Social factors in the economy

First insertion on Heterodox Gazette Sam de Wolff: 14 november 2013

E.A. Bakkum is a blogger for the Sociaal Consultatiekantoor. He loves to reflect on the labour movement.

This column describes how groups use their power to influence the economic processes. The general framework for the interaction between groups and markets is provided by the book An economic theory of greed, love, groups and networks by Paul Frijters. Next it is explained how Heiner Ganßmann in Politische Ökonomie des Sozialstaats applies the frame to the political economy. And finally the Leninist version of the theory is explained with the help of the book Moral und Gesellschaft by Bernd Bittighöfer and Jürgen Schmollack.

In a previous column it has been explained how the neoclassical theory is built on the idea of man as a homo economicus. This image is contrasted with the homo politicus, who is his ideological opposite. The present column elaborates on the difference, and describes how the images can dictate the foundation of the institutional structure of society.

The homo economicus tries to realize his goals with minimal costs, and for a given income tries to maximize the satisfaction of his needs (so-called utility maximization)1. This behaviour is called economically rational. The homo economicus merely considers his own interest, and thus has no morals, ethics or want of meaning. In the neoclassical theory the homo economicus is commonly active on markets with perfect competition. Such markets are completely transparant, so that all market actors are always entirely informed with respect to the relevant market knowledge. No actor is able to influence the product prices. The product price is formed naturally due to the complex interaction of all trading actors on the market. The transactions are started and completed instantaneously.

On the other hand, the homo politicus is driven by altruistic motives. It is clear that also the homo politicus will sometimes act on markets, but in his decisions he always takes into account the general interest. He derives his norms and values and thus his identity from the community, where he lives. In this world perfect markets are not possible, because the people do not behave in the manner to match. For instance the column about the Edgeworth box has already shown, that people can exploit each other, as soon as the prices are not dictated by the market itself.

The real man is neither a pure homo economicus nor a homo politicus, but has characteristics of both types. The neoclassical theory is merely an abstraction, so that her predictions and results will never be accurate. Therefore the question must be asked, how that reality does look like. The present column makes some suggestions, which have been proposed in the economic literature, notably by the institutional school2. First some ideas from the theory of greed, love, groups and networks are discussed. Next some comments are borrowed from the political economy. And finally the ideas are applied to the Leninist theory.

The theory of greed, love, groups and networks

Recently the Dutch economist Paul Frijters has developed and published the theory of greed, love, groups and networks in a book, together with his Australian colleague Gigi Foster3. This book is interesting for everybody, who wants to look further than the neoclassical theory. The reader of the book gets the impression, that Frijters has mobilized wisdom for his ideas from many sciences, not merely economics, but also for instance the sociology, psychology, history and even pedagogics and biology. Thus the theory of Frijters has a large range of applications, and it constructs a conceptual foundation for other, more politically orientend analyses. The audacity and the high level of ambition are a natural incitation to pass criticism, but the present column will not do this.

It is interesting that Frijters maintains the image of man as a homo economicus, and still explains many social phenomena, such as power and the human morals and love4. It turns out that man does develop immaterial motives. Frijters does reject in his theory the abstraction of the perfect competition. Markets are not transparent, and therefore the actors on the market must make costs for transactions and for the search of information. Also the introduction of group formation and power factors distinguishes the theory of Frijters from the simple neoclassical models.

According to Frijters power is exerted by groups or circles, and not by individuals5. An individual develops love for an object, when that object can satisfy a need, and the individual can not coerce that object to do so. Love grows, when the individual wants to obtain satisfaction from a source of power, in the expectation that this will finally be granted. The primary motive remains greed! Thus the egoism of the homo economicus creates in a natural way the altruism of the homo politicus. In more dramatic words: above all it produces its own grave-digger. The individual begins to identify himself with the interests of the powerful object. That can be a group of people, or a good cause or ideal. Apparently the other object becomes a part of the personal interests6.

Group power is based on the expectation, that the group can reward or punish. The group has advantages for the individual, such as division of labour, learning processes, and positive returns to scale. Thanks to the extended identity towards the groups it is easier to resign oneself to the strange power. Thus the members of the group together develop a collective orientation and a collective interest. A group ethics can be formed, morals and a collective meaning.

Frijters distinguishes between three forms of collectives: the reciprocal group, the hierarchical group, and the network. Since he divides the groups according to their size, small or large, he considers five types, called archetypes by him. Reciprocity means that all members are more or less equal. Possibilities are the extended family, the association, the community, a religion, or a democratic nation-state. The decisions are made after a general consultation. The hierarchy may be an enterprise or a state agency, or a dictature. There the decisions are taken by the leaders. The hierarchy is instrumental for individual ambitions, such as self-enrichment.

Frijters limits his study to the economic system of production and trade. Contrary to the groups the commercial network does not embody a structural exertion of power and morals. The sole power of the actors in the net is the making and breaking of economic trade contacts (pacts and contracts for production and services). The national network encompasses all product markets, and thus the trade and industry. Also the labour market is part of the network. It could simply be called the spirit of enterprise. Networks have the interesting property, that they can transform into groups.

That happens, when certain contacts get a certain continuity, and the actors discover that they have a shared interest. For instance, institutions can be established, which regulate the trade, and in this way reduce the transaction costs. The contacts lose their characte of trust, and are guaranteed by law and surveillance. Thus the nation-state can emerge, which due to the monopoly of violence creates a level playing field within the network. For instance, conflicts can be solved quicker. The so-called search-friction decreases. The nation-state is a group, and can appeal to the morals, in addition to enforcement. Note again, that the costs of regulation, which are immense, are neglected by the neoclassical model.

Some institutions within the nation-state strengthen the network, such as the educational system and the construction of buildings and roads. These harmonize the social norms, so that less force is needed in order to maintain the law. Frijters calls this the social capital. New generations identify with the nation-state, and are willing to pay for it by means of taxes. The state becomes the bearer of the social ethics, and therefore of the social rights. The network appreciates the nation-state as an asset, but it rejects any oppression or domination by the state. Therefore the network, and within it notably the trade and industry, defends the civil rights. These include the democracy, perhaps in its representative form (one man, one vote).

According to Frijters the nodes of the network are formed by the contact makers. These continue to collect production factors, in and ever changing composition, dependent on the circumstances. It is mainly due to their efforts, that the division of labour becomes possible, and that technical knowledge is spread across society. Thus the network is instrumental for the economic growth. Since the character of the contact makers resembles the homo economicus, they distrust the administration of the nation-state. They refuse to voluntarily subject to the nation-state. On the other hand the nation-state is afraid to apply too much coercion, because the network is the source for his incomes. The result is the democracy, where the nation-state must forever prove his relevance (reciprocity).

This theory motivates Frijters to modify the common production function7. In her new form she becomes

(1)     N(t) = F(L(t), K(t), G(t), H(t), C(t))

In the formula 1 N is the national income, which evidently varies with the time t. It is a function of the variables L, K, G, H and C. Here L represents the quantity of labour, K is the stock of capital goods, and G is the stock of raw materials. The variable H is the human capital, which consists of learned knowledge, skills and creativity. The variable C is new, and represents the set of links between the contact makers. Apparently the business relations become a production factor. In general N will increase, according as the value of a variable rises. The formula 1 illustrates, that the growth depends on the network8.

The political economy of the state

Recently the sociologist Heiner Ganßmann published the fascinating book Politische Ökonomie des Sozialstaats9, which links the abstract theory of Frijters to the political economy. Actually Ganßmann wants to show, that the welfare state (in German Sozialstaat) must be preserved. However, the present column benefits mainly from some theoretical concepts, which he introduces.

Ganßmann distinguishes between three social pillars: the market, the state, and the extended family or community. The market coincides with the network of Frijters. Ganßmann identifies the market with the political system of the democracy, because there the representatives of the people compete with their ideas of ethics and morals. The market itself, the network, lacks morals. The extended family or community is a reciprocal group, and includes that, which in the Netherlands is called the social middle-field, and elsewhere the civil society.

In a primitive society the market and the community suffice as the supporting elements. It is true that the medieval state can emerge, a governement, but its portfolio of tasks remains small. It is limited to guaranteeing the human rights (security), and some minimal civil rights. However, the capitalist system can not survive in this minimal state, because it neglects the subsistence minimum of the individuals. Frijters has already stated, that capitalism requires institutions for civil rights. According to Ganßmann the social rights must also be guaranteed. The laissez faire of the Manchester capitalism is not reconcilable with a stable society. The state must turn into a welfare state. Civil rights can exist only, when they are combined with social rights!

Figure of triangle of pillars
Figure 1: the three pillars, their functions and bearers

Incidentally, Frijters thinks in the same direction. For he states, that the state must legitimize itself towards the society. The citizens distrust the state. They demand a reciprocity of the state, in the sense that he redistributes the social product of the capitalist system over all citizens. For that matter, in capitalism all kinds of external effects occur, which must be controlled10. The market coordinates in a spontaneous manner, but sometimes it is better to cooperate. Apparently there are three dominant groups: the democracy (in the form of representatives), the plutocracy (the elite of the trade and industry and of private institutions such as churches), and the autocracy (the governement, which controls the state hierarchy). The figure 1 displays these three poles of power, as well as their primary activity, as presented by Ganßmann.

Also Ganßmann argues, just like Frijters, that the state accepts the democratic system, because in this way its income from taxes will increase. The decentral economy is more productive than the system of central coordination. Thanks to this system the state can present itself as the defender of the general interest. Now the general interest always requires an ethics. Ganßmann distinguishes three political-ethical currents: the liberalism, the conservatism, and the social-democracy.

In practice each political current must reconcile itself with the three power groups: those of the democracy, the plutocracy and the autocracy. The figure 1 shows, where liberalism, conservatism and the social-democracy position themselves amidst the three power groups. Ganßmann believes, that especially thanks to the labour movement the struggle for the universal suffrage could be won. Subsequently the state has internalized the morals of the universal suffrage. Ganßmann warns, that in changing political conditions this right can easily be turned back. Even at present the material redistribution by the state is restricted by the power of the private property.

Also Ganßmann points out the nuances of the homo economicus. Several groups compete for power in the society, and therefore the economy is never politically neutral. The entrepreneurs of the plutocracy have other interests than the workers, who are united in the democratic trade union. Therefore the homo politicus emerges, who besides his own interest strives for the deliberations and the cooperation in the political administration, in casu the state. The power of intervention by the state has the consequence, that the citizens maintain their trust in the system. Thus commonly the state does not need to apply coercion. Usually the citizens are disciplined by the social control, or by the internalization of the state morals. This reduces the danger of sponging "free riders"11.

Ganßmann advocates the model of society as two classes, more than Frijters. The factors labour and capital are mixed up in what he calls the K-game. Both try to conquer a maximal part of the available national income. Also the so-called non-players can exert influence by means of the democracy: inactive people such as housewives, the unemployed, the elderly, and the sick. The struggle is softened, because both players benefit by a maximal national income. Therefore the struggle must not affect the productivity12.

The remainder of the book by Ganßmann discusses the development of this struggle since the end of the Second Worldwar. He makes several interesting observations. For instance, the state can make the network more flexible by means of deregulation. That can truly increase the productivity, as is suggested by Frijters. However, the benefits can accrue mainly to one group (for instance the shareholders), whereas the costs may be imposed on another group (certain groups of workers). That is an interesting matter, and warmly recommended to the reader, but not relevant for the present column.

The Leninist theory of society

During almost the entire twentieth century about half of the global population has lived in nation-states, which adhered to the Leninist theory of society. And still this paradigm is popular in many countries, for instance in China. Therefore also the Leninism deserves a discussion in the present column. The argument is based on the book Moral und Gesellschaft by the Leninist sociologists Bernd Bittighöfer and Jürgen Schmollack13. Also this book has been acquired by the second-hand bookshop Helle Panke in Berlin. It is striking, that the Leninist theory of society fits well in the preceding story.

The Leninism splits the capitalist society rigourously into two classes: on the one hand the labour movement, and on the other hand the associations of entrepreneurs and capital owners14. In this manner the network of Frijters and the market of Ganßmann are transformed into two enormous reciprocal groups, that are mixed up in a battle between Titans for power. In this struggle the distribution of the national income is at stake, just like in the K-game of Ganßmann. The capitalists own the capital goods, and use these as the lever of power in order to restrict the wage demands of the workers. This class war is the foundation of the classical theory of the nineteenth century, which culminated in the theory of exploitation by the political economist Karl Marx.

However, the Leninism takes the argument further, and supposes, that in capitalism the enterprises have developed into monopolies by a continuous process of concentration. The formation of the western mixed economies with a large public sector and an extended welfare state, is interpreted as the collaboration of the state-autocracy with the monopoly-plutocracy. The collaboration is notably caused by the fact, that the state supports the market. The support is also given during international expansions, if necessary with military means, and then is called imperialism. Incidentally, the theory of imperialism is also propagated by some ideologies beyond Leninism. The social system as a whole is called the state monopolistic capitalism (in Dutch sometimes abbreviated as stamokap). The stamokap model is not wrong, but it does represent an extremely one-sided view.

Bittighöfer and Schmollack think, that stamokap does not have a future. They mention two reasons:

Therefore the network benefits from the transfer of the ownership of capital goods to the community. This is in fact recommended by Bittighöfer and Schmollack. Since the capitalists exploit mainly the working class, notably this class is motivated to start the revolution. Although the idea of the workers as an avant-garde is the hallmark of all socialists from the late-nineteenth century, the Leninists truly adore the proletarian elite. The working class generates shock-troops, which will liberate the people from the bourgeois-liberal yoke. After the revolution merely one political party is allowed, namely the party of the working class. In practice this is the Leninist party.

In this manner the Leninist party can appropriate the leadership of the state-bureaucracy. During the first half of the twentieth century this coup d'état indeed succeeded in many states, including large ones like Russia and China. This makes the model somewhat credible. Following Frijters and Ganßmann, also Bittighöfer and Schmollack acknowledge, that the state must become legitimate in the eyes of the citizens. They also advocate the democracy. But due to the two economic advantages of the Leninist system of collective property, the democratic process must fit within the framework, that is dictated by the Leninist party. The morals of the Leninist party are the ultimate expression of the general interest15.

It would seem, that other parties would also propagate the general interest, that is expressed by the Leninists. Here the problem is, that the bourgeois parties are dominated by the plutocracy of the entrepreneurs. Thus they present a distorted image of reality to the electorate. And Frijters warns, that the people are inclined to adopt the faulty morals, through institutions such as the education. Power seduces them to love the morals. Therefore in capitalism the homo economicus is the common view on human nature. After the revolution by the Leninist party, she can propagate her own morals. There the idea of man as a homo politicus dominates. The Leninist paradigm prefers to call this the socialist personality. Since many socialists do not support the Leninist paradigm, the term Leninist personality is more appropriate.

Figure of GDR poster for democracy
Figure 2: GDR poster: democracy

Compelled by necessity the Leninist revolution of the society must be executed by means of coercion. However, that state will not last long. Namely, the Leninist morals represent the highest level. The propagation of these new morals must lead to internalization, or at least to a social control. The Leninist personality can unfold at will. However, this development always takes place within the community, as the large reciprocal group, or on a smaller scale within the reciprocal group of the worker's collective. Man is a social being. Therefore the individual interest coincides to a large extent with the general interest. The exploitation is eliminated. Therefore the Leninist personality will be willing to accept the Leninist morals.

Since just a single group ethics remains, the network does not have to fear, that some group will restrict them. In the new classless society the conflicts of interest are reduced to the minimum level. The consensus (the social capital of Frijters) reduces the transaction costs of the network. The human creativity of each individual can unfold in an optimal manner. Here everybody can be made responsible for his productive contribution. Since the morals are collective, the Leninist personality will adapt to her worker's collective. This illustrates the idea of Frijters, that the power naturally elicits love. All support the state.

Ganßmann states, that the capitalist system leads to an unbearable unpredictability of the living conditions. In the Leninist economy the uncertainty is controlled rigourously by planning the future on a scientific basis. Thanks to the planning the transaction costs are reduced even further. An atmosphere of cooperation and friendly competition is created. The Leninist democracy consists simply of the cooperation by all. Incidentally, everybody contributes to the plans, and everybody can propose changes. Changes and flexibility imply a moral risk, such as the discontinuation of one's own worker's collective, but that risk can be bridled by deliberations and the exchange of information.

The view of Bittighöfer and Schmollack is connected with a long history of humanist philosophy. Yet the Leninist dream has never been realized. The morals did not become the driving force, that was envisaged, so that the system became stuck into a structure of oppression. Following many publications your columnist is inclined to believe, that the two arguments at the beginning of this paragraph are false. The Leninist system does not have these comparative advantages. It is obvious that the population also began to notice the faults in the Leninist paradigm. Thus the Leninist morals never became credible. Power can elicit love, but not when its morals are clearly unsound.

First, in reality the new system simply continued to "exploit" the workers. The plutocracy of the entrepreneurs was replaced by the state bureaucracy. Somewhere halfway the nation-state as a whole remained stuck between the hierarchy and the reciprocal group. The party officials and their sympathizers have extracted material gains from their positions, sometimes through informal contacts, and sometimes through the open support of the state. Second, it turns out that the Leninist economy does not have productive advantages. The morals had the aim to eliminate the distrust of the network with regard to the state. But here the importance of the individual entrepreneurial spirit has been underestimated. In a bureaucratic society it does not get sufficient room for action.

Thus the Leninist economist Eva Müller states in hindsight: "Mangel oder Überschuss blieben, weil fortwährende Änderungen innerhalb einer Zirkulationsschleife Anpassungsmechanismen erfordern, die fehlten". The system was not able to respond in a dynamic manner to the various incidental and technological changes: "(After investments) treten dann Disproportionen in größerem Umfang auf, weil sie volkswirtschaftlich schwer voraussehbar sind. Der Versuch, dieser Veränderungen aus zu weichen, zieht gezwungener maßen wirtschaftlichen Stillstand nach sich, wie die Erfahrungen der DDR und anderer sozialistischer Länder seinerzeit zeigten"16.

In spite of the Leninist call to take risks this was insufficiently done in practice. This is partly due to the preference of the bureaucracy to plan the economic development in a rigourous way. Then the contact makers can not create a dynamic environment, because the contacts are fixed in long-term contracts. But even when the Leninist party would have given more freedom to the enterprises, and would have cut down the planning, then still the muzzling of the network by the Leninist party would undoubtedly have slowed down the economic growth. Sound enterprises demand indeed room for some greed.

  1. The assumptions of the neoclassical theory can be found in any decent introductory textbook about economics. Your columnist is pleased with Volkswirtschaftslehre (2003, Oldenbourg Wissenschaftsverlag GmbH) by M. Heine and H. Herr, Mikroökonomische Theorie (2011, UVK Verlagsgesellschaft mbH) by W. Hoyer and W. Eibner, and Micro-economie (1996, Senfert Kroese) by F.J. Dietz, W.J.M. Heijman and E.P. Kroese. (back)
  2. In a previous column it is noticed, that the institutionalists build on the ideas of the Historical School. (back)
  3. Zie An economic theory of greed, love, groups and networks (2013, Cambridge University Press) by P. Frijters and G. Foster. The attention of your columnist was drawn to Paul Frijters by his collaboration with Bernard van Praag, which makes him a descendant of the Leyden School. Due to the multi-disciplinary approach and the many practical examples it is a "funny" book. Moreover, it generates some distrust: no man can have knowledge about so many specialized topics. Nevertheless, your columnist really likes the outline of the text. (back)
  4. It is obvious that this problem is also important for politics. Especially the social-democrats have studied this theme. Thus the political scientist Monica Sie Dhian Ho states in Van waarde (2013, Van Gennep), that cohesion is essential for a healthy society, next to a minimum income, decent work, and emancipation. The former party leader Wouter Bos devotes in Dit land kan zoveel beter (2006, Uitgeverij Bert Bakker) an entire chapter to the question "What binds people together". On p.85 he comes to the same conclusion as Frijters, namely "But who considers the history of the welfare state, must conclude that the most important reasons for organizing solidarity were related to the well-understood personal interest". (back)
  5. M. Mulder distinguishes on p.37 and further in Omgaan met macht (1977, B.V. Uitgeversmaatschappij Agon Elsevier) four instruments of power: sanctions (including rewards), the formal function, identification (reference), and expertise (knowledge). Indeed these are more group characteristics than individual ones. (back)
  6. Frijters even advances this explanation for the parent-child and man-wife relations, perhaps in order to stimulate the sales of his book. (back)
  7. See the column about the model of Solow. (back)
  8. It is clear that here Frijters builds on a long tradition. The column about the Historical School states, that Adolph Wagner wants to add the state as a fourth production factors, besides the factors labour, capital and land. (back)
  9. See Politische Ökonomie des Sozialstaats (2009, Verlag Westfälisches Dampfboot) by H. Ganßmann. (back)
  10. See the column about external effects. (back)
  11. See the column about public goods. (back)
  12. It is well-known that trade unions restrict themselves, by coupling their claims for higher wages to the rise of the labour productivity and on the inflation. (back)
  13. See Moral und Gesellschaft (1968, Dietz Verlag) by B. Bittighöfer and J. Schmollack. Your columnist believes, that the Leninist paradigm sketches a one-sided picture of reality. Besides, the book is filled with citations of Leninist politicians, with a prominent place for Walter Ulbricht, the secretary of the central committee of the Leninist party SED, and chairman of the State Council. It is curious, that Vladimir Uljanov (Lenin) is not cited much. The authors do not hesitate to brag in a venamous way, when they comment on western adversaries. For instance on p.128: "In the battle against the aggressive West-German militarism and the rising neo-Nazism the large national responsibility of the GDR and al her citizens is to prevent with all their strength, that again a war will start on the German soil". In spite of these bizarre text fragments their arguments are still sufficiently interesting for a closer examination. (back)
  14. The column about alternative scaling of the utility of monetary incomes shows, that the personal view of people depends indeed in a schematic manner on the height of the income. Thus the group with average incomes and the group of richest individuals can develop a different view on society. But that column also shows that Bernard van Praag measures a large spread in the individual preferences, irrespective of the individual position. If there really is a class-dependent consciousness, then the other personal characteristics will erase most of it. This finding relates evidently to the GSOEP data. It is conceivable, that the situation is different in a society with extremely large differences in income. (back)
  15. The Leninist view on democracy is also applied within the Leninist party herself. Soon after the establishment of the Soviet state the democratic centralism has been introduced. This principle forbids the agitation by sub-groups (factions with deviating morals) within the party as a whole. (back)
  16. The citations stem from Marxsche Reproduktionstheorie (2005, VSA-Verlag) by Eva Müller. (back)