Brennan 1958-1

American Journal of Economics and Sociology, Inc.
Economics and the Theory of Social Systems

Author(s): Michael J. Brennan
Source: The American Journal of Economics and Sociology, Vol. 17, No. 2 (Jan., 1958), pp.
113-122
Published by: American Journal of Economics and Sociology, Inc.
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The AMERICAN JOURNAL of
ECONOMICS and SOCIOLOGY
Published QUARTERLY under grant from the Robert Schalkenbach
Foundation in the interest of constructive synthesis in the social sciences.
VOLUME 17 JANUARY, 1958 NUMBER 2
Economics and the Theory of Social Systems
By MICHAEL J. BRENNAN
OTHER THAN SOCIAL BEHAVIOR THEORIES based upon statistical decision

processes, one of the few systematic attempts in recent years to integrate
economic and sociological theories is presented in a study by Talcott Par-
sons and Neil J. Smelser.1 This article is a review of their provocative
book from the viewpoint of an economist. It is perhaps best at the outset
to make clear what will be meant by an economist. Economists, as used
here, will refer to those who employ the method of equilibrium analysis
-either stationary equilibria (statics) or moving equilibria and their
path and rate of movement (dynamics)-in the study of economic phe-
nomena. This includes most economists and is the -approach taken in
practically all textbooks on economics. It follows the usage of Parsons
and Smelser who, when referring to economists, take as examples those
who have used the equilibrium approach.
Generally speaking, with respect to the other social sciences economists
have been intellectual isolationists. The high degree of formal elegance
and the relative empirical success of many economic theories probably
contributed to a concentration on improvement of accepted technique.
Nevertheless, the necessity of explicitly including trend variables in many
of our theoretical models, i.e., of finding a significant time trend, is tanta-
mount to an admission of ignorance-ignorance of either the relevant
trend-causing factors or of the whereabouts of data by which to measure
the force of these factors. To the extent to which we have reduced the
ratios of the trend coefficients to their standard errors in statistical studies
1 Economy and Society. By Talcott Parsons and Neil J. Smelser. Glencoe, Illinois:
The Free Press, 1957, 344 pp., index, bibliographies, $6.00. All subsequent page references
not otherwise identified are to this volume.
114 The American Journal of Economics and Sociology
we have reduced our ignorance. In some cases this has not been possible,
perhaps because of the importance of "non-economic" factors.
The normal procedure in economics is to divide all variables like prices,
national income, savings, etc. into "explained" variables (those we seek
to predict) and "explanatory" variables (those which determine the values
of the explained variables). Structural relationships express the ex-
plained variables as functions of the explanatory variables. These rela-
tionships may be mathematical equations or verbal statements which imply
mathematical equations. Granted that we cannot know everything about
every variable which influences the determination of prices, wages, em-
ployment, etc., we want to include in our explanatory variables as many
as are relevant and manageable in such a way as to minimize the differ-
ence between actual values of the explained variables and the values esti-
mated by the structural equations. How adequate our methods are de-
pends upon the size of the unexplained residuals.
The relevance of non-economic factors is well summarized by Lawrence
R. Klein in his discussion of exogenous and endogenous variables.2 En-
dogenous variables are those which both determine and are determined
within the system of structural relations, i.e., they are both explained and
explanatory within the system. Exogenous variables determine other vari-
ables in the system but are determined outside the system, i.e., they are
explanatory but not explained. Exogenous variables are determined ulti-
mately by technological, natural, sociological, political or institutional
forces.
Although it is not completely satisfactory to separate sociology and poli-
tics from economics, we simplify our models by assuming the forces pecul-
iar to these disciplines are given. At the present stage of development
there are few theories which embrace politics, sociology, economics, etc.
One such theory is the Marxian theory (including revisionist Marxism).
Ignoring logical difficulties in the labor theory of value, not enough quan-
tification has been attempted to render the theory applicable to making
a variable like government expenditures endogenous. Through progress
in theoretical and empirical methods social scientists may hope, by coopera-
tion, eventually to construct a complete theory of society which relegates
to the exogenous category only "acts of God."
General Theory of Social Behavior

THE PARSONS-SMELSER THESIS is that economic theory may be treated
2 Lawrence R. Klein, Economic Fluctuations in the United States, 1921-1941, New
York, Wiley, 1950, p. 2.
Economics and the Theory of Social Systems 115
logically as a special case of the theory of social systems which, in turn,

is a special case of the general theory of action.3 The three major objec-
tives the authors set for themselves are (1) to demonstrate that there is a
general conceptual scheme available under which economic theory may be
regarded as a sub-system of the more inclusive social system, (2) to show
that economic theory can be derived from the general social theory by intro-
ducing appropriate logical restrictions and that economic theory is but one
member of a family of such special cases, and (3) to show that systematic
study of the relations between the economy and non-economic sub-systems
of society illuminates the boundaries of economics.
According to the general theory of action a social system is a system
generated by any process of interaction among two or more actors. Process
in the social system is subject to four independent functional imperatives
or problems which must be met if equilibrium in the system is to be main-
tained. The four imperatives are (1) Latent Pattern Maintenance and
Tension Management, (2) Goal Gratification, (3) Adaptation and (4)
Integration. Pattern maintenance refers to "stabilization against" pres-
sures originating outside the social system which operate to change the
value structure of the system. Tension management denotes "stabilization
against" internal threats to individual conformity to institutionalized
"role expectations." Goal gratification is the attainment of certain objects
which, ceteris paribus, maximize the stability of the system. When a sys-
tem has defined the plurality of goals and sub-goals, adaptation deals with
the problem of controlling the environment for attaining the goals. The
fourth functional imperative, integration, maintains solidarity in the rela-
tions among the units in the system. Any system of action can be described
and its processes analyzed in terms of these four fundamental categories.
Corresponding to each one of the four imperatives of society is a sub-
system. The economy is that sub-system which is differentiated with pri-
mary reference to the adaptive imperative of the society as a whole. The
polity is differentiated with reference to goal gratification, etc. The
economy can, in turn, be divided into four sub-systems, each of which
can in its turn be further sub-divided along the lines of the four impera-
tives. There is continuous interaction among the four sub-systems of soci-
ety and among the four sub-systems within the economy. These "boundary
processes" provide the basis for analyzing the variables which have cus-
tomarily been termed economic.
3 The present book leans heavily on Parsons' earlier work, especially The 'Social System,
Glencoe, Ill., The Free Press, 1951, and The Structure of Social Action, New York, Mc-
Graw-Hill, 1937.
In developing these boundary processes the authors attempt to show

that the central concepts of economic theory can be interpreted and treated
as special cases of similar concepts in the general theory of social systems.
For example, the economists' distinction between supply and demand is a
special case of the distinction between "performance" and "sanction" in
the general theory. In the process of interaction an act "analyzed in terms
of its meaning as a contribution to the maintenance of the system" (p. 9)
is called a performance. An act "analyzed in terms of its effect on the
state of the actor toward whom it is oriented" (p. 9) is called a sanction.
The amount of performance contribution (supply) is a function of the
expectation of sanction or "reward" (demand). Other concepts dis-
cussed are goods and services, utility, consumption, wealth and income.
Each of these is translated into a more abstract concept in the theory of
general social systems.
Criticism
THE OVERALL PURPOSE of the study may be stated as follows: since the
concepts of economic theory have counterparts in general action theory, the
general theory of social systems can be used to analyze and explain at once
both economic and non-economic social phenomena. To evaluate the de-
gree to which this has been accomplished it is helpful to sketch briefly
the elements of any scientific inquiry.
Although the procedures of investigation differ from one discipline to
another, it is generally agreed that there is common to all a certain meth-
odological core: (1) the assembly of facts or existing information, (2)
the formulation of hypotheses from assumptions by means of simplifying
abstraction in order to explain the phenomena not known, and (3) the
testing of these hypotheses by reference to empirical observation, i.e.,
verification.
Now the question of integration of economic and general social theory

can be rephrased. Does a more general, hence more abstract, theory in
itself imply an improvement in our ability to explain both economic and
other social behavior?
The goal of any scientific inquiry is the construction of hypotheses or
theories which yield operationally significant predictions about phenomena
not yet observed. By operationally significant predictions we mean two
things: they must be causal or functional explanations (not merely de-
scriptions or classifications) and they must be verifiable in the sense that
there must be some data or facts by which we can accept or reject the pre-
dictions. The data must refer to the class of phenomena which the theory
is designed to explain. Hence one test of the validity of a theory is its

ability to predict-or forecast in the special case of phenomena which
will occur in the future. For this purpose it is irrelevant that the predic-
tions of economic theory are derived from assumptions which are "psycho-
logically or sociologically dubious, if not downright untenable" (p. 184).
The assumptions are not the phenomena which the theory is intended to
explain. Assumptions never are "realistic" descriptions. The important
question is whether they are sufficiently good approximations for the
purpose at hand, and the purpose is to yield accurate predictions or ex-
planations. Of course, what are the predictions of one theory may be the
assumptions of another, but this does not alter the principle.
The irst suggested set of criteria for judging any theory is based upon
usefulness. A theory is more useful (1) the more precise are its predic-
tions, (2) the broader the scope within which the theory yields predic-
tions, and (3) the more suggestive it is for additional directions of re-
search energy.4 Given that the other two criteria are not affected adversely
an improvement in the remaining one may safely be regarded as a general
improvement in theory.
We know, however, that there are often several hypotheses which are all
logically consistent within themselves and which are compatible with the
same observed phenomena. This introduces the second principle for
judging a theory, the principle of Occam's razor (which, strictly speaking,
is not independent of the first set of criteria). In choosing among several
such hypotheses, that one should be chosen which requires less restricting
assumptions to explain the phenomena with the same degree of precision.
With respect to generality there are two types of theories which are
impotent for the solution of important problems: those which are too
restricted in applicability and those which are too broad to permit opera-
tionally significant generalizations. A more general social theory which
encompasses economic theory must be justified on the following grounds:
(1) the more general theory yields predictions over a wider range of social
phenomena and (2) it adds to, or at least does not detract from, the pre-
cision of the predictions of the narrower (economic) theory. To state
this another way, more general axioms must be more powerful axioms.
They must be more powerful in the sense that they provide theorems
which are at least as operationally meaningful as the less general axioms.
For the sake of concreteness let us consider a typical case of boundary-
process analysis presented by the authors. The polity (the source of capi-
4 See Milton Friedman, Essays in Positive Economics, Chicago, University of Chicago
Press, 1953, p. 3-43, for a detailed discussion of methodology in economics.
tal funds) possesses a body of rights to "intervene" with respect to the

supply of capital funds. The most common form of these rights is the
right to withdraw funds or restrict credit. By so doing it encourages or dis-
courages productivity via a boundary process. The discouragement of pro-
ductivity "is analogous to oversaving in the sense that it is a deficit input
of sanction. The discouragement leads, in accordance with a given 'sup-
ply-demand' schedule, to a diminished output of productivity from the
economy" (p. 99). The alleged virtue of this frame of reference is that
"the analytical components we have outlined still define the context in
which the decision to invest may be analyzed. More generally, the outline
of the analysis of motivation in occupational roles is a special case of a
general sociological theory of motivation in institutionalized roles. With
appropriate adjustments this kind of analysis can be extended to any type
of institutionalized role in a society. ... It seems to us that the central
fallacy in much of economic thought is to postulate some single motiva-
tional entity as an explanation of all economic behavior" (pp. 181-2).
Motivation enters economics as an assumption rather than a prediction;
as we have seen, the criteria for judging the adequacy of motivational con-
cepts in economics are those proper to the role played by assumptions in
theoretical reasoning. We should ask whether they are fruitful in pro-
viding logical implications or predictions which stand up under empirical
tests.
Aside from this, the problem of quantification arises immediately with

respect to the phenomena economic theory is designed to explain. Quan-
tification is one (but only one) important aspect of precision. Most of
the phenomena economics attempts to predict are quantifiable and meas-
urable. The concepts of general social theory do not readily lend them-
selves to quantification and measurement. Variables having cardinal
values such as prices, employment, savings, production, etc. can be meas-
ured in money units, hours, tons, etc. Similar variables, to my knowledge,
have not appeared in the framework of general social theory. Variables
like sanction, adaptation, intervention, performance, etc. are more akin
to utility in economics, whose magnitude can only be considered from an
ordinal viewpoint.
Obviously this consideration of measurement springs from the criterion
of usefulness: verifiable precision in prediction. Much empirical work
in economics has been an attempt to give more empirical meaning to theo-
retical constructs. If we should translate observable and measurable vari-
ables into non-measurable variables, even if they cover a wider range of
social phenomena, in many cases we must sacrifice precise predictive power

for the sake of broader formal propositions. If, on the other hand, the
broader theoretical propositions can explain (predict) such diverse items
as prices, inventory stocks, employment, population changes, career pat-
terns, political behavior, ethnic relationships, etc., then we are on the road
to a completely integrated social science. But this "explanation" should
be one which does not abandon the precision already attained in explain-
ing, for example, prices. Indeed it should improve that precision by show-
ing the relation of measured prices to non-economic forces.
Presumably the authors intended more than a change to a broader termi-
nology which would leave untouched the present mathematical and statis-
tical tools which economists have found to be relatively successful. They
transform the expression of production of goods and services (quantity
supplied) into production of utility, the reason being that allegedly econo-
mists have been forced to seek a reference different from physical units:
want satisfaction or utility. Of course economists do employ the concept
of utility, but as a tautology to "rationalize" the demand schedule. Used
in this way it is not in the class of phenomena economic theory seeks
to explain. Utility is also postulated as a criterion function in welfare
economics; more will be said of this later. The important point here is
that if the transition to general social theory is more than a question of
terminology-if it is to yield different and better predictions in both eco-
nomics and sociology-then the question cannot be settled on conceptual
grounds alone without demonstration of greater empirical accuracy.
Potentialities of Social Theory for Integration

DOES THIS MEAN, therefore, that general social theory has nothing impor-
tant to say to economists? I think not. No research endeavor is devoid
of personal judgments, and to more or less degree these judgments are
arbitrary. A good example is a problem encountered in many dynamic
economic models, choosing the number and duration of time lags or leads.
Monetary dynamics or business cycle theory and long-term growth theory
applied to underdeveloped areas appear to be the least satisfactory parts
of contemporary positive economic theory. The authors have shown that
sociological theory has noteworthy potential for specifying the number
and duration of lags in the circular flow of income, for providing more
exact knowledge about economic variables in specific temporal situations,
and for segregating and perhaps measuring the forces often summed up in
the notion of trend.
If further research can show that the insights social theory provides add
9 Vol.17
to the determinateness of relevant forces and thereby contribute to a trans-

fer of variables from the exogenous category to the endogenous, to that
extent it reduces our ignorance and enhances the effectiveness of our theo-
ries. It does more than this however; it also provides an integrated theory
which encompasses a greater expanse of social behavior without sacrificing
the empirical counterparts of the concepts. The exchange of ideas must
be bilateral between economists and sociologists, but on a smaller scale
than is implied by a complete transition to a more abstract general theory.
In Chapter IV of their study Parsons and Smelser illustrate the appli-
cability of social theory to certain economic problems. Three contribu-
tions to knowledge on the business cycle are reviewed. All three models
focus on multiplier-accelerator interaction involving time lags with dura-
tions more or less arbitrarily chosen. The authors show that sociological
analysis provides a framework for indicating why certain time lags are
important and the appropriate number and duration of these lags. Two
other cases are used by the authors to show some areas where indetermina-
tion may be reduced; the consumption and investment functions.
The overall effect of introducing concepts drawn from social psychology
is to put a step (concave to the income axis) in the consumption-income
relationship. Here is an obvious case where the theory can be tested by sta-
tistical data. Probably the most fruitful suggestion for increasing the
determinateness of investment decisions refers to risk. The structured-
unstructured situations in social theory may clarify the way in which risk
and uncertainty are institutionalized. This reflects on the marginal effi-
ciency of capital in investment decisions (a concept involving expecta-
tions) and more directly on securities-market behavior.
Other areas in which sociological theory might well contribute to the
analysis of economic phenomena come to mind.
It is a familiar proposition that labor will move between markets until
net advantages and disadvantages (monetary and non-monetary) are
equalized. The sum of the non-monetary factors is estimated residually
by wage differentials under conditions of equilibrium, and the matter is
often dropped at this point. Aside from monetary fringe benefits the
relative importance of statas in defined jobs, reputation in the community,
confidence in symbolic rewards and other "rigidities" are not located and
weighted separately. If these values can be incorporated in analysis of
labor markets, they can, ceteris paribus, contribute to more exact knowledge
and reduce the dimensions of the amorphous category of residual non-
monetary benefits. Such research should go a long way toward explaining
a larger portion of the general social behavior of people who work for
wages.
Also, welfare economics has lagged in development relative to most
other aspects of economics. The difficulty of defining and measuring
social utility and the problems of specifying and obtaining widespread
agreement on a "better-off" position have, no doubt, contributed to this
situation. The predicament reflects a more general issue of the relation
of abstract analytical models to actual public policy decisions. When re-
quired to make policy suggestions, economists have goals in mind-goals
such as efficiency in resource allocation, etc., drawn from welfare econom-
ics. These goals then become one set among many in the hands of policy
makers, and the many sets of goals may be conflicting. We might ask if
these goals can adequately be examined and weighted within a framework
of a general social theory. What are the goals other than economic and
how can they best be included in the set of alternatives available to a
decision-maker, for example on the basis of a probability calculus? It is
not inconceivable that such research can lead to a definition of social wel-
fare which meets the requirements of all the social sciences.
Conclusion
ALL EXPLANATORY VARIABLES in economics are classified as exogenous

or endogenous. All disturbances which cannot be explained by these two
types are assumed to be random. The disturbances may actually contain
systematic rather than random components, but it is permissible to regard
them as random if the compdnents are many, individually small, and inde-
pendent of each other. Their sum will then behave as if it were random.
The only conclusive way to judge whether the suggestions in the pre-
ceding section have any significance for economic theory is to experiment.
If research based upon the suggestions outlined permits a transfer of
variables from the exogenous to the endogenous category and/or can
demonstrate that some parts of the assumed random disturbance are sys-
tematic, important and can be specified, then these suggestions will con-
tribute to the development of economic theory.
Economists can likewise contribute to the working hypotheses of sociolo-
gists in the same manner. There are indications that the combined efforts
will gradually yield more general theories in both fields. Indeed they
will contribute to a general theory of social behavior. The more social
variables which can be determined within a system of structural relations,
given that other things remain the same, the more general that theory
becomes. In the last analysis it is only by predicting and testing those
predictions that we can tell which forces are important in concrete cases.
It is not the purpose of this reviewer to be over-critical of the work
of Parsons and Smelser on the integration of Economics and Sociology.
No one would welcome more an operationally powerful theory to explain
all social phenomena, and all such attempts should receive serious con-
sideration. The positive value of this review is that it suggests the lines
along which an effort to achieve a general theory of social behavior may
legitimately proceed. The meeting of the two fields is long overdue.
Piece-by-piece integration in restricted concrete problems appears to hold
more promise of integration than does a highly abstract theoretical system
which immediately includes both fields.
Brown University
In Memoriam: J. D. Kirby, 1903-1957
DR. JOHN D. KIRBY, associate professor of social science at Memphis

State College, Tennessee, and a valued collaborator in this JOURNAL, died
last year. His sudden death from heart disease brought to a close a
research project which held extraordinary promise of significant results.
Professor Kirby was born in Clyde, Kansas. A product of Illinois and
Northwestern Universities, he served in the Air Force during the second
world war and took his Ph.D. in philosophy at the University of Texas
in 1952.
His philosophical training nurtured a keen interest in the social sciences.
He was assistant professor of economics and philosophy at Southern
Methodist from 1951 to 1953, when he joined the Memphis State faculty.
His interest reached a focus in the sociology of morals and his work in
this field yielded a series of papers that shed new light on the bases of
morals and the foundations of moral theory. For so fruitful a scholarly
life in the relatively few years given to him, we are grateful.
W.L.

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American Journal of Economics and Sociology, Inc.

Economics and the Theory of Social Systems

VOLUME 17 JANUARY, 1958 NUMBER 2

Economics and the Theory of Social Systems

OTHER THAN SOCIAL BEHAVIOR THEORIES based upon statistical decision

General Theory of Social Behavior

logically as a special case of the theory of social systems which, in turn,

In developing these boundary processes the authors attempt to show

Now the question of integration of economic and general social theory

is designed to explain. Hence one test of the validity of a theory is its

tal funds) possesses a body of rights to "intervene" with respect to the

Aside from this, the problem of quantification arises immediately with

social phenomena, in many cases we must sacrifice precise predictive power

Potentialities of Social Theory for Integration

to the determinateness of relevant forces and thereby contribute to a trans-

ALL EXPLANATORY VARIABLES in economics are classified as exogenous

In Memoriam: J. D. Kirby, 1903-1957

DR. JOHN D. KIRBY, associate professor of social science at Memphis

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