About three years ago the Dutch economics P. Frijters presented an economic theory, which combines a group model with the concept of the homo economicus, who is capable of love. The present column tests the theory with the help of knowledge from sociology and psychology. It turns out that these two disciplines indeed support the hypotheses in the theory of Frijters. The insights are applied to reality, namely the enterprise, the bilateral transaction, the cartel, and the branch organization.
Sam de Wolff, the namegiver of this webportal, was a marxist, and therefore always placed his economic arguments in a social framework. Your columnist has copied this habit in his own texts. This implies concretely, that the economic knowledge must always be complemented with laws from psychology, sociology, and political sciences. At the end of 2013, the fascination of your columnist resulted in a description of the ideas of the Dutch economist Paul Frijters, which are explained in his book An economic theory of greed, love, groups and networks. This work is truly inter- or multi-disciplinary. Besides, the book gives an easily readable summary of the actual economic theory, including references to the happiness- and institutional economics.
Nevertheless, Frijters gives a typically personal interpretation of the social frame of the economy. It is difficult for the relative outsider to understand what is the relation with the existing knowledge from psychology and sociology. The present column wants to clarify the inter-disciplinary coherence. For this purpose his interpretation of three essential concepts will be elaborated in some detail. The complete model of Frijters will not be summarized again, because that has already been done in several previous columns. The attention will be focused on three concepts, which seem to define the model. They are:
Frijters distinguishes between three types of relations, namely the network, the hierarchy, and the circle. Markets consist of networks, where the mutual ties are weak. They aim at a mutual benefit, and leave the personal freedom of the concerned actors intact. The hierarchy is a form of organization, where the power is concentrated at the top. It is a command economy, and is realized for instance in the bureaucracy. The members of such a group submit merely, because they receive a material reward. Finally, the circle is a reciprocal group. The membership of such a group is attractive, because it satisfies the social needs of its members, contrary to the hierarchy. The members identify with their circle, and therefore they become dedicated to the group. Moreover, Frijters classifies the hierarchy and circle according to their size: small or large. Thus there are five archetypes in total.
It is true that in the modern social sciences the society is commonly portrayed as a loose network, but nonetheless this is not obvious. It is worthwhile to elaborate on this aspect1. The famous sociologist Emile Durkheim points out, that in the pre-history people still live in large families or tribes, that are mutually separated. There exist only (small) circles, and no networks. However, according as the population grows, the tribes come into contact with each other. They discover that they can increase their own welfare by trading. A division of labour results, in order to benefit from scaling effects and from local expertise. Thus the coherence of the members in their own circle diminishes. The individualism emerges. This latter phase dates from the nineteenth century.
Some trade networks can naturally transform into a circle, such as the nation-state. But often this does not happen, and then there are merely markets with competitive suppliers. Besides, increasing scales cause their own problems. For, in the tribe all contacts are still personal, and that creates rights and duties. Thanks to their dedication the members are bound by a mechanic solidarity. Those why try to shirk from it, will be disciplined by the group pressure. However, in large circles such as the nation-state, anonimity spreads. Therefore the group pressure weakens. Now the solidarity must be organized, by establishing institutions. Durkheim calls this the organic solidarity.
Thanks to the organic solidarity the individual existence is assured, also in the large circle. However, individualism gives an unprecedented liberty, and it requires new skills. Otherwise, the individual could perish due to his own impulses. At the beginning of the twentieth century, when the traditional relations disappeared rapidly, sociologists such as Durkheim were deeply concerned about this development. He calls the uprooting and desintegration an anomy2. He wants to combat her by forming new circles, now based on the professions. Incidentally, according to Durkheim markets can only function due to the presence of institutions, such as laws3. For, economic contracts can never be complete. Furthermore some mutual trust is indispensable for trading.
Yet during the Second Worldwar another famous sociologist, Karl Polanyi, comes to the same negative view of languishing social morals as Durkheim4. Polanyi tries to find the solution in the formation of new circles, consisting of productive corporations. It is remarkable that thirty years after Polanyi the sociological view turns around, because now many sociologists fear that the individuals succumb to a will-less acceptance of the system. Institutions such as education and the mass media lead to an uncritical individual adaptation to the social norms. This idea is propagated, among others, by the French philosopher Michel Foucault5. The reader may observe that originally even or especially the sociologists find it difficult to deal with the individualization. Nowadays the idea of networks has been accepted, and therefore Frijters is in the scientific main stream with his view on reality.
Polanyi states that the economy (the markets) separate from society as a whole. The economy becomes a system in itself, in relative isolation. Modern sociologists doubt also this hypothesis. For instance, Mark Granovetter is convinced, that markets are socially embedded6. Just like Frijters, he represents the economy by a network. But although the mutual ties are weak, yet the entrepreneurs are mutually dependent. Thus the network obtains a certain stability. For instance, cartels can form. Moreover, social institutions are formed in order to structure the trade. Thus the social autonomy of the economy remains within bounds7.
The archetype of the hierarchy, which is suggested by Frijters, deserves special attention. At the start of the twentieth century the sociologists study the bureaucracy, which develops within the enterprises and the political administration. For instance, the famous sociologist Max Weber is impressed by its effectiveness8. The bureaucracy treats every citizen as an equal. However, the hierarchy model assumes that the organization can be controlled simply by commands. And that assumption is rather abstract, certainly with regard to enterprises and public services9. Already in 1933, Elton Mayo concludes that the bureaucracy is influenced by her informal dynamics. In 1956, the famous sociologist Talcott Parsons describes the enterprises simply as organizations with internal norms. His idea is copied, and the sociology of organizations is formed. The hierarchy model becomes obsolete.
The interest in informal processes obtains a new boost, when during the seventies a social need for more informal manners emerges. Now the sociology begins to study the collective actions within the organizations. A decade later, the economic developments lead to a call for more flexible organizations. This is the era, when the network models of markets become popular. It is obvious that Frijters is aware of this development. However, he believes, that the central decisions within the enterprises still justify the hierarchy model. On the other hand, this special archetype does not play an important role in the theory, that is presented in his book. This point will be elaborated in the remainder of the column, during the discussion of the enterprise10.
The social psychology gives an alternative perspective on groups and networks. In psychology groups are simply small circles, where all members have personal contacts11. The hierarchy is not seen as a separate archetype. In psychology the concept of networks refers to communications structures, and therefore it can also be applied to groups12. Groups have a decisive influence on the identity and the attitude of their members. They affect the individual cognition, the emotions and the behaviour. This essential property of groups will be discussed further in the paragraph about love. A previous column has discusses various important group phenomena, such as decisions, conflicts within the group and with other groups, and the influence on its members. The present column will not repeat this, but merely give some additional comments.
In the remainder of this paragraph, notably the psychological interactions between groups will be studied. Group members develop prejudices or biases with respect to other groups. In principle biases make the actions more effective, because the outside world is ordered in categories, each with their own stereotypes. That makes economic transactions simpler, because the behaviour of others becomes somewhat predictable. However, stereotypes are general, and therefore misleading in specific situations. Moreover, biases are determined by emotions, and those are not very rational13. The individuals have an excessively positive judgement about their personal group (ingroup favouritism), whereas the attitude towards other groups is negative. Thus, biases are also a permanent threat for the relations between organizations such as enterprises.
In the economy this problem is amplified, because the groups compete with each other for the scarce available means. In such an atmosphere there is a large chance of frustration, that is to say, unexpected obstacles for the realization of the goals of the group. Frustration provokes a sense of irritation, and that incites aggressive reactions14. Aggression has advantages: it raises status, the competitor is deterred, and thus the desired means can be obtained. Although aggression can also have a hostile character, in the economy she will commonly be instrumental. In instrumental actions the emotions remain limited, so that a cost-benefit analysis can be made. Nevertheless, in psychology aggression is viewed as a negative phenomenon, perhaps because of the real chance of damage15. This is even conceivable in the industry. Remember the American robber barons at the end of the nineteenth century.
Biases and hostile behaviour also create the problem, that they usually become durable. This occurs due to the inclination to filter information and interpret her in a distorted manner (confirmation bias). A similar mechanism is the cherishing of negative expectations, which subsequently fulfil themselves. Negative incidents are attributed to the competitor, and not to the situation herself (attribution error). Nonetheless, it is possible to curb hostile behaviour16. A good leader can give the good example. The organization can introduce norms of fairness. And cooperation with the competitor can be pursued, for instance by establishing a branch association. For, there are also shared goals and interests.
The Gazette has in various columns paid attention to the hallmarks of the homo economicus. Frijters also includes this popular image of man in his model. The reader may remember, that the homo economicus is a rational egoist. The present paragraph will investigate to what extent this image finds support in other human sciences. Notably Weber has studied the development of rationality17. Weber refers to that, which nowadays is called rationality, as instrumental rationality. This implies only an interest in the outcome of actions (consequentialism). However, according to Weber, in the traditional societies the value rationality is used. Here the actions are compared with the personal morals. It is obvious that this appreciably limits the choice alternatives. Besides, it can never be excluded, that the morals are unsound. For, often they are purely mythical18.
The instrumental rationality fits well with individualism. Therefore, during the past centuries the society has become more and more (instrumental) rational. Modernism hardly uses value rationality any more. This development begins during the Renaissance, and continues during the Enlightenment. During the Industrial Revolution a counter movement emerges, the Romanticism, caused by a feeling of alienation from nature. However, this is merely temporary, because one gets used to everything19. Weber describes the society of the twentieth century as raional-legal. The state establishes institutions, which guarantee a just treatment of the citizens. Thus the state gains the trust of its citizens, it becomes legitimate, and therefore stabilizes society. During the sixties of the last century the trust in the state culminates in a policy preference for rational macro-planning. The Dutch economist Jan Tinbergen is one of its energetic propagandists.
It is intriguing, that during the past decades there is again a scientific movement, which questions rationality. The public choice school believes that the state and its institutions mainly defend their own interests. The executive apparatus disposes of more information than its principal, in casu the people, and it can exploit this situation20. The agent behaves in an opportunistic manner, and that evidently undermines the rationality of policies. In this view the officials resemble the image of the homo economicus. It is true that they act rationally in their own interest, but exactly this behaviour causes that the policy of the state does not yield the expected outcomes. Now this is called a bounded rationality of the policy.
This implies that the citizen must distrust the state. Sometimes it is more effective, when private actors take over tasks from the state. In this way the personal interest can exercise its beneficial influence for all. Then the state becomes less hierarchical, and is merely a single (albeit powerful) circle among the other social circles. This ideal is propagated by, among others, the movement of the radical centre. On the other hand, the radical centre itself questions again the rationality of the citizens in its formulation of policies. For, it is known from behavioural economics, that the behaviour of individuals is often determined by rules of thumb. In specific situations these can be misplaced, and then lead to irrational results. For such cases the radical centre believes that some paternalism is justified, so that the state can formulate a coercive policy.
It will be clear, that the social psychology is an important source of knowledge about human properties. It is more general than behavioural economics, which limits its analysis to the behaviour in economic situations. In such situations the individuals act fairly rationally. The interests are significant, and the emotions remain within bounds. Then it is worthwhile to gather information, and process it cognitively for making a well-considered decision. Often the economic actors consist of groups, and qualitatively sound decisions may be expected. On the other hand, it has just been remarked, that precisely groups can become entangled in biases and hostile behaviour. In such situations the model of the homo economicus is no longer valid.
As long as individuals base their actions on rules of thumb, there will always be disturbing factors. But a well-considered action creates extra costs. Even then it is inevitable, that finally the information will be selected, and thus filtered21. It also happens that essential information is ignored, simply because she is unpleasant for the self-image, or she does not fit in with the strategy of the organization. An additional danger is the group polarization, which has been explained in the previous column. She implies that group decisions reinforce the extreme opinions. The groups norms are interpreted in an orthodox manner (self-serving bias). In other words, the value rationality becomes more important. Thus a risky shift can occur, or precisely a cautious shift22.
Yet another source of irrational behaviour must be mentioned, namely the individual feelings. People dispose of a certain degree of empathy, so that they can take into account the interests of others. This can lead to an altruistic behaviour, which does not match the homo economics. Besides, empathy can lead to feelings of discomfort, which also incite to provide help. And finally, the group morals will commonly contain some norms about reciprocal aid. Such norms enforce a duty towards the other group members. But those who render assistance to another, are never assured of a future service in return. In fact these are negotiations for the long term. This kind of mechanisms is not conceivable, if one would be a homo economicus23. For, in such situations it is impossible to make a more or less reliable cost-benefit analysis. Duties are based on trust.
Scientifically seen, Frijters mainy sticks out his neck with the introduction of the concept love (which your columnist interprets as dedication), as the explanation for the formation of circles. Love incites individuals to join reciprocal groups. Thus Frijters provides the homo economicus with an unexpected property, and en passant enters the terrain of the social psychology. The sociology is not interested in reasons for group formation, but simply states that the society benefits from such an order. Nevertheless, the sociology provides several noteworthy insights. First, it is recalled that the earliest primitive tribes are already a circle, so that apparently the formation of groups indeed belongs to the nature of man.
The individualization implies the individual deliverance from the traditional circles. During the Industrial Revolution the household loses its productive function, and the family members become wage-earners. At the beginning of the twentieth century the percentage of family enterprises diminishes, in favour of the limited liability companies. The tie between the ownership and management is severed. Various traditional matters of course disappear. In the course of the twentieth century, the individuals begin to develop their own life-plan24. They become purposive. Henceforth they select their own groups, and develop a life-style. It has just been stated, that this alarms the sociologists, but that anxiety wanes. There is a growing appreciation for the network-society, although some communitarians still object.
A real test of the concept of love requires the consultation of the social psychology. It has just been remarked, that the group is defined by the social psychology as a small circle. The group members all have personal contacts. It was stated, that the individual owes its existence to its stay within his groups. Individuals are socialized since birth, when they are raised in the bosom of the family25. The group gives a material security. The members derive their identity from her, that is to say, their attitudes and their representation of the self. During their whole life, the group remains an important point of reference for her members. Therefore it is logical that the members attach much value to their stay within the group. They are willing to do many concessions in order to keep their place within the group.
Thus it is understandable, that Frijters sees the love for groups as a human property. Individuals transform their identity, in order to fit in the group. Frijters depicts this as a ragging period when joining the group. This phenomenon is indeed also known from the social pyschology. According as the ragging becomes a more heavy burden, the newcomer begins to revalue his group, in order to justify in retrospect his decision to join. This mechanism is called spreading apart of alternatives, and is a justification of effort26. Incidentally, the individual can raise his own status by glorifying his group. The members make their group stronger by conforming to the group norms, because this makes the interactions predictable. The order reduces the number of conflicts27. The norms are enforced by group pressure. The integration (adaptation) leads to bonding (cohesion).
Incidentally, the strong cohesion also has a disadvantage for the group. Notably, the constraint of consensus and harmony impede, that the group herself can change, and can adapt to the outside world. Besides, the individual members can suffer from the obligation to adapt. Sometimes they will feel the urge to differentiate with regard to some aspects of the group morals. It is a paradox that the differentiation sometimes takes on the form of an orthodox (strict) interpretation of group morals. The dissident becomes a radical. In this manner he tries to raise his status28. Good groups can limit the disadvantage of cohesion by leaving some room for internal criticism. Perhaps needless to say, groups as a unit also want to differentiate (distinghuish), but now with regard to their outside world.
Your columnist will now attempt to describe several socio-economic phenomena, by means of the just presented knowledge. It concerns the enterprise, the transaction between two enterprises, the cartel, and the product chain. Although these phenomena have already been analyzed in previous columns, the sociological and psychological framework provides new insights.
The enterprise is a fascinating group, precisely because her character is so politically controversial. Frijters calls her a hierarchy, although he also recognizes that internally the subgroups mutually compete. Around 1900 the owner was indeed still omnipotent. The workers are so desperate, that many propagate the political class-struggle. The difference in status between the direction and the workers is so large, that they form hostile groups, with reciprocal biases. But after the First Worldwar the situation changes rapidly. The owner is no longer onipotent, and definitely not when the ownership is fragmented among many shareholders. Already in 1946 the political scientist J. Burnham states, that a class of wage-earning managers determines the actual policy in the enterprises29.
In this period the trade union movement integrates into the society, and serve on various institutions. Everywhere in Europe the establishment of works councils is enforced by law. This co-management is a social compromise. Thanks to the organized deliberations, for instance during the bargaining about the collective agreement (CAO), a mutual understanding grows. The corresponding system is called Fordism. The wage-earning managers have additional goals, besides the maximization of the profit, such as the expansion of their enterprise. They develop a personnel policy, which must increase the motivation of the workers. Thus a company culture is formed, which propagates norms. In this way the enterprise obtains hallmarks, such as an inner cohesion and even reciprocal obligations, which remind of a circle.
The rise of Fordism fits well in the social vision of the christian-democracy, which during this period dominates the European politics. The christian-democracy has always seen the enterprise as a (sovereign) circle, albeit that around 1900 it still has paternalistic traits. The entrepreneur does have a personal vocation, but yet must serve the Word of God. During the radical seventies, notably the christian trade union movement even advocates a democratization of the enterprise. This is obviously an illusion, and even Fordism soon collapses. After the eighties the owners become again powerful. The cohesion within the enterprise undeniably diminishes, with the exception of a steady core. Many activities are put out to contract to ancillary suppliers, so that the former enterprise fragments and becomes a network. Incidentally, this increased flexibility does not seriously affect the well-being of most workers.
Transactions between two enterprises can be concluded in many ways30. In many branches the enterprises enter into long-lasting relations. Both enterprises benefit from the transaction, and therefore they will cherish the relation. Opportunistic behaviour would jeopardize the relation, and is therefore hurtful. In such a situation there is a mutual dependency, and that creates obligations. The trade is based on a mutual trust. Therefore the two enterprises together somewhat resemble a circle. Nevertheless, under changing conditions the relation must also be adapted. For instance, nowadays the big industries have put out to contract many tasks to ancillary suppliers. There are two reasons for this: the competition has become more fierce, and the mass consumption has given way to differentiation. In fact the big industries have become coordinators of a network, which has clearly weakened the mutual cohesion31.
The weakness of the relation obviously implies, that the two enterprises mutually compete more. Then in principle the instrumental rationality of the relation is strenghtened. But the present column has shown, that the situation is amenable to the emergence of biases, which can result in instrumental aggression. In a previous column it is described, how such relations can set the stage for a power-struggle, where finally an enterprise can even be destroyed. The production costs become essential. A dictate can be imposed, such as price differentiation, or the bundled sale of products. Also, one enterprise can integrate vertically, by buying the other one.
A cartel is a durable cooperation among a group of enterprises within a branch. The cartel can reduce the costs by bundling certain activities, such as the purchase of production factors, and the sale of the end products. Within the cartel there is no longer any competition. Thus the members hope to be less vulnerable to economic crises. The production is ordered economically, where the members are even prepated to fulfil reciprocal obligations. This is undeniably a small circle. Nevertheless, history has shown that cartels develop in a dynamic way, and can transform into other systems, such as a network (oligopoly or competitive market), in case of desintegration.
In fact the branch organization or organized product chain are variants of the cartel. These organizations differ from the cartel by socially ordering the branch. That is to say, besides the entrepreneurs the workers are also represented in the management of the circle, and perhaps also the consumers and the state. The top is formed by the branch council, which is composed of entrepreneurs and workers (in casu their trade unions) on an equal footing. During the first half of the twentieth century the social-democracy and the christian-democracy had high expectations of this branch organization. Also here the order must weaken the crises. Furthermore, theoretically there are many opportunities for reducing the production costs.
However, in the Netherlands the branch organization has not been a success in most branches. In practice it turns out that the order is rigid to such an extent, that the economic dynamics can insufficiently be absorbed. It turns out that the process-losses are unexpectedly large32. Moreover, the conflicting interests of the various subgroups in the circles (notably the entrepreneurs and the workers) dominate over the shared interests, so that the cohesion remains weak. It turns out that the organization was rarely established spontaneously in any branch, with as a consequence that the state must strongly urge the entrepreneurs to participate in the branch organization. In most branches that attempt has failed. This experience was a severe ideological set-back for both the social-democracy and the christian-democracy, which both had to adapt their views on the world (morals) to the realities of life.