Human Capital: The Driving Force for Economic Development 3031344936, 9783031344930

Citation preview

Human Capital The Driving Force for Economic Development

Cosimo Perrotta Salvatore Rizzello Claudia Sunna

Human Capital

Cosimo Perrotta • Salvatore Rizzello Claudia Sunna

Human Capital The Driving Force for Economic Development

Cosimo Perrotta Lecce, Italy Claudia Sunna Department of Economics University of Salento Lecce, Italy

Salvatore Rizzello Department of Human and Social Sciences University of Salento Lecce, Italy

ISBN 978-3-031-34493-0    ISBN 978-3-031-34494-7 (eBook) https://doi.org/10.1007/978-3-031-34494-7 © The Editor(s) (if applicable) and The Author(s), under exclusive licence to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. Cover pattern © Melisa Hasan This Palgrave Macmillan imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

To the ignored human capital: precarious, oppressed and migrant workers

Acknowledgement

We thank the anonymous referees for their very useful comments.

vii

Contents

1 Introduction  The Present Oppression of Labour: Causes and Consequences  1 2 Origins of the Economy as Collective Activity 13 3 Custom and Path Dependence in Economics 37 4 The  Debate Around the Role of the State in Promoting Economic Development 63 5 Competition  in Enlightenment Economists (with Some Teachings for Today) 81 6 Productiveness of Welfare Expenditures105 7 Keynesian  Policy Today: More Employment and More Human Capital119 8 Investing in Human Capital141 Index157

ix

CHAPTER 1

Introduction The Present Oppression of Labour: Causes and Consequences Cosimo Perrotta, Salvatore Rizzello, and Claudia Sunna

Abstract  The welfare state reversed the traditional accumulation based on the squeeze of wages to increase profits. It relied on human capital growth and productivity rise. However, the latter implied that the new public investments were based on collective goods and the growth of human capital. The lack of this kind of growth created saturation and unemployment. Then the big companies used unemployment in order to squeeze wages again and to attack the state and public interest. This means that the unequal distribution of incomes did not provide a parallel growth in productivity due to the check of costs through low wage policy. Such a policy hinders the expansion of skilled labour and increases inequalities while creating a vicious downward circle. All this has hindered the natural selection of skill in the division of labour, made the latter not work properly and introduced growing mismatches in the “codified knowledge” which grants the normal increase in productivity. Consequently in routines, the negative factors linked to repetition increased, while making labour dull and little productive. So routines could not any more drive the creative increase in productivity. Such deadlocks can be overcome only through an economy policy in which governments directly promote new investments in new fields, so that employment increases. This in turn will hinder productivity based on © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7_1

1

2 

C. PERROTTA ET AL.

low wages and precarious labour, will stop consumption being repetitive and will make the level of utility increase again. New investments must cover the new needs and provide new types of consumption such as skilled education, better public health, more public transport, a non-polluted environment and the substitution of fossil fuels with green energy sources. Keywords  Welfare state • Public investments • Skilled labour • Codified knowledge • Public investments

1   Unemployment and Labour Oppression The present world economic crisis is deep and long-lasting. In addition, it is structural, deriving from the breaking up of the balance between production and consumption. This lack of balance no more ensures the accumulation of wealth. In order to unravel the complex causes of this crisis, it is necessary to begin with the welfare state and the relationship which previously existed between production and consumption. Apart from some limited previous experiences, the welfare state as national project was established in Western Europe during the post-war period, following almost two centuries of a growing imbalance between excessive production and scarce demand. In fact, it was the industrial revolution of the nineteenth century that caused a soaring unemployment, excessively low wages1 and new phenomena—which were neglected by classical and neoclassical economics—such as the growth of unproductive capital,2 a huge increase in financial speculation,3 and economic stagnation.4 Even military investments and the New Deal policies in the 1930s were not enough to overcome this unbalance. The tragedy of World War II prompted European governments to adopt another way for accumulation, the so-called welfare state. Despite lacking a clear economic theorisation, the welfare state overturned the traditional logic of capitalist accumulation:5 now growth was no more based on the squeeze on wages and social expenditures but on the increase in employment and high wages, that is on human capital (intended as a  Bairoch (1997, chs. VIII, XVI).  Loria (1889, I, ch. 4). 3  Marx (1894, Capital III, ch. 25). Supino (1898). Hilferding (1910). 4  Kautsky (1902). 5  Bairoch (1997, ch. XXIX). 1 2

1  INTRODUCTION THE PRESENT OPPRESSION OF LABOUR: CAUSES… 

3

collective factor). This allowed the spread of well-being: free health care, mass schooling, houses for all, compulsory pensions, protection for the more vulnerable population and infrastructure. For the first time, after 1000 years of capitalist growth, the welfare state extended well-being to all social classes. Labour productivity grew at a speed never seen before. Thus, technological progress and investment productivity increased. Wages and profits grew together. However, after a speedy and partially unplanned 30-year growth, unemployment—which had been notably reduced—started increasing again. This time it was not due to a low consumer demand by workers—as in the 1930s—nor, as neoclassic authors maintained, to excessive public spending. It was due to market saturation as a result of a shortage of new opportunities. Without a development plan opening new investment sectors and aiming at a higher level of consumption, the productive system relied more and more on repetitive consumption (consumerism).6 This induced a stronger rivalry among producers and raised a conflict between capital and labour (entrepreneurs wrongly charged high wages with profit reduction). In fact, it would have been appropriate to move towards a post-­ industrial economy, as some authors had already anticipated.7 However, this prospect was unclear to everyone and a long-term plan in this direction8 arrived far too late. Indeed, conservatives and large enterprises took advantage of this growing unemployment for a frontal attack on welfare state. The upper classes were not happy to pay more than 50% tax on their incomes and to finance workers’ well-being and leading labour out of their control. Even less could they tolerate that institutions could be independent of themselves, instead of being at their service as in the past. The conservative governments therefore re-established their old anti-­union policy and attacked full-employment.9 Moreover, since the 1980s, the new digital and robotic economy has had the same role as the introduction of factories in the late eighteenth century: it has triggered technological unemployment that resulted once  See J.K. Galbraith (1958–1967, ch. 25).  See, for example, Richta (1967–1968). Rosdolsky (1968, ch. 28.2). Mallet (1969). Bell (1973). 8  See Delors (1993). 9  Pollin (2012). 6 7

4 

C. PERROTTA ET AL.

again in a growing gap between profits and wages. The enormous increase in productivity turned almost entirely into profits whilst wages started decreasing.10 This abrupt, soaring imbalance in industrial relationships allowed an explicit attack on the role of state in the economy. The state was referred to as being an inevitable source of welfarism, corporate privileges and inefficiencies. Reagan defined public control of the economy as being a bureaucratic and disruptive impediment. He theorised the deregulation and affirmed that the state was not the solution but the problem. Thatcher stated that society does not exist, only individuals exist. Milton Friedman described life and the economy as being a battlefield where there are winners and losers. These banalities came to dominate Western culture. For the first time, the elite did not confine itself to practically neglect general interest while paying it lip service, rather it showed off contempt for its representatives, that is, the state and institutions in general. Thus, besides deregulation, the other fundamental factor of the accumulation crisis was the drastic reduction of progressive taxation, which had provided a certain automatic balancing in the distribution of income. Even worse, often progressive taxation has been supplanted by a regressive one, with the argument that consumption by the rich mostly consists in investment, thus in the creation of more employment (the supposed theory of “the trickle down”). Finally, Western governments tried to contrast the saturation of their markets by dismantling customs protection of the poor countries and liberalising capital movements (globalisation). Then, new forms of colonial dominance sprang up (neo-colonialism). The obvious consequence of all these regressive processes has been the ever-growing increase in economic inequalities, that has now reached absurd levels.11 Piketty has shown that, just as in the nineteenth century, today the elite has come back to grab growing surplus shares.12 Piketty’s analysis suggests that when the wealth share taken over by the elite becomes excessive, a larger part of the surplus is not invested—it is rather transformed into rent, which is the opposite of what the trickle down thesis maintains. Profits turn into financial rent,13 or rent deriving from public  Stiglitz (2003).  Atkinson (2015). Stiglitz (2012). Fullbrook and Morgan (2020). Oxfam 2022 Report. 12  Piketty (2013). 13  Gallino (2011). 10 11

1  INTRODUCTION THE PRESENT OPPRESSION OF LABOUR: CAUSES… 

5

funds (as with digital or pharmaceutical production),14 or rent that ends up in tax havens.15 But there are many other ways in which profits turn into rents or rents are disguised as profits—for example, the privatisation of public services or public contracts for services that are not in competition. Other examples are the international value chains that very often start from the semi-slave work which is widespread in poor countries and became enormously extended due to Western multinationals. Today, this type of work has also spread in developed economies and has now involved many jobs for young people, including skilled or public jobs. The general reduction of wages has encouraged Western enterprises, even the efficient ones, to expatriate towards some countries where wages and job protection are weaker. As a consequence, the structure of social privileges has worsened. In the past, each professional or trade body was positioned at a certain level of social hierarchy. Such a structure provided the possibility of social upgrade, at least for individuals with merit. Today, this access has become deceptive. As a matter of fact, economic hierarchies are now internal in every single professional body. In each of them, there is a protected and guaranteed part of members and another unprotected and precarious part. The downward spiral of work degradation involves public employment too. The state, being obliged to finance private enterprises, lacks funds for public services. It therefore has lost most of the personnel needed in all its sectors. Thus, besides the over-protected old personnel, the new entries consist of temporary and underpaid young workers. Unemployment, in return, increases the NEET (Not in Employment, Education and Training) people among youngsters. The latter are now over 30% in developing countries. All this causes a great destruction of growth potentialities for human capital, decreases productivity and concentrates wealth in the hands of a few, individuals or enterprises, while the latter become less and less productive. Besides human capital, there is another victim of this perverse spiral: the stability of Western democracies. The growing number of youngsters, women and dependent or independent workers who are excluded from secure jobs and well-being makes the relationship between democracy and well-being appear as a privilege for protected ranks and this in turn increases hostility towards democracy.  Mazzucato (2013). Baker (2016).  Zucman (2013).

14 15

6 

C. PERROTTA ET AL.

2   Custom, Labour and Economic Development Capitalist development is founded on an accurate labour organisation, where skills are differentiated and tasks are planned. The enterprises’ efforts to increase productivity have gradually selected more efficient practices and experiences. The latter, being repeated time and again, have proved to be successful in problem solving and have transformed themselves into routines. This type of “codified knowledge” refers to all organisational and technological procedures which aim at increasing productivity by limiting costs and introducing competitive innovations. However, the growth of capital through increase in productivity is not always sufficient per se to secure development. In a highly unequal distribution of income, the demand for goods and services is lower than the system’s productive capacity. Many among those who would like to purchase them do not have sufficient resources and, on the other hand, many of those who have these resources consume less than they could and therefore increase savings. If there is not an adequate level of investments, many savings remain inactive and the system risks serious difficulties.16 To prevent this from happening, wages and incomes need to increase adequately as it happened during the welfare state. However, on the contrary, the welfare state costs were reduced due mainly to low wages. Besides, technological development, which aims at increasing productivity, reduced the quantity of human labour which was necessary for a certain production, and this consequently increases unemployment.17 Furthermore, income inequality grows and the system enters a crisis. In order to invert this tendency and reduce inequalities, it is necessary to re-­ establish welfare policies, invest in human and social capital, reduce working hours and increase incomes and wages proportionally to the increase in productivity. The pursuit of these three goals would allow a balanced development of the system. There is, however, a further difficulty which has not always been adequately analysed. This deals with routines. Ever since their appearance in factory labour, in the second half of the eighteenth century, authors have highlighted the advantages of routines as well as their negative aspects. For example, Adam Smith warned that, by always repeating the same tasks, there is a risk of degradation and stupidity for whoever carries them out  Robinson (1971).  Smith (1776, book V, ch. 1 part III).

16 17

1  INTRODUCTION THE PRESENT OPPRESSION OF LABOUR: CAUSES… 

7

due to the elimination of creativity in working activity. This negative element was subsequently strengthened with Taylorism and is, dramatically, still present. In this sense, the growing subdivision of labour into evermore simplified routines clashes with the need to invert the above mentioned negative tendency. So much so that today there are no adequate investments in human and social capital: only a restricted group of workers can afford higher education and very often with private resources. Instead of reducing working hours, many are obliged to increase them in order to have an acceptable income, given the low retributions for the mundane tasks. Consequently, wages and incomes do not increase and, in some cases, they actually decrease, due to the vast number of unemployed who are always ready to substitute the employed. Although the vast and various economic literature on routines highlights the controversial features of this issue, there is a common tendency to consider routines as being functional to competition and to oppose them to custom. In particular J.S. Mill, A. Marshall and J. Schumpeter considered competitiveness as being functional to social, civic and economic development, whilst they thought that the persistence of custom is a factor of backwardness.18 However, if we consider the neurocognitive dimension in the production of knowledge, which is the basis of decision-making, organisational and interactive processes,19 the picture that emerges is much more complex. Despite having common aspects, routines and custom have different roots, different features and unequal levels of pervasiveness (the latter is more widely spread in custom). Routines are explicitly directed to reach specific performances within organisations, and they determine the peculiar identity of such performances.20 Custom, instead, has a wider and more flexible dimension; it permeates a wider range of social relationships, the economic ones included. Therefore, custom, although it is not codified, is similar to the nature of institutions and their evolutionary features. Besides, routines, custom and institutions share the same path-­ dependent background as they all originate from the complex development of personal knowledge and the different levels of feedback with the 18  Mill (1848, ch. 4). Marshall (1890, pp.  7 and 58). Schumpeter (1934, in particular ch. XI). 19  Rizzello (1997). 20  Newell and Simon (1972).

8 

C. PERROTTA ET AL.

external environment. In this sense, dismissing custom as a hindrance to development is simplistic and misleading. Instead, studying it as an endogenous element of capitalist development strengthens this analysis and supplies tools to better understand the economic role of the state and the public sector, the non-contractual work relationships and the situation of social capital. Furthermore, this study also catches, in an efficient way, modern economy’s discrepancies which emerge in environmental disasters, migration tragedies and the progressive reduction of democratic freedom.

3  The Role of the State in Promoting Economic Development As previously mentioned, the neoliberal approach derives from the transformation of welfare state policies and the frontal attack against them. The role of the state in economic policy has dropped rapidly since the 1980s. In Western countries, any reference to full-employment and industrial policies in support of economic growth disappeared. In regard to developing countries, the Washington Consensus model prevailed (minimum state role, privatisations and liberalisation of financial markets).21 The economic policy “recipe” has been basically the same at all latitudes while having the same effects. For Western countries, this meant a gradual slowdown in economic growth, together with labour market “flexibility”. This, for many countries meant a dual regime, which saw workers with protected contracts, on the one hand, and “marginalised” workers on the other. The latter receive lower wages and have poor prospects for career advancement, especially from an economic point of view. As a whole, there is a decline in the increase of labour productivity and consequently the lack of wage increase appears to be justified.22 Another evident result, already mentioned above, is the increasing inequality in income distribution which appears both inside the developed countries and in international exchange.23 For developing countries, the liberal “therapy”—which is strongly supported by international  Stiglitz (2002–2003).  Tridico (2018). 23  Milanovic (2016). 21 22

1  INTRODUCTION THE PRESENT OPPRESSION OF LABOUR: CAUSES… 

9

institutions (World Bank, International Monetary Fund, World Trade Organization)—has produced, in general, lower economic growth and political instability24 (emblematic is the case of the shock therapy adopted by the ex-Soviet nations). The 2007/08 crisis partially changed liberal policies, which once again proved to be inefficient in the contrast of recession. Liberal policies, disguised as austerity, had the main purpose of reducing public expenditure, especially those which referred to education and social services. They have contributed to worsen the economic conditions of workers, who are caught between tax increases and income reduction. What is needed in this post-pandemic period is to redefine the role of the state in promoting development policies both for developed and developing countries. Besides the state intervention in the periods of recession, it is important to recognise and assess the role of the state as an “agent” of economic development. Such a function has been neglected for too long and denied by the mainstream theory (see, however, the pioneering research by David Aschauer, 1990, who found out that public investment spending is more “expansionary” than government consumption and military investment). The most recent economic crises have definitely highlighted that the dichotomy of State/Market is senseless. Consequently, reducing the role of the state or that of the market in the economy makes it impossible to have a valid economic development and improve workers’ conditions. Market economy cannot work without the state’s active presence and vice versa. In advanced economies, it is inconceivable to plan economic development processes that are entirely driven by the private sector, as it is inconceivable to formulate economic models which are planned exclusively by the public sector. The “right” integration between public and private investments derives from the necessity to revise past interventions, which in different historical periods have always shown to be weak. Above all, those interventions led to environment pollution and to the worsening of climate crises, just to mention a few of the most evident negative effects. Hence, it is important to go back to the “errors” of the past in order to create a development model. Such model may progressively redefine the role of both the state and the private sector as decisive factors of development.

 Adelman (1999).

24

10 

C. PERROTTA ET AL.

4   Conclusion So, in conclusion, the saturation of traditional markets and the lack of programmes to open new investment sectors weakened the economic initiative of the state and eased its discredit (see Chap. 4). Private initiative wrongly appeared as the only driving force of wealth production and distribution. This caused an unnatural unbalance among the two factors needed for economic growth: private initiative, on the one hand, and public regulation and support on the other (see Chaps. 2 and 5). This unbalance generated deregulation (including the lack of institutional controls) and the transformation of most of the public revenues into private resources or public resources which are put, surreptitiously or openly, at the disposal of private profit. Such processes radically lowered wages and promoted an accumulation opposite to that based on high wages (see Chaps. 3, 4, 5, 6 and 7). They impoverished labour conditions and human rights guarantees and reduced demand in the market. Consequently, investments were discouraged, huge riches shifted towards rents and inequalities were exacerbated. The downward spiral of wages, the disrespect of human rights and final demand are also producing a growing impoverishment in human capital formation (see Chaps. 3 and 6). All over the world, less skilled labour is oppressed, in terms of semi-slave work, rapid obsolescence of skill, unemployment or precarious labour and migrations to escape starvation. The dominance of private interests and its corollaries—increasing inequalities and conflicts of interest among generations, income classes and categories—has also prevented for decades the implementation of a serious policy to reduce climate warming and environment pollution. This in turn hinders the deepening of skill in these fields and the subsequent human capital formation. Moreover, the lack of human capital formation also involves social custom. The latter increasingly deteriorates in its ability of building up social solidarity and altruism. This hits the respect for institutions and the trust in the general interest as opposed to the interests of private groups or individuals (see Chap. 3). The only way out of this situation is to restore the prevalence of the general interest and the responsibility of the state (Chap. 4). The latter should return to the governing of the economy, mediating amongst the opposed interests in order to resolve market failures (Chap. 7). Finally, the state should make a policy of human capital growth as a durable strategy for development (Chap. 8).

1  INTRODUCTION THE PRESENT OPPRESSION OF LABOUR: CAUSES… 

11

References Adelman, Irma. 1999. The Role of Government in Economic Development. Working Paper n. 890, Department of Agricultural and Resource Economics…, University of California at Berkeley. Atkinson, Anthony B. 2015. Inequality. What Can Be Done? Cambridge, MA: Harvard University Press. Bairoch, Paul. 1997. Storia economica e sociale del mondo, Italian trans. of Victoires et déboires …, Torino: Einaudi, 1999. Baker, Dean. 2016. Rigged. Washington: Center for Economic and Policy Research. Bell, Daniel. 1973. The Coming of Post-Industrial Society. New York: Basic Books. Delors, Jacques, et al. 1993. Crescita, competitività, occupazione … Libro bianco. Bruxelles - Lussemburgo: Commissione delle Comunità Europee. Fullbrook, Edward, and Jamie Morgan, eds. 2020. The Inequality Crisis. Bristol, UK: World Economics Association Books. Galbraith, John Kenneth. 1958. The Affluent Society. London: Hamish Hamilton, 1960. Online: archive.org. ———. 1967. Il nuovo stato industriale. Translated from English. Torino: Einaudi, 1968. Gallino, Luciano. 2011. Finanzcapitalismo. Torino: Einaudi. Hilferding, Rudolf. 1910. Finance Capital. Translated from German. London: Routledge & Kegan Paul. Online: Google. Kautsky, Karl. 1902. Teorie della crisi. Translated from German. Partially in Colletti and Napoleoni 1970: 271–296. Loria, Achille. 1889. Analisi della proprietà capitalista. 2 vols. In his, Opere. Vol 1, Torino: UTET, 1957: 1–656. Vol. 2, Torino: Bocca, online: openbess from University of Torino. Mallet, Serge. 1969. La nouvelle classe ouvrière. 5th ed enlarged. Paris: Éd.s du Seuil. Marshall, Alfred. 1890. Principles of Economics. 8th ed. London: Macmillan. 1920. Marx, Karl. 1894. Capital III. New York: International Publishers. online: marxists.org, 1999. Mazzucato, Mariana. 2013. The Entrepreneurial State. Anthem. Milanovic, Branco. 2016. Global Inequality: A New Approach for the Age of Globalization. Cambridge MA: Harvard University Press. Mill, John Stuart. 1848. Principles of Political Economy with Some of Their Application to Social Philosophy. London - New York – Toronto: Longmans & Green. 1929. Newell, Alan, and Herbert Simon. 1972. Human Problem Solving. Englewood Cliffs, NJ: Prentice-Hall. Piketty, Thomas. 2013. Capital in the Twenty-First Century, 2014, updated, Translated from French. Cambridge MA: Harvard University Press. Pollin, Robert. 2012. Back to Full Employment. Cambridge MA: MIT Press.

12 

C. PERROTTA ET AL.

Richta, Radovan. 1967. Civilization at the Crossroads. Translated from Czech, 3rd ed. White Plains (N.Y.): International Arts and Sciences Press, 1969. ———, ed. 1968. Progresso tecnico e società industriale. Translated from the German edition. Milano: Jaca Book, 1975. Rizzello, Salvatore. 1997. The Economics of the Mind, trans. from Italian, Chelenam (UK): E. Elgar, 1999. Robinson, Joan. 1971. Economic Heresies. New York: Basic Books. Rosdolsky, Roman. 1968. The Making of Marx’s ‘Capital’. Translated from German, London: Pluto Press, 1977, online: gruppegrundrisse.files. wordpress.com Schumpeter, Joseph. 19111934. The Theory of Economic Development. Cambridge, MA: Harvard University Press. Smith, Adam. 1776. An Inquiry Into the Nature and Causes of the Wealth of Nations. Oxford: Oxford University Press. 1976. Stiglitz, Joseph E. (2002) Globalization and Its Discontents, Italian trans. Torino: Einaudi: 2002. ———. (2003) The Roaring Nineties, Italian trans. Torino: Einaudi: 2004. ———. 2012. The Price of Inequality. New York: Norton. Supino, Camillo. 1898. La borsa e il capitale improduttivo. Milano: Hoepli. Tridico, Pasquale. 2018. The Determinants of Income Inequality in OECD Countries. Cambridge Journal of Economics 42 (4): 1009–1042. Zucman, Gabriel. 2013. The Hidden Wealth of Nations, 2015, Translated from French. Chicago-London: University of Chicago Press.

CHAPTER 2

Origins of the Economy as Collective Activity Cosimo Perrotta

Abstract  The theoretical approach centred on the individual is misleading (Sect. 1). There are also other neoclassical assumptions which are unfounded: the rational behaviour of economic agents (abundantly disproved by neo-institutionalists); the view that exchange generates the division of labour and not vice versa; the idea that wealth only derives from competition; finally, Robbins’ thesis that the economy is only a matter of choice (Sect. 2). The anthropologists of Stone Age economy have disproved all these assumptions. They show that economic activity begins for survival; it is determined by the group and organised by the formation of custom in labour relations (Sect. 3). Then economic activity grows in parallel with human evolution (Sects. 4 and 5). The Neolithic revolution, by creating large aggregations, showed the existence of conflicts (Sect. 6), the birth of institutions and a strong increase in the division of labour (Sect. 7). But neoclassical and neo-institutionalist authors fail to properly analyse both conflicts and institutions. Keywords  Neoclassical postulates, Neo-institutionalism, Stone Age economy, Human evolution, Birth of institutions

I thank Salvatore Rizzello, Claudia Sunna and the participants of the session of 2022 ESHET Conference for their useful comments. Any errors are mine alone. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7_2

13

14 

C. PERROTTA

1   The Individualistic Postulate Today’s mainstream economic theory is founded on an unsustainable postulate that holds economic activity to have originated and to rest on the free action of the single individual. With this approach, the goals and methods of the economy are those of the individual (methodological individualism). As a rule, therefore, there are not (nor should there be) any collective purposes like economic development, for example, nor are there any rules other than those regarding individual action. Microeconomic action is the sole source of the economy. Clearly, the importance attributed to the individual was powerfully enhanced with the birth of capitalism, which owed its success precisely to the scope left for individual initiative, on the strength of which the collective dimension of the economy found a shaky equilibrium. To begin with, the importance of the individual found attention at the philosophical level (take, for example, Duns Scotus, the humanists, the direct rapport between the individual and the divine in Protestantism and Jansenism, or the approach of Descartes). In the seventeenth century, the importance of the individual also found its way into political theory (we might take the example of the Free Thinkers, contractualism and Locke). In the eighteenth century, the individualistic approach entered into various economic analyses by Mandeville, Hume and many other exponents of the Enlightenment. Smith and the classical school retained this approach only in part since their reasoning was mainly in terms of the development of national economies (as had already been the practice of the mercantilists) and of social classes defined by the roles they played in production. It was only with the neoclassical breakthrough that the reappraisal of the individual led to the theory of individualism. With it, social classes, development and collective goals were dropped from the theoretical core, while government policies, infrastructures that had accumulated over centuries, collective culture, the institutions and social conflicts became practically irrelevant. Around the mid-twentieth century, with great determination Hayek set about reviving individualism,1 hailing it in the name of freedom in opposition to the rationalistic and voluntaristic schemes that lead to collectivism (see Sect. 7). However, his individualism was more political than economic. At the economic level, he looked to the methodological 1

 Hayek (1948).

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

15

individualism of Menger and the Austrian School, which Rizzello more appropriately (in the case of Hayek) termed methodological subjectivism.2 As Hayek applied it, this approach became a way to reconnect the subject’s learning process and behaviours with the environment and the community. To avoid confusion, we will start with the harbingers of individualism. In the eighteenth century, Defoe described the “economic” activity of the isolated individual in his novel Robinson Crusoe (1719). The eighteenth and nineteenth centuries saw many writers, above all German, dwelling on the novel with generally utopian interpretations. This literature came to be known as Robinsonaden. The term was taken up and criticised by Marx, taking an ironical view of Smith and Ricardo (which he went on to extend to Bastiat, Carey and Proudhon), whose economic analysis started from the “individual and isolated hunter or fisher” rather than beginning from a social relationship. The eighteenth-century individual described by these authors, Marx observed, is seen “not as a result of history, but as its starting point”. In this way, however, modern economists eternalise the social relations of their times and view the current rules of production as if they were laws of nature.3 Marx’s critique was ignored by the economists of academia. Robbins recalls that Cannan, in the twentieth century, was still beginning his economic analysis with Robinson Crusoe.4 A century after Marx, Karl Polanyi and his circle advanced the same critique: the economics based on the capitalistic market claims a universal validity, but it “crystallises” outside history and real economic relations.5 So perhaps we might try returning to the historical approach as an alternative to individualism, but viewing history as an all-embracing process of economic activity and avoiding the idiographic approach which applies analysis to historical events as unique and unrepeatable. Indeed, it may well have been this reductive method that led to the impasse of the two major ventures in the application of the historical approach to

 See Rizzello (1997, pp. 3–5).  Marx (1857, I.1: 83–86). See also Marx (1847, pp. 110–111; and 1859, Ch. I, A: 42). Marx also mentions the question in Capital I (M. 1867, I.I.4: 50–51), but there, being concerned with value calculated as labour-time, he, too, indulges in the Robinsonaden. 4  Robbins (1932, p. 10). 5  Polanyi (1957, Ch. XII, by Polanyi, C. Arensberg and H. Pearson). 2 3

16 

C. PERROTTA

economics in the past—the German historical school and American institutionalism.6 On the strength of the historical approach, we will try to trace back the original nature of economic activity, which was to remain through all the successive developments. Economic activity began over three million years ago as a group activity, not as an individual practice, and as production rather than trade or choice amongst the alternative uses of resources. Since then it has never ceased to be a collective economic activity, even with capitalism. And if the individual takes on a central role in capitalism, it is due not to the elimination of the collective management of the economy (as is often assumed) but by virtue of it. In fact, capitalistic accumulation has been able to survive its structural crises thanks solely to the policies implemented by states or major organisations emerging in society. Suffice it to consider the mercantilist policies that opened the way for capitalism to develop, the reformism of the Enlightenment, government support during the Industrial Revolution, the government-guided industrialisation of Germany, Russia, Japan and Italy in the nineteenth century, the New Deal and welfare state policies, not to mention public intervention in the crises of 2000 and 2007, and so forth.

2   Four More Erroneous Assumptions Neoclassical theory associates the individualistic postulate with four more assumptions, equally ill-founded. Let us take a brief look at them. The first assumption has it that the economic agent always behaves in a rational way and seeks to maximise his/her utility. This assumption has been refuted by a creditable literature, that of new institutionalism.7 Maximising rational behaviour is not the norm. If it were, it would be so cogent as to leave no room for free choice, but this would clash with the assumed absolute freedom of the economic agent.8 Competition, too, would be impossible with perfect information. As Hayek put it, “Competition is important only because and insofar as its outcomes are unpredictable”.9 Furthermore, our ability to collect  See Mary Douglas (1996, p. 130).  On new institutionalism, see Rizzello’s (1997) valuable analysis. 8  Rizzello (1997, pp. 7–8). 9  Hayek (1968, p. 10). 6 7

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

17

information and assess our utility is limited and costly (Hayek).10 It is also subject to bounded rationality, which entails that the real economic agent can aspire only to a satisfactory outcome (not maximisation) through procedural rationality (Simon).11 The new institutionalists have also revived the valuable concept of routine, formulated by Marshall;12 they have pointed out the difference between competitive market relations and hierarchical relations in the firm (Coase) and brought transaction costs to the centre of analysis (starting from Coase). They also opened up new fields for investigation, including asymmetric information (Akerloff), path-dependence (Paul David) and the evolutionary process in firms (Williamson). In short, they have created a wealth of new ideas and analyses, but they, too, have accepted the erroneous assumptions deriving from the individualistic postulate. The second assumption sees the origin of economic activity in exchange between individuals. It was in fact Adam Smith himself who stated it, in contrast with his major theory that the division of labour was the driver of economic progress in productive activity. Indeed, Smith dedicated the first three chapters of his work The Wealth of Nations precisely to the division of labour (and the increase in productivity it generates), but observed that it was “the necessary, though very slow and gradual consequence of certain propensity in human nature … to truck, barter and exchange one thing for another”.13 Smith dedicated the second chapter to this thesis, taking it as far as discerning in exchange the basis of human dignity. Unlike animals or beggars, he writes, “it is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages” (ibid., I.ii.2). Basically, Smith describes the origin of economic activity as a market in which individual independent producers exchange their goods (once they have produced them, of course). He speaks of cooperation, but only in the sense of interdependence (ibid., I.iv.1). It is, however, worth noting that interdependence does not imply production performed by isolated  Hayek (1936, 1945).  Simon (1972, 1987a, 1987b; and above all 1981). 12  See Marshall [1860s–70s]; Raffaelli (1994). 13  Smith (1776, I.ii.1; I.ii.3). 10 11

18 

C. PERROTTA

individuals. Indeed, Marx suggests that it is exchange that derives from the division of labour, and not the other way round.14 In the Palaeolithic period, there was very little if indeed any isolated production.15 This is also true of many native populations studied by anthropologists. Individual production is also found to be marginal in feudal and slave economies, and even with capitalism only a part of the productive forces work individually. In the Stone Age, exchange did not take place in the direct, rational way described by Smith. As Bronislav Malinowski (Trobriand Islands, 1915), Marcel Mauss and, more recently, Sahlins explain,16 in “primitive” societies, exchange is conducted through various forms of gifting and reciprocity. These are more or less socially binding forms conditioned by complex constraints which may be of kinship, political or ritualistic nature. According to Mauss, the tribal practice of gifting left traces in the law and economy of antiquity (ibid.). The third assumption holds that wealth is generated only through competition between individuals or firms. Of course, the exponents of the Enlightenment were right in seeing competition as a driver of progress and guarantee of freedom,17 but it is wrong to assert that wealth is produced solely by private activities. In the Palaeolithic period, production was almost always carried out in cooperation and under the control of the group. Since then, the institutions have standardised and gone on to formalise the regulated cooperative production processes. They have supplied not only the rules for the various production sectors but also the conditions to underlie the activities, namely material and organisational infrastructures, management controls, administrative and judicial apparatus, and so on. Of course, this also happens with capitalism. In this system, the cooperative organisation of work is to be seen above all in the civil service. The prejudice—widespread also among economists—that only private labour produces wealth has no theoretical foundation.18 The fourth assumption sees economic activity as a choice. Robbins, winning over the consensus of almost all the economists, defined economic  Marx (1867, I.I.2, pp. 30–31 and I.2, p. 61).  See Sahlins (1974, 1, p. 13). 16  Mauss (1923–24, Ch. 3). Sahlins (1974, Ch. 5: pp. 185–275). 17  On this, see Perrotta (2023). 18  See Perrotta (2018). 14 15

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

19

science as “the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”.19 This definition tells us nothing about what economic activity has always been, namely the endeavour to address the shortage in the supply of goods and to increase wealth. Only occasionally is the collective endeavour to increase wealth prompted by the conscious choices of individuals. Usually, it derives from path dependence, routine and the variations in them. It is true that the further the economy develops, the more scope the conditioning of the past will leave for deliberate choices, but Robbins’ definition transforms economic behaviour from a collective, worked activity into a simple mental activity by the individual. We should be wary about reducing the economy to the “economic” choices of laboratory tests, as in the case of the—nevertheless useful— research by Kahneman (and Tversky).20 Shizgal even extended research to the choices made by animals and to the “rewarding effect of electrical brain stimulation”. He calls this research “neuroeconomic study”.21 This is a case of Robinsonaden taken to its limits. Another aspect featured in Robbins’ definition, the “scarcity postulate”, came under the well-aimed critical fire of Harry Pearson.22 On the other hand, Backhouse and Medema commend the definition because, being formal, it implies that “any kind of human behaviour falls within the scope of economic generalisations”. This, they say, gives rise to a certain “economic imperialism” in comparison with the other disciplines,23 but in reality, by doing so, economics loses its own identity and becomes subordinate to the disciplines (like psychology and political theory) that it was supposed to be dominating.

3   The Economy of the Palaeolithic The Palaeolithic is the immensely long period during which hominids gradually became humans. Recently, on the evidence of the dating of the latest finds of artefacts, its beginning has been shifted back from 2.5 to 3.3  Robbins (1932, p. 16).  See, for example, Kahneman (2007); Kahneman and Krüger (2006). 21  Shizgal (2012). 22  See Polanyi (1957, Ch. XVI, by Pearson, pp. 393–401). 23  Backhouse and Medema (2007, pp. 1–2). 19 20

20 

C. PERROTTA

million years ago.24 The transition began when hominids started to make the branches of trees into sticks and to flake stones to fashion weapons or utensils. The economic activity of the hominids aimed at the survival of the group.25 Thus economic activity began simply as work. From the outset, however, this work took the form of two different processes. The first was the work process—proper, deliberate, planned and sustained activity, with the aim of producing something serving for survival. The work gave rise to particular techniques, according to the type of product, which were handed down. These techniques were further refined through the repetition of the actions involved. The other process is the division of labour, the origins of which the authors trace back to the Palaeolithic as division based on sex or family.26 It consists in the collective organisation of work, not always planned but dictated by need and custom. Individuals perform different but complementary tasks, the common end being the survival of the group. Arioti has shown that the sexual division of labour does not derive entirely from technical necessity; it is also due to the “symbolic representation of productive and reproductive processes”.27 Something similar, but at an elementary level, is to be seen amongst the more highly evolved mammals and some species of birds. The human division of labour continues from that early, basic division, the difference lying in the increasingly wide range covered. Smith rightly observes that the various individual aptitudes are largely the result of the division of labour, which favours specific individual skills.28 Tomasello explains the difference between humans and primates in this respect. Only humans have a form of cooperative communication—the fruit of a sharing of intentions, giving rise in turn to specific skills. Collaboration and cooperative communication are closely bound up and proceed with common goals through planning and coordination. Thus, the various roles in the division of labour are established. It is hard, Tomasello observes, to imagine all this taking place in a context of self-­ interest or competition.29  Paleolithic Period (2021).  Ibid. (pp. 185–6n). 26  Darwin (1874, Ch. 5, p.  73). Sahlins (1974, pp.  78–79). Clark (1977, p.  36). Etc. Weber (1920) mentions it while treating the neolithic period (pp. 40–41). 27  Arioti (1991, p. 611b). 28  Smith (1776, I.ii.3-5). 29  Tomasello (2008, pp. 59–61, 70–72, 149–152, 162–166). 24 25

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

21

In the Palaeolithic period, the manufacture of tools and distribution of the final products followed precise models, as Clark noted.30 In fact, from the very outset, the continual repetition of the same actions created mental routines, or in other words the mental paths that facilitate the performance of the various tasks and their subdivision.31 In the first and longest phase, called the Lower Palaeolithic, the hominids lived on hunting and gathering. As the food resources available in one area dwindled away, they moved on in pursuit of further resources. The nomadic life prevented these groups from accumulating large supplies of food and tools, for they needed to travel light.32 The problem of conservation, as Sahlins observed, led to a tendency of underproduction and sparing consumption; it certainly did not encourage production of surplus or any sort of lavishness (ibid., pp. 30–31). So it was in this early phase that the hominids began to make their way out of Africa. In the meantime, they learnt to conserve fire, obtained from the embers of natural outbreaks of fire. In Africa, humans began to make use of fire about a million and a half years ago, and outside Africa about half a million years ago.33 With fire, they were able to defend themselves against wild animals, cook meat and bake clay to make pottery. About 100,000 years ago, the Middle Palaeolithic began, and Neanderthal Man reigned, making tools and weapons, burying the dead and apparently engaging in some marginal trade. In the last part of this phase, Homo sapiens sapiens started breeding certain animals and, on a very modest scale, farming. The Upper Palaeolithic—the phase closest to us—began about 40,000 years ago and was dominated by Homo sapiens sapiens, who continued hunting, fishing and gathering for food. They built small huts with wood and animal skins, made clothes with skins and fashioned tools specialised for various uses. They developed language, created statuettes and painted on the walls of the caves they lived in. The human groups were small, individuals coming together (as do many mammals) for better protection and greater ease in obtaining food.34

 Clark (1977, ibid.).  See Rizzello (1997: 158–161). 32  See Sahlins (1974, pp. 31–39). See also Arioti (1991). 33  See Bairoch (1997, p. 6). 34  See Darwin (1874, Ch. 2, p. 31). Clark (1977, pp. 36–37, 65). Arioti (1991). 30 31

22 

C. PERROTTA

This probably gave rise to the social aspect of human life, as Darwin observed. He noted the suffering of human individuals when isolated from the group.35 Effectively, the Hobbesian state of nature that sees single individuals attacking one another has never existed; within, the human groups were characterised by fellow feeling, while attack and defence prevailed externally. Today the experts are able to describe in detail the types of craftwork on stones and the manufacture of tools,36 including, among the latter, even non-metal axes (which appeared about 700,000 years ago). In the same period, humans learnt to strike fire with friction. The division of labour advanced considerably and a great many tasks were performed within the group, including raising the offspring, protecting them and giving them their first lessons in survival. The palaeoanthropologists point out that the human groups of the Palaeolithic were not strictly speaking producers since they made use of the resources already present in the environment and tended to use them up without reproducing them. Actual reproductive activity began only with sheep farming and agriculture in the Mesolithic and Neolithic periods. Nevertheless, this does not mean that labour failed to produce wealth in the Palaeolithic period. Adam Smith and the classical school explained that the production of wealth is not limited to work that physically reproduces the resources but also extends to the work that adapts the resources for consumption.37 As Sahlins points out, the human group began with the family nucleus and extended to relations of kinship. Thus the division of labour benefited from the natural fellow feeling of blood relations. The early forms of leadership emerged from the same background.38

4   The Economic-Cultural Evolution of Mankind Thus, in creating routines and habits, labour and the division of labour generated, together with the production of wealth, social cohesion and customs—all indispensable for the survival of society.39  Darwin (1874, Ch. 4, pp. 61–63; Ch. V, pp. 74–75).  See Clark (1977, pp. 41–59). Paleolithic Period (2021), Paleolithic toolmaking. 37  See the famous critique of physiocracy in Smith (1776, l. IV, Ch. IX). About the Classica School we mention only J.B. Say (1803, I, Ch. 12). 38  Sahlins (1974, Ch. 3, pp. 123–148). 39  On custom, see Schlicht (1998, Ch. 14) and Rizzello (2021). 35 36

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

23

From that early phase, the division of labour saw increasing ramifications; the specialisation of labour continued, enhancing its productivity; mental activity became ever more intensive, and the synapses and routines it gave rise to became increasingly complex and close-meshed, while symbolic and artistic creations multiplied and reached new levels of refinement. The cultural evolution consisted of ever better adaptation to the environment, which also moulded the physical organs like the hand, the larynx and the teeth and, naturally, the brain.40 Thus the biological evolution of the hominids was to a considerable degree a consequence of the cultural developments.41 Dealing with human evolution, Darwin seems to have wavered between applying the same selection mechanism of the species, that is, the selection between individuals, or moving on to selection between groups.42 The logic behind selection changes with the transition from the individual to the group level, and solidarity and altruism come into play. Darwin argued that the moral faculties of humans emerged and developed because the individuals needed the approbation of the group. In turn, the group engenders virtuous behaviours by showing high regard for or, on the other hand, disapproving and penalising certain actions. In fact, these behaviours create collective well-being, which also serves for the survival of the group itself. Thus the individuals conform to the virtuous behaviours and pass them down to their descendants, both with their upbringing and with genetic inheritance (ibid., Ch. IV, pp. 65–70). Darwin seems to have been quite certain that thanks to cultural evolution, the sense of solidarity would gradually spread to all humans in general, then to the disabled (who were eliminated in the earlier phases: Ch. 5, p.  76) and, finally, to animals (ibid., Ch. 4, pp. 62–9). Simon holds that altruism is impossible with the maximising approach but that it is perfectly compatible with Darwinian evolutionism and the mechanism of adaptation to the environment. He sees altruism as based on the sense of loyalty towards the group (society, organisation, homeland, etc.). Loyalty and a sense of belonging normally convey utility to the altruistic individual.43 Darwin and Simon pinpoint the link between altruism and social cohesion, but I would argue that altruism derives not only  See Lewontin and Levins (1978, pp. 1033 and 1045).  Clark (1977, p. 35). 42  Darwin (1874, Ch. 5, pp. 74–75). 43  Simon (1993, pp. 38–59). 40 41

24 

C. PERROTTA

from the need for social cohesion but also from the division of labour, being an indispensable condition for it. According to Darwin, although cultural evolution is faster than the biological process, it is subject to the same laws: the fight for existence, the selection of the individuals who best adapt to the environment, the necessity to cope with food shortage periodically and so forth. According to these laws, humans should undergo not only physical but also cultural transformation.44 This, however, seems impossible, in the first place given the excessive difference in rate between the two types of evolution,45 and secondly because, as Darwin himself repeated on every occasion, the inheritance of cultural endowments is impossible to prove at the practical level. Nevertheless, in Chapter 5, Darwin himself, examining the social processes that favour the progeny of the weaker individuals, seems to be tempted by a certain “social Darwinism”. The basic error in social Darwinism is that it deals with civilised society as if it were a merely biological society where the fight for existence between individuals prevails.46 Darwin could not have foreseen it, but the conception of social Darwinism—shared by many of his contemporaries and suggested by positivism—led directly to eugenics, racism and some appalling consequences that we know all too well.47 Routines and regular practices at work create learning mechanisms that are at the same time individual and collective. Communication—which is fundamental for survival—is the fruit of routine. Before actually becoming language, it emerged in the form of repeated sounds uttered in analogous contexts. Tomasello’s detailed analysis demonstrates that individual knowledge itself grows and becomes “cumulative cultural evolution” only in the social group. In the group, the individuals grow in a context—of artefacts, processes and ideas—created by man, and “pool their own cognitive resources”.48 As Darwin, too, writes: “It deserves notice that, as soon as the progenitors of man became social (and this probably occurred at a very early period), the principle of imitation, and reason, and experience would have  Darwin (1874, Ch. II; see especially p. 25).  See also Tomasello (1999, pp. 73–75). 46  See Hodgson (2006, Ch. 3), Douglas (1996, pp. 127–128). 47  See on this Sunna and Mosca (2016). 48  Tomasello (1999); see, for example, Chs. I, III.1, III.5, VII. 44 45

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

25

increased, and much modified the intellectual powers in a way, of which we see only traces in the lower animals”.49 Thus the choices regarding work and the division of labour are semi-­ aware and semi-free. In these processes, it is hard to distinguish between conscious and unthinking, purely spontaneous accord. These two elements are both at work in the formation of “social routines” and institutions, but they are scattered throughout an endless series of little acts of adaptation or learning performed by the individuals and the groups.50 This, I would contend, however, has nothing to do with the eternal question of whether or not there is individual freedom. After all, not even the latest developments in research in experimental psychology seem to settle the matter.51 On this issue, Hodgson proposes a well-balanced approach: “Habit is not the negation of deliberation, but its necessary foundation. Reasons and beliefs are often the rationalization of deep-­ seated feelings and emotions that spring from habits that are laid down by repeated behaviours”. This gives rise to “the normative power of custom in human society”.52

5   The Production of Art, Ornamental Objects and Monuments Artworks were already being produced in the Upper Palaeolithic, amid the hardships of the struggle for survival.53 There are “prehistoric Venuses”, statuettes and reliefs in stone and clay, bone and ivory, which highlight the features of the female body, particularly with regard to fecundity and breastfeeding. The Venus of Willendorf, carved in stone, dates back to 25,000 years ago, and the Lausselle Venus, a relief, painted in red, is 20,000 years old. There are, moreover, a great many prehistoric cave paintings, mainly depicting animals and hunting scenes with human figures. For example, the highly refined paintings of Chauvet date back to about 32,000 years ago,54 while the equally splendid paintings of Lascaux, again in the south 49  Darwin (1874, Ch. 5, p.  174). See on this Tomasello (2008), already cited earlier: Chap. 1. 50  See Rizzello (1997, pp. 133–134). 51  See Rizzello (2021). 52  Hodgson (2006, 11, p. 203). 53  Clark (1977, pp. 133–136, 145–153). 54  Bairoch (1997, p. 4).

26 

C. PERROTTA

of France, are 17,550 years old, and some flutes found in Germany, in the vicinity of Ulm, are actually 35,000 years old.55 Even when they served for propitiatory purposes, these fruits of artistry, including music, show that in the human group collective imaginings, skills with symbols and communication, and sets of practices—in a word, culture—grew hand-in-hand with the growing production of wealth and organisation of it. At the same time, the social structure of the group developed, creating roles and differentiation in responsibilities. The Palaeolithic also saw the creation of the first necklaces and personal adornments. Recently, a hand-decorated ivory pendant was found in the Stajnia cave in Poland, dating back to 41,500 years ago.56 In the Mesolithic, with techniques that were still rudimental, bracelets, earrings, necklaces and body paints and so forth were produced in considerable quantities. It is worth noting that these articles formed part of the wealth produced, although not serving the immediate purpose of survival. The consumption of goods deemed superfluous may well have been the most powerful driver of economic progress, as it is today. Thus human labour is not dedicated entirely and always to physical subsistence. In fact, there has always been a surplus, in the sense of products not indispensable for immediate survival; the very concept of subsistence is relative. For this reason, Sahlins rejects the picture of Stone Age man as prey to ceaseless scarcity; rather, he had to cope with alternating periods of plenty and scarcity.57 Nor is the increase in productivity from collective labour constant or linear; probably, phases of acceleration alternate with periods of stagnation or even regression. Finally, the Neolithic period saw the creation of the first architectural structures (dolmens, menhirs, tumuli, etc.), associated with the cult of the dead and religious rites. These continued into the historical age with various types of megalithic structures.

 Paleolithic Period (2021), Paleolithic art.  See Nature – Scientific Reports, 2021, November 25, online. 57  Sahlins (1974, Ch. 1). 55 56

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

27

6   The Neolithic Period: The Economic Revolution and Conflict About 8500 years ago, agriculture—having already made a patchy appearance during the Mesolithic period—became a regular activity in the area of the fertile crescent, in Mesopotamia.58 It spread over large parts of America 7000 years ago, and in the other continents between 6500 and 5000 years ago. The human groups settled down, the decline of nomadism began, and with it the domestication of various animals and plants, while animal farming developed on a larger scale. Apart from the possibility of growing crops, the other decisive novelty in the Neolithic period lays in the fact that, with the end of nomadism, the crops could be conserved, with a regular food surplus. However, as Bairoch pointed out, the value of the surplus was limited by the great distances, given the very thin scattering of the population in the Neolithic age. Nevertheless, surpluses—in food to begin with, but eventually in other goods—represented the true economic and social revolution of the period. From then on, every type of social organisation has been characterised by the way the surplus is managed. According to Bairoch, and indeed Braudel, the advent of agriculture was inevitably to lead sooner or later to the birth of cities. They appeared in different periods in the various countries, but invariably subsequent to the development of farming. And then the population started to grow.59 As areas became urbanised, there was a great increase in forms of organised work. Many new sectors appeared, and the division of labour advanced. Routes for transport and communication were established, and refuse disposal, aqueducts and water supplies came under management. Pile dwellings and cabins were built, common spaces were created and, eventually, armies and administrations were formed (apparently writing emerged from the need to record the handling of food). According to Max Weber, from the family and relations of kinship arose tribal society, on the one hand, and hierarchies and private property on the other.60 In fact, the division of labour gave rise to the need to organise,

 See the detailed analysis by Clark (1977, pp. 68–91).  Bairoch (1997, pp. 5–12). 60  Weber (1920, I.1–4). 58 59

28 

C. PERROTTA

make decisions and command. A social hierarchy emerged, and with it a common culture inspired by elites. Society fell into social classes.61 Trade developed, albeit on a very limited scale, and the first markets appeared. But a great part of the production activities, physical and administrative infrastructures and work connected with immediate consumption remained outside the market. Karl Polanyi and his group demonstrated that even the earliest civilisations were marked by extensive organisation of manufacture, trade over long distances and established forms of markets. However, this did not mean that the kingdoms of the Middle East, the city-states of Greece or the Roman Empire already had something like the modern economy. To begin with, their societies had hardly developed from the ancient tribal pattern and, above all, their economies were not shaped by the capitalistic market, with the (alleged) need to maximise utility, and with price-fixing on the basis of the free play between demand and supply.62 The prices were administrative or dictated by criteria protecting the interests of large groups or states.63 Polanyi and his ilk produced a scathing critique of the way neoclassical theory reduced the economy to mere trade.64 Those Neolithic societies saw the emergence of dominant classes (elites) which controlled the sources of wealth.65 This trend led to conflict between the contrasting economic interests of the various social groups, which were defined by their private property or levels of income, or indeed their working relationships. The conflict was rapidly institutionalised, either simply in practice (through habit and custom) or formally, the elites laying down the rules.66 Very often it was in fact the elites that obstructed the increase in the production of wealth in order to maintain their control. The Palaeolithic period had also seen internal conflict in the groups,67 while the first established elites must have formed in the Mesolithic. In December 2021, the grave of a newborn baby girl dating back 10,000  North et al. (2009, p. 1.3).  Polanyi (1957, see Chs. II and V, by Polanyi himself). This even holds for modern Europe: ibid., Ch. XVIII, by Walter Neale, p. 453). 63  Ibid., Ch. V, by Polanyi, pp. 101–104; Ch. XI, by Neale, pp. 268–270). 64  Ibid., Ch. XIII, by Polanyi, p. 326; Ch. XIV, by Terence Hopkins, p. 340; Ch. XVIII, by Neale, pp. 445–446. 65  See, for example, Godelier (1978, pp. 200–201 and 220–221). 66  See North et al. (2009, Ch. 2). 67  Sahlins (1974, pp. 125–126). 61 62

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

29

years was found in a cave in the vicinity of Savona (Italy). By her were a set of pendants and necklaces, which would never have been placed in the grave of a baby of any ordinary family.68 At times, economic-social conflicts lead to exceptional progress, but they have also proved destructive, reversing some of the progress achieved. A lot depends on the extent to which the institutions truly function in the general interest (as their representatives proclaim, in any case) and are able to control private interests or the extent to which they are controlled by some dominant private interest.

7   The Birth of the Institutions Our considerations on the prehistoric economy confirm the limitations of the neoclassical approach, which is deductive and based on the assumption of the rational individual with perfect information and no transaction costs. Moreover, the historical approach also points the way to a more realistic view of the institutions in general. And this is, in fact, the major problem yet to be solved. Neo-institutionalism has shown particular attention to the matter, coming up with diverse and often original answers, none of which, however, seem to settle the issue. To begin with, leading neo-institutionalists also make use of the neoclassical method of analysis, albeit in different ways. For Coase and Williamson, the capitalistic market constitutes the only context in which economic activity takes place. Simon, as we have seen, rejects the maximisation of utility, but after all clings to the picture of the economy not so much as a collective process but as a matter of individual and rational choices (although the rationality is limited and procedural).69 The institutions are of importance for North, but they serve to maximise the utility of the individual.70 All see the market as the mother of all the other institutions. Hayek insists on the natural occurrence of institutions generated by “free men”: “mankind has achieved things which have not been designed or understood by any individual and are indeed greater than individual minds”.71 Thus institutions are the natural outcome of millions of  See Domani, newspaper, 2021, December 20, p. 13.  See Simon (1955, 1981). 70  North (1990, p. 5). 71  Hayek (1946, p. 32, see also p. 13 and passim. See also 1945). 68 69

30 

C. PERROTTA

micro-­choices made by individuals, as Mandeville had it, and of the harmony already ensured by the invisible hand, as Smith saw it.72 In reality, the spontaneity of these processes is only part of the truth. The decisions of individuals proceeding together almost always serve for deliberate projects of collective interest. Hayek paints an idyllic picture of the institutions flowering to fulfil the aspirations of individuals without any conflict arising. Nevertheless, the new institutionalists’ considerations do lead to brilliant conclusions, although not quite complete. They all concur on the point that the institutions came about to reduce transaction costs of any kind whatsoever, from the costs to maintain order and improve safety to the costs to enhance information and computation capacity, including training, as well as the costs to promote competitiveness, technical progress and productivity.73 According to North, even altruistic institutions serve these ends.74 All this is true, but reducing the institutions to market efficiency means bending the realities to the theory. Even the norms and the very language are seen as institutions born to bring down transaction costs. But they amount to much more. Confining our attention to the economy, functioning through cooperation, the institutions produce the material and organisational basis for every economic activity. In any case, society and its institutions are far more complex than the market, and indeed than the economy itself. As we have seen, the first institutions took shape in the small original groups sharing common descent, that is, kinship. As the community grew and the bond of kinship was loosened, the institutions linked together individuals and groups through language, collective memory, practices and rules, or, in reference to the dominant group. Let us take a closer look at the analysis by North, who dedicated far more attention to the issue than the others. He refutes the need for neoclassical economic equilibrium,75 with scathing criticism of the neoclassical approach to the institutions.76 He writes: “Institutions are the humanly devised constraints that structure political, economic and social interaction. They  See Hayek (1946, respectively p. fn 9 and p. fn 7).  See North (1990, pp. 65–66). Mary Douglass (1996). 74  North (1990, p. 21); (1991, pp. 97–98). 75  North (1990, p. 24). 76  North (1990, Ch. 12). 72 73

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

31

consist of both informal constraints (sanctions, taboos, customs, traditions, and codes of conduct), and formal rules (constitutions, laws, property rights)”.77 They set penalties for those breaking the rules. North distinguishes between “natural states”, characteristic of societies that are not open, where the privileges of the elites and personal relations prevail, and systems with free access, that is, open societies. The latter is characterised by respect for private property and competition, rules and duties with no personal bias, and economic development associated with democracy.78 Society emerges from the “natural state” only when an elite acquires both monopoly in production and gains and the monopoly of violence, the latter barring access to control of the gains for the others.79 The final elimination of these obstacles with the opening up of society seems inevitable. The systems of the past—the hunters/gatherers, the Suq, the caravan economy—seem to take on value only insofar as they serve the final outcome, the fully efficient system of the modern age.80 In his last book, North played down this finalistic approach (which he denied having), but in practice, it hung on.81 North held that even in the societies of hunters/gatherers, many “individual households” are self-sufficient.82 But the theory of the self-sufficient oikos (household) on which the early economy rested had already been demonstrated to lack credibility in the 1930s.83 The obvious consequence of a finalistic approach is that premodern history is entirely flattened out into a generic society which obstructs free competition, while the fully accomplished modern economy is seen as the good economy achieved without conflict—not even between economic rent and profit, or between capital and labour. North’s analysis of the situation in Spain is significant in this respect. He deftly put his finger on the negative implications Spanish policies held for development but attributed them not to the prevalence of latifundium (as indeed there was) but to a no better-specified bureaucracy.84 He came  North (1991, p. 97).  North et al. (2009, Preface, location 137; pp. 1–13, 41–48; Ch. 4). 79  North et al. (2009, pp. 18–21). 80  Among the many texts worth citing, see North (1990, p. 92). 81  North et al. (2009, Preface, loc. 151; pp. 12–13, 240–243). 82  North (1991, p. 99). 83  Polanyi (1957, Ch. I, di Harry Pearson). 84  North (1990, pp. 112–117)—(1991, pp. 108–110). 77 78

32 

C. PERROTTA

to the same conclusion for Latin America,85 to which, however, the feudal system of Spain and Portugal had been exported.

8  Conclusions If we view the economy as a historical process, we can avoid failing to take into account the two essential dimensions shown by economic activity— the collective dimension, and the individual one. Until the advent of capitalism, individuals played a relatively marginal role in the economy and universal freedom as conceived in the modern sense did not exist. The great revolution of capitalism consisted precisely in giving play to the initiative of individuals and defending their economic and political freedom. In this long process, a balance between the two dimensions gradually set in, embracing social organisation and individual initiative, the general interest and particular interests. Although distinctly precarious, this balance has proved necessary to generate a major increase in productivity and great social wealth. With capitalism, growing wealth had produced well-being for the major part of the population, at least in the West. This process constituted the indispensable basis for freedom to flourish. Whenever the balance has broken down and one of the two dimensions has crushed the other, society has suffered tremendous turmoil and lost freedom. Hayek—like the major liberal authors he looked to—was set on releasing individuals from the oppression of rationalistic and voluntaristic schemes. However, with his strenuous defence of the freedom of the— abstract—individual, he ended up by defending the discretionary powers of few individuals and the economic rent of the elite. It simply isn’t true that increasing individualism means increasing freedom. Today, for example, the overwhelming prevalence of the interests of the private individual over those of the community works only to the advantage of the elite. This has often been the case in the history of capitalism. But before, at least, the well-being gradually extended to the rest of the population, whereas today we see it increasingly restricted. The general interest has, as it were, been expropriated, the rules of social behaviour have been weakened from above, and the public services privatised or harnessed to serve the needs of private corporations. Excessive

 North (1991, pp. 110–111).

85

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

33

economic inequality is transforming much of the social wealth into parasitic economic rent, diverting it from investment. Individualistic economic theory ignores these problems, with the conviction that it is describing “the best of all possible worlds”. Starting from such wrongheaded assumptions, it arrives at wrongheaded conclusions.

References The date after the name indicates the year of the first edition or the completion of the work. The year of the edition used here is at the end of the record. Arioti, Maria. 1991. Cacciatori e raccoglitori, società di, entry of Enciclopedia delle scienze sociali. Vol. I. I ed, 609–614. Roma: Enciclopedia Italiana. Backhouse, Roger, Steve Medema. 2007. Defining Economics: Robbins’ Essay in Theory and Practice, Downloaded Through The New Palgrave Dictionary of Economics, 2008, entry Economics, definition of, first posted 2012. Bairoch, Paul. 1997. Victoires et déboires. Histoire économique et sociale du monde du XVIme siècle à nos jours, Italian trans. (Storia economica e sociale del mondo). Torino: Einaudi, 1999. Clark, Grahame. 1977. La preistoria del mondo. Una nuova prospettiva, Translated from English, Garzanti, 1986. Darwin, Charles. 1874. The Descent of Man. 2nd ed. London: J. Murray, Online. Douglas, Mary. 1996. “Istituzioni  - Problemi teorici”, Enciclopedia delle Scienze sociali. Vol. V. I ed, 126–134. Roma: Enciclopedia Italiana. Godelier, Maurice. 1978. Economia, Enciclopedia Einaudi, vol. V, 197–223. Torino: Einaudi, 1978. Hayek, Friedrich. 1936. Economics and Knowledge, now in H. (1948, Ch. II, pp 33–56). ———. 1945. The Use of Knowledge in Society, now in H. (1948, Ch. IV, pp. 77–91). ———. 1946. Individualism: True and False, now in Hayek (1948, Ch. I, pp. 1–32). ———. 1948. Individualism and Economic Order. Chicago - London: University of Chicago Press. ———. 1968. Competition as a Discovery procedure, Translated from German. Quarterly Journal of Austrian Economics 2002 (3): 9–23. Hodgson, Geoffrey. 2006. Economics in the Shadows of Darwin and Marx. Cheltenham: E. Elgar. Kahneman, Daniel. 2007. Economia della felicità, Milano: Il Sole-24 ore libri. Kahneman, Daniel, and Alan Krüger. 2006. Developments in the Measurement of Subjective Well-Being. Journal of Economic Perspectives 2006 (1): 3–24.

34 

C. PERROTTA

Lewontin, Richard, and Richard Levins. 1978. Evoluzione, Enciclopedia Einaudi. Vol. V, 995–1051. Torino: Einaudi. Marshall, Alfred. 1860–70s. Ye Machine, in his Early Philosophical Writings, Edited by T. Raffaelli, JAI Press, 1994, Part II. Marx, Karl. 1847. Miseria della filosofia, Translated from French, in Marx-Engels, Opere complete, VI, 105–225. Roma: Editori Riuniti, 1973. ———. 1857. Grundrisse (Foundations of the Critique of Political Economy - Rough Draft), Translated from German, Harmondsworth: Penguin, 1973. ———. 1859. Per la critica dell’economia politica, Translated from German, Roma: Editori Riuniti, 1971. ———. 1867. Capital I. Moscow: Progress Publishers. online: 1995-96. Mauss, Marcel. 1923–24. Saggio sul dono. Forma e motivo dello scambio nelle società arcaiche, Translated from French, Torino: Einaudi, 2002. North, Douglass. 1990. Institutions, Institutional Change and Economic Performance. Cambridge: Cambridge University Press. ———. 1991. Institutions. Journal of Economic Perspectives 1991 (1): 97–112. North, Douglass, J. Joseph Wallis, and Barry Weingast. 2009. Violence and Orders. A Conceptual Framework for Interpreting Recorded Human History. Cambridge: Cambridge University Press. ebook. Paleolithic Period. 2021. Encyclopaedia Britannica (The Editors), online, updated Sept. 30, 2021. Perrotta, Cosimo. 2018. Unproductive Labour in Political Economy. The History of an Idea. London-New York: Routledge. ———. 2023. “La competencia según los ilustrados”, Cuadernos de estudio del siglo XVIII (forthcoming). Polanyi, Karl, ed. 1957. Traffici e mercati negli antichi imperi, Translated from English, Torino: Einaudi,. 1978. Raffaelli, Tiziano. 1994. “Marshall’s Analysis of the Human Mind”, Part 1 of Marshall [1860s-70s], 53–93. JAI Press. Rizzello, Salvatore. 1997. The Economics of the Mind, Translated from Italian, Cheltenham (UK): E. Elgar, 1999. ———. 2021. Consuetudine, mimeo. Robbins, Lionel. 1932. An Essay on the Nature and Significance of Economic Science, 2nd ed. (1935). London: MacMillan, 1945, downloaded ebook. Sahlins, Marshall. 1974. Stone Age Economics. London - New York: Routledge. 2004. Say, Jean Baptiste. 1803. Traité d’économie politique, 6th ed. Paris: Guillaumin, 1841, online: Inst. Coppet. Schlicht, Ekkehart. 1998. On Custom in the Economy. Oxford: Clarendon. Shizgal, Peter. 2012. Scarce Means with Alternative Uses: Robbins’ Definition of Economics and Its Extension to the Behavioral and Neurobiological Study of Animal Decision Making. Frontiers in Neuroscience, online Feb 9.

2  ORIGINS OF THE ECONOMY AS COLLECTIVE ACTIVITY 

35

Simon, Herbert. 1955. A Behavioral Model of Rational Choice, now is the Ch. 5 of S. (1985), pp. 143–159. ———. 1972. Theories of Bounded Rationality. In Decision and Organization, ed. C.B. McGuire and Roy Radner, 161–176. North Holland. ebook. ———. 1981. “Economic Rationality: Adaptive Artifice”, now is the Ch. 14 of S. (1985), pp. 341–370. ———. 1985. Causalità, razionalità, organizzazione, selected essays. Translated from English. Bologna: il Mulino. ———. 1987a. “La razionalità limitata”, in S. (1997, pp. 25–31). ———. 1987b. “Satisficing”, in S. (1997, pp. 32–37). ———. 1993. “Altruismo ed economia”, in S. (1997, pp. 38–59. ———. 1997. Scienza economica e comportamento umano, Translated from English (Models of Bounded Rationality, vol. 3, MIT) Torino: Ed. di Comunità, 2000. Smith, Adam. 1776. Wealth of Nations, Edited by R. H. Campbell and A. S. Skinner. Oxford: Clarendon, 1979, reprint Indianapolis: Liberty Classics. Sunna, Claudia, and Manuela Mosca. 2016. Heterogenesis of Ends: Herbert Spencer and the Italian Economists”, The European Journal of the History of Economic Thought, March 2016. Tomasello, Michael. 1999 Le origini culturali della cognizione umana, Translated from English, Bologna: il Mulino, 2005. ———. 2008) Le origini della comunicazione umana, Translated from English, Milano: Raffaello Cortina, 2009. Weber, Max. 1920. Storia economica. Linee di una storia universale dell’economia e della società, Translated from German, Roma: Donzelli, 1997.

CHAPTER 3

Custom and Path Dependence in Economics Salvatore Rizzello

Abstract  This chapter deals with the role of customs in economics. With few exceptions, economists reserved scarce interest in this topic. Some classical authors counterposed custom to market competition while considering the former as limiting development and the latter as progressing it. By following cognitive economics, and particularly Schlicht’s idea that custom derives from a predisposition of the human mind to clarity, this chapter avoids that dichotomy by investigating the real relationship between them and its relevant implications for economics. In this framework, path dependence emerges as a unifying element which permeates the indissoluble and complex process and, starting from the construction of personal knowledge, reaches the social dimension of customs. This leads to meaningful perspectives for economic analysis, especially in reference to uncertainty, free will and efficacy. On a methodological level, the idea of a complete return of economics to social sciences is also supported. Keywords  Custom • Cognitive economics • Routine • Uncertainty • Free will

This chapter was previously published in Theory and Criticism of Social Regulation, 2021, vol. 2, pp. 201–220. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7_3

37

38 

S. RIZZELLO

1   Introduction The role of custom in economics has so far received little attention and indeed, albeit sporadically, economists only recently dealt more deeply with this line of research (Schlicht 1998, 2004, 2021; see also the symposium on this topic published in the American Journal of Economics and Sociology in 2002) (Maki & Moss 2002). While references can be found in the relevant works of John Stuart Mill, Alfred Marshall and Joseph Schumpeter, investigation into the role of custom in economics remains scarce. On the contrary, the economic literature on routines is particularly extensive, especially with respect to decision-making (since Simon 1947) and the economics of innovation (see Nelson and Winter 1982 and the evolutionary economics tradition). Although they share some aspects, custom and routine emerge from different roots, have different characteristics and express dissimilar levels of pervasiveness since custom appears more extensive. In the 1980s, a branch of research that focused on the role of path dependence developed and found several applications in the economic literature (e.g. economics of innovation, institutional economics, experimental economics and cognitive economics). This chapter aims to explore in more detail the role of custom in cognitive economics by examining its relationship with path dependence and suggesting its emergent fruitful implications. Considering both the extensive use of routines in economics and the limited attention to custom, we try to shed light on similarities and differences among routines, customs and path dependence (Sect. 2). Subsequently (Sect. 3), we also investigate the following relationships: custom and uncertainty (Sect. 3.1); custom, decision-making and free will (Sect. 3.2); custom and economic efficiency (Sect. 3.3). On the basis of the previous sections, Sect. 4 highlights the most relevant consequences for the economic analysis, by acknowledging the right role of customs in economics in connection with path-dependent dynamics. Finally, Sect. 5 summarises the most important aspects considered in the chapter and offers some conclusive remarks for further research.

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

39

2  Routine, Custom, Path Dependence 2.1  Routine In general, a routine is the repetition of successful practices and experiences in solving a problem. In economics, routines found extensive application in the theory of the firm, thanks to the pioneering contributions of March and Simon (1958), Nelson and Winter (1982) and earlier research by Marshall (1920 [1890]) and Schumpeter (1934 [1911]). The focus on the role of routines is however present in the literature since Diderot and Adam Smith, highlighting respectively its positive and negative side. In fact, Diderot enhances the cleanliness in work tasks and order due to the adoption of routines as an organisation tool, which in turn improves the dignity of labour. Smith, on the contrary, underlines the degradation of labour and considers routines as deadening the mind of people who constantly perform the same tasks without any connection with creative and human dimensions typical of craftsmanship (Sennett 1998, ch. 2). This dichotomy is actually present throughout the evolution of industrial organisation (consider, for example, the wide debate on the advantages and disadvantages of the Tayloristic organisation of work). In organisations and institutions, we consider as routine all organisational and technological procedures which are functional to the achievement of goals through satisficing performances. We can therefore define routines as adopted behaviours, explicitly planned, deriving from successful experiences which have been previously applied in problematic situations. In other words, routines can be deemed as “codified knowledge” that can derive from exogenous (for example, worse performances due to institutional contexts or market dynamics changes) as well as endogenous causes (aptitude to innovate as a development strategy of the firm). At the beginning, there are some problems to be solved. Also, there are several crucial elements that lead to the origin and implementation of a routine: previous knowledge and skills; accessible and available information; environmental and institutional constraints; fluidity in decision-making dynamics. In a nutshell, the onset of a problematic situation prompts the search for a solution through a process of procedural rationality, which, in line with problem-solving theory (Newell and Simon 1972), typically occurs through different stages, including the representation of the problem, the formulation of solving conjectures, trial and error checks with the use of “rules of thumb”, the evaluation of feedback and—upon reaching

40 

S. RIZZELLO

repeated satisfactory solutions to the desired aspiration levels—the adoption of the new procedure which will continue to be used identically and repeatedly until a new problematic situation arises and triggers an impulse for change. However, this is not an automatic or simple process. As Schumpeter (1934 [1911]) argued, routines have a solid conservative force that can distort decision-making to generate new things (p. 86) so that any step outside the existing ones appears very difficult to decide considering their enclosed codified knowledge and the habit of re-proposing it unwittingly “as firmly rooted in ourselves as a railway embankment in the earth” (p.  84). To overcome this resistance and produce change, a special figure with extraordinary skills is needed: the entrepreneur. Beyond the Schumpeterian vision, the emergence of routines, their evolution and change involve a very complex process. In the light of the most recent literature, we know that routines directly affect the neurocognitive aspects of explicit and tacit representation and learning processes, the transformation of information into personal knowledge and the “history”, considered as a previous path, of the firm. We elsewhere described in detail all these aspects (Rizzello 1997; Egidi and Rizzello 2004). Here it is enough to remember that routines are the memory of organisational and technological knowledge of organisations and institutions that determine their identity. 2.2  Custom Custom is a continuous way of acting, operating and proceeding. It derives from habits, conducts, deep-rooted traditions that recur spontaneously, permeate action and are the result of the interaction between individuals. The set of these interactions conditions and directs the action of the preponderance of the subjects, which in turn slowly modifies them in a relationship of mutual influence. First, consider habit. The predisposition to use in a repetitive way what is already learned makes available mental energies to solve new problems, with obvious evolutionary advantages. In identical or similar contexts, we automatically employ successful action procedures which have been acquired through trial and error attempts or by imitation. As a species, we would have risked leaving the field open for the full automation of behaviour. The relational dimension, however, prevented it. Alongside habits, customs have arisen as well. They regulate the potential conflicts of different habits upstream, coordinating social relations in an orderly manner. If

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

41

the nature of habits is mostly individual, that of customs is essentially collective. There is no doubt that the two mutually influence each other in onset and development. However, several habits are individual or at least restricted to a very small number of individuals (e.g. due to family or emotional ties), whereas, customs, to become such, must be “followed” by a very large number of people, hence their social nature. Unlike the norm, which, once codified, crystallises and precisely defines the sphere of its applications, custom assumes its autonomy with greater dimensions and extensions and also orders human relations. Custom does not necessarily precede the rule and extinguishes when the norm is applied. In fact, custom and norm can be very closely linked since the norm can be codified “on the basis of custom”. This is the case, for example, of the dynamics that govern the relationship between formal and informal rules (i), which is one of the cornerstones of the Austrian school and Hayek’s (1963) in particular.1 At the same time, there are rules which are often introduced ad hoc and linked to contingent situations, with no clear direct evidence of derivation from customs (ii). In (i), we refer to rules of behaviour, which emerge spontaneously as a result of individual action and, in the same way, are spontaneously selected because they are useful to the group, leading to social order. In (ii), we face laws through which power is exercised with the goal of achieving specific political objectives by using coercive methods, which can have distorting effects on the social order. While understanding a close relationship between these two levels, in case (i) the exclusive reference to the idea that norm derives from custom seems inappropriate, not only for the existence of (ii) but above all because norm and custom are two dissimilar forms of social regulation, with different modalities and logics, even when closely related. In fact, custom presents not only greater flexibility than norm tout court but also carries out an action of “education”, information and transmission of even tacit cultural “visions” which shape prevailing habits, preferences and dominant moral attitudes. Economic processes, as well as more generally social ones, are permeated by some customary aspects, considered ordinary ways of behaving, thinking and evaluating (Schlicht 2004). In the rare literature on this 1  The difference between formal and informal norms has been extensively dealt with in economic literature and it is now considered common knowledge among economists (see, for example, Rizzello 1997; Rizzello and Turvani 2000; Fiori 2018). Obviously, custom belongs to the sphere of informal norms.

42 

S. RIZZELLO

topic, custom is sometimes considered as an impediment to change and a slowdown in economic development, but at other times as an element that reduces transaction costs, with particular reference to the contractual constraints. Consider, for example, fiduciary relations, mutual cooperation or, more generally, the dense and complex system of relationships that we define as “social capital” (Arrow 1972; Putnam 1994 and, more recently, Perrotta 2020, Ch. 8) and it is also typical of the relational dynamics in industrial districts (Becattini 1998). In an economic dimension in which the regulatory aspects are dominated by conventions, if everyone follows them, it is reasonable to comply. From the point of view of economic analysis, this entails obvious advantages in terms of simplifying the levels of uncertainty and forecasting expectations, leading to the particular equilibrium defined in game theory as “Nash equilibrium”. Ekkehart Schlicht (1998) argues this happens because custom is an amalgam of habitual, emotional and cognitive elements that are not easily separable and simultaneously shape preferences, behaviours and norms (p. 13). It derives from the fact that the human mind has a natural propensity to prefer regularity and spontaneously seek coherence between cognition, emotion and reason. This is largely related to the functioning of the mind, that is, its ability to actively structure and order external stimuli, giving them meaning and order in a clear and coherent way. Rules formation is therefore not a purely social process and customs are not a system of conventions. Their specific nature is based on the predisposition of the human mind to provide coherence and simplification to the largely tacit processes of knowledge construction and the “conservative strategies” of our mind, which lead us to prefer coherence and conformity in behaviour (Schlicht 1998). This is also in full harmony with individuals’ risk aversion, imitative processes and preference for cognitive coherence, as widely highlighted by experimental economics (Bardsley et al. 2009). It also emerges in the domain of cognitive economics, where the link between decision-making and social regulation, in contexts characterised by complexity and structural uncertainty, is illustrated in detail with direct reference to real limits and effective potential of our cognitive abilities (Rizzello 1997). Consistent with this approach, Schlicht’s contribution (1998, in part p. 3) convincingly highlights that, in order to understand the nature, role and dynamics of conventions, it is necessary to investigate the psycho-neurobiological micro foundations underlying our natural predisposition to clarity. In these terms, customs take on a more complete, pervasive and robust role than any other factor in

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

43

understanding social regulation since they represent “the primordial soup” from which economic and legal relations emerge. They do not singularly exhaust, but rather they coexist in a relationship of mutual influence. In the economic sphere, in particular, many activities cannot, do not want to or must not be mediated by market and competition (Schlicht 1998 p. 23). Norm-custom relationship is also not unidirectional, but one of reciprocal influence. In fact, the rules can also contribute to changing customs. For example, anti-discrimination laws in the workplace can lead to easing forms of discrimination in wider social spheres. Customs can be both adaptive, in strengthening the existing ones, but also active in modifying them (Schlicht 2004), considering that repetition shapes the custom which in turn reinforces the tendency to further repetition. A path-­ dependent process, which is implicitly present in all dimensions illustrated so far (psycho-neurobiological, cognitive, individual and social), then clearly emerges. 2.3   Path Dependence In general, we can define path dependence as a property of complex dynamic systems, according to which even small events in the past can later have relevant consequences. Decisions can only partially, or not at all, modify these events, implying that situations of multiple or inefficient equilibria can arise. In economics, since its introduction in the 1980s, path dependence was extensively used in various fields such as economic history, economics of innovation, economic geography and, later, institutional economics and cognitive and experimental economics. However, different controversies have arisen with reference to the examples supporting the thesis that small historical events tend to push the system towards irreversible suboptimal choices. Also, broad disputes over the validity of the proposed analysis, which appear as not being empirically proven, have been raised (Rizzello 2004). Here we do not intend to propose them again (please refer to Arthur 1994; Liebowitz and Margolis 1995; David 1997, 2000). Our intent is rather to understand if routines and customs exhibit similarities and differences with path dependence, and what kind of relationship they have with it, and still evaluate how fruitful this can be for economic analysis. By path-dependent processes, we mean here the complex processes typical of human nature we find in the extended spheres of interpersonal

44 

S. RIZZELLO

relationships. In addition to being easily discovered in many biological systems, these dynamics significantly characterise the complex psycho-­ neurobiological paths of acquisition of personal knowledge (Lotto 2017; Kandel 2018) and the interindividual interaction, going from the simplest forms of communication up to articulated dimensions of organisations and institutions in a relationship of mutual evolutionary conditioning. In this sense, path dependence emerges as a pervasive and ineluctable dimension of human nature and therefore it is necessary in any kind of socio-economic analysis, obviously including those who are characterised by the nature, characteristics and dynamics of customs. In the economic field, attributing such a pervasive role to path-dependent processes has disruptive effects on some cornerstones of the mainstream approach. Among the most appropriate to the comparison with routines and customs, we mention two in particular: (i) most economic phenomena are characterised by efficacy and not efficiency; (ii) it is necessary to deeply reconsider the concept of individual free acting, as epistemic foundation of mainstream approach in economics. With reference to (i) we remember (ai) that the construction of personal knowledge is a karst path, implemented through trial and error, trying to give meaning to external stimuli by bringing them back to what is already “known” through tacit and supra-conscious mechanisms (Hayek 1952); (bi) search ends when we find a satisficing solution to the problem (by reaching our levels of aspiration) (Simon 1956, 1959); (ci) that (ai) and (bi) are continuously influenced by external, natural, and social feedbacks in a relationship of mutual conditioning. Considered (ai), (bi) and (ci), it follows (di) that interactive dimension is pervasive and constantly present in every single or collective learning process and any behavioural analysis carried out must always be considered “systemic”. Regularised epiphenomenal results of these interactions are (e) norms of behaviour, conventions, customs, organisations and institutions. Like all dynamic systems (this is their nature), they are characterised by efficacy and not efficiency. The difference is between a redundant system, with excess resources and from which a satisfactory solution always emerges, and a system that uses (optimises) the resources at its disposal in a “perfect” way, without any cost or effort higher than minimum necessary. A redundant and

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

45

effective system is typical of real complex systems, while an efficient one can only be of simple systems or theoretical models. Finally, since (ai) and (bi) emerge from path-dependent dynamics and (ci) and (di) follow pathdependent dynamics, (e) must also be analysed from this perspective, which is typical of non-linear complex systems. As regards (ii), a premise must be made: since the subject is enormously vast, we specify that we will deal with it only with reference to the microfoundations of mainstream approach. In economics, free individual action is one of the essential prerequisites of standard models. Alongside the assumption of rational behaviour by economic agents, which complements it, free individual action is the prerequisite for achieving economic equilibrium. Consumer sovereignty and optimising choices by producers plastically represent human action in a context of total freedom. The only constraint is, in the first case, disposable income and, in the second, technology. Mere mechanics of prices condition individual choices and influence their outcomes, through the cybernetic action of the market, which conveys relevant information towards a selective system of perfect rationality. It is evident that this model effectively cancels “free” individual action, reducing it to a simple instrument of a broader mechanism, which must converge towards a general economic equilibrium with successive approximation. For over half a century, however, experimental economics convincingly highlighted that economic agents systematically violate the principles of rational behaviour predicted by mainstream models and recognised an active role (much more relevant than the mere principle of rationality) for emotions, imitation, and, more generally, the context in which choices take place (Bardsley et al. 2009). However, the solidity of the general economic equilibrium model eventually derives by considering market as a cybernetic mechanism able to overcome the limits of economic agents. In other words, it is accepted that individuals have limitations that prevent them from consciously achieving optimisation. Nonetheless, perfect rationality, which is not possessed by individuals, is ensured by the system, which by selection leads agents to act as if they were indeed perfectly rational (Friedman 1953). This mechanism works perfectly only if, in addition to other requisites, everyone acts freely in pursuing their own goals (self-interest) and the system is unbounded by regulatory and institutional constraints, other than those allowed for minimal State (laissez-faire).

46 

S. RIZZELLO

It is clear at this point that this “pan-rationalistic” dimension makes free individual action fictitious and completely subordinated to the continuous directing of the system towards the only behaviour deemed virtuous, the maximising one. But, as the studies in the neurocognitive field amply demonstrate (Lotto 2017; Kandel 2018), if knowledge used by agents to decide and choose is the result of a complex process of active construction, with a significant role of previous experiences and a continuous comparison with external feedback, we find again that decision-making process is almost always aimed at efficacy and not efficiency. More generally, outcome is not predictable because it depends on the individual interpretation of external data and on the feedback with environment, which in turn will be characterised by the action of others who also act applying the same criteria. On closer examination, “conditioning” elements are all linked to dependence of individual path (knowledge acquired, previous experiences, education, professional profiles) as well as social and relational dimensions (institutional, cultural, religious contexts). Therefore, free individual action is expressed in a condition of (aii) structural uncertainty (indefinite outcome of individual choices conditioned by actions of others, not perfectly predictable because they are the result of complex processes of construction of personal knowledge) and within (cii) a social order whose rules emerge from these spontaneous interaction processes. In turn, social rules play the dual role of (bii) simplifying the scope in which subjects use their limited (with respect to the complexity of the system) assessment and decision-making skills and (dii) standardising, dynamically considering that they change over time, the rules of social behaviour. Once again, let us therefore note how (e) (rules of behaviour, conventions, customs, organisations and institutions) are functional to real individual free action, consistent with the cognitive, rational and emotional actual capacities of economic subjects. The pervasiveness of path dependence as a unifying element of this complex process is evident. The process starts from the construction of personal knowledge and arrives at institutions. In summary, we define as path dependent any dynamic process in which each subsequent step is influenced by previous path at a neurobiological, cognitive, gnoseological (ai, aii, bi, bii), and social level (ci, cii, di, dii) in a relationship of mutual influence where (e) rules of behaviour, conventions, customs, organizations and institutions are the result of an unplanned and unpredictable outcome of the personal processes of acquiring knowledge and freely acting and, in turn, direct them towards a dynamic systemic order.

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

47

It seems evident that routines and customs have some elements in common, but also considerable differences. The former have an explicit purpose and are based on identical repetition, with very stringent and well-defined interactive levels. There is no doubt that they too have a path-dependent nature, especially of ai, bi, ci, type, because they are the result of decision-making processes based on previous knowledge and contain codified information. In the context of organisations and firms, they represent their identity and are functional to their performance. It is therefore not surprising that the analysis of their role found wide room in economic literature and in the firm’s one in particular. Furthermore, the fact that they have a certain “conservative” rigidity towards potential innovations, since they cannot normally be “updated” quickly, makes them compatible with the mechanistic model of mainstream economics. On the other hand, the more indefinite, complex, broad and flexible characteristics of customs, which, in addition to presenting all the aforementioned traits of path dependence (ai, bi, ci,), are more suitable for understanding the dynamics of social regulation (di, aii, bii, cii, dii), make them a much richer and more interesting tool, which involves some crucial aspects of economic analysis.

3  Relevance for Economic Analysis Conceiving custom as a path-dependent process has some significant consequences for economics. We consider the main ones in more detail in the following sections. 3.1   Custom and Uncertainty As it is well known, Frank Knight (1921) first explicitly pointed out the difference between risk and uncertainty in economics. Where it is possible to give a probabilistic degree to possible future events, we face situations characterised by calculable risk. However, when, on the other hand, it is not possible to prefigure future events even in probabilistic terms, we face situations characterised by uncertainty. It is interesting to remember that, despite the introduction of calculating risk dates back to Fibonacci, up until the mid-1700s venture companies calculated risk “at a rough guess”, through verbal considerations and discussions which is similar to what we now define heuristics (Sennett 1998, pp.  81–82). Regardless of current sophisticated risk calculation techniques, this aspect highlights how human

48 

S. RIZZELLO

nature typically tends to make approximate predictions about future events even when a probabilistic degree can be assigned. As already mentioned, however, when this is not possible we are in conditions of uncertainty. This distinction represents a clear dividing line between mainstream and heterodox economics. The whole theoretical and conceptual apparatus of the neoclassical school developed models which were entirely based on the idea of calculating risk and whose evolution was homogenised accordingly (from expected utility theory to rational expectations, up to and including behavioural economics). The idea of incommensurability of probabilities is instead the common thread that characterises the heterodox approach to cognitive economics from Keynes (see in particular Carabelli 2021) and thanks above all to Hayek’s contributions to the theory of knowledge and institutions, but also to Simon’s ones on procedural rationality and organisations, the economics of complexity, and a relevant part of experimental economics. Based on these considerations, it seems clear that the analysis of the role of custom in economics is placed in the second area, that of uncertainty. The idea of considering custom only as a behavioural regularity (Antonides 2002), and bringing it to mere empirical market dynamics, does not capture the rich interaction between cognition, motivation and action which results from human mind’s predisposition to clarity. Furthermore, in line with this view, the role of custom as a shaping force of behaviours would also be lost. If this were not enough (and it is a decisive aspect), customs are not always compatible with rational behaviours aimed at the efficient achievement of ends but rather emerge from our propensity for symmetry, coherence, analogy and all those psychological tendencies, including emotions, collectively referred to as clarity (Schlicht 2002). Even in art, in which human creativity is expressed at highest levels, the introduction of schemes to order chaos is functional to our need for regularity. Perspective, chiaroscuro, contour lines do not actually exist or exist in very unstable and mixed aggregate states. Artists utilised these visual conventions to direct the gaze and help us to give meaning to a complex multitude of stimuli (Gombrich 1960). This predisposition, which we all have since birth, to expect and continually seek regularity (Jacob 1977), also makes customs functional to make us act, often successfully, in conditions of uncertainty. Customs therefore reduce uncertainty, thanks to their ability to make the world appear orderly and understandable.

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

49

Finally, we must consider that uncertainty is a source of stress. As also emerging in the experimental field, in a problematic situation, it is typical of human nature to find an answer, even negative, instead of tolerating multiple scenarios, although some of these may be far preferable. Imagine that we are unable to understand what is and what is not dangerous when we are evaluating a situation. Everything seems dangerous, stress increases and a response becomes necessary. This response is typically of a narrative type and is not necessarily supported by scientific basis (de Berker et al. 2016). In summary, in most limited situations characterised by risk, we can use probabilistic calculation tools. In most extensive conditions of uncertainty, on the other hand, we act, reducing it, thanks to the continuous process which, starting from cerebral circuits of the neuro-cortex (perception and representation), reaches customs. This happens almost as the technique of musical counterpoint is applied, with the “organic” internal and external forces working together in shaping the rules of conduct in terms of clarity (Schlicht 1998). 3.2   Custom, Decision and Free Will When we leave the domain of mainstream economics, abandoning the less significant situations characterised by risk to analyse the most relevant circumstances marked by uncertainty, a problem of great importance emerges. If economy does not work when based on an abstract rationality, with perfectly maximising agents, it is necessary to explain in an alternative way how individual behaviour achieves economic goals. The combination of theory of knowledge and nature and role of institutions, in Hayek (1963), and procedural rationality, satisficing and theory of organisations, in Simon (1976), represents a convincing solution, consistent with a dimension characterised by uncertainty (Rizzello 1997). Both scholars, however, base their theories on a common, crucial assumption concerning free individual action. By acting in conditions of procedural rationality, and on the basis of approximate knowledge of problematic situations faced, individuals provisionally acquire results requiring continuous verification. They are conditioned by it, at different levels, including organisational and institutional contexts in which they operate and in turn contribute to modifying it with their actions. Although the domain of application of individual decisions may be more or less extensive, the

50 

S. RIZZELLO

prerequisite is that they act freely, with the outcome of actions not entirely predictable. What exactly do we mean when we talk about freedom of decision-­ making and action? Certainly, there is no space here to adequately address the eternal contrast between free will and determinism, which, as Trautteur argues (2020, p.  33), is a topic of constant interest in the history of humanity, probably since the beginning of conscious thinking. For the purposes of this chapter, it is appropriate to focus on two aspects in particular. The first concerns the causal relationship between thought and action, whereas the second is related to the relationship between individual behaviour and predictability of collective dynamics. On the first point, Daniel Wegner (2003) questioned the direct relationship between conscious thought and action. Conscious desire for what we do leads us to believe that it is caused by consciousness. But accurate cognitive, social and neuropsychological studies “suggest that experiences of conscious will frequently depart from actual causal processes and so might not reflect direct perceptions of conscious thought causing action” (Wegner 2003, p.  65). In reality, it would be a trick of the mind that produces useful insights into the authorship of our gestures, but it is not the foundation of an explanatory system that is outside the paths of deterministic causality. Thinking that we are the ones to consciously decide to implement a conduct means that it is thought that generates it. However, according to Wegner, this would be an illusory perception because when we become aware of wanting to perform an action, the brain has already decided to do it. In other words, we would not be faced with the cause of an action, but with a feeling of will that coexists with it. Despite brain generating both, mind devises the “trick” that leads us to infer that it is thought that causes action, while this feeling of will is indeed something that is added to the action and not its cause. Nevertheless, it is not entirely excluded that a causal relationship may exist. This is an issue that must be scientifically investigated in depth; however, we cannot establish that this is the case, simply because it appears so. Furthermore, the abandonment of the idea of a direct causal relationship would explain cases in which action and awareness of wanting to perform it do not coincide. This would support Libet’s experiments (2004) where awareness of wanting to carry out an action would come after the neuronal process to carry it out has been triggered. Therefore, for Wegner, since the mind gives us a representation of anticipation, we must not infer that it actually happens but rather think that there may be some general relationship between thought and action,

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

51

yet to be thoroughly investigated. Why would we have this illusion? What would it be useful for? The answer probably lies in the fact that, if total determinism of human actions was ascertained, this could lead to inconceivable effects on cultural, moral, ethical, social and juridical levels (Trautteur 2020, p. 129). Although it is widespread, the idea that human behaviour is deterministically generated by a mix of psychoanalytic unconscious, cognitive unconscious and brain processes that escape awareness, this is not shared by those who support the principle of intentional behaviour. Michel Gazzaniga (2012), for example, argues that in a very short time lag, measured in Libet’s experiments as the time between brain decision and awareness, subjects are able to veto and inhibit action, allowing us to choose. In truth, Libet himself (2004, Ch. 4) agrees with the idea that in that time lag of about 150 milliseconds, we can most likely exercise a veto and decide whether to do it or not. List (2019), on the other hand, argues that seeking free will on a physical level, in neurocerebral processes, is a mistake, considering that is an emerging, higher-level phenomenon belonging to the field of psychology. Thought and intention are properties of mind, and not of brain, namely the “locus of physical processes”. Intentional acting and control over our actions belong instead on a different level than physical world, just like mind, culture and institutions, among others. According to these points of view, physical determinism and psychological indeterminism could coexist and give life, in List’s words, to a sort of “compatibilist libertarianism” since any deterministic dimension at cerebral level would not compromise intentional action. Intentional action would rather develop at a different level, the psychic one, which is also, if not above all, relational. It would therefore be a matter of emergent properties, typical of complex systems, which cannot be reduced to properties of single components that constitute it (Gazzaniga 2012). On the basis of this emerging picture, action would derive from the mix between the tacit, probably deterministic, dimension of neurocerebral dynamics—which is conscious and therefore intentional one of the property emerging at the mental level—and relational dynamics that allow us to “adapt” our behaviours as ability to limit some impulses, with beneficial effects at the social level. For Gazzaniga (2012), in particular, emerging mental states, in turn, reconfigure the processes of brain activity through continuous feedback, in which the two dimensions mutually influence each other. As evidently emerges, this idea is consistent with the Hayekian

52 

S. RIZZELLO

theory of construction of personal knowledge, both in the feedback between tacit and conscious neurobiological dimensions, but also for the relevant and essential presence of relational nature. Here we address the second aspect which concerns the relationship between individual behaviour and the predictability of collective dynamics. In a scenario of individual behaviour dominated by such extensive uncertainty, characterised by indeterminism and imperfect predictability of outcome of human action, how is it possible for a social order to emerge? Many answers have already been given to this question. In particular, for Hayek, this would happen thanks to the role of institutions. However, what has emerged so far allows us to hypothesise that customs play a crucial role in determining social order as well (if not above all). This hypothesis is consistent with Austrian—and Hayekian in particular—tradition on nature, role and dynamics of institutions. Also, if we consider the source of customs from predisposition to clarity, typical of human nature, it has the advantage of being even more connected to the complex neurocognitive process described above. Practically, considering the social dimension, if individual conduct remains not entirely predictable, the trend of overall behaviour is not, since it is regulated by custom. As happens in quantum physics, where the distribution of photons or electrons in the two slits experiment is, on the whole, predictable, while the movement of the single particle is not (Trautteur 2020, p. 59), customs can be considered as the predictable macro-event of individual unpredictable behaviours. World could also have a causal nature, but one can imagine that in “laws of nature”, there are flaws that are not grasped at a macroscopic level, but that would be able “to reconcile uniqueness of evolution of world with the branches necessary for freedom” (Trautteur 2020, p. 75, my transl.). Access to knowledge takes place by making two different paths converge: one is immediate direct experience, often fallacious; the other, which can last for centuries, is scientific and the result of disputes and deep discussions. The second path, before consolidating, is filtered through experiments, mediations and arguments. It is often counter-intuitive and contrasts with direct perception (Trautteur 2020, pp. 106–107). In the process towards knowledge, customs spontaneously bring individual and heterogeneous paths of construction of personal knowledge back to clarity, slowly incorporating “dissonant” scientific discoveries with direct perception in the progressive harmony of social order.

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

53

3.3   Custom and Efficiency In capitalist economy, efficiency denotes a state of perfection. On the production side, given the present technology, it defines the best possible configuration of available resources to obtain the highest realisable profit, determining maximum gap between revenues and costs. On the consumption side, efficiency is given by the ability of individuals to maximise their income with the achievement of the highest possible level of utility. As for savings, efficiency is given by the perfect allocation of savings in such a way that it guarantees the highest possible levels of returns. In labour market, this is reached when a wage level is determined such that demand equals supply. Overall, a system is in a condition of efficiency when in all markets a configuration of prices of goods is reached such that maximum profit is obtained, that is, when same price configuration similarly allows consumers to allocate their income perfectly, obtaining the highest possible utility, and when an interest rate level is reached, such that demand for capital from investors is equivalent to supply of private savings. The one just described, in a very synthetic and simplified form, is the general economic equilibrium model, which has as prerequisites completeness of markets and free competition. When we refer to efficiency in economics, we therefore describe a perfect, complete and static configuration of the world, without waste of resources, disequilibria or dominant positions. Whatever “perturbation” intervenes (new technologies, new markets, new products, etc.) to break that equilibrium, “left to itself” system is able to reach a new efficient configuration of general equilibrium, in a short time, thanks to free competition. The conception of economics based on efficiency is the result of the process of progressive distancing from other social sciences to be configured as an “exact” science or “as a pure logic of choice”, in Hayek’s words (1937). But reality economics, in its orthodox version, is the only “science” to have persisted in a static world, that of classical Newtonian physics, which was predominant at the end of the nineteenth century, when its principles were formulated. In this moving away process, which sanctioned the transition from classical to neoclassical school, customs were also excluded from economists’ interest, suffering the same lot as morality, ethics, history, institutions, law and politics, with the aim of transforming political economy into economics. John Stuart Mill, a decisive figure in understanding the shift towards the new paradigm of Marginalist school, was very clear about the fact that,

54 

S. RIZZELLO

for example, customs, like competition, regulated economic processes. But what he observed (we are in the mid-1800s) was, in his opinion, a legacy of tradition inexorably tending to a transformation that would take place in a short time (Mill 1929 [1848], ch. 4). Economy would be coordinated by market competition alone, with the gradual disappearance of any role for customs in economic sphere. Indeed, he added, only by referring exclusively to the principle of competition, economics can become science. The road of economics to efficiency was thus cleared. Throughout last century and, surprisingly still today, we are witnessing enduring supremacy of this idea. Indeed, this vision has been further strengthened, with an increasingly hegemonic belief that economic conditions ultimately control all human relations. Schumpeter (2003 [1943], in part. Ch. XI) also follows in Mill’s wake. In his opinion, customs limit economic development when they predominated unchallenged in pre-­ capitalist phase. Modern civilisation is due to their overcoming and the affirmation of capitalism, “the propelling force of the rationalization of human behaviour” (p. 125). However, in the light of “heterodox” considerations carried out so far on uncertainty, rationality, knowledge, decision-making and so on, it seems clear that we cannot really explain economy by basing it on an abstract rationality, which outcomes in the efficiency of markets. On the contrary, a much more adequate and rich, albeit approximate, but reasonable explanation of behaviour of economic agents can be provided by referring to processes of perception and construction of personal knowledge (as previously illustrated) and to continuous, mutual influence with social dimension. In the latter, considering their characteristics described above, customs play a decisive role for the understanding of economic phenomena, at least in the most realistic conditions characterised by efficacy. Paradoxically, the role that Mill himself attributed to customs in favouring an orderly (but primitive and slowing) development of economic affairs, with “social sanctions” for who deviate from them (p. 237), now emerges as relevant to really understanding them in their complexity. The long path towards “modernity”, which in the opinion of Mill and Schumpeter (and in part also of Marshall 1920 [1890] pp. 7 and 58) was represented by emancipation of competition from the friction of custom, revealed a fatal mistake, which contributed to impoverish economic investigation and led it on the asphyxiated tracks of a purely accounting

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

55

discipline. Market economy is only one aspect of social complexity, intrinsically intertwined with other dimensions that are, if not more, at least as relevant. Customs, on the other hand, have a more pervasive and extensive role and are not mere residues of tradition, destined to perish in the face of modernity of competition. Choosing to remain in the analytical field of efficiency has so far made possible to produce elegant interpretative models, but which configure a too simplified reality. If we overturn this conception, subordinating dynamics of competition and market to customs, interpretative scenarios are opened that are more suited to a social science of complexity such as economics.

4  New Scenarios As emerged in this chapter, the recognition of the central role of customs allows us to explore economic phenomena more effectively, including uncertainty, free will and complexity. The simultaneous presence of these factors explains the nature and role of customs in social dynamics, including economic ones, with path dependence holding them together. In this context, customs are functional to social order because they standardise unpredictable behaviours of individuals. The most relevant aspect that seems to emerge from this analysis is that norms of behaviour, which innervate customs, do not emerge and are selected only for their instrumental utility (utility for the group), as for Hayek (1982 p. 99). Also, if not above all, they respond to criteria of clarity towards which human mind is naturally disposed. Environmental complexity, lato sensu, drives us in seeking regularity, through learning, which evolved because it is faster than genetic adaptation and therefore more suited to a rapidly changing reality. We are actively looking for regularity in environment to use it (Schlicht 2021). This is the source of the tendency to order, which arises from our “spontaneous” preference for linearity, coherence, analogy and clarity. This incessant and continuous process leads us to create interpretative models (construction of personal knowledge with path-dependent procedures), to maintain them (trying to adapt “the new to the already known”, in path-dependent way) and to expand or modify them, to achieve our levels of aspiration (efficacy of the action in path-dependent perspective). What drives us are mainly customs: macro result of composite individual actions tending to clarity and which, in turn, condition behaviour by bringing them back to it.

56 

S. RIZZELLO

Market and competition dynamics do not escape this process, but take place within it. Obviously, like others of a political, moral, ethical and religious nature, they contribute to changing customs. But those are the water that flows in the riverbed of these: levees direct course and are in turn more slowly modified (Schlicht 1998). This mutual relationship of reciprocal conditioning is the key element that places us outside of any deterministic analysis, thanks to path dependence, and which allows us to understand the considerable differences in social sphere, between micro and macro dimensions and their interactivity. Similar to, but not exactly in the same modalities, what happens in physics, where it is possible to have a good predictive capacity of the macro-phenomena ordering the unpredictable quantum micro-phenomena. As described above, starting from complex psycho-neurocognitive processes of construction of personal knowledge, it is possible to identify this continuous feedback among the provisional meanings we give to stimuli coming from the environment, bringing them back to knowledge that has been previously acquired, and consolidate that in case of a successful outcome. In this “tacit” dimension, we can already identify decisive elements for our ability to use free will, except that criteria driving our decisions are extremely more complex than mere “rational behaviour”. If we really want to understand the dynamics underlying economic phenomena, it is essential to do this within a detailed analysis of the weave in which they are interlaced and in which they are immersed: customs. It is misleading and unrealistic to have to assume that to understand economic phenomena we must always rationally orient ourselves to maximising self-interest. By doing so, we eliminate from analysis the qualifying aspect of our nature, which is the ability to be oneself only together with others, including emotions, morals, sense of justice, empathy and creativity. Instead, considering customs as a spontaneous macro result of human mind’s tendency to clarity, including all their dimensions, it seems to us that it opens an extremely interesting scenario for economic analysis, especially if considered in a path-dependent way.

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

57

5  Concluding Remarks This chapter aimed to explore the role of customs in economics, highlight the link with path dependence and evaluate the implications for economic analysis. In general, customs have found little attention among economists. In classical authors, in particular Mill and Schumpeter, the rather negative idea of custom prevailed as an impediment to capitalist progress, or, for Marshall, as an inertial force that, at best, belatedly adapts to the new. Market and competition, on the other hand, represent forces that act in opposition to the yoke of custom. Their progressive affirmation would have untangled economic development towards progress. Mill, in particular, went beyond. He argued that, if economics claims to become science, scholars must direct their attention to the study of competition dynamics, leaving aside customs. This represents a crucial aspect in the progressive abandonment of economics from its social science dimension. Removing the intertwining of economic phenomena and political, moral, philosophical, legal and institutional spheres from interest of economists has reduced economics to a “pure logic of choice”, compatible with a dimension characterised by the ability to give probabilistic weight to realisation of future events in terms of risk. This severely limited any analytical capacity in conditions of uncertainty. Furthermore, considering customs and competition in dichotomous opposition relegated the relevance of the former as functional to social coordination, in pre-capitalist phases, or predominant in rural areas or in small communities where, compared to larger ones, competition tends to be successful. This contrast is too trenchant and, as argued, does not allow us to understand the significant influence of customs on economic phenomena. Referring to more recent contributions offered by cognitive economics, from the literature on path dependence (as argued in Sect. 2.3) and, remarkably, from the studies of Ekkehart Schlicht, a more varied picture emerges, opening up interesting scenarios, which we have partly explored. A first important aspect concerns the neurobiological origin of customs, connected to the spontaneous tendency to clarity of human beings. Their intrinsic social nature is connected in a complementary way. Particularly, they differ from habit, a dimension which is mainly individual, or restricted to a limited number of people, while customs have essentially a collective dimension.

58 

S. RIZZELLO

A second aspect concerns the difference between routine and customs. We especially explored this relation with the wider attention received in economic literature by the former, as compared to the latter. It emerged that, despite having common traits such as presence of path dependence, which can be traced in the process of creating knowledge, they also differ in relevant ways. In organisations, routines are codified as knowledge and are explicitly aimed at achieving specific performances. Customs have a broader, more flexible dimension and permeate a wider spectrum of social relations, including economic ones. This introduces the third important aspect: the full compatibility of customs in situations characterised by uncertainty. Indefinite outcome of individual decisions, linked to incomplete predictability of individual behaviour, is brought back to an “orderly” dimension thanks to the role of customs. This does not mean that a causal or deterministic dimension is determined at macro level, but simply that these “forces” act spontaneously in directing overall behaviours in terms of clarity. Nor does it mean that, thanks to the presence of customs, we may be able to perfectly predict future outcomes because the relationship between individual actions and ordered collective outcomes is dynamic and mutually influencing. In fact, the former contribute to slowly modify the latter as well. The fundamental difference lies in the fact that individual decisions are more unpredictable, also thanks to free will. On the other hand, customs change, generally but not always, more slowly, thanks to a gradual modelling process that individual actions determine. Individual decisions, in turn, are conditioned by the customary channel in which they take place. The fil rouge around which this complex relationship is woven, which goes from neurocognitive dimension of perception to social order, is the “tendency to clarity in a path-dependent way”, typical of human mind in aligning emotions, beliefs and behaviours. Customs are at the same time most manifest and most latent phenomenon: manifest because they are easily recognisable in collective behaviours; latent because they unconsciously condition us in our actions. Thinking that economic phenomena could be exempt from them, or that they would be released from them, adapting only to competition is an unrealistic and anachronistic idea. Schlicht (1998), in particular, indicated in property, law, business and market the main areas in which economic analysis can benefit from a correct consideration of the role of customs. Here, through a greater focus on microfoundations, uncertainty, decision and efficiency were also indicated as relevant, and it was highlighted how

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

59

path dependence is constantly present. In our opinion, this last aspect gives further coherence to Schlicht’s ideas. Looking forward, it would also be desirable to study in depth the role customs play in keeping a few situations of privilege inaccessible (perhaps by profitably referring to the part of Mill’s thought (1929 [1848], p. 247) which clearly glimpses these distortions). In this way, we could provide ourselves with further tools to understand capitalist system failure in containing growing inequalities and how to contribute more effectively to drastically reduce pernicious effects on the ecosystem of present economic development. Similarly, it is interesting to investigate what kind of influence customs have on expectations, how they condition them and how they are in turn conditioned. In this chapter, some issues have been addressed such as perception, construction of personal knowledge, habit, routine, decision and convenience to adapt to the behaviour of the majority, among others. In this way, conducting a specific analysis also on the relationship between expectations and custom could give profitable results. In short, this approach proposes that economists take into due consideration the intertwining between theoretical analysis and empirical investigation, also in order to evaluate “real” forecasts and effects of economic policies. If for a long time economics shied away from empirical investigation, taking refuge in more comfortable and elegant formal dimension of its models, recent award of the Nobel Prize to David Card, Joshua Angrist and Guido Imbens (and before that also to others) seems to show a turning point, thanks to full recognition of the relevance of empirical methods for a correct understanding of economic phenomena. In this direction, a serious consideration of role of customs can give fruitful results. Last but not least, trying to study in depth the nature dynamics and role of customs, in a comparative and endogenous way to capitalist development, as well as providing us with new and more adequate tools of analysis for a more effective understanding of the profound transformations taking place in contemporary capitalist system and its future perspectives, can be fundamental in bringing the economy wholly back to the most profitable field of social sciences.

References Antonides, G. 2002. Economic-Psychological Reflections on Custom in the Economy. The American Journal of Economics and Sociology 61 (2): 539–545.

60 

S. RIZZELLO

Arrow, K.J. 1972. Gifts and Exchanges. Philosophy and Public Affairs 1 (4): 343–362. Arthur, B. 1994. Increasing Returns and Path Dependence in the Economy. Ann Arbor: University of Michigan Press. Bardsley, N., R. Cubitt, G. Loomes, P. Moffatt, C. Starmer, and R. Sugden. 2009. Experimental Economics: Rethinking the Rules. Princeton NJ: Princeton University Press. Becattini, G. 1998. Distretti industriali e made in Italy. Le basi socioculturali del nostro sviluppo economico. Torino: Bollati Boringhieri. Carabelli, A. 2021. Keynes on Uncertainty and Tragic Happiness. Complexity and Expectations. London: Palgrave Macmillan. David, P. 1997. Path Dependence and the Quest for Historical Economics: One More Chorus of Ballad of QWERTY (Discussion Papers in Economic and Social History, Number 20). University of Oxford. ———. 2000. Path Dependence, Its Critics and the Quest for ‘Historical Economics’ (Working Paper). All Souls College, Oxford University Press. De Berker, A.O., et al. 2016. Computations of Uncertainty Mediate Acute Stress Responses in Humans. Nature Communications 7: 10996. https://doi. org/10.1038/ncomms10996. Egidi, M., and S.  Rizzello. 2004. Cognitive Economics. Vol. I and II. Cheltenham: E. Elgar. Fiori, S. 2018. Formal and Informal Norms: Their Relationships in Society and in the Economic Sphere. Review of Social Economy 79 (2): 198–226. Friedman, M. 1953. Essays in Positive Economics. Chicago: University of Chicago Press. Gazzaniga, M. 2012. Who’s in Charge? Free Will and the Sciences of the Brain. New York: Harper Collins Publishers. Gombrich, E.H. 1960. Art and Illusion. A Study in the Psychology of Pictorial Representation. New York: Pantheon Books. Hayek, F.A. 1937. Economics and Knowledge. Economica IV (13): 96–105. ———. 1952. The Sensory Order. An Inquiry into the Foundations of Theoretical Psychology. London: Routledge & Kegan Paul. ———. 1963. Rules, Perception and Intelligibility. Proceedings of the British Academy XLVIII: 321–344. ———. 1982. Law, Legislation and Liberty. A New Statement of the Liberal Principles of Justice and Political Economy. London: Routledge. Jacob, F. 1977. Evolution and Tinkering. Science 196 (4295): 1161–1166. Kandel, E. 2018. The Disordered Mind. What Unusual Brains Tell Us About Ourselves. New York: Farrar, Straus and Giroux. Knight, F. 1921. Risk, Uncertainty and Profit. Boston & New York: Houghton Mifflin Company.

3  CUSTOM AND PATH DEPENDENCE IN ECONOMICS 

61

Libet, B. 2004. Mind and Time: The Temporal Factor in Consciousness. Cambridge, MA: Harvard University Press. Liebowitz, S.J., and S.E. Margolis. 1995. Path Dependence, Lock-In, and History. Journal of Law, Economics, and Organization 11: 204–226. List, F. 2019. Why Free Will is Real. Cambridge, MA: Harvard University Press. Lotto, B. 2017. Deviate. The Science of Seeing Differently. Tintern, UK: Stella & Rose’s Book. Maki, U., and L. Moss, eds. 2002. Symposium on Ekkehart Schlicht’s On Custom in the Economy. Oxford: Clarendon Press, 1998. The American Journal of Economics and Sociology, vol: 61/2 pp 503–595. March, J.G., and H.A.  Simon. 1958. Organizations. New  York: John Wiley and Sons. Marshall, A. (1890) 1920. Principles of Economics, 8th ed. London: Macmillan. Mill, J.  S. (1848) 1929. Principles of Political Economy with Some of Their Application to Social Philosophy, London  – New  York  – Toronto: Longmans, Green and Co. Nelson, R.R., and S.G. Winter. 1982. An Evolutionary Theory of Economic Change. Cambridge, MA: Harvard University Press. Newell, A., and H. Simon. 1972. Human Problem Solving. Englewood Cliffs, NJ: Prentice-Hall, Inc. Perrotta, C. 2020. Is Capitalism Still Progressive? A Historical Approach. London: Palgrave Macmillan. Putnam, R. 1994. Making Democracy Work. Civic Tradition in Modern Italy. Princeton: Princeton University Press. Rizzello, S. 1997. L’economia della mente, Roma-Bari: Laterza; Eng. transl. (1999) The Economics of the Mind, Cheltenham: Edward Elgar. ———. 2004. Knowledge as Path-dependence Process. Journal of Bioeconomics 6: 255–274. Rizzello, S., and M.  Turvani. 2000. Institutions Meet Mind: A Way out of a Deadlock. Constitutional Political Economy 11 (2): 165–180. Schlicht, E. 1998. On Custom in Economy. Oxford: Clarendon Press. ———. 2002. Reflections and Diffractions: Schlicht Replies to His Critics. The American Journal of Economics and Sociology 61 (2): 571–594. ———. 2004. Custom. In The Oxford Encyclopedia of Economic History, ed. J. Mokyr. Oxford: Oxford University Press. ———. 2021. Patterned Variation: The Role of Psychological Dispositions in Social and Institutional Evolution. (Munich Discussion Paper No. 2021-1). Munich: Department of Economics University of Munich. Schumpeter, J. (1911) 1934. The Theory of Economic Development, Cambridge, MA: Harvard University Press. ———. (1943) 2003. Capitalism, Socialism and Democracy, London New York: Routledge.

62 

S. RIZZELLO

Sennett, R. 1998. The Corrosion of Character. The Personal Consequences of Work in New Capitalism. New York and London: Norton & Company. Simon, H.A. 1947. The Administrative Behavior. A Study of Decision-Making Processes in Administrative Organization. New York: The MacMillan Company. ———. 1956. Rational Choice and the Structure of the Environment. Psychological Review 63 (2): 129–138. ———. 1959. Theories of Decision-Making in Economics and Behavioral Science. The American Economic Review 49 (3): 253–283. ———. 1976. From Substantive to Procedural Rationality. In Method and Appraisal in Economics, ed. Spiro Latsis. Cambridge, MA: Cambridge University Press. Trautteur, G. 2020. Il prigioniero libero. Milano: Adelphi. Wegner, D. 2003. The Mind’s Best Trick: How We Experience Conscious Will. TRENDS in Cognitive Sciences 7 (2).

CHAPTER 4

The Debate Around the Role of the State in Promoting Economic Development Claudia Sunna

Abstract  The chapter focuses on the decline of the role of the state in the economy since the 1980s. In Western countries, any reference to full employment and industrial policies to support economic growth disappeared. In developing countries, the Washington Consensus model prevailed. The economic policy “recipe” was basically the same in all latitudes, and the effects were the same. For Western countries, this meant a gradual slowdown in economic growth, growing dualism in labour markets, declining labour productivity and growing inequality. For developing countries, the liberal “therapy” has generally led to lower economic growth and political instability. Focusing on three issues, (i) the debate over the microeconomic policy approach; (ii) the interpretations of the Chinese development “miracle” and (iii) the recent debates on industrial policy,  it is sustained the futility of the state-market dichotomy and the need to revise past interpretative models. Keywords  Development economics • Economic policy • Industrial policy • China

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7_4

63

64 

C. SUNNA

1   Introduction The role of the state in the promotion of economic development has dropped rapidly since the 1980s. In Western countries, any reference to full-employment and industrial policies in support of economic growth has gradually disappeared. As far as concerns in developing countries, the so-called Washington Consensus approach has prevailed (Williamson 2008). In this approach, there is a strong orientation of international institutions, namely the World Bank, International Monetary Fund and the US Treasure, towards minimum state role in the economy, privatisations, deregulation and liberalisation of financial markets (Stiglitz 2002, 2003, 2016). Initially experimented in Latin America, this approach was then conditionally imposed on many other developing countries. The economic policy “recipe” has been basically the same at all latitudes and also the effects have been the same. For Western countries, this meant a gradual slowdown in economic growth, accompanied by labour market “flexibility” and growing dualism in labour markets, with “marginalised” unprotected workers receiving lower wages, declining labour productivity and growing inequality (Tridico 2018). Another evident result was the increasing inequality in income distribution which appears both inside the developed countries and in cross-country analyses (Milanovic 2016). For developing countries, the liberal “therapy” has generally led to lower economic growth and political instability (Adelman 1999). The aim of this chapter is to analyse the role of the State as a promoter of economic development through the review of recent literature and debates on this issue. There will be, in particular, an analysis of: (i) the debate around the microeconomic policy approach that emerged in development economics, (ii) the interpretations of the Chinese development “miracle” and (iii) the debates on industrial policy approaches in developed countries. We have reached the conclusion that the most recent economic crises have definitely highlighted that the dichotomy state/market is senseless. The “right” integration between public and private investments derives from the necessity to revise past interventions, which, in different historical periods, have always shown to be weak in defining a single “model” centred on the State’s role in fostering economic development.

4  THE DEBATE AROUND THE ROLE OF THE STATE IN PROMOTING… 

65

2   A Brief Account of Development Strategies Since the 1950s It is quite challenging to find in the past economic growth history a single model or a single sequence that can generalise the range of courses taken in various historical eras by various countries. The historical comparison of development experiences since the first Industrial Revolution, which takes into account the institutional and social contexts in which these have occurred, fails to reveal any patterns or, alternatively, a single growth path that can be applied globally. In the 1950s and 1960s, development economists actively worked to establish a theoretical framework that could account for historical regularities and extrapolate those regularities onto the development potential of “backward” or “underdeveloped” countries at the time. This is where the theory of modernisation comes into play, which, in the form of Walt W. Rostow’s take off theory of stages, or Paul Rosenstein Rodan’s big push, serves as the foundation for the majority of post-war intervention strategies (Latham 2000). The logical sequence that inspires most of the development strategies is rather simple and linear: to modernise each country, it is necessary to transform it in an industrial sense; to carry out industrialisation it is necessary to plan a top-down intervention (preferably of large dimensions and in complementary sectors); to finance investments, given the lack of national savings, it is necessary to use foreign capital, or that made available by international multilateral institutions, such as the World Bank. This approach, however, essentially based on capital accumulation entered a crisis and was questioned as early as the 1970s mainly due to dissatisfaction with the results achieved in those countries that had adopted industrialisation strategies. As a result, from a theoretical point of view, the principle of modernisation, which in the past had identified, at all latitudes, the “right” model of intervention, began to be questioned (Gilman 2003, ch. 6). The criticism focused primarily on the type of industrialisation carried out by developing countries, which, in order to allow for the survival of the planned sectors, had been accompanied by protectionist measures, resulting in industrial sectors protected from international competition, sometimes inefficient precisely because the principle of competition on which the market economy is based was denied. In other words, beginning in the early 1970s, two significant issues arose: first, the import

66 

C. SUNNA

substitution strategy turned economies into rent-seeking economies, and second, the fact that many countries neglected agricultural development in favour of concentrating investments in the industrial sector at a time when the need for investment policies and the risk of food crisis remained urgent (Little et al. 1970). The result is that, over time, it has no longer been possible to identify a single factor or process responsible for the dynamics of economic development. It is impossible to specify a single developing country that has characteristics common to all countries and at the same time be an ideal type to constitute a point of reference for economic policy. The latter would be particularly ineffective if it were the same for all socio-economic and institutional contexts. The culmination of this dissatisfaction with intervention strategies would appear to be a narration of absolute relativism. This feeling was effectively explained by Irma Adelman and Cynthia Taft Morris when they stated that “both contemporary and historical development experiences suggest rather strongly that different economic, institutional and political processes are important in countries characterized by different economic and institutional initial conditions” (Adelman and Morris 1997, p. 834). There are no predefined paths for structural change that results in economic development. Depending on the setting or institutional framework in which they were implemented, many sorts of strategies—such as industrialisation that is gradually export-oriented, import substitution-­ industrialisation, or balanced growth—have been used with varying degrees of success. To this we must add that, starting from the crisis of the 1970s, it becomes clear that the problems of economic development do not concern only the less advanced countries. Paul Streeten on this transformation of development economics, in 1979, wrote, “Development was considered exclusively a problem of underdeveloped countries becoming less so. In contrast, development is now beginning to be viewed as a problem common to the whole world: it gives rise to problems that are shared by the rich and by the poor, with some interests in common, others conflicting” (Streeten 1979, p. 48).  Therefore, according to Adelman and Morris, given the absolute uncertainty and variety regarding the possible paths of economic development, the only certainty that remains is that of relying on the “strong, able, public-spirited, far-sighted, enlightened and committed” public sector as a guide to adopt the most appropriate intervention policies for each stage of development and to give shape and appropriate rules to the institutions

4  THE DEBATE AROUND THE ROLE OF THE STATE IN PROMOTING… 

67

necessary to govern the transformation processes (Adelman and Morris 1997, p. 839). However, the hope of the two economists went unnoticed by economic development theorists, who, like the transformation taking place in economic theory in general, were increasingly directed towards the “microfoundation” of development theory, in which the role of the state in promoting economic development was no longer investigated.

3  The Twist Inside Development Economics: From the “Big Picture” to Microfoundation and Randomised Evaluations In recent years, it has been possible to register a decisive change within economic theory in general and, in particular, in development economics. We refer to the so-called issue of the microfoundation in the economic discourse, which assigns validity and methodological rigour only to theoretical formulations based on hypotheses relating to individual behaviour.1 The application of the microfoundation principle to the study of social phenomena poses a number of interpretive and methodological challenges. For instance, the issue of how institutions should be interpreted comes up frequently. As Hodgson concluded, The social structure stands above individuals in a hierarchical arrangement, and the causal powers associated with the higher level may not simply impede or constrain behaviour but may also affect and alter fundamental properties, powers and propensities of individuals. (…) Those particular social structures that have the capacity for substantial, enduring and widespread reconstitutive downward causation upon individuals are termed institutions. (Hodgson 2002, p. 175)

In this respect then the idea that macrofoundations must come before microbehaviour, in an effort to reverse the hierarchy between the two, stems from the realisation that all actions have intertwined social roots (see Heilbroner and Millberg 1995, p. 8). Regarding development economics, microfoundation meant a shift from a focus on government intervention to the advantages of free market functioning, from a historical perspective incorporated in policy 1

 For a comprehensive analysis on the shortcomings of microfoundation, see King (2012).

68 

C. SUNNA

intervention in the long run to the special recipe of microeconomic policies formed from the short-term experimental approach. After a growing consent revolving around the microfoundation of economic development models culminated with Randomised Controlled Trials (also known as Randomised Evaluations, REs), development economists are interrogating themselves on what this, mainly microeconomic policy, approach is neglecting to analyse. REs, borrowing the experimental methodology from medical trials, are focused on individual behaviour and on the “right” incentives that can eventually favour economic development through the aggregation of individual actions. No place and no room is left for the analysis of economic policies intended as a general framework into which to integrate the economic behaviour of micro-unit of analysis (Cohen and Easterly 2009). Some examples of experimentation involve deciding whether it is more or less effective to provide bed nets for purchase or free to tackle malaria in Africa or, in the case of instruction, whether it is effective to ask teachers to photograph the class of students every day to counter the problem of absenteeism. The emergence of REs coincided with the debate generated among international institutions at the start of the twenty-first century on the effectiveness of aid and partnerships for development. As underlined by Vaggi, there were at least ten major international development conferences between 2002 and 2017: four high-level forums on aid effectiveness, four conferences on financing for economic development and two high-level meetings of the Global Partnership for Effective Development Cooperation (Vaggi 2018, p. 42). In the same years, the RE methodology grew in popularity as a tool for analysis and intervention, drawing increasing attention from international development organisations, NGOs and donors. The RE methodology tests the efficacy of micro-intervention policies to reduce poverty, or rather, to alleviate extreme poverty in contexts where the major intervention strategies have not resulted in significant improvements in the quality of life for the poorest population because of the convergence of market and government failures. The RE literature made a clear case for grounding aid policy on evidence rather than “prejudice” and “special interests”. Randomised evaluations could enable development policy to be based on evidence instead of on fads and, in turn, this could permit a higher level of aid effectiveness. REs could then inform the choice of donors, NGOs and politicians in selecting from a variety of development programmes (Cohen and Easterly 2009, p. 7).

4  THE DEBATE AROUND THE ROLE OF THE STATE IN PROMOTING… 

69

With the 2019 Nobel Prize given to Abhijit Banerjee, Esther Duflo and Michael Kremer for “their experimental approach to easing global poverty”,2 these intervention tools gained widespread recognition for their significance. Nonetheless, it must be remembered that since the start of the 2000s, many authors within the community of development and growth economists have harshly criticised RE methodology. A first group of criticism concerns several methodological issues raised within the context of experimentation. There are issues with the experiments’ ability to be replicated outside of the context in which they were originally planned and carried out (i.e. the issue of external validity). Also, it should be noted that this approach does not require any previous theory because it is sufficient to test a few hypotheses regarding certain potential interventionist policies without the need for a theoretical underpinning. Finally, and given the previous point as well, there is a problem with identifying the relevant variables. How can one tell if their intervention experimented strategy is the “right” one for that situation? A second group of critics highlights the “problematic” relationship that can exist between experimentation in particular situations and policies that have already been implemented, or are in the process of being implemented, by government agencies or other public authorities. In this case, it is very difficult to discuss policies that were implemented on a large scale on the basis of a small-scale experiment. Last but not least, and this is not a criticism to be dismissed lightly, during the experiment there may be ethical issues that arise from the deliberate exclusion of some groups from the experiment (think of vaccinations as an example). More generally, the criticism that is frequently voiced is that, despite the difficulties mentioned earlier, it could be possible to implement large-scale programmes and interventions based on REs that would constitute an exercise in “social engineering” unsupported by a historical track of data (Cohen and Easterly 2009, pp. 8–21). In this respect, Romer emphasises the problematic relationship between randomisation and economic policy when he claims that there is a risk that economists may overestimate the reliability of their arguments or the success of their experiments in order to influence the formulation of intervention policies. Yet, theory and experiments are something very different from effectively implementing interventionist policies; thus, it would be wise to maintain a less

2

 https://www.nobelprize.org/prizes/economic-sciences/2019/press-release/.

70 

C. SUNNA

“invasive” approach while suggesting them (Romer 2009, pp. 126–127, see also Ravallion 2009). All of this in-depth discussion stems from the realisation that over time, the same theories of economic growth and development have given up on attempting to explain the causes of economic growth through broad theoretical frameworks and unifying theories. The issue arises when they also stop attempting to explain growth in general. In the words of Banerjee: Perhaps making growth happen is ultimately beyond our control. Maybe all that happens is that something goes right for once (…) and then that sparks growth somewhere else in the economy, and so on. Perhaps we will never learn where it will start or what will make it continue. The best we can do in that world is to hold the fort until that initial spark arrives: make sure that there is not too much human misery, maintain the social equilibrium, and try to make sure that there is enough human capital around to take advantage of the spark when it arrives. (Banerjee 2009, pp. 219–220)

The point is that if the RE approach has given up on illuminating economic growth, it can no longer claim to be qualified to reveal growth processes once they are realised (see Easterly 2009, p. 230). The impetuous Chinese economic development over the last 30 years, which appears to be problematic compared to the development’s microeconomic strategy, is an example to be studied in order to overcome the limitations of the randomisation approach and to assess a specific case of success in economic development driven by the State.

4  Chinese Economic Growth and Implications for Development Theory Since the 1980s, the economic growth and development processes in various Asian countries have been massive and, in many ways, unexpected. The rapid development of Japan and, in turn, of the so-called newly industrialised countries (NICs) South Korea, Taiwan, Singapore and Hong Kong has represented a success model of export-led growth characterised also by massive investments of foreign capital. During the 1990s, this success story was widely interpreted as a triumph of markets over state interventionism. This “strong” interpretation has been modified over time to emphasise that the success of the NICs was the result of collaboration between public policies supporting exports and, more importantly,

4  THE DEBATE AROUND THE ROLE OF THE STATE IN PROMOTING… 

71

policies supporting the production of high-added-value goods that required significant technological investments. In this way, the state’s developmental role was defined, leading these countries along an economic development path in which economic growth was accompanied by structural changes in production (Wade 1990; Chang 2006; Vaggi 2018, pp. 53–55). The Chinese case is included in the overall analysis of these transformations. With its demographic weight and the unique and innovative characteristics of the intervention measures implemented, China occupies a position distinct from those mentioned earlier. The statistics on Chinese economic growth over the past 40 years are unprecedented in international statistics in regard to the magnitude of the growth rate as well as the outcomes achieved in terms of economic growth and poverty reduction (Stiglitz 2016, pp. 14–16; Ang 2016; Qian 2017). It is noteworthy that China, depending on the source of the analysis, is frequently presented as a success story for central planning, or free markets, or strong state or institutional experimentation. What is certain is that, throughout the past 40 years, China has not implemented all of the policies that the Washington Consensus has identified as essential for the majority of developing nations to achieve economic growth. Stiglitz reminded us that the suggested policies called for a small state that was solely concerned with ensuring that there was price stability and macroeconomic stability. Neoliberal policies opposed any form of government involvement from encouraging business to interfering in international trade. In fact, they promoted trade liberalisation (removing all trade barriers), deregulation (removing other restraints on the free market) and privatisation of state-owned enterprises (Stiglitz 2016, p. 16). The more harmful effects of this strategy have been realised through the “shock therapy” in former Communist nations. The state’s ability to act as a tool of distributive justice was hindered by the ardent cries for the state’s demise made by international neoliberal institutions in the late twentieth century, but this did not lessen the state’s level of importance as an institution necessary to foster economic development (see Evans 1995). Going back to China’s economic miracle interpretation, it is reasonable to say that it embodied every aspect of the Asian success model since it is an example of an export-led growth nation built on capital accumulation and characterised by structural transformation. The issue then becomes comprehending China’s approach to economic reforms and institutional

72 

C. SUNNA

changes that have resulted in its economic performance. From this point of view, it is possible to explain the economic results analysing the pragmatic approach of experimental (macro) gradualism. The agricultural sector was the first to be involved in the Chinese development strategy. Following field experiments, the gradual introduction of individual contracts with farmers was chosen from among the various ideas for reforming the collective agricultural system. According to Ravallion, this caused “the most dramatic reduction in the extent of poverty the world has yet seen” (Ravallion 2009, p. 30). This first step resulted in a variety of reform policies addressing various aspects of the Chinese economy (like Township and Village Enterprises, or Special Economic Zones). All of these institutional innovations were gradually implemented under the general rule of reversing the conventional wisdom that policy action must be based on theory. According to Ang (2016), state policies in China are broad in the sense that they affect the entire economy and at the same time the entire country, or at least its 50 million civil servants, moves in and does whatever it takes to achieve the new goals. At the same time, policies are often uneven and produce different results in different places or at different times. The key element to the success of the model is the importance of a strong party to coordinate actions and the relevance of regional autonomy in generating strategy variations. Aside from that, regional performance is evaluated as a result of a competitive action process among various local authorities. Looking at this strategy, there are two fascinating elements to consider: (i) the fact that the state manages the macroeconomic policy, including heavy investments in human capital, and sets the goals, after that, there is plenty of room for innovation at the regional level; and (ii) the Chinese experimental gradualism teaches us that there are numerous alternatives to the standard “design-implement-evaluate” methodology to study in order to achieve and sustain the goal of economic development. Contrary to the microeconomic experimentalism discussed in the preceding paragraph, it appears from the theoretical level that it is necessary to reconsider the relationship between the macroeconomic approach (which sets policy innovations) and the microeconomic analysis (designed to evaluate policy results) (see Rodrik 2009, pp. 44–45).

4  THE DEBATE AROUND THE ROLE OF THE STATE IN PROMOTING… 

73

5  Debates on Industrial Policy Approaches in Developed Countries A broad definition of industrial policy describes public policy measures that seek to affect resource accumulation and allocation, as well as technology selection in specific economic contexts. A specific set of industrial policies includes, for instance, those aimed-at activities that promote the accumulation of specific human capital and technological advancement of the productive sector. Friedrich List [1841] (1856) was the first author to write a detailed definition of industrial policy. According to his vision, the economic role of the state was to maintain and expand the national productive sectors through specialised commercial and investment policies (see Hoselitz 1960, pp. 195–204; Boianovsky 2013, pp. 650–657). Another example of a broad concept of industrial policy may be seen within the European integration process. Even though the concept of European industrial strategy has never been legally integrated into the treaties, it has been the subject of debate since the 1960s and garnered greater attention in the 1990s during the Commission’s presidency by Jacques Delors. He launched the European strategy for industrial policy in 1990, which was crucially linked to the acceleration of the European economic integration process and culminated in the Maastricht Treaty in 1992. The strategy was aimed at promoting the creation of a favourable economic environment for large European corporations, as well as limiting the excesses of international competition while reaffirming the principle of competition and the need to ensure a stable macroeconomic environment (see Ross 1993; Bussière 2022). In recent years, after the 2008 crisis, industrial policy analysis has advanced rapidly, given that many advanced countries have had to implement significant interventionist policies in order to mitigate the effects of the economic crisis. The policy options regarding specific measures of intervention are articulated in different intervention sectors that concern both the improvement of the inputs used by firms in production processes (levels of scientific knowledge, technology transfer, access to new technologies or innovations) and policies designed to encourage the development of markets considered strategic for economic development (new financial instruments, agreements that allow for integration with foreign markets and so on). Another group of policies concerns the so-called place-based policies created to favour the development of particular areas by exploiting the positive effects generated by the agglomeration of firms

74 

C. SUNNA

or policies which support and develop already-existing clusters. There are also specific programmes designed to foster entrepreneurship and training or which are designed to exploit the diffusion effects of development that derive from the organisation of events (such as major international sports competitions). Finally, policies can be implemented to attract foreign direct investment or, more generally, to encourage competition (see Clydesdale 2022, ch. 5). Aside from the conventional wisdom at the heart of the current wishful list of economic policy interventions, there is also the harsh reality of the moderate effectiveness of this intervention package in order to sustain economic growth, especially for advanced economies and, particularly for European countries, to increase good quality employment. The debate over industrial policies has been fuelled by the publication of two studies by Mariana Mazzucato (2013, 2021) on the role of the state as an active agent of innovation and economic growth, which have reopened a debate that appeared to be overshadowed by the dominance of the economic policies previously described as the Washington Consensus. In a nutshell, Mazzucato’s thesis revolved around some clear observations. She proposes dispelling the myth of a ponderous, bureaucratic state versus a dynamic, innovative private sector by citing some effective examples (IT, biotech, nanotech and green tech) in which the private sector discovers an opportunity to invest after the state has previously made high-­ risk investments. In essence, Mazzucato proposes that there is the need to consider the developmental role of the state rather than just its duty to intervene in cases of market failures, as is commonly held in liberal economics. Her second widely debated contribution Mission Economy, drawing inspiration from the “moonshot” initiatives that successfully linked public and private sectors, wishes for the same level of courage and experimentation to be used for the most pressing issues of our time, like inequality, the health issue and the environmental crisis. In a recent book edited by Wennberg and Sandström (2022) Mazzucato’s open support of the active role of the state is completely questioned. In their introduction, the authors underline that “huge government schemes towards specific, noble outcomes have historically been plagued with failures” and that “innovation policy needs to be inverted: instead of being specific and targeted, it needs to be broad and general, focusing on the general conditions for firms to operate” (p. 3). In a few pages, the editors reiterate old arguments against the active role of the

4  THE DEBATE AROUND THE ROLE OF THE STATE IN PROMOTING… 

75

state in the economy stating that “policy should be a matter of removing barriers to growth and renewal instead of handing out targeted support that tends to end up reinforcing vested interests” and that “markets provide a cumulative and emergent selection mechanism that results in innovation over time” (ibid., p. 11). Considering that markets are better than government intervention in the economy they state that “the best policies to promote innovation are those that promote productive economic activity more generally: property rights protection, open and contestable markets, a stable monetary system, and legal rules that favour competition and entrepreneurship” (ibid.). The state-market dichotomy and the Washington Consensus approach are fine and still alive. The belief in markets still focuses on the notion that they constitute the sole systems capable of coordinating economic actors and disseminating the information necessary to support resource allocation. This disregards how institutions, like in the Chinese macro-experimental approach described in the previous paragraph, create, choose and disseminate knowledge as well as socialise norms and behaviours. As underlined by Boyer, institutions “are crucial in the various development modes (…): they have an origin, they mature and finally they may encounter their structural limits. Bringing back historical time into the analysis is a necessary step” to understand real economic development processes (Boyer 2019, p. 207, italics in the text).

6  Conclusion In this chapter, we examined the development of the current debate over the function of the state as a catalyst for economic development processes. We have shown how the field of study of economic development theory has, on the one hand, undergone significant changes over time and, on the other, how the strategies and interventionist policies employed to support economic development have changed quickly in emerging economies, looking at the case of China and developed nations alike. With the goal of simplifying the discussion and highlighting the most significant changes that have occurred in the recent debate, numerous points in support of various arguments were not considered. However, before concluding, it is necessary to state that there are significant differences in the role of the state between developing economies and advanced

76 

C. SUNNA

economies. The most evident difference, looking at current data, is that in advanced economies, general government spending accounts for 40% of GDP (up from 20% in the 1950s), while in emerging economies, it accounts for 30% and in low-income countries, it accounts for 25% (Fitzgerald 2019, p. 147). It is worth noting that the proportion of GDP allocated to public health and education is now broadly comparable across developing regions and not significantly lower than in advanced countries. However, the extent of social transfers (for pensions, unemployment and sickness) designed to reduce poverty is significantly greater in advanced economies, accounting for the majority of the difference in social spending as a percentage of GDP (ibid., p. 149). Lindert effectively demonstrated that there is no negative relationship between the state’s economic dimension in terms of GDP and growth rates. Furthermore, for advanced countries, the period of greatest growth in public welfare spending, from 1950 to 1980, coincides with the period of greatest economic growth. “Whether one looks at levels or at rates of changes, one cannot show any clear negative relationship between social spending and GDP per capita” (Lindert 2004, p. 30). The argument that “excessive” social spending becomes a barrier to economic growth is not supported empirically, but it does still constitute one of the strongest arguments for limiting the role of government in the economy, both in advanced and developing countries. Lastly, the topic we developed in this chapter was how to view the relationship between theoretical advancements in economic development and subsequent advancements in actual policies. This has made it possible to demonstrate how the Asian development model, and the Chinese case in particular, has deviated significantly from both the dominant theory and the policies strongly recommended by international organisations. At the same time, Asian countries are unanimously classified as examples of economic success, with a wide range of interpretations on the role of the state. Finally, the current debate over industrial policy directed at developed countries once again reiterates old arguments used to limit the role of government in economic development policies.

References Adelman, Irma. 1999. The Role of Government in Economic Development. Working Paper n. 890. Department of Agricultural and Resource Economics and Policy, University of California at Berkeley.

4  THE DEBATE AROUND THE ROLE OF THE STATE IN PROMOTING… 

77

Adelman, Irma, and Cynthia Taft Morris. 1997. Editorial: Development History and its Implications for Development Theory. World Development 25 (6): 831–840. Ang, Yuen Yuen. 2016. How China Escaped the Poverty Trap. Ithaca: Cornell University Press. Banerjee, Abhijit V. 2009. Big Answers for Big Questions: The Presumption of Growth Policy. In What Works in Development? Thinking Big and Thinking Small, ed. Jessica Cohen and William Easterly, 207–221. Washington DC: The Brookings Institution Press. Boianovsky, Mauro. 2013. Friedrich List and the Economic Fate of Tropical Countries. History of Political Economy 45 (4): 647–691. Boyer, Robert. 2019. The Process of Development: The Contribution of Régulation Theory. In The Palgrave Handbook of Development Economics. Critical reflections on Globalization and development, ed. Machiko Nissanke and José Antonio Ocampo, 177–227. Cham – Switzerland: Palgrave Macmillan. Bussière, Eric. 2022. EU Industrial Policy: Lessons from the Experience of the 1960s to the 1990s. In EU Industrial Policy in the Multipolar Economy, ed. Jean-Christophe Defraigne, Jan Wouters, Edoardo Traversa, and Dimitri Zurstrassen, 159–172. Aldershot: Elgar. Chang, Ha-Joon. 2006. The East Asian Development Experience: The Miracle, the Crisis and the Future. London and New York: Zed Books. Clydesdale, Greg. 2022. Industrial Development. How States Build Capabilities and Deliver Economic Prosperity. Abingdon: Routledge. Cohen, Jessica, and William Easterly, eds. 2009. What Works in Development? Thinking Big and Thinking Small. Washington, DC: The Brookings Institution Press. Easterly, William. 2009. “Comment by William Easterly” to A.V.  Banerjee. In What Works in Development? Thinking Big and Thinking Small, ed. Jessica Cohen and William Easterly, 227–231. Washington DC: The Brookings Institution Press. Evans, Peter. 1995. Embedded Autonomy. States and Industrial Transformation. Princeton NJ: Princeton University Press. Fitzgerald, Valpy. 2019. Development Economics and Public Economics: Emerging Analytical Interface and Practical Policy Implications. In The Palgrave Handbook of Development Economics. Critical reflections on Globalization and Development, ed. Machiko Nissanke and José Antonio Ocampo, 143–176. Cham – Switzerland: Palgrave Macmillan. Gilman, Nils. 2003. Mandarines of the Future. Modernization Theory in Cold War America. Baltimore and London: The John Hopkins University Press. Heilbroner, Robert, and William S. Millberg. 1995. The Crisis of Vision in Modern Economic Thought. Cambridge: Cambridge University Press.

78 

C. SUNNA

Hodgson, Geoffrey M. 2002. Reconstitutive Downward Causation: Social Structure and the Development of Individual Agency. In Intersubjectivity in Economics: Agents and Structures, ed. E.  Fullbrook, 159–180. London: Routledge. Hoselitz, Bert F. 1960. Theories of Stages of Economic Growth. In Theories of Economic Growth, ed. Bert Hoselitz, 193–238. New York: The Free Press. King, John E. 2012. The Microfoundations Delusion. Metaphor and Dogma in the History of Macroeconomic. Aldershot: Elgar. Latham, Michael E. 2000. Modernization as Ideology. American Social Science and “Nation Building” In the Kennedy Era. Chapel Hill: The University of North Carolina Press. Lindert, Peter H. 2004. Growing Public. Social Spending and Economic Growth Since the Eighteenth Century. Cambridge and New  York: Cambridge University Press. List Friedrich [1841] (1856) National System of Political Economy, Philadelphia: J.B. Lippincott. Little, Ian, Scitovsky Tibor, and Scott Maurice. 1970. Industry and Trade in Some Developing Countries, OECD. London and New York: Oxford University Press. Mazzucato, Mariana. 2013. The Entrepreneurial State: Debunking Public vs. Private Sector Myths. London: Penguin. ———. 2021. Mission Economy: A Moonshot Guide to Changing Capitalism. London: Allen Lane. Milanovic, Branko. 2016. Global Inequality: A New Approach for the Age of Globalization. Cambridge MA: Harvard University Press. Qian, Yingyi. 2017. How Reform Worked in China: The Transition from Plan to Market. Cambridge MA - London: The MIT Press. Ravallion, Martin. 2009. Evaluation in the Practice of Development. The World Bank Research Observer 24 (1): 29–53. Rodrik, Dani. 2009. The New Development Economics: We Shall Experiment, But How Shall We Learn?. In What Works in Development? Thinking Big and Thinking Small, ed. Jessica Cohen and William Easterly, 24–47. Washington DC: The Brookings Institution Press. Romer, Paul. 2009. “Comment by Paul Romer” to M. Kremer and A. Holla. In What Works in Development? Thinking Big and Thinking Small, ed. Jessica Cohen and William Easterly, 126–129. Washington DC: The Brookings Institution Press. Ross, George. 1993. Sidling Into Industrial Policy: Inside the European Commission. French Politics and Society 11 (1): 20–44. Stiglitz, Joseph E. 2002. Globalization and Its Discontents., Italian Trans. Torino: Einaudi. ———. 2003. The Roaring Nineties., Italian Trans. Torino: Einaudi: 2004.

4  THE DEBATE AROUND THE ROLE OF THE STATE IN PROMOTING… 

79

———. 2016. The State, the Market, and Development. WIDER Working Paper 2016/1. Helsinki: United Nations University, WIDER. Streeten, P. 1979. Development Ideas in Historical Perspective. In Toward a New Strategy for Development. A Rothko Chapel Colloquium, ed. A.O. Hirschman, D. Seers, and P. Streeten, 21–52. New York and Oxford: Pergamon Press. Tridico, Pasquale. 2018. The Determinants of Income Inequality in OECD Countries. Cambridge Journal of Economics 42 (4): 1009–1042. Vaggi, Gianni. 2018. Development. The Re-Balancing of Economic Power. Cham – Switzerland: Palgrave Macmillan. Wade, Robert. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization. Princeton: Princeton University Press. Wennberg, Karl, and Christian Sandström, eds. 2022. Questioning the Entrepreneurial State Status-quo, Pitfalls, and the Need for Credible Innovation Policy. Cham – Switzerland: Springer. Williamson, John. 2008. A Short History of the Washington Consensus. In The Washington Consensus Reconsidered: Towards a New Global Governance, ed. N. Serra and J.E. Stiglitz, 14–30. Oxford and New York: Oxford University Press.

CHAPTER 5

Competition in Enlightenment Economists (with Some Teachings for Today) Cosimo Perrotta

Abstract  Competition was considered by Enlightenment authors as the major output of capitalism. It allowed the latter to overcome definitively feudal society, which was static and based on privileges and prepotency. It substituted it with a dynamic society and an impersonal process of exchange and distribution in which merits prevail. The authors stress that competition eliminates the inequalities due to monopolies and prohibition of selling land property; reduces prices and advantages the consumer; encourages industry and efficiency; and increases general welfare. For these authors, competition means economic freedom, against the possible prepotency of the state. However, Enlightenment economists believed (except Turgot) that competition leads towards high wages. They were not yet aware that technical progress, generated by competition, in the short run creates unemployment and lowers wages unless it is supported by public policies for employment and new production fields. Keywords  Competition • Feudal society • Freedom • Enlightenment • High wages

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7_5

81

82 

C. PERROTTA

1   Introduction1 Enlightened authors were the first to theorise competition as a central factor in capitalistic development. Their analysis can be considered the culmination and the final act of the long-lasting fight of capitalism against feudal society. This conflict took place on two levels, the level of ideas and the level of real economy. Feudal society began its decline in the thirteenth and fourteenth centuries with the establishment of large wool processing mills in places like Florence and Bruges. This was then followed by the mass exodus of serfs leaving the countryside to go to cities and become artisans, thus allowing more choice and autonomy. It is no coincidence that the first reflections on human dignity began in the same period (in particular with the British Franciscan monk Duns Scotus). The thirteenth century also saw the first notion of money as capital and the first legitimation of monetary interest by another Franciscan, Peter of John Olivi. Paradoxically, Olivi was an extreme pauperist, and due to this, he was fiercely persecuted by the papacy. He found followers in the Friars minor of his order, who secretly preserved his writings and passed them down. The sixteenth century saw the Protestants strongly resuming the polemic against “usury” (the monetary interest) that Aristotle had already expressed. Steps forward were made in the 1300s–1400s, when humanists asserted both the dignity of work and the primacy of active life. This was contrary to the classical and Christian tradition which affirmed the superiority of a contemplative life. Besides, humanists legitimated the possession of wealth and made the Promethean vision prevail over the relationship between man and nature. This vision gave a great impulse to the dominance of man over natural resources (but also to the indiscriminate waste of resources in which today we pay for).

1  I would like to thank the participants of the second workshop “20 años sin Ernest Lluch” (June 2021) for their comments and Pablo Cervera for helping me with the Spanish version of this article. The Spanish version will appear in June 2023 in the journal Cuadernos de Estudios del Siglo XVIII (Instituto Feijoo de Estudios del Siglo XVIII de la Universidad de Oviedo), n.° 33 (2023), https://reunido.uniovi.es/index.php/CESXVIII.

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

83

In the 1400s, we also find the first defence of self-interest as the driving force of economic initiative and welfare. For example, Poggio Bracciolini spoke out about in a polemical Dialogue in defence of avarice.2 In the seventeenth century, a similar attitude was expressed by the “Freethinkers”, also known as Libertines, and culminated—at the beginning of the 1700s—with Bayle and Mandeville. This approach was also found in the Jansenists effective defence (see Pierre Nicole)3 and ultimately it reached a balanced synthesis in Hume’s masterful work “Of Self-Love”.4 In the eighteenth century, the idea of competition (which was not completely new) 5 strongly emerged and had a tight bond with the concept of economic freedom. The defence of economic freedom is indispensable to the growth of wealth and civilisation, that is, to development. The connection between freedom and development is precisely competition. Eighteenth-century economists were well aware of the superiority of their society in respect of the feudal society due to the steady increase in wealth and economic freedom. Freedom, as such, was finally considered essential to the well-being of society and its citizens.6 The link between freedom, creation of wealth and competition first appeared in the analyses carried out on agriculture, followed by those who attacked monopolies in all economic activities. We shall examine these two issues in Sects. 2 and 3 respectively. In Sect. 4 we will treat the defence of high wages made by all Enlightenment authors. Lastly, through the analysis of competition, these authors re-examine the conflict between private interests and general interests. On this point, economists were divided into two schools of thought. One inclined towards the idea of perfect competition, while the other (often left neglected) stressed the negative effects of non-regulated competition (Sect. 5).

 For all of this, see Perrotta (2004).  See Perrotta (2009). 4  Hume (1751). 5  See, for example, Lottini (1574, avvedimenti 241 and 248), who states that competition pushes producers to be industrious. 6  See Justi (1766, pp. 396–397). 2 3

84 

C. PERROTTA

2   Freedom of Trade and Competition in Agriculture 2.1   Feudal Agriculture in the Modern Age In the seventeenth century, Western European countries—while keenly competing with each other—had paid great attention to the expansion of manufacturing and to foreign trade, mainly focusing on the import of raw materials and the export of finished goods. Mercantilists were committed to this policy and provided many analyses, which were refined in the eighteenth century.7 However, the growth of manufacturing raised the level of hostility amongst the powerful landlords, who preserved their feudal functions. These landlords, although defeated by the alliance between the sovereign and entrepreneurs, had managed to keep their lands and prevent the commercialisation of land properties. A number of unnecessary medieval rules had made the agricultural economy static. These rules included birthright, legacy constraints, rents deriving from specific properties or public offices and the exemption of property taxes. The permanent need for money by the states—also due to frequent wars—led sovereigns to find impromptu solutions, which however, in the long term, aggravated the need for money. They started selling public offices, thus ruining the efficiency of the state bureaucracy. The purchasers of such offices considered their position as a sinecure without any commitment to work. Besides, sovereigns contracted private tax inspectors who collected taxes and made periodic payments to the Exchequer. These inspectors paid as little as possible to the state while putting the squeeze on the working poor. Furthermore, countries often suffered from severe famine, which provoked shortage of wheat, the essential nourishment. As a solution to this, export of wheat was prohibited, not only towards other countries but also from one province to another. The result was an impediment of any possibility of crop developments. As the economy and population grew, this situation was no longer sustainable. It is therefore for this reason that the eighteenth century concentrated on agriculture. With respect to the industrialisation of the previous century, it could seem that a step backwards had been taken. Actually, the 7

 See, to give just one example, Postlethwayt (1757).

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

85

new attitude was due to the need of developing agriculture, whose immobility risked to stifle the entire economic development. This mostly applied to France, which was in the middle between countries with a developed agriculture (the Netherlands, North-Central Italy, England) and countries with a still feudal agriculture (such as Spain, Portugal and Southern Italy). In the seventeenth and eighteenth centuries, England adopted Dutch techniques and—being less populated than the Netherlands and Northern Italy—it could optimally exploit per capita productivity. This led to the second agricultural revolution (the first one had happened 10,000 years earlier). It was this growth of English agricultural productivity that later provided the capital needed to the First Industrial Revolution.8 France still had a very poor agriculture sector and its manufacturers were isolated from the rest of the economy. Moreover, the luxury manufacturing promoted by Colbert soon faced marketing difficulties. Just in that period international trade was changing, concentrating mainly on everyday goods. Lastly, King Louis XIV was constantly in dire need of money to finance both the modernisation of the State and the continuous wars. 2.2   Boisguilbert: Agricultural Modernisation The first to launch the alert in France was Pierre de Boisguilbert, rightly celebrated as the precursor of the laissez-faire.9 He described the French agricultural system as totally irrational. “When the wheat harvest is abundant, he wrote, it reaches such low prices that farmers cannot afford the expense of cultivation, therefore lands often remain uncultivated. When then the wheat harvest is poor, the cost becomes too high, starving farmers cannot afford to buy it and literally starve to death (2 or 300 thousand a year, Boisguilbert calculated).10 Similarly, insufficient demand discourages production; many lands are left uncultivated, which is also to the damage of the King, who no longer receives taxes from those lands”.11 There were other major obstacles to the free movement of products. Firstly, the sale of rent titles on land properties, which created endless speculations. Then the sale of new public offices, with tax exemptions for  See Bairoch (1997, I, I.III.1).  See, for example, Horn (1867, ch. XV), Schumpeter (1949, II.4.2, pp. 215–217). 10  See Boisguilbert (1707a, p. 157). 11  Boisguilbert (1695, part II, respectively chs. 17 and 19–21). 8 9

86 

C. PERROTTA

the purchasers.12 There was also the rapacious behaviour of tax collectors, who gave the Exchequer a monthly flat rate and embezzled the rest.13 Moreover, taxes were the same for all the population; therefore, they were light for the wealthy and oppressive for the poor. Lastly, there was an endless congeries of taxes on the production, sale, transportation and consumption of various goods, with exemptions for the most powerful people.14 All this led Boisguilbert to propose a single tax on revenue. A few years later, Vauban, Marshal of France, a brilliant military architect, articulated Boisguilbert’s proposal in a more analytic way.15 He also denounced all the privileges that harmed the economy and that would hinder the single tax on revenue.16 Unfortunately, both their proposals were rejected. Boisguibert’s considerations on competition were naïf. He claimed that no profession may disappear, nor could trade diminish. This would break the perfect balance between sales and purchases and cause the collapse of the economy.17 So the state has to supervise in order to maintain justice and harmony.18 In his moralistic vision, competition is based on mutual solidarity that prevents disproportion of prices and corruption (ibid., ch. VI, p. 216). Boisguilbert believed that the “circle of trade” derived from landlords’ consumption (ibid., IV, pp.  188–189; this idea was later revived by Cantillon19 and Quesnay). He also maintained that nature should not be violated or forced since it provides us with our needs in a balanced way (V, pp. 192–193). Nature requires that a mutual aid exists between lands with abundant harvest and those with low harvest, so as to allow the export of wheat (ibid., 195–196). Quesnay re-proposed these ideas about nature. 2.3   Quesnay: Competition and Free Export of Wheat According to Quesnay, competition is the tool that nature uses to enforce its efficiency and equity. Competition reaches the perfection of economic  Boisguilbert (1707a, pp. 158–159).  Boisguilbert (1695, final points 22–23). 14  Boisguilbert (1695, part III—1707a). 15  Vauban (1707). 16  Ibid., ch. IX and pp. 359–361. 17  Boisguilbert (1707b, ch. IV). 18  Boisguilbert (1707b, IV, p. 185; V, pp. 193–194). 19  Cf. Cantillon (1730, I.XIII, p. 56). 12 13

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

87

behaviour. It creates the mechanism that achieves both the greatest consumption and the most extensive reduction of costs—and also the most extensive reduction of laborious work.20 Competition reduces the price of labour, but at the same time it puts a limit to this tendency, since workers have to satisfy their needs. This limit “is regulated by the sovereign and irrefragable laws of physical order” (ibid., p. 982). The same happens for the price of goods; it rises through the competition among consumers, but it finds a limit in the competition among sellers (p. 985). In Quesnay, we are able to find for the first time the mechanism of competition as an essential factor internal to the whole economic process, of production, distribution and consumption. Also, for him, competition generates at the same time both welfare for all and economic equilibrium. Quesnay relied on agricultural entrepreneurs to modernise French agriculture and saw in the free export of wheat the path to economic development. Romá y Rosell also called for the free export of wheat. Arriquíbar defended the freedom to sell wheat among the different provinces of the state and the freedom to export it in years of abundant harvests.21 In 1774–1775, Turgot, as Minister of Finance, tried to liberalise the wheat trade while taxing agricultural producers, in accordance to the physiocratic principles. However, the measure was deluged with a wave of protests. People, by losing their security of the grain reserves, saw agricultural entrepreneurs as their enemy, while nobles posed as protectors of the starving people. Furthermore, by the same measure, Turgot abrogated the artisans’ and traders’ corporate rules, which actually hindered competition. Thus, guilds too were against him and he had to resign.22 Indeed, many authors, even among those in favour of free trade, were opposed to the complete liberalisation of the wheat trade, as desired by the physiocrats, since this product was essential to the survival of ordinary people. Particularly successful was Galiani’s critical work. He effectively criticised the competition of countries which produced wheat at lower prices than France. He wrote that allowing this wheat to be imported meant, in the long run, that it would create a terrible monopoly that would damage French agriculture. Thus, it was important to put

 Quesnay (1767–1768, pp. 980–981).  Romá y Rosell (1768, II.I, pp. 59–78), Arriquíbar (1765, § XIII–XXIII). 22  See Finzi (1978, pp. XVII–XIX). 20 21

88 

C. PERROTTA

a tax on imports to set the value of imported wheat equal to that of French wheat.23 Galiani proposed a more complex concept of nature. Nature determines the great transformations, but in small matters, we are forced to fight it—not to obey it—in order to build our houses, grow new plants and so on.24 Therefore, the physiocratic modernisation of agriculture did not succeed, yet the subject continued to disquiet economists. 2.4   Attacks to Property Privileges in the Name of Free Competition Probably the most evocative expression of the bond existing between development and free competition is found in the “Esprit de Lois” by Montesquieu: “Les pays ne sont pas cultivés en raison de leur fertilité, mai en raison de leur liberté”.25 An analysis similar to that expressed by Boisguilbert was suggested by Campomanes in regard to Spain. Wheat had a very low price for farmers and sharecroppers due either to the lack of outlets (for the prohibitions of sale) when it is abundant or to the excessive taxes during the famines. The excessively low cost of wheat harms both the poor and landowners. Free circulation of wheat, Campomanes adds, would allow—through competition—the price to form at the right level.26 He vehemently criticised the growth of mortmain, which obstructs the free circulation of land and its fruits.27 Pietro Verri proved with great sharpness that the banning of wheat exports was counterproductive. It leads to a decrease in wheat production and therefore exposes the state to the danger of famines. As a matter of fact, the banning of exports creates an excess of sellers who, in competition with each other, lower the prices too much. This situation allows some monopolists to take over the wheat and raise its price as high as possible.28 Verri adds that, when there is free trade, what is physically necessary can never leave the state. On the other hand, “wherever there is competition, there can be no monopolists” (ibid., p.32).  Galiani (1770, VIII, pp. 604–608). See also therein, p. 599.  Ibid., VIII, pp. 551–553. 25  Montesquieu (1748, book XVIII, ch. III). 26  Campomanes (1764, pp. 151–155). 27  Campomanes (1765, pp. 173–178). 28  Verri (1771, ch. VIII, pp. 30–31. See in general chs. VIII and IX, pp. 30–37). 23 24

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

89

In the same period, Beccaria effectively described all the obstacles to the modernisation of agriculture: obsolete equipment, little support given to farmers and their low education, difficulties of transport, land property concentrated in a few hands, excessive number of rules for domestic trade which makes prices too low and the ban of exports.29 In 1780, Abbot Longo was deploring the custom of conferring public offices exclusively to nobles. This custom made the acquisition of knowledge and abilities related to such offices useless for the nobles. Moreover, the bourgeois were precluded to get these positions. This is certainly not the way to encourage merit. Longo was intolerant towards these legacies of the past. The attribution of wealth upon birthright privilege and through legacy constraints is damaging and unjust. It damages “the freedom to dispose of the property, the improvement of it and the value of lands and production”. The moral effects are even more deleterious. They produce “tantrums, extravagances, pride, ostentation, ignorance, dissipation and deceit”.30 Longo, therefore, shows very effectively that the actual obstacles to modernisation are the privileges of aristocracy. It is because of them that free competition is prevented when acquiring lands or conferring public offices. He strongly underlines the indissoluble bond between competition and merit. The same kind of claims are made by a number of authors from Spain and Southern Italy. Among them, Filangieri vehemently attacked not only aristocracy but also ecclesiastical feudal rights.31 Olavide, in a dramatic document, definitely clarified the error that Spain had made for centuries: the tendency of landowners to further increase their estates more and more. The mistake was to give preference to grazing land instead of extending cultivation and giving farmers too small lots. Consequently, most of the land was left uncultivated, the population decreased and the breeding of livestock diminished. Olavide called for allowing at least the landowners to lease their lands, despite the constraints given by birthright or ecclesiastical ties.32 Finally, Jovellanos offered a great synthesis of the hindrances which had prevented the development of Spanish agriculture and the solutions  Beccaria (1769–1770, II.1, sections 4–14).  Longo (1780, pp. 281–283). 31  Filangieri (1785, book II, ch. III–V). 32  Olavide (1785). See also Perdices (1992, pp. 117–125), who illustrates the same theses by analysing Olavide’s Informe al Consejo sobre la Ley Agraria (1768). 29 30

90 

C. PERROTTA

necessary to overcome them. Among these obstacles were abandoned fields, communal lands, ecclesiastical mortmain, birthright and the ban on wheat export. Regarding solutions, he states that all the necessary improvements converge towards greater freedom and spirit of emulation, whether in physical terms (water canalisation, roads, bridges, etc.) or in cultural terms (education of landowners and farmers, different forms of cooperation, etc.). In the premise, Jovellanos wrote that the interest of economic agents converges with that of laws, that is to obtain from agriculture the most of public wealth. Laws therefore should not stimulate agriculture, but rather they should remove the obstacles that impede its progress.33 This means that, unlike Smith’s metaphor of the invisible hand, the convergence between private interests and public interests, although natural, is not spontaneous. Thus, it should be underpinned by laws and economic policies. The theme of economic freedom in agriculture was the first and the most important because it required a direct confrontation between feudal structure and capitalist development. It is no surprise that European academies devoted great efforts to promote studies on the modernisation and increase in agricultural productivity. The eighteenth century saw a great number of authors from all European countries lamenting the impediments to freedom in the agricultural trade and to the free formation in the price of wheat. However, the issue that caused most clamour during the Enlightenment was that of economic freedom in relation to the state.

3  Economic Freedom and Competition Against Monopolies and Privileges Supporters of laissez-faire strongly criticised the state as a protector of trade monopolies; hence, the insistent criticism against mercantilism (which had promoted and managed the first long phase of nations’ development). Moreover, the state was also criticised as a protector of the guilds’ privileges (they also were monopolies) and for failing to abolish prohibitions, duties, exemptions and so on that hindered the freedom of enterprise based on competition.

 Jovellanos (1795, § 29–33).

33

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

91

The polemic against any kind of monopolies stimulated the analysis. Soon, competition was seen as the mechanism which set all market prices, from those of goods and services to profit rate and monetary interest. The general approach to the issue was clearly defined by Hume. He wrote that industry and crafts increased both the power of the sovereign and the happiness of individuals. He therefore criticised governments that enrich themselves through the poverty of individuals.34 The same applied to foreign trade, where competition among merchants naturally arises (ibid., p. 160). Hume also criticised, like many Enlightenment thinkers, excessive inequality which weakened any state. Everyone should enjoy not only necessities but also some comforts (p. 161). A repudiation of exaggerated competition is implicit in the last thesis. Against the mercantilist vision, moderation in competition also applies, according to Hume, in the relationship with other countries. The increase in wealth in one state generally helps commerce and wealth in another state.35 This is the result of emulation among states (ibid., p. 195). In regard to competition amongst merchants, Hume writes that it is unavoidable. While diminishing the revenues of individuals, competition enlarges all trades. Not only this, low profits lower the prices of goods, thus encouraging both consumption and the spread of economic activities. Even speculation can help the economy.36 This is why, Hume says, the countless impediments, obstacles and taxes on economic activities are to be condemned. It should be noted that this disapproval is linked to that of the excessive desire to “hoard money”.37 Before Hume, Cantillon dedicated a chapter to entrepreneurs (a new concept introduced by him) where he vividly described the relentless competition among them (whether they are producers or sellers). This competition may lead some of them to ruin.38 Montesquieu does not say much about competition but he states that it “met un prix juste au marchandises”.39 He thus praises freedom of trade, which should not be hindered by exclusive privileges.40

 Hume (1752a, p. 158).  Hume (1758, p. 194). 36  Hume (1752b, pp. 181–182). 37  Hume (1752c, pp. 191–192). 38  Cantillon (1730, I.XIII, pp. 50–54). 39  Montesquieu (1748, book XX, ch. IX). 40  Ibid., chs. IX–XIII. 34 35

92 

C. PERROTTA

Also, for Turgot, competition sets prices. 41 However, he was not as optimistic as Quesnay about any result of competition. When the latter occurs among workers, competition lowers wages to a level of subsistence (a thesis that will later be assumed by all the classical authors). 42 On the other hand, competition among entrepreneurs determines the selling price of products. When competition is very keen, it can seriously damage entrepreneurs. Agricultural entrepreneurs, for instance, in order to lease lands to cultivate, become willing to give landlords even all the surplus they think to earn. 43 Turgot insisted that the price of money (interest rate) is not determined by the rate of profit but by competition in the specific sector we are examining. 44 However, Turgot adds, the rate of interest must be lower than the rate of profit. Although different investments yield very different earning rates, these different earning rates reciprocally limit one another. 45 It should be noted that nowadays Turgot’s rule has completely fallen and speculative gains are far greater than production profits. According to Beccaria, competition is beneficial to everyone because it lowers prices and promotes emulation. It works only when economic initiative is completely free, without any monopolies, privileges or exclusions, like those imposed by craft guilds. 46 Emulation must be promoted through rewards and recognitions (ibid., sections 20–22). It would be necessary to hinder the export of raw materials while encouraging their import; duties on imported finished goods should be fixed while the export of our finished goods should be encouraged (sections 23–24; these are typical mercantilist policies). Beccaria then ends with a panegyric on research, which should always be encouraged in every way, since the development of manufacturing depends on it. The crowd, he underlines, “is not perfected by the perfection of some individuals” but through the efforts and interests of the many (section 26). Campomanes proved, with an impressive documentation, that Spain— with its very tight monopoly on trade of American colonies—had destroyed that trade; therefore, prices of goods had been driven up enormously. He  Turgot (1766, LXXII and LXXVI).  Ibid., VI. 43  Ibid., LXIII. 44  Ibid., LXXII–LXXVIII. 45  Ibid., LXXXVII–LXXXVIII. 46  Beccaria (1769–1770, III.2, section 18). 41 42

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

93

called for liberalising as much as possible private commerce with the colonies and, at the same time, the sale of American goods abroad. 47 Also, Condillac established a link between freedom, competition and general welfare. Prices are set by competition between buyers and sellers; 48 they are determined by the scarcity or abundance of goods; foodstuff prices are lowered by competition while remaining high without it (ibid., I.3). The greatest freedom of trade generates the greatest competition; it makes wheat circulate and makes monopoly and high prices impossible. 49 Competition, Condillac writes, causes enrichment, but it is a slow and limited enrichment. Freedom of trade ensures that everyone has the wherewithal to live. Of them, many will live comfortably, a few will be wealthy and none will be extremely rich. 50 Complete freedom makes entrepreneurs numerous, so it will be almost impossible for one of them to get disproportionately rich. He would not dare to take risks on account of the too many uncertainties. 51 Unfortunately, our times show that this is not true. The physiocratic Le Trosne tries to link value and competition within the price formation process. Competition contributes to determining prices because, by setting exchange ratios, it establishes the rarity or abundance of goods in the market. The only way to have stable prices is to have “the greatest freedom of trade”. 52 Genovesi, who was influenced by his mercantilist sources, wanted the state to balance the number of employees in the various productive and social sectors. 53 He was, nonetheless, very favourable to freeing commerce from the feudal ban on land sales, the excessive burden of rents, the prepotency of tax collectors and also the prices of goods imposed by the state. 54 Particularly the trade of wheat must be liberalised, 55 and all workers must be protected by the abuses of the rich. 56

 Campomanes (1775, § 404–468).  Condillac (1776, I.30, p. 205). 49  Ibid., I.22, pp. 172–173. 50  Ibid., II.1, pp. 22–23. 51  Ibid., II.18, p. 291. 52  Le Trosne (1777, sections 8–10, 17). 53  Genovesi (1768–1770, I.VIII–XIII). 54  See ibid., respectively I.VIII, p. 87; I.XV, p. 168; I.XVII, pp. 185–186. 55  Ibid., I.VIII, pp. 83–84. 56  Ibid., I.XV, p. 168. 47 48

94 

C. PERROTTA

However, Genovesi feared that freedom may degenerate into absence of rules and merchants may not observe a limit in their behaviour. In any case, economic freedom must be “neither hindered… nor weakened”. Anticipating the Smithian theory of the Invisible hand, Genovesi states that: “although people are wanting to enrich and their only aim is their private interest, nevertheless by enriching themselves they do good for all and enrich the whole nation”. 57 All this leads him to say that it is not competition but emulation in trade that promotes industriousness and “weakens the ancient nobility”. 58

4  Competition and High Wages Enlightenment authors are all in favour of high wages. This is not just because of social reasons but also because they believe that high wages are indispensable for increasing labour productivity. 59 All of them, apart from Turgot, believed that economic freedom would guarantee high wages. Two authors in particular committed themselves to upholding high wages: Steuart and Smith. Steuart stressed the dual competition among buyers and among sellers. If competition is not dual and develops only between sellers or between buyers, its effects can grow without limits (as Quesnay had already observed), either by dramatically increasing the price or by reducing it to zero. This would create a dangerous imbalance, that speculators may exacerbate. 60 Speculation in the market, Steuart says, is a crime (p. 175). According to Steuart—who was a mercantilist—imbalances in competition must be avoided through state intervention. For instance, at the stage of the infant industry, if the selling price falls because producers are actually outnumbered, the state must reduce the number of producers. If, on the other hand, this fall derives from an overly optimistic calculation of demand, then the state has to inform producers and give them assistance. 61 Steuart was extremely concerned about competition among workers since it would bring wages below the “physical necessary” (note that physical necessary implies for Steuart workers to be well-fed, protected from  Ibid., I.XVII, pp. 183–184.  Ibid., I.XIX, p. 206. 59  See Perrotta (2004, ch. 11, pp. 223–225, 237–240). 60  Steuart (1767, vol. I, II.VII, pp. 174–178; II.XI, p. 198). 61  Ibid., I, II.X, p. 191. 57 58

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

95

weather and with the right to breaks and paid vacation days). In this case, he writes, the state must “destroy this competition as much as possible”, thus compensating those who fall victim to it. On the other hand, the guilds of unskilled labour in the towns make sometimes high profits because they prevent competition. Also, this possibility must be avoided; high wages are justified only by skill. 62 Smith provided a thorough analysis of competition. First of all, he saw competitive behaviour as “sympathy”, that is the desire of being appreciated by others by emulating the people who are above us on the social scale. 63 Of course, Smith too believes that competition sets market prices and leads demand and supply to meet, at least when there is perfect freedom. 64 When analysing wages, he writes that, in the disputes between masters and workers, the former get the better because they are few in number so they can easily join forces, while arrangements among workers, besides being difficult, are in fact prevented or forbidden. 65 Smith maintains that what keeps wages high is not the absolute level of the national wealth but the continuous growth of wealth. A strong development raises entrepreneurs’ demand for labour; therefore, competition among them increases wages, as it has happened in Great Britain and even more in North America. In contrast, in a rich but stagnant country like China, there is strong competition among workers which lowers wages (pp. 70–80). In his powerful defence of high wages in the interest of all society, Smith notes: “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable” (p.  80). High wages are the effect of both society’s wealth and population growth. High wages enhance the industriousness, physical strength and motivation of workers (pp. 81–88). They are part of a positive spiral: technical progress increasingly lowers the production cost of goods, thus allowing a higher purchasing power of wages (p. 88). In this case, high wages are balanced by low profits, which makes exports cheaper (p. 99). The opposite happens to profit (as Turgot and others had already remarked). The more prosperity spreads the lower profits are because

 Ibid., I, II.XXI, pp. 272–276.  See Raffaelli (1994, pp. 206–208). 64  Smith (1776, I.VII, vol. 1, pp. 58–59). 65  Ibid., I.VIII, vol. 1, pp. 68–69. 62 63

96 

C. PERROTTA

more capitals are employed in trade. 66 For the same reason, monetary interest rate decreases as productivity, population and wages increase (p. 94). On the other hand, scarcity causes wages to be very low in two opposite cases. The first case is colonial economy; as in Bengal, where the profit level is very high but wages and interest rates are at a starving level (pp. 95–96). The second case happens when a country has acquired “that full complement of riches” that its conditions allow and can no longer progress. In this situation, profits would be very poor due to the overabundance of capital and the strong competition among capital holders, while wages would be very low because just a few of these capitals are invested and this creates a strong competition among workers (pp. 96–97). Smith’s analysis reminds the present situation of developed countries. Smith then criticises the different barriers to competition created by the institutional framework. The first is what today we call barriers to entry; for example, the exclusive privileges that craft guilds hold, or the limitation on the number of apprentices or the excessive duration of apprenticeships. Smith frontally attacks guilds, a “sort of enlarged monopolies” (pp. 63–64). The argument that they are necessary to govern trades has no foundation. Barriers to entry create serious inequalities. 67 But also, the opposite policies create a barrier to competition. In many professions, through prizes and scholarships, many young people are encouraged to pursue their careers. They are more than the market requires, so many of them are engaged in useless efforts (pp. 131–135). The third way in which policies distort competition is to prevent—through the rules on apprenticeship—the free movement of labour and capital from one job to another (pp. 136–144). Smith also attacked the monopolies in the countryside that are generated by the location of lands. These monopolies prevent, for instance, the creation of canals, navigable rivers and roads. Such infrastructures would lower commodity prices and would allow products from remote lands to reach urban markets. Monopolies, therefore, hinder agricultural improvements and also hinder good governance, which is guaranteed only by free competition. 68

 Ibid., I.IX, vol. 1, p. 93.  Ibid., I.X.II, vol. 1, pp. 120–131. 68  Ibid., I.XI.I, vol. 1, pp. 147–149. 66 67

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

97

Competition among capitals benefits both the consumer and the producer; indeed, it encourages traders to buy at a higher price and sell at a lower price. 69 To all this, we should also add Smith’s long and detailed criticism of the “mercantile system” (i.e. the policy of mercantilists) with all its monopolies, duties, prohibitions and other innumerable restrictions on freedom of trade. 70 According to Roll, Smith’s hostility towards the state derives from his conviction that a strong state allows large fortunes to oppress and exploit people (the same view appears in Hume), while competition limits excessive inequalities. 71 Roncaglia too emphasises Smith’s distrust towards rentiers and entrepreneurs who try to limit competition. 72 However, it may be noted that in industrial capitalism, the weakness of the state has worsened the prepotency of private oligopolies more and more. All in all, the Enlightened economists thoroughly stressed the positive effects of competition. It favours the best technical and economic solution; it rewards merit through an impersonal mechanism; it prevails over feudal arbitrariness and privileges. It also creates freedom and prosperity, raises productivity, lets the most able prevail and benefits everyone but rentiers. Such a view is linked with the vision of commerce as freedom. Commerce is the driving force of the economy and the source of a peaceful revolution. As such it was celebrated by Abbot Reynal in his “Histoire des deux Indes” (1770) and by Diderot, who contributed to Reynal’s work, 73 particularly to the 1780 edition. However, most of the authors were also conscious of the dangers of excessive competition and stressed that it must be moderate and balanced not to damage the weaker.

5  Competition and Conflict Between Private and General Interests The Enlightenment praise of competition became the best legitimation of capitalism. However, it tended to marginalise a crucial problem: the conflict between private interests and general interests.  Ibid., II.V, vol. 1, p. 342.  Smith (1776, book IV, chs. I to VIII). 71  Roll (1938, pp. 149, 161). 72  Roncaglia (2001, pp. 130–131, note 32). 73  See Quintili (1995, pp. 24–25). 69 70

98 

C. PERROTTA

Mercantilists believed that this conflict was natural and, when it occurred, general interest should prevail. In the late seventeenth century, Child and Martyn linked this issue to that of competition. They noticed that competition is beneficial to the nation but not to all individuals. 74 They implied that national interest is to be preferred to that of private groups. Later, another mercantilist, Forbonnais, displayed the same attitude. He praised competition as the “soul of liberty” and the source of abundance, but actually he subordinated freedom of trade to the favourable balance of trade. 75 Thus, mercantilists were referring to the conflict between some groups of entrepreneurs and the general interest represented by the state. But for the majority of Enlightenment authors, similar conflicts were solved precisely by free competition. However, on this issue, two divergent paths opened up in that period. On the one hand, most authors actually believed that competition eliminated all conflicts. As early as 1720, Gervaise wrote that unless trade is restrained by laws, over time a balance is established among nations, which distributes goods in proportion to their respective inhabitants. 76 To Quesnay, as Schumpeter recalls, the convergence of self-interest and general interest was so obvious that it needed no explanation; so much so that Quesnay arrived at an idea of perfect competition. 77 Finally, Smith—the Smith whom we might call exoteric (popularising)—suggested that individuals, in pursuing their own interest, also realise—without noticing— the general interest (the metaphor of the “invisible hand”). 78 Smith’s interpretation not only prevailed but was taken to extremes by his successors, as Winch and Roncaglia have well explained. 79 The classical school adopted this view. Such a view reinforced the physiocratic idea of competition as an inviolable law of nature and included in it the competition among workers which brings wages to the subsistence level. By assuming this theory of wages, the classical school lost the most important element of the Enlightenment vision, namely the idea that competition rewards merit and achieves the well-being of all individuals.  Child (1693), ch. 9, p. 187), Martyn (1701, chs. 4 and 5).  Forbonnais (1753). 76  Gervaise (1720, p. 15). 77  Schumpeter (1949, II.4.3.c.i, pp. 233–234). 78  Smith (1776, IV.II, p. 421). 79  Winch (1978), Roncaglia (2005). 74 75

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

99

Continuing on this path, neoclassical economists saw competition as the impersonal process which accomplishes the optimal allocation of resources and establishes the general economic equilibrium. This is perfect competition, which pays everyone the equivalent of their contribution to product value and achieves equity regardless of the various starting endowments. This approach has now become dogma. There was, however, also another line of thought in Enlightenment, which proposed a far less optimistic view of competition. Although it has always been marginal, it can give us valuable insights about what is happening today. Firstly, Josiah Tucker admitted that the conflict between private interests and general interests persisted in competition. He showed the same attitude of mercantilists: when this conflict occurs, the general interest (that of society) must prevail. 80 Tucker also states that personal interest (self-interest) is indeed the engine of human progress but when it is left unchecked it does not allow that other competitors share its benefits. Self-­ interest, therefore, must be regulated and governed, otherwise—says Tucker—mutual exclusion among individuals leads to general poverty and denial of self-interest itself. 81 Moreover, some great authors realised that competition can harm one social class to the advantage of another. For example, it can harm workers while benefiting entrepreneurs. As already seen, these authors are Turgot, Steuart and Smith himself, this time the esoteric Smith. Steuart and Smith strongly argued that, in the conflict on wages and working conditions, the state—in order to save competition—must protect the weaker party, that is the workers. Jovellanos generalised this principle by saying that the convergence between private and general interests is natural but not spontaneous. It needs the intervention of the state (see Sect. 2). 82 Thus, at least these authors are able to express a more complex idea of competition. In general, Enlightenment authors could not foresee the effects of technical progress and unemployment in competition. Only in the nineteenth century did these effects emerge. Briefly, we can say that individual entrepreneurs introduce innovations in the production process—usually through technical progress—to gain advantage in competition. Technical progress lowers production cost and  Tucker (1750, pp. 316–318, passim).  Tucker (1755, pp. 56–58). 82  On the need of state intervention, see also Paladini (1992, esp. p. 258). 80 81

100 

C. PERROTTA

increases productivity, but the latter makes some workers redundant and generates unemployment. In turn, unemployment lowers wages and causes scarcity of demand. If this scarcity is durable (due to lack of investments), unemployment rises still more and creates a vicious downward circle that leads to stagnation (which has nothing to do with the economic cycle). On the other hand, technical progress also favours the formation of oligopolies, which impose prices that are too high for most consumers. In both cases, competition achieves results which are opposite to what usually Enlightenment authors thought. These negative results are now part of our daily experience, although economic theory does not notice them. They show the inhumane face of unbridled competition: hyper-exploitation of workers but also of small producers, wages below the subsistence level, low-wage hunting, offshoring, chronic shortage of demand and consequent lack of investment opportunities. More negative processes follow from all this: conversion of a growing portion of investment capital into speculative capital (the latter, when it is excessive, does not produce, rather consumes wealth); regressive taxation for the wealthiest; disregard for rules (deregulation); monstrous growth of inequalities. If we can draw one lesson from Enlightenment economic thought, it is that there is no such thing as perfect competition. Instead, there may be reasonable competition, and this has to be regulated in the name of public interest in order to prevent self-destruction.

References Argemí, Lluís. 1988. Compilador, Agricultura e Ilustración. Ministerio de Agricultura Arriquíbar, Nicolás. 1765. In Recreación política. Primera parte, ed. J. Astigarraga and J.M. Barrenechea. Bilbao: Inst. Vasco de Estadística. no date. Bairoch, Paul. 1997. Victoires et déboires. Histoire économique et sociale du monde du XVIme siècle à nos jours, Italian trans. (Storia econ. e sociale del mondo) Torino: Einaudi, 1999. Beccaria, Cesare. 1769–1770. Elementi di economia pubblica, partly in Venturi (1958), pp. 153–197. Boisguilbert, Pierre Le Pesant. 1695. Le Détail de la France, Italian trans. in Nicastro (2003), pp. 39–153.

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

101

———. 1707a. Supplément au Détail, Italian trans. in Nicastro (2003), pp. 155–166. ———. 1707b. Dissertation sur la nature des richesses, Italian trans. in Nicastro (2003), pp. 167–222. Campomanes, Pedro Rodríguez. 1764. Respuesta fiscal sobre abolir la tasa y establecer el comercio de granos, partly in Argemí (1988), pp. 151–170. ———. 1765. Tratado de regalía de amortización, partly in Argemí (1988), pp. 173–178. ———. 1775. Discurso sobre la educación popular de los artesanos y su fomento, ed. John Reeder. Madrid: Inst. de Estudios Fiscales. 1975. Cantillon, Richard. 1730. Essai sur la nature du commerce en général, ed. Henry Higgs. London: Macmillan. 1931. Child, Josiah. 1693. A New Discourse of Trade. 4th ed. London: Hodges etc. [1740]. Condillac, Etienne. 1776. Commerce and Government Considered in Their Mutual Relationship, Translated from French, ed. Sheila and Walter Eltis, Edward Elgar, 1997. Filangieri, Gaetano. 1785. La scienza della legislazione, partly in Venturi (1962), pp. 661–767. Finzi, Roberto. 1978. Introduzione to Turgot 1766. Forbonnais, François. 1753. “Commerce”, Encyclopédie 1751–1780, reprint 1966, tome III, pp. 690–699. Galiani, Ferdinando. 1770. Dialogues sur le commerce des bleds, in his Opere, ed. F. Diaz and L. Guerci. Milano-Napoli: Ricciardi. 1975. Genovesi, Antonio. 1768–1770. Delle lezioni di commercio o sia di economia civile, ed. F. Dal Degan, Milano: Vita e Pensiero, 2013. Gervaise, Isaac. 1720. The System or Theory of the Trade of the World. Baltimore: Johns Hopkins University Press. 1954. Horn, J.E. 1867. L’Économie politique avant les Physiocrates. Paris: Guillaumin. Reprint, ed. by Carlo Guarmani, no place, no date, no publisher. Hume, David. 1751. Of Self-Love, in his An Enquiry Concerning the Principles of Morals, e-book, Dead Dodo Classics, Section IX, Part II, Appendix II: pp. 120–126. ———. 1752a. Of Commerce, in Hume [1987, pp. 155–162]. ———. 1752b. Of Interest, in Hume [1987, pp. 177–183]. ———. 1752c. Of the Balance of Trade, in Hume [1987, pp. 184–193]. ———. 1758. Of the Jealousy of Trade, in Hume [1987, pp. 194–96]. ———. 1987. Essays Moral, Political, Literary, Liberty Fund online (from his Philosophical Works, vols. 3 & 4, London 1882-6, ed. T.H.  Green and T.H. Grose, revised ed. 1987).

102 

C. PERROTTA

Jovellanos, Gaspar Melchor. 1795. Informe de ley agraria, in his Escritos económicos, ed. V. Llombart, 185–342. Madrid: Real Academia de Ciencias morales y políticas, etc. Justi, Johann H.G. 1766. System des Finanzwesens, partly trans. In Early Economic Thought, ed. Arthur E.  Monroe, 379–399. Cambridge: Harvard University Press., 1927. Le Trosne, Guillaume-François. 1777. De l’intérêt social, partly in ed. G.  Longhitano, Ricchezza, valori, società, Italian trans., Vicenza: Neri Pozza, 1993. Llombart, Vicent. 2000. Estudio preliminar. In Escritos económicos, ed. Gaspar Melchor de Jovellanos, pp. 3–177. Madrid: Instituto de Estudios Fiscales, Fundación ICO. Longo, Alfonso. 1773. Istituzioni economico politiche, partly in Venturi (1958), pp. 250–278. ———. 1780. Notes à Mirabeau, Les Devoirs, partly in Venturi (1958), Italian trans., pp. 279–286. Lottini, Gian Francesco. 1574. Avvedimenti civili, posthumous, in Biblioteca enciclopedica italiana, vol. VI: Scrittori politici, Milano: Ubicini, 1839, pp. 532–620. Martyn, Henry. 1701. Considerations on the East-India Trade. In A Select Collection of Early English Tracts on Commerce, ed. John R.  McCulloch, 541–629. London: Political Economy Club. Montesquieu, Charles. 1748. De L’esprit de lois, Garnier-Flammarion, 1979, 2 vol. Nicastro, Onofrio, ed. 2003. Economisti francesi del Primo Settecento. Pisa: ETS. Olavide, Pablo. 1785. Memorial … sobre los daños y decadencia que padece la agricultura, partly in Argemí (1988), pp. 193–210. Paladini, Ruggero. 1992. Concorrenza, entry of Enciclopedia delle Scienze sociali. Vol. II, 249–259. Roma: Ist. Enciclopedia Italiana. Perdices, Luis. 1992. Pablo de Olavide (1725-1803) el ilustrado. Madrid: Editorial Complutense. Perrotta, Cosimo. 2004. Consumption as an Investment. The Fear of Goods from Hesiod to Adam Smith. New York - London: Routledge. ———. 2009. La teoría social de los jansenistas y el desarrollo del capitalismo. In Escritos Jansenistas, 1–27. Zaragoza: Fundación Ernest Lluch y Gobierno de Aragón. Postlethwayt, Malachy. 1757. Britain’s Commercial Interests. Vol. 2. New  York: Kelley. 1968. Quesnay, François. 1767–1768. Sur les travaux des artisans. Second dialogue (deuxième version), ed. by Du Pont, in Q., Oeuvres économiques complètes et autres textes. Paris: INED, 2005, tome II, pp. 973–998. Quintili, Paolo. 1995. Introduzione to Diderot, D’Alambert, Marmontel, Quesnay, Deleyre, Arti, scienze e lavoro nell’età dell’Illuminismo, ed. by Quintili, Roma: Pellicani, pp. 13–92.

5  COMPETITION IN ENLIGHTENMENT ECONOMISTS (WITH SOME… 

103

Raffaelli, Tiziano. 1994. Dalla teoria delle passioni al nuovo ordine: mercato e capitalismo in Adam Smith. Moneta e Credito, June 1994, pp. 203–231. Roll, Eric. 1938. Storia del pensiero economico, Translated from English, Torino: Boringhieri, 1967. Romá y Rosell, Francisco. 1768. Las señales de la felicidad de España …. Madrid: Muñoz del Valle. Roncaglia, Alessandro. 2001. The Wealth of Ideas. A History of Economic Thought, Translated from Italian, Cambridge: Cambridge University Press, 2005. ———. 2005. Il mito della mano invisibile. Roma - Bari: Laterza. Schumpeter, Joseph A. 1949. History of Economic Analysis (1954). London: Routledge. 1997. Smith, Adam. 1776. … Wealth of Nations, ed. E.  Cannan, vol. 2. London: Methuen. Online: Maryville University. Steuart, James. 1767. … Principles of Political Economy, ed. A.  Skinner, vol. 2. University of Chicago Press. 1966. Tucker, Josiah. 1750. A Brief Essay … with Regard to Trade. In Select Collection of Scarce and Valuable Tracts on Commerce, ed. John R. A. McCulloch. London: (Overstone), 1859. ———. 1755. The Elements of Commerce …. In Id., A Selection of his Economic and Political Writings, ed. Schuyler. New York: Columbia University Press. Turgot, Jacques. 1766. Le ricchezze, il progresso e la storia universale, ed. R. Finzi. Torino: Einaudi. 1978. Vauban, Sébastien Le Prestre. 1707. Projet d’une Dîme Royale. In Nicastro (2003), pp. 225–371, Italian trans. Venturi, Franco, ed. 1958. Illuministi italiani, III, Riformatori lombardi, piemontesi e toscani. Ricciardi: Milano-Napoli. ———. 1962. Illuministi italiani. Riformatori napoletani. Milano-Napoli: Ricciardi. Verri, Pietro. 1771. Meditazioni sulla Economia Politica, from Wikisource April 29, 2021. Winch, Donald. 1978. Adam Smith’s Politics. Cambridge: Cambridge University Press.

CHAPTER 6

Productiveness of Welfare Expenditures Cosimo Perrotta

Abstract  During the welfare state, the main streams of economics considered welfare expenditures as unproductive despite the great advantages they gave to workers and mass consumers (Sect. 1). The classical approach excluded any room for workers’ welfare due to the idea of wages at the subsistence level (Sect. 2). Also, neoclassical authors considered public employees and state expenditures unproductive. An exception was Alvin Hansen (with Kuznets and others), who argued that if all sectors depend on the others, then all of them are productive (Sect. 3). Even the majority of Marxists considered welfare expenditures unproductive. Sweezy assumed the old thesis of Loria that there are increasing unproductive investments (in assistance, armaments, etc.) to avoid excessive surplus (Sect. 4). Only post-Keynesians praised welfare expenditures, but—due to their empirical approach—they neglected the problem of their productiveness (Sect. 5). The only prospect of long-run development was provided by Pasinetti, Kindleberger and others, who relied on the variety and increasing refinement of consumption (Sect. 6). Keywords  Welfare expenditures • Public work • Productiveness • Post-Keynesians • Refined consumption I presented this analysis at the ESHET Conference 2018 in Madrid. I thank the discussant and the participants in the discussion. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7_6

105

106 

C. PERROTTA

1   The Question This chapter in a sense continues on a specific issue the analysis of my 2018 book about the theories of unproductive labour.1 In that book, among other things, we have tried to show that in the 1970s, all the traditional economic streams (classical, neoclassical and Marxist) considered welfare expenditures as due to the necessity to meet the basic needs of the lower classes or the need to avoid overproduction (by employing part of the surplus outside investment). In both cases, those expenditures were seen as a burden on profit, due either to higher taxes or to less infrastructure and less support to production. Only a few heterodox authors of the three schools admitted that those expenditures were conducive to economic development. The post-Keynesians were the only defenders on the theoretical level of the welfare state and implicitly assumed its productiveness. Still, now they uphold it against the neoliberal attacks. However, usually the post-­ Keynesians—like Keynes himself—do not consider the long run, although in general only in the long run the returns of public investments appear. Thus, doubts about the productiveness of public services remain unsolved. We are still trapped in the vicious circle of “austerity”. According to the neoliberal approach, public services make the resources they employ unavailable to investment for private profit; thus, they hinder development and must be minimised. But actually, the reduction of public services impoverishes workers and depresses both demand and human capital growth; then, it hinders development. The knowledge of past thought should help us to avoid this vicious circle.

2   The Classical Approach The great increase in social expenditures undertaken for implementation of the welfare state was, as we know, contrary to traditional economic theory. In both classical and neoclassical approaches, public expenditures are considered unproductive, although necessary to some extent. Thus, they have to be kept at the lowest possible level, since they are subtracted to investment for profit. Wealth only derives from the production of profit. The tendency to reduce the production of wealth to the production of profit—although very rarely expressed as such—has always vitiated 1

 Perrotta (2018).

6  PRODUCTIVENESS OF WELFARE EXPENDITURES 

107

economics since the times of Adam Smith. In the first phase of modern economic thought, this actual identification was in a sense justified by the polemics against the huge proportions of parasitic rent. The early economists implicitly championed investment and the production of profit in opposition to land rent. The former increased social wealth, while the latter consumed it unproductively. This opposition was theorised during the Enlightenment. Not only Smith but a great number of Enlightenment authors embraced this view.2 Their attitude was perfectly reasonable given that in the early classical period many authors—Lauderdale, Dugald Stewart, Spencer and Chalmers, for example—were still defending rent against the prevalence of investment for profit.3 However, the defence of investment and profit— conducted by Charles Sismondi, Jean-Baptiste Say, David Ricardo, James Mill, Destutt de Tracy and Karl Heinrich Rau, among others4—led authors to greatly underrate the importance of public spending in economic development. Smith stood as the reference point for the classical debate on this subject. He had used the distinction between productive and unproductive labour as the main criterion to defend the economy based on investment and profit. According to Smith, labour is productive only if it adds value to the product. But that is not all. To be productive, labour must also be material labour, that is, it must add value to the product by transforming materials.5 Consequently, Smith’s approach excludes public workers doubly, so to say, from the field of productive labour: first, because they do not yield profit; and, second, because their labour is usually non-material. Thus, the state expenditures which pay for public labour and do not yield a profit are unproductive as well. However, some authors—although agreeing with Smith’s productive/ unproductive labour distinction—rejected this conclusion and stated that

2  Hume (1752, pp. 326–330), Genovesi (1765–1767: I.11.6), Smith (1776: b. II, Ch. 3) and many others. 3  Lauderdale (1804: Ch. I, pp. 12–3), Stewart (1809–1810, pp. 261–265), Spence (1807) and Chalmers (1832). 4  Sismondi (1819: 49–51, 85, 90), Say (1803: 36–40), Ricardo (1951–1973: vol. 1, pp.  150–151), Mill (1808: pp.  68–74), Destutt de Tracy (1817, pp.  168–174) and Rau (1826–1827, pp. 148–149). 5  Smith (1776: I.I.6, II.3.1–2).

108 

C. PERROTTA

public employees, or some of them, are indirectly productive insofar as they increase the private workers’ productivity.6 Other authors—John Ramsey McCulloch above all—explicitly stated that public employees are productive. But they wisely noted that these workers must be strictly controlled in both number and efficiency because, unlike the other workers, they are not subject to market control.7 Here, we find an important implicit distinction between state expenditures that are necessary and productive and those which are unnecessary and unproductive. But this distinction was eventually lost. Most classical and neoclassical economists adhered to the radical view that the state economic function (and its expenditures) must be confined to those of a “night watchman”. Thus, in the end, even among the classical authors who supported Smith’s distinction between productive and unproductive labour, the most rigid line of thought prevailed. Marx, the last great representative of the classical school, stated that all public expenditures and all sorts of public labour are unproductive, deeming that in the capitalist system only the direct production of surplus value, later transformed into profit, can be productive.8 In the classical authors, there is an implicit view of public work as work which escapes the productivity control guaranteed by the market. This is the question raised by McCulloch, and it is a real one. But while it holds on the empirical level, it does not touch on the principles. McCulloch was able to avoid this confusion, while the overwhelming majority of classical economists was not.

3   The Neoclassical Approach During the nineteenth century, various authors simply rejected Smith’s division between productive and unproductive labour. They took a subjective approach and considered not only labour but also nature and capital as the three sources of wealth and the value of goods.9 From this viewpoint, 6  Jakob (1805: §§ 486–96). The author of the entry Political Economy of Encyclopaedia Britannica (1810: 120b). Malthus (1820, pp. 37–38), Rau (1826–1827: I, §§ 94–95 and 332–339), etc. 7  McCulloch (1824, pp.  275b–278b), Read (1829, pp.  38–39, 40-1fn) and Sanfilippo (1828, pp. 130–131). 8  See, for example, Marx, Grundrisse: 208. Theories, I, IV.1. 9  Say (1803: I, chs. 3, 4, 7; 1820, pp. 32–38).

6  PRODUCTIVENESS OF WELFARE EXPENDITURES 

109

production and productiveness could not be credited only to labour. Consequently, Smith’s main criterion for development policy, namely the distinction of productive/unproductive labour, lost its significance. These authors considered all labours productive,10 insofar as they yield an income. After the 1830s, this approach gained momentum, until—as we well know—it served as the basis for the rise of the new economics, with the neoclassical school. One might have expected that according to these economists, public work should be productive, like all other work. But this is not the case. The income public workers receive does not derive from the market but from the state, that is, from taxes. This means that it is ultimately paid for with the other economic activities. It was only in the 1940s that some neoclassical authors affirmed the productiveness of public expenditures. Alvin Hansen provided an outstanding analysis, maintaining that public expenditures can generate utilities like private investments or increase investment efficiency. They can also create income because they boost employment. Hansen notes: they say that private expenses are self-sustaining, while public spending is not. But no private business could sell without a flow of public expense. The ‘private sector is not self-sustaining either’. During depressions, only the government is able to support income. Hansen adds that those who state that public expenses are fed by private income are like the physiocrats who affirmed that industry is maintained by agriculture. Nowadays, we can satisfy many needs thanks only to public activities. It is wrong to say that some sectors of the economy maintain certain other sectors with their surplus. Every sector contributes to the general flow of revenue. Agricultural products are essential, but this priority is paramount only in the primitive economies, when society is so poor that nearly all labour must be devoted to the production of food. When material productivity increases, it allows for other types of consumption, satisfying artistic or intellectual needs, for example.11 Some authors followed Hansen, notably with contributions by Simon Kuznets, Lekachman, Kapp and Sleeman.12 But the vast majority of neoclassical authors held on to the traditional position, incoherent as it was. The book by Bacon and Eltis maintained that public expenditures hindered the  Gray (1815: I.2: 5; see also II.3: 47–69).  Hansen (1941, pp. 144–52). 12  Kuznets (1966, pp.  224–234), Lekachman (1966, pp.  104–106), Kapp (1950, pp. 28–30) and Sleeman (1979, pp. 2–3, 38–39). 10 11

110 

C. PERROTTA

British economy because they subtracted wealth from the profit private sector, which is the only producer of social wealth.13

4   The Marxist Approach Marx saw state expenditures as one of the unproductive expenses (faux frais de production) borne by profit.14 However, there is a contradiction in Marx on this issue: in a few points of his very extensive notes, he writes of the parasitic bourgeoisie growing more and more, and absorbing a large part of the growing surplus.15 Thus, while Marx confirms the classical assumption that normally the surplus goes to investment, he also admits the increase in the “unproductive” middle classes.16 The two statements are incompatible. In contrast, his follower Paul Sweezy maintained that capitalism had a strong tendency to overproduction and that the only remedy was to employ an increasing part of it unproductively, the most important part of such unproductive use being represented by the expenditure of the state. This is channelled in very different and numerous directions, but—apart from the channel devoted to public enterprises—all of them are, by definition, unproductive.17 Sweezy’s analysis was the main basis of later Marxist theories of accumulation. It was followed by, among others, Maurice Dobb, Gillman and Baran, then set out in an organic form in Monopoly Capital, by Baran and Sweezy.18 Thus, the majority of Marxist authors interpreted the expenditures for implementation of the welfare state as an intensification of the process of waste to avoid overproduction and the consequent crisis; see, for example, Mandel, Offe, Altvater, Poulantzas, Balibar, Bravermann and Fine and Harris.19 Note that the orthodox Marxists were influenced by

 Bacon and Eltis (1978).  Marx (Theories, IV.7.a, 348; IV.17). 15  Marx (Theories, part II, Ch. 18, B.1.d: 745–746). 16  Marx (Capital I, IV.XV.168–169; VII.XXV.46; Ch. 30. Capital III, Ch. 15). 17  Sweezy (1942, pp. 226–236). 18  Dobb (1946, pp.  321–337), Gillman (1957), Baran (1957: Ch. 2) and Baran and Sweezy (1966). 19  Mandel (1972, pp.  404–406), Offe (1971–1977, pp.  67–76), Altvater and Huisken (1970, pp. 43–65), Balibar (1974, p. 154), Bravermann (1974, pp. 284–293) and Fine and Harris (1979, pp. 49–53). 13 14

6  PRODUCTIVENESS OF WELFARE EXPENDITURES 

111

Sweezy only with regard to the absorption of the surplus while, as to the unproductiveness of the public sector, they were inspired directly by Marx. These authors appear somewhat indifferent to the great social revolution of the welfare state. For the first time in history, even the lowest classes were involved in welfare and comfort. Houses, roads, railways, infrastructures, schools, hospitals and public offices were built. National social security and the health care system were organised. Education and research received ample funding. The incomes of the lower categories and the unemployed were guaranteed at a decent level. Besides bringing about great improvement in the welfare of people, all these policies increased labour productivity enormously. Thus, the welfare state was actually the greatest investment that capitalist accumulation ever made. However, a certain number of Marxist authors did recognise that welfare expenditure was not unproductive parasitism but a real investment in favour of both the lower classes and accumulation. Some of these authors— Barratt Brown, Gough and Nagels,20 for instance—saw in it a twofold nature, containing both unproductive and productive elements, while others—for example, Joseph Steindl, Negri, Rowthorn and Desai21—were definitely in favour of social expenditures as favouring productivity and as an investment.

5   Keynes’ View John Maynard Keynes, with his empirical approach, was not particularly interested in the productive/unproductive labour distinction, and even less in the question as to whether public work was productive. This is well illustrated by his famous paradox, creating employment by digging holes and filling them in. He simply wanted to raise demand in the short run, mainly through an increase in employment, as Hicks noted.22 He was confident that, once demand was sufficiently raised, the usual working of accumulation would be restored. This is why he tenaciously refused to get involved in the long-run questions. Keynes brilliantly demolished the neoclassical analysis of the causes of the crisis, which was not due to excessively high levels of wages, deriving  Barratt Brown (1969, pp. 31–68), Gough (1975) and Nagels (1974: 190ff, 208, 308).  Steindl (1952: 355–377), Negri (1974: 239–240), Rowthorn (1979) and Desai (1979). 22  Hicks (1974, p. 57). 20 21

112 

C. PERROTTA

from their rigidity, but rather to excessively low wages. However, he embraced the dominant idea that crises in general, even the most deep-­ reaching and devastating, were due to the business cycle. On this issue, he was simply repeating the tradition, never questioned, which started with John Stuart Mill and arrived up to Gottfried Haberler.23 Even Marx had in fact bowed to this identification of crises with the business cycle. Having stated that the final crisis of capitalism has nothing to do with the periodical crises, he reduced the latter to simple fluctuations.24 They too derive from the basic “contradiction” of capitalism between the production of use values and of surplus value. But they do not really hinder the advance of capitalist accumulation. Things, however, were more complex. In the 1930s, the crisis was not, of course, an episode of the business cycle, nor did it last like a business cycle. Indeed, it lasted not only up to World War II but even after. To consolidate the post-war boom, besides the huge public expenditures for reconstruction, there was also a great need for large-scale social intervention in favour of the lower classes. All this was necessary to reverse the tendency to economic depression, opening the way to fast accumulation and progress. The post-Keynesians did in fact support these innovative policies, but even then, they—like their master—did not concern themselves with whether these expenditures were productive or not.25 They strived for full employment while assuming that in the short run all new employments are productive since, by raising demand, they make production restart. However, the proper dimension of the welfare state boom lay in the long run. In the long run, there is constant growth in productivity. Increased productivity stimulates demand for new goods, and this new demand absorbs the increase in production. But no policy for implementing such a virtuous spiral in the long run was planned, and the result was the crisis of the welfare state boom.

 Mill (1844, II essay), Keynes 2013: Ch. 22, 313–315 and Haberler (1937, pp. 118–122).  Marx (Theories, Ch. 17. Capital III, Ch.s. IV.XVIII, V.XXX). 25  Eichner (1979: 179). 23

24

6  PRODUCTIVENESS OF WELFARE EXPENDITURES 

113

6  Unlimited Needs and Investment in Human Capital On the other hand, there is a long tradition which points to the prospect of production growth supported by variation in consumption. When discussing the periodical crises of their times, both Say and Ricardo maintained, against Malthus, that accumulation has no limits. It can proceed indefinitely because—as the Enlightenment authors, Smith included, had already stated—human needs are unlimited.26 But this can only happen on one condition, namely that goods constantly vary in nature to satisfy ever-­ new needs.27 The progress of accumulation allows production to supply ever new goods, which meet people’s increasingly refined needs.28 Similar views were later advanced by Friedrich List, J.S. Mill, Alfred Marshall and various other authors. Even Karl Marx, in the Grundrisse (which he then put aside in the “official” theory of Capital), suggests a prospect of indefinite variation of needs which, he says, are generated by capitalist accumulation itself.29 It is hard to say whether the Grundrisse influenced the critical Marxists of the socialist countries. As a matter of fact, while the vast majority of Western Marxists repeated the official Marx in a scholastic way, a suggestive new stream of thought was flourishing in the socialist countries, theorising development based on progress in science, innovations and a potentially infinite multiplication of needs. Ossowski described the economic progress of his time as based on the new middle classes (public employees, technicians and functionaries). Löbl acutely noted that every good contains innumerable contributions involving different activities, ranging from the materials and their sources to distribution and even public administration. Thus, we cannot say how much labour is contained in a certain good. But certainly, major public services, like education, research or health care, have increasing importance in the production of society’s wealth because they increase workers’ efficiency and productivity. Richta and his large team depicted an alluring

26  Smith (1776: I.11.59), Malthus (1820: II.1.9, 401–405), Say (1828–1829: VII.4, tome 2, 210–213) and Ricardo (1821: 21.7). 27  Say (1803: I, XV, 92) and Ricardo (1821: 21.5). 28  See Perrotta (2004: Ch. 11, 231–237). 29  Marx, Grundrisse, notebook VI: 639–640.

114 

C. PERROTTA

prospect of a new economy based on culture, science and constant innovation.30 However, we also find some very interesting authors who envisage similar prospects in Western countries. Mallet, for example, enthusiastically described the growth of the new middle classes. The latter, being highly educated and skilled, increase the general productivity of the economy. Roman Rosdolsky—again following in the footsteps of the Grundrisse— insightfully describes the welfare state boom as fully developing all the potentialities of human labour, thanks to permanent technological innovation and the prevalence of creative labour.31 Of the authors following the same line of thought, mention should be made at least of Daniel Bell, Thomas Bottomore, Cazzaniga and Cerroni, the latter two showing particularly keen appreciation of the Grundrisse.32 This precious legacy was soon dispersed, and the issue of the welfare state was reduced to an inane debate on the need for more or less state intervention.

7   Conclusion As we have tried to show, today there are all the requisites—theoretical and practical—for reviving and continuing, mutatis mutandis, the development experienced during the welfare state boom. The only obstacle is the ideological conviction that the presence of the state in the economy is always a damage. This chapter is a modest attempt to show that such a conviction is unfounded.

References Altvater, E., and F. Huisken. 1970. Lavoro produttivo e improduttivo. Translated from German. Milano: Feltrinelli, 1975. Bacon, R., and W. Eltis. 1978. Marketed Output – Yes, Luxury – No. A Reply to Mrs. Ietto Gillies. British Review of Economic Issues 1978: 47–54.

30  Ossowski (1957, pp.  202–204), Löbl (1967, pp.  190–192, 201) and Richta (1967, 1968). 31  Mallet (1969, pp.  15–27, 94–98), Bell (1973, pp.  148–154) and Rosdolsky (1968: Ch. 28.2). 32  Bottomore (1973, pp.  21–27), Formenti (1980, pp.  18–29), Cazzaniga (1981, pp. 235–236) and Cerroni (1983, pp. 304–305).

6  PRODUCTIVENESS OF WELFARE EXPENDITURES 

115

Balibar, É. 1974. Cinque studi di materialismo storico. Translated from French. Bari: De Donato, 1976. Baran, P. 1957. The Political Economy of Growth. New York: Monthly Review Press. Baran, P., and P.  Sweezy. 1966. Monopoly Capitalism. New  York and London: Modern Reader, 1968. Online: scribd.com. Barratt Brown, M. 1969. Il marxismo e lo sviluppo economico del capitalismo. Translated from English. In Sviluppo economico e rivoluzione, ed. F.  Aymone et al., 23–76. Bari: De Donato. Bell, D. 1973. The Coming of Post-Industrial Society. New York: Basic Books. Bottomore, T., ed. 1973. Introduction to Karl Marx. Oxford: Basil Blackwell. Bravermann, H. 1974. Labor and Monopoly Capital. New  York: Monthly Review, 1998. Cazzaniga, G.M. 1981. Funzione e conflitto. Napoli: Liguori. Cerroni, U. 1983. Teoria della società di massa. Roma: Editori Riuniti. Chalmers, T. 1832. On Political Economy ... . Glasgow: Collins and New York: Appleton. Desai, M. 1979. Marxian Economics. Oxford: Basil Blackwell. Destutt de Tracy, A. 1817. A Treatise on Political Economy. Translated from unpublished French original. New York: Kelley, 1970. Dobb, M. 1946. Studies in the Development of Capitalism. London: Routledge & Kegan Paul, 1950. Eichner, A. 1979. A Look Ahead. In A Guide to Post-Keynesian Economics, ed. F. Eichner. London and Basingstoke: Macmillan. Fine, B., and L. Harris. 1979. Rereading ‘Capital’. London: Macmillan. Formenti, C. 1980. La fine del valore d’uso. Milano: Feltrinelli. Genovesi, A. 1765–1767. Lezioni di commercio. Revised ed., 1768–1770. Milano: Vita e Pensiero, 2013. Gillman, J. 1957. Il saggio di profitto. Translated from English. Roma: Editori Riuniti, 1961. Gough, I. 1975. State expenditures in advanced capitalism. New Left Review 1975: 53–92. Gray, S. (George Purves). 1815. The Happiness of States. London: Hatchard. Haberler, G. 1937. Prosperity and Depression. Geneva: League of Nations. 1939. Hansen, A. 1941. Fiscal Policy and Business Cycle. London: Allen & Unwin. Hicks, J. 1974. The Crisis of Keynesian Economics. New York: Basic Books. Hume, D. 1752. Of Interest. In Id. Philosophical Works. Vol. III: Essays Moral, Political and Literary, 320–330. Aalen: Scientia, 1964. Jakob, L. H. 1805. National-Oeconomie oder National-Wirtschaftslehre. 2nd ed. Charcow etc, 1809. Kapp, W. 1950. The Social Cost of Private Enterprise. Cambridge, MA: Harvard University Press.

116 

C. PERROTTA

Keynes, J. M. 2013. General Theory of Employment, Interest and Money, Vol. VII of The Collected Writings of John Maynard Keynes, edited by A. Robinson and D. Moggridge, London: Macmillan. Original Date of Publication, 1936. Kuznets, S. 1966. Modern Economic Growth. New Haven: Yale University Press. Lauderdale, J. 1804. An Inquiry into the Nature and Origin of Public Wealth … New York: Kelley, 1962. Hathi Trust, online. Lekachman, R. 1966. The Age of Keynes. New York: Random House. Löbl, E. 1967. Geistige Arbeit. Die wahre Quelle des Reichtums. Translated from Slovak. Wien- Düsseldorf: Econ, 1968. Mallet, S. 1969. La nouvelle classe ouvrière. 5th ed. Enlarged. Paris: Éditions du Seuil. Malthus, T.R. 1820. Principles of Political Economy. 2nd ed. London: Pickering. 1836. https://oll.libertyfund.org/title/malthus-­principles-­of-­political-­economy. Mandel, E. 1972. Late Capitalism. Translated from German. London: New Left Books, 1975. Marx, K. 1857–61. Grundrisse. Harmondsworth: Penguin, 1973. ———. 1861–1863. Theories of Surplus-Value. Translated from German. Moscow: Progress Publishers. https://www.google.com/search?client=firefox-­b-­d&q= Marx%2C+Karl.+%5B1861-­63%5D.+Theories+of+Surplus-­Value. ———. 1864–1865. Capital III. Translated from German. Library of Economics & Liberty, online. ———. 1867. Capital I. Translated from German. Library of Economics & Liberty. https://oll.libertyfund.org/title/marx-­capital-­a-­critique-­of-­political-­ economy-­volume-­i McCulloch, J.R. 1824. Political Economy. Supplement of Encyclopaedia Britannica 6: 216–278. Mill, J. 1808. Commerce Defended. London: Baldwin, Online Library of Liberty. Mill, J.S. 1844. Essays on Some Unsettled Questions .... 2nd ed. London: Longmans etc., 1874, online, Library of Economics & Liberty. Nagels, J. (1974). Travail collectif et travail productif…. Bruxelles: Univ. de Bruxelles. Negri, A. 1974. Stato, spesa pubblica …. In Id. La Forma-Stato. Milano: Feltrinelli, 1977. Offe, C. 1971–1977. Lo stato nel capitalismo maturo. Translated from German. Milano: Etas Libri, 1977. Ossowski, S. 1957. Struttura di classe e coscienza di classe. Translated from Polish. Torino: Einaudi. Perrotta, C. 2018. Unproductive Labour in Political Economy. The History of an Idea. London-New York: Routledge. Perrotta, C. 2004. Consumption as an Investment. The Fear of Goods from Hesiod to Adam Smith. Routledge. Political Economy. 1810. Entry of Encyclopaedia Britannica. 4th ed, 106–123. Edinburgh: Constable.

6  PRODUCTIVENESS OF WELFARE EXPENDITURES 

117

Rau, K.H. 1826–1827. Corso di economia politica. Translated from German (vol. 1). Genova: Monni, 1855. Read, S. 1829. Political Economy. Edinburgh, Printed for the Author. Ricardo, D. 1821. Principles of Political Economy … Library of Economics & Liberty, online. ———. 1951–1973. Works and Correspondence. P.  Sraffa ed.. Cambridge, UK: Cambridge University Press. Richta, R. 1967. Civilization at the Crossroads. Translated from Czech. 3rd ed. White Plains, NY: International Arts & Sciences, 1969. ———, ed. 1968. Progresso tecnico e società industriale. Translated from German. Milano: Jaca Book, 1975. Rosdolsky, R. 1968. The Making of Marx’s ‘Capital’. Translated from German. London: Pluto Press, 1977. Rowthorn, B. 1979. Skilled labour in the Marxist system. In Id. Capitalism, Conflict and Inflation, 231–245. London: Lawrence & Wishart, 1980. Sanfilippo, I. 1828. Sposizione dei principj di economia politica. 2nd ed. Palermo: Reale Stamperia, 1839. Say, J.-B. 1803. Traité d’économie politique. 6th ed. Paris: Guillaumin, 1841. ———. 1820. Lettres à M. Malthus. Paris: Bossange. https://fr.wikisource.org/ wiki/Lettres_%C3%A0_M._Malthus_sur_l%E2%80%99%C3%A9conomie_politique_et_la_ stagnation_du_commerce ———. 1828–1829. Cours complet d’économie politique pratique. 2nd ed. Paris: Guillaumin, 1840. Sismondi, J.C. 1819. Nouveaux principes d’économie politiques. 2nd ed. Paris: Delaunay, 1827. https://openlibrary.org/books/OL23322235M/ Nouveaux_principes_d%27%C3%A9conomie_politique Sleeman, J. 1979. Resources for the Welfare State. London and New York: Longman. Smith, A. 1776. Wealth of Nations. Cannan ed. Library of Economics & Liberty, online. Spence, W. 1807. Britain independent of commerce. In Id. Tracts on Political Economy, 1–92. London: Longman. Steindl, J. 1952. Maturità e Ristagno nel Capitalismo Americano. Translated from English. Torino: Boringhieri, 1960. Stewart, D. 1809–1810. Lectures on Political Economy. In Id. Collected Works, vols. 8 (1855) and 9 (1856). Edinburgh: Constable. Sweezy, P. 1942. The Theory of Capitalist Development. London: Dobson, 1962.

CHAPTER 7

Keynesian Policy Today: More Employment and More Human Capital Cosimo Perrotta Abstract  Keynes stated that the periodical crises of the early nineteenth century and the crisis that started in 1929 were both due to scarce demand, as a result of technological unemployment. He also argued that the neoclassical misinterpretation of the 1930s crisis derived from Ricardo. Both Ricardo and his contemporaries, in contrast with Malthus, denied that there was any persisting lack of demand. Thus Keynes criticised “classical economists” and projected to overcome the crisis by boosting demand through a policy of employment. Keynes’ approach proved highly effective during the welfare state. However, a full employment policy required long-run structural transformations that governments and big enterprises did not implement. Thus, technological unemployment and insufficiency of demand reappeared and have persisted up to now. Today, we need new Keynesian policies which complete the old ones. Keywords  Periodical crises • Underconsumption • Insufficient demand • Technological unemployment

I am very grateful to Anna Carabelli, Valeria Cirillo, Carlo Panico, Mario Pianta, Salvatore Rizzello, Clauydia Sunna and the anonymous referee for their useful comments and suggestions. The usual disclaimer holds.—This article has already been published in The Review of Keynesian Studies, vol. 3. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7_7

119

120 

C. PERROTTA

1   Introduction Eighty-five years after the publication of the General Theory (in the notes: GT), the Keynesian policy of full employment is still fundamental for development, but it needs to be updated to respond to the major changes that have come about in the interim. In this chapter we aim, in the first place, to demonstrate that Keynes’ critique of Ricardo brings out the connection between two issues that the classical school had examined separately, namely the relationship between technical progress and employment and the relationship between technical progress and the level of demand (Sects. 2 and 3). We then go on to see how the solution to these two problems influenced Keynes’ proposal for full employment (Sect. 4). In Sect. 5, we look into the effects that the full employment policy had on the welfare state. Finally, we will examine the new problems emerging after the welfare state boom and the adjustment we now need for employment policies (Sect. 6).

2   Keynes’ Critique of Ricardo The two issues mentioned above were addressed and, according to mainstream theory, settled by Ricardo. But Keynes demonstrated that they had not been settled. On the first issue: in the course of the first Industrial Revolution, with the introduction of new machines, the productivity of factories grew to such an extent, as to destroy the competition of the artisans, above all in the textile industry. As technical progress forged ahead, a proportion of the factory workers left workless (called Luddites, after the mythical leader, Ned Ludd) set about breaking the machines that were the cause of their unemployment. According to Ricardo, the Luddites were acting against their own interests. In fact, by boosting productivity, technical progress raised profits, in turn enabling firms to increase their investments, which would lead to new and more numerous jobs.1

1

 Ricardo (1821, ch. 31, 18–22).

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

121

Ricardo’s answer met with almost unanimous consensus, but Barton explained to his friend Ricardo that his answer would only apply on the condition that the higher profits went into employing new workers. If, on the other hand—and as was, in fact, the case—the new investments were mainly to take the form of acquiring new and even more productive machinery, then far from solving the problem of negative effects of technical progress and employment, they would aggravate it.2 It was then that Ricardo realised that the new machines were causing trouble for the workers (this was the point of his famous “self-criticism”), although he reasserted his general thesis. No one took notice of Barton’s criticism, except for Marx, 50 years later.3 Now for the second issue. Only Malthus and Sismondi remained dissatisfied with Ricardo’s explanation. In technical progress, they saw the cause not only of unemployment but also of underconsumption. The sequence triggered by technical progress as they saw it—albeit not always with the greatest clarity—developed through three stages. The first is the introduction of new machines to boost productivity and hence profits. And as soon as it comes underway, the substitution of part of the labour force with mechanical labour is already depriving some workers of their jobs. The second stage: the unemployed, left without wages, no longer play a part in demand on the market. The fall in demand means production in excess due to the reduced capacity for consumption. This excess leads to gluts on the market, with a persisting imbalance between supply (in excess) and demand. So runs the theory of underconsumption. Then we have the third stage of the process, advancing yet further, beyond underconsumption. Sismondi glimpsed it vaguely, but it was explained rather later by Marx (who was, however, critical of underconsumption theories since they stood against technical progress and development). Persisting unemployment, Marx wrote, brings pressure to bear on the employed, inducing them to accept lower wages and worse working conditions.4 Keynes did not take up Marx’s explanation but bore the phenomenon very much in mind in his analyses. To tackle underconsumption, Malthus proposed a boost for demand by increasing unproductive consumption, which meant lowering taxes on rents and increasing the labour considered unproductive (the civil service,  Barton (1817, pp. 40–45).  Marx [1861–1863], 2nd vol., XVIII.B.2. 4  Marx (1867, ch. 25, section 3). He called these unemployed “industrial reserve army”. 2 3

122 

C. PERROTTA

public works).5 Ricardo was shocked, not without reason: the centuries-­ old struggle to replace rent from land with profit as the basic source of income for society had just come to an end.6 Malthus, quoted by Keynes, noted: “Adam Smith has stated that capitals are increased by parsimony, that every frugal man is a public benefactor, and that the increase of wealth depends upon the balance of produce above consumption. That these propositions are true to a great extent is perfectly unquestionable. … But it is quite obvious that they are not true to an indefinite extent, and that the principle of saving, pushed to excess, would destroy the motive to production. …there must be some intermediate point”.7 It was this criticism of excessive thrift that found favour with Keynes. Sismondi, on the other hand, goes to the heart of the matter, namely the demand of the productive workers. The workers are to be protected, guaranteeing higher wages for them (although he does not know exactly how to do so). This would have prevented the crises.8 But neither Ricardo nor Keynes took Sismondi into serious consideration. And yet, in Ricardo’s times, Sismondi’s solution appeared no less heretical than Malthus’, for it contravened the postulate that competition inevitably brings wages to the limit of subsistence (subsistence in the historical and customary sense). This held to be an inviolable law of economics, to the extent that the wage-fund theory was constructed to support it. The theory holds that an increase in wages jeopardises accumulation because it takes money away from investment. Naturally, Keynes criticised this theory.9 Ricardo then denied the existence not only of the first issue (technical progress as the cause of unemployment) but also of the second (shortage of demand), which is closely bound up with the first. Malthus, Keynes wrote, could advance no argument other than the evidence of the facts  (which is not negligible).10 Nevertheless, in answering Malthus, Ricardo and his followers had to fall back on Say’s law.11  Malthus (1820. See, in the 1836 2nd ed.: II.1.9).  Ricardo (1820, fn 284). 7  Keynes 1936 (from now on: GT, i.e. General Theory), Ch. 23, p. 225. 8  Sismondi (1819, 1, II.3, pp. 77–78). 9  GT, ch. 23, p. 226. 10  GT, ch. 3, pp. 28–29. 11  On Say’s law, see Say (1803, II, p. 15) and Say (1820), first letter. On Ricardo’s endorsement, see Ricardo (1820, p. 245). 5 6

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

123

3  Unemployment and Saving Say’s law was universally accepted by the classical economists, and subsequently by the neoclassical economists, but it was rejected by the theoreticians of underconsumption,12 and indeed by Marx. To dismantle the “classical” theory, Keynes levelled his criticism at Say’s law but saw in Ricardo the source of the errors of all the “classicals” (including “J.S. Mill, Marshall, Edgeworth, and Pigou”,13 and Marx).14 Keynes associated Say’s law with the classical postulate that any saving automatically translates into investment and went on to criticise both. “From the time of Say and Ricardo the classical economists have taught that supply creates its own demand”. Marshall too, Keynes wrote, in the Pure Theory of Domestic Values, states that “a man purchases labour and commodities with the portion of his income which he saves just as much as he does with that he is said to spend”.15 Keynes recognised that this wrong idea resembled another idea that was right, namely, that the aggregate income matches the value of the total output. But, he went on, the classical economists assume a (non-­ existent) match between saving decisions and future consumption decisions. But the reasons behind these decisions are different.16 In the neoclassical approach, unemployment was seen to depend on the wishes of the workers who withdraw their labour when the marginal utility of the wage falls short of the marginal utility of the labour.17 According to Keynes, by contrast, experience shows that workers suffer the lack of demand for labour on the part of the firms.18 It is not, therefore, wage rigidity that causes unemployment but, rather, the poor prospects firms may face in selling their products. This thesis, which forms part of the theory of expectations, lies at the core of the General Theory (Chapters 5, pp. 11–12, and 19) alongside the chapters on the rate of interest and on money. The real cause of the lack of investments that leads to unemployment is, therefore, the lack of effective demand.19  See Sismondi (1820–1827, pp. 402–403).  GT, ch. 1, p. 12. 14  GT, Preface to the German edition, p. 6. 15  GT, ch. 2, VI, pp. 20–21). 16  Ibid., VI, p. 22. 17  Ibid., II, pp. 13–17. 18  Ibid., ch. 2, pp. 15–18 and ch. 18. 19  Ibid., ch. 3, pp. 28–29. 12 13

124 

C. PERROTTA

So it was, Keynes wrote, that after the general endorsement of Say’s law, the issue of underconsumption sank into century-long oblivion.20 In reality, however, other authors supported the thesis of underconsumption subsequent to that debate.21 Among these was Hobson—the only one cited by Keynes—who (like Keynes) embraced the idea of development based on growing consumption.22 Keynes quoted a passage by him that referred to the “check of undue saving and the consequent accumulation of over-supply exerts on production”, observing that “consumption limits production and not production consumption”.23 More generally speaking, Keynes criticised the habit of hoarding and saving, which for centuries had held back investment and dampened demand. Here he praised the mercantilists for their opposition to hoarding, basing his observations mainly on Heckscher.24 However, Heckscher himself rightly pointed out that the mercantilist policies had little to do with Keynes’, the low level of demand having opposite courses in the two cases. The mercantilists lined up against the scarcity of savings (available for investment), typical of an economy seeking to launch development. Keynes, by contrast, was concerned about excessive saving. Blaug too stressed this difference with similar arguments.25 Nevertheless, Keynes clearly pictured the opposition of eighteenth-­ century economists to real estate rents and waste.26 Elsewhere he noted: “The high rates of interest from mortgages on land, often exceeding the probable net yield from cultivating the land, have been a familiar feature of many agricultural economies”.27 This, he wrote, has for centuries been a massive obstacle to investment. The only real solution was to expand employment. There is, he contended, a univocal correlation between national income and volume of employment.28 Historians have drawn a similar comparison between Keynes and the theoreticians of underconsumption. For example, Watarai (2015) pointed out that Malthus not only—like the other classical economists—identified  Ibid. and ch. 23, p. 226.  See Perrotta (2018, pp. 73–75 and ch. XV). 22  GT, see ch. 2, p. 23n; ch. 23, pp. 227–230. Compare Hobson (1894, chs. 12 and 14). 23  GT, ch. 23, pp. 228–229. 24  See Heckscher (1931). 25  Heckscher (1955), and Blaug (1961, I.4). 26  See GT, the first part of chapter 23, devoted to mercantilists. 27  GT, ch. 17, p. 152. 28  GT, ch. 18, pp. 155–156. 20 21

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

125

saving and investment but held that increase in investment diverts resources from consumption and so dampens demand. This is the exact opposite of Keynes’ argument. Watarai rightly concluded that Keynes could not be said to be a theoretician of underconsumption. Similar arguments are to be found in Graziani and Costabile.29 Despite these inaccuracies, the General Theory has great historical scope. Besides, Keynes criticised Ricardo for having transformed the political economy from an investigation into the causes of the production of wealth into an examination of the way wealth is distributed amongst the various classes.30 Instead, he wrote, the classical economists had shown little interest in the real use of the available resources (ibid., p. 13).

4  The New Employment 4.1   State Intervention Keynes formulated a proposal for employment alternative to the classical version, no longer based on unlimited saving—which led to stagnation and permanent unemployment—but rather on an increase in consumption and demand. The effective demand is to be boosted by increasing public investments, which draw private investments in their wake. This is the road leading beyond “the opprobrium of two centuries of moralists and economists who felt much more virtuous in possession of their austere doctrine that no sound remedy was discoverable except the utmost of thrift and economy both by the individual and by the state”.31 To exit stagnation, the state has to be the driver of recovery, expanding employment. “When involuntary unemployment exists, the marginal disutility of labour is necessarily less than the utility of marginal product” (ch. 10, p. 85). The new employment has to be developed along the lines set by the public investments, which are to produce useful things, like homes for the workers. However, if this policy comes up against obstacles— Keynes adds, paradoxically enough32—given the aim of expanding employment even useless activities can help (ibid., pp. 85–86). The state has to 29  Watarai (2015, pp.  56–66), Graziani (1980, pp. XLIII–XLIV) and Costabile (1980, pp. 125–135). 30  GT, ch. 2, pp. 13 and 22-3n. 31  GT, ch. 23, p. 224. 32  See Marcuzzo (2020, pp. 5–6).

126 

C. PERROTTA

encourage the propensity for consumption: “up to the point where full employment prevails, the growth of capital depends not at all on a low propensity to consume but is, on the contrary, held back by it; and only in conditions of full employment is a low propensity to consume conducive to the growth of capital”.33 And the state has to influence consumption “partly through its scheme of taxation, partly by fixing the rate of interest” (ibid., p. 238). State intervention is necessary to offset the predominance of financial speculation. Alessandro Roncaglia took up a schematic representation of it which Keynes had himself proposed in an article, tracing out the hierarchy of factors at work on the economy. The dominant position is held by the expectations of the financial speculators (which, however, are also determined by monetary policies). It is these expectations that determine the allocation of stocks of savings and, through it, the rates of interest, while the demand for money for transactions remains at a secondary level. The interest rates, together with long-period expectations, determine the level of investments while, through the multiplier, the latter determines income and employment.34 Keynes criticises the erroneous tenet that the more wealth is left to the rich, the better it will be for everyone (an argument that used to be adopted to criticise death duties, and today is used in support of the flat tax). “The existing confusion of the public mind on the matter is well illustrated by the very common belief that the death duties are responsible for a reduction in the capital wealth of the country”, which “is the exact opposite of the truth” (p. 238). Thus he attacks the serious inequalities of his time: “For my own part, I believe that there is social and psychological justification for significant inequalities of incomes and wealth, but not for such large disparities as exist today” (ibid., p. 236). 4.2   The Disappearance of the Rentier On the subject of inequalities, Keynes’ thoughts go to the rentier who gets rich on the high interest rates on the money lent to entrepreneurs, and his hopes are for “the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital—the euthanasia of the  GT, ch. 24, p. 235.  Roncaglia (2001, p. 406).

33 34

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

127

rentier, of the functionless investor”. And he adds: “I see, therefore, the rentier aspect of capitalism as a transitional phase which will disappear when it has done its work” (ibid., p. 237).35 It is, Keynes observes, easy enough “to make capital-goods so abundant that the marginal efficiency of capital is zero”, and this will lead to the “the gradual disappearance of a rate of return on accumulated wealth”. There will be a return on specialised investment, although it is doubtful whether it will continue to be so over the long period. In fact, “it is not unlikely that, in such circumstances, the eagerness to obtain a yield from doubtful investments might be such that they would show in the aggregate a negative net yield”.36 However, rather than coming closer, nowadays this prospect seems to be receding. It is true that interest rates have been dropping over the last few decades,37 but today financial firms are absorbing a growing part of the value added. Thus, the situation has worsened. At least the money lent by the rentiers used to finance production, while now it is the wealth produced that increasingly tends to turn into financial rent. Actually, when he shifts his focus from the past or the present to the future, Keynes seems to change register, moving on from a lucid realism to suggestive visions of non-conflictual abundance. Similar optimism emerges from the lecture: Economic Possibilities of our Grandchildren. Here Keynes analyses the prospect of a stationary state achieved by virtue of growth in technology, and so in productivity. The pessimism over technological unemployment which now afflicts us, he writes, is unfounded. This situation is the necessary transition towards a society that ensures an abundance of goods for all, and thus a peaceful society no longer troubled by the “disgusting morbidity” of the love of money.38 A similar vision of a stationary state is to be found in J.S. Mill.39 In this situation, most of the work now done will be rendered useless by the high productivity achieved. This will lead to the end of political economy insofar as it is a science that studies the scarcity of resources. The

 See also GT, ch. 20, p. 183).  GT, ch. 16, p. 140. 37  Carlo Panico pointed it out to me. 38  Keynes (1930, pp. 5–6). 39  J.S. Mill (1848, ch. IV.6, pp. 3–9). 35 36

128 

C. PERROTTA

real problem then will not be unemployment but, rather, how to adapt to a life relatively free from the demands of work.40 At the end of the General Theory, Keynes reasserts the necessity of full employment in tones approaching the prophetic. He writes that hitherto the advanced countries had had to struggle against one another to conquer ever-new external markets ensuring adequate openings for their products. But the struggles will cease “if nations can learn to provide themselves with full employment by their domestic policy” and thus avoid putting their own interests before their neighbours.41 The closing words of the General Theory also belong to this vision: “soon or late, it is ideas, not vested interests, which are dangerous for good or evil” (ibid., p. 241). It may indeed be so, but what is certain is that the groups that have vested interests have always pursued their objectives also through more or less well-founded ideas, often dreamed up for the purpose. 4.3   The Short Period Alongside this reassuring of the future vision, Keynes provides an analysis of the current crisis. He addresses it mainly by focusing on the short period or, rather, by reducing the long period to short-period segments, following the Marshallian tradition, as Roncaglia points out.42 The practice of reducing the analysis of crises to the short period—the most pernicious legacy of the debate on underconsumption—dates back to J.S. Mill. As we know, J.B. Say and the other classical economists interpreted the periodic crises noted by Sismondi and Malthus in terms not of structural lack of demand but rather of momentary difficulties in matching demand and supply which the market would settle—not underconsumption crises, but “disproportion” crises. J.S.Mill sees the thesis of disproportion crises as the cycle in which all prices increase, creating the illusion of growing wealth, only to fall when disillusionment sets in. Alternating illusion and disillusionment generate a cyclical trend of expansion and contraction of investments.43 40  For a collection of comments on and criticisms of Keynes (1930), see Pecchi and Piga (2011), and Carabelli and Cedrini (2011). 41  GT, ch. 24, p. 240. 42  See Roncaglia (2001, pp. 396–405). 43  Mill (1828–1829, p. 51).

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

129

It seemed to be a Columbus egg. Of course, the cycle exists, but it has nothing to do with the structural crises noted by the underconsumption theoreticians. Once the latter had been routed, structural crises gave way to a neutral business cycle (or trade cycle), as inevitable as it was harmless. Mill’s “solution” enjoyed a huge success, which has proved lasting, making it difficult to analyse the disastrous crises that have followed one after another since the mid-nineteenth century. Mill’s thesis was embraced by all, including Marx, no less, and even by Keynes, who dedicated a chapter of the General Theory (ch. 22) to it. Here he speaks of fluctuations and describes the crisis as a phase in a cycle, adding: “I suggest that a more typical, and often the predominant, explanation of the crisis is, not primarily a rise in the rate of interest, but a sudden collapse in the marginal efficiency of capital” (ibid., p. 197). However, in the ascending phase of the cycle, marginal productivity bounces back. Carlo Panico argued that Keynes gradually departed from the classical/neoclassical idea that the rate of interest and demand for money depend on the real economy and do not influence it, but was unable to abandon the principle of the marginal efficiency of capital and the role of the production factors. The long-period approach, Panico points out, finds a place in the General Theory. For example, Chapter 17 demonstrates that monetary factors act with a permanent effect on the real variables, like the returns on capital assets and the quantities of production. However, Panico recognises, this approach does not loom large in the economic policy proposals.44 Actually, it is true that Keynes was perfectly clear about the difference between short and long period. The former obtains “when capital equipment is virtually unchanged”,45 while technical progress has its effects over the long period, when it brings down prices or, alternatively, drives up wages.46 Nevertheless, his frequent analyses involving the short period raised confusion over two very different things—on the one hand, fluctuations in prices and interest rates and, on the other hand, the fact that over the long

 Panico (1988). See in particular ch. 5.  GT, ch. 10, 77. 46  GT, ch. 19, p. 169. 44 45

130 

C. PERROTTA

period (as Smith explained)47 the rate of returns on investments tends to come down when, thanks to accumulation, capital becomes more abundant.48 Of course, analysis of the cycle is not particularly relevant to analysing the welfare state, or the subsequent painfully prolonged crises,49 and even less transition to the post-industrial economy. Even Haberler, who ill-­ advisedly reduced the crisis of the 1930s to a matter of the business cycle, recognised that the latter has nothing to do with the categories of accumulation used by classical economists.50 Finally, there is a passage that heightens doubts about the short period in Keynes. It appears when, reassuring readers that he does not want policies of a socialist nature, he states that policies organised by the state must cease as soon as they have succeeded in reaching an aggregate volume of production sufficient to sustain full employment. At that point, he writes, classical theory takes over again, thanks to which private interests “will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them”.51 It may have been that Keynes adopted this reassuring stance to ensure admission for his proposal in the corpus of academic theory (actually, only a small part was admitted, as evidenced by the rise of the Neoclassical Synthesis). But the price he paid was high.

5   Keynesian Policies in the Welfare State The question to address at this point is: is it possible to achieve full employment in a short period, in the sense used by Keynes (see above)? The answer is no.52 After the war, the Keynesian project for full employment through public investments enjoyed extraordinary success. However, its implementation necessitated the profound transformation of the advanced economies and in particular of the European economies.  Smith (1776, II, IV, p. 335).  On the weak adaptability of Keynes’ theory to the long period, see Ackley (1961, ch. XV.3, pp. 478–479). 49  See Cornwall (1997, p. 307). 50  Haberler (1937, pp. 121–122). 51  GT, ch. 24, p. 238. 52  See Kaldor (1960, chs. V and X). 47 48

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

131

It gave rise to a high-power boom that lasted nearly 30 years based on the increase in mass consumption and eventually involved practically the whole society, beginning with the classes that had been hitherto excluded. For the first time in history, essential public services became universal, extending well-being to all and boosting social productivity—education, health services, housing and pensions for all, together with public transport and large-scale infrastructure. The state protected the weaker categories—the labourers, farmhands and craftworkers, the elderly, the ailing and the disabled. The productive structure of the economy was changed at its very roots. The welfare state did not only bring widespread well-being, but it also fostered a huge increase in the productivity of labour at all the levels of specialisation, to the extent that it can be considered the greatest investment in human capital ever organised. Few realised this at the time, however, although throughout the nineteenth century, many economists had insisted on education as a factor to boost productivity. The neoclassical economists and the Marxists—with a few exceptions— took a decidedly wary view of the welfare state. For both, the state had no significant role to play in capitalistic accumulation, and public spending could be seen as wealth removed from investment.53 For both, public spending was unproductive. Besides, the followers of Keynes, despite being the sole defenders of the welfare state, attributed scant importance to this aspect of the theory. However, this theoretical shortcoming proved ruinous. Moreover, it prevented perception of certain—albeit limited—degenerations in public spending. And it was on this point that the neoliberals speculated, discrediting all the public spending that promoted employment. Keynes had already had to defend himself against this school of thought, which we now call neoliberal. He insisted that a fall in the propensity to spend, far from fuelling investment reduces employment: “A decreased readiness to spend will be looked on in quite a different light if, instead of being regarded as a factor which will, cet. par., increase investment, it is seen as a factor which will, cet. par., diminish employment”.54 This belies the neoclassical charge that Keynesian policy generates inflationary tensions. Such tensions arise only if public investment fails to find demand, that is, in the case of saturation.  See Bateman (2019, p. 31).  GT, ch. 14, p. 117.

53 54

132 

C. PERROTTA

As was inevitable, in the mid-1970s, the first signs of market saturation appeared. The need, then, was to open up new markets, which meant entering into a transition towards the post-industrial economy. This type of economy had been anticipated by various authors in the 1960s and was to be based on increasing investment in human capital. Thus, increasing importance would be taken on by community services, immaterial products, personal care, research and education. But the transition did not come about. The boom petered out at the end of that decade, leaving room for a cultural and economic reaction that was in the space of a few years to destroy the values upon which the Keynesian policy of full employment had been constructed. For 40 years, the reaction (neoliberalism) has stood in the way of a steady and lasting recovery of development, generating rampant unemployment.55 So it was that a simple crisis of transition turned into a total disaster. As the market situation came to a head, the upholders of the welfare state found themselves devoid of theoretical arms to counter the neoliberal backward march. And today Keynesians still have to address the structural problems that emerged at the end of boom (besides the problems that have since cropped up). The problems are emerging not from a stagnant industrial economy based on private enterprise, as in the 1930s, but from a new economy based on diffuse social production which calls  for steering by the state insofar as it represents the general interest.

6  The New Problems Emerging After the Boom and Adjustment of Employment Policies Let us consider what might be seen as the major critical points. 6.1   Goods in Excess and New Needs Keynes writes that with increasing wealth, the marginal propensity to consume declines, and with it the marginal efficiency of capital. In these conditions, investment is far from being an attractive option.56 However, Keynes does not specify the sectors in which the propensity to consume and the efficiency of capital decline, nor those where they  See, for example, Paesani (2010, pp. 395–399).  GT, ch. 3, II, pp. 26–28.

55 56

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

133

remain high or even increase. Without this distinction, the theory seems to suggest that increasing wealth always leads towards saturation at the end of investments. Here we come to another element, almost always ignored, in the initial debate on underconsumption. To demonstrate that crises of saturation do not exist, Say and Ricardo—like Smith—assert that human needs are unlimited. Thus, saturation can be avoided, but on condition that there be constant variation in consumption57—a thesis that has been upheld by other economists, too. After all, the need to diversify production to fuel development is a fairly obvious point, and yet it has no significant role to play in the analysis of the neoclassical economists, nor indeed in Keynesian analysis. Now, the saturation that surfaced in the 1970s concerned the traditional goods of the period, which had become repetitive and thus with ever lower marginal utility. At the time, however, the need to shift investments towards the production of new goods was not perceived. Obviously, in this case, too, some entrepreneurs sought more productive investments opening up new sectors, such as information technology and robotics (but also medical treatments, biotechnologies, etc.). This led to the digital economy, the new technological revolution that is radically changing work in almost all sectors. It has boosted labour productivity to such an extent as to destroy tens of millions of jobs. Contrary to claims often made for it,58 however, the number of new jobs it has created is indeed far lower.59 6.2   Human Capital In the welfare state, public spending was not a short-period remedy for unemployment; it proved a very far-reaching process that determined the development of the advanced societies. The underlying cause of the subsequent unemployment was the lack of public investments. Public capital, in the broadest sense of the words, is of three types: natural common goods, public infrastructures of all kinds and, finally, what Smith called the aggregate of acquired useful abilities (“the

57  Smith (1776, I.11, pp. 164–165). Say (1803, I, XV, p. 92). Say (1828–1829, tome 2, VII.4). Ricardo (1821, 21, pp. 5–7). 58  See, for example, Moretti (2013). 59  See Dosi et al. (2021).

134 

C. PERROTTA

acquired and useful abilities of all the inhabitants or members of the society”),60 which we might call the collective human capital.61 Instead of enhancing this type of production, however, the liberals have fought tooth and nail.62 They hold it to be unproductive because it does not aim at profit, and they see it as subtracting wealth from private investment. The neoliberals ignore history. No great technological revolution can be confined within the limits of the firm. The birth of manufacturing in the seventeenth century, the creation of factories at the end of the eighteenth century and the “second industrial revolution” in the second half of the eighteenth century all called for large-scale and long-period state interventions which—while encouraging private investments—spent on adapting the productivity of the aggregate human capital to technological progress. In countries like Germany, Japan, nineteenth-century Russia and southern Italy development was launched on the basis of state planning and financing. If Keynes was somehow allowed to disregard the issue of the productive nature of public works, it was no longer possible after the welfare state. In the times of the welfare state, various authors sensed the growing importance of the more advanced forms of consumption associated with the productivity of aggregate human capital.63 But all this had a scant effect on the mainstream theory of the period. Today the lack of public activities is holding back development in the more advanced sectors as well. There is no adequate education and training of human capital for new jobs or efficient organisation of services ranging from information, financial and statistical services to information technology network, and so forth. The cultural, logistic, commercial, health care and education structures show scant vitality, and for this reason, too, an increasing proportion of capital is being channelled into low-­ level technologies.

 Smith (1776, II.I, p. 264).  This is different from social capital. The latter is a sociological concept that refers to the relationship between individuals or between groups and is generally associated with civic sense. However, this concept too is now important in economic analysis. 62  See the neoliberal criticism cited by Pressman (2001, pp. 104–11). 63  See Perrotta (2018, ch. XVIII, sections 3–4). 60 61

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

135

6.3   Conflict Between Contrasting Interests The full employment policies had reinforced the bargaining power of the workers, and this came about, moreover, in a climate that saw keenly critical attitudes towards capitalism. Fearing this tendency, businesses took advantage of the first drop in employment—due to saturation—to launch a fierce attack on public spending for employment, involving the discredit of even the regulatory role of the state.64 As Reagan put it, “government is not the solution to our problem, government is the problem”. The ideological campaign succeeded in discrediting Keynesian policies, turning a policy that had guaranteed widespread well-being and high profits into a source of inefficiency and parasitism in the public image. Consequently, public capital was reduced to the bare minimum, as we have seen. A frenzy of privatisation took over, financed with public money (a handy brand of hyper-liberalism). This was weighed down on state budgets and blighted the services (which, of course, represent a significant part of the real wage of the middle-to-low classes). With the waning of public capital and its productivity, the unemployment produced by the digital revolution was aggravated. The money subtracted from the public sector also found its way to private interests along another road, namely reduced taxation on the highest incomes, a policy that would in theory encourage investment. This is the trickle-down theory. In reality, with market demand reduced to a minimum, higher incomes for the richest did not translate into higher investment but, rather, increasing financial and real estate speculation or pure parasitic rent, cramming the world’s tax havens. Naturally, growing unemployment weakened the workers’ bargaining power (which was the real aim of the neoliberal restoration), and today’s new workers have insecure jobs, very low wages and scant recognition of their rights; they also have to endure ruthless exploitation. At the bottom of this scale is a great mass of slave workers. Clearly, it cannot suffice to bring back the traditional Keynesian policy, as Krugman seemed to think.65 It needs to be integrated with a long-period policy distinguishing between repetitive goods and new goods, investments to enhance the human

64  For the effects of full employment on capital/labour conflict, see King (2001, p. 76) and Harcourt (2007, pp. 65–66). Both place their trust in incomes policy. 65  Krugman (2012).

136 

C. PERROTTA

capital and regulation of bargaining between capital and labour (the weaker side), as called for by Smith.66 6.4   Rents and Inequalities The fourth critical point concerns the relationship between inequalities and rents. Today revision of Keynesian policies in advanced economies is necessary for two reasons—to respond to the ever-increasing poverty produced by neoliberalism and to complete transition to the post-industrial economy. However, there is one crucial obstacle; it is a programme that calls for the reduction of inequalities,67 which have now grown monstrous.68 Excessive inequalities obstruct both the formation of capital sufficient for investment and the necessary level of demand. The General Theory does not attribute a central role to the issue of inequalities, but the approach to it is itself significant. As we have seen, Keynes held that it was up to the state to prevent excessive inequalities by means of debt duties, which can interact with a cumulative process on rents formed through inheritance (p. 237). Perhaps unwittingly, Keynes repeats the thesis of the illuminists, who argued that while a certain degree of inequality is necessary, excessive inequality harms the economy.69 Nevertheless, it is impossible to reduce inequalities to a reasonable extent only in the advanced economies. The mechanism that spawns them ever more profusely is now at work on the worldwide scale. The multinationals flooding Western markets with their goods and services exploit the virtual slave labour of women and children in the poor countries. And everywhere, moreover, firms are making use of miserably paid, insecure jobs offering no guarantees. The profits made by these firms reflect an increasing predatory approach. They derive not so much from higher productivity as from hyper-­ exploitation of labour. This also applies to the hyper-intensive exploitation of resources of the poor countries, at the expense of the local economies. And, of course, it also applies to the financial and real estate speculation and to the criminal economy, reaching out ever further.  Smith (1776, I.VIII. pp. 68–70).  See Bonifati and Simonazzi (2010a, b, p. 25). 68  We confine to mention here the Oxfam Report 2021 online. 69  GT, p. 236. See, for example, Hume (1752, p. 161). 66 67

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

137

The rents formed by destroying natural resources and depreciating human capital often pass under the guise of profit, and are considered profits; thus, parasitism in disguise increasingly aggravates inequalities (between individuals, social groups, and countries) and passes them off as the result of alleged increase in efficiency. This trend has impoverished society to the extent that it is now impossible to reboot productive investments without combating rents. Keynesian policies should be addressing this trend today, committing labour and capital to full employment in both the advanced and the poor countries. This is to be achieved by producing both the essential goods for the poorer levels of the population and more advanced goods for the middle classes. The advanced economies will not be able to solve the problem of their unemployment and low level of demand unless they tackle the problem of employment and demand in the poor countries. So Keynesian policies still have a long way to go.

References Ackley, G. 1961. Teoria macroeconomica, Translated from English. Torino: Einaudi, 1971. Barton, J. 1817. Observations on the Circumstances Which Influence the Conditions of the Labouring Classes of Society. Baltimore: Johns Hopkins University. 1934, online. Bateman, B.W. 2019. What Has Become of Keynesian Economics? Review of Keynesian Studies 1: 22–41. Blaug, M. 1961. Economic Theory in Retrospect. 4th ed. Cambridge, UK: Cambridge University Press. 1985. Bonifati, G., and A. Simonazzi, eds. 2010a. Il ritorno dell’economia politica. Saggi in ricordo di Fernando Vianello. Roma: Donzelli. ———, eds. 2010b. L’economia classica e Keynes. In G. Bonifati and A. Simonazzi (2010a), 3–29. Carabelli, A., and M. Cedrini. 2011. The Economic Problem of Happiness: Keynes on Happiness and Economics. Association for Social Economics. Online. Cornwall, J. 1997. Keynes? What Remains of. In An Encyclopedia of Keynesian Economics, ed. T. Cate, 299–309. Cheltenham: Elgar. Costabile, L. 1980. Malthus. Sviluppo e ristagno della produzione capitalistic. Torino: Einaudi. Dosi, G., M.  Piva, M.E.  Virgilio, and M.  Vivarelli. 2021. Embodied and Disembodied Technological Change: The Sectoral Patterns of Job-Creation and Job-Destruction. Research Policy. May.

138 

C. PERROTTA

Graziani, A. 1980. Malthus e la teoria della domanda effettiva. in Costabile (1980) VII–LV. Haberler, G. 1937. Prosperity and Depression: A Theoretical Analysis of Cyclical Movements. Geneva: League of Nations, revised ed. 1939, online (Questia). Harcourt, G. 2007. The Theoretical and Political Importance of the Economics of Keynes. In Post Keynesian Macroeconomics: Essays in Honour of Ingrid Rima, ed. M.  Forstater, G.  Mongiovi, and S.  Pressman. London and New  York: Routledge. Heckscher, E. 1931. Mercantilism. New York: Macmillan. ———. 1955. Keynes on Mercantilism. In E. Heckscher (1931) 2nd ed. 340–359. Hobson, J.A. 1894. The Evolution of Modern Capitalism. London: Scott, Internet Archive. Holt, R., and S. Pressman, eds. 2001. A New Guide to Post Keynesian Economics. London and New York: Routledge. Hume, D. 1752. Of Commerce. In Essays Moral, Political, Literary: Liberty Fund online Philosophical Works, vol. 3, 155–162. London: Green & Grose. 1887. Kaldor, N. 1960. Saggi sulla stabilità economica e lo sviluppo, Translated from English. Torino: Einaudi 1965. Keynes, J.M. 1930. Economic Possibilities for Our Grandchildren. In Essays in Persuasion, 358–373. New York: Norton., 1963, online. Keynes, J. M. 1936. The General Theory of Employment, Interest, and Money, online from the University of Adelaide Library (2003). King, J. E. 2001. Labor and Unemployment. In R. Holt and S. Pressman (2001), pp. 65–78. Krugman, P. 2012. End This Depression Now! New York and London: Norton. Malthus, T.R. 1820. Principles of Political Economy. 2nd ed. London: Pickering, 1836, Online Google from Bodleian Library, Oxford. Marcuzzo, M.C. 2020. Mistrusting the Free-Market Economy: Keynes’s Revolution in Economic Thinking. Review of Keynesian Studies 2: 1–21. Marx, K. 1861–63. Theories of Surplus-Value, first ed. 1905–1910. Moscow: Progress Publishers, online. ———. 1867. Capital I. Moscow: Progress Publishers. online. Mill, J. S. 1829–30. On the Influence of Consumption on Production. in Essays on Some Unsettled Questions of Political Economy, 1st ed. 1844, 2nd ed. London: Longmans etc. 1874, online Kitchener (Canada): Batoche Books, 2000: 37–55. Mill, J.S. 1848. Principles of Political Economy. 7th ed. London: Longmans, online Library of Economics & Liberty. Moretti, E. 2013. La nuova geografia del lavoro. Milano: Mondadori. Paesani, P. 2010. Keynes e la crisi attuale: diagnosi e prescrizioni di politica economica. In G. Bonifati and A. Simonazzi (2010a), 389–403. Panico, C. 1988. Interest and Profit in the Theories of Value and Distribution. London: Macmillan.

7  KEYNESIAN POLICY TODAY: MORE EMPLOYMENT AND MORE HUMAN… 

139

Pecchi, L., and G. Piga, 2011. Il ventunesimo secolo di Keynes (trans. of Revisiting Keynes, Economic Possibilities for Our Grandchildren, 2008). Perrotta, C. 2018. Unproductive Labour in Political Economy. London and New York: Routledge. Pressman, S. 2001. The Role of the State and the State Budget. In R. Holt and S. Pressman (2001), 102–113. Ricardo, D. 1820. Notes on Malthus’ Principles of Political Economy. Baltimore: Johns Hopkins, online. ———. 1821. Principles of Political Economy and Taxation. 3rd ed. London: Murray, online Library of Economics and Liberty. Roncaglia, A. 2001. The Wealth of Ideas: A History of Economic Thought, Translated from Italian. Cambridge UK: Cambridge University Press, 2005. Say, J.-B. 1803. Traité d’économie politique. Paris: Guillaumin, 1841, online Inst. Coppet. ———. 1820. Lettres à M. Malthus. Paris: Bossange. Online Wikisource. ———. 1828–29. Cours complet d’économie politique pratique, 2nd ed., 2 vols. Paris: Guillaumin, 1840. Sismondi, J.  C. 1819. Nouveaux principes d’économie politique, 2nd ed. 1827. Paris: Delaunay, online: 1re tome, Gallica, BNF; 2nd tome: University of Michigan. ———. 1820. Éclaircissements relatifs à la balance des consommations avec les productions. In J. C. Sismondi 1819, ed. 1827, 2nd tome, 369–464. Smith, A. 1776. In An Inquiry into the Nature and Causes of the Wealth of Nations, ed. E. Cannan. London: Methuen. 1904, pdf from libertyfund.org. Watarai, K. 2015. The General Gluts Theory of Thomas Robert Malthus. Conference on Population, Poverty, Welfare in the History of Economic Thought. Tokyo: Waseda University.

CHAPTER 8

Investing in Human Capital Cosimo Perrotta

Abstract  Economists have always been aware that development is led by investments in education and skill, that is, by human capital. However, mass workers were excluded from such investments by classical and Marxist authors due to their postulates: the tendency of wages to the subsistence level and the separation between wage and luxury goods. List, J.S. Mill and Marshall among others stressed the central role of education in long-­ run development, but they did not propose specific policies. Keynes was mainly concerned with the short run. Then the post-industrial part of today’s economy has emerged without the support of theory and even less of a suitable policy. This has produced the semi-failure of its take-off and huge destruction of human capital. This chapter first sums up the main reflections on education before 1960 economics (Sect. 1); then it deals with the theories and policies of human capital during and after the welfare state boom (Sect. 2); in Sect. 3, it treats the present mass destruction of human capital; finally, it gives some prospects for the future (Sect. 4). Keywords  Education • Skill • Post-industrial economy • Human capital

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7_8

141

142 

C. PERROTTA

1   Human Capital and Education Before the 1960s The expression “investment in human capital” has two meanings, different but connected. The literal meaning refers to dependent workers in general, especially wage earners. However, Theodore Schultz’s understanding (see below) refers to investment—or self-investment—to improve workers’ productivity, and especially investment in education and training. The first organic policy of investment in human capital was implemented by the British sovereigns from the fifteenth to the seventeenth century and referred to both aspects of human capital. The sovereigns required parishes to collect alms for the poor and to build workhouses, in which the ablebodied poor were both assisted and forced to work. The pivot for this policy was to transform beggars into human capital. Such initiatives aimed at organising a policy of import substitution by extending manufacturing in order to produce at home what until then had been imported.1 Of course, this was mainly unskilled labour. But the mercantilists also sought to attract the best foreign artisans with good economic and living conditions,2 which implies that they also had a clear idea about skilled human capital. Similar attitudes can be easily found during the seventeenth century. We here mention just Serra, who put “the quality of people” among the main factors of economic development, and Petty who described the increase in productivity due to the study of production techniques.3 In the last decade of the seventeenth century, the need to extend the domestic market led British economists to advocate high wages, because they could increase demand, but also because they encouraged workers’ industriousness.4 In the eighteenth century, most authors were aware of the link between the increase in consumption and the increase in the productivity of human capital. For example, Defoe stated that in foreign trade it is impossible to compete with the very low wages of China and India. Since British workers enjoy the highest wages in the world, they are able to produce better goods. Only at this level—that is, the quality of products—can we compete with the others, he wrote.5 1  See Starkey (1529–1532, pp. 34, 115). For the general issue, see Perrotta (2004, ch. 6: 127–136). 2  See, for example, Fortrey (1663, pp. 219–226). 3  Serra (1613, part 1, ch. 4). Petty (1672, XV: 182; see also — 1662, pp. 29–30, 52, 81). 4  Among many others, see Child (1694, pp. 4–5). 5  Defoe (1728, pp. 59–67).

8  INVESTING IN HUMAN CAPITAL 

143

During the Enlightenment, most authors support high wages because they allow workers to increase their productivity through education and training. Postlethwayt and Butel-Dumont maintain that, due to the consequent increase in productivity, production made through high wages costs less than production based on low wages.6 Cantillon revived Petty’s reflection and forged the concept of investment in one’s own human capital. He affirmed that artisans’ remuneration must cover the time and labour spent in apprenticeship.7 Smith, in turn, extended this concept to society: the talents acquired by individuals through study and training form a sort of fixed capital for society as a whole.8 Industrial Revolution separated unskilled human capital from the skilled one. The first happened mainly inside the factory and referred to elementary workers, the second developed mainly outside or at the top of the factory. Additionally, the public sector increased enormously. All the jobs of the second kind required a long process of education and training. Consequently, the classical economists often underlined the importance of education in raising productivity, but their basic economic principles were forged according to the mass factory workers. These principles actually ignored development founded on human capital. In particular, there were two classical postulates that blocked this perspective: the constant tendency of wages to the subsistence level and the division of goods between wage goods (essential final products) and luxury goods. The classical economists did acknowledge that, in the long term, luxury goods could become common goods. However, they conceived this shift as too slow to influence the process of accumulation. For instance, Marx, although he foreshadowed many aspects of later capitalist development, missed the most important one: the growth of productivity through investment in education and skill.9 Moreover, Smith confined wealth to material goods.10 Subsequently, it took time and hard thinking to arrive at the recognition that also nonmaterial wealth could be accumulated and that education—that is, a type of non-material accumulation—was a key way to development.  Postlethwayt (1757, pp. 18–19), Butel-Dumont (1771, II, pp. 122–126, 132–134).  Cantillon (1730, I.VII: 18). 8  Smith (1776, II.1.17). 9  See Perrotta (2018, ch. XI). 10  Smith (1776, book II, ch. 3). 6 7

144 

C. PERROTTA

Dunoyer, J.S. Mill, List, Marshall and many others underlined the importance of education, intellectual progress and customs for accumulation.11 On the other hand, Eisdell effectively described the difficulty of raising the skill and productivity of common workers. He wrote: “The wealth of a country depends mainly on the skill”, but we cannot have enough skill because the workers are too poor to send their children to study. Thus, there is a shortage of skill and an excess of common labour.12 The trap described by Eisdell afflicted industrial accumulation for two centuries, up to the advent of the welfare state. The insufficient growth in skill held back both increase in production and increase in consumption. Often there were periods of stagnation, in which investments dropped and capital turned out to be in excess. Excess capital tended to go towards financial speculation or unproductive rents.13 Although the period saw a substantial increase in the middle classes (professionals, public administrators, teachers, researchers, engineers, technicians), it was not enough to grant stable growth. Even Keynes failed to fully appreciate the real issue. He demolished the inadequate analyses of the crisis which, he stated, was not due to excessively high (rigid) wages, but—on the contrary—to excessively low wages and the consequent scarcity of demand. However, the increase in wages he propounded aimed only at increasing demand, but not at steady growth based on skill. It is precisely here that Keynes appears to have been adopting a short-run approach.

2   Human Capital in the Welfare State and in Its Crisis The welfare state policy, however, was much more comprehensive than Keynes’ prescription, which was nevertheless its main pillar. The post-war governments finally implemented a policy for the support of both development and the lower classes. For the first time, even the lowest social classes were included in the distribution of wealth. Not only did employment and wages rapidly grow, but also a long series of public interventions provided support for the weaker categories: housing, health 11  Dunoyer (1830, vol. 2, book 5: 1–33). J.S.  Mill (1844, III, 7, 10–12, 26–28). List (1841, II.XII.1–7 and 20–21). Marshall (1890, VI, XII.45 and XIII.39–41). 12  Eisdell (1839, II: 255–164). 13  See, for example, Loria (1889, pp. 444–476; 1934, pp. 604–609).

8  INVESTING IN HUMAN CAPITAL 

145

system, education, infrastructures, social security, support of weak groups or areas and so on. The general level of welfare showed a sharp rise. According to traditional prejudices, these expenditures subtracted wealth to profitable investments. In fact, the contrary happened. The unprecedented increase in welfare resulted in boosting productivity and led to one of the longest booms in the history of capitalism. Actually, the social spending on the welfare state proved the greatest investment in human capital ever seen. Only ideology could hide such an obvious fact. It is a well-known fact, for instance, that health care increases workers’ productivity, education and culture enhance their technical skills and critical aptitude, while comfort and social security improve workers’ ability to adapt. All this boils down to an increase in labour productivity. Furthermore, the rise in wages allowed for a great increase in the demand for new goods, such as household appliances, cars, care for the elder members of the family and so on. This caused a radical change in family life. Women had now much more time and opportunity to do non-­ domestic work. This too led to a great increase in social productivity. According to Piketty, it was only during the prevalence of the welfare state that the returns of rent and shareholding were lower than the growth rate of the economy. Before and after, they had and have been higher. During the welfare state growth in Western Europe (1950–1970), the per capita GDP annual increase even surpassed that of the US, reaching 4%. But in the period 1970–1990, it slowed down.14 It was precisely during that boom that Theodore Schultz theorised the growth of human capital. He stressed that a great part of what we consume is in fact investment, including education, training and healthcare. Even leisure can be an investment if it leads to enhancement of skill. Public spending on education, health and training represents an investment in the workers’ productive capacity.15 After Schultz’s article, other scholars from Chicago extended his analysis to specific aspects of the issue. Mincer examined in detail the increase in married women’s external work and its influence on the family income. An increase in income far from diminishing married women’s external work is a cause of its increases. On the other hand, Gary Becker noted the change of significance that was then happening in the traditional expressions of labour-intensive and capital-intensive products (see below).  See Piketty (2014, pp. 23–27; 97).  Schultz (1961, 1968, pp. 280–281). Mincer (1962).

14 15

146 

C. PERROTTA

Thus, the social spending during the welfare boom unlocked the workers’ potentialities—which had been constricted by low wages and bad living conditions—and triggered an increase in productivity. However, most people saw production and distribution as separate. All economic and political approaches converged on this incorrect view. The popular parties, despite being favourable to the welfare state, theorised that production must be independent of distribution. The Keynesians thought that production should, only temporarily, be encouraged by an increase in demand. The great majority of neoclassical authors were convinced that social spending deducted wealth from investments and hindered production.16 The Marxists substantially followed Sweezy’s interpretation, according to which the welfare state consisted in an unproductive use of the surplus. The latter, being in excess, had to be employed unproductively in order to avoid gluts in the market.17 Behind this unanimous neglect of human capital, there was a common distrust towards public spending, which was considered per se unproductive. Only a few economists did not share such a view.18 On the other hand, the services were considered useful only as support for material production. After all, we were still in the industrial era, and the growth of production was mainly based on material products. However, in the 1970s there were many signs suggesting that, in order to continue development, a vigorous increase in non-material or high-­ quality goods was necessary. Further, new enterprises were emerging, for example, production and sales of projects, analyses, statistical data and organisation; extension of education, training, culture, tourism and research; or greater investment (also for profit) in personal care, socialisation, tutoring of children and support for the handicapped or for the elderly and so on. Besides, modern infrastructures were necessary (like those of the Delors Plan, which were never actually implemented) for information and communication networks. Additionally, there was a need for systematic work in every field in order to stop pollution and the greenhouse effect, to restore the environment, necessitating new technological devices in every field, which required higher skill and specific research.

 See, for example, Bacon and Eltis (1976).  Sweezy (1942, chs. 8.4 and 10.2). Baran and Sweezy (1966). 18  See, among them, Hansen (1941, pp.  144–152); Kuznets (1966: 224–234); Gough (1975); Rowthorn (1979). 16 17

8  INVESTING IN HUMAN CAPITAL 

147

All these activities (not yet fully developed) called for new investments in human capital, which were not implemented. Thus, the lack of new opportunities led the economy towards a saturation of the market and capital in excess. Then, to keep markets open, consumerism spread. Since then there has been an invasion of repetitive consumer goods, disposable implements, items with planned obsolescence and new goods or services induced by fashion. Such goods enhance neither utility nor indeed the consumers’ productive capacity. Other channels taken by the excess capital were, and still are, financial or land-based speculation which favoured the transformation of investment capital into rent. Of course, there were also new fields for productive investment. Firstly, Western countries agreed on globalisation, that is, on reducing duties in international trade, especially through inter-state agreements, and also agreed on the free movement of capital across countries. Thus, the Western countries enlarged the market for their commodities. From 1950 to 2000, international trade grew from 8% to 27% of the world GDP.19 However, globalisation also prompted Western manufactures and capital to move to emerging countries, where they could have lower wages and looser controls. In the end, globalisation supported emerging countries’ development but was counterproductive for rich countries. A plan should have been implemented to convert traditional factories or gradually relocate them abroad. Another plan should have supported the re-training of unemployed workers, but we are still waiting for such policies. It must be stressed that it is not only inequalities and poverty that destroy human capital; it is also the persistence of unskilled labour when qualified labour is needed. Since the end of the welfare state boom, Western countries have been trying to defend jobs in non-competitive factories. But there is no room for such a vast quantity of unskilled factory jobs in the Western context of high wages. Old factories need to be reduced and converted to allow for new skilled jobs and high-quality products. Besides globalisation, another great field of new investment was the digital revolution. Today, digital procedures are increasingly pervading every field of work. They have opened a number of new production sectors: not only information technology and its applications but also robotics, biotechnologies, medical equipment, 3D printers and so on.  See Vaggi (2018, p. 132).

19

148 

C. PERROTTA

Huge databases provide automatically collected information on any subject. News, every kind of information and financial operation can be realised in real time. Distribution is undergoing a radical restructuring thanks to online purchases. Many people think that the digital economy will improve democracy and participation. But non-material activities are now making it easier to concentrate markets, production and economic information. Digital monopolies represent the biggest concentration of wealth and power in the history of capitalism. They are able to obtain detailed information (profiles) on hundreds of millions of people (their customers) and trade and sell it so that even Orwell’s worst nightmares are now possible.

3  The Waste of Human Capital The Western economic crisis, with ever-increasing unemployment and poverty, is generating a deep-reaching social and political crisis. The basic values of the Western civilisation (human and civil rights, respect for other cultures, democracy) are being called into question or despised. Those who are excluded from welfare or feel marginalised take refuge in their traditional identity by reviving old fanaticisms: superiority of one’s religion, culture or “race”. The disappointing paradox is that the great digital oligopolies—which have opened so many pioneering itineraries to the growth of human capital—coexist with, or foster a huge increase in rent (the greatest in a hundred years, according to Piketty).20 Rent, of course, is exactly the opposite of human capital. While the latter is linked to merit, labour and personal improvement, certainly big rents derive from fortune and parasitism. Post-industrial production differs from industrial production. The latter has to do mainly with basic needs, which are limited, while the former is based on more refined needs and goods which are produced above all by intellectual labour. Some economists who analysed Engel’s law best demonstrated this. In 1857, Ernst Engel noticed that the percentage of spending on food out of the total income diminished in proportion to the increase in income. Pasinetti extended this law to all final goods. He wrote that, when income steadily increases, the percentage of basic consumption decreases, while  Piketty (2014, pp. 232–233).

20

8  INVESTING IN HUMAN CAPITAL 

149

that of refined consumption grows. This makes human capital grow.21 In turn, Kindleberger used Engel’s law to analyse the production factors. In economies based on agriculture, the production factor that determines the value of goods is land. In industrial economies, it is capital, while human capital is the basic production factor of post-industrial economies. Kindleberger emphasised that traditional goods have low elasticity to income, and their market thus tends towards saturation.22 The impasse of saturation is precisely what happened at the end of the welfare state economy. Kindleberger also indicated the way to restart development. In order to avoid saturation, new goods must be produced and new fields of production must be opened. He affirmed that this can be achieved thanks to the support of the state (about the state, today Mazzucato holds the same position).23 Actually, state intervention should go in several directions. First, it should satisfy the needs which are still unsatisfied, like those mentioned above. Most important is, of course, efficient public administration both at a national and local level. Subsequently, the state should encourage new sectors of production and provide a series of services to private enterprises, ranging from information on investment opportunities to lending money at low interest rates for the long-run investments and so on. Nevertheless, the contrary has prevailed. In the 1980s, precisely when information technology was becoming the driving force of accumulation, the welfare policy that enhanced human capital rapidly went into decline, public intervention was criticised in principle and deregulation became the new mantra of political economy. As a result, the unemployment created by the technological revolution—in addition to that caused by saturation and globalisation—was not relieved with any appropriate remedy. This growing unemployment and deregulation allowed enterprises to increase exploitation of the workers through low wages and poorer working conditions. For European young people, unemployment now (2020) stands at 16%.24 But in fact general unemployment is undervalued because the official figures take into account temporary, occasional and involuntary

 Pasinetti (1981, ch. 11.16).  Kindleberger (1990, pp. 5–13). 23  Kindleberger (1990, pp. 14–21). Mazzucato (2018, ch. 8). 24  Eurostat-Unemployment, online. 21 22

150 

C. PERROTTA

part-time jobs as if they were steady jobs (in Southern Europe more than 50% of part-time jobs are involuntary).25 On the other hand, a high percentage of the wage labour employed, directly or indirectly, by the multinationals is practically slave labour. Children working in inhuman conditions number 152 million throughout the world.26 Deregulation also allows multinationals to evade or elude taxes. Thus, the state has become poor precisely when social spending should be increasing to cope with the growing poverty of people. Today public services are deteriorating, which again increases poverty and destroys human capital potential. Stiglitz writes: “According to the IMF, governments lose at least 500 billion dollar per year as a result of corporate tax shifting. And Gabriel Zucman … and his colleagues estimate that some 40% of overseas profits made by US multinationals are transferred to tax havens. In 2018, 60 of the 500 largest companies … paid no US tax, despite reporting joint profits (on a global basis) of some $80bn. These trends are having a devastating impact on national tax revenues and undermining the public’s sense of fairness”.27 Thus, although there is a speedy growth in the human capital of a minority, the extensive destruction of human capital is spreading due to unemployment, poverty, the digital divide and lack of social spending; in a word, due to inequalities. In 2010, the top 10% of Western population owned about 60% of the total wealth (72% in the US).28 In the US, the top 1% owned 18.3% of the total wealth in 2016.29 In 2018, the poorest half of the world’s population (3.8 billion) owned an amount of wealth equal to that of the 26 richest individuals.30 These inequalities are growing while the upward trend of wealth in Western countries is slowing down. From 1969 to 2019, the per capita GDP growth of the OECD countries dropped from an average of 3% a year to 1%.31 As the production of social wealth declines, the top families’ wealth increases, which disproves the alleged benefits of the trickle-down  See Atkinson (2015, pp. 136; 138).  Global Slavery Index 2018—Global Findings: 28–29, online. 27  Stiglitz (2019). See Zucman (2013, pp. 47–55; chs. 3 and 5). 28  See Piketty (2014, pp. 249, 257–258). See also Atkinson (2015, pp. 68–81). 29  Baker (2016, pp. 26–27). See also Stiglitz (2013). 30  Oxfam (2019, pp. 5–14). 31  World Bank, see Valentini (2019). 25 26

8  INVESTING IN HUMAN CAPITAL 

151

theory on which rapacious minorities have built up their fortunes. The trickle-down theory holds that the rich should pay low taxes in order to increase their investments because the latter benefit all of society.32 Actually, the only visible trickle-down effect in the last decades has been an enormous displacement of wealth from productive investment to parasitic rent. However, in many emerging countries, human capital is growing, with reciprocal enhancement between an increase in education/skill and an increase in production/consumption. From 1980 to 2017, at least ten countries (China and India included) have seen their Index of Human Development soar by about 30 percentage points; another ten or more countries increased by 20 percentage points. In all these countries, a large middle class grew, indicative of a steady increase in human capital. The general world context is now more favourable to the growth of human capital. Nearly all children of both sexes enter primary school. Before the pandemic, extreme poverty (less than 2 US dollars per capita a day) is diminishing by about 1% a year.33 Literacy is now 86%. In Algeria, literacy stands at 16% among people aged 65 years or more, but at 92% among people under 25. Similar huge progress can be seen in Saudi Arabia, Iran and so on.34 But in Latin America, although there are well-established education and health care systems, only a privileged minority enjoys them. Latin American societies tend to be static; there is no visible growth of human capital. The middle classes are still too small and partly share the privileges of the rich. In the vast majority of African and South-Asian countries, the waste of human capital is still huge. In many of these countries, the economy is even worsening.

4  Restarting the Growth of Human Capital At present, the de-regulated market is proving unable to accomplish Western transition from the industrial to the post-industrial economy. On the contrary, it favours the transformation of a growing part of wealth into rent. While the displacement of Western manufacturers towards emerging countries is going ahead, the growth of the post-industrial economy is proceeding too slowly. The picture offered by the Silicon Valley society is  For a criticism of this thesis, see Vaggi (2018, pp. 61–65 and passim).  Oxfam (2019, pp. 10–27). 34  UNESCO and OECD data (see OWD, Education-Literacy). 32 33

152 

C. PERROTTA

emblematic. In that area, many advanced technicians of the digital economy are homeless due to the disproportion between their salaries and the rent they have to pay for their apartments. Moreover, the issue of migration must be addressed. The Western countries are handling migrant flows in a very short-sighted way. While governments endeavour to hold them back, their economy desperately needs a new workforce. They need migrants for two reasons. First, Western young people reject unskilled jobs, having invested a lot of time in their studies. Second, the Western population is growing old and the birth rate is dropping (both phenomena are due to welfare). By the end of this century, Europe will have lost 100 million people. On the other hand, Africa has a very high birth rate: at least 2% and, in many countries, 3%.35 African demographic growth derives from a partial exit from absolute poverty and improving health care. If the development of poor countries is sustained, soon the demographic transition will begin and the upward trend of the birth rate will slow down. However, this also depends on Western policy, because the demographic transition is the result of a certain level of welfare. However, is this picture of decline we have painted inevitable? By no means. The growth of human capital can drive us out of the crisis. This growth, in the Western economies, has already led to an increase in productivity of such proportions that society would be able to satisfy its usual needs with a small percentage of the work that is being done at present. Thus, the great unemployment oppressing our society is in fact the consequence of great progress. Only a leading role by the state can reconcile such contrasting tendencies and carry through the welfare development that came to a halt in the 1980s. The state should discourage the extension of rents and excesses of profit and seriously levy the due taxes. With the money thus recovered, the state should start a plan of major investments to satisfy new and old needs and create new employment, supporting productive private investments and extending the growth of human capital among people of low incomes. Unemployment is a crucial issue. It causes discontent and frustration even when society is able to provide the unemployed with a decent income. Labour is still an important factor to achieve full citizenship, independent of income. Keynes appreciated this fact. He wrote that, thanks to technical progress, humanity would  OWD—World Population Growth.

35

8  INVESTING IN HUMAN CAPITAL 

153

eliminate scarcity; the difficulty will then be how to adapt to a life without work.36 Besides, an economy based on human capital tends to transform the very nature of labour. The more labour depends on skill and creativity, the less the present quantitative controls (timetables, work pace, number of products, etc.) will be able to assess its social productivity. Thus, labour productivity is increasingly becoming the result of the general advance in skill, culture and social organisation. For instance, the humanitarian work of non-governmental organisations (NGOs) must now be considered highly productive because they greatly enhance human capital, especially in poor countries. In this context, rich societies can contemplate planned intervention for the development of backward economies. There would also be a great number of major investments, with long-run but very high returns. Collaboration on such projects could extend in many directions, to the institutions, NGOs and humanitarian foundations, networks of enterprises and banks. This would also constitute a powerful drive to restart Western development, providing employment to a great many skilled young people. In our times it is impossible for poor countries to repeat the Western itinerary to development, as Gary Becker’s analyses suggested. The major role played by human capital has upset the old distinction between labour-­ intensive production (economically and technologically backward) and capital-intensive production (technologically advanced and highly productive). Now, thanks to skill and education, labour-intensive (skilled) production is more advanced and more productive than big factory plants.37 Becker also examined the Ricardian law of comparative advantages, which stated that in international trade, every country has more to gain if it specialises in the sector where it is most productive. He maintained that the advantages no longer depend on the different resource endowments but rather on an infinite variety of goods, generated by skills. This is why the rich countries, despite their production similarities, have an increasing interchange (ibid.: 20–21). Becker’s analyses show that in these times, skills and the general growth of human capital are the driving forces of development also in poor countries. Only substantial growth of human  Keynes (1930, pp. 4–5).  Becker (1964, pp. 59–60).

36 37

154 

C. PERROTTA

capital can restart the Western economy and, at the same time, foster development in poor countries.

References Atkinson, Anthony. 2015. Inequality. Cambridge, MA-London: Harvard University Press. Bacon, Robert, and Walter Eltis. 1976. Britain’s Economic Problem: Too Few Producers. London: Macmillan. Baker, Dean. 2016. Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer. Washington, DC: Center for Economic and Policy Research. Baran, Paul, and Paul Sweezy. 1966. Monopoly Capitalism. New York - London: Modern Reader. 1968, scribd.com. Becker, Gary. 1964. Human Capital …with Special Reference to Education. Chicago: University of Chicago Press. Butel-Dumont, George-Marie. 1771. Théorie du Luxe. Londre: Publisher unknown, 1775. Cantillon, Richard. 1730. Essai sur la nature du commerce en général. London: Macmillan. 1931. Child, Josiah (1694) A Discourse of the Nature, Use and Advantages of Trade …, now in his Selected Works 1668-1697, Farnborough, Hants: Gregg, 1968. Defoe, Daniel. 1728. Plan of the English Commerce …. New York: Kelley. 1967. Dunoyer, Charles. 1830. Nouveau traité d’économie sociale. Paris: Guillaumin. Eisdell, Joseph. 1839. A Treatise on the Industry of Nations …. London: Whittaker. online. Fortrey, Samuel. 1663. England’s Interest and Improvement. In A Select Collection of Early English Tracts on Commerce, ed. J.R. McCulloch, vol. 1856, 201–249. London: Political Economy Club. Gough, Ian. 1975. State Expenditures in Advanced Capitalism. New Left Rev, July-Aug: 53–92. Hansen, Alvin. 1941. Fiscal Policy and Business Cycle. London: Allen & Unwin. Keynes, John Maynard. 1930. Economic Possibilities for Our Grandchildren, online: in his Essays in Persuasion, New York: Norton, 1963: 358–73 (yale.edu). Kindleberger, Charles. 1990. Leggi economiche e storia dell’economia. Translated from English. Roma - Bari: Laterza. Kuznets, Simon. 1966. Modern Economic Growth. New Haven, CT: Yale University Press. List, Friedrich. 1841. The National System of Political Economy, Translated from German, London: Longmans & Green 1909, online: Library of Economics & Liberty.

8  INVESTING IN HUMAN CAPITAL 

155

Loria Achille. (1889) Analisi della proprietà capitalista, vol. 1, in his Opere, vol. 1, Torino: UTET, 1957. ———. 1934. Corso di economia politica. Torino: UTET. 1964. Marshall, Alfred. 1890. Principles of Economics. 8th ed. London: Macmillan. 1920, online: Library of Economics & Liberty. Mazzucato, Mariana. 2018. The Value of Everything. Allen Lane - Penguin. Mill, John Stuart. 1844. Essays on Some Unsettled Questions …, 2nd ed. 1874, London: Longman etc., online: Library of Economics & Liberty. Mincer, Jacob. 1962. Labor Force Participation of Married Women: A Study of Labor Supply. In Gender and Economics, ed. Jane Humphries, 211–253. Aldershot, Vermont: Edward Elgar. OWD. (Our World in Data), ed. by Max Roser, online: https://ourworldindata.org/ Oxfam. 2019. “Oxfam Briefing paper”, January 2019, Italian version, online www.oxfam.it Pasinetti, Luigi. 1981. Dinamica strutturale e sviluppo economico. Torino: UTET. 1984. Perrotta, Cosimo. 2004. Consumption as an Investment. London-New York: Routledge. ———. 2018. Unproductive Labour in Political Economy. London-New York: Routledge. Petty, William. 1662. A Treatise of Taxes and Contributions, in Petty [1899, I, 1–97]. ———. 1672. The Political Anatomy of Ireland, in Petty [1899, I, 121–231]. ———. 1899. The Economic Writings, vol. 1, reprint New York: Kelley, 1963. Piketty, Thomas. 2014. Capital in the Twenty-First Century, Cambridge, MA-London: Harvard University Press. Translated from French ed. (2013) and updated. Postlethwayt. 1757. Britain’s Commercial Interest …, reprint New York: Kelley, 1968, 2 vols. Rowthorn, Bob (1979) “Skilled Labour in the Marxist System”, now in his Capitalism, Conflict and Inflation, 231–245. London: Lawrence & Wishart, 1980. Schultz, Theodore. 1961. Investment in Human Capital. American Economic Review, March: 1–17. ———. 1968. Capital, Human, International Encyclopaedia of the Social Sciences. Vol. 2, 278–287. New York: Macmillan & The Free Press. Serra, Antonio. 1613. Breve trattato delle cause che possono far abbondare li regni d’oro e d’argento dove non son miniere. In Scrittori classici italiani di economia politica, ed. Pietro Custodi, Parte Antica, vol. 1. Milano: Destefanis, 1803, reprint 1965. Smith, Adam. 1776. Wealth of Nations, edited by E. Cannan, London: Methuen, 1904, online: Library of Economics & Liberty.

156 

C. PERROTTA

Starkey, Thomas. 1529–1532. A Dialogue between Pole and Lupset. London: Royal Historical Soc. Stiglitz, Joseph. 2013. The Price of Inequality. New York - London: Norton. ———. 2019. Corporate Tax Avoidance: It’s No Longer Enough to Take Half Measures. The Guardian, International ed., 7 Oct. 2019, online. Sweezy, Paul. 1942. The Theory of Capitalist Development. London: Dobson, wordpress.com. Vaggi, Gianni. 2018. Development. Palgrave Macmillan. Valentini, Ezio. 2019. Structural Crisis and Robotisation Require More Europe, Less Austerity. Social Europe, online periodical, 4th June 2019. Zucman, Gabriel. 2013. The Hidden Wealth of Nations. Chicago-London: University of Chicago Press, 2015, Translated from French.

Index1

A Abilities, 10, 16, 42, 48, 51, 53, 56, 57, 69, 71, 89, 133, 134, 145 Accumulation, 2, 4, 10, 16, 65, 71, 73, 110–113, 122, 124, 130, 131, 143, 144, 149 Adelman, Irma, 64, 66, 67 Africa, 21, 68, 152 Agriculture, 22, 27, 83–90, 109, 149 America(s), 27 Ang, Yuen Yuen, 71, 72 Artisan(s), 82, 87, 120, 142, 143 Asia, 70, 71, 76, 151 As if, 45 Aspiration levels, 40 Austrian School, 15, 41 B Banerjee, Abhijit V., 69, 70 Beccaria, Cesare, 89, 92 Becker, Gary, 145, 153

Behavioural analysis (economics), 44 Boisguilbert, Pierre, 85–86, 88 Boyer, Robert, 75 Brain, 19, 23, 50, 51 Business cycle, 112, 129, 130 C Campomanes, Pedro, 88, 92 Cantillon, Richard, 86, 91, 143 Capital immaterial/material, 132, 143, 146 unproductive, 2 See also Human capital Capitalism (capitalist economy), 14, 16, 18, 32, 54, 82, 97, 110, 112, 127, 135, 145 Cerebral circuits, 49 China (Chinese economic development), 71, 72, 75, 95, 142, 151 Civilisation, 28, 54, 83, 148

 Note: Page numbers followed by ‘n’ refer to notes.

1

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 C. Perrotta et al., Human Capital, https://doi.org/10.1007/978-3-031-34494-7

157

158 

INDEX

Clarity, 42, 48, 49, 52, 55–58, 121 Class(es) (social), 3, 14, 28, 99, 144 Classical author(s)/economics/ economist(s)/school, 2, 14, 22, 57, 98, 108, 120, 123–125, 128, 130, 143 Climate, 9, 10, 135 Codified knowledge, 6, 39, 40 Cognitive economics, 38, 42, 48, 57 Cohen, Jessica, 68 Collective (collectivism), 3, 14–33, 41, 44, 50, 52, 57, 58, 72, 134 Colonial(ism), 4, 96 Comfort, 91, 111, 145 Competition, 5, 7, 16, 18, 20, 31, 43, 53–58, 65, 73–75, 82–100, 120, 122 Complexity, 42, 46, 48, 54, 55 Complex processes (systems), 40, 43, 46 Condillac, Étienne, 93 Conflict, 3, 10, 14, 27–31, 40, 82, 83, 97–100, 135–136, 135n64 Conscious thinking, 50 Constraint(s), 18, 30, 39, 42, 45, 89 Consumer sovereignty, 45 Consumption conspicuous/luxury, 85, 143 immaterial/material, 109 as investment, 4, 9 productive/unproductive, 121 refined, 148 See also Underconsumption Contractual constrains, 42 Conventions, 42, 44, 46, 48 Cooperation, 17, 18, 30, 42, 90 Corporations, 32, 73 Creativity, 7, 48, 56, 153 Crisis/crises, 2, 4, 6, 9, 16, 64–66, 73, 74, 110–113, 122, 128–130, 132, 133, 144–148, 152 Custom, 4, 6–8, 10, 20, 22, 25, 28, 31, 38–59, 89, 144

D Darwin, Charles, 22–24 David, Paul, 17, 43, 107 Decision making, 7, 38, 40, 42, 46, 47, 50, 54 Delors, Jacques, 73 Demand, 3, 6, 10, 28, 53, 85, 94, 95, 100, 106, 111, 112, 120–126, 128, 129, 131, 135–137, 142, 144–146 See also Consumption; Underconsumption Demographic transition, 152 See also Population Determinism, 50, 51 Developed (rich) countries, 8, 64, 73–76, 96, 147, 153 Development (economic), 6–9, 14, 31, 42, 54, 57, 59, 64–76, 85, 87, 106, 107, 142 Digital, 3, 5, 133, 135, 147, 148, 150, 152 Distribution, 4, 6, 8, 10, 21, 52, 64, 87, 113, 144, 146, 148 Division of labour, 17, 18, 20, 22–25, 27 Duflo, Esther, 69 Dynamic system, 43, 44, 46 E Easterly, William, 68–70 Economic development, 6–9, 14, 31, 42, 54, 57, 59, 64–76, 85, 87, 106, 107, 142 Economics of innovation, 38, 43 Ecosystem, 59 Education investing (investment) in, 142, 143 private/public, 76, 113 and productivity, 131, 142, 143, 145 Efficacy, 44, 46, 54, 55, 68

 INDEX 

Efficiency, 30, 38, 44, 46, 53–55, 58, 84, 86, 108, 109, 113, 127, 129, 132, 137 Egidi, Massimo, 40 Eisdell, Joseph, 144 Élite(s), 4, 28, 31, 32 Emerging (developing) countries, 147, 151 Emotions (emotional), 25, 41, 42, 45, 46, 48, 56, 58 Empathy, 56 Employment, 4, 5, 74, 109, 111, 112, 120–137, 144, 152, 153 See also Unemployment (-yed) Engel’s law, 148, 149 Enlightenment, 14, 16, 18, 82–100, 107, 113, 143 Enterprise(s), 3, 5, 6, 71, 90, 110, 132, 146, 149, 153 Entrepreneur(s), 3, 40, 84, 87, 91–93, 95, 97–99, 126, 133 Environment (-al), 8–10, 15, 22–24, 39, 46, 55, 56, 73, 74, 146 Equilibrium (-ia), 14, 30, 42, 45, 53, 70, 87, 99 Europe/European, 2, 73, 74, 90, 130, 149, 152 West(ern), 2, 84, 145 Evolution, 22–25, 39, 40, 48, 52 Expectations, 42, 48, 59, 123, 126 Expected utility, 48 Experimental economics, 38, 42, 43, 45, 48 F Feedback, 7, 44, 46, 51, 52, 56 Feudal(-ism), 18, 32, 82–85, 89, 90, 93, 97 Finance (-ial), 2–5, 8, 64, 65, 73, 85, 126, 127, 134–136, 144, 147, 148

159

speculation, 2, 126, 144 Firm (theory of), 39 Fiscal, see Tax Foreign direct investment, 74 France, 26, 85, 87 Free/freedom, 3, 8, 14, 16, 18, 25, 28, 29, 31, 32, 38, 44–46, 49–53, 55, 56, 58, 67, 68, 71, 83–98, 128, 147 Friedman, Milton, 4, 45 G Galiani, Ferdinando, 87, 88 Gazzaniga, Michael, 51 Genovesi, Antonio, 93, 94 German historical school, 16 Germany, 16, 26, 134 Globalisation, 147, 149 See also Delocalisation; International trade Gombrich, Ernst, 48 Goods common, 133, 143 luxury, 143 new, 112, 113, 133, 135, 145, 147, 149 repetitive, 135 wage, 143 Great Britain (UK, England), 95 Growth, 2, 3, 5, 6, 8–10, 64–66, 69–72, 74–76, 83–85, 88, 95, 100, 106, 112–114, 126, 127, 143–146, 148, 150–154 H Haberler, Gottfried, 112 Habit(s), 22, 25, 28, 40, 41, 57, 59 Hansen, Alvin, 109 Hayek, Friedrich A., 14–17, 29, 30, 32, 41, 44, 48, 49, 52, 53, 55

160 

INDEX

Hayekian, 51, 52 Heckscher, Eli, 124 Heterodox economics/ authors, 48, 106 Heuristics, 47 Human capital individual/social, 10, 137 investing (-ment) in, 113–114, 135, 136, 142, 143, 145, 147 Human Development Index, 151 Hume, David, 14, 83, 91, 97 I Identity, 7, 19, 40, 47, 148 Imitation/imitative, 24, 40, 42, 45 Income, 3, 4, 6–10, 28, 45, 53, 109, 111, 122–124, 126, 135, 145, 148, 149, 152 Income distribution, 8, 64 Indeterminism, 51, 52 India, 142, 151 Individual (-ism, -istic), 4, 5, 10, 14–25, 29–33, 40–46, 49, 50, 52, 53, 55, 57, 58, 67, 68, 72, 91, 92, 98, 99, 125, 134n61, 137 Industrial district(s)/revolution(s), 2, 16, 42, 65, 120, 134, 143 Industrialisation, 16, 65, 66, 84 Industrial policy (-ies), 8, 64, 73–76 Industry, 91, 94, 109 Inequality (-ties), 4, 6, 8, 10, 59, 64, 74, 91, 96, 97, 100, 126, 136–137, 147, 150 Information, 16–17, 29, 30, 39–41, 45, 47, 75, 133, 134, 146–149 Infrastructures, 3, 14, 18, 28, 96, 106, 111, 131, 133, 145, 146 Innovation(s), 38, 43, 47, 72–75, 99, 113, 114 See also Technical progress

Institutional constraints/economics, 38, 39, 43, 45 Institutions, 3, 4, 7–10, 14, 18, 25, 29–32, 39, 40, 44, 46, 48, 49, 51–53, 64–68, 71, 75, 153 Intentional behaviour, 51 Interest(s), 10, 17, 28–30, 32, 50, 53, 57, 66, 68, 75, 82, 83, 90–92, 94–100, 120, 123–130, 132, 135–136, 149 International Monetary Fund, 9, 64 International trade, 71, 85, 147, 153 Investment, 2–4, 6, 7, 9, 10, 33, 64–66, 70–74, 92, 100, 106, 107, 109–111, 113–114, 120–128, 130–137, 142–147, 149, 151–153 individual/public (state), 9, 106, 125, 130, 131, 133 Irreversible choice(s), 43 Italy, 16, 29, 85, 134 J Japan, 16, 70, 134 Jovellanos, Gaspar M., 89, 90, 99 K Keynes, John M., 48, 106, 111–112, 120–132, 128n40, 130n48, 134, 136, 144, 152 Keynesian(s), 120–137, 146 Kindleberger, Charles, 149 Knight, Frank, 47 Knowledge, 6, 7, 24, 39, 40, 41n1, 42, 44, 46–49, 52, 54–56, 58, 59, 73, 75, 89, 106 Kremer, Michael, 69

 INDEX 

L Labour/work conditions, 10, 99, 121, 149 division of, 17, 18, 20, 22–25, 27 elementary, 143 exploited, 136 immaterial/material, 107 intellectual, 148 market, 8, 53, 64 precarious, 10 productive/unproductive, 106–109, 111 skilled/unskilled, 10, 95, 142, 147 slave, 136, 150 Laissez faire, 45, 85, 90 Land speculation, 85, 147 Landowners, 88–90 Latin America, 32, 64 Learning, 15, 24, 25, 40, 44, 55 Libet, Benjamin, 50, 51 Lindert, Peter, 76 List, Friedrich, 51, 73, 113, 144 Löbl, Eugen, 113 Longo, Alfonso, 89 Lotto, Beau, 44, 46 Luxury(-ies), 85, 143 M Mainstream economics(-sts), 14, 47, 49 Malthus, Thomas R., 113, 121, 122, 124, 128 Malthusian(s), 113, 121, 122, 124, 128 Manufacture(s), 21, 22, 28, 147, 151 March, James, 39 Margolis, Stephen E., 43 Market(s), 3, 4, 8–10, 15, 17, 28–30, 39, 43, 45, 48, 53–58, 64, 65, 67, 68, 70, 71, 73–75, 91,

161

93–96, 108, 109, 121, 128, 132, 135, 136, 142, 146–149, 151 Marshall, Alfred, 7, 17, 38, 39, 54, 57, 113, 123, 144 Marx, Karl, 15, 18, 108, 110–113, 121, 123, 129, 143 Marxist(s), 106, 110–111, 113, 131, 146 Maximise/maximisation, 16, 17, 28, 29 Mazzucato, Mariana, 74, 149 McCulloch, John R., 108 Memory, 30, 40 Mental, 19, 21, 23, 40, 51 Mercantilists(-ism), 14, 16, 84, 90–94, 97–99, 124, 142 Microfoundation, 67–70, 67n1 Middle class(es), 110, 113, 114, 137, 144, 151 Mill, John Stuart, 7, 38, 53, 54, 57, 59, 112, 113, 123, 127–129, 144 Mincer, Jacob, 145 Mind, 29, 39, 42, 48, 50, 51, 55, 56, 58, 121, 126 Modernisation, 65, 85–86, 88–90 Monopoly(-ies), 31, 83, 87, 90–94, 96, 97, 148 Morris, Cynthia Taft, 66, 67 Multinationals, 5, 136, 150 Musical counterpoint, 49 N Need(s), 6, 7, 20, 24, 27, 28, 30, 32, 48, 66, 69, 73, 74, 84–87, 99, 106, 109, 112–114, 120, 132–133, 135, 142, 146–149, 152 Nelson, Richard R., 38, 39 Neoclassical, 2, 14, 16, 28–30, 48, 53, 99, 106, 108–111, 123, 129, 131, 133, 146

162 

INDEX

Neo-institutionalism(-sts), 29 Neolithic, 22, 26–29 Neurocognitive, 40, 46, 52, 58 Neuro-cortex, 49 New Deal, 2, 16 Newly industrialized countries (NICs), 70 Non-governmental organisations (NGOs), 68, 153 Norm(s), 16, 30, 41, 41n1, 42, 44, 55, 75 North, Douglass, 29–31 Not in Employment, Education and Training (NEET), 5 O OECD countries, 150 Olavide, Pablo, 89 Optimisation/optimising, 45 Order, 2, 6, 7, 10, 28, 30, 39, 41, 42, 46, 48, 52, 55, 58, 59, 65, 69, 70, 72–74, 82, 86–88, 92, 99, 100, 142, 146, 149, 151 Organisation, 6, 7, 16, 18, 20, 23, 26–28, 32, 39, 40, 44, 46–49, 58, 68, 74, 76, 134, 146, 153 P Palaeolithic, 18–22, 26, 28 Parasitism(-itic), 33, 107, 110, 111, 135, 137, 148, 151 Pasinetti, Luigi L., 148 Path-dependence(-ent), 7, 17, 19, 38–59 Perception, 49, 50, 52, 54, 58, 59, 131 Petty, William, 142, 143 Physics, 52, 53, 56 Physiocracy(-crats), 87, 109 Piketty, Thomas, 4, 145, 148 Polanyi, Karl, 15, 28

Pollution, 9, 10, 146 Poor countries, 4, 5, 136, 137, 152–154 Population, 3, 18, 27, 32, 68, 84, 86, 89, 95, 96, 137, 150, 152 Post-Keynesian(s), 106, 112 Poverty, 68, 69, 71, 72, 76, 91, 99, 136, 147, 148, 150–152 Predictability, 50, 52, 58 Predictable/non predictable, 46, 50, 52 Problem solving, 6, 39 Production, 2, 5–7, 10, 14–18, 21, 22, 25–26, 28, 31, 53, 71, 73, 85–89, 92, 95, 99, 106–109, 112, 113, 121, 122, 124, 125, 127, 129, 130, 132–134, 142–144, 146–151, 153 immaterial/material, 146 Productiveness, 106–114 Productivity, 3–6, 8, 17, 23, 26, 30, 32, 64, 85, 90, 94, 96, 97, 100, 108, 109, 111–114, 120, 121, 127, 129, 131, 133–136, 142–146, 152, 153 Professional(s), 5, 46, 144 Profit, 3–5, 10, 31, 53, 91, 92, 95, 96, 106–108, 110, 120–122, 134–137, 146, 150, 152 Progress, 3, 17, 18, 26, 29, 30, 57, 90, 95, 96, 99, 100, 112, 113, 120–122, 129, 134, 144, 151, 152 Protectionism, 3–5, 21, 65, 75 Psychology, 19, 25, 51 Public expenditures/investment(s)/ sector(s), 8, 9, 66, 106, 108, 109, 111, 125, 130, 131, 133, 135, 143 Putnam, Robert D., 42 Q Quesnay, François, 86–88, 92, 94, 98

 INDEX 

R Randomized evaluations (RE), 67–70 Rational behaviour/expectations, 16, 45, 48, 56 Rationality, 17, 29, 39, 45, 48, 49, 54 Ravallion, Martin, 70, 72 Reagan, Ronald, 4, 135 Regulation(s), 10, 41–43, 47, 136 Rent, 4, 5, 10, 31–33, 84, 85, 93, 107, 121, 122, 124, 127, 135–137, 144, 145, 147, 148, 151, 152 rent-seeking, 66 Rentier(s), 97, 126–128 Repetition, 20, 21, 43, 47 Representation, 20, 39, 40, 49, 50, 126 Research, 9, 19, 25, 38, 39, 92, 111, 113, 132, 146 Resources (natural), 82, 137 Revenue, 10, 53, 86, 91, 109, 150 Ricardians, 153 Ricardo, David, 15, 107, 113, 120–123, 125, 133 Risk, 6, 42, 47–49, 57, 66, 69, 93 Rizzello, Salvatore, 15, 40, 41n1, 42, 43, 49 Robbins, Lionel, 15, 18, 19 Robinsonaden, 15, 15n3, 19 Romer, Paul, 69, 70 Roncaglia, Alessadro, 97, 98, 126, 128 Rosenstein Rodan, Paul, 65 Rostow, Walt W., 65 Routine(s), 6, 7, 17, 19, 21–25, 38–47, 58, 59 Rules (formal/informal), 31, 41 Russia, 16, 134 S Sahlins, Marshall, 18, 21, 22, 26 Satisficing, 39, 44, 49

163

Saturation, 3, 4, 10, 131–133, 135, 147, 149 Say, Jean Baptiste, 107, 113, 123, 128, 133 Say’s law, 122–124 Schlicht, Ekkehart, 38, 41–43, 48, 49, 55–59 Schultz, Theodore, 142, 145 Schumpeter, Joseph, 7, 38–40, 54, 57, 98 Scitovsky, Tibor, 66 Self-interest, 20, 45, 56, 83, 98, 99 Sennet, Richard, 39, 47 Simon, Herbert, 17, 23, 29, 38, 39, 44, 48, 49, 109 Sismondi, Charles, 107 Skill(s), 6, 10, 20, 26, 39, 40, 46, 95, 143–146, 151, 153 Slavery/slaves, 18, 150 Smith, Adam, 6, 14, 15, 17, 18, 20, 22, 30, 39, 90, 94–99, 107–109, 113, 122, 130, 133, 136, 143 Social capital, 6–8, 42, 134n61 Social order, 41, 46, 52, 55, 58 Spain, 31, 32, 85, 88, 89, 92 Stagnation, 2, 26, 100, 125, 144 State (the), 4, 5, 8–10, 64–76, 84–88, 90, 93–95, 97–99, 107–110, 114, 125, 126, 130–132, 135, 136, 149, 150, 152 Steuart, James, 94, 99 Stiglitz, Joseph, 64, 71, 150 Stone Age, 18, 26 Streeten, Paul, 66 Supply, 8, 19, 21, 27, 28, 53, 95, 113, 121, 123, 128 Surplus, 4, 21, 26, 27, 92, 106, 108–112, 146 Sweezy, Paul, 110, 111, 146 System(s), 3, 6, 18, 31, 32, 42–46, 50, 51, 53, 59, 72, 75, 85, 97, 108, 111, 145, 151

164 

INDEX

T Tacit dimension/mechanism, 56 Tax, 3, 5, 9, 84–86, 88, 91, 93, 106, 109, 121, 126, 135, 150–152 Taxation progressive/regressive, 4, 100 tax evasion/elusion, 85 tax havens, 5, 135, 150 Taylorism/tayloristic, 7, 39 Technical progress, 30, 95, 99, 100, 120–122, 129, 152 Thatcher, Margaret, 4 Tomasello, Michael, 20, 24 Tradition(s), 31, 38, 40, 52, 54, 55, 82, 112, 113, 128 Transaction costs, 17, 29, 30, 42 Trautteur, Giuseppe, 50–52 Trial and error, 39, 40, 44 Trickle down, 4, 135, 150, 151 Tucker, Josiah, 99 Turgot, Jacques, 87, 92, 94, 95, 99 U Uncertainty, 38, 42, 46–49, 52, 54, 55, 57, 58, 66, 93 Underconsumption, 121, 123–125, 128, 129, 133 Unemployment (-yed), 2–7, 10, 76, 99, 100, 111, 120–125, 121n4, 127, 128, 132, 133, 135, 137, 147–150, 152 technological, 3, 127, 149 USA/US, 145, 150, 151 Utility, 16, 17, 23, 28, 29, 48, 53, 55, 109, 123, 125, 133, 147

V Vaggi, Gianni, 68, 71 Verri, Pietro, 88 W Wages high/low, 2, 3, 6, 8, 10, 64, 83, 94–97, 100, 112, 121, 122, 135, 142–144, 146, 147, 149 subsistence, 92, 98, 100, 122, 143 Washington Consensus, 8, 64, 71, 74, 75 Waste, 53, 82, 110, 124, 148–151 Watarai, Katsuyoshi, 124, 125 Wealth, 2, 4, 5, 10, 17–19, 22, 26, 28, 32, 33, 82, 83, 89–91, 95, 100, 106–108, 110, 113, 122, 125–128, 131–134, 143–146, 148, 150, 151 Welfare/welfare state, 2, 3, 6, 8, 16, 76, 83, 87, 93, 106–114, 120, 130–134, 144–149, 152 Western countries/economies/ governments, 4, 8, 64, 114, 147, 150, 152, 154 Winter, Sidney G., 38, 39 Work, see Labour Workers, 3, 5, 7–9, 64, 87, 92–96, 98–100, 106–109, 113, 120–123, 125, 135, 142–147, 149 World Bank, 9, 64, 65