How Economics Should Be Complicated
Table Of Contents
- Title Page
- Copyright Page
- About the author
- About the book
- This eBook can be cited
- Introduction: Five Theses and an Excursus
- 1 Foreign Trade as an Instrument of National Power
- 2 Disinflation, Discrimination, and the Dollar Shortage
- 3 Devaluation and the Trade Balance
- 4 Balanced and Unbalanced Growth
- 5 Efficiency and Growth of the Individual Firm
- 6 The Contriving of Reform
- 7 Obstacles to Development: A Classification and a Quasi-Vanishing Act
- 8 The Principle of the Hiding Hand
- 9 The Political Economy of Import-Substituting Industrialization in Latin America*
- 10 Foreign aid A Critique and a Proposal
- 11 “Exit, Voice, and Loyalty”: Introduction and Doctrinal Background
- 12 Political Economics and Possibilism*
- 13 Policymaking and Policy Analysis in Latin America. A Return Journey
- 14 Varieties of Consumer Disappointment
- 15 From Private Concerns into the Public Arena
- 16 Against Parsimony: Three Easy Ways of Complicating Some Categories of Economic Discourse
- 17 The Concept of Interest: From Euphemism to Tautology
- Bibliography of Albert O. Hirschman’s Work
- Index of Names
- Index of Subjects
Introduction: Five Theses and an Excursus
1. The title of this collection brings to mind the title of an article the reader will find further on: “Against Parsimony: Three Easy Ways of Complicating Some Categories of Economic Discourse” (1984).1 In any case it is not difficult to understand that, sometimes perhaps in a latent or interrogative form, the need to renew the discipline long absorbed the attention of Albert Hirschman.
Going back in time, we can ask, for example, how the problem was manifest in the change in the author’s research interests at the end of the 1960s; how the need to meet the challenge of the political disasters in some Third World countries and to pursue detours and forays into other fields (in voice and exit, in passions and interests, in changing involvements)2 led Hirschman to think “more and more” that parsimony in the construction of economic theory could be carried too far, and that “something is sometimes to be gained by making things more complicated” (cf. below, p. 354). Furthermore, if we go back even further and look, for example, at National Power and the Structure of Foreign Trade (1945), it ←1 | 2→immediately becomes clear that here too the author is seeking to combine economics and politics and to thus make economics “less isolated and self-enclosed”.
2. These observations are in themselves enough to clarify the direction of the present introduction. We will deal first with some theses concerning the reform of the discipline and will then proceed to an intellectual excursus whose intent is to show points of contact—generally unnoticed—among some of Hirschman’s works. These elements are useful both as an aid to understanding the author’s sources of inspiration and as a starting point for exploring the contribution of these works to our topic. “How Economics Should Be Complicated” can thus represent both the endpoint of a long work project and one of its central and recurring themes.
This is not to deny, however, that its message may at first sight appear incomprehensible: isn’t economics, after all, already a sufficiently complicated discipline? Clearly, the point is not so much to make often difficult analytical processes even more complex, as to understand that conceptual elaboration of the discipline—giving it more “structure” even in its basic categories—can make it more useful as well as more accessible.3 The point is to call into question the highly parsimonious paradigm traditional economics is based on: of the isolated individual, moved by material self-interest, who freely and rationally chooses among alternative lines of action after having calculated the costs and expected benefits. Hirschman contests this approach and proposes incorporating into economic discourse a series of natural human characteristics and tensions that have until now been forgotten.
3. Back in the early seventies, however, in two linked essays—“The Search for Paradigms as a Hindrance to Understanding” and “Political Economics and Possibilism” (included in the present collection)—he cast doubt on the role generally assigned to paradigms in contemporary social science.←2 | 3→
The search for economic and social regularities must of course retain its leading role; nevertheless—Hirschman argues—there is a problem of cognitive style when it comes to the type of paradigms utilized, the way we connect them, and the interpretive power we attribute to them. Specifically, we need to be wary of parsimonious and all-encompassing paradigms, rigid constructions superimposed on reality (and carrying with them anti-democratic implications), and clear and definitive predictions. Every outcome must instead be qualified, delimited, and linked back to its true dimension. In addition, it is essential to leave room—equal room, Hirschman argues—for analysis of the unexpected; along with the repeatable (that is, the probable), we need to study the unique, the possible—learning from the actual history of events.
This “possibilism” is an attitude of mind that favours the search for rare constellations of favourable events, narrow paths, and partial improvements that could be followed by others: it does not respect the boundaries of disciplines and leads, in itself, to a widening of the limits of what is possible (or is considered to be so). This gives rise to an analytical pathway that is at once cautious and brisk, that analyses the reality of proposals for change. In each case, attention is focused on examining a specific feature in depth, while many directions for further analysis are kept open. Proceeding in this way, over time the author progressively explores a vast field of economic-political themes and creates an output that in retrospect seems surprisingly unified.4
1. Why Complicate Economics?
4. I would like to focus on several aspects of this work. First of all, in 1977 Hirschman published The Passions and the Interests, an important essay on the history of ideas that aims to investigate theoretical conjectures concerning the political consequences of economic development before the triumph of capitalism, when social scientists could reason freely on such topics as “commercial expansion for peace, or of industrial growth for liberty” (p. 3). He identifies several important propositions that can help us come to grips with particularly difficult economic/←3 | 4→political issues;5 this inevitably includes a severe critique of established knowledge and the clean division between economics and politics that lies behind it.
The text reconstructs a long sequence of ideas that began with Machiavelli and led to the eighteenth century argument that coping with passions requires recourse to material interests. In the second part the author concentrates on several salient points—such as Montesquieu and Steuart’s concept of ‘doux commerce’—to conclude in the end that with Adam Smith the traditional analytical distinction between passions and interests was lost.
In The Theory of Moral Sentiments, the father of political economy had placed non-economic impulses, with all the energy they carry, in the service of economic ones, stripping them of the autonomy they previously had enjoyed. Thus, the analysis in The Wealth of Nations, in spite of its many political elements, is based on the idea that people are motivated solely by the wish to improve their condition. This was the moment of the birth of the discipline of economics: a great intellectual conquest that at the same time brought with it a significant narrowing of the field of inquiry.
5. The history of ideas reconstructed in The Passions and the Interests shows, in a certain sense, the “progressive impoverishment of the prevailing concept of human nature over a period of some three centuries”,6 culminating in the birth of political economy. From this it is clear that there is an opposing need to gradually complicate the discipline, because (in the first place) it was founded on postulates that are over-simplified. This critique is mainly directed at traditional theory, but it also includes the critical schools of economics—the Keynesian school, the institutionalist, Sraffian, Marxist schools, etc.
Starting with his earliest writings—this is my opinion—Hirschman (usually) manages to avoid the choice that has faced economic critics in the last century—that is, either speaking from within the prevailing way of thinking—like Keynes and Schumpeter, or appealing—like Sraffa and (in part) Joan Robinson—to a different tradition. Hirschman instead creates a political focus of interest (economic, social and general policy) outside the discipline and, often starting with fieldwork, develops aspects of economic theory for his own purposes, combining ←4 | 5→them (sometimes) with modified analytical elements from other social sciences. In this way he obtains new and often surprising results.
Among other things, it allows him to avoid committing himself on every aspect of a theory (on its so-called internal coherence: even in the case of the General Theory—cf. below, sec. 16) nor even to limit himself to a verification or a practical application of the theory itself. Instead, in the fashion of the early Renaissance, he is able to freely re-utilize ancient capitals and columns and other materials for purposes that are specific and limited, but useful. And in doing so, he uncovers new architectonic perspectives.
6. An ongoing characteristic of Hirschman’s work, then, is his lack of respect for the traditional limits of the discipline, and this in time becomes “the art of trespassing” beyond the limits of the social sciences.7 This points to a second topic I would like to call attention to.
There is no need to mention here the ups and downs of the concept of interest (which the reader will find later). For our purposes, it is enough to briefly recall the history of political economy, which for two centuries embraced the well-known thesis of Adam Smith according to which it is not the benevolence of the baker or dairyman that we have to thank for our breakfast, but rather their personal interest.
As early as 1820—as Schumpeter, Downs, Olson and many others would do in the twentieth century—James Mill proposed an economic theory of politics assuming that actors follow their own interests in this field as well. But the possibility that a significant gap exists between a citizen’s real interests and an individual’s perception of them gave Macaulay an opening to denounce the doctrine of interest as tautological, a criticism that would only acquire importance as the concept was diluted to make room for motivations extraneous to material interests in the narrow sense. This happened both by means of concepts of enlightened, forward-looking, real interest, and through the lack of rehabilitation of the eighteenth century distinction between interests and passions: even the initiatives of the Schumpeterian entrepreneur and the animal spirits of the Keynesian capitalist were proposed as manifestations of their interests.←5 | 6→
7. In this way, rather than deducing economic behaviour from the pursuit of material interest, political economy tended increasingly to move in the opposite direction, attributing to economic behaviour—whatever it might be—the quality of conforming to interest. This latter became “the engine of everything people do or want to do” (and eventually other key concepts of economic analysis, such as utility and value, were replaced by more neutral terms such as revealed preferences and constrained maximization).
How to interpret this development? The text offers the hypothesis that the positivist and formalist direction of economic analysis during the past century and a half is linked, in opposition, to the extraordinary interest in the non-rational—in instinct, the unconscious, the customary, etc.—that held sway in philosophical thought at the end of the nineteenth century. Based on the rational pursuit of interests, economics could not incorporate the new discoveries into its analytical apparatus. So it reacted “by withdrawing from psychology to the greatest possible extent, by emptying its basic concepts of their psychological origin” (see below p. 382).
8. This hypothesis seems to me important for (at least) two reasons. In the first place, the dilution of the concept of interest serves to highlight the intellectual turnabout in the discipline at the end of the nineteenth century, which involved the well-known rise of marginalist economics. This can in turn be linked to the economics of “appearance” of Say, Senior or Bailey (rather than to the classical thinking claimed by a long, “orthodox” tradition). Additionally, its arrival was presented as an intellectual revolution happening at the same time in different countries and supported by progress in physics and mathematics. Finally, in some of its basic concepts—balance, efficiency, harmony of interests—neoclassical economics is an offspring of positivist thinking: by contrast, it seemed that its success was favoured by the development of social conflict.
Added to this interpretive picture is the hypothesis that the development of economic analysis in a positivist and formalist direction is linked to the development of other social disciplines. Instead of an immersion—following tradition—in the history of economic thought, here there is an effort to understand the evolution of economics as a part of the overall history of ideas. The end of the nineteenth century thus witnessed a great change: the birth of some new social sciences—psychology, sociology, anthropology; the reformulation of ancient sciences—geography, philosophy, politics, history; the extraordinary attraction for ←6 | 7→the non-rational prevalent in many disciplines. Positivist culture, which gives a great boost to the natural sciences, is indeed expressed in physics and mathematics in the deductive method, but in medicine and biology it is through experiment and induction. While economics is inspired by the former, the other social sciences turn primarily to the latter: for this reason the separation of content also becomes a separation of method and of research mentality.8
9. The interesting thing about Hirschman’s hypothesis is clearly in the implicit suggestion it contains. The isolation of economics—in method and content—that took place as a reaction at the end of the nineteenth century is also a legacy of the past, an historical wound that might gradually heal. This also helps us understand the meaning of the author’s intellectual proposal. His art of violating the boundaries of disciplines finds here its general raison d’être.
In time a specific opportunity presented itself: the invasion of many research fields by economics in recent decades, mainly in the United States. The central core of these developments, argue Francesco Forte and Elena Granaglia,9 consists of three trends in the literature: economic analysis of the collective decision-making processes of political bodies and the bureaucracy; microeconomic analysis of judicial-social institutions with regard to ownership and a company’s internal and external relations; and the extension of the economic paradigm to fields habitually studied by other sciences, such as non-profit associations, the family, illicit activities and even the associations and dissociations between animals and plants (economics of biology).
Predictably enough, voters, “servants of the state”, jurists, philanthropists, lovers, parents, criminals—heretofore considered prey to complex passions—and even animals and plants (who should be inspired by mother nature) are all described as committed to laboriously pursuing the “constrained maximization” of their material interests. In this way, the “economic paradigm, like it or not, invades the most ‘sacred’ and seemingly distant spheres.”10←7 | 8→
10. The question, Hirschman maintains, has two aspects. On one hand, these analyses activate the mechanism of the scandalous paradox common to so much of social research: their aim is to show that behind the halo of veneration, ignominy, etc. that surrounds these activities lies simple individual material interest. This creates a moral trauma which is the basis for the analyses success.11 On the other hand, however, as this procedure repeats itself and invades new spheres of life, it becomes predictable and triggers a spiral of decreasing (cognitive) returns.
Moreover, this almost suggests the possibility of an opposite logical process because it reveals some intrinsic weaknesses in the mode of interpreting social reality inherent in the economic paradigm. “As a result, it has become possible to mount a critique which, ironically, can be carried all the way back to the heartland of the would-be conquering discipline” (cf. below, p. 353).
Thus Hirschman achieves a critique of economics that belongs to a broader current of thought. He tells us in a note12 that he considers The Passions and the Interests and the essays linked to it as part of the progressive intellectual initiatives that got started in the United States with the publication of A Theory of Justice by John Rawls.13 His line of reasoning connects above all with the micro and macro analyses (of Kenneth Arrow and John Goldthorpe) which, contrary to the view of Adam Smith, show in different ways the need for “benevolence” in a well-functioning economic system.14
A few years later Hirschman likened his work to that of Schelling, Sen and other authors—like Boulding, Collard, Margolis, McPherson, Phelps and Pizzorno—who had begun to take seriously human actions and behaviours not traceable to the traditional concept of interest: “actions motivated by altruism, by commitment to ethical values, by concern for the group and the public interest, and, perhaps most important, the varieties of non-instrumental behaviour” (cf. below, pp. 353–354 and p. 383). In the meantime, he wrote Shifting Involvements (1982) ←8 | 9→an important monograph on the oscillation of human involvement between the private and public spheres: it is here, probably, that the final maturation of his position should be sought—above all in a key chapter on reasoning (the fifth, included in the present volume) that opens with a radical critique of The Logic of Collective Action by Mancur Olson.15
2. The “Free Ride”, the “Invisible Hand”, the Heart and the Mind
11. As mentioned, the economic theory of politics has a long history behind it; but in recent decades it has taken on a more definite connotation, giving rise to the theory of “public choice”.16 A point of reference for this material is undoubtedly the “free ride” concept (primarily in its application to collective action, as proposed by Olson) which has gained favourable attention from all the finance manuals and many sociology and political science texts.
For an economist, the thesis is more than predictable. The logic of collective action, Olson argues, has to be “exposed” through the postulate of individual interest. Groups of people with common interests do not act in the name of such interests. It is instead the case that the people who make up the groups are pursuing their individual interests and that as a result they have no real reason to participate personally in the activity of the group, since they can get the result they want leaving it to others to make the commitment to collective action, thus enjoying the benefits without incurring costs—the free ride.
But if everyone behaved this way, collective action would be impossible, so how can its existence be explained? Olson’s answer is that, with the exception of small groups, collective action is in reality based on constraint and inducement to participate (through economic benefits): the “closed shop” of Anglo-Saxon trade unions, where jobs go only to union members; taxation enforced by the state; ←9 | 10→farmers’ organizations held together by government agencies and cooperatives; professional associations that rely on subtle forms of coercion and the offer of services.
12. As we can see, this conception excludes the existence of a non-instrumental component in the life of trade unions (and political parties) and completely overlooks the great majority of collective actions, such as interest in political activities and participation in demonstrations and elections, along with the back-and-forth discourse of everyday life. So why do people mobilize, follow politics, vote, argue? Olson’s theory only suggests that they shouldn’t, which leaves it open to the critics.
Hirschman was long occupied—as we shall see—with the different kinds of relations that exist between economics and politics. In Shifting Involvements he studies the movement of personal involvement from the private to the public sphere (and vice versa) through the pursuit of happiness and the product of its frustration: disappointment. (The second chapter, included in the present collection, concerns a phenomenology of the disappointments that come from consuming merchandise.) The experience of disappointment in the private sphere thus gives rise to greater participation in the public sphere. Increased collective action is a consequence of such a decision (and the rebound effect that goes with it): it is not supported by a simple assessment of costs and benefits because here participation has a positive meaning (it is not—or not only—a cost).
This “Adam’s rib” is probably what lies behind “Against Parsimony”. Indeed, the explanation of political action in Shifting Involvements is developed here in such a way as to highlight the existence of two types of activity: instrumental and non-instrumental. Alongside these, Hirschman goes back to the book’s analysis of consumer disappointment (and the self-reflection it entails); and adds, finally, his thesis on “love” (civic spirit). Thus, to begin his line of reasoning on the reform of the discipline, he now suggests complicating economic discourse through two fundamental human qualities—voice (communication, persuasion, and protest, well-known long-term concerns of the author’s17) and self-evaluation—along with two tensions of the human condition—between instrumental and non-instrumental modes of behaviour, and between personal interest and public morality (see below, pp. 366–367).←10 | 11→
13. Thus, the analytic framework of economics would lose the cold pole star of material interest so as to begin moving in a number of directions. But if this is possible and necessary, what then is the true significance of the traditional concept of economics?
Here another central point in Hirschman’s reasoning comes into play. One important aspect of the different forms of non-instrumental behaviour is that they are subject to wide variation. In politics, as mentioned, there is a whole range of such activities—from active commitment to simple everyday chatter—which change continually both in quantity and quality. But a higher level of participation in different forms of public action entails a reduction in citizens’ dedication to their private interests (and vice versa). And all but total privatization is to be found only where there are particularly authoritarian governments, who seek to suppress even private expressions of disagreement with official policy.
An arresting conclusion follows. “That vaunted ideal of predictability, that alleged idyll of a privatized citizenry paying busy and exclusive attention to its economic interests and thereby serving the public interest indirectly, but never directly, becomes a reality only under wholly nightmarish political conditions!”
A fine outcome, it must be said, for a concept—the Invisible Hand—that represented the keystone of a doctrine of interest which at first probably “served to assuage any guilt feelings that might have been harboured by the many Englishmen who were drawn into commerce and industry during the eighteenth century but had been brought up under the civic humanist code enjoining them to serve the public interest directly” (cf. below, pp. 384 and 373).
14. On the other hand, in the face of an intellectual earthquake of these proportions, the reader might at this point appreciate some additional investigation. I would recommend the essay “Morality and the Social Sciences: A Durable Tension”,18 which argues that by birth and vocation the social sciences—beginning with political science and economics—have an inflection that goes against moral instruction. By birth, because they originated from a process of emancipation from traditional moral teachings.19 By vocation, because just by living in society ←11 | 12→we have a notable ability (based on common sense and collective morality) to understand problems pertinent to the social sciences which, in their effort to add something to our knowledge, are typically led towards shocking and paradoxical conclusions that often run counter to traditional morals. This is true in economics for the rehabilitation of luxury by Mandeville as well as the parsimony paradox by Keynes. This is also true for the expeditions of conquest we have mentioned.
How then to breech this “existential” incompatibility between moralizing activity and scientific analysis that presents itself simply as a “fact of life”? It is not enough to be aware, pace Adam Smith, that a substantial output and distribution of “benevolence” is essential to the functioning of our society; nor is it sufficient to mount a “frontal attack” concentrating, for example, on altruism, almost to counterbalance the previous worry about personal interest.20 Hirschman suggests that it is instead a matter of setting to work on a careful and long-term project that moves ahead artfully, case by case, concerning itself with the many aspects of human nature hitherto neglected, to be undertaken by economists open to the moral dimensions of reality (and to the analytical contributions of other human sciences).
15. But it is a path fraught with difficulty. The mutual exclusion between heart and mind is deeply rooted in our culture: once trained as a “scientist”, the economist’s battle to enter this new order of ideas is all uphill. Their “trained incapacity” (Veblen) is so strong that they may not even confess to themselves the moral source of their own research (which happened to the author in Exit, Voice, and Loyalty).
But at the same time—the text continues, in a typical about-face—being unaware moralists is not necessarily a bad thing. Given present cultural arrangements, if a morally alive social scientist unconsciously inserts moral considerations into her work, this might turn out to be “peculiarly effective”.21 But there is also ←12 | 13→the opposite problem: once aware of our intellectual traditions, we have already taken the first step in repairing the deep laceration between mind and heart and its less-than-beneficial consequences; and thus also a first step in beginning to think about a science of the future that is at once social and moral.
We must therefore proceed—as I understand it—along the narrow road that runs between these two aspects of the question; following a gradual, difficult (but not impossible) path that climbs between respect, sometimes unconscious, for the pre-existing rules, and the creation of pathways that are new. Since the issue concerns ways of “reconciling the traditional posture of the economist as a ‘detached scientist’ with his or her role as a morally concerned person”,22 it would be useful to keep these pathways in mind—as I intend to do—as we approach some aspects of the debate on the work of Albert Hirschman.
3. A Methodological Break
16. As mentioned at the outset, it is possible to interpret the title of the present volume—which intends to “represent” the entire span of the author’s work23—as dictated by the simple observation that it is precisely this “opera omnia” that contains important indications about what to do (or what ought to be done) to complicate economics. Although unable (not least for reasons of space) to fully argue this statement, I hope to be able to give an idea of the tractable and lively problem that it refers to.
To this end, I would like to begin my brief experiment with the “break” that exists between Hirschman’s first writings and those from after the war. As known, the author got his degree at Trieste in 1938 and worked initially in demographic statistics and the Italian economy, writing:24
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- New York, Bern, Berlin, Bruxelles, Oxford, Wien, 2020. VI, 404 pp., 2 b/w ill., 2 tables.