature of economic activity, as revealed through
methods grounded in concrete empirical analysis. This contrasts with both
the structuralist approach of Marxism, and the formalism of orthodox eco-
nomics. For the social economist, it is the provisioning of lives rather than
the action of choice that therefore underpins the economic system.
Important to our argument is that implicit within this approach is a rejec-
tion of the idea of insatiable wants. The economic dynamic of household
provisioning is that of sufficiency, rather than efficiency or optimization.
The substantive value standard of sufficiency is social reproduction
(O’Hara 1995). That is to say, a flourishing society is maintained as a going
concern. If social reproduction is the value standard, then distribution
100 Elizabeth Oughton and Jane Wheelock
becomes extremely important in understanding economic achievement
(Stanfield 1982).
In orthodox economic terms, household provisioning processes divide
between production and consumption with distribution determined by the
market in which a formal rationality is assumed to operate. In contrast,
from an institutional economics perspective, production, consumption, and
distribution are subject to a mix of substantive and formal rationalities.
Let us work through the institutional approach step by step before going
on to look at how these work out in practice. Institutionalists conceive of
all economic activity – including household provisioning – as taking place
within a socio-cultural context. Household provisioning draws on
domestic, market, and state resources, nested within this complex environ-
ment (Wheelock 1996). Household provisioning includes production for
use and not gain. True, markets and money are still significant for the
household, but they are not the only form of economic relation. As eco-
nomic activities within such a provisioning process, production and con-
sumption cannot be meaningfully distinguished. It is, however, important
to realize that the socio-cultural context is not fixed and that change may
be more or less rapid according to historical period. For example, ideas
about appropriate childcare changed quickly in Britain following World
War II, encouraged by government policies assuming household income to
be based on a male breadwinner wage (Lewis 1984). A significant part of
the cultural context, then, is the activity of the state which may also play a
direct part in inter-household distribution (as when child benefit is made
payable to mothers in person).
Household provisioning is a process of building up livelihoods that
shape lives. In an earlier study (Oughton et al. 2003), we developed the
institutional framework through empirical work exploring livelihood cre-
ation in rural microbusiness households in Britain and Norway. There was
evidence from the majority of households that the ways in which members
wanted to live their lives limited the extent to which economic maximiza-
tion determined their livelihood choices. Decisions within the Norwegian
businesses in particular were guided by values associated with family,
place, and tradition rather than with maximizing income.2 This example
helps us to understand the complexities of the household as an institution
and illustrates household provisioning in the light of substantive ration-
ality. A further example of these complexities is Rhoda Halperin’s analysis
of an Appalachian community. She shows that “the coordination, timing
and scheduling of different economic activities (production, distribution
and consumption) by people who move in and out of differently organised
economic institutions” (Halperin 1991: 96) is a key feature of household
provisioning.3
Our arguments now turn to focus upon the roles of substantive and
formal rationality in household economic provisioning, and the changing
relative strengths of these rationalities within the broader institutional
 Conceptualizing well-being in the household 101
environment. Let us first consider the orthodox distinction between pro-
duction and consumption, where production performs the instrumental
function of bringing in a household income and consumption involves the
using up of that income. In this very simplified model, both production and
consumption are subject to formal rationality. Within orthodox economics,
this model has been updated with the recognition that unpaid production
activities take place within the household and that the distribution of con-
sumption goods within the household is not just based on a calculus of
economic gain (Mincer 1962; Becker 1965). Additionally, we may consider
work – which in orthodox terms has been regarded as purely instrumental
– as an activity which has intrinsic value in its own right and therefore con-
tributes to well-being.4
Social economics takes this further. Figure 8.1 tries to capture the more
complex nature of the social relations which we hypothesize underpin
household provisioning. There are three elements to this complexity. First,
production (P) and consumption (C) are not regarded as simply distinct
activities. We represent this in the diagram as a fuzzy and porous bound-
ary. Production may have intrinsic as well as instrumental value, as when a
job is enjoyed for its own sake as well as for the payment it generates
(Lane 1991). For example, we suspect that recent industrial action for
higher pay by university staff in the United Kingdom in part arises from
the changing nature of academic work. As academic institutions shift
towards a more market-based model of formal rationality, the substantive
rationality that applied to people’s understanding and enjoyment of their
work is being destroyed. Similarly, in the case of consumption, although in
a completely different context, a demonstrated capacity to spend on

Household provisioning, which

involves both production (P)
and consumption (C)

(B) The socio-economic C

context of provisioning

Formal rationality
Substantive rationality

Figure 8.1 The social relations of household provisioning.

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

The cultural context of householding

We return now to the larger picture of household provisioning and our
concern with its place within the cultural environment. Since household
provisioning in Polanyi’s model is as production for use rather than for
gain, markets and money are accessories. At the same time, Polanyi (1957)
argued that the historical spread of market relations weakens social rela-
tions, disembedding economic activity from its social context. Maintaining
consumption rather than just maintaining the worker becomes the concern
of the market economy, and market relations thereby enter the home, cre-
ating invidious demand through constant dissatisfaction (Veblen 1912;
Galbraith 1962; Baran and Sweezy 1968; Smart 2003). An example would
be the spread of ownership of “white goods” such as refrigerators and
washing machines during the 1950s and 1960s, VCRs in the 1980s, and per-
sonal computers in the 1990s. For Polanyi, the extension of motivation
based on gain is counteracted by the “double movement,” in which social
movements act to re-establish social relations with the specific aim of lim-
iting the damaging impact of market imperatives. An example would be
the century-long trade union pressure to restrict the working day to eight
hours (Figart 2004). Yet, over the past 50 years, capitalist market relations
have extended into areas which historically have not been regarded as
subject to market rationality. Thus, Le Grand (1997) suggests that as
quasi-market relations spread in the public sector, self-interestedly
 Conceptualizing well-being in the household 103
“knavish” behavior may substitute for altruistic “knightly” behavior. The
effect is that materialism has become a more marked element in social
relations. This includes the social relations of household provisioning
(Wheelock 1999). In other words, the cultural context is not fixed, and the
cultural reference points for household decision-making shift over time.
This has important implications for the analysis of household
provisioning.5
The cultural context of provisioning is threefold: state, market, and
household. These three arenas together form the institutional environ-
ment within which livelihood decisions are made. We have already argued
(as, for example, does Lane 1991) that work has both intrinsic and instru-
mental elements. We are therefore able to discuss the decisions that the
household makes about provisioning in terms of the decisions it makes
about work, with work acting as a numeraire. Decisions about work are
made in a context of constrained choice within this institutional environ-
ment (Folbre 1994). In some cases, choices are acts of judgment about the
content, meaning, and outcome of work. For example, “Jackie,” an entre-
preneur whom we met in our earlier empirical research, continued with
starting a new business venture despite a previous business going into liq-
uidation; was committed to the community through the employment of
disadvantaged workers; and had no regrets about leaving more secure
employment for the buzz of being an entrepreneur (Oughton and Whee-
lock 2003). In other words, the intrinsic enjoyment that Jackie gained from
being an entrepreneur meant that she put aside calculations around the
advantages she might gain from employment activities.
However, as institutional economists emphasize, choices may also be
affected by habit and by invidiousness (see, for example, Veblen 1912;
Stanfield 1995). So, in a changing cultural context in which social relations
are becoming more influenced by material criteria, households may feel it
necessary to have two earners in order to meet newly accustomed material
standards. It is this acceptance of a culture of “keeping up with the
Joneses” that leads to the household provisioning value of “sufficiency”
being replaced by one of an economic treadmill (Lane 1991; Schor 1992;
Hochschild 1997). The treadmill syndrome begins when income and con-
sumption become the ends, rather than the means of life. The countervail-
ing element of Polanyi’s double movement may thus have a limited
impact, as formal economic rationality itself becomes an institutionalized
value (Stanfield 1995). Similarly, government policy, in assuming selfish
instrumental motivations on the part of state bureaucrats, may undermine
or even destroy motivations based on public service (Le Grand 1997). The
cultural context for work has thus changed.
One of Amartya Sen’s key contributions is that, in the same vein as
institutional economists, he acknowledges the significance of the cultural
context (Sen 1999). In an earlier article (Oughton and Wheelock 2003), we
incorporated insecurity into this cultural context in order to understand its
104 Elizabeth Oughton and Jane Wheelock

Household
endowments (A)

Transformation 1: Provisioning

Livelihood
capabilities (B)

Transformation 2: Being and doing

Observed functionings
of the household and Institutional environment
the individual (C) affecting household
livelihood and processes

Figure 8.2 The relationship between household endowments and individual

well-being.

impact on household livelihood capabilities. Again here, as a starting

point, we are going to modify Sen’s focus on the individual, and take the
household as the unit of analysis. We can now look at the places within
Sen’s framework where active household decision-making occurs, which
are represented as transformations in Figure 8.2. This diagram summarizes
the framework that Sen has developed to understand provisioning
processes as a foundation for well-being, where his starting point is the
endowments (assets or resources) available to the individual.
The diagram assumes that the ways in which the household may use
endowments (A) is governed by entitlements mediated by legal and social
rights. For example, a British household with an expectant mother may be
entitled to maternity benefit, and subsequently to childcare tax credit.
These are forms of endowment mediated by government social policy.
Thus we have incorporated these processes of establishing entitlements
within the institutional (or socio-cultural) environment.
Transformation 1 is a provisioning transformation that covers the
movement from endowments to livelihood capabilities. Livelihood cap-
abilities represent the potential ways of “being and doing” open to the
household and its members. Let us illustrate this transformation with two
 Conceptualizing well-being in the household 105
examples. Going back to our study of business livelihoods: Jackie could
have either started again as an entrepreneur in a new business, or she
could have become an employee once more. Or, in the context of caring, a
father may apply for two weeks’ leave for the birth of a child born by cae-
sarean section, since his help in looking after the new baby could be very
important.
Transformation 2 covers the movement from livelihood capabilities to
achieved functionings, that is, the actual choices made in the context of
constrained opportunities. Can Jackie live with the financial risk that goes
with the enjoyment of being an entrepreneur? The family’s decision on
whether the father should take leave will depend on whether the growing
household can afford to do without his salary for those two weeks, and get
by on paternity pay (if entitled to it). The key problem is how to look
at these transformations taking into account relationships within the
household.

Distribution of well-being within the household

We return, therefore, to look at the distribution of intra-household well-
being. We have talked about “sufficiency” as the value basis for house-
holding, and shown how this may give way to maximization and efficiency,
but we have not yet dealt explicitly with distribution. Stanfield (1982)
points out that the institutional emphasis on livelihoods means that the
economic provisioning process has the individual as the ultimate benefi-
ciary, but that distribution is vital to social reproduction. Robeyns (2001)
shows clearly the strength of ethical individualism in Sen’s capability
approach to evaluating well-being. As a feminist, Robeyns discusses how
social constraints can affect the ability to convert individual capabilities to
achieved functionings. She uses the differences between men and women
and their perceived obligations to care for children. So, despite recent leg-
islation providing for paternity leave in Britain, fathers may not avail
themselves of these provisions because either workplaces or households
may hold on to traditional views that mothers give the best care for
newborn babies.
However, Deneulin and Stewart (n.d.) criticize this individualist
approach, arguing that the “structures of living together” are precondi-
tions for individual agency. As they see it, these “structures of living
together must be included as space for evaluating the quality of life, in
addition to the evaluation space of individual capabilities” (4). For ethical
individualism, such structures of living together are merely instrumental.
However, as Deneulin and Stewart assert: “The structures of living
together are those structures which belong to a particular historical
community, which are the very conditions for individual lives to flourish,
and which are irreducible to interpersonal relations and yet bound up with
these” (7). Deneulin and Stewart’s insights are crucial in underpinning our
106 Elizabeth Oughton and Jane Wheelock
approach to the distribution of production and consumption in the house-
hold. As we have argued, production and consumption each have both
instrumental and intrinsic value. The rationalities that are drawn on to
make decisions about production and consumption are therefore both
formal and substantive. These decision-making processes are at the same
time constrained and expanded by being made in the context of member-
ship of a household.
Let us return to transformation 1 – the transformation from endow-
ments to capabilities – to bring out the significance of membership of a
provisioning group. The resources that the household can draw on are
more than the sum of resources available to the individual. Moreover, dif-
ferent individuals benefit from endowments arising from their group mem-
berships outside the household. The transformation of individual
endowments to household capabilities can benefit from economies of scale
and shared rights of ownership or use, for example. Janet Finch (1989), in
her study of family obligation, points out that household decision-making
with regard to which member takes on care of older parents can depend
on which son, daughter, or son/daughter-in-law has fewest labor market
commitments, allowing members to continue to earn. Such decisions draw
on formal rationality to make choices within the non-market arena of
caring.
Sen is concerned with the capability set of the individual with respect to
the second transformation of livelihood capabilities into observed func-
tionings (transformation 2). Robeyns (2001) advocates the importance of
ethical individualism at this point, because this allows us to focus on dif-
ference between individuals. She sees this second transformation of cap-
abilities into achieved functionings as reflecting the constraints and
opportunities facing individuals: male, female, young, old, able-bodied, or
otherwise. Individuals command differing levels of power within the
household. In parallel, the institutional norms that surround different indi-
viduals constrain their relative as well as their absolute achievement of
well-being (Folbre 1994). This argument treats the social relations of the
household in instrumental terms, affecting distribution. But there is also
intrinsic value in the structures of living together.
Living together is an important dimension of the doings and beings of the
household, a valued functioning. We suggest, though, that the more formal
rationality has imbued decisions with respect to provisioning, the more
likely it is that formal rationality will also imbue intra-household relations.
For example, in terms of the social reproduction of the household, whether
childcare is done within the household, through the market, or from state
provision, depends on the mix of formal and substantive rationality adopted
by household members. Wheelock and Jones (2002) have shown that, where
both parents spend time in paid work in order to enjoy a higher level of
income, the household may draw on kin networks – almost always the
maternal grandparents – to help with childcare. In other words, grand-
 Conceptualizing well-being in the household 107
parents are making a gift of time to their daughter. Grandparents draw on a
substantive rationality in giving care, while daughters apply a formal ration-
ality to using their own time in the labor market. But parents are able to
make decisions about paid work and childcare that allow them the qualitat-
ive benefits of maintaining care within the close kin networks of the family.
In this situation, complex social relations produce an outcome based on
decisions drawing on both formal and substantive rationalities.
The broader literature on the sociology and anthropology of consump-
tion (see Douglas and Isherwood 1980; Fine and Leopold 1993) conceptu-
alizes the importance of consumption for establishing meaning in people’s
lives. It is in the second transformation of capabilities into functionings
that this meaning is created. Yet again, there are many forces acting on the
individual’s decision-making at this point, arising from the cultural context
of provisioning the household as discussed above. Individuals make judg-
ments about the meanings and gains from work and their claims in terms
of their needs, role, and contribution to the provisioning of the household.
But at the same time, invidiousness and habituation undermine active
judgment, feeding into an economic treadmill of work and spend.6 The
resulting lack of time combines with the perception of unsatisfied wants to
obscure consideration of non-material needs. To re-emphasize our earlier
argument, the householding value of sufficiency becomes compromised.

Conclusions
This chapter has argued that provisioning the household is the fundamen-
tal economic problem. Provisioning consists of production, consumption,
and distribution. We have shown that production and consumption are dif-
ficult to differentiate, and that each has both instrumental and intrinsic
value. We have pointed toward empirical evidence to demonstrate this.
Individuals, drawing on substantive and formal rationalities, make
decisions about their production and consumption activities taking both
aspects of value into account. This adds complexity to the analysis for any
economist concerned with the ways in which people achieve well-being.
Nevertheless, we argue that a holistic approach offers insights in terms of
the distribution of paid and unpaid work within and outside the house-
hold. Through this we have drawn attention to the porous nature of the
boundary between the household and the rest of the social and economic
world. This may be one way of moving towards an analysis which inte-
grates behavior within and outside the household.
What specifically does our heterodox perspective have to contribute
to understandings of well-being inside the household? We draw attention
to the changing nature of the institutional environment within which pro-
visioning decisions are taken. This dynamic is a function of the shifting
boundary between market and non-market relations, as understood by
Karl Polanyi. The positive valuations given to both consumption and
108 Elizabeth Oughton and Jane Wheelock
production often encompass, and may arise from, social relations. On the
other hand, the material relations of an expanding market are entering the
household, and to an extent the instrumental values associated with this
expansion may counter intrinsic values. Insofar as social meanings are
increasingly derived from commodities, the market sphere incorporates
social relations, rather than systematically destroying them as Polanyi
argues. But some of these social relations derive from covetousness and
habit rather than being positively sought out through an active process of
seeking sufficiency. Implicit in Polanyi’s argument is that social embedded-
ness is an unalloyed good, which may not be the case. Answering the ques-
tion with which we started the paragraph: one contribution of our
perspective is to underline the porous nature of the household boundary.
The capabilities framework has been used to understand distribution
both with respect to individuals and groups. In this chapter, we have tried
to look explicitly at the relationship between the individual and the house-
hold group. Entitlements assume that individuals are embedded in a set of
social relations and that there is an institutional context within which enti-
tlements are transformed into capabilities. Thus, a second contribution we
make is to focus on the social relations of the household when we are
exploring the transformations between household endowments and indi-
vidual well-being. We have found commonalities between the capabilities
framework and an instititutionalist approach to household behavior, in
particular through the understanding of both the instrumental and the
intrinsic values achieved in household provisioning. However, the cap-
abilities framework does not satisfactorily deal with the positive aspects
that the individual gains from being part of a group which lives together.
Here we find ourselves more in agreement with the arguments of
Deneulin and Stewart than with those of Robeyns.
We find taking the capabilities and the institutional approach together
analytically useful. We think that we have shown, for example, that this
mixed approach is helpful in facilitating in-depth description. We believe
that it can be operationalized by looking at particular elements of indi-
vidual and household behavior. There is a remaining problem. How can
this dual approach be operationalized in a way that is useful for the devel-
opment of social policy?

Notes
1 Stanfield (1995) sees institutional and social economics as synonymous. For
both, the wants of the individual and the resources available are part of the vari-
ables that need to be explained by economics. Human wants and technology
change by virtue of influences that are endogenous to the human social system
and theoretical and empirical examination of the processes by which these
changes occur is essential to the comprehension of any human group.
2 This pattern was also observed amongst urban microbusiness households
(Baines and Wheelock 1998)
 Conceptualizing well-being in the household 109
3 Halperin (1991) argues that householding (household provisioning) is not
necessarily contained with the household, but includes other close (primarily
kin) individuals. We consider that Halperin adopts an overly rigid definition of
the household. We have argued elsewhere that the boundaries of the household
are fuzzy and porous (Wheelock et al. 2003). Our more flexible definition
encompasses what Halperin refers to as the householding “group.”
4 Marx (1973), in the Economic and Philosophic Manuscripts of 1844, sees work
as the essence of human nature.
5 Smart (2003) argues that an increasing proportion of production is devoted to
cultivating demand and increasing consumption.
6 Some possible evidence for this is that in Britain over the last ten years private
borrowing has doubled and now stands at £4,000 per head (£38,000 when mort-
gage debt is included). The total of private borrowing is higher than the level of
total government borrowing. Servicing such levels of debt even at current low
interest rates in addition to provisioning day-to-day needs implies long hours of
paid work.

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

Like “économie,” which in French means both economics and economy,

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

Social economy and three ideological traditions

In the early nineteenth century, the term social economy was used in
diverse ways within three ideological traditions: liberal, Christian, and
socialist (Desroche 1983). These traditions nonetheless had some common
objectives: “social economy means, no more no less, another way to do
political economy” (Gueslin 1998: 1). We will discuss each tradition in
turn.
 Social economy as social science and practice 113
The liberal tradition: social economy as an enhancement of
political economy
In the liberal tradition, Charles Dunoyer, in Treatise on Social Economy
(1830), defines productive means of wealth as “the funds of personal facul-
ties, refuting the restrictive analysis of the production of wealth of classical
economists such as Say or Smith” (Dunoyer 1830: 551). This idea of the
construction of social economy as an extension of political economy by a
broadening of its field of analysis to “all that is useful, responding to needs
and desires,” taking away from it all naturalist determination and all moral
content, draws mainly on the utilitarian approach of John Stuart Mill. The
latter had already put forth the importance of “productive consumption”
(health, education) that, in satisfying the most important needs of men,
contributes at the same time to collective enrichment (Mill 1848).
For these liberals, the “immaterial functions” must reinforce liberty and
morality. In fact, for Dunoyer they integrate the sources of health, well-
being, and the healthy life that he perceives as stimulants for intelligence
and training, as well as the learning of mores and “good civil habits”
(Dunoyer 1830: 88). These ideas come close to those of Thomas Malthus,
since “the laboring classes must raise themselves up through work, fore-
sight, and morality” (Dunoyer 1830: 470). Like liberals such as Mill,
Dunoyer therefore favors free and voluntary association between workers
and bosses (see also Bastiat 1864; Clark and Elliott 2001). Such an associ-
ation is perceived as being in the interest of all, contributing to social
progress through the moralization of and control over the working classes:
“The associate escapes the seduction of cafés and pubs. While living
better, he [the worker] makes savings and the attraction of savings, once
begun, is well-known” (Casimir-Périer 1864: 28).
In relation to these liberal traditions, social economy as social practice
is constituted around patronage, by the establishment of institutions of
mutual benefit and the creation of a social environment deemed favorable
(housing, collective gardens, childcare services, etc.), thus paternalistically
attempting to better living conditions. With the import of the Italian
model of People’s Banks (Banques Populaires), it is in the domain of
credit cooperation that the liberals bring a real contribution to the consti-
tution of a sector of social economy (Gueslin 1998: 138).

The Christian tradition: critique of political economy and the

right to work
In the social-Christian tradition of the followers of Henri Saint-Simon,
associationnistes such as Philippe Buchez, the legal scholar Auguste Ott,
and the republican journalist Louis Blanc defend the idea of an association
as the guarantee of the right to work in the struggle against pauperism.
Competition is denounced as harmful.
114 Danièle Demoustier and Damien Rousselière
Setting itself against the “English principle” of the separation of sci-
ences, which consists of “political economy as having to constitute itself as
the science of wealth in order to place itself outside the entirety of human
knowledge,” Ott (1851: 5) denounces the assimilation of physical laws to
the “moral world.” Physical forces are predetermined, whereas man is
free; their effects are independent of each other, whereas the actions of
men living in communities are interdependent. The self-regulation of the
market should be replaced by social provision. Louis Blanc equally
denounces the systematic search for the lowering of prices: “a good deal [a
cheap price] profits those who consume only in throwing the seed of the
most ruinous anarchy amongst those who produce” (1847: 77).
Social economy is a science, which like all science must not only differ-
entiate between its object and its goal, but the latter must also be subordi-
nate to a more general principle of justice: “to organize work towards the
most perfect preservation of society and the individual and of the achieve-
ment of liberty, equality and fraternity” (Ott 1851: 20). Social economy
thus conceived, following Buchez, leaves great room for association, seen
as “the key word of the problem posed to modern civilization” (1851: 132).
Buchez (1831: 31–6), in fact, promised “the association of work and not
that of capital” by “the constitution of a common social capital which
would be inalienable and indivisible,” as “the means for improving the
condition of city workers.” This association belongs to the larger general
program of social reform through the constitution of ad hoc institutions.
Buchez, like Ott, expressed the need for a special bank destined to give
credit to associations. Endowed by the state, it could draw upon public
savings. Blanc widens this role of the state, seen as a “Bank for the poor”
(1847: 14), which, qua financer, would have to intervene as a regulator as
well in order to put technical progress at the service of society.
Buchez’s theses prevailed over those of Blanc in the interim govern-
ment of the 1848 Revolution. Although Blanc was the president of the
Luxembourg Commission (as a substitute for a Labor Minister called for
by the workers), the model of national workshops for the unemployed
took priority over social workshops for workers of strategic industries
(Sewell 1979). After their closing in June 1848, the National Assembly
proclaimed the right to association and supported the workers’ associ-
ations by authorizing a credit of three million francs. This credit would
back the opening of 300 production associations, a certain number of
which gathered bosses and workers from the workshops. But, at the same
time, the state restricted them from federating, before entirely abrogating
the right of association when the Second Republic became the Second
French Empire with the anti-parliamentary constitution of Napoleon III.
Many projects not only to reduce competition between associations but
also to support new creations, and to escape the constraints of competition
between producers thereafter, were destined to fail (Desroche 1981).
 Social economy as social science and practice 115
The socialist tradition: social economy and scientific socialism
The movement of “scientific” socialism examined the concrete structures
of cooperation, differentiating associative enterprise from political associ-
ations. A debate opposed Karl Marx and Pierre-Joseph Proudhon regard-
ing the emancipatory power of the labor association (Lowit 1962; Jossa
2005). For Marx, only political association (like The International Work-
ingmen’s Association), feeding the political struggle, can reach this end.
Marx’s (1864, 1894) references to “the political economy of labor” salutes
the cooperative movement as a “great victory over the political economy
of property,” (1864: 1469) but puts forth two principal series of criticisms
which limit the extent of this victory. On the one hand, cooperation lacks
an intrinsic dynamic likely to energize it own expansion. Limited to spor-
adic and occasional attempts, the cooperative movement is powerless to
transform capitalism on its own or to “arrest the growth in geometrical
progression of monopoly.” Moreover, cooperative action does not consti-
tute an efficient means for “freeing the masses, nor even for perceptibly
lightening the burden of their misery” (Marx 1864: 1469). On the other
hand, the cooperatives that are formed in capitalist society cannot attain
or even claim to be the most definitive form of associated work: “they nat-
urally reproduce, and must reproduce, everywhere in their actual organi-
zation all the shortcomings of the prevailing system” (Marx 1894: 304).
They should be considered as “transitional forms from the capitalist mode
of production to the associated one” (Marx 1894: 304). Nonetheless, these
two critical reservations do not strip the cooperative of its importance:
“the idea of cooperation is intimately linked, in Marx’s point of view, with
the end of such action: the establishment of ‘a republican system of associ-
ation of free and equal producers’ ” (Lowit 1962: 84).
Proudhon (1846) disagrees: the constitution of a social economy is “the
accord of reason and social practice”(54), the end of which is the safe-
guard of human personality (Neurisse 1983). Proudhon’s view is based on
a profound conception of “justice,” balancing social and physical forces.
He denounces “the right of escheat” related to capitalist property, allow-
ing the owner the capacity to extract the value that collective labor
creates. By eliminating useless intermediaries, the “mutual society” repre-
sents both the interests of consumers and producers. Divergence of inter-
ests would also be allayed by industrial-agricultural federations and
agreements with consumers that together form “a production-
consumption union.”
The French workers’ movement struggled with these tensions and in its
meetings from 1876 to 1879 distanced itself progressively from Proudhon’s
theses in favor of Marxist theories as spread by Jules Guesde, challenging
labor cooperation while cautiously promoting consumer cooperation. In
1879, criticisms became even more virulent. Isidore Finance (1879: 329),
for instance, denounced cooperation in general (“nothing but a name: the
116 Danièle Demoustier and Damien Rousselière
largest divisor of the working class”). At the end of the century, Jean
Jaurès (1903: 37) tried to reconcile political, union, and cooperative action,
for “the democratic state is the supreme cooperation towards which the
other cooperatives stretch as if as towards their limit.” But, despite the
experiments of the stock exchange of socialist cooperatives and the Albi
Workers’ Glassworks in close relation with the main French trade union
Confédération Générale du Travail, the rupture with the union movement
is already complete by 1879. As the workers’ congresses saw the victory of
Guesde’s Parti Ouvrier Français, trade unions became the main means of
workers’ action. This was happening while the Republicans, following the
liberals of the Second Empire, were using the cooperation as “a bulwark
against Socialism.”
The turn of the nineteenth-to-twentieth century thus is an important
moment for social economy (Vienney 2000). It is from this point onwards
that “academic social economy” is established, following the Walras/Gide
debate and the contributions of Fauquet, as we will see in the subsequent
section.

Social economy between morality and science: the

Walras/Gide debate
In 1896, Léon Walras defined l’économie sociale as the voluntary distribu-
tion of wealth, based on the criteria of the “just,” thus differentiating it
from the natural production through pure economics. The popular cooper-
ative associations participating in the production of wealth figure in
applied economics (see Demoustier 1988).
The association movement does not directly respond to the problem of
social justice, but promotes free and voluntary association privately initi-
ated. In encouraging the entry of workers to the owners’ class, working-
class associations combine economic progress with social and moral
progress, since they “fulfill their great economic role which is not to get rid
of capital, but to make everyone a capitalist, as well as their no less
important moral role which is to introduce democracy to the mechanism
of production and to clear its way to access business, the veritable school
of active politics” (Walras 1898: 261). One must thus see “in cooperative
association the last word, the supreme effort and the definitive success of
individual initiative” (Walras 1896: 21).
Charles Gide differentiates himself from Léon Walras, an author with
whom he corresponded. Gide distinguishes between pure economics –
only to explain what is – and social economics – to study voluntary rela-
tionships that men form with each other so as to improve their living con-
dition (Gide 1926: 3). For social economics as normative economics, Gide
defines a cooperative as the framework for the reconciliation of divergent
interests in the name of an ulterior principle of justice (the just price
theory), in line with the theory of justice developed by Gabriel Tarde. The
 Social economy as social science and practice 117
cooperative thus allows the transformation of conflicts between men into
conflicts within each man, laying the basis for a peaceful resolution of con-
flicts and solidarity that Gide does not observe but desires. “It is the best
form of character building to have to argue the pros and cons in one’s own
conscience” (Gide 1924: 36).
The report of the sixth division on “social economy” of the Paris
World’s Fair of 1900 was written by Gide (1905). After having suggested
in the first edition that three rankings of institutions of social economy
were possible: according to their characteristics, their origins, and their
goals, he retains only the last two. Thus, the institutions of social economy
are divided between “all the forms of free association . . . of state inter-
vention . . . of proprietary institutions that participate in four major object-
ives: raising salaries, the rise in comfort and well-being, security for
tomorrow and independence” (10–12). In the different editions of his
report, Gide progressively abandons the term social economy, preferring
“institutions of social progress” and giving up on an expression “the inde-
terminacy of which could well lead to misunderstanding.”

From social economy to cooperative economy: on Fauquet’s

contribution
The crisis of the 1930s rehabilitated the cooperative, which benefitted
from access to public markets and took hold strongly in the domains of
consumption and agriculture. Nevertheless, evaluation of the contribution
of the cooperative was not unambiguous, and its role in economic and
political transformations not beyond discussion.
Holding the chair in cooperation at the International Labor Organi-
zation, Georges Fauquet followed Gide’s approach in aiming to integrate
“man as a whole,” into his system:

the capitalist and market-based economy . . . has gradually detached

the economic from the social and, thus, giving birth to hard realities
that served as a model for the abstractions of economists. Conversely,
the cooperative institutions, by restituting to the associates the func-
tion that the salesman had taken away, reintegrate the economic into
the social.
(Fauquet 1935: 44)

Cooperatives are distinguished by their sectors of activity and, above

all, the nature of their membership: workers’ cooperatives and consumers’
cooperatives for the emancipation of the working class; and farmers’ coop-
eratives. Despite the distinctions, Fauquet advocated the unity of the
cooperative in showing that, on the one hand, the cooperative is a business
at the service of its members and not a firm out to profit its shareholders,
and, on the other hand, an associate is both a member of the cooperative
118 Danièle Demoustier and Damien Rousselière
association and a user of the cooperative enterprise. Herein lies the source
of the rules of indivisible resources (the basis of solidarity between genera-
tions), of equality between the members (the basis of democratic function-
ing), and of proportionality in the individual redistribution of surplus (a
pro rata on activity).
Distinguishing himself from the coopératisme of the Rochdale pioneers
and from Gide of the cooperative period, Fauquet proposes an argument
in terms of sectors. The cooperative sector shares economic activity with
the private/capitalist sector (small, agricultural, or artisanal businesses)
and the public sector. Though it is coextensive to the private sector, the
cooperative sector maintains relations with these two sectors of a different
kind:

with the capitalist sector, there are relations of competition and

struggle which do not however exclude commercial relations at the
heart of national economies or on the international market; with the
public sector: complex and variable relations following the degree of
development of cooperative institutions and the political and eco-
nomic orientation of the state.
(Fauquet 1935: 36)

Fauquet came to be considered as one of the founders of the cooperative

movement by the International Cooperative Alliance (Watkins 1986). His
theses were institutionalized in the post-war period. The law of 1947
marked the unity of the cooperative enterprise, beyond specific statuses,
but it took until 1968 for different cooperative movements to unite and
form the French National Association of Cooperative Federations. Con-
sumers’ cooperatives, farmers’ cooperatives, and new credit cooperatives
developed in defense of small groups of farmers and consumers.
Parallel to the integration of cooperatives – along with mutual societies
and associations – in economic, industrial and social policies, the term
“social economy” progressively designates a field of activity and categories
of actors, the study of which necessitates an interdisciplinary combination
of law, economics, and sociology due to their institutional idiosyncrasies
(Vienney 2000). This process intensifies in the late twentieth century.

Transformations of social economy: from the relations with

economics to an economic sociology?
Since the 1970s, socioeconomic conditions have changed and transformed
the context in which the cooperative movement developed. Critics of
industrial public policies became increasingly outspoken, clearing the path
for the liberalization of prices, job markets, and capital. Cooperatives
within highly competitive fields felt increasingly constrained by pressures
generated within the capitalist sector; and rising numbers of people
 Social economy as social science and practice 119
endured economic and social exclusion. Renewed attention was given to
the nature of cooperative organizations or the so-called social economy,
including from mainstream economics and economic sociology points
of view.

The nonprofit sector: a mainstream economics vision of social

economy
In the 1970s, national representatives of cooperatives, having a sense of
imminent changes, joined the directors of mutual societies and the associ-
ations in social work and education to create a common federation. Sociol-
ogist Henri Desroche was called upon to discuss the denomination of their
organizations, by then referred to as nonprofit organizations. Desroche
insisted upon not adopting a negative definition; he proposed the term
“enterprises of social economy” to designate “an associative, participative
and united economy” (Desroche 1983: 230). This definition can incorpo-
rate “institutional” social economy but also an “emerging” social
economy. Desroche thus redefines the cooperative practice as a “voluntary
practice of self managed socializations” (1981: 3) close to self-help, mutual
aid, and self-reliance.
With the abolition of the social economy unit by the European Com-
mission, some try to redefine social economy as a nonprofit sector in line
with mainstream economics (Archambault 1997). This approach considers
that all associations have an economic activity, and assimilates all the non-
profit-making associations to non-commercial associations. Inspiring pro-
jects such as the inclusion of “a satellite account” of social economy in the
national accounts, this framework separates or artificially dissembles the
larger part of French cooperatives and mutual societies from the rest of
the economy. Foundations whose paradoxical particularity is to pursue
social goals with entirely financial means are included.
Many theorists, as noted by Favereau 2002; Hodgson 2002, thus rely on
neoclassical economic analysis to explain the growing role of these organi-
zations in a mixed market economy. For instance, the nonprofit sector is
seen as a group of organizations taking charge of “public goods” with a
limited audience. The constraint of non-distribution of profit weakens
their incentives to maximize profit at consumers’ expense. Nonprofit
organizations may, however, inspire consumer confidence, especially when
quality is not observable prior to the purchase (Archambault 1997; Enjol-
ras 2000).

Social economy and alternative economy

The ideas of Michel Rocard, the socialist minister of Planning and Eco-
nomic Development in 1981, rather than those of Jacques Delors (archi-
tect of the “common market” that preceded the European Union) have
120 Danièle Demoustier and Damien Rousselière
been at the heart of the socialist party from its 1977 congress onwards.
Social economy becomes the mixed economy, the objective of which is
industrial modernization, or the workers’ cooperative, playing a role in the
creation and revival of small and midsize enterprises. Also, the creation of
the DIES (Délégation interministérielle à l’innovation sociale et à
l’économie sociale) in 1981 constitutes a consecration of “institutional-
ized” social economy, rejoining “the cooperatives, mutual societies, and
. . . the associations whose activities of production assimilate them to these
bodies” (Decree no. 81-1125 of 15 December 1981).
Vienney (1994, 1995) formalized the cooperative (later extended to all
of the social economy) in legal-economic theoretical terms. The unity of
the field comes from “a correspondence between the rules of certain insti-
tutions, the place of their activities in the economy, and the identity of
actors that are their participating members” (Vienney 1994: 71). Taking an
institutionalist approach, following Fauquet, and close to the Regulation
School (André and Delorme 1983), Vienney points out how social
economy is “an ensemble of activities of production of goods and services,
which functions according to specific social rules” (1994: 72).
The difficulty of this definition of social economy results from the fact
that one is faced with a set of institutions in renewal; some organizations
are losing their initial characteristics whereas others are acquiring them
(Vienney 1994: 117). By analyzing the relation between their own rules
and those of the socioeconomic system – of which they are a part – we can
understand the formation and the transformation of these organizations.
Thus, following this analysis, the organizations of social economy play a
role in crisis regulation as the “post-Keynesian solution” (Vienney 1995),
constraining the self-oriented interest of parties with a view to stimulate
social utility.
Besides this formalized social economy, there is the tentative establish-
ment (with lesser success in France than in Germany) of a movement pro-
moting social change and an alternative economy. These currents are
successively fed by the journals Autogestions and then Autrement.1 A
critique of institutions inspired by the work of Ivan Illich (1973), of the
hierarchy in and outside work, the goals of the alternative are diverse:
reflection on product utility, from automobiles to weapons; on technolo-
gies – soft versus hard; on alternative (medical) treatment; on alternative
education. On the organization of work, it takes up the reflection of
former European Union chairman Jacques Delors favoring small-sized
units, worker management, that foster the warmth of human relations.
The founder of this movement, Aline Archimbaud (1995: 68), character-
izes this alternative economy as “a radical form of social economy . . . for
the period of concomitant crises of productivism and salaried society,” due
to the unacceptable effects of the mode of accumulation on the environ-
ment and society. But this alternative economy is stuck between survival
strategies (by necessity) and the refusal of dominant norms (by choice).
 Social economy as social science and practice 121
While the social priority goes from social change to the quest for new jobs
in a service economy, the movement does not find durable modes for
structuring itself, except in alternative, solidarity-based finance.

The solidarity-based economy: from social economics to

economic sociology
From the beginning of the 1990s, voluntarist actions and policies tried to
decrease unemployment by supporting the development of new services
likely to respond both to the demand for jobs and to the demand for ser-
vices (Demoustier 2001). The promotion of community-based services,
called services solidaires, were attempts to create both jobs and necessary
services in certain areas of activity such as youth centers, social integration
enterprises, childcare services, voluntary organizations for environmental
protection, neighborhood restaurants, and musical cafés (Laville 1992),
supported by the creation of specialized agencies (such as the Agence de
Développement des Services de Proximité close to the CRIDA – Centre
de recherche et d’information sur la démocratie et l’autonomie). This
collective of alternative and solidarity-based enterprises complemented
fair trade practices (to rebuild reciprocal links between consumers in
industrialized countries and producers in developing countries) and tried
to structure itself as a national committee. Sociologist Jean-François
Draperi underscored a new model for a social economy: charitable rather
than egalitarian, less alternative than integrated into civil society as a reac-
tion to the power of a “predominant” economy producing exclusion and
inequality. The reference is not the cooperative but the working project,
the social enterprise: “the actual meeting of two practical traditions: social
welfare and social economy” (Draperi 2003: 49; see also Borzaga et al.
2001).
A theory to differentiate these processes comes from the work of the
CRIDA. Jean-Louis Laville refers to Karl Polanyi’s approach (1944) that
identifies four economic patterns (free market, redistribution, reciprocity,
and domestic administration), to demand the reinsertion of the economic
into the social. New forms of companies should be promoted, character-
ized by “reciprocal tendencies, economic hybridization and democrat-
ization brought on by users and the institutional change” (Laville 1994:
168). Supporting community-based services allows for new forms of regu-
lation to be put into place on the local level and permits the establishment
of “community groups, intermediaries between the anonymous collectivity
and the family, . . . places likely to foster real and free solidarity, to which
many people aspire” (Laville 1992: 208). Faced with the crisis of abstract
solidarity, the emergence of new concrete solidarity thus prevents the
return to “inherited” solidarity of the family.
In the debates on the relationship between social economy and
solidarity-based economy, the idea of the “redundancy” of social economy
122 Danièle Demoustier and Damien Rousselière
is heavily discussed. The main French journal on social economy (the
Revue des études cooperatives founded by Gide in 1921 to become the
Revue internationale de l’économie sociale in 1986) has staged these discus-
sions. As an example: “The model of social economy necessarily meets the
model of solidarity-based economy through its common values of solid-
arity, cooperation, democratic or participative management, through its
rules of ‘a-capitalism’ ” (Collombon and Parodi 1997: 60). The journal
established points of convergence between the different dynamics around
the recognition of social and solidarity-based economy, although the theo-
retical construction of this alliance is yet to be done (Espagne 2002).

Conclusion
The historical approach adopted in this paper shows the complex relation
of social economy to the standard theory of economics as well as the dif-
ferent views of authors contributing to discussions about the social
economy in France. Social economy as practice is mainly recognized either
by its objectives – health and education, the right to work, social progress
in the nineteenth century, innovation and modernization, local develop-
ment in the 1970s and the 1980s, social relations, and the creation of jobs
and activities in the 1990s; by its institutional frameworks – patronage,
association, social rights – followed by statutory frameworks – coopera-
tives, mutual societies and associations – although the statutes are bound
to evolve as a function of the insertion of social economy into its environ-
ment; or by its modus operandi, that is to say their internal characteristics.
Empirical evidence from the description of the large-scale success story of
Mondragon Corporacion Cooperativa in Spain (Forcadell 2005), the
growth of nonprofit organizations in the cultural sector (Greffe 2002), and
broader cross-country investigations such as the World Values Survey
(Dekker and Van den Broek 1998; Paxton 2002) support the social eco-
nomic arguments developed here. In addition, two theoretical debates
relate closely to the discussion here and present a challenge to the main-
stream view in economics. The first one questions the nature of the firm:
why are there so many kinds of organizations (Williamson 1999: 30)? As
documented by some economists (Weisbrod 1998), organizations with dif-
ferent objectives than for-profit objectives are characteristic of any
modern society, “no matter how strong the pledged and actual allegiance
to the ideology of the market” (Arrow 1998). The second questions the
nature of the economy, and particularly its relation to society, as we can
notice different relations between economy and society (Polanyi 1944;
Dolfsma et al. 2005); can the social economy be viewed as the social capital
of a society, contributing to human development and a democracy-based
society (Paxton 2002)?
Thus, the ambivalent and diverse character of social economy examines
research in social science on a more general level. It points out that the
 Social economy as social science and practice 123
comprehension of economic, political, and social phenomena calls for a
dialogue between theory and practice, between science, ethics, and moral-
ity. As new actors are appearing, new activities are structuring themselves
according to the rules of social economy, and older forms are being re-
examined in their process of transformation; they are questioned by the
tensions with the public and capitalist logics (Vienney 1995). Social
economy is undergoing a renaissance and a transformation, but it is also
consolidating itself, contrary to mainstream economics theses that confine
it to a strictly palliative or transitory role.

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

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10 France and Québec
The progressive visions embodied
in different social economy
traditions
Carole Biewener

In both France and Québec, Canada, there are social economy traditions
that look beyond the “state” and the for-profit, commodity sectors to
community economic development and the “third sector” to provide an
alternative arena for economic activity and progressive social change. This
chapter provides a critical assessment of the progressive visions embodied
in these social economy traditions by focusing on two important books
that are representative of the two different (though related) traditions:
Alain Lipietz’s For the Third Sector: A Solidarity and Social Economy
(2001) [Pour le Tiers Secteur. L’économie Sociale et Solidaire] and Louis
Favreau’s and Benoît Lévesque’s Community Economic Development:
Social Economy and Intervention (1999) [Développement Économique
Communautaire. Économie Sociale et Intervention].1 I consider the pro-
gressive vision of these traditions by comparing how each of the texts
define the boundaries, contours, and character of what comprises the
social economy and by considering how the social economy is understood
in relation to the “state” and the “commodity sector.”
In both the French and Québécois contexts it is the “crisis of the
Welfare State” and of market-oriented production that is used to explain
the recent growth of the social economy and/or third sector activity. This is
often put in terms of “the crisis of Fordism.” Thus, the social economy, the
third-sector, and community economic development are positioned rela-
tive to the failures of the welfare state and left social democratic practice,
as well as relative to the inadequacies of profit-oriented commodity pro-
duction. The public and commodity sectors are seen as unable to produce
enough jobs and/or to provide for the full range of social needs (Lipietz
2001: 17). The social economy and/or third sector is, therefore, called upon
to respond to the unresolved problems of the welfare state and commodity
production by “filling in the gaps” left by the crisis.
One of the main contentions in this chapter is that defining the social
economy and/or third sector in relation to the gaps, inadequacies, and
crises of the commodity and public sectors lends to both of these perspec-
tives certain strengths and certain weaknesses or limitations. To put it
broadly, I argue that both traditions offer significant, exciting, and vibrant
 Visions in social economy traditions 127
economic alternatives that encompass an important range of social and
economic processes and that offer important alternative criteria for
shaping economic activity. Indeed, my interest in these social economy tra-
ditions is fed in large part by my own work within what many of us have
come to call a “postmodern Marxist-feminist perspective” that is inter-
ested in the radical project of proliferating differences which enable
alternative class, gender, sexual, and racial ways of being. In the realm of
economics, this is a project to enable “economic difference” in a manner
that activates people as creative economic subjects and that fosters nonex-
ploitative economic activity (see Gibson-Graham 1996, 2003; Biewener
1999, 2001; Community Economies Collective 2001). Therefore, one
aspect of the social economy projects in both France and Québec that I
find to be of particular importance is their understanding of the economy
as a diverse space populated by a wide range of practices and economic
entities. This is a refreshing contrast to the all too present representations
of the economy that characterize it in monolithic, homogenous, and ubiq-
uitous market capitalism terms (whether in the neoclassical economic
perspective or in the classical Marxian one). Indeed, insofar as the social
economy perspectives develop an analysis that highlights the diversity of
economic activity, they contribute to understanding the social conditions
that enable the creation of nonexploitative, noncapitalist economic
processes and thereby foster alternative progressive forms of economic
activity.
Yet, at the same time, both projects leave a vast social terrain relatively
uncontested and seemingly not in need of significant progressive social
change. As I argue in the following pages, in working to legitimate and
enable “social economy” and/or “third sector” activity, the French tradi-
tion does not develop a progressive agenda for the commodity and public
sectors; whereas the Québécois tradition comes to define itself in terms of
a community’s local democratic control over resources without also devel-
oping an agenda to redistribute resources on a broader social scale.

France and the movement for a third sector

First, let us consider the French tradition as represented by Alain Lipietz’s
book, For the Third Sector: A Solidarity and Social Economy. Published in
2001, this book was written in large part as a result of a charge by the
French Minister of Employment and Solidarity to create a statute for a
new category of enterprises – those with a “social goal.” This charge indic-
ates clearly how institutionalized “social economy” issues are in France. It
also marks the importance of the social economy as a vibrant political
project for many. Thus, much of Lipietz’s book is concerned with justify-
ing the special fiscal and regulatory privileges enjoyed by existing social
economy entities – mutuals, cooperatives, and associations – so as to
extend them to new types of activity that have come to be recognized as
128 Carole Biewener
part of a “solidarity economy” or the third sector. The fiscal privileges are
primarily justified, according to Lipietz, because of the positive externali-
ties and the provision of public goods and services that result from third-
sector activity such that, in Lipietz’s words, “in the final analysis social and
ecological usefulness is what justifies the specificity of the third sector”
(2001: 27). Thus, because third-sector entities provide socially useful out-
comes in addition to privately useful ones, they merit support from the
state sector, primarily in the form of lower social welfare and business
taxes.
While Lipietz acknowledges that it is often difficult to define what con-
stitutes a positive social outcome (and that such a determination should
rightly be left to some form of democratic deliberation), throughout the
book he characterizes “socially oriented” production in general terms by
referring to the production of “social ties,” the creation of “social net-
works,” and the rebuilding of the “social fabric.” At one point he writes
that what defines third-sector activities is the creation of “social capital in
the sense meant by Putnam (2000),” that of building a network of social
relationships along with the capacity for a community to take care of itself
(30). Here Lipietz builds upon the work of others in the French social
economy tradition who have argued for a rethinking of economic activity
in both its “interpretive” and “practical” dimensions (Lévesque et al. 2001:
61). For them, the goal of economic activity should not be defined just in
terms of the production of goods and services. Instead, new forms of pro-
ducing must be undertaken that incorporate a “complex ensemble of
values” including that of “creating social ties that combine initiative and
solidarity” (Laville 1995–6: 22). Thus, in the French tradition, activities
that are to be included in the social economy have a hybrid character: they
produce an actual good or service that someone pays for and they create
a socially useful outcome – that of creating “direct social ties of a
community-based type” on the “material basis of services rendered”
(Lipietz 2001: 29).
Lipietz provides further characterization of third-sector activity when
he distinguishes it from the two “primary” sectors: the public sector and
the “secteur marchande” (which I am translating as the “commodity
sector”). With respect to the secteur marchande, what I find to be particu-
larly notable is that while, in some sense, Lipietz locates commodity pro-
duction as different from third-sector activity, it is clear that the
production of commodities per se does not establish a firm boundary
between the two because, as noted above, much third-sector activity
involves the production and sale of a use-value that is sold and purchased,
i.e., a commodity. Lipietz also addresses the issue of whether profitability
should mark the boundary for what may “count” as third-sector activity.
Here he argues strongly that third-sector entities should be able to earn a
modest profit if some of the profit is reinvested in the enterprise. For
Lipietz then, it is not so much the presence/absence of profit that is at
 Visions in social economy traditions 129
issue, but the extent of profit (moderate versus large), the role the search
for profit plays (whether it is the main driving force of the business’s
raison d’être or whether there is a “disinterested management”), and
whether or not the profit is reinvested in the social enterprise. In this latter
respect Lipietz situates third-sector entities firmly in the French social
economy tradition by referring to “the principle of the indivisibility of
reserves” that characterizes mutuals, cooperatives, and associations (45).
Thus, to the extent that a social economy enterprise is able to build up its
own capital, it creates “social capital in both the accounting sense and in
Putnam’s sense” (46).
Lipietz also argues that the third sector should be able to rely to some
extent on private capital for financing, as long as the funds come from the
same community in which the third-sector entity works or from employees
who expect only a “modest” return (41). Indeed, he is concerned that
current French regulations limit funding for third-sector activity, since
only cooperatives are able to have employees invest in their enterprise and
the new Alternative Venture Capital Funds (Cigales, clubs d’investisse-
ment à gestion alternative et locale de l’épargne) are not able to lend to
local associations.2
Thus, Lipietz has taken important attributes that are often associated
with a “market economy” or “capitalism” and, in a sense, has “unattached
them.” He presents a typology in which commodities can be produced by
noncapitalist, “third-sector” entities; economic viability via the production
of surplus (or profit) is a concern shared by all production entities, not just
capitalist ones; and “private” financing that must be valorized to some
extent can be used to foster noncapitalist, social economy relations. This
characterization therefore diversifies the economic space in important
ways by recognizing that third-sector activity may be compatible with a
range of different economic conditions. For those of us concerned with
recognizing and enabling progressive alternatives to capitalism within the
current economic context, this then is a significant move.
It is important to note, however, that neither of these books character-
ize their projects in “anticapitalist” terms. Indeed, there is a notable lack
of reference to “capitalism” or a “market economy” in both texts; and in
Lipietz’s book the secteur marchande is cast in a relatively benign manner,
though subject to the harsh realities of profit maximization. I find this lack
of reference to capitalism to be especially intriguing given Lipietz’s back-
ground as a theoretician in the Parisian Regulation School (see Lipietz
1977, 1979, 1983; Aglietta 1976; and Boyer 1986) and given the strong
history of socialist and communist politics in France. The “absence” of
capitalism and the market in these two texts is also intriguing relative to
how other economic traditions (within both neoclassical economics and
Marxism) center their discussions around an “economy” defined solely in
“market” or “capitalist” terms, thereby presuming the ubiquity of the
capitalist market economy as well as the identity of capitalism, markets,
130 Carole Biewener
and economy. I am not sure whether to read this capitalist absence as
ceding the terrain of capitalism, as a pragmatic turn so as to not politicize
the issues (to not raise any “red” flags), or whether this is a strategy to
produce “economic difference” and to recenter economic and social analy-
sis around different economic categories. As noted above, the social
economy project has intersected in important ways with those who advo-
cate a diversification of the economic space (Laville 1995–6; Aznar et al.
1997). Perhaps this absence of capitalism should be read as all three at
once, producing different and contradictory effects.
Now, if the production of commodities, profitability, and private financ-
ing do not mark the boundary line between what constitutes the secteur
marchande and the “third sector,” what else does aside from the provision
of socially useful outcomes or positive externalities?3 Here Lipietz notes
that another important characteristic of third-sector activity is that of
democratic functioning. To be included in the third sector, work must be
undertaken in a “democratic” fashion, following the rules associated with
the social economy: that of “one person, one vote” and that of free associ-
ation (45). Under these organizational principles “power is regulated by
people joining rather than by the provision of capital” and the people who
freely associate in a common enterprise are the ones who undertake
democratic management of the enterprise (45–6). Indeed, Lipietz strongly
emphasizes the importance of fostering free association. In places the text
becomes a mini-treatise on how important it is to create new forms of cit-
izenship, to create “a reciprocity of free individuals” (63); and it is this
“free association” aspect of the third sector that seems to most clearly
delineate it from the “public sector.” As Lipietz writes, “the freely associa-
tive dimension of the social and solidarity economy, based upon initiative
and direct solidarities and upon face-to-face regulation explains why it
cannot and should not allow itself to be absorbed by the public sector”
(64). Thus, the “third sector” is defined not only with respect to its goals of
producing socially useful outcomes but also with respect to its internal
modes of organization – that of democratic functioning and the reinvest-
ment of profits (58).
Yet, while on the one hand Lipietz carves out an important space for
third-sector activity, he also clearly limits this space and, thereby, cedes
important terrain since he contends that it is best for the third sector to
coexist with the public sector and the commodity sector. In arriving at this
conclusion, he raises the important issue of how private efforts, labor, or
contributions are to be socially recognized or validated. Following the
work of Polanyi (1944), Lipietz distinguishes the three sectors according to
the “three forms for the social validation of private labor” (62). In the
commodity sector, private labor is valorized via monetary exchange. The
sale of the good or service “validates the utility of the activity undertaken”
to produce it. In this case, social ties are based on exchange. In the public
sector, the provision of social services is “validated by democratic debate”
 Visions in social economy traditions 131
and social ties are based on redistribution (61). Whereas, in the social
economy sector, the regulatory principle of reciprocity or mutuality reigns.
From Lipietz’s perspective, each socialization principle has its own
problematic aspects: the cold, calculated, and narrow self-interest of com-
modity exchange; the abstract and rigid bureaucracy associated with
public-sector redistribution; and the favoritism that often marks recipro-
city (64). Therefore, it is the coexistence of the three regulatory logics as
embodied in the three different sectors that ensures that the “perversions”
of each will best be controlled and compensated for (64). It is here that we
come up against what I consider to be one of the most problematic limita-
tions of this project for, with this reasoning, Lipietz leaves out a large
arena for progressive social change – that of the two primary sectors and,
most notably, that of private-sector commodity production. I return to this
later.
For now, I would like to emphasize how such a positioning of third-
sector activity as complementary to public and profit-oriented commodity
forms of provisioning makes it all the more important to understand more
precisely which types of “activities” Lipietz has in mind when he refers to
third-sector entities that serve social ends or that produce positive exter-
nalities. Given that the third sector is located in part relative to the “crisis
of Fordism” which has produced long-term unemployment, services aimed
at “reintegrating” the chronically unemployed are seen as one important
axis for third-sector activity. Indeed, the French government’s support for
“enterprises with a social goal” can be traced to the 1981 Schwartz Report
on The Professional and Social Integration of Youth which relied heavily
upon the macroeconomic logic of “activating passive expenditures” to
argue for state financial support for services oriented toward job training
and “social integration” (Lipietz 2001: 17–18).
However, when exploring the “gaps” that need to be filled in terms of
the goods and services that are not being provided (rather than in terms of
the labor that is not being employed), the explanation for the need for
third-sector activity becomes that of the dissolution of the traditional ties
of the patriarchal family; and the crisis instead appears to be that of
needing to provide services that women used to provide via unpaid
domestic labor:

In traditional society, human activity took place primarily in the

domestic sector, which was patriarchal. Women “voluntarily” assured
not only the satisfaction of daily needs but also the coverage of life’s
risks: the care of the sick, the convalescing, the dependent, and the bed-
ridden. Women also provided a considerable amount of education.
(20)

Although the welfare state is understood as “progressive” in compari-

son to “traditional society” (because it brought many important universal
132 Carole Biewener
and unconditional rights), the commodity and public sectors “have never
been able to cover the entire range of needs that used to be covered by
traditional society . . . nor a series of new needs emerging in this ‘post-
modern’ world” (22). Therefore, the third sector is called upon to fill this
gap: “It is in this immense field of community-based services, some of
which have yet to be rediscovered and some of which have yet to be
invented, that we can locate the third sector’s vocation” (24).
I find this to be a surprising, yet important turn in Lipietz’s analysis. By
recasting the crisis from that of Fordism to that of the dissolution of tradi-
tional patriarchal family ties, Lipietz shifts the terms of what is at stake in
a significant way. Here he argues for the explicit recognition of the social
importance of women’s paid and unpaid caring labor and a “regulariza-
tion” of this work in a manner that institutionalizes it as third-sector activ-
ity which is adequately remunerated:

When these activities are no longer undertaken within the mute gen-
dered division of family labor, but in the name of the community, then
this validation and remuneration can only be paid by the client or the
public collectivity. . . . And in the case of the third sector, by both at
the same time.
(61)

The dissolution of traditional ties, while opening up a space for true

voluntary devotion by each person toward those to whom one is close
. . . will necessitate the mobilization of an ever-growing number of
people who will have the care of children and older people as their
principal activity (and this will be difficult and highly skilled work) and
who will be paid so that they might “live.” It is unthinkable to reduce
these activities to the principles of commodity exchange or public
redistribution. A huge field is thus opened up for the social and solid-
arity economy.
(65–6)

The project to build a third sector thus becomes, in many respects, a

project to recognize that caring labor is socially necessary and that it must
be supported and remunerated at a level that enables the
providers/workers to enjoy a decent standard of living. Further, this
project also recognizes that such remuneration should not be solely
market-determined, which clearly establishes the legitimacy of other bases
for claims to receiving a portion of the “social product.” Thus, here we
have not only an economic analysis that legitimizes nonmarket criteria for
conferring social usefulness or social validation, but one that also estab-
lishes nonmarket criteria for determining the distribution of some portion
of social wealth, insofar as the wages of third-sector workers should be
determined by some sort of a “living wage” standard rather than solely by
 Visions in social economy traditions 133
the dynamics of market exchange. Clearly then, Lipietz’s characterization
of the third sector incorporates important feminist concerns.4
However, the characterization of social economy activity in terms of
“direct services” and caring labor; of face-to-face work or person-to-
person services; of providing “security, comfort, conviviality, and social
integration” (61) also cedes a vast terrain. For what is the progressive
social vision for the production of goods and services that are not provided
“directly” or “face-to-face” or via caring labor; that are not based upon
“geographical proximity” or as part of a “local” social network? What is
the progressive vision for those of us who spend large portions of our lives
working in factories, offices, and retail outlets, or who work as “civil ser-
vants” in some capacity? For those of us who are “socially integrated” via
wage labor? In short, what is the progressive vision for the secteur
marchande or even for the public sector?
Thus, while Lipietz’s analysis does diversify the economic space in
important ways and incorporates crucial feminist issues, thereby opening
up significant alternatives to what I would call “capitalism,” he also cedes
any explicit project of transforming what remains of “capitalism” (even if
this “capitalism” is more circumscribed and not named as such).

Québec and community economic development

By contrast, the Québécois social economy tradition explicitly embraces a
project of creating a “new model or logic of development” that gives it a
broader emancipatory vision in some respects. As Louis Favreau and
Benoît Lévesque show in their book, Community Economic Development:
Social Economy and Intervention (1999), in Québec the “social economy”
has become part of a larger “Community Economic Development” project
that has developed significantly since 1985.
Here too the growth of “new” social economy activity and the turn
toward community-based initiatives is seen as arising in response to the
“crisis” of the previous Fordist model. As Favreau and Lévesque charac-
terize it, there has been a triple crisis: a “crisis of Fordism, of wage labor,
and of the welfare state” (xx). They emphasize how the crisis of Fordism
has created a lack of jobs and chronic unemployment, thereby producing a
“new form of exclusion – exclusion from wage-labor” (8). This has created
“a fragmented society in which the excluded masses are not exploited by
anyone” (16). Favreau and Lévesque thus highlight the “high economic
and social costs” (11) that have resulted from long-term unemployment.
For them it is primarily the macroeconomic logic of the costs of unemploy-
ment that serve to justify support for the social economy and community
economic development rather than the microeconomic logic of positive
externalities. Work is seen not just as a way of “making a living” (33). It is
a key aspect of how people become integrated into society, helping to
shape their personal and social identities, their “sense of self.” Thus,
134 Carole Biewener
chronic unemployment – a “new” form of social exclusion – “threatens all
of society, not just the margins” (16).5
How then does community economic development respond to this
triple crisis of Fordism, of employment, and of the welfare state? Further,
what makes this a “new” approach or an “alternative”? Favreau and
Lévesque argue that community economic development responds to the
social problem of exclusion by providing an alternative means for “reinte-
grating” people who have been marginalized via chronic unemployment.
For them, engaged communities offer an important new form of social
integration, and this engagement needs to address the economic aspect of
community life (33). They identify at least four distinctive characteristics
of the community economic development approach. First, it is community-
based and, thereby, focuses upon using local resources in socially produc-
tive ways. Second, there is a strong emphasis upon building “intermediary
organizations” such as community development corporations that create
public spaces between “the state” and the “citizen.” Third, there is a
strong emphasis on building partnerships by fostering participation by
multiple stakeholders:

A new approach is taking shape, that of partnership, conceived of

neither as an alienating or dependent form of participation . . . nor as
an equal and consensual relationship . . . but as a form of compromise
where the actors do not give up their respective perspectives, thereby
leaving space for “conflictual cooperation” . . . [In this manner] the
interested parties are able to advance common concrete objectives
while also defending different, even opposed, interests.
(31)

This emphasis upon building communities of difference and the recog-

nition of a plurality of interests is also evident in the fourth aspect that dis-
tinguishes this new “logic of development,” that is, a strong emphasis on
“diversity” in the range of activities undertaken: “We need to allow for the
production of goods and services via a combination of commodity (sale of
goods and services on the market) and noncommodity forms (public
financing and social transfer payments) and nonmonetary forms (recipro-
city and volunteerism)” (28). A large portion of the book is devoted to
examining a wide range of examples of social economy activity, including a
community kitchen, small-scale community enterprises, loan circles,
community loan funds, planning and coordination by community develop-
ment corporations, youth centers focused on social integration via skills
training and collective management practices, housing cooperatives,
community gardens, domestic violence centers, a community television
station, community health centers, and workers’ cooperatives offering a
range of services from home aid and childcare to building maintenance
and lawn care.
 Visions in social economy traditions 135
The emphasis upon incorporating and integrating a wide range of activ-
ity under the umbrella of “community economic development” distin-
guishes this approach relative to both the civic engagement/grassroots
empowerment movement (Boyte 1984) and the socialist “worker self-
management” movement. The civic engagement movement tends to focus
upon fostering democratic political participation, with little explicit
emphasis upon areas of economic activity, while the socialist movement
has focused upon building workers’ cooperatives and ownership. The
Québécois project moves beyond workplace-centered democratic initi-
atives by targeting “the economy” more broadly and “economic develop-
ment” in particular as crucial arenas for democratization. Indeed, they
emphasize the importance of using economic activity as a way of building
community, of creating “social integration,” and of fostering economic cit-
izenship. One might summarize the community economic development
approach as aiming to “democratize economic development” through
local governance, local control, and growth that develops endogenously on
the basis of community resources (26).6
Thus, in the Québécois case, the emphasis upon local economic autonomy
and empowerment delimits this progressive agenda in important ways. On
the one hand, there is the vibrancy of the project to “empower” people and
to “activate them” in the arena of “the economy,” to enliven people’s cre-
ativity and imagination around economic issues, and to enable people to
become subjects of the economy rather than being subjected to the economy
(Community Economies Collective 2001). In this endeavor to build
communities of difference there is clear attention to the multiplicity of ways
in which people engage in economic activity. People are to participate in eco-
nomic development initiatives in a wide range of capacities – as workers, cit-
izens, consumers/users/clients, community owners, investors, and residents –
and the “neighborhood” is to serve as the integrating site.
The emphasis upon local autonomy for social economy activity also
translates into a concern with the entities being economically viable so as
to be able to become self-financing and to not have to depend on state
subsidies. Clearly self-financing can provide important material conditions
for sustainability. Yet, by defining their vision in terms of “local” auto-
nomy and thereby emphasizing the importance of relying on local
resources, this project limits the scope of its progressive alternative in
important ways, for it does not develop a politics oriented toward social
transfers of surplus within a broader community, nation, or region. Indeed,
neither the French nor the Québécois projects offer a strong redistributive
agenda. They thereby relegate issues of social inequality to the shadows of
their progressive politics. As others have noted, since the social economy
projects are based on a language of social utility rather than upon a lan-
guage of entitlement, they have developed a politics oriented toward
responding to social needs and have neglected a politics oriented toward
gaining and maintaining social rights (Boivin and Fortier 1998).
136 Carole Biewener
Certainly, one could read these projects as in some sense predicated
upon an existing welfare state in which there are extensive transfer pay-
ments. Lipietz explicitly embraces the importance of a public sector: “The
public sector has an important redistributive mission that is in the general
interest and undertaken on the basis of abstract generalized norms”
(Lipietz 2001: 64). Further, as discussed above, he recognizes the import-
ance of the coexistence of the public sector and the third sector, with the
social economy posed as a supplement or complement to the welfare state.
This then opens up the space for the possible coexistence of progressive
projects built upon broad social redistribution, a language of rights, and a
language of providing for social needs.
Favreau and Lévesque, on the other hand, are more explicit in defining
their project against that of the welfare state, claiming that the turn to
community economic development and the promotion of social economy
activity is a search for “alternatives to social transfers as the resolution of
social problems and recomposition of the social fabric”(Favreau and
Lévesque 1999: 4). Thus, while in the Québécois tradition there is a clear
concern with addressing the effects of poverty by “revitalizing” local
communities via community economic development, there is no clear
emphasis upon developing a redistributive agenda that would attack social
inequality on a broad scale. Indeed, Favreau and Lévesque pose the
primary problem or crisis as a “movement from a society of inequality to a
society of exclusion” (8), thereby reframing their emancipatory project in
terms of “social integration” and a refashioning of the social fabric, rather
than in terms of addressing social inequality.
This seems quite problematic in a period where there are many people
who have jobs (and are, therefore, “socially integrated” via wage labor)
but the jobs do not pay living wages nor provide adequate benefits. As one
critic has commented, the social economy approach often seems to be situ-
ated “within a dynamic of a sharing of poverty rather than a sharing of
wealth” (Lamoureux 1998: 49). Indeed, there are concerns in many quar-
ters that the French and Canadian governments’ embrace of the “social
economy” is a way of dealing with the crisis in social services brought on
by the neoliberal strategy of privatizing economic activity and eviscerating
the public sector (Shragge 2003; Lamoureux 1998; LeBel 1998).
Favreau and Lévesque recognize the possibility of the social economy
sector becoming simply a subcontractor to the state, substituting low-paid
wage labor and unpaid voluntary labor for relatively well-paid and regu-
larized public-sector jobs.7 They comment on how the social economy
sector is posed with an important challenge: will it follow “a neoliberal
path, in which the associative world and voluntary participation become
palliatives within the framework of a dual society” or will it pursue the
progressive path of “redefining the relationship between the economic and
the social by revalorizing citizens’ power and, thereby, democratizing
society and the economy” (Favreau and Lévesque 1999: 10)? While
 Visions in social economy traditions 137
Favreau and Lévesque clearly advocate for the “progressive path” of
defining the social economy in terms of local democratic control, one may
ask if they adequately address the material conditions for enabling and fos-
tering such democratization – those that involve the redistribution of
social wealth and the social conditions under which wealth is produced in
all arenas of economic activity.

Notes
1 All translations are by the author. I focus on these texts as they are good
examples of work that connects academic inquiry with community-based activ-
ity. This is important because in both France and Québec theoretical work
about “social economy” has been tied to “grassroots” activity. Alain Lipietz is a
French economist from the Parisian Regulation School (which also includes
Michel Aglietta and Robert Boyer). While he has written significant theoretical
work (see, for instance, Lipietz 1977, 1979, and 1983), more recently he has been
quite active as a militant in the French Green Party and, as such, has worked
with community-based “third-sector” groups to further alternative, progressive
forms of economic and social activity. Similarly, Louis Favreau and Benoît
Lévesque have been actively engaged as both scholars and community activists.
Favreau, currently a sociologist and editor of the well-known journal, Economie
et Solidarité, previously worked as a community organizer for 20 years.
Lévesque, also a sociologist, is the co-founder of the Center for Research on
Social Innovation in Social Economy (CRISES, Centre de recherche sur les
innovations sociales en économie sociale).
2 In this respect there is an important difference between the French and the
Québécois contexts, for in Québec there is an extensive network of alternative,
community-based forms of credit that can be used to finance social economy
activities (Biewener 2001).
3 It is important to note here that even the criterion of producing socially useful
outcomes cannot be said to identify third-sector activity in any firm manner for,
as Lipietz notes in passing, some private, profit-oriented, commodity production
also produces positive externalities (59). In this respect, what distinguishes
third-sector activity is that without state subsidies third-sector services would
not be provided (60).
4 Here I am struck by the similarities and differences with Nancy Folbre’s con-
cerns in her book, The Invisible Heart (2001). Folbre’s analysis is similar to
Lipietz’s in so far as she argues that there is a crisis of care and that the provi-
sion of caring labor needs to be supported by the public sector because of the
positive externalities and public goods that it produces. However, unlike Lipietz,
rather than casting the market or commodity sector as compatible with caring
labor activity, Folbre emphasizes the contradictory and often negative dynamics
at play. For instance, she shows how competitive capitalism is undermining
family-based child- and elder-care, while at the same time failing to provide
incentives for adequate market-based substitutes. Further, Diane Lamoureux
(1998) cautions that, while social economy advocates may look to this sector to
provide long-lasting valuable work for women, there are indications that the
opposite is actually occurring when jobs in the social economy substitute for
public-sector employment and offer less permanent positions with lower pay
and fewer benefits.
5 The analysis of unemployment as a form of social exclusion has also been
addressed extensively in the French social economy tradition, most notably in
138 Carole Biewener
the work of Bernard Perret and Guy Roustang (1993). They recognize wage
labor as both a means of exploitation and of emancipation, and they identify
three ways in which wage labor enables access to the public sphere: first, by rec-
ognizing the social utility of one’s labor via market validation; second, by the
recognition and socialization of the wage laborer within a firm or organization;
and, third, by recognition of workers’ rights, especially that of collective bargain-
ing. Thus, the social economy traditions in both France and Québec emphasize
the importance of wage labor in creating one’s social identity. Wage labor is
understood as an important arena for fostering economic forms of “citizenship”
and a sense of community whereas unemployment carries the negative effect of
reducing the scope of one’s citizenship.
6 Michel Parazelli and Gilles Tardif (1998) raise the important question of to what
extent the radical democratic discourse is matched in practice. They note the
lack of rigorous studies of the actual practices of community development
organizations in Québec. Indeed, they cite the problematic example of a
community economic development organization in Montreal, Corporation de
Développement Économique Communautaire (CDEC) Rosemont-Petite
Patrie, which developed a project to address long-term unemployment without
including any unemployed people in the project planning (75–7). They argue
that this “hope for democratic inclusion” is thus more of a “dream” that serves
to “dissimulate the constraints of a repulsive reality by substituting the image of
an ideal social model: mass poverty and marginalization replaced by the social
economy” (89).
7 Lamoureaux (1998) emphasizes how it is most often women who are “ghet-
toized” in second-rate social economy jobs, such that the social economy serves
to reinscribe the devalorization of women’s work rather than to confer more
social value on it. She cites a study by Maude Rochette (1996) which compared
the average hourly salary for female childcare workers in Canada, finding that
those working in nonprofit childcare facilities earned $10.87 (Canadian) per
hour on average and those in for-profit facilities earned $8.08, while comparable
jobs in the public sector paid between $14.61 and $20.46 per hour (15).

References
Aglietta, M. (1976) Régulation et Crises du Capitalisme, Paris: Calmann-Lévy.
Aznar, G., Caillé, A., Laville, J.-L., Robin, J., and Sue, R. (1997) Vers une
Économie Plurielle. Un Travail, une Activité, un Revenu pour Tous, Paris: Syros.
Biewener, C. (1999) “A Postmodern Encounter: Poststructuralist Feminism and
the Decentering of Marxism,” Socialist Review 27 (1–2): 71–96.
Biewener, C. (2001) “The Promise of Finance: Banks and Community Develop-
ment” in J.K. Gibson-Graham, Stephen Resnick, and Richard Wolff (eds),
Re/presenting Class: Essays in Postmodern Marxism, Durham, NC: Duke Uni-
versity Press, pp. 131–57.
Boivin, L. and Fortier, M. (eds) (1998) L’Économie Sociale: L’Avenir d’une Illu-
sion, Québec: Éditions Fides.
Boyer, R. (1986) La Théorie de la Régulation: Une Analyse Critique, Paris: La
Découverte.
Boyte, H.C. (1984) Community Is Possible: Repairing America’s Roots, New York,
NY: Harper and Row.
Community Economies Collective (2001) “Imagining and Enacting Noncapitalist
Futures,” Socialist Review 28 (3–4): 93–105.
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Favreau, L. and Lévesque, B. (1999) Développement Économique Communautaire:
Économie Sociale et Intervention, Québec: Presses de l’Université du Québec.
Folbre, N. (2001) The Invisible Heart: Economics and Family Values, New York,
NY: New Press.
Gibson-Graham, J.K. (1996) The End of Capitalism (as We Knew It): A Feminist
Critique of Political Economy, Cambridge, MA: Blackwell Publishers.
Gibson-Graham, J.K. (2003) “An Ethics of the Local,” Rethinking Marxism 15 (1):
50–74.
Lamoureaux, D. (1998) “La Pannacée de L’économie Sociale: Un Placebo pour les
Femmes?” in Louise Boivin and Mark Fortier (eds), L’Économie Sociale:
L’Avenir d’une Illusion, Québec: Éditions Fides, pp. 25–53.
Laville, J.-L. (1995–6) “Pour l’Économie Solidaire,” Coopératives et Développe-
ment 27 (1–2): 19–24.
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L’Avenir d’une Illusion, Québec: Éditions Fides, pp. 101–33.
Lévesque, B., Bourque, G., and Forgues, E. (2001) La Nouvelle Sociologie
Économique, Paris: Desclée de Brouwer.
Lipietz, A. (1977) Le Capital et Son Espace, Paris: Maspero.
Lipietz, A. (1979) Crise et Inflation: Pourquoi?, Paris: Maspero.
Lipietz, A. (1983) Le Monde Enchanté. De la Valeur à l’Envol Inflationniste, Paris:
La Découverte/Maspero.
Lipietz, A. (2001) Pour le Tiers Secteur. L’Économie Sociale et Solidaire: Pourquoi,
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Sociale” in Louise Boivin and Mark Fortier (eds), L’Économie Sociale: L’Avenir
d’une Illusion, Québec: Éditions Fides, pp. 55–99.
Perret, B. and Roustang, G. (1993) L’Économie contre la Société. Affronter la Crise
de l’intégration Sociale et Culturelle, Paris: Seuil.
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Gagnent-ils au Change?, Québec: Conseil du statut de la femme.
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Organizing, Peterborough, Canada: Broadview Press.
Part III

Social economies in
transition
11 Accounting for societal
externalities
Laura McCann

In North America, the beginning of the twentieth century saw an agricul-

ture based on animal traction, animal manure, and mechanical weed
control, with relatively low productivity. In the twenty-first century, trac-
tors have replaced horses and bullocks; chemical fertilizers have replaced
animal manure; and herbicides have largely replaced cultivation as the
primary means of weed control. Coupled with advances in plant breeding,
these changes have dramatically increased productivity per unit of land
and per unit of labor. This increased productivity has had tremendous
benefits both for farmers and for society as a whole but has also resulted in
unintended effects on the environment and on rural communities. This is
not surprising to those familiar with what Merton (1976) refers to as the
law of unintended consequences.
A number of negative environmental externalities associated with new
technologies have eventually appeared. Excess nutrients result in the
eutrophication of lakes and rivers, reducing aquatic life and the recre-
ational value of these water bodies. Hypoxia in the Gulf of Mexico may be
due to agricultural practices in the midwestern United States. Ground-
water supplies have become contaminated with nitrates and pesticides.
Insecticides have unintended effects on birds and beneficial insects. Herbi-
cide resistance is a severe problem in some parts of the world. Critics fear
that biotechnology will also have unforeseen effects.
Including environmental externalities in the economic evaluation of
new and existing technologies and management practices is now well
accepted. Although according to economic efficiency criteria, the optimal
amount of pollution is not zero, including environmental externalities in
the evaluation may reduce the amount of production that is optimal or
change the optimal production technology. In addition, the recreational,
aesthetic, and biodiversity benefits associated with resource conservation
are acknowledged by the economics profession and sophisticated tech-
niques have been developed to measure these non-market benefits. As
evidence of this, at the 2002 American Agricultural Economics Associ-
ation (AAEA) annual meetings, almost 17 percent of the sessions
were directly related to environmental and natural resource issues, not
144 Laura McCann
including sessions on biotechnology, food safety, or benefits estimation
techniques.
New technologies and improved productivity have had some negative
societal effects such as the demise of small towns in rural North America.
Technological advances that improve incomes for the early adopters ulti-
mately result in increased supplies and lower prices for farmers, a phe-
nomenon which Willard Cochran, in the 1950s, called the “technological
treadmill.” Labor-saving machinery, economies of scale, and larger farms
mean that fewer people are needed on farms, which reduces the rural
population.1 Also, larger farms are less likely to buy from local retailers
than small farms (Chisolm and Levins 1994). It is no longer viable for
every town to have a post office, bank, or clothing store. Schools close
down, consolidate or reduce the educational activities they can provide.
The number of jobs in rural communities declines. The fabric of rural
America thins. This phenomenon is not confined to the United States. In
Britain, Shorten et al. (2001) conclude that many villages are not
economically, socially, or environmentally sustainable. In Australia, the
number of farms was halved from 1961 to 2001 (Hopkins 2002). The Aus-
tralian Human Rights Commissioner, Chris Sidoti (1998: 1), said that
“Many communities in rural Australia are under siege – they have declin-
ing populations, declining incomes, declining services, and a declining
quality of life.” These changes have been seen as an inevitable, albeit
unfortunate, consequence of improved labor productivity. In addition, a
variety of well-intentioned policies have had perverse effects, partly
because social consequences were not considered or poorly predicted.
Cochrane and Runge (1992) argue that in the USA, subsidies have actu-
ally accelerated the demise of small farms compared to a laissez-faire
policy. Van der Sluis and Peterson (1998) examined 100 agriculturally
dependent counties and found that programs such as acreage reduction
and set-asides caused net outmigration, reducing non-farm populations by
about 15 percent over the 1960 to 1990 period. John Ikerd (1996)
bemoaned these trends at the 1996 AAEA meetings and said we should
preserve small farms and rural communities despite the economics of the
situation. As economists, we tend to treat these effects on rural communit-
ies as “non-economic.” If, however, we view these changes as a type of
externality, we can analyze them in a standard economic framework and
use established economic tools to measure them.
This chapter asserts that the profession should pay more attention to
what can be called “societal” externalities when evaluating whether pro-
jects or technologies increase welfare. It is necessary to begin by discussing
some welfare economic concepts in order to show that societal externali-
ties are well within the purview of standard applied welfare economic
theory and that they are not merely pecuniary externalities, which can be
ignored. These concepts are then used to show that many of the changes in
rural communities can be seen as societal externalities. Two specific
 Accounting for societal externalities 145
examples, the plight of Worth County in northern Missouri, USA, and
structural changes in the hog industry, are presented. A theoretical frame-
work for environmental externalities is then expanded to include societal
externalities. The final section of the chapter argues that contingent valua-
tion and choice modeling techniques, commonly applied in environmental
economics, can also be used to value societal externalities.

Welfare economics and societal externalities

Standard welfare economics is based upon a utilitarian philosophical
perspective that goes back to 1791 when Jeremy Bentham expressed the
social goal as “the greatest good for the greatest number.” More recently,
Roemer (1996: 127) states that under utilitarianism or welfarism, “the just-
ness of a social state can be evaluated by knowing only the utilities that
that state delivers to individuals.” The social welfare function implied by
Bentham is the unweighted sum of utilities over individuals. While other
perspectives exist (rights-based, capacity-based), Roemer indicates that
utilitarianism is the oldest and most widely accepted social choice rule
among economists. This is the underlying philosophical perspective of this
chapter. Alternative perspectives in the literature are discussed at the end
of the chapter.
While externality is a commonly used term, it is important to examine
several definitions in more detail because some would argue that these
unfortunate consequences for rural communities are a result of the market
working, not an example of market failure. One distinction in the liter-
ature is that between Pareto-relevant, technical, or real externalities,
which are considered to be examples of market failure, and pecuniary
externalities, which are not. Randall (1987: 182) describes an externality as
“any situation in which the utility of one individual is influenced by an
activity under the control of another” but goes on to exclude certain cases
from being Pareto-relevant. For example, an increase in the price of a
good decreases the utility level of a consumer but changing prices reflect-
ing changing relative scarcity promote efficiency. Bromley (1991) discusses
the two aspects of an externality: (1) that an agent’s utility function or pro-
duction function contains real variables, the levels of which are chosen by
others; and (2) the agent that chose the levels of the variables did not com-
pensate the recipient. Bromley distinguishes pecuniary from technological
externalities: “Pecuniary externalities are transmitted through the pricing
system . . . while technological externalities are real-valued physical effects
transmitted from Alpha to Beta. . . .” (1991: 69). Mishan (1971) distin-
guishes real externalities, which have a direct influence via arguments in
the utility or production function, from pecuniary externalities, which
affect utility and output indirectly via relative prices.
In the definitions of real or technical externalities examined above,
environmental externalities such as pollution, noise, dust, etc. were the
146 Laura McCann
focus of the discussion. The economics literature also includes other types
of externalities including positive ones, such as the aesthetics of a flower
garden, literacy, and health. Fundamentally, however, externalities are
broader than this. Buchanan (1962) discusses political externalities, which
refer to situations where political action is carried out without unanimous
consent, thereby reducing the choice set of agents. Boadway and Bruce
(1984) indicate that, while orderings of social states are judged based on
individual preferences, an individual’s ordering may depend on commodi-
ties consumed by others thus allowing for altruism. In practice, however,
the literature discusses social costs as in costs borne by society as well as
the producer but seldom addresses costs that the general public would
think of as social and which relate to quality of life. These might include
crime, lack of trust, loss of a sense of community or social cohesion, dis-
ruption due to relocation, level of inequality in the community, change in
the industrial focus of the community, disruption of daily living patterns,
and change in leisure opportunities. These are examples of issues that
would be addressed in a social impact assessment (Burdge 1998) and that
are based on research in sociology.
Because satisfaction or utility depends on how the world is experienced
by individuals, which depends on our interactions with others as well as
the consumption of commodities, this seems to be an oversight on the part
of the profession. We look at impacts such as the water quality of a lake
and perhaps even the aesthetics of whether an ugly factory is visible from
the shore, but not whether people feel safe leaving their keys on shore
while they go swimming. These effects are real in that they enter into the
utility function of individuals and thus are externalities that should be
included in economic analyses. To avoid confusion, the term “societal” is
used in this paper to distinguish these types of externalities from the more
encompassing term “social,” which can relate to environmental, aesthetic,
health, as well as societal externalities. As with other types of externalities,
societal externalities can be either positive or negative.

Societal externalities in the rural context

The concept of societal externalities can now be applied to the issue of
technical and structural change in agriculture. As discussed in the intro-
duction, these changes have had both positive and negative effects. As
incomes in developed countries have increased, it may be that the negative
effects are becoming relatively more important than in the past. Cheap,
plentiful food is no longer as important to the public in developed coun-
tries as it was early in the twentieth century.2 Relative scarcity of social
attributes3 versus consumable goods has changed and economists have
tended to ignore this in their analyses.
The number of farms has decreased and the size of farms has increased
in both the USA and Australia. According to the United States Depart-
 Accounting for societal externalities 147
ment of Agriculture’s National Agricultural Statistics Service
(USDA/NASS 2001), the number of farms decreased from 6.4 million in
1920 to 1.9 million in 1997, with a particularly large drop in the 1950s, from
5.4 to 3.7 million. Over that same period, average farm size increased from
148 to 487 acres. The increase in size of farms and changes in the structure
of agriculture have an impact on the rural population. In the early 1940s,
Walter Goldschmidt (1998) compared two communities in California’s
Central Valley, one which was primarily composed of large corporate
enterprises and another which was primarily family farms. This led to the
Goldschmidt Hypothesis: communities with large absentee-owned farms
are less developed both economically and socially than comparable
communities with family farms.
Societal externalities flow from production processes and structural
change similar to the way in which environmental externalities flow from
production processes. In the same way that chemical pollutants are a
byproduct of the functioning of a market that affects individuals who may
or may not purchase the product, societal externalities are similarly a
byproduct of market forces. It is not being suggested that we prevent
structural change in agriculture, rather that we should take account of
these externalities in the same way that the optimal output or production
process of a factory should be adjusted to take account of environmental
externalities.
It is important to distinguish between real or technical externalities and
pecuniary externalities as indicated in the previous section. Changes in
technology may affect the price of labor or land but this represents a pecu-
niary externality because it is transmitted through the price system. When
hog prices decrease due to industrialization and economies of scale in that
industry, smaller farms will be forced to close down, a consequence which
would be described as a pecuniary externality. Costs of production
decrease and consumer prices decrease resulting in an increase in net
welfare. One might also argue that if businesses in the community
experience reduced sales due to families relocating to the city, this also
represents market efficiency. However, if the loss of that farm family
leaves a hole in the social fabric of the community, is that still a pecuniary
effect? Is the fact that the church no longer has the services of the best
voice in the choir, or the high school no longer has enough people to form
a football team not a real externality in that it enters directly into indi-
viduals’ utility functions? What market mechanism is in place for the
church or the football team to be compensated for their loss? If aban-
doned farms are unsightly to tourists and rural residents, what mechanism
exists to compensate them?4 Lynne (2002) writes of the “gloom among
youth who might otherwise pursue food system careers” (410). Are these
not spillover effects, societal externalities arising from the industrialization
of agriculture? Negative societal externalities do not only affect farmers
and rural residents. Residents of cities might like to see and experience
148 Laura McCann
vibrant rural communities rather than dying ones and they might even
value the fact that they exist even if they do not actually leave the city,
analogous to the phenomenon of existence value in the environmental
economics literature.
It should be noted that these negative impacts may be offset by positive
impacts felt elsewhere in the economy or at a later point in time. For
example, if the person with the wonderful voice joins a choir in their new
location, this will have a positive impact. The past literature on secondary
benefits in cost–benefit analyses suggests that, if economic activity in one
area was just displacing economic activity in another area, the net effect
would be zero and these benefits could be disregarded (Marglin 1962).
Whether the positive externalities counterbalance the negative externali-
ties in the case of technical and structural change in agriculture is an
empirical issue which would need to be addressed. It would seem,
however, that in the case of societal externalities within a particular
region, the loss to a small community would generally outweigh the bene-
fits to a large one, similar to the phenomenon of decreasing marginal
productivity.
Another issue is the dynamic or transition costs of moving to a new
equilibrium. Returning to the example of the swine industry, in the ori-
ginal equilibrium, there were a large number of small and relatively ineffi-
cient producers. In the new equilibrium, after structural change, there are
a small number of large and efficient producers. Comparing the two equi-
libria, there has been an increase in efficiency. There may, however, be
costs associated with this transition that are not apparent when focusing
only on the equilibrium situations. A trivial example might be moving
costs, but there would also be adjustment costs associated with learning a
new trade and putting children in new schools. If so, it may be more
appropriate to analyze this change by taking account of the discounted
sum of costs and benefits over time. The time frame involved also becomes
important both due to discounting as well as the impact on transition costs.
A related issue is the rapid pace of technological change. Historically,
advances in agriculture have occurred on much slower time scales. This
allowed both people and social institutions to adjust.
One reason that many “efficient” policies are not put in place may be
that policy-makers recognize that distributional issues, fairness, and social
consequences are important, but that economists do not address them.
These policy-makers have implicitly been taking societal externalities into
account when arguing to save the family farm or imposing Conservation
Reserve Program5 acreage limitations on a county basis. Colby (1988)
indicates that area of origin protection regarding transfers of water in the
western United States is designed to protect business, public services, cul-
tural values, and communities, i.e., to avoid another situation like that of
Owens Valley in California where purchases of water rights by Los
Angeles resulted in the demise of agriculture. The Clayton/Peterson
 Accounting for societal externalities 149
amendment providing additional funding for rural development, which
was included in the US House Farm Security Act of 2001, is the most
recent effort to ensure that rural “communities do not slowly fade away”
(Clayton et al. 2001:1, quote from a letter from the sponsors to their
House colleagues). If we do not address the issues that politicians value,
our advice will not be adopted and the net value of the research will be
negative.

Examples of societal externalities

Prior to presenting the formal model, two examples that illustrate the soci-
etal externalities experienced in rural North America due to depopulation
and industrial agriculture are presented. Many rural areas have seen a
decrease in population which limits the social amenities and services that
can be provided.6 Worth County, Missouri, on the border with Iowa, is one
of the counties that has been most affected by changes in agriculture and a
detailed examination of that county will clarify the concepts addressed in
this chapter.
Worth County is classified as agriculturally dependent, which means that
over 20 percent of the economy is based on agriculture. Farm numbers have
decreased from 414 in 1974 to 356 in 1997, and average farm size has
increased from 352 to 422 acres (Missouri Agricultural Statistics Service
2002). As shown in Figure 11.1, the number of hog farms has also decreased
dramatically over this period from 225 in 1969 to 14 in 1997, while the
number of hogs and pigs has decreased from 29,000 in 1970 to 4,000 in 1999
(USDA/NASS 1999). The number of beef farms has decreased from 429 in
1969 to 228 in 1997, and the number of beef cattle has also decreased from
30,000 in 1970 to 23,200 in 1997 (USDA/NASS 1999).
Worth County’s population has decreased from 3,359 to 2,382 since
1970 (US Census 2002). One half of the schools closed with total enroll-
ment dropping from 778 to 453 students (Missouri School Directory 2001).
Employment has also decreased from 413 to 279 jobs (US Department of
Commerce 1997). According to Donald Null (2002), an extension agent,

The early and mid-eighties was a very tough time for agriculture in the
US. Worth county is very heavily dependent upon agriculture . . . it
was during the mid-eighties that we lost both of our automobile
dealers, one machinery dealer, two hardware stores, one grocery store,
one bank, the cap manufacturing business, and a couple of service
stations.

While the cap factory later reopened, many residents commute to neigh-
boring counties for work. The county is struggling to provide services and
it may be forced to shut down the courthouse and other centralized county
government since land values and retail sales are stagnant or decreasing
150 Laura McCann

35,000 250

30,000
200
Number of hogs and pigs

25,000

Number of hog farms

150
20,000

15,000
100

10,000
50
5,000

0 0
1960 1970 1980 1990 2000 2010

Year

Hogs and pigs Hog farms

Figure 11.1 Hog farming in Worth County, Missouri.

(Belschner 2002). No benefits are paid to county employees and no elected

official is getting the salary they are entitled to by state law. More than a
fourth of the children live below the poverty line and a fourth of its resid-
ents are over 65. Crime related to methamphetamine laboratories is a
problem in the county, a reflection of the growing nationwide problem
highlighted by a New York Times article (Egan 2002). The other types of
societal externalities, such as lower participation in groups, are not col-
lected at the county level on a systematic basis which further illustrates
that these effects are not valued by researchers.
A community in Worth County has tried to fight a hog farm owned by
Land O’ Lakes (a large agricultural cooperative) by incorporating their
town, Irena, which gives them legal and taxing authority (Stevens 1999).
This is an example of the backlash that is being experienced by corporate
hog farms nationwide and another example of the concepts presented in
this chapter. A book, Pigs, Profits and Rural Communities, edited by
anthropologists (Thu and Durrenberger 1998), presents the negative con-
sequences of the industrialization of swine production in the United
States. The editors indicate that there is a range of effects on the physical,
social, psychological, and political well-being of people which is not incor-
porated into our economic analyses. The environmental impacts such as
manure spills, nutrient enrichment of surface and groundwater, odor, and
 Accounting for societal externalities 151
health impacts on workers and neighbors are recognized by economists,
but the authors in this volume also discuss the disadvantages for
communities of the separation of ownership, management, and labor.
They give examples, such as Jackson County, Michigan (DeLind 1998),
where industrial hog production has torn communities apart. Investors
from Detroit, benefitting from a variety of tax incentives, financed the
project, which was managed by Sand Livestock Systems Incorporated of
Maine. Farmers who sold land for the hog facilities benefitted but the
promised improved climate for Michigan grain farmers never materialized
and neighbors suffered negative impacts on their health and quality of life.
Land values collapsed. One neighbor indicated that friends refused to
come to his home after production began. There was also a high level of
anger and frustration over the lack of community consultation and the loss
of confidence in government agencies to look out for their interests. In
addition, communities often bear increased health and education costs due
to the influx of cheap, unskilled labor, costs that are not borne by the firm.
Corporate hog farms have resulted in lower prices for consumers, but
the low prices have also caused many small hog farmers to go out of busi-
ness. From 1994 to 1996, one-fourth of hog producers in the US quit. Jim
Braun (1998: 44) clearly linked the loss of hog producers to the loss of
societal amenities:

For generations, tens of thousands of us farmers relied on pork pro-

duction to put food on our tables, pay for our land, and help pass our
land on to our children. For generations, we pork producers went to
town to worship, to educate our children, to buy supplies, and to
entertain ourselves. Rural communities thrived as farmers thrived.

A theoretical framework for societal externalities

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

Max [pq  c(q)]

q

The first-order condition for the privately optimal level of output is:

p  c or MB  MC
152 Laura McCann
For the case where there are external environmental or aesthetic effects
that depend on the output, E(q), the relevant maximization problem
becomes:

Max [pq  c(q)  E(q)]

q

The first-order condition for the socially optimal level of output, q**, is:

p  c  E

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

Max [pq  c(q)  E(q)  S(q)]

q

and the first-order condition for the socially optimal level of output, q***,
is:

p  c  E  S

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

MC  MEC  MSC
MC  MEC
MC

MB

q*** q** q* q (output/farm)

Figure 11.2 Optimal output with environmental and societal externalities.

MC  MEC  MSC
MC  MEC
MC

MB

q*** q** q* q (output/farm)

Figure 11.3 Optimal output when net societal externalities change sign as output
level increases.
154 Laura McCann
considering environmental externalities. For example, this could be the
case if marginal benefits were lower than indicated on the graph. Empiri-
cal evidence is needed to determine the magnitudes of these societal exter-
nalities and to what extent they accentuate or attenuate the effect of
incorporating environmental externalities.

Incorporating societal externalities into economic analyses

A case for incorporating societal externalities into economic analyses of
technical and structural change has been made. However, in order to
include these effects, we must first measure them; fortunately we already
have the tools to do so. Advances in environmental economics and non-
market valuation mean we can measure and take into account the welfare
loss due to the pollution caused by factories and farming practices. We
could similarly measure the decrease in welfare that is due to the industri-
alization of agriculture, together with its benefits. Travel cost methods
could be used to value the loss of the local bank or post office. Contingent
valuation or choice modeling could be carefully used to examine a wider
range of social issues. For example, while direct interpersonal comparisons
of utility to examine distributional issues are not feasible, we could
measure what value individuals place on equity in the same way we use
surveys to measure existence and option values for a natural resource. By
asking people their willingness to pay for social attributes, we can move
many of the difficult issues of values and ethics from the economics discip-
line to the economic agents. Obviously, surveys would need to be designed
and the data interpreted in light of the limitations and potential biases
associated with these valuation methods.
There has been a trend to incorporate additional factors into our eco-
nomic evaluations. Emery Castle’s (1998) discussion of the relevance of
the social capital concept in relation to rural studies is related to the
concept of societal externalities. Multifunctionality refers to externalities
and public goods that are jointly produced with food and fiber. In the
European context, this typically includes the traditional landscape, ameni-
ties, vital rural communities, and environmental protection (Latacz-
Lohmann and Hodge 2001). For example, some Europeans are concerned
that hedgerows are being removed to allow more efficient use of large
machinery because this has a negative effect on the esthetics of the land-
scape, becoming less visually pleasing to tourists and others. Some argue
(Harrison-Mayfield et al. 1998) that because of the positive externality
provided by the traditional landscape, farmers should be paid to preserve
it. Chisholm and Fraser (1998) discuss the historical and cultural value of
grazing in the Victorian Alps in Australia that needs to be balanced with
the environmental damage caused by grazing. Blamey et al. (2000)
included job loss as an attribute in an environmental choice modeling
study. While preservation of jobs was valued, it was less important than
 Accounting for societal externalities 155
species preservation in that study. More recently, and more relevant for
this article, Cordes et al. (2003) used a contingent valuation study to
measure attachment value to a rural Nebraska community. In Australia,
Bennett et al. (2004) examined the trade-offs between environmental
improvements (to waterways, wetlands, esthetics, and biodiversity) and
loss of farmers or rural residents. They found that both rural and urban
residents had a positive value for preserving rural populations.
People may care about the way a product is produced, and that may
shift the demand curve. Organic produce is purchased because people
worry about the effect of pesticides on their own health, but also because
they want to promote an agriculture that is less polluting. Free range
chickens command a premium because of a perceived improvement in
quality and also because consumers want to promote better treatment of
animals. Fair trade bananas and coffee are purchased not because the
quality of the product is different, but because of the positive social effects
in the producing country, therefore the premium paid could provide a
value for those social effects. According to Hornblower (2000), coffee
became “the first foodstuff to be independently certified for the U.S.
market based on criteria of economic justice.”
A number of methodological issues would need to be addressed regard-
ing implementation of the recommendations in this chapter. As evidenced
by Cordes et al. (2003), determining an appropriate hypothetical scenario
and payment vehicle could be more problematic than in the case of
environmental goods. Choice modeling may be more adapted to these
issues than contingent valuation because it allows trade-offs between mul-
tiple attributes of a situation. More fundamentally, development of a
typology of values associated with societal externalities may be needed in
order to design surveys and facilitate comparisons of studies. For example,
in the environmental field, revealed preference techniques are useful for
obtaining measures of use values, but stated preference techniques are
needed to obtain existence values. Methodologies based on self-interested
individuals may not be well suited to examine the full range of values that
are associated with loss of community, but they would provide a lower
bound for such values. In addition, this type of research could lead to
advances in the area of social capital and increased interest by economists
in the role of groups.
It is also the case that implicit assumptions about the status quo prop-
erty rights allocation embedded in neoclassical economics, and therefore
non-market valuation, are questioned by institutional economists. One
view is that externalities should be considered as inputs, not as byproducts,
thus focusing attention on the ownership of those inputs (Schmid 2004).
Vatn and Bromley (1995) caution against using contingent valuation in
making policy choices regarding the environment and this would presum-
ably carry over to societal externalities. To Castle (1999), the use of
benefit–cost analysis represents a normative decision, that the values
156 Laura McCann
inherent in neoclassical economics have biased the research agenda
related to natural resource economics, and that the self-interest hypothesis
needs to be evaluated. Nevertheless, he indicates that neoclassical eco-
nomics will remain the dominant paradigm used in natural resource and
environmental economics.

Conclusion
It is hoped that this chapter stimulates a critical analysis of the implicit and
explicit assumptions that we use in economics. If the ultimate goal of eco-
nomics is to maximize utility rather than production or income (since they
are only a means to an end), then we should incorporate what individuals
value into our analyses instead of implicitly imposing our values on them.
“Economics is not just the study of markets, but more generally the study
of human preferences and behavior” (Hanemann 1994: 37–8). Some
researchers are focusing on examining the role of relationships in eco-
nomics (Easterlin 2003; Ash 2004). A psychological study of empathy
found that many of the same areas of the brain are stimulated when
people see a loved one subjected to a pain stimulus, as when they
experience it themselves (Singer et al. 2004). If people value viable towns
and jobs for other people, then economists should include those variables
in their economic analysis. Economic techniques can provide a conduit for
the expression of individual preferences. It is also the case that the debate
regarding multifunctionality and international trade (Paarlberg et al. 2002)
would benefit from quantifiable measures of the multiple outputs from
agricultural production. Incorporation of a wider range of impacts is in
line with social economics which sees the market economy as one compo-
nent of the social economy.
I have implicitly assumed that the magnitudes of societal externalities
are large, implying that they should be routinely incorporated into eco-
nomic analyses and policy decisions, but this is an empirical question. If
the measured effects are very small, particularly with respect to the trans-
action costs that would be involved with policy implementation, it may be
appropriate to ignore them. On the other hand, even if the magnitudes are
significant, new policies may not be necessary. It may be the case that
existing policies can simply be modified in order to lessen the societal
externalities that they cause or that new policies that would cause large
societal externalities are not implemented. Including societal externalities
in analyses does not mean that economists will recommend that we return
to the agriculture of the early twentieth century, rather that both the
increased productivity as well as the negative societal and environmental
changes associated with it are taken into account in a broader economic
framework.
 Accounting for societal externalities 157
Notes
1 For Cochrane (1979), the most important force in American agriculture in the
twentieth century was farm mechanization and technological advance. This
resulted in labor being pushed out of agriculture. However, Peterson and Kislev
(1986) argue that in some instances labor was actually pulled out of agriculture
because of the relatively high non-farm wages.
2 According to Maslow’s hierarchy of human motivation (1970), physiological and
safety needs must be met before higher-order needs such as the desire for
belonging, esteem, knowledge, and self-actualization are strived for.
3 Robert Putnam (2000), in Bowling Alone, argues that the level of social connect-
edness in the USA has dropped significantly and that this connectedness is vital
for the well-being of individuals and nations.
4 William Gabler (1997) photographed abandoned farmhouses and wrote a book,
Death of the Dream: Farmhouses in the Heartland, that has been made into a
television documentary.
5 The Conservation Reserve Program was established in the 1985 US farm bill
and pays producers to take land out of production and put it into conserving
uses, for example by planting trees or perennial grasses.
6 A study of rural Missouri by the Brookings Institution (2002) found that while
the population of most rural counties (51 of 93) fell in the 1980s it grew in the
1990s (76 of 93). The exceptions were the northern agricultural counties and the
Bootheel region in the southeast corner of the state.

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

Because mainstream economic studies are built on the assumption of the

universality of economic rationality, in the study of development
processes, there is little or no room for culture. “Culture” is taken here as
the shared knowledge, values, beliefs, and attitudes transmitted from gen-
eration to generation that are at the foundation of order and sense,
and that allow members of a community to behave in a convenient and
acceptable manner, or at least an understandable one (De Kadt 1999).
Fortunately, the obvious unrealistic character of mainstream studies has
brought a growing number of heterodox scholars to study the interaction
of cultural and economic factors, though not all share the same paradigm.
For some, culture can be seen as an obstacle to development, and there-
fore cultural change should precede development. For others, the domin-
ant development model destroys local cultures and consequently is
responsible for the alienation and impoverishment of individuals and
communities.
These two visions of the interaction of cultural and economic factors in
development processes, though apparently contradictory, might produce
the same outcome: the perpetuation of underdevelopment. In the first
case, the loss of values it might imply could nourish a resistance to the very
idea of progress and change; in the second case, the risk of cultural isola-
tion might induce social and economic immobility. The incorporation of
progress in developing countries demands, therefore, a renewed dialogue
and a new insight into their economies. The first step is to insist on the
chances of promoting an original path for development rather than on the
need of removing the obstacles to traditional development. The second
step is to construct an alternative set of premises to the dominant system
of knowledge production. In this alternative set of premises, pluralism
should play an important role.
According to Richard Norgaard (1994), western rationality believes
that there is only one best way for knowing any particular system and that
our separate individual ways of understanding complex systems are
merging into a coherent whole. Within this monist approach, there is one
best way to reach the good life and, thus, there is also one best culture to
162 Manuel Branco
facilitate the process. Accordingly, mainstream studies see global develop-
ment as the spread of the capitalist economical and ethical system to all
parts. In the same fashion, the belief that underdevelopment is solely the
consequence of the exploitation of the periphery by the center is also a
derivation of the monist approach. In a pluralist approach, on the con-
trary, complex systems, such as development processes, can only be known
through alternate patterns of thinking (see Norgaard 1994).
A pluralist approach not only accepts different views to the problem,
but also does not fear the contradictory unraveling that might occur as a
result of the use of opposed standpoints. As Norgaard (1994: 97) puts it,
“to accept conceptual pluralism is to accept multiple insights and the
inherent inability of science to describe complex systems, to predict how
they may behave, or to prescribe how to make them behave in another
way.” Monism in development studies is, undoubtedly, aesthetically beau-
tiful because of its very strong explicatory power, if only it could explain
anything. Pluralism, on the contrary, allows a deeper knowledge of a social
phenomenon because it accepts complexity, but has trouble in designing
policies.
On the one hand, the knowledge produced by universalistic models is
useless to understand the complexity of the development processes
because of its lack of realism, but, on the other hand, insisting on the
uniqueness of a particular social phenomenon may lead to the dissolution
of policy-oriented knowledge because any information gathered is threat-
ened by the immediate expiration of its validity. We should avoid ignoring
what the other has to say, but we also have to make sure that there is still
something to say to each other. Thus, between the dominant model, that
ignores difference, and the particularistic fundamentalism that depoliti-
cizes the development process there has to be some kind of path. The
main purpose of this chapter is, therefore, to propose a pluralist approach
of the interaction of cultural and economic factors in development
processes, an approach that will use and combine different perspectives to
look at ethnic diversity and authoritarianism, with special reference to
Africa, and its relation with economic development. Finally it will try
to show that a pluralist development policy might not be such a difficult
task after all.

Ethnicity and economic development

If a poll were to be done on the cultural obstacles to economic develop-
ment, I would not be surprised if ethnic diversity were the answer that
would arise most often. Indeed, the constant propagation of images por-
traying civil war, along with its procession of statistics about the killing and
destruction, is very persuasive to demonstrate the importance of the cul-
tural dimension of economic development, and the disruptive power of
ethnicity, especially in Africa, the most ethnically diverse continent. The
 Ethnicity, democracy and development 163
concept of ethnicity usually refers to aspects of relationships between
groups that consider themselves, and are regarded by others, as culturally
distinctive. This distinctive character can be defined by a sense of common
historical origin, shared culture, language, value orientation, shared social
norms, and sometimes religion. Although the anthropological definition of
the concept does not imply any pejorative burden, ethnicity, from the
beginning of development studies, has always been taken as a brake on
economic development. Let us review the arguments most often displayed.
Trying to explain why the industrial revolution started in England,
David Landes (2002: 244) states that England had the early advantage of
being a nation, taken not only as a territory but also as something close to
what we could call a cultural entity. According to Landes, the importance
of nations is that they can reconcile social purposes and individual action,
enhancing the latter’s performance through collective synergy. Further-
more, development economics, either diagnosing or suggesting policy,
thinks in terms of the nation-state. The object of the analysis is the
national territory, the national income, the national productive structure
and so on. Even the obstacles are accounted at the national level: demo-
graphic growth, natural conditions, imbalances in foreign economic rela-
tions and, of course, ethnic diversity.
In other words, one of the first steps of a development process would be
building a nation-state, a viable nation-state I should add, and this is,
exactly, the source of the trouble. Indeed, a 1988 survey showed that 63
out of the 111 conflicts occurring in the world at the time were internal,
and among these, 36 could be considered as wars for the shaping of new
countries (Berlinguer 2002). A more pacific way of building nations is to
look for the national identity or the greatest amount possible of cultural
features shared by a more or less large group of people. Once again, how
can one do it easily if within the 184 independent countries in the world
there are more than 600 linguistic groups and 5,000 ethnic groups
(Berlinguer 2002)?
Nation-building is all the more difficult since the very idea of nation-
state is a purely European innovation (Kantorowicz 1951; Hobsbawm
1992) and, therefore, presumably hard to transpose to other cultures. In
the nineteenth century, the Europeans believed that Africans had never
built nations, and that, indeed, they were incapable of doing so (Davidson
2000: 20). Considering then, as today, that ethnic diversity was the African
curse, they carried out the physical and cultural construction of the
African nation-states regardless of local identities. Basil Davidson (2000:
96) argues that it is true that the ancient multicultural kingdoms of Ghana,
Mali, Songhay, and Kamen, were similar to the feudal European states
but, unlike them, could not produce any kind of national identity.
However, where national identity was created and was starting to evolve
towards a very western-like form of nation-state, with the Asante for
instance, its potential was disrupted by the colonial domination, declares
164 Manuel Branco
Davidson. When the nationalist movements sought independence, they built
the new nations within the borders of the colonial territories and it seemed
that the ethnic groups got trapped inside these limits. Since the very start,
then, African nations appeared to be doomed because of difference.
In addition to creating serious difficulties to the construction of nations,
numerous studies on ethnic diversity and public-policy suggest that ethnic
diversity reduces the efficiency of public service delivery, undermines eco-
nomic performance through the inhibition of social capital, and trust
(Easterly and Levine 1997; Alesina et al. 1998; Collier and Garg 1999),
fosters clientelism (Van de Walle 2000) and, finally, restrains development
because it hinders democracy, taking for granted that democracy is essen-
tial to economic development (Przeworski and Limongi 1993; Alesina and
Perotti 1994; Branco 1999).
In accordance with a pluralist approach, we should, now, confront these
views with alternative ones, starting with the last argument. It is easily
accepted that whenever there is a strong ethnic diversity, political struc-
tures tend to be organized around ethnic groups rather than around philo-
sophical affinities. Therefore, whenever an election is called, it is ethnic
belonging, or demographic vigor, that is balloted rather than strategies
outlined to enhance the public good. In this sense, ethnic diversity inter-
feres negatively with what can be considered one of the pillars of demo-
cracy, but are we sure that in mature democracies, where free choice is a
powerful instrument to legitimate economic policies, such interferences
never occur? In an election in the United Kingdom for example, can we be
assured that when people vote, they only care about weighing strategies,
and their tradition, and culture, such as belonging to a Conservative or
Labor political family does not interfere in their judgment of the goodness
or badness of this or that particular policy? In other words, ideology is
accepted to be one of the pillars of western democracy, but, regardless of
our values, what makes ideology better than ethnicity in procuring
stability, representativeness, and fairness to governance?
Moreover, some studies sustain that it is not so much ethnic diversity
that impedes democracy, but democracy that is essential to mitigate, or
even eliminate, the potential negative effects of ethnic diversity (Collier
1999), although others do not agree with this (Horowitz 1999). Studies
on democratic Botswana and Mauritius (Carroll and Carroll 1997; Ace-
moglu et al. 2002) show that not only have these countries succeeded in
maintaining a high growth rate, they have also created fairly honest and
competent bureaucracies, in which the plural character of their societies
has apparently been reasonably reflected. One could argue that
Botswana does not display a very strong ethnic diversity when compared
to other African countries (Stedman 1993), but when countries face the
presence of a major ethnic group side by side with smaller groups, the
risk of conflict is apparently higher than when ethnic diversity is wider
(see Collier 1999).
 Ethnicity, democracy and development 165
With respect to the question of ethnic diversity raising transaction costs,
some arguments sustain that, on the contrary, in the absence of trustwor-
thy institutions, like courts or other contract-enforcement institutions
(Collier and Gunning 1999), the ethnic group reduces cheating because of
the moral obligations that each member has to respect in order to preserve
the good name of the group (Wintrobe 1995); therefore ethnicity can, in
fact, contribute to reducing transaction costs. Furthermore, in the absence
of proper institutions, the ethnic group can provide a system of insurance,
or social security, against common setbacks of life. On this matter, Niger-
ian historian Peter Ekeh (1990) draws a parallel between the rise of feu-
dalism in Europe and the consolidation of the ethnic affiliation in Africa,
each of these systems being a response to the need of security of the
people. Thus, every time the state could not ensure security to its citizens,
as during the slave trade or the post-colonial and neo-colonial state preda-
tion, ethnic and kin affinities became tightened. We should add that in the
absence of private property in rural Africa, ethnic groups and their rules
have proven to be one of the few effective instruments for land allocation
(see Bates 2000; Rakotoarisoa 2002).
In relation to the lowered efficiency of public-service delivery, the dele-
terious effects of ethnic diversity, in general, only occur in the context of
governments that are undemocratic (Collier 1999). Indeed, dictatorships
tend not to transcend the ethnic group of the dictator, so that the more
ethnically fragmented the society, the more narrowly based will gover-
nance be, whereas democratic governments, in such societies, must be
ethnically cross-cutting. In turn, the more narrowly based the governance,
the greater the payoff to predation (or plundering) relative to the induce-
ment of generalized growth (Collier and Gunning 1999). The problem,
thus, is not ethnic diversity as much as the lack of democracy. Therefore,
we could be facing a political issue rather than a cultural problem.
After the independences, many of the new African leaders thought that
building nations meant more or less the same as homogenizing society. They
used a considerable amount of their energy to repress any claim to dif-
ference, institutionalizing undemocratic governance as the only way to reach
the alleged first stage of development. The problem is that the attempt to
erase cultural difference by the means of political repression was not only
harmful to economic development but, in several cases, also both inefficient
and counterproductive to foster national unity. Indeed, according to Samir
Amin (1989) the repression of cultural pluralism led to the exacerbation of
this same cultural pluralism through clandestine forms, much more danger-
ous to the goal of national unity that repression was supposed to achieve.

The roots of cultural differences

Until now we have assumed ethnic diversity of the new territories as an
indisputable fact, but reality is not that simple. Cultural differences exist
166 Manuel Branco
everywhere within nations. In Europe, we talk of provincialism instead of
ethnicity. In some cases, cultural differences led to the establishment of
precise borders circumscribing separate national states; in the vast major-
ity of the cases, the construction of the national states arose from the
aggregation of different cultural identities. The question, then, is why has
this process been so hard to achieve in so many areas of the Third World,
especially in Africa? Amin (1989: 151) declares impudently that the colo-
nial administration has a determinant responsibility in the creation of the
ethnic reality. George Nkrumah (1998) sustains that the laws and the insti-
tutions inherited from the colonial powers were often designed to exploit
ethnic, religious, and linguistic differences within and between African
states. Finally, Basil Davidson (2000), on tribalism – a ramification of
ethnicity – declares that it is a convenient invention of the colonial period.
The purpose of this invention seems obvious: it intended to make the colo-
nial administration of vast territories easier and cheaper, without the
mobilization of a great number of Europeans who were not only scarce, in
view of the enormous task, but also clearly unadapted to the climatic con-
ditions in the field, and thereby condemned to face high natural mortality
rates (Acemoglu et al. 2001). The invention of cultural differences also
served the needs of the colonial rulers in the creation of labor reservoirs
and the segmentation of labor along ethnic lines (Ishemo 2002).
This does not mean that ethnic diversity only exists in our western
minds. Ethnic diversity and ethnic conflict are facts of contemporary life.
The point is that this diversity was overestimated from the beginning and
exacerbated with calculated action by the colonial administration.
The invention of the ethnic group, argues Amin (1989), was made by a
bunch of bad anthropologists in a frenzy of classification that can be
compared to the meticulous work of adventurer botanists discovering the
rainforest.
The differentiation between Tutsis and Hutus in both Rwanda and
Burundi, for example, is a perfect illustration of the artificial methods used
to separate people that any important feature, culture, language, or
history, did in the first place. Some say that, traditionally, the Tutsi minor-
ity was the ethnic group that dominated the Hutu majority, but we know
well today that the feudal Tutsi domination was made up by the Belgian
colonization (Lacoste 1993: 747). Indeed, in order to control the territory,
the Belgian administration relied on the Tutsi minority, invoking a fake
ethnical, and almost racialist, distinction between a Bantu and Hamite
origin that gave the Tutsis an alleged touch of nobility to which Hutus
could not aim. The colonization established the Tutsis as the elite and nat-
urally the administration in the pre-independence period was monopolized
by them, creating as one could expect natural frustration and resentment
among the Hutus. External influence of the colonizer is at the origin of the
surge of many other ethnic groups such as the Bambara, in Mali, or the
Bete, in Ivory Coast (Latouche 1986; Lacoste 1993). In Madagascar, at the
 Ethnicity, democracy and development 167
beginning of the twentieth century, the colonial administration artificially
defined the existence of 18 tribes and today people recognize themselves
in this distinction, especially because the names that were given to the
tribes were related to the physical characteristics of the territories they
inhabited (Rakotoarisoa 2002): Tefasy means those who come from the
sands, Tanala, those coming from the forest, and so on.
Ethnic conflicts can also be the result of other external interferences,
besides the colonial adventure. According to Yves Lacoste (1993) many of
today’s ethnic conflicts in Africa have their origins in the slave trade. From
the eighth century until the nineteenth century, the Arabs first, and the
Europeans onwards, used some ethnic groups to capture slaves. A great
deal of the actual ethnic conflicts would, thus, be coincidental with the
frontier between the predator and the predated groups among the African
population. Although slavery is a very old system, one which actually con-
tinued long after the Congress of Vienna prohibited it in 1815, there is no
doubt that the mass slave trade has an external origin, based on the labor
demands of the economic systems of other colonized regions – the Ameri-
cas by the Europeans and the Mediterranean and the Middle East by the
Arabs. Thus, it seems that we are facing an historical, political, and eco-
nomical issue, closer to class struggle than to cultural clash.

On the cultural roots of authoritarianism

In the Wealth and Poverty of Nations, attempting to draw the outline of
the political and social institutions necessary to reach the goals of eco-
nomic growth and development, David Landes (2002) refers to the
importance of tolerance and the rule of law, supporting the views of many
who consider the way in which authority was performed an important
factor in the western European development process. The opposition
between centralized and delegated use of power seems, indeed, quite rele-
vant in explaining the precocity of economic development in England and
in the Netherlands when compared to France or Germany. Regarding
political institutions, the Roman tradition establishes the unconditional
character of the sovereign’s power. In the Anglo-Saxon tradition, on the
contrary, sovereignty is delegated. In terms of the administration, the prin-
ciples are the same. In the Roman tradition, it is the central administration
that decides all, whereas in the Anglo-Saxon tradition matters that can be
decided locally need not be taken higher up in the hierarchy of the state.
In England, for example, county sheriffs and judges have been elected
since the twelfth century whereas in France the need is felt to designate
the public servants from the center and, very often, to make sure that they
come from a region other than the one to which they were appointed
(Hénaff 2000: 62–3). This procedure is, actually, still largely followed in
today’s French administration.
The centrality tradition gave French kings the possibility of deciding,
168 Manuel Branco
more or less by themselves, the nature and the level of taxes. Con-
sequently, taxation struck essentially the productive population leaving
the socially inactive elites free of charges. In England, on the contrary, the
monarchy was obliged to negotiate with different social groups. Taxes
were now decided in common and the tax burden was more equitably dis-
tributed. The fact that the government became more public and account-
able also allowed higher levels of taxation than in Continental Europe
(Epstein 1995). According to Marcel Hénaff (2000), this resulted in
innovation and competitiveness with long-lasting benefits for all. From an
institutional point of view, this would explain why England was better pre-
pared to launch the industrial revolution than France, in spite of the fact
that their economies seemed to be growing at a similar rate during the
eighteenth century (see, for example, Epstein 1995).
After this brief overview, we should ask ourselves if a tendency towards
authoritarianism in politics, explaining the obstruction to development,
could be found in the different cultural traditions in the Third World. In a
conference on globalization, science, culture, and religions, held in Lisbon
in October 2002, Daniel Etounga-Manguelle (2002), chairman of a
Yaounde-based company, declared that among the progress-resistant fea-
tures of the African culture was an excessive concentration of authority
and power in one individual, who will often claim magical powers. The
recent history of Africa gives indubitable examples of this excessively cen-
tralized manner, to say the least, of performing authority, but is this the
demonstration we were looking for, that authoritarianism is a cultural
feature? Indeed, on many occasions, while analyzing the cultural back-
ground of underdevelopment, especially in Africa, there is a tendency to
isolate these features from the last centuries of the societies’ history.
If one wants to look for, say, an African tradition of performing author-
ity, one should not forget the few hundred years of colonization and
unequal development that have affected this continent. In order to get a
more authentic view of tradition in these fields, one should probably have
to study pre-colonial Africa. In doing so, the image of the despotic tradi-
tion in African ruling is not so striking. Where there were organized states
the forms of government could be either centralized or more participative.
One feature, though, seems present almost everywhere, the possibility of
the people overthrowing the ruler in many different institutionalized ways
(Davidson 1981; Ayittey 1992; Lacoste 1993). It seems that culture, or tra-
dition, cannot explain authoritarianism among the majority of African
countries during the post-colonial period.
The brief alternative explanation offered below results from the combi-
nation of the economic structure and the institutions inherited from the
colonial period. Regarding the economic structure, a major part of African
economies are dependent on the export of a scarce variety of natural
resources, or plantation crops, which have shown a tendency to lead to
loot-seeking activities (Collier and Gunning 1999: 9). This kind of appro-
 Ethnicity, democracy and development 169
priation of national income is clearly opposed to democratic, problem-
solving distribution of national wealth, even more so when the ruling
elites constitute a small group. The gains to an extractive strategy, a
euphemism for loot, are closely related to the size of the ruling elite
group (Acemoglu et al. 2001: 1376). When the elite is scarce, each
member can expect a larger piece of the pie and so, the smaller the elite
group, and we could add the more unequal the income distribution, the
greater the incentives to be extractive. Following the same line of
thought, the greater the extractive character, the greater the risk for the
elite of becoming a political loser, that is to say, of losing their economic
and social status if replaced, which, in turn, favors authoritarian strategies
to keep the power.
In many parts of Africa, the fact that the European colonization was
mainly interested in exploiting the natural resources and the exotic crops
is the main reason for their excessive specialization and their alienating
dependence from volatile external markets (Frank 1966; Jalée 1973; Amin
1973, 1977). In turn, the fact that the colonial administration delegated the
day-to-day running of the state to a small domestic elite (Acemoglu et al.
2001) as well as the low investment made on educating the native popu-
lation, partly explains the existence, at the time of independence, of a
small elite group, almost exclusively connected to either extractive activ-
ities or colonial administration.
After having taken control of the state, this elite received few incen-
tives to change the institutions and consequently favored the undemoc-
ratic and extractive institutions that prevailed in the colonial era
(Acemoglu et al. 2001). If we are convinced of this line of thinking, it
follows that authoritarianism has little to do with culture and is much
more related to historical and economical matters. A comparative study
of Botswana and Lesotho provides an enlightening example. Despite
sharing the same traditional ruling institutions in pre-colonial times, and
being very close both linguistically and culturally, Botswana evolved
towards a democracy and Lesotho did not. The reason for this diver-
gence should be sought in the recent history of the two countries. The
limited impact of the colonial rule in Botswana, as compared to the
experiences of many other nations in Africa, South America, or the
Caribbean, allowed the continuity of the pre-colonial institutions and the
elites that came to power after the independence were only partly
members of the former administrative elite (Acemoglu et al. 2002: 23);
the power, therefore, became essentially delegated. In Lesotho, on the
contrary, the wars against the Boers and the fact that the British were
much more interventionist undermined the traditional institutions and
contributed to the centralization of the political power in the hands of
the colonial elites (Acemoglu et al. 2002: 29).
This does not mean that ethnic diversity, for example, does not have
any negative effects on the development process. Ethnic diversity can
170 Manuel Branco
foster violence and destruction as the world has witnessed in Rwanda and
more recently in Congo, former Zaire. The solution, though, in the major-
ity of the cases, is political and economic and does not imply that one has
to adopt an alien culture apparently best fit to promote development.
Leaving behind their culture, in order to enjoy the delights of develop-
ment, should not even be an option, as many studies show that the only
countries that have succeeded in development are those that kept intact
the spine of their culture, e.g., Japan, South Korea, or Taiwan (Dockès
and Rosier 1988; Latouche 1992; Lê Than Khôi 1992). If there were any
secret in the success of the once called “New Industrializing Countries” of
the Far East, it was the combination of openness to the external winds of
progress, namely technical progress, and the cultivation of tradition.
Because societies always search to change and to last, this combination
appeared to be mutually beneficial, as change ensured continuity and tra-
dition worked as a technique to incorporate change (see for example
Perrot 1994).

Contribution to a pluralist development policy

In order to build a pluralist development policy, instead of picking altern-
ative views of the interaction between cultural and economic factors, one
needs to use all the different and sometimes contradictory approaches to
the problem. In a pluralist approach, no school of thought can claim to
explain underdevelopment. Each is partial and delivers one particular
vision of reality. Accepting one does not mean recognition of the other is
impossible but, rather, the need to combine them in order to catch com-
plexity and therefore to come close to reality. Thus, in studying ethnicity,
democracy, and development, neo-Marxist as much as neoclassical or new
institutionalist approaches have been termed.
On the one hand, imperialism under the shape of colonial administra-
tion and the heritage of a particular economic structure based on the
export of very few goods, mainly natural resources, can explain the
resilience of such cultural features as ethnic diversity and authoritarianism.
On the other hand, neoclassical and new institutionalist interpretations,
which insist on pointing out the fatal influence of undemocratic and
corrupt states to explain underdevelopment, can also help us to under-
stand why it has been so hard to create a sense of the common good and,
thus, to substitute wealth exaction for wealth creation. Traditionally, these
views, especially neo-Marxist and neoclassical, are presented as contra-
dictory and, therefore, they are seldom combined to account for underde-
velopment.
Despite the fact that it was exacerbated and sometimes erected stone by
stone by colonial authorities, ethnic diversity is a fact in a large part of
Africa. The conflicting nature of this ethnic diversity has often contributed
to jeopardize the meager economic achievements in many parts of the
 Ethnicity, democracy and development 171
continent. But the attempts made with the purpose of homogenizing
nationalities have also brought totalitarian regimes and even more hatred
between communities, which means that hindering ethnic diversity has
become, in turn, a new obstacle to development.
If democracy has been a decisive tool to mitigate, or even eliminate, the
potential negative effects of ethnic diversity, in practical terms, the intro-
duction of democratic governance in an ethnically diverse country, espe-
cially in Africa, does not appear to be a simple task. The solution, as we
have seen above, should not be found in the elimination of ethnic diver-
sity, because ethnic groups play an important role in the absence of crucial
institutions to development such as courts or social security, but according
to Adrian Leftwich (2000) more so in the confinement of ethnic loyalty to
the private sphere.
The first ingredient of a pluralist policy aiming at the reconciliation of
ethnicity, democracy, and development consists in the transformation of
the economic structure of most of the African developing countries. The
diversification of the sources of internal and external revenue is crucial to
create new elites and to soften the mechanism of the political loser. The
actual structure of foreign trade, for example, at the origin of a loot-
seeking economy, is not favorable to this enterprise. In this sense, special-
ization can represent a brake as much as a propeller to development. The
trends within the global economy point to further specialization and,
therefore, pursuing democratization and specialization, both part of the
mainstream new political economy agenda, might, in fact, have contra-
dictory effects.
The second ingredient of our pluralist policy consists in admitting that
democratic governance is not forcibly a synonym of majority democracy.
Among ethnically divided countries, the principle of the “winner takes all”
might not be applied. This should not mean that the governments pro-
duced by this system would not be democratic; they would just be based
on a different, plural, conception of democracy. The exploration of such
possibilities is not new. On this matter the most cited work is Arend
Lijphart’s (1977) in which the author analyzes the democratic political
systems of ethnically, or culturally, divided countries such as Switzerland,
the Netherlands, and Belgium. In this system that he calls consociational
democracy, the government is not politically homogenous but composed,
instead, of the different political organizations proportionally to their
weight in parliament. The fact that these countries display stable and
democratic governance is sometimes presented as a demonstration of the
non-inevitability of conflict and totalitarian political regimes in ethnically
and culturally divided societies (Dahl 2000; Michalon 2003). Therefore,
the ethnic diversity in itself should not constitute an obstacle to democracy
and even to development as the countries referred to above are also
among the wealthiest in the world.
Democratic reforms implemented in Africa in the 1990s only had
172 Manuel Branco
formal effects, partly because the majority system confers power to the
organization that obtains the majority of the seats in parliament, frustrat-
ing all the others. When these organizations correspond to ethnic groups,
it means that the minorities are condemned to remain apart from the
administration of public affairs. On the other hand, the ethnic group
holding the majority can hardly obtain the cooperation of the opposition
because there are no foreseeable political gains in it for the latter. There-
fore, this form of democracy, instead of contributing to reducing the con-
flicting potential of ethnic diversity could, on the contrary, foster violent
coexistence of the different groups.
The examples of consociational democracy presented above only
concern European countries and one may ask if this experience can be
transposed to other parts of the world, namely to Africa. The democratic,
and relatively successful, development strategy in Mauritius shows that it
is possible to import this governmental system to other countries where
ethnic diversity can be even stronger. Nevertheless, Leftwich (2000) draws
attention to one very crucial condition for the implementation of consocia-
tional democracy: the recognition by the local political forces of the need
to compromise.
A system based on the principles of the consociational democracy is a
chance to break the vicious circle in which several developing countries
have been imprisoned since the creation of their nation-states. Ethnic
diversity could cease to be a source of conflict and an obstacle to demo-
cracy, and democracy would not need to wait for cultural homogeneity to
function. In this sense, two extreme speeches on the interaction of cultural
and economic factors can be dismissed, the first being that the cultural par-
ticularities of developing countries are an obstacle to democracy, and the
second that parliamentary democracy is a western concept and, therefore,
cannot be adapted to suit Third World countries.

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

Much of the orthodox approach to economic policy-making is founded on

liberalization, a favorite “catchphrase” of economic and political vernacu-
lar over the last few decades. Following the orthodox paradigm, developed
countries push for the neoclassical vision of the laissez-faire global
economy, and expect developing countries to do the same. This trend
toward liberalization has reshaped the sphere of international finance in
particular, which has shifted its center of activity from the public to the
private sector.
Many orthodox economists support neoliberal policies, arguing that
decentralized government and liberalized capital flows promote a more
efficient allocation of resources and, in turn, higher economic growth (see
Quinn 1997; Klein and Olivei 2000; Bekaert et al. 2001). An important
question, then, is whether or not the recent experiences of the global
economy have validated this theory. While examining the track record of
Latin America and Asia – two regions that implemented financial liberal-
ization programs – one cannot answer this question in the affirmative. In
these regions, financial liberalization programs have been associated with
“low levels of productive investment . . . and economic growth, a flourish-
ing of speculative investments, dramatic increases in non-performing bank
loans, and financial crises” (Grabel 1995: 128; see also Rodrik 1997, 1999;
Stiglitz 2002). Such outcomes, the antithesis of orthodox policy prescrip-
tions, suggest problems with both the analysis and the prescriptions.
As an alternative to the orthodox approach, I adopt a heterodox con-
ception of financial crises. The heterodox (specifically, post-Keynesian)
finance literature argues that orthodox financial policies have not led to
stability and global growth, and furthermore, they have actually con-
tributed to an increasing amount of financial instability. However, I sup-
plement this post-Keynesian view by integrating the gender dimension.
Orthodox policy is nominally gender-neutral, but there are significant
gender effects associated with contemporary orthodox theory and policy.
To note but one example, stabilization policies such as budget cuts may be
gender-neutral “on paper,” but the actual policy outcomes tend to disad-
vantage women relatively more than men. If household funds are
176 Tonia L. Warnecke
insufficient for external medical and childcare expenses, the “money cost”
for these services is often translated into “time cost” for people within the
household; socially determined roles often allocate these non-monetary
costs to women. I elaborate these types of gender effects in a later section.
Unfortunately, the gender dimension is often overlooked, even in het-
erodox papers. This is problematic because there are several feedback
effects between gender equity and financial policies. Exploring these rela-
tionships is crucial to understanding the implications of particular policy
choices. In several ways, the liberalization of international finance can be
linked to growing gender inequity. The growing numbers of financial crises
have aggravated the poverty problem, and women – constituting more
than 70 percent of the poor (Center for Women and Democracy 2004) –
have suffered disproportionately. From this point of view, the contempor-
ary system of international finance and its associated policies are not
gender-neutral since these crises are considered a byproduct of financial
liberalization. Furthermore, the stabilization plans designed to address
financial crises “work to the benefit of men more than to the benefit of
women” (Elson 1992: 47). Developing a feminist approach to international
finance will help to address these important issues, and to consider “how
gender relations and inequalities are embedded in what might appear to
be hidden economic interactions” (Benería et al. 2000: 10). By (1) suggest-
ing modifications to orthodox policy, and (2) depicting the need to create
heterodox solutions, I aim to provide a foundation for a gender-aware
approach to international finance. The fundamental premise, therefore, is
that the sphere of international finance (and the policies designed to regu-
late this sphere) cannot be considered an entity closed off from, and
impermeable to society. Because I emphasize the intricate relationships
between economic policies and social outcomes, especially with regard to
gender equity, this research endeavor is compatible with social economics.

The international financial system

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

1 Financial liberalization creates instability at the domestic level;

2 The interdependencies between countries then make each country
vulnerable to financial crises; and
3 The orthodox stabilization package does not attain its intended results,
and can exacerbate the problems of countries in financial crisis.
 Gender-aware approaches to finance 177
These three premises are used to substantiate the conclusion of this
section: the orthodox stabilization package must be rejected along with the
orthodox theory.
Regarding the first premise, domestic-level instability is spawned by
financial liberalization in a few different ways. Financial liberalization both
widens and deepens the banking and financial services sectors of a
country, leading to a diversification of available services and a greater
number of firms providing such services. As financial sectors are deregu-
lated, lucrative entrepreneurial opportunities emerge in several areas,
including financial structures, institutions, products, production tech-
niques, and marketing (see Arestis and Glickman 2002). The drive to
secure these “fresh” profits intensifies inter-firm competition.
While competition can lead to more efficient production of goods and
services by forcing firms to improve quality and/or lower costs, competi-
tion can also foster an environment conducive to speculative behavior.
Firms begin to utilize a new type of rent-seeking behavior as they attempt
to exploit regulatory loopholes. A firm declining to participate in these
activities “may face slower growth and a loss of market share” (Grabel
1995: 142). Because of this, a particular tension emerges between a firm’s
potential to capture profits and the possibility of overextending its
resources.
At first, this fragility is masked by the astounding successes realized by
some entrepreneurs. Risky investments may begin to seem less risky. In
any case, any personal success motivates further speculation. The firm
does not fear greater indebtedness because

success breeds a disregard for the possibility of failure: the absence of

serious financial difficulties over a substantial period leads to the
development of a euphoric economy in which increasing short-term
financing of long positions becomes a normal way of life.
(Arestis and Glickman 2002: 241)

Over time, though, this interplay creates a destabilizing force that slowly
spreads throughout the domestic economy. Reacting to the highly
competitive environment, firms are bound to undertake certain invest-
ments and to reduce their bank reserves in ways that might have previ-
ously been unacceptable (Grabel 1995). As the value (and cost) of
investments climb, firms may require very high returns in order to satisfy
their obligations, and, as this cycle continues, firms may need to “increase
debt to pay debt” (Arestis and Glickman 2002: 240). This succession of
events is entirely endogenous to the process of financial liberalization, and
will continue until the cycle reaches a breaking point.
It is important to note that the determinants of this breaking point are
different for orthodox and heterodox economists. As previously men-
tioned, orthodox economists refer to exogenous shocks to the financial
178 Tonia L. Warnecke
system. However, the prosperous cycle can easily be halted by endogenous
factors. (The endogeneity of the breaking point is characteristic of a het-
erodox view.) An example of this endogeneity follows: as aggregate
demand increases, financed by speculative investment, this demand acts as
a catalyst boosting interest rates (Arestis and Glickman 2002: 241). As
interest rates rise, the costs of debt servicing rise for firms and individuals.
Increased demand also leads to increased production (i.e., supply), and the
associated demand for labor enables workers to demand higher wages.
Together, these factors squeeze company profits and, over time, firms’
profits decline and/or vanish. Yet, this sequence of events is far from being
exogenous to the financial system; it seems a natural component of the
business cycle. Moreover, this cycle becomes more pronounced and mag-
nified by the higher debts incurred through speculative finance. As a
result, the domestic financial system rests on a shaky foundation.
Moving to the second premise, this domestic fragility is contagious
because of the interdependencies between countries. With international
financial liberalization, the “mood” of a domestic financial sector (positive
or negative) is easily transmitted to investors in other countries. A positive
outlook will naturally inspire investors to pour more money into the “suc-
cessful” country. Since financial liberalization deregulates capital flows,
investors worldwide are able to capitalize on any perceived arbitrage or
profit-making opportunities. This occurred in both Asia and Latin
America, where capital inflows increased dramatically prior to their
respective financial crises. While the additional funds seemed purely
advantageous for the recipients, the investment actually contributed to the
speculative cycle by enabling banks to intensify their lending and borrow-
ing. Furthermore, the positive economic mood curbed caution for both
creditors and debtors.
In a world of speculative finance, a country’s economic mood is surpris-
ingly fickle. The far-reaching success of some firms cannot compensate for
the staggering indebtedness of others. As more firms default on their
debts, foreign investors become wary and withdraw funds from the
country in question. “Herding” behavior spreads and capital flight com-
pletely reverses the previous capital investment. Since most central banks
only have a limited amount of reserves to buffer the exchange rate, capital
flight can lead to an exchange rate crisis.
The main problem with financial liberalization, then, is the increased
vulnerability of countries to financial crises (both domestic and external in
origin), largely because of the shift from hedged finance to speculative
finance. A second problem is that free capital flows have not benefited the
least developed nations. In the mid-1990s, 14 countries received 95 percent
of all private flows to developing countries, and the low-income countries’
share of foreign direct investment (FDI) inflows averaged only 6.8 percent
(Singh and Zammit 2000: 1251). Furthermore, as deregulated finance has
replaced official development assistance, low-income countries have fewer
 Gender-aware approaches to finance 179
funding options available to them. While private capital flows may be an
“efficient substitute” for official flows in some countries, lower-income
countries remain unattractive to foreign investors.
However, even the lucky recipients of capital inflows remain vulnerable
to changes in investor moods. Many countries depend upon these inflows
to finance their development schemes and social assistance plans, and the
volatility of capital flows from one year to the next can be very disruptive.
If a country receives substantial inflows for a length of time, it is likely to
count on their continuation when making decisions regarding investment
and expenditure. Yet the recipient country is entirely at the mercy of
changing foreign interest rates, which can quickly make other countries
appear more attractive for investment.
In light of the financial fragility caused by liberalization, the orthodox
theory of international finance must be rejected. Nonetheless, inter-
national financial institutions have not considered any fundamental change
to the liberalization strategy. Instead, they have proposed a more gradual,
step-by-step approach to financial liberalization. Sequenced reforms,
however, may contribute to the cycle of speculative finance rather than
eliminate its risky behavior. The reason for this is simple: national
endorsement of economic programs creates an “aura of safety” around the
economy (Arestis and Glickman 2002: 245). As a result, feelings of eco-
nomic invulnerability are likely to minimize investor fears and, corre-
spondingly, their financial conservatism. These behavioral patterns easily
perpetuate the aforementioned cycle of fragility and crisis.
The links between liberalization and financial fragility create further
problems because the financial crises have not been adequately amelio-
rated by the orthodox stabilization package (premise number three). This
package includes tight monetary policy and contractionary fiscal policy, in
addition to structural reforms, financial and trade liberalization, and priva-
tization. This standard set of policies is universally implemented in finan-
cial crisis situations, even though such crises can have (and have had) very
different causes. Using a static policy package in dynamic financial crises is
not a recipe for success, as exemplified by the Asian crisis. In that case, the
World Bank admitted that tight monetary policy was an inappropriate
approach to exchange rate stabilization. Why? In an environment of weak
banks, higher interest rates can weaken the exchange rate further by
increasing risk premiums attached to the currency (Aslanbeigui and Sum-
merfield 2000: 85). The exchange rate can also suffer from falling expecta-
tions, since the stabilization package “is likely to reduce both output and
income equality” (Taylor 1995: 1959). By revealing the inadequacy of the
orthodox stabilization package, these examples suggest that it must be
rejected along with the orthodox theory of international finance.
Orthodox finance has been challenged by heterodox critics, and for
good reason. However, even these critics have largely missed the gender
biases inherent in orthodox theory and policy. Among other factors,
180 Tonia L. Warnecke
considering the gender dimension requires a comparison of policy results
for men and for women. Gender equity is emphasized; policy intent is dis-
tinguished from policy outcome, and (in accordance with social eco-
nomics) it is understood that social norms which are not necessarily
“economic” – for example, gender bias – may influence the worldview of
the policy-makers and in turn, shape the economy.

The gender dimension

In this section, a discussion of the impact of orthodox theory on women is
followed by an explanation of the “gender-blind” nature of said theory.
Finally, policy adjustments to the orthodox stabilization package are pro-
posed, in order to create a gender-aware conceptualization of financial
policy. Although it is beyond the scope of this chapter, I must emphasize
the necessity of formulating re-gendered policies that do not depend on
the orthodox framework. This remains a subject for future research.
First, it is necessary to determine the effects of orthodox financial pol-
icies on women. Many leaders accept that financial liberalization will
create “winners” and some “losers.” It is worth asking who these losers
are likely to be. How has the mainstream approach to international
finance affected women? What new perspectives might a feminist
approach within social economics offer? Many studies have demonstrated
the asymmetrical benefits accruing to men and women as a result of eco-
nomic growth. Yet, an equally important point is that women suffer dis-
proportionately from economic declines and financial crises.
The principal reason for the disproportionately negative impact of
orthodox financial stabilization policies on women is that financial crises
have aggravated the global poverty problem, and women constitute the
majority of the world’s poor. Moreover, economic crises disproportion-
ately affect women in several specific ways, the first being employment.
While

in advanced countries . . . economic downturns tend to throw more

men out of work than women, in many developing countries the
opposite is the case . . . in many semi-industrial countries . . . women
tend to be employed in labor-intensive export industries which are
more prone to fluctuations.
(Singh and Zammit 2000: 1259)

The International Labor Organization suggests that women are more sus-
ceptible to job losses in an economic downturn. Since many employers do
not consider women to be family breadwinners, they are likely to prioritize
male employment when facing business difficulties (Singh and Zammit
2000). Furthermore, women are harder hit by wage cuts because their
salaries are lower than men’s to begin with.
 Gender-aware approaches to finance 181
Examining the Asian crisis, Aslanbeigui and Summerfield (2000) show
that women’s employment suffered more than men’s in the key crisis years
of 1997–8. In Indonesia, 46 percent of the unemployed were women, even
though they comprised only one-third of the labor force. Some 50–60
percent of the unemployed in Thailand were women, and Korean women
“comprised 75% of discouraged workers and 86% of retrenched workers
in the banking and financial service sectors” (Aslanbeigui and Summer-
field 2000: 87). These statistics suggest that economic downturns are not
gender-neutral in terms of employment.
The management of financial crises, primarily through International
Monetary Fund (IMF) stabilization programs, also disproportionately
harms women. Programmatic “emphasis on efficiency and market-based
growth has replaced the earlier goal of welfare states to promote social
welfare through equity and redistributive policies” (Benería et al. 2000: 9).
This ideological swing has led to a particular conception of fiscal tighten-
ing: reducing social expenditures, implementing new user charges for
health and education, and slashing food and transportation subsidies.
These cost savings for the state, however, are not really social savings. The
costs for these services are merely shifted from the state to the household,
which creates a gap “between household basic needs and the level of mon-
etary income” (Floro 1995: 1926). Faced with insufficient household
income, households must match these monetary costs by “non-economic”
methods.
When this cost shift occurs, developing country households forgo some
of these services – particularly primary education for girls (Aslanbeigui
and Summerfield 2000: 90). Studies of developing countries indicate that
user charges for education lead families to remove their younger female
children from school in order to protect their investment in their older
sons (see, for example, Frankenberg et al. 1999: 20). By disinvesting in the
future labor force, this trend could be perceived as a misallocation of
resources (Palmer 1995: 1983). Other, “essential” services are “paid for”
with lengthier and more intensive household labor. For example, spending
more time shopping for food bargains or growing food in backyard
gardens can substitute for some food purchases (Floro 1995: 1917). More
time is required to cook raw foods when processed and packaged foods
become too expensive. As health care fees are imposed, more time is spent
caring for the health needs of one’s family members. This labor time does
not contribute to GDP-enhancing activities (Bakker 2001: 235). Yet, while
gender-typing typically relegates such tasks to women, these types of time
and energy “expenditures” are entirely ignored in macroeconomic
accounting.
As a result, the market becomes an incomplete substitute for the state
and the household fills in the “unseen” gap between the two. The house-
hold (rather, woman of the household) is assumed to be able to compen-
sate fully for any shortfall in the state provision of social reproductive
182 Tonia L. Warnecke
services. However, by reducing time available for education (and training
in personal financial management), this increased labor time bars most
women from the benefits of liberalized finance – which include expanded
loan, investment, and real-estate opportunities, as well as the jobs created
in these fields. If most women are to gain from the open financial markets,
they also need access to the public-sector services eliminated by stabiliza-
tion programs. State-provided services (such as health care and food subsi-
dies) reduce the time required for household labor, enabling women to use
this time to acquire the skills necessary to enter and participate in the lib-
eralized financial market. Having access to financial services enables a
woman to undertake more household responsibility in providing for her
family. Therefore, there is, as Diane Elson (1992: 57) says, “a complemen-
tarity between state provision and market access.” Substituting the market
for the state is not in the best interests of most women.
There are other factors barring women from equal access to financial
services. A feminist approach, as in Bakker (2001), accepts that financial
goods and services are allocated through the political structure and social
relations of markets. These political and social aspects include unequal
power relations between men and women, which unofficially regulate
access to the financial sector. Power is a key issue for access, but the status
of women in developing countries is “much more marginal than in the
West. Fewer laws exist to protect women’s rights, and such laws are less
likely to be enforced” (Aslanbeigui and Summerfield 2000: 85). Because of
this, women are not likely to enjoy equal access to financial instruments
and services, and the availability of financial resources is not synonymous
with their accessibility in practical terms. Women in developing countries
are also less likely to have personal knowledge about securities, invest-
ments, and loans. If targeted instruction is not provided to women (an
unlikely occurrence in less developed countries), women will not share
many of the benefits from financial liberalization. In this sense, “neutral”
policies applying to everyone, both men and women, are not gender-
neutral at all.
Thus, the central impact of mainstream theory on women may be illus-
trated through the inequitable socioeconomic results of orthodox financial
policies. This leads to the second topic of this section: what makes inter-
national policies gender-blind? First, it is important to realize that inter-
national financial policies are macroeconomic policies. Although
macroeconomic policies are not holistic policies, macroeconomic theory
presumes “economy-wide adding up or aggregation conditions that indi-
viduals’ actions have to obey” (Taylor 1995: 1953). Aggregated statistics
are formed by adding up price and quantity information about the market
behavior of firms or households, which is more accessible than information
about individuals. Because macroeconomics revolves around categorical
figures, aggregation ignores the internal dynamics of the analyzed groups.
In gender terms, this means that “household” issues of unequal power or
 Gender-aware approaches to finance 183
unequal distribution of resources are generally not taken into considera-
tion.
When aggregating statistics, the data focus on particular groupings of
individuals. Aggregating this data seems forthright and unbiased, but it is
actually based on a socially constructed methodological foundation. Which
groupings are chosen for aggregation, and which sectors of data are disag-
gregated, are crucial (but “invisible”) decisions. These decisions will
“reflect the priorities of those with strongest control of resources” (Elson
1995: 1863). These choices are also based on certain assumptions regard-
ing, as Isabella Bakker (2001: 230) argues, the “determinants of the level
and pattern of economic activity; about human capabilities, how they are
allocated to production, and how they are reproduced and maintained.”
Feminist economists argue that these assumptions reflect a relatively
autonomous, mobile individual that can freely access resources – in other
words, characteristics that “fit” men more than women. The mainstream
approach has not looked for signs of gender in macroeconomic data
because gender is conceived as a social (non-economic) issue. As John
Ruggie claims, “what we look for obviously has an effect on what we find”
(cited in Sylvester 1991: 3).
Gender-conscious policy proposals depend on the availability of data
disaggregated by gender. According to Nahid Aslanbeigui and Gale Sum-
merfield (2000: 98), the “numerous gender differences in unpaid work and
informal sector activities, allocations of time and consumption within the
household, and the transformation of permanent jobs into temporary con-
tracts have not been accounted for in surveys.” Very little gender-
disaggregated data are available in the banking and financial services
sectors. Furthermore, the scanty data that are disaggregated by gender are
relatively incomparable across countries, due to different standards of
measurement. As a result, the macroeconomic disregard of the “private”
realm of the household “seems to reflect traditionally male thinking, with
its emphasis on control and its penchant for absolute and dichotomous
categories” (Sylvester 1991: 2–3).
An important question, then, is whether women have sufficient “voice”
in the economic policy-making realm. Unfortunately, they do not; of all
policy-making sectors, economics and finance are those in which women
have the lowest levels of representation (Women’s Environment and
Development Organization [WEDO] 2002: 1). There are only 28 female
ministers around the world in the areas of Finance, Trade, Development,
Industry and Agriculture. Women comprise less than 8.3 percent of the
World Bank Board of Directors, none of the International Monetary Fund
Board of Directors, 5.5 percent of the World Bank Board of Governors,
and 2.2 percent of the IMF Board of Governors (WEDO 2002: 2) (see
Table 13.1).
Furthermore, this underrepresentation continues in regional develop-
ment banks, key institutions addressing poverty. As shown in Table 13.2,
184 Tonia L. Warnecke
Table 13.1 Female representation in the IMF and World Bank

Institution % Female

IMF Board of Governors 2.2

WB Board of Governors 5.5
IMF Board of Directors 0.0
WB Board of Directors 8.3

Table 13.2 Female representation in regional development banks

Institution % Female

(Board of Directors)
European Investment Bank 16.1
Asian Development Bank 0.0
African Development Bank 16.6
Inter-American Development Bank 7.1

there are no women in the Asian Development Bank Board of Directors

and only 7.1 percent in the Inter-American Development Bank. The
highest female representation at this level is only 16.6 percent, for the
African Development Bank, trailed closely by the European Investment
Bank with 16.1 percent (WEDO 2002: 2).
Does a focus on the higher levels of management provide an overly
skewed view of the gender breakdown? It is true that female representa-
tion among the general staff of these organizations has increased over the
last ten years. Women comprise about 34 percent of IMF staff and nearly
40 percent of World Bank staff (WEDO 2002: 3). However, the question
remains: who makes the policies? Because the Board of Directors is dele-
gated the principal role for policy-making, it is significant that women are
not well represented at this level. This disproportion pervades other
important policy-making organizations as well, such as the United Nations
Conference on Trade and Development (UNCTAD), as indicated in
Table 13.3 (WEDO 2002).
Since women have only a minor presence in these key institutions,
international economic policies are gendered in a few different ways.
However, “gendered” policies do not require a conscious discrimination
against women. Gendered policies are more often “gender-blind,”
meaning that women’s interests are rendered invisible because they are
not consciously taken into consideration. Since fewer women are voting
members of these international institutions, active advocacy for women’s
interests is in short supply. Consequently, the possibility of gender bias in
particular policies is likely to be relegated to the back burner of discussion.
Increasing female representation in these institutions would not only
 Gender-aware approaches to finance 185
Table 13.3 Female representation in UNCTAD

Professional staff levels % Female

(Lowest to highest)
1 0.0
2 37.0
3 43.9
4 28.9
5 19.5
6 15.4
7 0.0
8 0.0
9 0.0

increase gender dimensions of policies, but is likely to enhance the focus

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

Gendering financial policies

Creating new policy prescriptions is a complex task, and even more so
when attempting to use a gender-sensitive framework. The final portion of
this chapter discusses various options for integrating gender into economic
policies. Of course, re-gendering international finance is not just a matter
of fairness, justice, or democracy. There are also economic reasons to
186 Tonia L. Warnecke
reshape the international financial architecture from a new gender
perspective. Improving the equality of access to financial instruments will
promote a more efficient allocation of resources and a more efficient use
of labor time. Several feminist economists accept that stable and steady
economic growth is the best first step for improving conditions for both
men and women. Given the volatility of the international financial system,
re-regulating some areas of finance in developing countries may be a wise
policy decision. The goal of this regulation would be to inhibit the
domestic and global instability resulting from speculative finance.
Enabling developing countries to control capital flows would also support
a more long-term focus on restructuring and development.1 Most likely,
this would lower the countries’ susceptibility to “hot money” movements
and shift the composition of inflows towards more stable, long-term, and
committed investment. This solution is not explicitly re-gendered, but has
the potential to create more gender equity as an externality.
Another important point is that steps have been taken toward social
(and gender) equity at the microeconomic level of finance, but this has not
been matched by similar effort at the macroeconomic level. A variety of
financial institutions around the world have joined the microfinance band-
wagon, serving clients that are excluded from the formal banking sector
(due to lack of collateral, for example). Between eight and ten million
poor households are now served by microfinance programs, and these
clients generally borrow to finance self-employment activities such as rice
processing, livestock raising, or traditional crafts (Morduch 1999: 1575).
An interesting (and at first, unexpected) finding is that the major microfi-
nance programs (Grameen Bank in Bangladesh, BancoSol in Bolivia,
Bank Rakyat Indonesia, Bank Credit Desa in rural Indonesia, and Foun-
dation for International Community Assistance village banks in 25 coun-
tries) enjoy loan repayment rates of more than 95 percent – better in many
cases than repayment rates in the formal banking sector.
Some microfinance institutions (BancoSol and Rakyat Indonesia) are
financially sufficient; many others are not, requiring subsidies to maintain
their operations. However, the financially less capable institutions often
reach out to relatively poorer clientele, or clientele in rural areas that are
more difficult to access. In essence, the emphasis on pure profit maximiza-
tion has given way in part to an emphasis on “social capital,” defined as
“institutions, relationships, and norms that shape the quality and quantity
of a society’s social interactions” (World Bank 2002; see also Rankin
2002).
The high loan repayment rates can be attributed to the factors differen-
tiating microfinance from formal banking: group-lending contracts that
minimize the adverse selection problem, peer monitoring that lessens
moral hazard, and dynamic incentives such as progressive lending (loan
amounts are increased as timely repayments occur) and credible threats to
cut off future funding if loans are unpaid. These incentives are most effect-
 Gender-aware approaches to finance 187
ive among clientele with limited mobility, which may be one reason for
women’s higher repayment rates. Indeed, the vast majority of microfi-
nance clientele are women; females comprise 95 percent of Grameen
Bank borrowers. Of course, the fact that women borrow does not
necessarily translate into female control over the borrowed funds; studies
by Goetz and Sen Gupta (1996) and Hashemi and Schuler (1997) estimate
that significant female control over the borrowed funds is maintained in 62
to 63 percent of cases involving Grameen Bank loans. Goetz and Sen
Gupta, however, also find that women’s control over funds borrowed from
another microfinance institution, the Bangladesh Rural Advancement
Committee (BRAC), was much lower at 28 percent. This means that
microfinance should not be equated with female empowerment, but it is
helping “households that are not destitute but still remain considerably
below poverty lines” (Morduch 1999: 1610).
Microfinance has enabled institutions around the world (even the finan-
cially sufficient ones) to formulate a more “social” approach to finance.
The popularity of microfinance programs contrasts sharply with the
emphasis on social spending cutbacks and strict economic growth at the
macro level. A gender-aware approach to international finance would con-
sider the impact of international policies on what I would call “global”
social capital. Global social capital would build upon the broadest view of
social capital outlined by the World Bank, which moves beyond indi-
vidual-level relations to capture “the most formalized institutional rela-
tionships and structures representative of the state . . . [so that] the
corporate sector, and civil society create forums in and through which they
can identify and pursue common goals” (World Bank 2002). By creating
goals that combine international financial targets with socially sustainable
policies, it may be possible to alleviate some of the uneven growth that is
so common in developing countries beginning to follow the neoliberal
policy schema (see Bhalla 1995; Morris 1995; Smith 1996; Dixon 1999).
Moving to more explicit re-gendering, macroeconomic modeling tech-
niques could also be altered to reflect a gender-aware view of international
finance.2 According to Elson, the easiest way of introducing gender into a
macroeconomic model is by disaggregating at least one of the variables
(1995: 1851). This strategy is the least controversial and is more likely to
be accepted by the mainstream, because it does not challenge the basic
scope of the model. For example, it does not include coercion and power
relations. However, a gender-disaggregated model could reflect the fact
that men and women often face different constraints in earning income.
These constraints may include the following: discrimination against
women outside the household; copying of gender-specific role models; and
the restricted range of economic activities which are more easily compati-
ble with motherhood (Collier 1990: 159). Second, men and women often
have “radically different propensities to consume particular public ser-
vices” (Collier 1990: 149). Because of this, budgetary changes due to
188 Tonia L. Warnecke
stabilization packages “can have very different gender-differentiated
effects” (Collier 1990: 149). A disaggregated model could incorporate
these types of gender distinctions.
A more involved and contentious tactic is to “identify missing variables
which have a particular gender significance and bring them into the
model” (Elson 1995: 1852). For example, the macroeconomic model could
incorporate a new sector for analysis – the unpaid household sector. By
calling attention to the gap between market and state provision of
resources, this could help to make stabilization policy more responsive to
household adjustment. Furthermore, introducing a non-market sector into
the model could create a more socially responsible foundation for financial
decision-making. However, this modeling approach is very controversial
because it challenges the market-only basis of traditional models, and it
bridges the current divide between “economic” and “social.” Hence, this
type of model is heterodox (social economic) in nature.

Conclusion
Cultivating a feminist approach to international finance is important because
financial policy-making can no longer be the sole concern of the experts. The
reason is simple: liberalization has thrust the consequences of international
policies into the everyday lives of women around the globe. Of course there
is no “magic formula” for ridding the global economy of financial crises, as
financial panics are nothing new. Crises in finance plagued the global
economy long before the recent waves of liberalization. However, reducing
the frequency of these crises and their severity are feasible policy goals. Mod-
erating the economic and social devastation from these crises would benefit
all persons, including women. Furthermore, stabilization packages can be tai-
lored to mitigate the disproportional effects on women. For example, “apply-
ing fees to university education or to specific health services” would probably
not exacerbate gender inequalities as much as “fees for primary education or
primary and reproductive medical care” (Palmer 1995).
In conclusion, it is not that orthodox financial policies emphasize growth-
at-any-cost, but they certainly support economic growth at high social costs.
For women, these social costs often have disproportionately negative feed-
back effects which dampen their prospects for economic productivity in the
future. It is crucial to develop a detailed feminist approach to international
finance, in order to bring a focus on gender-specific welfare back into the
picture. In this way, a gender-aware approach would lead to a “leveling up”
of women’s quality of life, rather than a “leveling down” of men’s.
Because it focuses on the inseparability of society and economy and
emphasizes the socioeconomic feedback effects of policies targeted at the
economy, this gender-aware approach to international finance is compati-
ble with a social economic approach. Of course, a gender-aware, social
economic approach to international finance may not eliminate global
 Gender-aware approaches to finance 189
financial crises. Nonetheless, by redefining development in a more holistic
manner (instead of a narrow focus on profit alone), the disastrous cycle of
boom and bust is likely to moderate in the sphere of international finance.

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

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

According to Robert Putnam (2001), who found trace of the expression in

an article dating to 1916 (Hanifan 1916), social capital seems to be a quite
early notion in human sciences. Nevertheless, this concept is convention-
ally attributed to the sociologist Pierre Bourdieu (1980), who developed
and popularized it with an eye to highlighting its role in the preservation
of social class from a macro-social perspective. Social capital in this
context refers to the entirety of resources an agent can obtain from his/her
social network: “the current or potential resources linked to the possession
of a durable social network of more or less institutionalised relationships
of mutual knowledge and mutual acknowledgement; or in other words the
idea of belonging to a group” (Bourdieu 1980: authors’ translation.)
Influenced by Bourdieu’s work, James Coleman (1988) introduced the
concept of social capital in a more micro-socioeconomic framework,
relying on the hypothesis of rational individuals. Social capital is seen as a
productive asset derived from the social structure that facilitates coopera-
tion among rational individuals. Since the mid-1990s, Putnam popularized
Coleman’s conception of a new factor of production through its ability to
explain why some countries or regions develop further than others. Being
involved in social organizations and sharing the same norms and values
promote trust and facilitate cooperation and coordination for mutual
profit (Putnam 1993; see also Helliwell and Putnam 1995). Subsequently,
Francis Fukuyama (1995) emphasized the role of social capital as the key
element fostering economic growth and development because it produces
trust. His assertion relies on the usual neo-institutional theory stipulating
that trust among people reduces transaction costs and thus fosters eco-
nomic growth (North 1990).
Little by little, the notion of social capital evolved from its original con-
ception to finally take into account the entirety of social interactions
among all economic agents. Such a derivation from Bourdieu’s prior work
leads to two main points. First, social capital is seen as a public good,
whereas Bourdieu highlights the fact that it is an exclusive resource for
some individuals. Second, the various forms of social features associated
with social capital reduce the explanatory power of this concept. Put
192 Alexandre L. Bertin and Nicolas Sirven
differently, “social capital means different things to different persons”
(Dasgupta and Serageldin 1999: x).
The ever-increasing importance of social capital in the economic liter-
ature does not signify a general agreement on its definition. By and large,
the idea crystallized in the metaphor of social capital seems to stress that
the social environment (norms, values, networks, social activities, etc.) has
an effect on individuals’ well-being. This idea is simultaneously shared by
social economics and the capability approach. Social economists have long
recognized that the (social) environment influences how preferences are
formed and decisions are made by individuals (Dolfsma 2002; Davis 2003),
while the capability approach recognizes social interactions as a central
human functional capability1 (Nussbaum 2000). Both of these approaches
are powerful alternative analytical frameworks for human development
and economic policy.
The purpose of this chapter is to provide an attractive pathway between
the two frameworks. The challenge is to find both a strict definition of
social capital and an analytical framework that could support the idea of
improved access to resources. More precisely, the concept of social capital
can be criticized from a social economic perspective (e.g., Dolfsma and
Dannreuther 2003) so as to reinterpret Bourdieu’s work in a capability
approach. The chapter is structured in the following way. First, we aim to
overcome the limitations of mainstream analysis by suggesting an altern-
ative definition of social capital based upon the rights an agent has over
the resources of his social network. We then turn to the mobilization of
social capital in order to get access to resources. In Amartya Sen’s words,
the resources an agent can obtain from his social network are part of an
entitlement set. Those entitlements are individual means people can use to
achieve their own way of life. In other words, social capital can improve
people’s capabilities. Following this scheme, we employ Sen’s capability
approach to evaluate the role social capital plays in poverty reduction.

An alternative definition of social capital

Ever since the development of social capital in the literature, some schol-
ars pointed out the limitations of such a fuzzy concept (Arrow 1999; Solow
1999). Most of those criticisms arise from the partial analysis of Bourdieu’s
work by Coleman. Indeed, the latter’s conception of social capital gives
little attention to the importance of differential access to resources based
on class, which is at the heart of Bourdieu’s aim. Therefore, a strong con-
ceptualization of social capital based upon a reinterpretation of Bour-
dieu’s work in a microeconomic framework could resurrect its analytical
power.
 Social capital and the capability approach 193
Some limitations of the mainstream approach to social capital
In the last 15 years, the focus on social capital as a factor in economic
growth has shifted the literature back from a micro- to a macroeconomic
level of analysis. Some authors have denounced the abundance of defini-
tions of social capital that enhance the multifaceted vagueness of the
concept (Portes 1998; Dasgupta and Serageldin 1999; Sobel 2002). The
World Bank launched the Social Capital Initiative (SCI) in 1996, utilizing
many of the heterogeneous approaches dealing with social interactions. This
vagueness has been proposed to hold back a multidimensional and multi-
form perspective where several different elements make part of social
capital (Grootaert and van Bastelaer 2002a, 2002b). The concept refers to
any feature of social organizations, including networks, norms, and values
that have an economic outcome. Social capital is widely understood as
bonds within the family, groups, or social networks members; bridges
linking together different associations and other civic organizations; and ties
between institutions from the civil society and local or national govern-
ments. As underlined by Grootaert and van Bastelaer (2002a: 4), such an
approach takes into account some large effects of complementarities and
substitution between the forms and dimensions of social capital.
However, the analytical framework provided by the World Bank associ-
ates together under one thematic banner a wide range of socioeconomic
studies that do not always share the same conception of social capital. For
example, some authors stress the negative effects of social capital on eco-
nomic performance (Portes and Landolt 1996; Rubio 1997), whereas it is
usually described as a productive factor. One reason for such misunder-
standings about social capital resides in the mainstream economist’s desire
to use “social capital” as synonymous with “institution” in the analysis of
economic growth determinants. There are some “productive” forms of
social capital as well as some “perverse” ones, just like one can account for
“good” and “bad” institutions.
The World Bank (2003: 38) actually articulated that “the difference
between social capital and institutions is often fuzzy and there are strong
influences among the different social assets.” Therefore, social capital is
very closely related to the concept of institutions, as seen by the New Insti-
tutional Economics (North 1990), and the former is more and more used
as a substitute for the latter in recent studies. Such a practice can be
explained by Arrow’s position stipulating “institutions are a form of
capital.” Nevertheless, it does not justify the use of the term capital.
Indeed, a form of capital is a specific asset with the properties of being
accumulated, fungible, and rentable. Most of the literature does not deal
with the first two issues. There is no consensus on the third one, which
considers social capital as rentable when its effects on economic perform-
ance are positive. In other words, social capital – as conceived by the
World Bank – should be seen as an asset, rather than a form of capital.
194 Alexandre L. Bertin and Nicolas Sirven
Another problem raised by the mainstream approach of social capital is
related to the measurement of the concept. Due to the slippery breadth of
the concept, social capital can be evaluated using a range of different vari-
ables (e.g., Helliwell and Putnam 1995; Knack and Keefer 1997; Narayan
and Pritchett 1997, 2000; Krishna and Shrader 1999; Krishna and Uphoff
1999; Grootaert 2000; Grootaert and Narayan 2004). To make possible
comparisons between empirical results, some studies use an index of trust
as a proxy for social capital (Whiteley 2000). However, this methodology
raises some complications. First, there is some evidence, unlike Putnam2
(2000), that “trust” only poorly captures the effects of social capital on
growth (Beugelsdijk and van Shaik 2001). Second, the Organization for
Economic Cooperation and Development (2001) stresses some misunder-
standings about the meaning of “trust” according to relationships among
people in different time, space, and culture. Third, Durlauf (2002) raises
some econometric difficulties linked to the use of community-based data
so as to explain individual economic performance: “In light of the vague-
ness of the concept, I believe that the use of observational data to identify
substantive forms of social capital is unlikely to be successful” (495). On
the whole, it seems quite difficult to search for a good index of social
capital as long as a strict, simple, and operational definition of social
capital is not given.

Social capital as an endowment

In order to provide an alternative definition of social capital, it may be
interesting to come back to its roots. More precisely, one can focus on the
derivation of Bourdieu’s macro-social conception into Coleman’s micro-
economic one. According to Bourdieu, a fundamental property of social
classes is to ensure their reproduction by excluding non-class members
from the resources (e.g., social capital) of the social network. Hence, the
main difference with Coleman’s reinterpretation is that one can no longer
consider social capital as a public good because its use is exclusive. Taking
that into account, an alternative way of defining social capital is to con-
sider it as a private form of capital in a microeconomic framework. In
other words, the analysis of this concept should take its private good
characteristics as a starting point.
Such a viewpoint may raise some debate about the formation of social
capital. Since it is a private good, standard economics suggests individuals
rationally invest time and/or money in social activities with the aim of ben-
efitting from positive social externalities or social support from their
network of relationships. The anthropological literature, on the other
hand, indicates that a “gift” from an individual to another member of his
or her network is not necessarily rational, but may follow from a set of
normative obligations. According to prior work by Marcel Mauss (1924),
individuals within a community are submitted to three kinds of obliga-
 Social capital and the capability approach 195
tions: the gift has to be given, accepted, and “repaid.” The latter obligation
is consistent with the principle of reciprocity that means each giver is enti-
tled (through norms, values, and informal institutions of the community)
to a gift that the given has to make in turn. To sum up this idea: “one gives
because one is constrained to, because the given has a kind of property
right over everything the giver owns” (Mauss 1924: 19; authors’ transla-
tion). Following this, we can turn to a rights-based definition of social
capital.
Assume that an individual within a social network or a community can
benefit from the help of other members in event of need. This means he or
she has the “right” to access resources that other people would afford him
or her. Assume this norm is the same for all members; anyone that can ask
for help is conversely supposed to provide social support to any other
member (Mahieu 1989). For example, if agent i is given money by
members (j, k, l, m, . . .) of her/his network at time t; in turn, one can
expect i helps j at time t  1. Such reciprocity is guaranteed by strong
norms and values that discourage free-riding behaviors. In other words,
every time agent i asks her/his network for help, s/he has, in turn, the
obligation to provide subsequent social support to other members who
have already helped him. Note that the result is the same if i provided
social support before asking for help. The network is no longer seen as
social capital, but rather as the social structure in which social resources
are embedded (Lin 2001). Social capital is defined as the rights an agent
can exercise over his social network so as to access some particular
resources.
This characterization breaks up the “fuzzy” conception of social capital
and avoids any functionalist considerations. Social capital becomes a
causal notion because social interactions (such as remittances) lead to
expectations of gift-giving and thus create reciprocity and cooperation.
The analogy with other forms of capital is now undeniable: while human
capital comes from investments in oneself, social capital can be accumu-
lated through investments in others. The main difference is that, whereas
other forms of capital can be obtained on the market (capital markets for
financial capital, goods markets for physical capital, the labor market for
human capital), it appears that the mobilization space3 for social capital is
only within the network of an agent’s sustainable relationships. In
summary, social capital refers here to the rights an agent has over the
resources of his social network. These rights can be accumulated and
transformed in other kinds of resources. That is why we consider social
capital as an endowment an individual can mobilize in event of need.

Social capital and access to resources

Once social capital is defined as an endowment, its analysis must take into
account the accumulation and the use of the rights an agent has over his
196 Alexandre L. Bertin and Nicolas Sirven
social network. In this perspective, Amaryta Sen’s (1981) entitlement
approach of poverty and famines provides an analytical framework where
all the forms of capital (physical, financial, human) are considered as a
means to access resources. The challenge is to incorporate social capital as
defined here into this approach, and to specify its particularities as a
special form of capital.

The entitlement approach

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

A particular focus on social capital

An individual’s stock of social capital is made of the whole rights that give
him or her access to some of the resources of his/her own social network.
Those potential resources represent part of the entitlements set an agent
 Social capital and the capability approach 197

Resources

y1
S1
Poverty line
Z
y0 S0

S2

Social
O x1 x0 A
capital

Figure 14.1 Exchange entitlement mapping with social capital.

can get with a given social capital endowment. Following the above analy-
sis, an agent can mobilize his/her social capital so as to get resources that
would enhance his/her well-being. Figure 14.1 illustrates the incidence of
poverty of a conversion of social capital into purposeful resources.
In Figure 14.1, x0 stands for the amount of social capital agent i is
endowed, and y0 represents the potential social resources associated to x0.
To simplify, the relation between entitlements and social capital is of the
form y  p.x where p is the transformation rate of social capital (x) into
resources (y). In situation S0, agent i is below the poverty line Z; i.e., one
considers the agent poor because his/her resources are insufficient to fulfill
his/her needs. Now, assume agent i asks for help. Put differently, s/he
chooses to exercise the (informal) rights s/he has over the members of
her/his network. Note that exercising those rights in order to acquire
resources can be analyzed as “selling off” social capital. Consistent with
reciprocity hypothesis, agent i will have to provide subsequent resources
to members of the network, and thus transforms part of his/her rights into
social obligations. The stock of social capital declines from x0 to x1, but is
associated with an increase in resources agent i has available. To sum up,
an agent can benefit from the resources of a network by becoming
somehow indebted to the group.
As a result, an individual mobilizes social capital when s/he takes
advantage of her/his ownership rights on the resources of her/his social
network. It seems that these rights are necessarily distinct; they are the
198 Alexandre L. Bertin and Nicolas Sirven
sum of those rights to which an individual may lay claim once s/he has
honored his/her obligations vis-à-vis community. According to Mahieu
(1989), these rights become apparent via the exchange of one’s time or
goods, which elicit a certain level of obligation. By bringing this last prop-
erty into play, it may be considered that an agent’s rights and social obliga-
tions take the form of transfers with other agents (not taking place in a
market but within a social network).

Social capital and poverty reduction

Sen’s entitlement approach laid the foundation for a much more complex
analysis of welfare: the capability approach. Considering social capital as
an endowment in the entitlement approach led us to evaluate its impact on
well-being using the capability approach. Although there is a constantly
growing body of literature on both the capability approach and social
capital, and although they put forward new ways of analyzing poverty, few
studies have linked the two concepts together. Therefore, in order to be
able to explore this new analytical framework, this section will offer an
interpretation of the capability approach before going on to identify how
social capital works alongside it.

The capability approach

Of the various interpretations of the capability approach, the greatest
importance can be given to that which focuses on rethinking the utilitarian
precepts that aim to measure the happiness of individuals. Essentially, the
utilitarian doctrine rests on the principle that utility can only be measured
in an indirect way, if one wants to make inter-personal welfare compar-
isons. In this reading, the standard neoclassical approach considers utility
to be a growing function of consumption (the monotonicity hypothesis), or
an increasing function of income (more generally, of the resources avail-
able to the representative agent). For a long time, this argument has been
vaunted as the keystone in the majority of pro-developmental policies, to
increase wealth in order to improve living conditions. It has only been
relatively recently that theories have begun to appear which offer a less
simplistic vision of human development. Here, Sen’s work provides the
principal point of reference. The capability approach Sen developed brings
into question this direct link between the resources available to an agent
and his level of welfare.
According to Sen, at least two obstacles exist to equivalence between
an agent’s resources and the level of well-being. First, it can be considered
that an agent’s resources are potential as long as s/he has not made good
use of the ownership rights on those resources. In other words, an agent’s
standard of living does not depend solely on the total value of her/his
resources (commodities), but also on the ability to transform resources
 Social capital and the capability approach 199
into baskets of goods. Second, once an agent does have a stock of goods or
resources available, the usage (doings and beings) s/he can make of them
is conditional on a whole range of personal characteristics (age, gender,
handicap, etc.) and social characteristics (the position held in the commun-
ity, etc.), all of which represent what Sen (1985) names the functions of
utilization. They determine an agent’s ability to use the goods available
(capability) in order to be free to choose a way of life that suits him or her
(functionings). In summary, these three elements – resources, entitle-
ments, and functions of utilization – will determine the extent of choices
open to an individual (options for being and doing). The more curtailed
the capability extent is, the poorer an individual will be in terms of life
choices. Therefore, poverty is not a lack of resources anymore, but rather
a lack of capabilities.

Interest ands limits of the capability analysis of social capital

The main application of the capability approach for social capital is to
make a strict distinction between the concept, its social environment, and
its effects. Indeed, social capital as an endowment is made of informal
rights of property that gives it the status of an asset. Because those rights
can be accumulated, social capital has the characteristics of a special form
of capital. This conception differs from the World Bank’s point of view
where the concept is a “fuzzy” combination of several social interactions
that have an economic payoff. In contrast, the capability approach separ-
ates those social interactions between the informal social rights an agent
accumulates (social capital) and the social environment, composed of
norms and values that ensure these rights. More precisely, the social
environment is different from social capital because the former plays the
role of a function that transforms the latter into a vector of capabilities.
Even if this theoretical clarification gives social capital a precise concep-
tion, several difficulties apply at the empirical level. More precisely,
according to Jérôme Ballet and François-Régis Mahieu (2003), the evalu-
ation of social capital is quite possible in this framework using inter vivos
remittances, but the main problem deals with the measure of capabilities
(Robeyns 2003). Remember, the capability set represents all the individual
freedoms an agent can enjoy among all the achievable functionings.
Therefore, if one wants to measure the level of individual capabilities, one
will be confronted with a problem of multidimensionality. Indeed, the
capability set of an agent is made of infinitely achievable functionings that
are not all observable. Moreover, Sen (1985) underlines that achieved
functionings take into account additional information in the sense that
there is a process of choice of life absent in the measure of capabilities.
Consequently, most of the empirical studies focus on functionings rather
than capabilities (see, for example, Chiappero-Martinetti 2001; Lelli 2001).
Therefore, the capability approach tends to be nothing more than a
200 Alexandre L. Bertin and Nicolas Sirven
complement of the usual welfarist conception of poverty (Ravallion 1998;
Lachaud 2002).

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

Notes
1 Affiliation is defined as the seventh central human functional capability as
follows: “Being able to live with and toward others to recognize and show
concern for other human beings, to engage in various forms of social inter-
action . . .” Nussbaum (2000: 79).
2 Actually, Putnam found a strong correlation between “trust” and some com-
ponents of social capital (number of associations, number of people involved in
associations, etc.).
3 One could define this expression as both real and virtual places where resources
are allocated. Markets, social networks, the state, and any institutions that guar-
antee entitlements according to the law, norms, and values common to those
who belong to them, all enter into this definition.
4 Studies by Ballet and Mahieu (2003), for example, propose a monetary measure
of social capital through remittances.
 Social capital and the capability approach 201
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Index

accountability 19 capitalism 11, 15, 26, 33, 51, 52, 127,

adoption 17 129
Africa 7, 162, 165, 166, 168, 169, 170, capitalist economy see capitalism
171, 172 Caribbean 169
agriculture 33, 143, 147, 148, 155, 156, caring (caring labor) 99, 102, 132, 133,
183 134, 176
Aid to Families with Dependent Catholic Church 16
Children; see also welfare reform certificates of deposit see securities
AIDS 49 childcare see caring
alienation 99 children 18, 132, 181; child labor 21
altruism 12, 13, 18–20, 22; Trojan choice 71, 85, 100, 154, 155
altruism 13, 20–1, 22 Christian ideological tradition 112,
anthropology 16, 107, 194 113–14
apartheid 23 civic organizations 193
Aristotle 28, 62 class 43, 116, 191
Asia 175, 178 Coleman, James 191, 192, 194
Association for Social Economics 64 collective intentionality analysis 72–3
Australia 144, 146, 154, 155 colonialism 163, 165, 166, 169
commodification 3, 43, 47, 50; of finance
Bangladesh 50, 186, 187 41
bankruptcy 12 commodity sector see market sector
banks and banking 41, 42 community 3, 4, 26, 27, 29, 36, 37;
Becker, Gary 86, 88, 89, 101 definition of 27, 28
behavior 85 comparable worth see pay equity
Bentham, Jeremy 145 comparative advantage 56
biology 34, 88; evolutionary 28 competition 177
biotechnology 143 cooperation 12, 13; defined 14
blocked exchange 12, 13 cooperatives 116, 117, 118, 122, 127,
Bolivia 186 134, 135
bonds see securities conflict 90, 92, 93, 94; ethnic 167
Botswana 164, 169 Confucianism 16
Bourdieu, Pierre 191, 192, 194 Congo 170
boycotts 20, 23 consumption (consumers) 5, 36, 41, 99,
Britain see United Kingdom 107, 119; capabilities 98
contentment 92
California, State of (USA) 147 creative construction 37
capabilities, livelihood 104, 106; see also creative destruction 27
Sen, Amartya credit 15, 44, 46, 129
capital 31, 51, 118, 178, 196 critical thinking 56
capital markets 15 cultural differences see diversity

culture 38, 102, 103, 107, 161
customs and habits 1
Davis, John 2, 5, 69, 70, 71, 72, 73, 81,
84, 85, 97
debt 178
democracy 164, 165, 171, 172, 185
desire 86, 87, 93
Desroche, Henri 119
development see economic
development
development economics 163
dignity 69, 70, 77–80, 81
discrimination 80
distribution 105, 131, 132, 169
diversity 7; cultural 7, 16, 165; ethnic 7,
162, 164, 166, 169, 170, 171, 172
Dunoyer, Charles 113
Durkheim, Émile 11
earnings differentials see wage gap
economic agent 85, 86
economic citizenship 135
economic development 6, 7, 11, 50, 122,
134, 135, 161, 164, 170, 171, 182, 186,
189, 191
economic growth 26, 30, 31, 35, 36, 191;
see also Gross Domestic Product
economic orthodoxy see neoclassical
economics
Ecuador 16
education 131, 181
efficiency 13, 15, 17, 18, 22, 42, 53, 56,
61, 62, 143, 145
Employee Stock Ownership Plan 37
England see United Kingdom
environment 183; physical 7;
regulations 32
environmental economics 156
environmental goods 7
equality 114, 118
equity 56, 59, 62
ethics 3, 58, 162; decision-making 61;
ethical code 14, 22, 55; ethical
conduct 4, 56; in social economics
1 human rights 69, 78, 79
ethnicity see race-ethnicity
Europe 166, 172
European Commission see European
Union
European Union 119, 120
externalities 131, 143, 144, 145, 146;
environmental 154; social 146–56;
technical 147
Index 205
fairness 59, 185
Fauquet, Georges 117, 118
Favreau, Louis 6, 126, 133, 137
feedback effect 176
feminist critiques: of economic
liberalization 7; of international
finance 176, 188
feminist economics 99, 102, 133, 176,
182
financial crises 175
Fordism 126, 131, 132, 133, 134
foreign direct investment 178
France 6, 114, 115, 118, 120, 126–37,
167
Frankfurt, H. 76, 85, 86, 87, 88, 89, 90
free rider problem 15
freedom 59, 62, 69, 71, 74, 79
Friedman, Milton 11
game theory 23
gemeinschaft 28, 29, 35
gender 43, 44, 80, 175, 176, 180
General Motors 58
Germany 120, 167
gesellschaft 28, 29, 34
Gide, Charles 116, 118, 122
globalization 3, 4, 21, 60
Grameen Bank 52, 186, 187
Gross Domestic Product 181
group solidarity 12, 14–15, 22
habits see customs
health (care) 61, 62, 88, 176, 181
heterodox economics 81, 114, 162, 176
heterodox theory see heterodox
economics
Hirschman, Albert 88
Hispanic see race-ethnicity
homo economicus 2, 28, 55, 64
honesty 47
household 5, 103, 175, 182; decision-
making 3
housework see social reproduction
human capital 37, 88, 196
human needs see needs
human wants see wants
humiliation 80
identity: personal 1, 5, 28, 69, 76, 80, 84,
86, 89, 92, 93, 94, 95, 133, 163; organic
93; social 94, 133
ideology 164
illegal activity 48
206 Index
immigrants 15, 31; see also race-ethnicity Madagascar 166
imperfect information 46 mainstream economics see neoclassical
imperialism 170; see also colonialism economics
income 6, 32, 100, 169 Mali 166
India 102 Malthus, Thomas 113
individual: choice 71; neoclassical Mandeville, Bernard 63
conception 70, 91; social conception markets 103; economy see capitalism;
of 114; as socially embedded 5, 72–3, exchange 13, 18, 29; functioning of 11,
74, 76, 79, 80 22; goods 88; illegal 18; mechanism
Indonesia 186 19; rise of 30; sector 128, 133
inefficiency see efficiency marriage 52
inequality 32, 136, 176 Marx, Karl (Marxism/Marxist
institutional discrimination see economics) 26, 31, 99, 109, 115, 127,
discrimination 129, 170; Marxist-feminism 127
institutional economics 2, 12, 15, 32, Mauritius 164, 172
50, 100, 100–1, 103, 108, 117, 168, Mexico City, Mexico 50
193 Michigan, State of (USA) 151
institutions see institutional economics microfinance 186, 187
integrity: moral 75, 76; personal 75, 76 Middle East 167
international finance 176 Mill, John Stuart 113
International Labor Organization 180 Missouri, State of (USA) 145, 149,
International Monetary Fund 181, 184, 150
185 model building 96, 187
international trade see trade morality 1, 3, 4, 11, 12, 23, 56, 62; moral
investment 42 code 11
invisible hand 11, 55 mortgages 41
irrationality see rationality mutuals see cooperatives
Ivory Coast 166
nation-building 163
Japan 170 natural resource economics see
judgment 4; moral judgment 4 environmental economics
justice 57, 185; commutative 57 Nebraska, State of (USA) 155
needs 38
Kant, Immanuel 62, 70, 78 neoclassical economics 1, 3, 5, 7, 69, 71,
Keynes, John Maynard (and 81, 85, 98, 119, 127, 129, 161, 162, 170,
Keynesianism) 43, 46, 51, 175 175, 177, 188, 192, 193
neoliberalism 136, 175
labor markets 17, 99, 118 Netherlands 167
Landes, David 163, 167 New Industrializing Countries 170
Latin America 175, 178 New Keynesians 43, 44
Lesotho 169 nonprofit sector 119
Lévesque, Benoit 6, 126, 133, 134, 137 normative economics 64, 71, 155
liberal ideological tradition 112 norms 44, 120, 136
liberalization 118, 175, 176, 177, 178, Norway 100
179, 182
liberty 114 objectivity 2, 90
Lipietz, Alain 6, 126, 127, 128, 130, 129, ontology 71
132, 133, 136 Organization for Economic
Livet, Pierre 93, 94, 95 Cooperation and Development 194
living conditions 198 orthodox economics see neoclassical
loans (lending) 41, 42, 44, 134, 186 economics

macroeconomic development see Pareto efficiency see efficiency

economic development partnerships 134

patriarchy 131, 132
pedagogy 4, 56; use of films 62–3; use of
novels 62–3
philosophy 44, 61–2, 84, 85, 93, 96
plagiarism 55, 64
pluralism see heterodox economics
Polanyi, Karl 99, 102, 103, 107, 121, 122,
130
policy 48, 59, 144, 148, 156, 164, 176,
192; development 170, 179; fiscal 31;
industrial 118; laissez-faire 144, 175;
macroeconomic 182; monetary 31;
social-economic 81, 85; stabilization
175, 176, 188
political economy see heterodox
economics
pollution 21, 154, 155
positive economics 64, 71
post-Keynesians 120
postmodernism 127
poverty 136, 176, 180, 196, 197, 198
preferences 86–9; individual 11;
satisfaction of 89
pride 82
principal agent problem 14
prisoner dilemma 14
production 98, 99, 107, 131; of
knowledge 161, 162
productivity 55, 143, 144, 148, 156
profit (maximization) 11, 31, 46, 58, 117,
119, 128, 129, 131, 177, 191
profit motive see profit
Protestantism 11, 16
Proudhon, Pierre-Joseph 115
provisioning 98, 99, 100, 101, 104, 107,
108, 131
psychology 29
public goods (public services) 33, 119
public sector 126, 130
Putnam, Robert 35, 38, 128, 157, 191,
194, 200
quality of work 36
Québec, Canada 6, 126–37
race-ethnicity 42, 43, 44, 80, 163
rationality 12, 17, 29, 32, 42, 99, 100,
106, 107, 161, 194
redistribution see distribution
regional development banks 184
relationships 4, 41, 45, 47, 52
religion 8, 29, 33
rights 132, 135, 197, 200
risk 42, 48, 49, 177, 179; assessment 51
Index 207
Robinson Crusoe 60–1, 64
Rothschild, Kurt 2
Rwanda 166
Saint-Simon, Henri 6, 113
science 6, 69
scientific or formalist economics see
positive economics
securities 41, 42, 51, 52
self-confidence 92
self-interest 11, 29
self-respect 77, 79, 80
Sen, Amartya 6, 12, 23, 57, 73, 74, 77,
84, 103, 104, 192, 196, 198, 199; Sen’s
capability approach 7, 105, 108, 192,
198–9
service sector 121, 132, 134, 181
slavery 17, 167
Smith, Adam 11, 23, 28, 55, 56, 57, 59,
60, 62, 63, 64, 113
social capital 3, 46, 114, 128, 164, 191,
193; defined 35, 38, 192, 195, 200; as
an endowment 194, 195; entitlement
approach 196; index of 194
social change 126, 131
social democracy 126
social economics 3, 43, 46, 99, 108, 188,
192, 200
social economy 117, 119, 129; defined 6,
112, 118; as a science 114
social fabric see social capital
social practices 112
social relations 99
social reproduction 99, 131, 132, 136,
181; see also caring
social sciences 112
social ties see social capital
social values see values
socialist cooperatives see cooperatives
socialist ideological tradition 112
socialization 26
sociology 15, 27, 29, 34, 35, 37, 43, 46,
47, 88, 107, 121
solidarity-based economy 121;
relationship with social economy 121
South Africa 20, 23, 38
South America 169
South Korea 170
Spain 122
specialization 171
standpoint 87
state 103
Stigler, George 86, 88, 89
stocks see securities
208 Index
sufficiency 99, 103, 105
Taiwan 170
tastes and preferences theory see
Becker, Gary
taxes 168
teaching of economics see pedagogy
technological change 148
“third sector” 128, 130, 131, 132; as part
of the social economy 5, 6, 126, 127
Third World 21, 23, 168
time use; family time 30; leisure (free)
time 30, 31, 36
trade (international) 31, 156
trade-offs 56, 58
traditional society (culture, community)
30, 33, 34, 131
trust 46, 49, 191
underdevelopment see economic
development
unemployment 133, 134, 137
unions 15, 31
United Kingdom 100, 101, 105, 109,
144, 164, 167
United Nations 78, 184
United States 144, 146
unpaid work see social reproduction
utilitarianism 71
utility: marginal 36; maximization of 12,
91, 92–3, 146, 156; social 135
values 1, 2–3, 35, 36, 42, 48, 57, 71, 98,
101, 106, 108; World Values Survey
122
Van Staveren, Irene 1, 75
Veblen, Thorstein 282
venture capital see credit
wages 31, 133, 180; living wage 132, 136
Wal-Mart 20
Walras, Léon 116
wants 108n
wealth 32, 114
Weber, Max 11, 16, 17, 98
welfare: economic 11, 15, 18, 96, 144
welfare state 126, 133, 136
well-being 7, 22, 36, 99, 105, 150
women 175, 180; unpaid see social
reproduction; work of 131, 132, 138n
worker ownership 36, 52; see also
Employee Stock Ownership Plan
worker participation 36, 37
working class see class
World Bank 179, 184, 185, 193, 199
Zaire see Congo
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