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Three Pillars of a Social Economy

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  • MAYO RESEARCH INSTITUTE

Abstract

A common thread that holds this paper together is its criticism of conventional economics and praise for its alternative, social economics. The three scholars featured here were not so openly critical. They focused on new insights and while they contradicted basic assumptions of the neo classical model invariably they left criticism to others. I, too, might have ignored the criticism, but the criticism is too important to be left at the margin of mainstream economics. What we have discussed here has to be given center stage. Solidarity as explained by Pesch is a complement to competition and deserves to be treated analytically and recognized as a component of the basic model. The role of innovational activity explained by Schumpeter reflects the sacredness of human creativity and shows economics in its most essential aspects to be a dynamic, not a general or partial equilibrium, science. And finally, the unique achievement of our century, as told by Fogel, was to raise the majority of people in the industrialized world from a wasteful life to one of social economic well being.
THREE PILLARS OF A SOCIAL ECONOMY
William R. Waters
Professor Emeritus of Economics
DePaul University
1998
This paper was prepared for presentation at a conference in 1998.
However, Professor Waters was unable to make that presentation.
The paper has never been published.
A small number of copyediting changes were necessary.
Question and comments should be directed to
Edward J. O’Boyle, PhD
Senior Research Associate
Mayo Research Institute
West Monroe, Louisiana
318-381-4002 edoboyle737@gmail.com
Three Pillars of a Social Economy Page 2
This paper was written to suggest some ways of enriching the teaching of economics. It
focuses on three aspects of an effective and efficient economy: solidarity, creativity and high
living standard. Economies and economics are incomplete without a full measure of each of
these components. The paper might have been entitled “three great social economists” for
the solidarity part of the paper refers especially to some social economic contributions of
Heinrich Pesch, the creativity portion to Joseph Schumpeter’s kind of economics and the
treatment of an adequate living standard to the path-breaking work of the contemporary
economist, Robert Fogel.
1
By way of introduction we pose some questions meant to reflect the difference between the
dominant kind of economics (referred to as conventional, orthodox, mainstream and/or
neoclassical) and an alternative known as social economics. While these questions are
crucial to our inquiry, we will not attempt to answer them in depth, rather we mean for
them to express the overall spirit of criticism of the prevailing economic education.
What is the dominating behavioral value (or ethos) assumed in the discipline of economics?
Is it not that each individual acts according to his/her self-interest? This utilitarian flavoring
is embedded in the study of the economy and in social policy in English speaking nations at
least since the eighteenth century and dominates even more in the last quarter of the
twentieth. It is the focus of the most famous of all satires on economic education, Hard Times,
written in 1854 by Charles Dickens when this utilitarian ethos reached a pinnacle of political
influence. Or, on the contrary, is the governing value that we are all in this together?
Another basic question: is competition the unique, positive driving force of our economic
activities? Or is cooperation? Or is it a combination of the two? To conventional economists
the focus is on competition solely. To them, there is no place in theory for cooperation;
competition is a God-like, sacrosanct social value.
What makes the economy work? Does it run by itself (a la laissez faire) according to a set of
natural physical laws? Or do small committees, strong rulers, corporate leaders and
politicians rule? Or do people cooperate and make decisions by mutual argument? Which
1
This paper is dedicated to Helen Potter whose goal before her untimely death in 1986 was a serious effort to
promote the teaching of social economics in regional educational networks. She would have been delighted to
participate in the Ninth World Congress of Social Economics at DePaul University, Chicago, which was
devoted to the teaching of social economics. Potter was associate editor of the Review of Social Economy from
1948 until 1986 and is well known for having initiated and financed the Potter Award presented annually for
the best article in the Review.
Three Pillars of a Social Economy Page 3
way predominates? Or, which way should predominate? Our options are: the unfettered
market, strong dominating authorities, social cooperation.
How scientific can we be in studying the economy? It is true that physics has been the
dominating model to such famous economists as Adam Smith and Leon Walras. Are they
our models? Or should we accept the view of Lord Keynes that economics is a moral science.
This difference of opinion indicates that pre-analytic judgments are a starting point for
one’s study of the economy.
Can we know about the economy without stressing history? Without incorporating it in our
studies? Some say we must know the past to decide the future. Many economists get paid to
forecast but they are not very successful except in the shortest of periods; to be successful at
all, some scholars say, we must know history; not just of the last few quarters but of the past
decades and centuries.
Such questions, we suggest, set the tone for any examination of the nature of our economy
and, of course, of our economics.
HEINRICH PESCH
In mainstream economics competition is the exclusive driving force for a well performing
economy. Social economists do not believe this. They contend that there are
emotionally- and spiritually-based attitudes of cooperation, sharing and caring embracing
all members of the community that are an addition to competition as the central allocative
force. Such social attitudes may be referred to as solidarity. There are examples in every
language of economic literature espousing these attitudes as crucial in every language; for
example, in the works of Simonde de Sismondi in French, Schumacher in English and,
recently, Margarlit in Hebrew. Possibly, the richest and most sustained tradition of
solidaristic inclusiveness is found in German. Ralph Bowen’s beautifully crafted monograph
on corporative state theory [Bowen 1947] reports on the German contributions to
communitarian institutional theory. There are critiques in Bowen of Catholic social
philosophers and economists, of Baader, Adam Muller, Ketteler, Vogelsang, Hitze and
Pesch. Also, others are treated, including Fichte, Gieske and Marlo. The most important of
these was probably Heinrich Pesch, not only because of his influence on the twentieth
century papal encyclicals, On Reconstructing Order [1931], On Human Work [1981], On
Social Concerns [1987] and The Hundredth Year [1991] but mainly because of his place in the
development of social economic policy, especially in present day Germany, and of social
economic theory.
Three Pillars of a Social Economy Page 4
Pesch (1854-1926) was a native of Cologne who studied economics under Berlin professor of
economics Adolph Wagner. Like most German economists of the time, Wagner was more
institutionalist than market analyst. Had Pesch opted to study under the most eminent
Cambridge economist, Alfred Marshall, a choice open to him, his conception of how society
might best be reconstructed might have been quite different. In any case, whatever his
economic education, he had already been persuaded that government-chartered vocational
groups should play a key role in any effective social economy. These corporative
organizations (they have many names, call them vocational or occupational groups, Stande,
guilds or industry councils) would serve as intermediaries between individuals, businesses
and government.
With this conception of the key institution, along with a strong belief in the validity of
Catholic social ethics, Pesch created a pre-analytic vision of a proper social economy.
Then, with it in place, he produced his voluminous masterwork, Lehrbuch der
Nationalöekonomie, a 3800 page textbook of economic science.
2
Most importantly, he
demonstrates a distinction between pre-scientific vision and science.
Pesch is not alone in proceeding in so broad a way. He joins a small number of other
economists, including Adam Smith and Karl Marx, in economic system building. To Smith,
the pre-scientific conception is that the economy is governed most effectively by natural
physical laws, not unlike laws governing the solar system as described by Isaac Newton; to
Marx an underpinning of the science is the conflict of the two social classes, the people who
own the means of production and those who do not. To Pesch, like Smith, the economic
sector of society is governed by natural laws, but the crucial ones are moral not physical.
Rupert Ederer, probably the best living authority on Pesch mentions the distinction thus:
... Like Adam Smith, Karl Marx, and possibly John Maynard Keynes, Heinrich
Pesch also provided a set of principles which constitute a particular form of economic
system. Such principles are derived from a social philosophy which for Adam Smith
was individualism; for Karl Marx it was collectivism, and for Keynes it was a kind of
humanitarian pragmatism. Pesch’s social philosophy, solidarism, derives from the
Aristotelian-Thomistic natural law philosophy; and it is in total harmony with
Christian ethics which reflects Catholic theistic theology. The system of economy
based on it Pesch called the social or solidaristic system of human work [Ederer 1988,
pp. 1-2; emphasis in the original].
2
Rupert J. Ederer translated the complete Lehrbuch into English in 2002. Cf. Pesch 2002.
Three Pillars of a Social Economy Page 5
According to Ederer, Pesch reduces the cardinal principles of solidaristic social control to
three: “First of all, the economy must be regulated to accord with the virtues of justice and
charity.” Second, the principle of subsidiarity is applied universally, which means in part,
that “
social organs at successfully higher levels ought to intervene only when individuals
and lower organs cannot accomplish a task which the common good nevertheless requires.”
Third, there should exist
autonomous organizations which revolve around the various
functions which people perform in the economy” [Ederer 1988, p. 2].
In its first principle, acting according to charity and justice, solidarism denies the validity of
the mainstream assumption that people act exclusively as rational utility maximizers. This
extreme utilitarian ethic is seriously defective; people sometimes act out of duty. They
behave according to what is right. Therefore, economic behavior is not purely utilitarian; it
is, in part at least, deontological.
3
For example, journalists have observed that most
Japanese prefer Japanese-made products because they are Japanese and represent
Japanese jobs. They are tolerant of high retail prices in Japan, higher than some imports.
“If living standards in Japan are marginally lower than those in the West, this is more than
compensated in Japanese eyes by the strength of the nation
” [Longworth 1998, p. 37].
In the solidarist tradition, economic institutions (markets, households, financial and public
sectors and businesses) are formed according to three kinds of justice, the first,
commutative, being a guide to interpersonal relationships governing exchanges among
equals. Illustrations of abuses of commutative justice are, it is wrong to cheat, or to seek and
use “insider information.” Justice requires widespread information for all marketers. This
kind of justice is not absent from mainstream economics being incorporated in the micro
model as a criterion of perfect or pure competition. Social economists have no complaint
about the orthodox science in this matter of commutative justice. The second kind of
justice, recognized by Aristotle as was commutative, says that the whole of society, or
community, has obligations in justice to each and any person in severe need. This is
distributive justice. An illustration is the need for social security legislation and the like.
Social economists have no complaint about deficiencies in distributive justice in socialist
models. That a social economy requires both commutative and distributive justice is a
reason why some scholars have identified solidarism as the middle way. Finally, there is the
medieval contribution to economic justice that each individual has a duty to contribute to
3
From the Greek deon meaning duty.
Three Pillars of a Social Economy Page 6
the improvement of social welfare. Each of us has a responsibility to improve the common
good; an obligation termed contributive justice.
There are virtues associated with each of the three kinds of justice: honesty is attributed to
the person-to-person relationships that are commutative; fairness the virtue related to the
community-to-person relationships governed by distributive justice, and responsibility of
each individual is the virtue involved in person-to-community relationships.
Much can and needs to be said in economics courses about the place of justice and charity in
the economy. But, in fact, little is said in conventional economic courses except on issues
related to the individual. It is assumed that most other matters are outside the expertise of
economists; the whole subject of correct social interpersonal relationships is relegated to
Management, Sociology or Business Ethics courses.
4
Social economists, on the other hand,
contend that solidarity, the harmonious relationship of persons in the community, and its
cousins cooperation, participation and collegiality, are important elements of economic
activity, to be treated in the first Principles courses as well as in the highest level of theory
courses. Solidarity is a complement to competition, being complementary to competition.
Efficiency is not a matter of competition alone but of competition and cooperation
interacting. It is a factor in the allocation of resources.
The literature supporting solidarity and cooperation for use in economic courses is
enormous and cannot even be touched upon here. But one impressive example is given as a
start. In an article published in the Review of Social Economy, (a journal that is a source
book of a broader and more institutional kind of economics), Jan Erteszek calls the firm “a
common venture enterprise” [Erteszek 1982, p. 326]. This California manufacturer says the
firm is the central community of our time, wherein we work eight or more hours a day. Since
people spend more of their waking hours in a business institution than in any other
environment, the company must address itself to the whole person, both to one’s physical
and spiritual needs. While the company plans for profit, it is not profit that is its purpose,
4
It was Lionel Robbins, more than any other economist, who constricted the subject matter of the science of
economics to a narrow, unrealistic area of expertise. Robbins wrote
Now in so far as the idea of rational action involves the idea of ethically appropriate action ... it
may be said at once ... that no such assumption enters into economic analysis ... economic
analysis is Wertfrei in the Weber sense. The values of which it takes account are valuations of
individuals ... If the word rationality is to be construed as in any way implying this meaning,
then it may be said that the concept for which it stands does not enter into economic analysis
[Robbins 1952, p. 91; emphasis in the original].
Three Pillars of a Social Economy Page 7
rather it is to produce a useful product in a climate of integrity. Moreover, the company
must plan for full employment; the steady employee is not a temporary resident but a full
citizen in the business. The investment process, says Erteszek, has two parts: not only does it
involve the practice of investing in physical capital, it consists also in developing the talent,
administrative skills and know-how of the worker thus acknowledging that some employees
invest their whole lives in their places of work.
5
Solidarism’s second principle, subsidiarity, guides decision-making in that decisions should
always be made on the lowest possible level. By Becker’s definition, a high unit of society
should not undertake to perform functions that can be handled as well by a lower unit; in
fact, the higher unit of government or business should offer help (subsiduum) where
necessary to enable the lower unit to function at full capacity [Becker 1957, p. 4].
The implication is that decision making should be shared as broadly as possible. The reason
for the low level of the units (and for a related requirement of Schumacher’s [1973] that they
be small in size) is that the units are comprised of free intellectual beings whose perfection
should not be thwarted any more than is necessary. Moreover, the higher the decision
making unit the more it must be for the common good, less for the interest of the group.
6
The principle of intermediary groups is the third significant part of solidarism.
Widespread application of this principle minimizes the need for governmental intervention
and the consequent invasion of bureaucratic inefficiency. Not-for-profit intermediaries are a
part of the institutional structure of the social economy comprising occupational groups,
socially oriented trade unions, industry councils, professional or trade associations and
5
See Tomer [1987, 1994] on the role of “organizational human capital” in determining productivity in a firm.
The good (or bad) “chemistry” of worker participation is a positive (or negative) force in production. Such
chemistry is an aspect of solidarity. Solidarists have a long way to go to include cooperation as a variable in
theoretical analysis but some economists have been giving it serious thought. Walters [1993] refers to two,
Donald Dewey and Lester Telser. Dewey introduced a model wherein firms maximize, not profits alone, but
the profit rate and its variance. It is assumed cooperative action will reduce the variance and contribute
positively to the firm [Walters 1993, p. 184]. To Telser, competition alone may not ensure a socially optimal
outcome for a firm; in some circumstances competition and cooperation may. An optimal mix of competition
and cooperation among firms may be required to achieve efficiency [Walters 1993, pp. 184-85].
6
Schumacher’s emphasis on small and Pesch’s on subsidiarity are related but different. They are often
confused. The social economic developments in Mondragon, Spain apply both principles: workers make
authoritative decisions on the lowest level of the firm, but also the firms are limited to five hundred
owner/workers.
Three Pillars of a Social Economy Page 8
consumer and environmental organizations. Their function is to make decisions concerning
the quality of the goods and services produced and the economic welfare of the whole. They
are not new to America. An important example is the MPPDA (the Motion Picture
Producers and Distributors of America). In the 1930s and 1940s the motion picture industry
blossomed to account for 75 percent of America’s entertainment dollar and produced the
country’s leading export during the Depression [Gomery 1986]. The studios cooperated
through the MPPDA to constrain sex and violence in the films they produced, distributed
and exhibited. It appears that without this intermediation the government would have been
called upon to perform this function.
Oswald von Nell-Breuning [1936], a German Jesuit who died in 1991 at the age of 101, was
one of three important drafters of the 193l encyclical, Quadragesimo Anno, that stressed the
significance of intermediaries. Shortly before his death, he “allegedly told some who were
close to him that the vocational order idea was moribund” [Ederer 1995, p. 73, n.27 ]. If true
this is unfortunate for the future of a proper social economy. But the view is controversial.
Severyn Bruyn [1991], writing most persuasively about the future of the America says that
the current organization of the American market economy foretells a major shift in the
social economy. Among other things, the growth of service and not-for-profit corporations is
giving a social character to business; moreover, the development of trade associations allows
competing corporations to regulate themselves in the public interest [Bruyn 1991, p. 321].
According to Bruyn, although not on the immediate horizon,
a new socially-oriented
economy is visible and emerging in the interstices of market life” [Bruyn 1991, p. 336]. “It is
a future in which non-economic factors societal values will become a more deliberate
part of the market, a future in which the society will operate the market through all its
manifestations, including folkways, attitudes, associations, and social interactions” [Bruyn
1991, p. 336].
7
JOSEPH SCHUMPETER
The creative component of the economy does not get the recognition due it. This is
understandable for, however important it might be, it is not the prime criterion of an
effective economy which are to social economists: the current welfare of all individuals in the
7
Since Bruyn’s book was written the nation has continued to move in a strong Market Liberal direction that
started in the late 1970s. Hopefully, this is a blip down on the hypothetical time series line representing the long
run upswing in institutional cooperation.
Three Pillars of a Social Economy Page 9
society/community and the prospective welfare of future generations.
8
While the creative
element in the economy is important, being responsible for the overall improvement in the
human condition is vital. The essential measures of economic welfare are the social indices:
the age of mortality, per cent of literacy (which measures the quality of education) and
infant mortality rate (a proxy for general health).
Kerala, in southern India, illustrates a distinction between social and conventional
economics in the matter of welfare criteria and measures. The social economic performance
in Kerala shows that there can be a high measure of economic welfare without high levels of
income or GDP. Amartya Sen [1994], drawing upon Krishman et al [1976], reports that
Kerala has impressive social indices, whereas per capita income – the prime measure of
welfare in conventional economics - is very low. This democratic state in India with 29
million people (a population larger than most countries) scores very well indeed in
education, health care, fertility rates (1.8 in 1991 that is lower than authoritarian China’s
2.0, the U.S. and Sweden’s 2.1, or Canada’s 1.9), 86 percent female literacy rate that
compares well with China’s 68 percent, the rural literacy rate and the infant morality rate
(16.5 per 1000 live births compared to China’s 31). By conventional economic measures,
however, Kerala does not do well at all.
Its domestically produced income is quite low – lower indeed in per capita terms than even
the Indian average – even if this is somewhat deceptive, for the greatest expansion of
Kerala’s earnings derives from citizens who work outside the state. Kerala’s ability to
finance adequately both educational expansion and health coverage depends on both
activities being labor-intensive; they can be made available even in a low-income economy
when there is the political will to use them [Sen 1994 p. 71].
But the topic of this section is creativity. The way to integrate the human quality of creativity
into social economics is to read Joseph Schumpeter’s Theory of Economic Development
[1934] written in 1911 when he was twenty-eight years old. It captures, after all these years,
the substance of how new kinds of products are introduced into a private enterprise
8
Concerning the welfare of future generations, the environment should be made a significant part of
economics. Daly [1996] says that the crucial issue is how much economic development the environment can
sustain. Sustainable development, like most important concerns, is “not subject to analytically precise
definition -- think of democracy, justice, welfare, for example”; for that matter think of money. “Is money
really M1 or M2 or is it M1a?” Yet we work with such imprecision; in fact, he says, we would have a hard time
without it [Daly 1996, p. 2].
Three Pillars of a Social Economy Page 10
economy.
9
Schumpeter says that the “vision” of innovative entrepreneurial opportunity
along with its complement “capitalist” financial support are the heart blood of development
and the creative component of the economy.
An effective and developing social economy requires institutions, not for the creation or
promotion of new possibilities (inventions), they are always present, but to give a select few
creators the opportunity to bring new ideas into being by carrying out the necessary
combinations of resources [Schumpeter 1934, chap. IV]. Josef Solterer, says about this
activity “
to deprive men of opportunity is resented by them more perhaps than to deprive
them of the fruit of their labor” [Solterer 1950, p. 19]. In his Theory [p. 93], Schumpeter
talks about motivation for this activity: the creative entrepreneurs act “to succeed for the
sake, not of the fruits of success but of success itself
and for the joy of creating, of getting
things done, or simply exercising one’s energy and ingenuity.” Such behavior is contrary to
conventional economics’ assumption of the rational utility maximizer. He says, typically,
entrepreneurs are driven in such a way that is contrary
to the picture of the economic man balancing probable results against
disutility of effort and reaching in due course a point of equilibrium beyond
which he is not willing to go
Hedonistically, therefore, the conduct which
we usually observe in individuals of our type would be irrational [Schumpeter
1934, p. 92].
The innovating entrepreneur is the embodiment of a free person acting economically.
“This mental freedom presupposes a great surplus force over the everyday demand and is
something peculiar and by nature rare” [Schumpeter 1934, p. 86]. Yet it exists everywhere
in that it is not limited to progressive nations or specific races of people. Significant for
development is the supply side of capital, the institutional structure where the
banker/capitalist supplies the financial support for the innovations’ resources. Herein is the
creative entrepreneurs’ complementary agent of development. That is to say, the innovator
exists in a meaningful way only if society builds an effective institutional arrangement
9
This book is small, well written and timely after almost a century. But the reader can easily be turned off and
never get past the long first chapter. “The circular flow of economic life” is a dull description of Walras’
general equilibrium system. In true Austrian School style this exposition of the static theory of the impersonal
forces of supply and demand is written in literary form without any geometry or mathematics. But this makes
it anything but exciting. It is the other four chapters that explain the logic of development and the genesis of
credit, capital, entrepreneurial profit, interest and the business cycle they do so in a most interesting and
realistic way.
Three Pillars of a Social Economy Page 11
whereby credit is created to finance innovational activity. Credit creation – the creation of
money by the banking system - is necessary for one cannot expect significant risky
entrepreneurial projects to come from “savings” or thrift in the strict sense. Credit creation
originating in Renaissance Italy helps to explain the great achievements by northern Italian
bankers in financing the commercial revolution, producing a momentum of entre-
preneurship that led to further expansion in the industrial revolution and to subsequent
innovational activities up to the present time.
10
This is not the place to be more detailed about this economic creativity. Should we explain
the process even in outline we would need to mention the following, at least.
Creative destruction. Each important innovation brings resistance because it disrupts
established ways of doing things. For example, the railroad destroyed the stage coach
industry, so that those affected reacted strongly. Innovations damage some members of
society while being helpful to others. This creative destruction is a negative effect resulting
always from development.
He does not say what society must do about the social harm that results though it is obvious
that it brings great suffering to a part of society. But he does say one cannot opt for a market
liberal society that would allow the suffering to go unattended. The philosophy upon which
the laissez faire form of economy is built is socially irresponsible regardless of how successful
economically it may be.
Families, workshops, and societies do not function if
each person attempts to adjust the
balance of his immediate personal and disadvantages every instant. However, that is
precisely where
the utilitarian philosophy of the past century leads. This system of ideas,
developed in the course of the eighteenth century, recognizes no other regulatory principle
than individual selfishness.
Historical research makes it possible to explain how this very superficial and dangerous
principle of irreligious rationalism gained control of a long line of highly intelligent thinkers
this philosophy expresses only too well the spirit of social irresponsibility that
characterized the secular, or more extremely, the secularist state of the nineteenth century
and its emotional milieu. Amidst moral disorganization, economic success only increased the
10
Stolper quotes Schumpeter as saying: Capitalism began as early as the eleventh or twelfth century because
then there was a banking system to finance innovations [Stolper 1994, p. 96].
Three Pillars of a Social Economy Page 12
gravity of the social and political conditions which resulted from a century of economic
liberalism [Schumpeter 1945, pp. 5-6].
Competition and the Price Variable. According to Schumpeter, the first things to eliminate in
describing a dynamic economy are the text book picture of competition and its central role
of price. An ideal economy is not one that is perfectly competitive, in fact, should it ever
exist, could not finance innovations. “
[I]t is not that kind of competition which counts but
the competition from the new commodity, the new technology, the new source of supply, the
new type of organization ... competition ... which strikes not at the margins of profit and the
outputs of the existing firms but at their foundations and their very lives” [Schumpeter
1950, p. 84]. Also to be ousted from a dominant position in conventional economics is the
price variable. “As soon as quality competition and sales effort are admitted into the sacred
precincts of theory,” price loses its role as dominant parameter of the system [Schumpeter
1950, p. 84]. Economic theorists deal usually with how the system administers existing firms
or industries, whereas the relevant problem is how is creates and destroys them. As long as
the creative act is not recognized, “
the investigator does a meaningless job. As soon as this
is recognized, his outlook on capitalist practice and its social results changes considerably”
[Schumpeter 1950, p. 84].
The Long Wave Business Cycle. Cycles are the essence of the economy; they are as the
heartbeat of the private enterprise system. While there are many kinds of cycles, including
the average eighteen-month inventory cycle and the average ten-year cycle that many
economists make a living forecasting, it is the 45-60 year long wave cycle of business activity
that is most significant. Using the statistical research of N. D. Kondratieff in a very loose way
Schumpeter recognized three long wave cycles beginning in the last quarter of the
eighteenth century and ending after World War II. A fourth may be added although he did
not live to see it. The cluster of innovations from about 1946 to the beginning of the long run
downswing starting in the mid 1970s to an obvious recovery in the mid 1990s delineates this
long wave cycle.
The irregular pace of technological and organizational innovations is the cause of these four
long waves. They began to occur in a regular fashion with factory-based, cotton textile
manufacture in the period known as the Industrial Revolution, continued for sixty years or
so with railroads and improved steel production derived from the railroadization, then
followed with an amazing cluster of innovations pertaining to automobiles, electrification
and chemical products, and finally, there came a less impressive list of new products after
World War II (airlines, television, the interstate highways, nuclear energy and space) that
propelled the last full long wave.
Three Pillars of a Social Economy Page 13
What appears to be convincing about this cyclical interpretation of economic history is the
current increase in the pace of economic development when we would expect it after the long
run depression phase that began in 1973. In the mid 1990s there occurred an amazing burst
of economic activity due to the combination of computers and transistors. This dynamic
surge, it must be mentioned, was accompanied by expected negative effects. Creative
destruction took the form of a halt -- temporary it is hoped -- to the solidaristic progress of
American workers and an inequitable redistribution of income.
ROBERT FOGEL
The third great social economist to be treated here is the contemporary, Robert Fogel. His
recent work (as opposed to his early work in economics that utilized econometric inference
applied to the neo-classical model) explains the widespread improvement in the standard of
living of the great mass of people in the developed nations. His work deals with whole
populations becoming better off and with the reduction in the differences between the rich
and poor [Fogel 1991, pp. 33-71]. He believes that egalitarianism (the movement to more
equality of economic welfare) is the economic revolution of the twentieth century. Indeed,
this is an area of great interest for social economists. He prefaces an article with a quote
from another University of Chicago Nobel Prize winner, T. W. Schultz, that clearly reflects
his attitude about the nature of the science of economics. “Most of the people in the world
are poor, so if we knew the economics of being poor we would know much of the economics
that really matters” [Fogel 1992, p. 243].
There are four measures of the extent of the inequality that was removed. Three are
biomedical: life expectation, height and body mass index. (BMI is weight per height). The
fourth is the Gini ratio that tracks changes in income inequality.
Height and BMI are predictors of risk of disease and a short life. For example, Americans
experienced better health earlier than Europeans and so achieved modern heights by the
1750s. The English reached these heights only after 1825. The reasons that American diets
were richer in protein than European diets and population density was lower and so less
disease. All of the four measures show the twentieth century to be a time when the rich and
the poor in the developed countries became considerably more equal. Data on income
distribution show that while the rich got richer, the poor came closer to them.
Life expectancy began to rise among the poor in the 1790s after the Industrial Revolution in
England but the improvement was slight and there were decisive reversals up until the
Three Pillars of a Social Economy Page 14
twentieth century. Rapid increases in development and income per capita were achieved
from 1775 to 1875 but there was little overall improvement in health as measured by height,
BMI or longevity. Fogel finds this puzzling. The process of modernization was a mixed
blessing for those who lived through it. It brought such benefits as a leap forward in
scientific knowledge, remarkable technological innovations in agriculture, transportation,
and marked gains in labor productivity. Yet, negative aspects tempered the benefits. The
negatives were brought about by: (a) rapid urbanization (death rates rose in cities of more
than 50,000); (b) increased mobility, for example, the spread of cholera in 1849-50 and
malaria following the Civil War in the United States;
11
(c) in some places populations
increases greater than the food supply; and (d) more inequitable income distribution.
Moreover, there were negative factors responsible for “stunting” children under the age of
three: namely, infections of pregnant women, contaminated food, opiates used to pacify
infants and diets poor in protein.
There were some advances in life expectancy in England, France, the United States and
elsewhere between 1830 and 1900, but they were surprisingly small and there were reversals
among lower income people. The gains from 1890 to 1955, on the other hand, were
remarkable. Chronic malnutrition was almost eliminated. There were advances in public
health (water purification and disease control), improvement in housing, reduction in toxic
substances, such as drugs and leads, and innovations in medical technology.
Some other changes that contributed to the twentieth century revolution was progressive tax
programs transferring income from rich to poor. Moreover, an extremely important factor
was the subsidization of education. Primary and secondary education was made compulsory
and free. In the United States subsidies were extended by the establishment of state and city
universities. And then in 1944 came the GI bill financing higher education for eight million
American veterans of World War II. In a period that has been termed the Golden Age of the
American economy salaries of skilled and professionals greatly increased by more that the
increases in per capita income.
12
An effect of this subsidization of education was a more
equitable distribution of income. According to Fogel, for purposes of equity, this strategy of
11
Also there were increases in typhoid, typhus, and dysentery.
12
Ray Marshall is one who speaks of 1945-1965 as the Golden Age of the American economy. There was a long
period of relatively high growth in productivity and total output with but moderate inflation. Crucial to the
general welfare was that strong unions protected workers. He also adds two other elements: a Keynesian
macro policy and a strong international monetary system formulated in Bretton Woods [Marshall 1987, pp.
130-131].
Three Pillars of a Social Economy Page 15
subsidization of education should be continued and increased. This is his favored policy
recommendation.
There was more of course. Public health programs greatly reduced homelessness and
beggary. The problem in Europe in the nineteenth century and before was chronic
malnutrition. Twenty percent of the population did not have sufficient calories and protein
to supply the energy to work. The best that the poorest ten percent could do was stroll a few
hours a day begging. With better nutrition came the physical stamina to do a day’s work.
Moreover, and this was most noticeable in the United States, private philanthropy was
encouraged by the tax laws.
There is a religious variable in Fogel’s analysis of the great egalitarian movement. For
centuries religiosity influenced policy in the United States and Europe. There were three
Great Awakenings in religiosity that impacted politically and socially according to the
nature of the specific revivals: (a) predestination remained throughout the eighteenth
century, continuing up to the early nineteenth, with influence upon the American
Revolution and British corruption; (b) in the middle of the nineteenth century there
appeared an awakening, stressing the presence of saving grace to strengthen one in the
struggle against sin, that helped abolish slavery in the United States; and (c) in the late
eighteenth and first half of the nineteenth century there occurred an awakening that
influenced policy to eradicate social sin by attacking corrupt big business and the rich. The
last, from about 1890 to 1970, is very relevant to Fogel’s thesis that the twentieth century is
the century of egalitarianism for it helped the disadvantaged by such actions as opening
medical clinics in poor sections of large cities and settlement houses to help the poor find
work. The twentieth century movement meant a change in values and attitudes about social
programs generally. The established Protestant religions became more socially minded and
pushed for social economic intervention of government. The Catholic Church joined the
Protestants, in fact, was a leader in the revolution, with social encyclicals beginning in 1891,
that called for government support of workers, a full socialization program that continues to
this day with a succession of encyclicals emphasizing the dignity of the person in the
workplace and the right of all to a just wage with a component of savings therein.
Fogel is very much afraid that a new awakening that had its origin in the 1960s will greatly
diminish the social fervor that has accomplished so much through organized religion. If
halted it would leave the job half done. In the new awakening, with stress placed on biblical
fundamentalism and personal rather than social sin, many of the converted disparage the
social movement as Liberalism (notwithstanding that the word is used contrary to its initial
meaning) and the socialization as government’s inversion upon and restriction of one’s
Three Pillars of a Social Economy Page 16
freedom. This contributes a threat to progress in equalization of social economic welfare in
developed countries and to its spread to the rest of the world.
PUTTING SOCIAL ECONOMICS AT CENTER STAGE
A common thread that holds this paper together is its criticism of conventional economics
and praise for its alternative, social economics. The three scholars featured here were not so
openly critical. They focused on new insights and while they contradicted basic assumptions
of the neo-classical model invariably they left criticism to others. I, too, might have ignored
the criticism and repeated Alfred Marshall’s statement of consensus, as Hans Jensen did,
that all great economists look to the general economic welfare.
[T]he founders of the major schools of economics “were without exception devoted
to the doctrine that the well-being of the whole people should be the ultimate goal of
all private effort and public policy” [Jensen 1977, p. 240 quoting Marshall].
But the criticism is too important to be left at the margin of mainstream economics. What we
have discussed here has to be given center stage. Solidarity as explained by Pesch is a
complement to competition and deserves to be treated analytically and recognized as a
component of the basic model. The role of innovational activity explained by Schumpeter
reflects the sacredness of human creativity and shows economics in its most essential aspects
to be a dynamic, not a general or partial equilibrium, science. And finally, the unique
achievement of our century, as told by Fogel, was to raise the majority of people in the
industrialized world from a wasteful life to one of social economic well being.
Three Pillars of a Social Economy Page 17
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Article
Today, Kerala is the most literate state of India (69 percent in 1981). From about 1800 until 1947, it was divided among three political administrations each of which pursued different educational policies. All three areas, however, achieved remarkably high rates of literacy. Government policies affected the timing of increases in literacy in the three jurisdicitons; but culture explains the readiness with which, irrespective of policy, Kerala's people sought literacy-oriented education. The most important aspect of that culture was the place of women. At the beginning of this century about a third of the population was matrilineal and another 20 percent was Christian. Both traditions offered more scope for women than they experienced elsewhere in India. The Kerala evidence suggests that literate men have literate sons, but literate women have literate families.