From Reproduction to Evolutionary Governance: Toward an Evolutionary Political Economy (Evolutionary Economics and Social Complexity Science, 20) 4431549978, 9784431549970

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Evolutionary Economics and Social Complexity Science 20

Kiichiro Yagi   Editor

From Reproduction to Evolutionary Governance Toward an Evolutionary Political Economy

Evolutionary Economics and Social Complexity Science Volume 20 Editors-in-Chief Takahiro Fujimoto, Tokyo, Japan,  Yuji Aruka, Tokyo, Japan

The Japanese Association for Evolutionary Economics (JAFEE) always has adhered to its original aim of taking an explicit “integrated” approach. This path has been followed steadfastly since the Association’s establishment in 1997 and, as well, since the inauguration of our international journal in 2004. We have deployed an agenda encompassing a contemporary array of subjects including but not limited to: foundations of institutional and evolutionary economics, criticism of mainstream views in the social sciences, knowledge and learning in socio-economic life, development and innovation of technologies, transformation of industrial organizations and economic systems, experimental studies in economics, agent-­ based modeling of socio-economic systems, evolution of the governance structure of firms and other organizations, comparison of dynamically changing institutions of the world, and policy proposals in the transformational process of economic life. In short, our starting point is an “integrative science” of evolutionary and institutional views. Furthermore, we always endeavor to stay abreast of newly established methods such as agent-based modeling, socio/econo-physics, and network analysis as part of our integrative links. More fundamentally, “evolution” in social science is interpreted as an essential key word, i.e., an integrative and/or communicative link to understand and re-domain various preceding dichotomies in the sciences: ontological or epistemological, subjective or objective, homogeneous or heterogeneous, natural or artificial, selfish or altruistic, individualistic or collective, rational or irrational, axiomatic or psychological-based, causal nexus or cyclic networked, optimal or adaptive, microor macroscopic, deterministic or stochastic, historical or theoretical, mathematical or computational, experimental or empirical, agent-based or socio/econo-physical, institutional or evolutionary, regional or global, and so on. The conventional meanings adhering to various traditional dichotomies may be more or less obsolete, to be replaced with more current ones vis-à-vis contemporary academic trends. Thus we are strongly encouraged to integrate some of the conventional dichotomies. These attempts are not limited to the field of economic sciences, including management sciences, but also include social science in general. In that way, understanding the social profiles of complex science may then be within our reach. In the meantime, contemporary society appears to be evolving into a newly emerging phase, chiefly characterized by an information and communication technology (ICT) mode of production and a service network system replacing the earlier established factory system with a new one that is suited to actual observations. In the face of these changes we are urgently compelled to explore a set of new properties for a new socio/economic system by implementing new ideas. We thus are keen to look for “integrated principles” common to the above-mentioned dichotomies throughout our serial compilation of publications. We are also encouraged to create a new, broader spectrum for establishing a specific method positively integrated in our own original way. Editors-in-Chief Takahiro Fujimoto, Tokyo, Japan Yuji Aruka, Tokyo, Japan

Editorial Board Satoshi Sechiyama, Kyoto, Japan Yoshinori Shiozawa, Osaka, Japan Kiichiro Yagi, Neyagawa, Osaka, Japan Kazuo Yoshida, Kyoto, Japan Hideaki Aoyama, Kyoto, Japan Hiroshi Deguchi, Yokohama, Japan Makoto Nishibe, Sapporo, Japan Takashi Hashimoto, Nomi, Japan Masaaki Yoshida, Kawasaki, Japan Tamotsu Onozaki, Tokyo, Japan Shu-Heng Chen, Taipei, Taiwan Dirk Helbing, Zurich, Switzerland More information about this series at http://www.springer.com/series/11930

Kiichiro Yagi Editor

From Reproduction to Evolutionary Governance Toward an Evolutionary Political Economy

Editor Kiichiro Yagi Setsunan University Neyagawa, Osaka, Japan

ISSN 2198-4204     ISSN 2198-4212 (electronic) Evolutionary Economics and Social Complexity Science ISBN 978-4-431-54997-0    ISBN 978-4-431-54998-7 (eBook) https://doi.org/10.1007/978-4-431-54998-7 © Springer Japan KK, part of Springer Nature 2020 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, 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. This Springer imprint is published by the registered company Springer Japan KK part of Springer Nature. The registered company address is: Shiroyama Trust Tower, 4-3-1 Toranomon, Minato-ku, Tokyo 1056005, Japan

Preface

This is a book that I promised the publisher 3  years ago. It was the year when Springer agreed to publish the series Evolutionary Economics and Social Complexity Science in collaboration with the Japan Association for Evolutionary Economics. It was an honor for me not only to be nominated as a member of editorial board of this series but also to be invited to publish my own study in this series. I sincerely thank the two editors-in-chief of this series, Prof. Yuji Aruka and Prof. Takahiro Fujimoto. I also thank the publisher, Springer Japan KK, for this publication. The reader will quickly realize upon the first glance at this book that I am not an economist trained in modern mathematical analysis. I studied sociology in Tokyo in my student years and turned to Marxian economics during my graduate course at Nagoya University. My first academic job was a lecturer in history of economics at a local national university in Okayama. Then, in 1985, I moved to Kyoto University to teach political economy and history of economics. After a quarter of a century in Kyoto, I am currently affiliated with a private university in Osaka Prefecture, Setsunan University. In this university, too, I taught political economy and the history of economic thought. Thus, seen from this background, I belong to be an outmoded traditional stream of economics in Japan that was deeply influenced by Marxism and relied heavily on the synthetic vision of sociopolitical economy. I was fortunate to have the experience of studying abroad in then West Germany in my mid-20s. Although my stay was too short to bring any result from it, I was able to develop a flexible attitude toward the newly emerging ideas with an international perspective. Gradually, a vision of evolutionary political economy or evolutionary institutional economics caught my attention. During my second period of study abroad in Europe and the USA in 1989/1990, I made the most of this opportunity to extend my perspective in this direction. I attended meetings of the European Association for Evolutionary Political Economy, the International Schumpeter Society, in addition to those of the History of Economic Thought Conference and the History of Economics Society. I met there many ambitious scholars. Further, Kyoto was an excellent place to receive scholars from all over the world. I was able to learn much from my guests by organizing their workshops, having frank discussions with them, and enjoying dinner together. I also enjoyed my graduate course vii

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seminar, which was attended by overseas students every year. Some of these overseas acquaintances are unfortunately deceased; however, most of the others remain my friends. I would like to acknowledge my appreciation to all of them on this occasion. As a historian of economics, I followed the stream of Austrian economics for several decades. I found an evolutionary direction in Carl Menger and Friedrich Wieser, whose philosophy was inherited later to Friedrich Hayek. In Hayek’s library in Salzburg, I rediscovered Eugen von Böhm-Bawerk’s 1876 study that contained basic ideas of his theory of capital interest and discussed its implication. I investigated Joseph Schumpeter’s idea of the development of social economy as a whole. Further, I discussed Max Weber’s position in the intellectual panorama and revived the Weber–Marx problem in the twentieth century. These were included in my book Austrian and German Economic Thought (2012, Routledge). My interest in evolutionary economics spurred me to organize an academic association together with several of my colleagues at Kyoto University. The idea was born in March 1996 and after one year’s organizational work, resulted in the foundation of the Japan Association for Evolutionary Economics in March 1997. I attach my personal memoir on its foundation as an appendix to this book, which may be of some interest to the readers of this book. I thank all the friends I met in my activities in and outside of this academic society; I feel strong empathy toward those leading the revitalization of social science and economics. In this book, I sketched my viewpoint of the evolutionary political economy in six chapters. The first is the introductory chapter, which bridges the classical ideas of reproduction and the evolutionary view of social science. The second chapter describes the social and ethical scheme for social science. In terms of originality that can be evaluated, this chapter may be the core. The third chapter is the extension of the second in the direction of sociology and management studies. In the fourth chapter, I return to the classical Smithian view on the division of labor and proceed to the transaction in industrial relations under capitalism. In Chap. 5, the classical theme of capitalism is transferred into the “enchanted world” of commercial and financial dimensions. At the end of this chapter, I provide a brief overview of the difficulty of evolutionary governance in the financial sector during the transformation of the Japanese economy from the “bubble” boom years to the slump years of the “lost decade.” The last chapter deals with the historical “transition” from the centralized planned economy of socialism to a market economy in the so-­ called transition countries in the 1990s. This was the result of several years of research that I undertook with the conviction that evolutionary social science should advance hand in hand with the investigation into the contemporary historical change. From the analytical viewpoint, the true value of this book probably consists of the two contributions by Dr. Tetsuya Kawamura (Chap. 7) and Dr. Tomonori Koyama (Chap. 8). These are the revised versions of their contributions to the special issue of the Keizai Ronso (The Economic Review), which commemorated my retirement from Kyoto University (Vol. 183, No. 3). Dr. Kawamura and Dr. Koyama’s progress over a decade are integrated into this revised version but the topics themselves are the same. At my request, Dr. Kawamura examined my

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approval theory in the light of contemporary game theory. Dr. Koyama dealt with the evolutionary dynamics whose core is represented by the Fisher’s Principle. Its significance was stressed by J. Stan. Metcalfe, and Esben S. Andersen but was not well known. Accepting my request, Dr. Koyama published the translation of Metcalfe’s Schumpeter Graz Lecture in 2015.1 He offered the new version of his 2009 Keizai Ronso contribution for this book. I sincerely thank these two friends for their contributions. I must ask both of them to forgive me since I made them wait over 1 year due to my slow progress in finalizing my manuscript. In preparing the manuscript for this book, we are obliged to acknowledge the permission of copyright holders of our old works in Japanese and English. In particular, Kyoto University Economic Society permitted my two coauthors to publish the revised English version of their aforementioned contributions. I also used my old contribution to Keizai Ronso in preparing Sect. 2.3. Other copyright holders are acknowledged in each chapter at relevant places. Neyagawa, Japan September 26, 2019

Kiichiro Yagi

 J.  St. Metcalfe, Evolutionary Economics and Creative Destruction. London and New  York: Routledge. In Japanese, Shinkateki Keizaigaku to Souzouteki Hakai, translated by Kiichiro Yagi and Tomonori Koyama,Tokyo: Nihon Keizai Hyoron-sha, 2015. 1

Contents

Part I Political Economy 1 From Reproduction to Evolutionary Governance��������������������������������    3 Kiichiro Yagi 2 Approval Theory and Social Contract ��������������������������������������������������   25 Kiichiro Yagi 3 Economic Exchange and Social Exchange��������������������������������������������   51 Kiichiro Yagi 4 Institutional Dynamics of the Capitalist Market Economy ����������������   73 Kiichiro Yagi 5 Evolution of Commercial and Financial Structures of Capitalism��������������������������������������������������������������������������   91 Kiichiro Yagi 6 System Transition and the Institutional Political Economy����������������  113 Kiichiro Yagi Part I Appendices Part II Further Explorations 7 Interpretation of Approval Theory Related to Norms and Interests: Interpretation by Image Score Model and Reputation Dynamics ����������������������������������������������������������������������  141 Tetsuya Kawamura 8 On the Relatedness Between R. A. Fisher’s FTNS and J. S. Metcalfe’s Construction����������������������������������������������������������  161 Tomonori Koyama

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Editor and Contributors

About the Editor Kiichiro Yagi  is the ex-president of Setsunan University, Osaka, Japan. He taught History of Economics and Political Economy at Okayama University, Kyoto University, and Setsunan University. He served as the President of the Japanese Society for the History of Economic Thought, Japan Association for Evolutionary Economics, and Japan Society of Political Economy, successively. His many publication includes Social Economics of Modern Japan (1999  in Japanese), Political Economy (2006 in Japanese), and Austrian and German Economic Thought (2011 in English). He is currently the editor-in-chief of Evolutionary and Institutional Economics Review.

About the Contributors Tetsuya Kawamura  is lecturer of the faculty of management at Japan University of Economics, Tokyo. He received Ph.D. from Kyoto University in 2009. He published “Experimental Multimarket Contact Inhibits Cooperation” in Metroeconomica (2015) and “Cognitive ability and human behavior in experimental ultimatum games” in Research in Economics (2019). His recent research is directed to the relation between intelligence and social preference. He uses laboratory and field experiments to study the relationship between intelligence and strategic choice. Tomonori Koyama  is assistant professor of the faculty of psychology at Yasuda Women’s University, Hiroshima, Japan. He received Ph.D. from Kyoto University in 2012 on the thesis Re-examination of J. Stanley Metcalfe’s Evolutionary Market Analysis: Focusing its relation to R. A. Fisher’s Fundamental Theorem of Natural Selection (in Japanese). His fields of research are the interconnection of dynamical system with statistical inference, the criticism of utilitarianism, and the social design of regional revitalization. xiii

List of Figures

Fig. 1.1 The materialistic view of history. (Source: Yagi (2002) Fig. 1, slightly modified)��������������������������������������������������������������������  14 Fig. 1.2 Evolutionary model of social change. (Source: Yagi (2002) Fig. 2, slightly modified)����������������������������������  15 Fig. 1.3 Three-layer model of governance. (Source: Figure 9.1 in p. 223 of Oliver Williamson, The Mechanism of Governance, Oxford University Press, 1996. Oxford Publishing Limited)��������������������������  19 Fig. 1.4 Governance constellation around public interest. (Source: Yagi (2002) Fig. 4, slightly modified)����������������������������������  21 Fig. 2.1 Dual structure of civil order. (Source: The author, originally Figure 1 in Yagi 2001)������������������������������������������������������������������������  29 Fig. 2.2 Autonomous agent becomes a general norm provider. (Source: The author, originally Figure 3 in Yagi 2001)����������������������  32 Fig. 2.3 Transaction of agents and judicial authority. (Source: The author, originally Figure 4 in Yagi 2001)����������������������  33 Fig. 2.4 Exclusive egoist as the representative of general interest. (Source: The author, originally Figure 5 in Yagi 2001)����������������������  34 Fig. 2.5 Sympathy grounded on the resemblance of interests. (Source: The author, originally Figure 6 in Yagi 2001)����������������������  35 Fig. 2.6 Money and pecuniary interest in the market. (Source: The author, originally Figure 7 in Yagi 2001)����������������������  35 Fig. 3.1 Perspectives of economic exchange and social exchange. (Source: The author)����������������������������������������������������������  53 Fig. 4.1 Incomplete but stable institution. In the case of 1 > 𝜙′ > 0, an institution may emerge around the stable propagation point where f(a) = F(a). (Source: Figure 1 in p. 160 of Ulrich Witt “The evolution of economic institutions as a propagation process,” Public Choice, 62, 1989. Springer Nature)����������������������������������������������������������������������������������  79 xv

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Fig. 4.2 Difficulty in the area below 45°line. In the area where f(a)0. F(a) moves leftward and f(a) moves downward. However, if f(a) crosses 45°line from below, a successful institutionalization can be anticipated. (Source: Figure 3 in p. 161 of Ulrich Witt “The evolution of economic institutions as a propagation process,” Public Choice, 62, 1989. Springer Nature)����������������������������������������  80 Fig. 4.3 Propagation of indirect exchange by learning. A society is composed of rapid learners and slow learners. In this simulation graph, two groups have different adaptation speeds while they start from close positions. If the adoption of the indirect exchange by the former raises the average frequency of indirect exchange, the latter may be involved in its diffusion, following the former afterwards. (Source: The author. Simulated by Stella)������������������������  80 Fig. 4.4 Exit, voice, response of management. (Source: The author from Hirschman’s hint)��������������������������������������  86 Fig. 5.1 Three-layer structure of capital. (Source: the author)������������������������  99 Fig. 5.2 Financial surplus and deficit by sectors (Japan 1980–2003). (Source: BOJ 2005, Chart 1)������������������������������������������������������������  103 Fig. 5.3 Nominal GDP growth rate and inflation rate (1980–2003). (Data source: Annual Report on the Japanese Economy and Public Finance 2019, Time Series Statistics. Cabinet Office of Japan) ������������������������������������������������������������������  107 Fig. 5.4 Rise and fall of land price and stock price (1980–2003). Land price: land price announced by the Ministry of Land, Infrastructure, Transport and Tourism (hundred JPY/m2); TOPIX: Tokyo Stock Price Index. (Data source: Annual Report on the Japanese Economy and Public Finance 2019, Time Series Statistics. Cabinet Office of Japan)������������������������������  107 Fig. 6.1 Contested exchange of loyalty and insider’s benefit. (Source: original graph in Figure 2.1 in p. 25 of Samuel Bowles and Herbert Gintis, “Contested exchange: a new microeconomics of capitalism,” in G. M. Hodgson, M. Itoh, N. Yokokawa (eds) Capitalism in Evolution: Global Contentions – East and West, 2001. Edward Elgar Publishing Ltd. Modified by the author)������������������������������������������  123 Fig. 6.2 Exogeneity and endogeneity in the path-dependent development. (Source: Yagi 2009, Fig. 6)����������������������������������������  128 Fig. 8.1 Evolution in biological system and market��������������������������������������  172 Fig. 8.2 Metcalfe’s single product market with the simplest demand change�����   177 Fig. 8.3 Two frames of reference and its conjunction by Frank. ∗In biological context, it appears as the fitness distribution of population ������������������������������������������������������������������������������������  188

List of Tables

Table 1.1 Three levels of reproduction ����������������������������������������������������������������  6 Table 2.1 Four aspects of social approval of property/ownership����������������������  27 Table 3.1 Social exchange as local order������������������������������������������������������������  57 Table 3.2 Patterns of approval combination��������������������������������������������������������  58 Table 4.1 Transaction of capitalist and landed worker ��������������������������������������  82 Table 4.2 Transaction of capitalist and proletarian worker��������������������������������  82 Table 5.1 Listed items of the balance sheet��������������������������������������������������������  93 Table 5.2 Items of the balance sheet for commercial banks ������������������������������  97 Table 7.1 Payoff matrix for mutual approval in a practical domain ����������������  145 Table 7.2 Algorism of “leading eight”��������������������������������������������������������������  154 Table 7.3 Payoff matrix between synchronous approver and autonomous approver ����������������������������������������������������������������  158 Table 8.1 Four types of efficiency norm ����������������������������������������������������������  186

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Part I

Political Economy

Chapter 1

From Reproduction to Evolutionary Governance Kiichiro Yagi

The human being is in the most literal sense a zoon politikon (ζωον πολιτιχον), not merely a gregarious animal, but an animal which can individuate itself only in the midst of society. (Karl Marx written in 1857) (English translation by Martin Nicolaus, Marx 1973, p.84; in original German, Marx 1953, S. 6)

Abstract  As a general introduction, this chapter describes the perspective of evolutionary political economy. Understanding reproduction at three levels—the biological, the social or cultural, and the economic—the author introduces an evolutionary perspective into political economy in a broader sense. After criticizing the deterministic traits of the so-called materialistic view of history, he raises the problem of how “governance” can fit the view of evolutionary social science. Keywords  Reproduction view in economics · Social or cultural reproduction · Materialistic view of history · Evolutionary model of social change · Evolutionary governance

Kiichiro Yagi, Shakai Keizaigaku: Shihon-shugi wo siru (Political Economy: Knowing Capitalism), 2006. University of Nagoya Press (Partly used in Sects. 1.1 and 1.2). Kiichiro Yagi, “Shakai Keizai System no Hendo Zushiki to Governance (Evolution and Governance of Socio-Economic System),” in Shakai Keizai System (Social and Economic Systems Studies), no. 23 (October 2002) pp. 11–21. The Japan Association for Social and Economic Systems Study (Partly used in Sects. 1.3 and 1.4).

K. Yagi (*) Setsunan University, Neyagawa, Osaka, Japan e-mail: [email protected] © Springer Japan KK, part of Springer Nature 2020 K. Yagi (ed.), From Reproduction to Evolutionary Governance, Evolutionary Economics and Social Complexity Science 20, https://doi.org/10.1007/978-4-431-54998-7_1

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1.1  Individuals in a Society As described by Marx’s remark in the epigraph, man is a peculiar species whose sociality permits individuals to have a sense of self-interest and independence. Most modern nations have similar political institutions that are grounded in the dogma of basic human rights of individuals.1 Economic relations are mostly composed of transactions that are believed to originate in the free will of individuals. Standard theories in politics and economics are essentially systems of propositions that are grounded in this central dogma of individuals as independent agents. However, the birth and death of a person are not acts of free will; they are biological facts. From the biological perspective of population, lives of individuals are seen collectively as the result of the reproduction process of man as a species. The term “population” signifies “the number of organisms of the same species living in the same area at the same time.”2 It is the group of individuals in which the reproduction of a generation proceeds. Their members may have divergent features so long as they do not endanger the reproduction of the population as a whole. From the evolutionary viewpoint, populations of a species are “gene pools” in which mutation, selection, retention, and diffusion of specific “genotype” features proceed, manifesting in living individuals as “phenotypes.” The lives of individuals and the reproduction of a population can thrive in environments that provide them with the necessary resources and chances. The life cycle of an organism consists of metabolism in which it assimilates needed ingredients from the environment and discharges body waste until it reaches death. The economic activities of the human species—production, transaction, and consumption—are seen as a composite global metabolic process in the entirety of the environment range. For a species, an environment consists not only of inorganic materials but also of organic conditions that are made up of populations of their own and other species. The destruction of the balance of the environment endangers the biological reproduction of the relevant species. Thus, the individual, population, and environment are the three core elements for the reality of biological reproduction of a species. The biological reproduction of the human species as zoon politikon is accompanied by social and cultural aspects. In most human societies, marriage and family life are embedded in a traditional kinship system. Infants and a range of young individuals are excluded from that domain of the dogma of independence.3 They  We admit that political leaders of the revolutionary states as well as religious leaders of Muslim nations may think differently in this respect. However, the secular orders in their countries, too, cannot do away with this central dogma. Their leadership is based on the delicate balance of the former and their political or religious credo. 2  From Quizlet Chapter 6: Population Biology (https://quizlet.com) accessed on May 6, 2019. The significance of the “population thinking” in the theory of evolution is stressed by the biologist Ernst Mayr (1988). 3  The range of the application of this dogma varies from the dominant view of relevant age and society. It was not too long ago that independent decision-making by women was not permitted. 1

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form stepwise classified minorities allotted in various careers of socialization and education which begin from infant learning and continue up to preadult education. The language used by individuals in their communication is the social media they have acquired from the process of socialization. The youth learn basic traits, knowledge, and norms to exist in society through a social and cultural environment provided by family life, schooling, and adult education. They can also learn from their own ventures. Sociologists have called this process of socialization or education from the viewpoint of cultural continuity of a society “reproduction” (Bourdieu and Passeron 1977). Reproduction is carried out in a social and cultural environment that includes language, ideas, norms, institutions, and other factors. It enables existing social orders to be supported internally by the consciousness and conduct of new members. It could even be called social or cultural reproduction. This sort of reproduction can be seen at several levels of the society, such as family, group, organization, and the society at large. It is easy to observe that “reproduction” also contains the basic elements of the individual, population, and environment. Without the collective interaction of individuals in a population, those traits, knowledge, and norms are meaningless. Further, in the absence of maintenance of the accumulated habits and corresponding social framework, the socialization of individuals remains unsuccessful. Societies that incorporate the central dogma of free individuals are dominated and supported by various sorts of economic reproduction. Transactions in this sense are so coordinated that they can suffice not only the present production but also enable production in the next term. Car manufacturers, for example, purchase a variety of parts and raw materials from suppliers to produce their final products. This transaction can continue only on the condition that the sale of the final products will provide suppliers with the cost of materials and wages needed for production. The production of final goods and intermediate goods (including all machinery and materials) must proceed simultaneously in order to enable production and transactions in the next term. The condition for the transaction of labor is the same; in all stages of production, it must afford workers the means to live and support their families. This condition further presupposes the production of consumption goods sufficiently in all their production stages. Such a relationship can be termed economic reproduction. As the terms suggest, the economic reproduction of an individual entity (such as an individual, a firm, or a household) presupposes the transaction with other entities that form a population of economic entities. Further, the significance of the environment that includes the currency and financial system, transaction and jurisdictional institutions, and other necessary conditions for smooth economic reproduction cannot be overlooked. Thus, the concept of reproduction can be perceived at three levels: biological, social or cultural, and economic reproduction. In the total processes of the social lives of people, these three levels of reproduction proceed simultaneously. We believe that this recognition of reproduction serves as the foundation for the study of social economics (Table 1.1).

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Table 1.1  Three levels of reproduction Level Biological reproduction Social or cultural reproduction Economic reproduction

Element Individual Man and woman Socialized man and woman with traits and culture Economic agent (household and firm)

Population Gene pool Society, nation, class, religious group, etc.

Environment Organic and inorganic resources Cultural and social heritage (language, ideas, norms)

Class, industry, regional and national economy

Financial, transaction, and jurisdictional institutions

Source: The author

Standard academic economics, now termed “neoclassical,” begins with the assumption of the isolated person, homo oeconomicus, and intends to explain all economic phenomena logically from the rational behavior of individuals. Economic agents are equipped with consistent utility functions and behave rationally to maximize their utility in conditions of perfect knowledge. The result is an equilibrium in the market where demand and supply of goods become equal with definite prices. Though it doesn’t assert that equilibrium is attained in every condition, the state of equilibrium and rational behavior toward this end are the criteria in any circumstance to evaluate them. The theoretical approach that concentrates on the rational conduct of individuals is called “methodological individualism.” The author is skeptical if this approach holds up against the progress of human sciences. As methodological individualism is based on the reductionist principle of explanation, it fits poorly with the phenomenon of complexities in human and social affairs. It has been said that the standard theory of methodological individualism tackles simple problems that only it can solve. Further, it inherits the position of economic liberalism and its harmonious vision, which exclude the possibility of worsening results and deepening conflicts due to free transactions. In such cases, it attributed the reasons to obstacles against free economic transaction. Thus, it is biased when approaching economic problems and social conflict. The reductionist approach and the prejudiced vision of harmonious transaction have together blocked standard neoclassical economists from introducing social structure and historical–cultural elements in their analyses. Social relations and cultural elements were considered to be of secondary significance as they were merely used to provide concrete features to results obtained by the universal rational choice theory. Introducing social or historical elements in theories was strictly forbidden in the past and, thus, did not fit an understanding of historical uniqueness or sociocultural diversity of the existing economic societies.4 Why should economics have a social and historical perspective? Our answer is that it is a part of the grand theory of social reproduction that covers all three levels of reproduction: biological, social or cultural, and economic.  The representative criticism against mainstream economics is surmised in Hodgson (1988), a title I translated into Japanese with my friends in 1993. 4

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1.2  Reproduction View in Economics The vision of economic reproduction emerged with names such as François Quesnay and Adam Smith and went on to occupy the core of classical political economy. Quesnay’s Tableau Économique5 tabulated an economic model in which production and transaction by social classes (farmers, artisans, and landlords) in the present year prepared their economic activities for the forthcoming year. In other words, the spending pattern of revenues of the current year affected the size and balance of economic activities in the next year. Adam Smith dissolved the Quesnaysian feudal social structure into a plain commercial society but set reproduction and accumulation of the capital in the center of his analysis of modern market economy. Karl Marx widened this reproduction view of socioeconomic relations in his critical analysis of capitalist production. Not only did Marx propose the formula for capital movement that reproduced its initial conditions as a result, he also attempted to contain the total reproduction of a two-sector economy in his reproduction scheme.6 As observed in the necessary conditions of economic reproduction, this view implies value in transactions that are compatible with necessities of reproduction, such as bon prix in Quesnay, natural prices in Smith, and value in Marx. These concepts are different from the equilibrium prices of neoclassical economics in respect to their independence from the voluntary choice of individuals as well as the supply and demand coordination mechanism. This group of value concepts is the manifestation of the objective criterion that is inherent in the structure of reproduction. In other words, they are reflective of the structure of reproduction.7 Thus, these values convey the range of admittance and permit deviation of market prices from the center. During the heyday of the neoclassical economics of the twentieth century, Piero Sraffa exposed its weakness with the very concept of capital and its substitution of labor. He demonstrated that a simple system of simultaneous equations of the necessary reproductive conditions of goods in a productive system implies an objective value criterion that is independent from neoclassical assumptions (Sraffa 1960). Since then, the reproduction view of classical economics has had a revival.8 As the

 See Kuczynski and Meek (1972).  In the second volume of his Capital (Marx 1885, 1967). 7  To avoid misunderstanding, I must add that the criterion of value inherent in the reproduction system follows the structure/relations of reproduction, and not the contrary. Most Marxists adhere to labor theory of value and maintain that “exploitation” of workers by capitalists can be grasped only by this theory. Such is an ideological interpretation of value that has retarded the progress of their theory so far. As value is the reflex as well as the criterion for economic reproduction, it develops in accordance to the structure of reproduction. Further, the real situation of workers should be judged not exclusively by “exploitation rate” but by their well-being and quality of working life including industrial relations, which Marx called “production relations.” 8  The newest achievement in this direction is Yoshinori Shiozawa’s reconstruction of international value in the classical Ricardian perspective, not that of J.S. Mill (Shiozawa et al. 2017). Together with the process view of stability in the reproduction (Shiozawa et al. 2019), evolutionary direction in economics has acquired solid ground for the further development. 5 6

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reproduction view presupposes the interactions of plural individuals under given environments, it shows theoretical economists the need for institutions as well as evolutions. Here, the three levels of reproduction need integration to understand institutional change and its grounds. This work is intended to be a contribution to the revival of the reproduction view despite its apparent limitations.

1.2.1  Main Features of Reproduction To say it generally, reproduction is the ensemble of the acts of multiple human agents that proceed interdependently in time and space. Several crucial features in this process are discussed in the following texts. 1.2.1.1  T  rend Embedded in the Present and the Possibility of Change Based on It The conception of time in the reproduction view has the feature of continuity. The conditions for production tomorrow must be prepared today. However, conditions of today’s production are a result of yesterday’s activities. In other words, the future exists as a possibility at present, and the present is the realized possibility of yesterday. Thus, in the structure of reproduction at present, the trends in the past are embodied. This continuity, of course, does not determine the behavior of each agent and the distribution of goods completely. The change in persons as well as in distribution is possible considerably within objectively determined conditions. The reproduction view is not deterministic despite the stress on continuity from the past. The decision making of individuals or a collective body of them can change the present constellation of production and distribution to enable the reproduction structure of the future they want. The present structure of reproduction is the interface where continuity from the past and demand from the future collide. Let’s take the relation between economic growth and industrial structure in a closed economy into consideration. The capacity of economic growth is limited by the maximum possible supply of production and investment goods at present. Thus, the sectoral structure of an economy is different according to its trend of growth rate. If a nation should realize 10% economic growth, it would need the industrial structure that could supply the incremental investment in goods correspondingly. Most stationary economies face difficulties fulfilling this demand as their industrial structures are determined by past growth trends. However, if investment rates begin to rise due to changes in future expectations, the industrial structure correspondingly starts traveling on a similar upward path via price hikes and elevated profit rates of investment goods. When distribution of ­products and their uses are affected by a shift in demand and prices, they cause a change in production. However, as in the case of accelerated growth, if growth rate

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demanded is beyond the limit of this coordination, it would end in confusion with formidable damage. In case it is within the limit of coordination, the industrial structure would change on the grounds of flexibility of the distribution of labor and financial resources. 1.2.1.2  D  epersonalization of Interdependent Relations, Their Emergence as Macroeconomic Factors Interdependent relations in a market economy are not always personal relations. In a typical market where goods of standard quality are traded, the counterpart for each trade has no personal characteristic. Both producers and consumers adjust their behaviors in response to market prices. Participants in a market react not to the demands of their counterparts but to prices that reflect the situation of the market. Marx termed this depersonalization Versachlichung (reification) (Marx 1867, S.73). The theory of neoclassical economics presupposes that this adjustment of an impersonal market brings forth an equilibrium where the most efficient solution for all participants has been reached. However, it is too strong an assumption that such a market equilibrium works universally. First, it ignores the limitation of participants’ capability to manage information in order to find optimal solutions. Second, most economic activity is supported by nonmarket elements such as natural and artificial environments, including social media and knowledge. Focusing on the ideal workings of a market mechanism exclusively misses the reality of the socioeconomical process of human economy. Another manifestation of the depersonalization of the economic relationship is the emergence of macroeconomic variables. Especially in the market of money (capital) and labor, we cannot rely on the automatic adjustment of supply and demand. The fluctuation in the exchange rate of national currencies directly affects international trade. The interest rate becomes a key variable for decisions regarding consumption and investment where the finance sector assumes primacy in the decision of investment and finance. Unemployment rates also influence the decisions of private economies and policies of governments. Most actors in the market economy, including government and banking sectors, react to these macroeconomic variables in their own ways. Thus, at the macro level, a disequilibrium in the market results in fluctuations of business conditions. 1.2.1.3  Reproduction of Actors and Their Social Relations Economic reproduction focuses on the continuous production of goods and services of a national economy but is not limited to material reproduction. The reproduction of agents and their relations are inevitably linked and serve material reproduction as their social condition. To reproduce social relations for capitalist production, both workers and capitalists (including managers) must maintain vigor or a new generation must enter their

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arena. This is possible only on the condition that wages and profits are on certain levels that make ordinary consumer life possible or so high that they can attract newcomers. Of course, workers’ wages should be not high enough to allow them to compensate for leaves of absence or to start out as entrepreneurs themselves. The relation of workers’ dependence on employment must continue. This reveals that the separation between workers and productive means is maintained and the relation of employment of workers by capital is reproduced. The positions of owners of productive means (capitalist or firm) who employ workers, and those of workers employed by the former are reproduced. Individuals are allotted to positions above by their particular conditions, including class, background, or fortunes. In the late capitalism of our times, as most firms take the form of corporations, the personal position of a capitalist is divided into owners of equity and managers. Due to the diffusion of education and skill formation in the work place, workers are now widely diversified and differentially evaluated based on knowledge and skill. The classical civil law system of property and contract was insufficient in maintaining the production relation. Already in the mid-nineteenth century, employment relations became the domain that received public intervention in respect to working hours and infant workers. Of late, there have been significant developments in both legislative regulations and effective de facto control of production relations. At present, at least in advanced industrialized nations, the reproduction of individuals is supported from birth to death by various public welfare and educational schemes. However, it is still true that unhealthy working conditions, and inhuman exploitation remain all over the world. 1.2.1.4  Rationality That Corresponds to the Reproduction In the neoclassical theory, core rationality is imposed in individual agents. From the reproduction point of view, the smooth process of economic reproduction provides a criterion that manifests itself objectively. The “natural price” in classical economics, also known as “production price” by Marx, is the stable price in the long run that guarantees the producer the cost of production and an average rate of profit. It is a sort of reproduction price. Marx’s concept of the labor value also represents the necessity of reproduction as it compensates a sum of bestowed labor for production. However, in a capitalist economy, this necessity must transform itself into the necessity of capitalist producers in order to attain the rentability expected on investment. Further, the necessity of reproduction differs between simple reproduction and extended reproduction. In the optimal path of balanced growth, known as the von Neumann balanced growth path, an optimal price emerges correspondingly to ensure the profit rate is equal to the highest possible growth rate.9

 Morishima (1973) called it the Marx-von Neumann path.

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However, apart from simplified models, the rationality that corresponds to reproduction does not emerge beforehand, since reproduction is the complex process of a multitude of factors. Production price is the result of competition among capitalist producers aiming for higher profit rates beyond the boundaries of industries. This merely means that the result reflects necessity of reproduction if the process is not self-destructive. Biologically, living creatures as surviving and proliferating machines inherit a variety of reproduction strategies in their organs as well as behavior. In the case of the human species, consciously or unconsciously, such reproduction strategies are seen not only at individual levels but also at collective levels spanning across families, communities, firms, and nations. In individuals, self-love or self-interest is probably the most powerful tools to facilitate the necessity of biological reproduction. However, rationality in collective reproduction differs from rationality in individual agents, since the latter is in many aspects inter-replaceable from a collective view. This is the pressure on individuals and individual entities such as firms to make the greatest efforts to survive. Such endeavors may change the conditions of collective reproduction. At the collective level of the reproduction of the human species (i.e., the society), various production branches and service sectors are active apart from the consumption patterns of individuals and families. Scientific research, public administration, policymaking, etc., are institutionalized, and their working is open to public discussion. They can affect conditions of economic reproduction by introducing aspects such as new knowledge, technological investigation, regulative rules, and so on. 1.2.1.5  Historical Path Dependence and Evolutionary Development The results of interactions of heterogeneous agents in the reproduction process is evolution, so far as the new features are in any way transmitted to succeeding stages. In the process of evolution, a peculiar feature is path dependence in which a diversion is widened eventually up to the separation of two different species. When we look back at this historical process, we find several divides after which change proceeds in a certain direction. In some such historical developments, we may envisage that the selection of the development path was decided by rather arbitrary conditions in early stages. This is the phenomenon of historical “path dependence.” The phenomenon of path dependence in the selection and diffusion of technology became well known via Paul David’s famous article on the diffusion of QWERTY arrangement on typewriter keystrokes (David 1985). According to David’s explanation, this arrangement that originated in the design of key arrangements of old hand typewriters to avoid the entanglement of keys is still used in most electronic computers today. Even though the physical problem of keys getting entangled is not experienced in current electronic computers, the QWERTY arrangement is still prevalent, mainly because it has been so widespread that adaptation to its standard is easier than the introduction of a more efficient arrangement.

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From the reproduction perspective, it is rather easy to integrate this phenomenon into consideration, because we recognize the significance of the past that is apparent at present in the trend of development from the past to the future. Path dependence occurs when results of activities have a positive feedback effect on the selection of activities in successive stages. When this feedback has a negative influence, oscillation or equilibrium occurs instead of path dependence. When we think of cases in which the result of a type of activity depends on the frequency of appearance or proportions in the relevant group, positive feedback brings forth path dependence. At the same time, however, we admit the possibility of “goal dependence” in the “futurity” as is conceived by John Richard Commons.10 Since the condition of reproduction allows agents to make most of the possibility that legacies of the past permit, modifications of the path are also possible. There may even be the possibility of integrating the vision of the goal in the initial conditions of the changing processes. The transition from planned economy to market economy across most Central and Eastern European economies is one of the largest unilateral historical developments of the twentieth century. During the turmoil of economic transition, affiliation of transitioning countries to the European Union (EU) was suggested by leaders of Western Europe as the goal of transition. In order to be considered as candidates, the EU imposed a bulk of tasks on transitioning countries to coordinate their legislation to EU standards. It was an attempted intervention at shaping the path of development from transitory chaos to a stable market economy. The prospect of EU affiliation functioned as the goal for the nations that accepted EU’s demand.11 As evinced, “goal dependence” does not deny the binding effect of the path but in fact serves as a part of it by guiding the possible adjustment of development. It is a part of the governance mechanism of the evolutionary path, which will be discussed in forthcoming sections. I mentioned before that the reproduction view is most clearly expanded on by Karl Marx. In his case, the economic reproduction of a society constitutes its economic structure, which is the foundation of a superstructure that includes legal and political institutions as well as other ideological forms of social consciousness. However, we must be cautious about being trapped by inflexible schematic determinism that is often accompanied with this “materialistic view of history.” Thus, the next section contrasts the evolutionary view of social change to the reproduction view.  Commons characterizes this concept as follows: “The concept of Futurity is that of expected events, but the principle of Futurity is the similarity of repetition, with variability, of transactions and their valuations, performed in the moving Present with reference to future events as expected hindrance, aids, or consequences” (Commons 1934, p. 738). 11  See Chap. 6. Probably the present reactionary tendencies in several central European nations are reactions coming from the demise of the goal euphoria. Now nationalist leaders in these nations begin to distinguish their nations from those beyond the EU border. 10

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1.3  Evolutionary View of Social Change In the preface of A Contribution to the Critique of Political Economy which was published originally in 1859, Marx presented a famous construction model of his materialistic view of history. In the social production which men carry on they enter into definite relations that are indispensable and independent of their will; these relations of production correspond to a definite stage of development of their material power of production. The sum total of these relations of production constitutes the economic structure of society—the real foundation, on which rise legal and political superstructures and to which correspond definite forms of social consciousness. The mode of production in material life determines the general character of the social, political and spiritual processes of life. It is not the consciousness of men that determines their existence, but their social existence determines their consciousness. At a certain stage of development, the material forces of production in society come in conflict with the existing relations of production, or—with the property relations within which they had been at work before. From forms of development of the forces of production these relations turn into their fetters. Then comes the period of social revolution. With the changes of economic foundation the entire immense superstructure is more or less rapidly transformed. (Marx 1904, p. 11f., in German Marx 1961, S. 8f.)

The first characteristic of this view is the supremacy of economic structure over other elements of society, also expressed as the relation between the “real foundation” and the “superstructure.” The former is considered a “relation of production” that corresponds to the stage in the development of “productive forces.” Thus, a unilinear determination from the development of productive forces to the society as a whole is stipulated. The second characteristic is the explanation of “social revolution” in an era in which existing production relations are conflicted with the development of productive forces. The economic change in which the former is ultimately adapted to the latter accompanies the transformation of the entire superstructure. This view interprets the contradictions and struggles in the superstructure from such change in the economic foundation. The third characteristic is its apparent holism. Since individuals are considered the personifications of economic categories whose functions are designated by dominant relations of production at a given stage of history, both the economic foundations and the ideological superstructures are seen with a holistic vision. The only element that breaks this holistic harmony is class struggle. However, even in this struggle, the relations of confrontation and their final results are conceived from the structure of production relations. Thus, from an evolutionary point of view that stresses the interaction of heterogeneous individuals in populations on grounds of changing environments, this ­construction model of the “materialistic view” lacks the linkage of microscopic elements and the macroscopic features and possibility of the emergence accompanying

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K. Yagi 㻯㼛㼚㼟㼏㼕㼛㼡㼟㼚㼑㼟㼟

㻲㼛㼞㼙㼟㻌㼛㼒㻌㻿㼛㼏㼕㼍㼘㻌㻯㼛㼚㼟㼏㼕㼛㼡㼟㼚㼑㼟㼟

㻿㼠㼞㼡㼓㼓㼘㼑㻌 㼛㼒㻌 㻲㼛㼞㼙㼟㻌 㼛㼒㻌 㻿㼛㼏㼕㼍㼘㻌 㻯㼛㼚㼟㼏㼕㼛㼡㼟㼚㼑㼟㼟㼟㻌

㻩 㻿㼡㼜㼑㼞㼟㼠㼞㼡㼏㼠㼡㼞㼑㼟

㻱㼞㼍㻌㼛㼒㻌㻿㼛㼏㼕㼍㼘

㻴㼍㼞㼙㼛㼚㼕㼦㼑㼐

㻾㼑㼢㼛㼘㼡㼠㼕㼛㼚

㻿㼠㼍㼎㼘㼑㻌㻿㼠㼍㼠㼑 㻲㼛㼡㼚㼐㼍㼠㼕㼛㼚

㻹㼍㼠㼑㼞㼕㼍㼘㼕㼟㼠㼕㼏

㻱㼏㼛㼚㼛㼙㼕㼏 㻿㼠㼞㼡㼏㼠㼡㼞㼑㻌

㻾㼑㼢㼛㼘㼡㼠㼕㼛㼚㻌㼕㼚㻌

㻔㻾㼑㼘㼍㼠㼕㼛㼚㼟㻌㼛㼒㻌㻼㼞㼛㼐㼡㼏㼠㼕㼛㼚 

㻼㼞㼛㼐㼡㼏㼠㼕㼛㼚

㻼㼞㼛㼐㼡㼏㼠㼕㼢㼑㻌㻲㼛㼞㼏㼑㼟

㻱㼤㼕㼟㼠㼑㼚㼏㼑

Fig. 1.1  The materialistic view of history. (Source: Yagi (2002) Fig. 1, slightly modified)

such a “micro–macro link.”12 Together with these three aforementioned characteristics, it results in a deterministic view of history. We can regard this as the fourth characteristic of the Marxian “materialistic view of history.” It is believed that to overcome the holistic and deterministic traits of the “materialistic view” of history, the changing processes of population and environment must be regarded as normal and introduce the “micro–macro loop,” that is, the interaction of microscopic change in the nature and behavior of individuals and the macroscopic state that consists of population and environment. Historical change contains in its essence the diversity and contingency that cannot be reduced to a uniquely determined scheme of development. What we need is an evolutionary view of social change that permits diversity and contingency at both micro and macro levels. The contrast in both views is depicted in Figs. 1.1 and 1.2. In the “materialistic view,” social change occurs from the inconsistency between the development of “productive forces” and the older “production relations.” This inconsistency is reflected in contradictions and struggles in the intellectual superstructure. However, as the deterministic causation is kept intact, the inconsistency sooner or later replaces itself with a new stable state of foundation and superstructure. Contrastingly, the basic explanatory feature of evolutionary change is “post-­ festum selection.” As Charles Darwin explained at the core of “the principle of ­natural selection” (Darwin 1859), the outcome of historical processes consists of a constellation of patterns of action and types of individuals that have survived. The

 Sociologists generally use the term “micro–macro link.” See Alexander et al. (1987). Under the similar term “micro–macro loop,” Shiozawa (2000) elaborated more substantial causal interrelations such as that of the structure of Japanese firms and the macroeconomic growth pattern that emerged under the rapid growth era of Japanese economy. 12

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㻮㼑㼔㼍㼢㼕㼛㼞 㻔㻹㼕㼏㼞㼛㻕㻌

㻿㼕㼙㼕㼘㼍㼞㼕㼠㼥

㻯㼛㼑㼤㼟㼕㼠㼑㼚㼏㼑 㼍㼚㼐㻌㻯㼛㼙㼜㼑㼠㼕㼠㼕㼛㼚㻌㼛㼒㻌 㼂㼍㼞㼕㼍㼠㼕㼛㼚㼟

㼂㼍㼞㼕㼍㼠㼕㼛㼚㼟㻌㼚㼛㼠㻌㼕㼚㼏㼞㼑㼟㼕㼚㼓

㻯㼔㼍㼚㼓㼕㼚㼓㻌㻿㼠㼍㼠㼑㻌 㻔㻼㼞㼛㼏㼑㼟㼟㻕

㻼㼛㼟㼠㻙㻲㼑㼟㼠㼡㼙

㻿㼠㼍㼎㼘㼑㻌㻿㼠㼍㼠㼑 㻔㻿㼥㼟㼠㼑㼙㻕

㻿㼑㼘㼑㼏㼠㼕㼛㼚 㻿㼠㼍㼎㼘㼑㻌

㻯㼔㼍㼚㼓㼕㼚㼓

㻱㼚㼢㼕㼞㼛㼚㼙㼑㼚㼠

㻱㼚㼢㼕㼞㼛㼚㼙㼑㼚㼠

㻵㼚㼏㼘㻚㻌㻼㼛㼜㼡㼘㼍㼠㼕㼛㼚㼟

㻵㼚㼏㼘㻚㻌㻼㼛㼜㼡㼘㼍㼠㼕㼛㼚㼟

㻱㼚㼢㼕㼞㼛㼚㼙㼑㼚㼠 㻔㻹㼍㼏㼞㼛㻕 Fig. 1.2  Evolutionary model of social change. (Source: Yagi (2002) Fig. 2, slightly modified)

environment functions as the apparatus that limits the survival (success and failure) of activities and agents. However, for individual agents, the environment cannot be reduced to an inorganic physical environment as it is in itself an ecological environment consisting of populations of the same species and other species. In the case of economic reproduction, in addition to direct interaction with other agents, the macroscopic variables of economy belong to the environment of reproduction and evolution. Selection presupposes the set of varieties that are selected. Thus, the second essential element of evolutionary change is the emergence of variations and diversities of individuals as well as populations. Further, they must be inherited in the future after their success in selection. Darwin not only excluded ex ante conscious selection by the hand of higher order but by individuals that recognized its merits and demerits. His hope to find the entity that is selected and inherited to the next generation was fulfilled by the scientists in the twentieth century as the discovery of genes. Genes may suffer mutations, and the population of a species is a gene pool that contains lots of variations. The composition of the population of a species and, thus, that of its gene pool varies from the success and failure of individuals in their survival and reproduction. In case of cultural and economic reproduction, we need not restrict ourselves to a rigid Darwinism that excludes any intentional element in the emergence of variations in the evolutionary process. What separates the evolutionary view from other deterministic views is its rejection of perfect knowledge and perfect rational ­expectation. The intentional selection of activity is an essential feature of man as a species. Knowledge and rules that humans use in their decision-making are the preconditions of their social lives. Individuals learn from experience and education.

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When individuals deal with a new agenda or face unfamiliar environment, they examine their knowledge and past experiences to find a new appropriate activity that may make their survival. So far as such selections and innovations are seen in the process of ex ante and ex post learning and assessment, they are contained in the evolutionary process without any inconvenience. We can also contrast the phases in which activities, populations, and environments remain stable against phases in which there are considerable variations and fluctuations. In the latter phase, new variations emerge in addition to existing variations and go through the trial of changing environments. However, some patterns of variation may enjoy self-reinforcing effects, such as path dependency, while others do not. In the stable phase, the degree of diversity is lower, and existing variations make the interrelations that are nearer to the state of “equilibrium.” It seems as if a fixed system reigns over society. However, this stability is not solid enough to continue eternally, since this quasi-equilibrium is sustained only via the delicate balance of plural dimensions of reproduction and endangered by the emergence of variations that can transform the arrangement of elements of the prevailing system. Let’s surmise the key points that the evolutionary view contains in contrast with the “materialistic view” and other views of social change. There are four key elements: (1) dualistic ontology that supposes the existence and functions of “information” or “knowledge” behind the real phenomena, (2) “population thinking” that enables investigation into the micro–macro relations in the area of social evolution, (3) the changing process that often has self-reinforcing effects such as path dependence, and (4) the self-emergent feature in the formation of a system. To understand the first element, dualistic ontology,13 one must imagine the biological relation between genes and their phenotypes (the real individuals). The real world consists of real individuals, their interactions, and their outcomes. However, what determines the future is not the results of present struggles of survival in the real world but the generative information in genes that is inherited from the previous generation. Along with other conditions, it determines the development of the physical body and behavior patterns of the future generation. In the process of social and economic reproduction, sentiments, knowledge (including technical know-how), technology, science, customs, and norms inherited from former generations or acquired from own experiences guarantee the continuity of the social world. While inventions, innovations, and creations can transpire in this realm of knowledge and may affect the real world, such novelties usually emerge with the help of some intellectual inheritance. Further, the survival of innovations is tested in the competitive real world and cannot change the real world without their success.

 Dopfer and Potts (2008) call it “bimodal” and explain it as the “ontological property of all existences, in that they are always composed of an idea and an actualization” (p. 100). In Japan, Tamito Yoshida’s concept of “program science” has similar dualistic view. According to Yoshida, all the sciences including social sciences and humanities the complexity of whose research agenda is higher than that of biology are covered by this concept of “program science.” He considered this proposal as a manifesto of the informatic turn of science after the advent of genome science. See Hasegawa (2010). 13

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Population thinking, the second element, is also taken from the Darwinian biological evolution theory that considers a “species” not as a fixed, invariable entity but as a group of populations in which variations and their compositions within the population change in the process of reproduction of successive generations. Population thinking is the antipode to the usual procedure of prevailing economics presupposes a “representative agent” and follows the rational action of this agent to construct the economic system. One of the serious defects of this procedure exists in its lack of repercussions from the aggregate level. Seeing a species in its population is a macroscopic observation that considers its traits and living conditions in a given environment. The supposition of populations is also valid in social and economic sciences. It provides the activities of individuals with variations at the aggregate level. Thus, it supports the micro and macro causations that are inevitable in the investigation to social and economic reproduction. The third is the phenomenon that some kinds of activities can have self-­ reinforcing effects under given conditions. This effect negates the means to attain an equilibrium to which academic economics are so accustomed. In the real process, as far as the feedback mechanism of a process should work negatively, it can keep the process as close to the equilibrium point as desired. The positive feedback circuit deviates the process up to a point that the process loses its necessary conditions. The aforementioned “path dependence” is a phenomenon where a small difference in initial stages results in an extended difference even after the initial ground of difference has been covered. The prevalence of the QWERTY arrangement rests on its high diffusion among typists and continues into present-day computers only because of a difficulty in breaking routines (David 1985). This is an example of the repercussions of increased composition in a segmented population. We must observe that the phenomenon of path dependence can appear not only from physical or technological conditions such as increasing returns or network externalities but also from direct social interactions between individuals such as imitation, stimulation, and learning. The fourth is the possibility that a certain combination of agents and their specific activities can form an integrated system that is beyond a mere transient equilibrium. The emergence of a system may occur from the synchronization of plural processes without any intervention. However, in the case of the emergence of social systems, the element of information and knowledge plays a pivotal role. Institutional view is a mode of thinking in which we understand the system of plural patterns of activity with information or knowledge accompanying that system. It usually accompanies customs, norms, and knowledge that aim to maintain the integrity of the system. In some cases, such knowledge or value in a higher dimension may emerge and promote the development of an agent of higher dimension that recognizes, evaluates, and governs the mode and functioning of the system. The evolution of knowledge and information in relation to their carriers is one of the core themes of industrial and cultural history.

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1.4  Formation and Evolution of Governance The previous section explained that the evolutionary view of social change is exempted from the holism and determinism that accompanies the Marxian materialistic view of history. However, placing change in individual agents and their behavior on grounds of macroscopic changes of social systems does not mean the exclusion of governing elements that function at higher than individual levels in the process of social change. In General Theory of Economic Evolution, Dopfer and Potts proposed the taxonomy of rules as follows: “0th order constitutive rule,” “1st order operational rule,” and “2nd order mechanism rule,” The 0th order rule is defined as “social, legal, cultural, and other constituent rules that underpin generic rules for economic operations.” In other words, it signifies a general rule that is embedded in general social consensus. The first-order rule is “generic rules originated, adopted, and retained by carriers for operations.” This rule corresponds to the concrete types of economic operations. The second-order rule is “rules for changing rules. The origination, adoption, and retention of rules about origination, adoption, and retention.” This is a meta-rule that controls the evolutionary process of rules (Dopfer and Potts 2008, p.9). We can also introduce such order distinction to our investigation. The 0th-order rule is integrated to the general understanding of a society and thus constitutes an element embedded in the common environment for the activity of economic agents and the organization concerned. The first-order rule deals with the particular behavior and the transactions of individuals and organizations concerned. The second rule deals with recognition, evaluation, and reformation of existing systems of operation and the relational structure of agents. Thus, on the recognition of the rules on three levels of order, we can adopt the concept of “governance” as used by political and management scientists. Political scientists use “governance,” which has thus far been regarded as the function of “government,” in a wider sense to incorporate the interaction of institutions and agents including governments. “Governance” is not only confined to the use of monopolized political powers of a government but also includes the condition and performance of policy-oriented interaction of institutions and agents. In this sense, the term can also be used in international politics and areas where no legitimate powers exist. To management scientists in business firms, this concept is more familiar as “corporate governance.” Nowadays the use of this term has widened as far as to encompass governance of corporations in the public sector, such as education, medicine, and welfare. The usage of this term includes whether the behavior of managers and employees is trustworthy from the stance of the mission of the concerned corporation, if rights and interests of the stakeholders are protected, if the management and services are trustworthy, and so on. Oliver Williamson, a researcher of corporate governance and recipient of the 2009 Nobel Prize in Economic Science, discussed this in The Mechanisms of Governance (1996). According to him, “governance” in a wider sense is “good

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㻵㼚 㼟 㼠㼕 㼠㼡 㼠㼕 㼛 㼚 㼍㼘 㻱 㼚 㼢 㼕 㼞 㼛 㼚 㼙 㼑 㼚㼠

㻿㼠㼞㼍㼠㼑㼓㼕㼏

㻿 㼔 㼕 㼒 㼠 㻌㻼 㼍 㼞 㼍 㼙 㼑 㼠 㼑 㼞 㼟

㻳㼛㼢㼑㼞㼚㼍㼚㼏㼑

㻮㼑㼔㼍㼢㼕㼛㼞㼍㼘

䊹 䠡䡊䡀䡋䡃䡁䡊䡋䡑䡏

㻭㼠㼠㼞㼕㼎㼡㼠㼑㼟

䠬䡎䡁䡂 䡁䡎䡁䡊 䠿䡁䡏

䊻

㻵㼚 㼐㼕 㼢㼕 㼐㼡 㼍㼘

Fig. 1.3  Three-layer model of governance. (Source: Figure 9.1 in p. 223 of Oliver Williamson, The Mechanism of Governance, Oxford University Press, 1996. Oxford Publishing Limited)

order and workable arrangements” (p.  11) of institutions and “the institutional matrix in which the integrity of transactions is decided” is their “governance structure” (p. 378). He explored this mechanism and structure against the integrity that transactions of agents produced under the orientation of institutional design. He provided a graphic model of governance that consisted of three layers: individuals, governance, and the institutional environment (Fig. 1.3). Adopting the concept that the preference of individuals is formed endogenously under an institutional framework, Williamson sandwiched the layer of governance in between individuals and institutional environments. Adjusting “shift parameters” according to conditions of “institutional environments,” the layer of “governance” evaluated the performance of individuals and directed it to guide them. However, upon receiving information of the state of governance, individuals can try to change the institutional arrangement of the layer on top. In this graph, governance has been labeled “strategic feedback.” A system of organization is the combination of elements from all three layers presented in this model. “Governance” is the intermediate layer that assesses the performance of the system and sends feedback to individuals and institutional environments. The “governance” layer is the springboard by which Dopfer and Potts’ “2nd order rule” may come into operation. The institutional environment that receives the impact of external conditions is not always stable. It may be changing. Thus, in my view, if feedback within this model is overlapped with the adaptive (post festum) selection, Williamson’s ­three-­layer model is interpreted successfully as a model of evolutionary change. The direction and speed of a system’s evolutionary change depends on the nature of

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governance mechanisms that include individuals who have their own information, capability, and preferences. These traits of individuals are modified by their experiences and the information provided by the governance mechanism. The internal model of individuals (in humans) can contain macro-oriented information and its evaluation; the intervention of a governance mechanism does not contradict the evolutionary view of social change. However, Williamson’s concept of governance was limited to cases of individual corporations (such as an organizations). “Population thinking” and the micro–macro loop of the whole range of economic relations were foreign to him. Williamson’s model thus was more like a miniature self-governing system. In this respect, a group that studied coordination processes in policy-making and used the term “evolutionary governance” first can be considered more flexible. In their Evolutionary Governance Theory (2014, 2015), receiving an inspiration from such ideas as autopoiesis of Maturana and Varela (1987) and “self-reference” of Nikolas Luhman (1995), Van Assche, Beunen, and Duinenveld conceived a definition of “governance” in which not only the system but also all its constitutive elements experienced evolutionary changes. Joining the shift from government to governance in the academic trend of political science, they understood “governance” as “a form of coordination in the taking of collectivity binding decisions within a certain community” (2015, p.  3). They further argued, “an evolutionary perspective is necessary because the effects of governance arrangements are always influenced by the dynamic networks of actors, discourses, and institutions” (2014, p. 4). To our regret, as they stand on a rather radical side of constructivism in their views and reasoning, it is hard to find definite elements and core causation in their theory. Compared with Williamson’s isolated model of “governance,” the “evolutionary governance theory (EGT)” has a broader perspective that is able to integrate a diversified mode of interaction. In politics, “governance” is discussed mainly from the fundamental criterion of “public interest.” However, as “public interest” does not exist in a different domain from the substantial interest of members of a community, governance of publicity must have an effective channel with the conditions of market economy and nonmarket social economy. So far as the domestic policy of a nation is concerned, “public interest” is nothing other than the economic interest in market economy (as expressed by national income) and the well-being and activity in nonmarket social life. In Japan, a group of political scientists headed by Msaru Kono published a book of the title From Institutions to Governance (Kono 2006). Kono distinguished “governance as function” and “governance as state” and attributed to the latter an “external effect” such as the provision of “public goods.” The former is a disciplinary mechanism as Williamson conceived under the term “governance.” The assessment of the governance of institutions is not possible without the evaluation of the external effects of the relevant institutions. This view typically reflects the interest of political scientists. Activities of the government in a broader sense, including legislation, administration, and jurisdiction, are the governing functions of centralized authoritarian power, also called “governments” or “states” depending on the domain. On the one

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㻱㼏㼛㼚㼛㼙㼕㼏㻌㻼㼞㼛㼏㼑㼟㼟㻌 㻔㻹㼍㼞㼗㼑㼠㻌㻱㼏㼛㼚㼛㼙㼥㻕㻌 㻸㼑㼓㼕㼟㼘㼍㼠㼕㼛㼚 㻯㼞㼑㼐㼕㼠

㻯㼑㼚㼠㼞㼍㼘㼕㼦㼑㼐

䠟䡅䡒䡅䡈 䠯䡋䠿䡅䡁䡐䡕

㻳㼛㼢㼑㼞㼚㼍㼚㼏㼑

䠧䡊䡋䡓䡈䡁䡀䡃䡁㻛䠲䡋䡅䠿㼑

㻼㼛㼘㼕㼠㼕㼏㼟

㻰㼑㼏㼑㼚㼠㼞㼍㼘㼕㼦㼑㼐 㻳㼛㼢㼑㼞㼚㼍㼚㼏㼑

㻱㼠㼔㼕㼏㼟

㻿㼛㼏㼕㼍㼘㻌㻼㼞㼛㼏㼑㼟㼟 㻔㻺㼛㼚㻙㼑㼏㼛㼚㼛㼙㼥㻕

Fig. 1.4  Governance constellation around public interest. (Source: Yagi (2002) Fig.  4, slightly modified)

hand, various forms of indirect democracy, such as representative democracy, serve as the governance mechanisms of this authorized power. On the other hand, both market economy and social life develop various sorts of nonauthoritarian governance mechanism in morals, customs, and institutions. Reputation, trust, and popularity help these decentralized governance mechanisms to function. However, both centralized and decentralized governance mechanisms may not work well. They may contradict each other or offend the interest of a community as a whole, or of its non-negligible fractions. Thus, the search for a solution on the grounds of examination of accumulated experience, expertise, and knowledge has much significance. In a presentation I made for a workshop of Public Philosophy,14 I used a sketch (Fig. 1.4) that demarcated an area where individuals could discuss their interests in market economy and social life, as well as on the functioning of centralized and decentralized governance. Individuals that make reflections in the public sphere can raise their muted voices, resulting in discussions, thereby utilizing expertise and knowledge accumulated from collaborations. Perhaps the “civil ­society” and “deliberative democracy” that Jürgen Habermas (1990, 1992, 1996)15 envisioned can finally be achieved when the public sphere connects with discussions in the parliament.  This workshop was frequently held in Kyoto from 1998 to 2012 by Kyoto Forum and Shorai Sedai Sogo Kenkyusho (Research Institute for the Future Generation) whose director was Prof. Kim Taechang. It promoted the interest in public philosophy also by publication of the total 30-volume Series of Kokyo Tetsugaku (Public Philosophy) from the University of Tokyo Press from 2001 to 2006. I attended this workshop several times. 15  Section 3 of the next chapter discusses Habermas’ ethical theory. For more information on the dynamics of system transformation, refer to Chap. 6. 14

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References Alexander JC, Giesen B, Münch A, Smelser NJ (eds) (1987) The micro-macro link. University of California Press, Berkeley Bourdieu P, Passeron J-C (1977) Reproduction in education, society and culture, translated from the French by Richard Nice. Sage Publications, London Commons JR (1934) Institutional economics: its place in political economy. The Macmillan, New York Darwin C (1859) On the origin of species by means of natural selection, or the preservation of favoured races in the struggle for life. John Murray, London David P (1985) Clio and the economics of QWERTY. Am Econ Rev 75(2):332–337 Dopfer K, Potts J (2008) The general theory of economic evolution. Routledge, London Habermas J  (1990) Strukturwandel der Öffentlichkeit: Untersuchungen zu einer Kategorie der bürgerlichen Gesellschaft, 2. Auflage. Suhrkamp, Frankfurt a. M Habermas J  (1992) Faktizität und Geltung: Beiträge zur Diskurstheorie des Rechts und des demokratischen Rechtsstaats. Suhrkamp, Frankfurt a. M. (In suhrkamp taschenbuch wissenschaft 1361, 1998) Habermas J (1996) Die Einbeziehung des Anderen: Studien zur politischen Theorie. Suhrkamp, Frankfurt a. M. Hasegawa K (2010) Tamito Yoshida: an unknown master of Japanese Sociology. International Journal of Japanese Sociology 19(1):126–132 Hodgson GM (1988) Economics and institutions: a manifesto for a modern institutional economics. Polity Press, Cambridge Kono M (ed) (2006) Seido kara Governance he: Shakai kagaku ni okeru Chi no Kosa (Japanese). University of Tokyo Press, Tokyo Kuczynski M, Meek R (eds) (1972) Quesnay’s Tableau économique, edited with new material. Kelly, New York Luhman N (1995) Social systems. Stanford University Press, Stanford Marx K (1859) Zur Kritik der politischen Ökonomie. Berlin: Duncker. (Included in Marx 1961) Marx K (1867) Das Kapital. Kritik der politischen Oekonomie. Erster Band. Buch 1: Der Produktionsprozess des Kapitals. Otto Meissber, Hamburg Marx K (1885) Das Kapital. Kritik der politischen Oekonomie. Zweiter Band. Buch 2: Der Zirkulationsprozess des Kapitals. Otto Meissner, Hamburg Marx K (1904) A contribution to the critique of political economy, translated from the second German edition by N. J. Stone, with an appendix containing Marx’s Introduction to the Critique recently published among his posthumous papers. Charles H. Kerr, Chicago Marx K (1953) Grundrisse der Kritik der politischen Ökonomie (Rohentwurf) 1857-1858, Dietz, Berlin. (Eng. Tr. Marx 1973) Marx K (1961) Zur Kritik der politischen Ökonomie (Original pub. in 1859), in Karl Marx  – Friedrich Engels Werke, Band 13, Institut für Marxismus-Lenismus beim ZK der SED, Berlin: Dietz Verlag, 1961. (English translation, Marx 1904 and Marx 1970) Marx K (1967) Capital. A critique of political economy. In: Engels F (ed) Book 2: the process of circulation of capital, vol 2, 4th pr edn. Progress Publishers, Moscow Marx K (1973) Grundrisse, Foundations of the critique of political economy (rough draft). Translated with a Foreword by Martin Nicolaus, Penguin Books, Harmondsworth Maturana HR, Varela FJ (1987) The tree of knowledge: the biological roots of human understanding. Shambhala Publications, Boston Mayr E (1988) Toward a new philosophy of biology: observations of an evolutionist. Belknap Press of Harvard University Press, Cambridge Morishima M (1973) Marx’s economics: a dual theory of value and growth. Cambridge University Press, Cambridge Shiozawa Y (2000) Micro-macro loop ni tuiite (On micro-macro loop). Keizai Ronso 164(5):1–73 (in Japanese)

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Shiozawa Y, Oka T, Tabuchi T (eds) (2017) A new construction of Ricardian theory of international values. Springer, Singapore Shiozawa Y, Morioka M, Taniguchi K (2019) Microfoundation of evolutionary economics. Springer, Singapore Sraffa P (1960) Production of commodities by means of commodities. Cambridge University Press, Cambridge Van Assche K, Beunen R, Duineveld M (2014) Evolutionary governance theory: an introduction (Springer briefs in economics). Springer, Cham Van Assche K, Beunen R, Duineveld M (2015) Evolutionary governance theory: theory and applications. Springer, Cham Williamson OE (1996) The mechanisms of governance. Oxford University Press, New York

Chapter 2

Approval Theory and Social Contract Kiichiro Yagi

Abstract  This chapter’s basic theme is that of social philosophy: how is order in human society possible and what is the structure of its order? Naturally, the structure of social order relates to ethical problems in rules and duties. The author begins with a dispute over property and civil society in which he was involved in his twenties and sketches his scheme of mutual “approval” on property and ownership. He distinguishes the autonomous type and the synchronous (conformist) type of approval and follows the development of the relationships of both to the emergence of law and general economic media. Then, he applies the framework to the problematique of social contracts to determine its modern validity. He analyzes the structure of deontological ethics of Jürgen Habermas and Immanuel Kant from the perspective of approval theory. Keywords  Social order · Approval theory · Social contract · Property and ownership · Norm and interest · Discourse ethics

Kiichiro Yagi, “Shakai Keiyaku kara Shonin no Riron he: Danpen teki Shiron (From Social Contract to the Theory of Recognition: Tentative Consideration),” Keizai-Ronso (The Economic Review), vol. 186, no. 3 (April 2013), pp. 1–14. Kyoto Daigaku Keizai Gakkai (Kyoto University Economic Society). (Partly used in Sect. 2.3). Kiichiro Yagi, Trust and Sympathy in the Social and Market Order, Chapter 2 of Yuichi Shionoya and Kiichiro Yagi (eds.) Competition, Trust, and Cooperation: A Comparative Study, Heidelberg, Berlin, 2001, pp. 20–41. Spiegel Nature. (Used in an abridged way in Sect. 2.2). Kiichiro Yagi, “A note on discourse ethics and naturalized social contract,” Evolutionary and Institutional Economics Review, vol, 15, no. 2 (December 2018), pp. 341–350. Japan Association for Evolutionary Economics. (Partly used in Sect. 2.4). K. Yagi (*) Setsunan University, Neyagawa, Osaka, Japan e-mail: [email protected] © Springer Japan KK, part of Springer Nature 2020 K. Yagi (ed.), From Reproduction to Evolutionary Governance, Evolutionary Economics and Social Complexity Science 20, https://doi.org/10.1007/978-4-431-54998-7_2

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2.1  The Debate on Property and Civil Society The debate on “individual property/civil society” in Japan from the late 1960s to the early 1970s served as the starting point for author’s research on social theory. The discussion centered around the interpretation of Marx’s use of the terms “reconstruction of individual property” and “civil or bourgeois society” (bürgerliche Gesellschaft).1 Marxian scholars in Japan were divided between in two camps. The first appreciated Marx’s use of them and maintained that (1) the future society Marx had imagined retained the positive values of civil society and (2) its essence consisted of the reconstruction of individual property on the ground of associations of producers, which capitalism had perverted as private property and exploiting workshops. The main proponent of this interpretation was Prof. Kiyoaki Hirata, who acquired the support of a group of scholars and students that would break the traditional class-oriented thinking of Marxism with the perception of the emergence of a new wave of social movements.2 The second camp, which represented rather majority, consisted of Marxian scholars that supported the established left parties in Japan, (i.e., the Communist Party and Socialist Party). They were against the conceptual appreciation of individual property and civil society, because both parties adhered to the traditional concepts of revolutionary socialism, including state ownership and dictatorship of working class. Naturally, as a graduate student, the author sided with Prof. Hirata. In 1971, he registered for Hirata’s seminar at Nagoya University. However, he was not interested in the exegetic controversy surrounding Marx’s text. Rather, he believed that this debate opened a fresh direction for theoretical studies in the problem of property/ownership. Thus, after he submitted his master’s thesis, which dealt with Marx’s Capital as a theory of property/ownership, he entered into the study of comparative economic systems. Prof. Masahiko Aoki, then at Kyoto University, kindly adopted his article on property problem in the series on Theory of Economic Systems that Aoki edited in 1977 (Yagi 1977). In this stage, his view on social theory was not yet evolutionary. He was still trapped in the contrast of economic systems and the idea of Marxian revolutionary change in economic institutions. Evolutionary thinking reached him later, in the 1980s, when he extended his research to include the Austrian School of Economics (from Carl Menger, Eugen von Böhm–Bawerk, Friedrich Wieser to Joseph A. Schumpeter and Friedrich A. Hayek)3 and Institutional Economics. The chance of research abroad in 1889/1990 gave him the opportunity to become acquainted with several leading figures of the evolutionary and institutional direction in the field of economics in Europe and the United States. After return to Japan, he strove to introduce ­evolutionary

 Marx (1859) regarded political economy as “the anatomy of civil society” (Marx 1961, S. 8). The thesis of the reconstruction of the “individual property” is in the conclusion of the first volume of Marx’s Capital (Marx 1867, S. 791, in English translation Marx 1954, p. 715). 2  On the origin and influence of this so-called “civil society” school of Marxism, see Barshay (2007). 3  The result of my investigation in this line was published in English as Yagi (2011). 1

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2  Approval Theory and Social Contract Table 2.1  Four aspects of social approval of property/ownership Domain Normative (consent) Positive (fact)

Area Individual Allocation of ownership Possession

General Property right as general norm Social class or status

Source: The author. Modified from the table in Yagi 1977, p. 271.

and institutional economics in Japan. With some friends, he was involved in establishing the Japan Association for Evolutionary Economics (1996–1997) and organized a joint research for the systematization of institutional economics (1997–1999).4 In this stage of the investigation, the scheme he had written in Yagi (1977) that depicted four aspects in the social approval of the property/ownership (Table 2.1) provided the base of further research. This scheme was originally drawn to analyze the social relations of property from the internal orientation of the subjective consciousness of the agent; the understanding of each individual case and that of general suppositions is interdependent, both in the normative and positive (factual) domains. For example, let’s say that someone owns some property. From the normative viewpoint, a circularity exists between each individual case and the general supposition legitimizing the right of each individual case, which then simultaneously confirms the validity of the relevant general norm. On the other side, as the protection of possession envisages, someone’s factual domination of a property is approved on the significance of the activities on its ground. Behind this positivistic approval exists an approval of the collective interest of the supposed type of property/ownership relations (e.g., class interest). This represents the solidarity of interest that supports and defines the structure of normative domain. This scheme represents the structure of civil society that advocates general law and individual right on the substantial ground of possession and class. He thought that this scheme contained most representative social theories, from that of social contract to utilitarianism. While Jean-Jacques Rousseau’s L’origine de L’inegalité (1755) describes the gravity of the historically accumulated fact in the positive over the normative domain, his second treatise Du contrat social (1762) draws the logic of ordering the positive domain from the general will of the people defining themselves as sovereign. In John Locke’s Two Treaties on Government (1689), the normative and positive (factual) domains are not in as sharp a contrast. Possession that emerges in the natural state is protected in the common order by the social contract. Further, the author assumed that David Hume and Adam Smith deal with the orientation for normative approval using the term of “convention” and “propriety.” After an interval, he resumed the investigation into the property problem in the mid of 1990s. He revised Table  2.1 as Fig.  2.1 by highlighting the interactions/ interdependences of the four boxes (①~④) and introducing the relations of agents  See author’s recollections in Yagi (2018), which is included as appendices to Part I.

4

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approving/disapproving of individual possessions of agents over resources. Without the development of such individual relations, neither a description of the emergence of the general norm nor that of the general measure of interest is possible. Borrowing the logic of Marx’s theory of value form and exchange process (Marx 1867), he introduced the exchange of approval of two agents in the form of equations. Thus, his scheme of property/ownership developed into the scheme of “mutual approval” relations, which he termed as the Approval Theory of Property/Ownership. He presented this theory several times at conferences and workshops around 2000. The paper he gave at the international SEEP5 workshop in Kyoto in 2000 was then published in English as Yagi (2001). In the next section, we will surmise this approval theory, since several of this book’s chapters presuppose and refer to it. Then, we will apply this theory to the social contract and social ethics. Readers can regard them as appendices of this chapter.

2.2  Approval Theory of Social Order In this version of the civil order scheme (Fig. 2.1), the interdependence/interrelation of the items in the columns is explicitly illustrated (①~④). The first area of interaction/interdependence is the circularity between individual and general legitimation (Li and Lg: ①).6 If we do not presume the transcendental existence of universal norms, the emergence of general legitimation must be explained using multiple cases of individual legitimation. Applying this logic in reverse, the application of a general norm functions as a title of the individual’s right to dominate goods. The second area is that of solidarity in the real domain of the sentimental and material interest (Si and Sg: ②). As already mentioned, universalization of interest in this domain is very difficult. At first, nothing more than the generality of “group interest” emerges out of the interaction of multiple supports for individual interests. Conversely, the generality of a “typical” interest situation within a group (class) provides an advantage to the support of the relevant individual’s material interest. In both the normative and real domains, the demand of universalization is extremely difficult as long as the nature of individual claims remains constant. It may be possible that the process of universalization evolves along with the transmutation of individual claims. The third area (③) is the core of human nature itself. While idealists focus their attention on the prevalence of reason over sentiment or material interest, a group of philosophers and scientists headed by Hume envisaged the core of human nature in the sentiment and custom (routine) of the mind. We use the term “naturalists” to signify  This is the abbreviation of the Studies in Economic Ethics and Philosophy. This workshop was organized by Peter Koslowski, then director of the Hannover Institute of Philosophical Research, for several years around 2000 and published the results from Springer. 6  We used the word “legitimation” to stress its normative nature. However, when its broader meaning includes sentimental consent, it is replaced by more straightfoward word “approval.” 5

2  Approval Theory and Social Contract 㻰㼛㼙㼍㼕㼚 㻺㼛㼞㼙㼍㼠㼕㼢㼑㻌㼣㼛㼞㼘㼐 㻾㼑㼍㼘㻌㼣㼛㼞㼘㼐

29

㻵㼚㼐㼕㼢㼕㼐㼡㼍㼘

㻳㼑㼚㼑㼞㼍㼘 䐟 䊹㻌㻌㻔㼏㼕㼞㼏㼡㼘㼍㼞㼕㼠㼥㻕㻌䊻

㼕㼚㼐㼕㼢㼕㼐㼡㼍㼘㻌㼞㼕㼓㼔㼠㻦㻌㻌㻸㼕 䐡䊺䊼 㼕㼚㼐㼕㼢㼕㼐㼡㼍㼘㻌㼕㼚㼠㼑㼞㼑㼟㼠㻦㻌㻿㼕

䊹㻌㻌㻔㼟㼛㼘㼕㼐㼍㼞㼕㼠㼥㻕㻌䊻 ղ

㻸㼓㻦㻌㻌㼓㼑㼚㼑㼞㼍㼘㻌㼚㼛㼞㼙 䊺䊼䐢 㻿㼓㻦㻌㻌㼠㼥㼜㼕㼏㼍㼘㻌㼕㼚㼠㼑㼞㼑㼟㼠

Fig. 2.1  Dual structure of civil order. (Source: The author, originally Figure 1 in Yagi 2001)

them. However, it is often the case that individuals behave against their own interests. The altruistic behavior of humans continues to be a hot topic for both philosophers and scientists. The last area (④), where generality in the normative domain and the real domain interacts, is the proper area of public philosophy; thus, it is also prerogative of social sciences that deal with public policy. On the one hand, the cynical view maintains that the generality of a society’s norms is no more than the sanctioned name of the general interest of the dominant group (class). On the other hand, modern society has developed several universal principles, such as global human rights, which should be unilaterally respected by individuals and organizations, including governments. No one can deny that such an idealistic claim changes the nature and constellation of the dominant interests in the societies concerned.

2.2.1  The Stable State of Civil Order Reciprocal approval relations in both domains are introduced to explain more precisely the accordance of ownership/possession relations and the upcoming shifts in civil order. In the normative domain, a general description of the Ownership Rule (Ng) gives Individuals (i) Legitimation (L) of their Possession over goods (Pij)7 as their recognized right. In reverse, the right of individuals over certain goods reinforces the normativity of the corresponding rule and often raises it to the status of a general norm (law). Thus, there is circularity between individual rights and general norms (①). This relation is presented in the Eq. (2.1):









Li N i  Pij   Lg N g  Pij  .



(2.1)

However, in the real world, where individuals and society as a whole are concerned with their own interests, the action as well as subjective approval does not occur from norm but from the sentiment (motivation). Thus, Si(Ii(Pij)) rather than Li(Ni(Pij)) is the appropriate expression for determining the Agent’s (i) attitude.  In my former presentation in Yagi (2001), I used the expression “domination of agent i over j” (Dij), as the dominium was the original term of property/ownership in Western tradition. I changed it to “possession” (Pij) to express our agenda more precisely. However, in case that it contains personal control of i over j, I continue to use the term “domination.” 7

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Compared with the normative domain, the emergence of a general interest as a whole is difficult, due to the collision of interests within the society. Still, the ­similarity in the Interest Situation (I) easily grows into a Common Interest (Ig) for a group (or class) in which the principle of solidarity is prevalent (②). In this case, the accord of the individual interest and the collective interest is presented by the following equation:









Si I i  Pij   Sg I g  Pij  .

(2.2)

The mutual influence between two domains is easy to understand in the individual case. Individuals prefer or search for the norms or grounds to protect their interests, and the latter support the adherence of individuals over their interests. However, in the general case, mutual influence is very problematic: Society as a whole is never a unified collective whose interests can be conceived of in general. Most seemingly universal norms (law) emerged at first as the partial rules that represented some sort of group interest (class interest). Laws in modern civil society are no exception. On the one hand, herein lies the possibility of conflict in large social groups (class), while on the other hand, there are also the contributions of lawyers and public persons, including politicians, toward solutions for enhancing the universality of the norms concerned.

2.2.2  A  utonomous Approval and Synchronous Approval on the Normative Domain The existence of the General Norm (Ng) and its Representative (Lg) cannot be presupposed from the outset. How they emerge poses a problem. Also, in the substantial domain, the possibility of General Interest (Ig) and its Representative (Sg) must be shown. Here, we introduced two types of agent, the autonomous and the synchronous (conformist); the former determines his attitude on the grounds of his own norm and interest, while the latter adopts the norm and interest of his counterpart in determining his attitude. The accord of two autonomous agents (A and B) in the approval of Agent A’s possession of goods p (Pap) is formulated in the following equation:









La N a  Pap   Lb N b  Pap  .

(2.3)

If Agent B’s possession of goods q (Pbq) is also approved from the autonomous Agent A, the following is also valid:









La N a  Pbq   Lb N b  Pbq  .

(2.4)

2  Approval Theory and Social Contract

31

However, in the relation of two autonomous agents, due to the difference between Na and Nb, the validity of Eqs. (2.3) and (2.4) is not guaranteed. To evade from the Hobbesian situation, homo homini lupus, a General Norm (Ng) and its Representative (Lg) are necessary. In a case in which Agent B is so obedient as to assume the norm of Agent A to determine his attitude, it is easy to reach an accord in the approval of A’s possession of p:









La N a  Pap   Lb N a  Pap  .

(2.5)

If agent A also respects the normative judgment of the counterpart, a reciprocal approval occurs between two agents:









La N b  Pbq   Lb N b  Pbq  .

(2.6)

This is a peaceful situation in which both agents respect the counterpart’s normative judgement. However, on the one hand, that the agent who is accustomed to judging his own norm can so easily adopt his counterpart’s norm is too strong an assumption. On the other hand, Agent B’s obedience may grow further to replace his own norm with that of the autonomous agent in the counterpart. Then, Eq. (2.6) is replaced by









La N a  Pbq   Lb N a  Pbq  .

(2.7)

Now, what happens if Agent A is the only autonomous agent facing a group of obedient conformist-type agents? Then, Agent A becomes the sole provider of the related norm (Na) for a group of conformist-type agents:

 N N N N N

     L  N  P    L  N  P    L  N  P    L  N  P    L  N  P 

La N a  Pap   Lb N a  Pap  La La La La La



  

a

a

a

a

a

P P P P P

bq

ap

b q 

ap

b q 

b

a

bq

b

a

ap

b

b 

b 

a

a

b q 

(2.8)

ap

a

b q 



Here, where there is only one autonomous agent and other obedient conformists, the reciprocal approval among agents is achieved by adopting the normative judgment of the autonomous agent commonly. Then, the position of the autonomous agent rises

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K. Yagi

Fig. 2.2 Autonomous agent becomes a general norm provider. (Source: The author, originally Figure 3 in Yagi 2001)

㻸㼓 㻔㻺㼍䊻㻺㼓㻕㻌㻌㼁㼚㼕㼝㼡㼑㻌㼍㼜㼜㼞㼛㼢㼕㼚㼓㻌㼍㼓㼑㼚㼠

㻸㼎 㻔㻺㼎䊻㻺㼓㻕㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌㻌

㻸㼎䇻㻔㻺㼎䇻䊻㻌㻺㼓㻕

to that of the “general approver” whose norm is generally valid within this group: (Na ⇒ Ng). This is the case of the emergence of an authoritarian order. See Fig. 2.2. However, is the rise of an authoritarian state the only one possibility for the emergence of a civil order? Consider the necessary approval conditions for the occurrence of an economic transaction. Since the perfect autonomous agent is not suited to be an actor in economic transaction, we consider here the exchange of goods (q and q′) in the hands of conformist-type Agent B and B′. Then, the necessary condition for the transaction becomes the reciprocal approval of their possession of the goods concerned, and the prospect that this accord of approval will continue during and after the transaction. In the relation of the conformist-type agents, the mutual exchange of the position occurs together with the exchange of normative judgement. When a real economic transaction occurs, real economic interest urges a proximity of this “imaginary exchange of positions” to the real transaction. In the case of an exchange of goods (q and q′) between two conformists (B and B′), the reciprocal approval before the exchange is written as follows:

    L  N  P   L  N  P . Lb N b  Pbq   Lb N b  Pbq 



b

b

b q 

b

b

(2.9)

b q 

This reciprocal approval must continue during and after the exchange (at least in the agents’ prospect before its contract):

    L  N  P   L  N  P . Lb N b  Pbq    Lb N b  Pbq 



b

b

b q

b

b

(2.10)

b q

Thus, Nb and Nb′ must be sufficiently robust so that they can permit the change of the objects of domination (goods). As the range of transaction extends, the norm of agents (Nb, Nb′, …) must be refined to enable the “imaginary exchange” of the norms. They become convention, which, in the universal range of exchange, can be refined to as a General Norm (Ng). Each agent approves his possession and that of his counterpart according to his interpretation of the general norm ( N gb ,N gb ,) . The general norm, sui generis, is latent in ordinally exchange, but it is called forth when dispute occurs. As shown in Fig. 2.3, the general norm and its representative (i.e., the judicial system) support the order of economic transactions, but they do not interfere in individual transactions without a reason.

33

2  Approval Theory and Social Contract 㻸㼎 㻔㻺㼓㼎㻕

㻸㼎䇻㻔㻺㼓㼎䇻㻕

㻸㼓 㻔㻺㼓㻕㻌㻌㻌㻳㼑㼚㼑㼞㼍㼘㻌㼍㼜㼜㼞㼛㼢㼕㼚㼓㻌㼍㼓㼑㼚㼠㻌㻔㼖㼡㼐㼕㼏㼕㼍㼘㻌㼟㼥㼟㼠㼑㼙㻕

Fig. 2.3  Transaction of agents and judicial authority. (Source: The author, originally Figure 4 in Yagi 2001)

2.2.3  S  olidarity and Generality of the Interest in the Substantial Domain In the substantial domain, a parallel argument can be described concerning approval of domination on the ground of the sentimental solidarity of common interests. Agent A demands the approval of possession of his goods p on the grounds that his sentiment is combined with his interest. In a case in which another agent B approves it based on his own interest, an autonomous approval relation between Agents A and B emerges:









Sa I a  Pap   Sb I b  Pap  .

(2.11)

In a case in which Agent B approves on the grounds of his sympathy for B’s interest, a conformist-type synchronous approval appears in the substantial domain:









Sa I a  Pap   Sb I a  Pap  .

(2.12)

If Agent A also approves of B’s possession of goods q on the grounds of the complexity of sentiment and interest, then, in the case of autonomous type of approval, we have the following formula:









Sa I a  Pbq   Sb I b  Pbq  .

(2.13)

And in the case of conformist-type synchronous approval, we have:









Sa I b  Pbq   Sb I b  Pbq  .



(2.14)

Combinations of the two approval types are represented in the following equations:

     I  P   S  I  P .

Sa I a  Pap   Sb I a  Pap 

Sa

a

bq

b

b

(2.15)

bq

In a case where the same occurs in the relations of Agent B′, B″, … to Agent A, the latter develops into an authoritarian egoist that overwhelms the

34

K. Yagi

Fig. 2.4  Exclusive egoist as the representative of general interest. (Source: The author, originally Figure 5 in Yagi 2001)

㻿㼓㻔㻵㼓㻕 㻦㻌㻱㼤㼏㼘㼡㼟㼕㼢㼑㻌㼍㼡㼠㼛㼚㼛㼙㼛㼡㼟㻌㼑㼓㼛㼕㼟㼠

㻿㼎㻔㻵㼎㻕㻌 㻌

㻿㼎䇻㻔㻵㼎䇻㻕

others. Under this agent, who becomes the self-professed representative of the General Interest Sg(Ig), other Agents B, B′, B″, … confine their interests to their private sphere and perform their business diligently. See Fig. 2.4. Under this authoritarian egoist, reciprocal approval of interest between conformist-­type agents is supported by the sympathy for the resemblance of interests, which differs from sympathy for the general interest imposed on them by the authoritarian ruler. This sympathy may be refined into a pseudo-general interest of their particular grouping. See Fig. 2.5. Next, we introduce the transaction (exchange) between agents of the conformist-­ type. The approval must exist in the prospect of the relations in both pre- and posttransaction:

 Before exchange 

Sa

 After exchange 

     I  P   S  I  P   I  P   S  I  P   I  P   S  I  P .

Sa I a  Pap   Sb I a  Pap 

Sa Sa

a

bq

b

b

bq

a

aq

b

a

aq

b

bp

b

b

bp

(2.16)

The agents performing the exchange are egoists in the sense that they enter this transaction because of individual interest. They find their interest in the goods present, which are possessed by their counterpart. Exchange is the act that transforms this imaginary interest, Ia(Paq), to the real interest. The agent must alienate the goods he owns in exchange. Rather, the Interest of the owner in his property, Ia(Pap), exists in its value as the means for the appropriation of goods of the counterpart in the exchange. In the classical economists’ usage, the owner’s interest in their goods is dominated by its “exchange value,” while the interest of “use value” is directed toward the goods in the hand of the counterpart, Ia(Paq). As the division of labor advances, individuals must acquire their necessary goods through the exchange of their products that are considerably specialized. To use specialized products for the acquisition of diversified range of goods they require, their products must have universal “use value” to attract all the owners of the goods they needed. Logically, this is impossible. As is well known, Marx found the solution of this contradiction in the development from the direct exchange to the indirect exchange via the general means of exchange. Using Marx’s term of commodity (C) and money (M), direct exchange (C − C′) is replaced by C − M − C′.

2  Approval Theory and Social Contract

35

㻿㼍㻔㻵㼍㻕㻩㻿㼎㻔㻵㼍㻕

㻿㼎㻔㻵㼎㻕㻩 㻿㼍㻔㻵㼎㻕

㻿㼥㼙㼜㼍㼠㼔㼥㻌㼎㼍㼟㼑㼐㻌㼛㼚㻌㼠㼔㼑㻌㼞㼑㼟㼑㼙㼎㼘㼍㼚㼏㼑㻌 㻿㼎㻔㻵㼓䇻㻕㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌

㻿㼍㻔㻵㼓䇻㻕

Fig. 2.5  Sympathy grounded on the resemblance of interests. (Source: The author, originally Figure 6 in Yagi 2001)

㻵㼍㼙㻦㻌㻯㼛㼙㼙㼛㼐㼕㼠㼥㻌㼍

㻹㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻯㼛㼙㼙㼛㼐㼕㼠㼥㻌㼎㻌㻦㻌㻵㼎㼙

Fig. 2.6  Money and pecuniary interest in the market. (Source: The author, originally Figure 7 in Yagi 2001)

Similar to the General Norm (Ng) in the normative domain, the general means of exchange (money) is exclusive in nature. As command of money enables direct acquisition of any good in the market, interest in commanding money is a general interest across every agent’s range of wants. Let’s mark such interest in the exchange value with suffix “m.” In indirect exchange, the exchange of goods (C − C′) is separated into selling (C − M) and buying (M − C′). Then, assuming Agent A as the seller of the commodity and Agent B as the buyer with Money (m), the exchange partner’s ex ante and the ex post reciprocal approval is transformed into the following equations:

 Exante approval 

Sa

 Ex post approval 

 I P I P I P

     S  I  P    S  I  P    S  I  P .

Sa I am  Pap   Sb I am  Pap 

Sa Sa

bm

bm

am

am

bm

bp

b

bm

bm

b

am

am

b

bm

(2.17)

bp

The total of the exchange relations that is integrated in the circulation of money produces the order of market where socially determined prices are attributed to all commodities. Thus, the arbitrage of the conflict in the exchange relation is not settled by judging the interest of agents in the use value but by weighting their interest in the exchange value, which is equipped with a general monetary measure. See Fig. 2.6. Money’s position in the market is thus comparable to that of the general norm (law) in the normative domain. So far, we have traced the development of the reciprocal approval relation in the normative domain and substantial (real) domain up to the emergence of civil order and market order. The interaction and interdependence of the two domains is the very area of institutional and political economics. However, before moving on to the economic analysis, we must deal with classic social theory (social contract) and social ethics.

36

K. Yagi

2.3  Range and Depth of Social Contract Reconsidered 2.3.1  M  odern Questions for the Revival of Social Contract Theory As already revealed in the first section of this chapter, the idea of social contract served as the archetype of my formulation of approval theory. In this section, we would discuss the limitation of the classical concept of social contract for its application to contemporary problems and look a way to “revive” it. In our view, the classical theory of social contract is ambiguous in terms of the contract’s range of participants and the depth of their involvement. Our reading of John Rawls’ Theory of Justice (1971) and Robert Nozick’s Anarchy, State, and Utopia (1974) stimulated us to consider this problem again. Classical social contract theories generally presuppose that individuals are able to build possessions in the “natural state” and are ready to fight in the “war state” before entering into the contract. Therefore, those who cannot work or fight were out of the sight from the beginning. In contrast, through the fiction of a “choice” of social orders under the “veil of ignorance,” Rawls introduced the possibility that an individual can be born among “the weak.” This is likely why, on the one hand, many liberals and those concerned in welfare policies have favored Rawlsian theory. On the other hand, from the Libertarian viewpoint, Nozick proposed a thought experiment in which a minimal state emerges from the series of voluntary contract without interfering the choice of free individuals. In his parable, at first, only the rich gather and establish associations for the mutual protection of their persons and fortunes. These “protection associations” or their congregations go through the process of competition and fusion and gradually grow until they become territories in which they hold quasimonopolistic control in the field of security. At last, these wealthy associations offer nonmembers who elect to live in their own way the purchase their freedom. If such a deal is completed, a minimal state for the protection of life and wealth can emerge without a forced contract. This thought experiment raises the question on the range of contractor and the depth of obligation accompanying the social contract. In the classical social contract literature, while the need for a social contract is deduced from the inconveniences of the “natural state,” an explicit statement regarding the range of contract participants is rare. Hume criticized this theory by saying that no historical fact regarding the origin of a state by gathering the people for such a contract (the “original contract”) is known. Surely, scholars who have written about the social contract have not succeeded in vindicating its historical existence. They have only supposed the existence of the “social contract” from the contemporary existence of the state, sovereign, and law as their origin. Once, as they maintain, the historical existence of an “original contract,” which produced civil society and government, is assumed, we can interpret our present situation of living in a civil society with governments as a continuous consent to this “original” social contract.

2  Approval Theory and Social Contract

37

Then, should we consider that all individuals are included in the social contract? The answer is no. Locke argued explicitly that the social contract does not interfere with the “freedom” of those who do not join. The only way whereby any one devests himself of his Natural Liberty, and puts on the bonds of Civil Society is by agreeing with other Men to joyn and unite into a Community, for their comfortable, safe, and peaceful living one amongst another, in a sense Enjoyment of their Properties, and a greater Security against any other that are not of it. This any number of Men may do, because it injures not the Freedom of the rest; they are left as they were in the Liberty of the State of Nature. (Locke 1988, p. 330f.: §95)

At first glance, similar to Nozick’s thought experiment, the process seems to follow a development path that is tolerant of the freedoms of nonparticipants in the social contract. They are left “in the liberty of the state of nature.” However, such outsiders are neglected completely; and, when they return to society, they find themselves subject to a government which requires them to obey the civil order of the political community (state) established by the social contract. Because they live in the government’s territory and their possessions are protected by its laws, such individuals are considered to have given their “tacit consent” to the circumstances of the government’s rule.8 The same question as before arises then: are such individuals who “tacitly consent” to the existing political community in fact participants in the social contract? Locke’s answer is no. … the Owner, who has given nothing but such a tacit Consent to the Government, will, by Donation, sale, or otherwise, quit the said Possession, he is at liberty to go and incorporate himself into any other Commonwealth, or to agree with others to begin a new one, in any part of the World, they can find free and unpossessed. (Locke 1988, p. 349: §121)

Those who do not give their explicit consent to the social contract but live and hold possessions within its territory can only evade its constraint if they dispose their possessions and leave. They can join another established political community or establish a new on the frontier. However, they cannot then return to living as “free individuals” in the “state of nature.” Specifically, Rousseau identifies the situation of the nonparticipants with that of foreigners. If, then, at the time of the social pact there are some who oppose it, their opposition does not invalidate the contract, it only keeps them from being included in it; they are foreigners among the Citizens. Once the state is instituted, consent consists in residence; to dwell in the territory is to submit to the sovereignty. (Rousseau 1997, pp. 123f.)

Do we regarded those who oppose the social contract as betraying their beliefs by residing further? Here, Rousseau notes that his postulation of a “free state” does

 “every Man, that hath any Possession, or Enjoyment, of any part of the Dominations of any Government, doth thereby give his tacit Consent, and is as far forth obliged to Obedience to the Laws of that Government, during such Enjoyment, as any one under it; …” (Locke 1988, p. 348 §119). 8

38

K. Yagi

not force a resident to remain against his will. This is nearly identical with that which recommends opponents leave their country to defend their convictions. Hume opposed Locke and Rousseau’s “residence equals consent” interpretation by making the following persuasive comment: Can we seriously say, that a poor peasant or artisan has a free choice to leave his country, when he knows no foreign language or manners, and lives from day to day, by the small wages which he acquires? (Hume 1994, p. 193)

In the case of a “shallow” social contract, in which improvement of living or economic conditions is the primary agenda, the participants may be limited such as the “protective societies” in Nozick’s thought experiment. Or, individuals who seek to evade grave public duties, such as military conscription, may comprise the majority, just as those in the category of “foreign resident.” Here, we have to consider the function of the assumption of the “state of war” between the “state of nature” and the “civil society.” In the “state of war,” not only the possessions but also his or her very life is at risk, so a social contract capable of rescuing its citizens from such adversity must be “deep” enough to work effectively. Personally, I am inclined to regard the “state of war” as a device to provide the social contract the depth and the range it needs to serve as the theoretical foundation of an effective political community (i.e., state). Even the contemporary states need the anxiety of war to discipline their citizens. In the past, it was not unusual for war’s victors to kill or enslave those they conquered. Thus, war itself may be the origin of the order of domination and subordination. Those who are vanquished may plead for their lives by choosing the reduced status of servitude. Obviously, rule of the “loser” by the “winner” is not based on “consent”; rather, it is the result of war (i.e., violence). Thus, the vanquished retains the right to retaliation; his obedience issues from the fact that he is forced to accept the conqueror’s order to save his life. Thus, it is the continued “state of war,” in which the conquered may overthrow the rule of the conqueror at any moment. In addition to the risk of successive retaliation, the conquering power that is weakened due to the constant fighting invites attack from other enemies. To avoid this perilous situation, achieve equilibrium after terror, and bring the war state to an end, it is necessary to formulate an effective and binding contract that includes all individuals in the territory. Necessity of establishment of monopolized power is the corollary of a deep social contract.

2.3.2  Introduction of the Dialectic of Master and Servant The above outlined assumption of the “state of war” remind us of the dialectics of master and slave that Marx inherited from G. W. Hegel (1807). In the original version of the social contract theory, all concerned individuals entered into a collective contract at the same time, which raises a question about its origin. In my view, the introduction

2  Approval Theory and Social Contract

39

of the dialectics of master and slave may solve this question by providing a process of generalizing the validity of the contract. “Losers,” who prefer to live as slaves to die with honor, alienate their autonomy and stay in the servitude to winners. Using approval equations, this situation can be expressed as one in which Slave A is obliged to admit (La) the fact that Master B owns Slave A (i.e., personal domination: Dba) by assimilating the Norm of the Master (Nb). According to my terminology, the slave is an agent of the conformist type, while the master denotes the autonomous type:

La  N b  Dba    Lb  N b  Dba   .



(2.18)

Before the conflict, Agent A was autonomous: He was either a belligerent agent who would conquer B, La(Na(Dab)), or an independent agent who would defend his life and possessions, La(Na(Daa)). After A is conquered by B through violence, he is transformed into an obedient servant who must admit the prevalence of his master’s will as for he remains under the command of his master on himself Nb(Dba). However, neither can Agent B eternally retain his dominance. Another agent (i.e., a mightier Agent B′) capable of conquering the original B, followed by an even mightier conqueror (B″, B‴, …) could appear and rob the original conqueror’s command of A. Accordingly, the Norm (N) that the Agent A has assimilated, namely, that he is in his master’s command, must change from Nb to Nb′, Nb″, … and so forth. Or, in the case where the slave, Agent A is sold to a new master (B′, B″, …), the same change again occurs. This successive change in masters may bring about a generalization of norm in terms of the slave’s passive assimilation of such norms, which may accumulate and eventually cumulate with the emergence of a General Norm (Ng). On the master’s side, such an adaptation of norms does not occur, since the dominance of A terminates with his defeat. The last survivor in the line of successive violent battles is not always a virtuous hero—he may be a selfish tyrant. In which case, a conflict between the Norm of Tyrant (Nbt) and the Generalized Norm (Nbg) already learned by the slaves may occur. The capricious tyrant may order his slaves to do things that contradict to the generalized norm which slaves have learned from their successive period of servitude as follows:









La N bg  Dba   Lbt N bt  Dba  .

(2.19)

However, if the slaves retain a right to resistance that is more universal than that of mere reiteration, the possibility of establishing a social contract terminating the war state may come about as follows:









La N bg  Dba   Lg N bg  Dba  .

(2.20)

In this equation, if we identify the representative of the Generalized Norm Nbg as a speculative agent, God, and Agent B as a slave of God, then who is

40

K. Yagi

free in relation to any other creature in this world? In the case, in which we identify Agent B as a collective Agent, a Nation; Agent A appears as a member of the Nation State (Agent B), who is free from anyone due to his devotion to the supreme collectivity of his Nation. If we follow L. Feuerbach in regarding “God” as “the essence of human species” (Gattungswesen) and Rousseau in regarding “Nation” as the “people in aggregate,” then dominion over Agent A (Dba), which now refers to his dominion by a “general being,” turns out to be a kind of reflective dominion of himself through the intervention of a speculative agent or imaginary collective agent. A pious Christian or a loyal citizen owns his property (life and possession) on the grounds that the supreme agent (God or Nation) owns him. Thus, we can exchange the right and left sides of the equation to signify God or Nation’s general approval of the competence of Agent A as a “self-owned” personality:





Lg N g  Dga   La  N a  Daa   .



(2.21)

Thus far, I have proposed an explanation for the move from the “war state” to the “social contract” by way of the dialectics of master and slave. When we read the General Agent G as the “people in aggregate,” we are then led to Rousseau’s concept of the “deep” social contract, in which the total alienation and the reappropriation of the people occurs. … , each, by giving himself to all, gives himself to no one, and since there is no associate over whom one does not acquire the same right as one grants him over oneself, one gains the equivalent of all one loses, and more force to preserve what one has. (Rousseau 1997, p. 50)

2.3.3  Hidden Domain of the Sentiment The aforementioned interpretation of social contract theory introduced the position of war’s “losers” or those conquered into it. However, even those who are concurred and find themselves enslaved are supposed to be “tough-minded” agents that can endure. Despite the unfortunate situation of servitude, because they have survived the experience of the “state of war,” they are expected to preserve through similar situations until the “social contract” emerges. The supposition that only independent adult individuals (virtually all men) are supposed to participate in the social contract is due to the theory’s intellectual history; the “social contract” was designed to serve as the theoretical underpinning of a political community consisting of patriarchs or active citizens. Those groups of people, whose living rights appear to be the main issue of the present welfare society, unborn children, infants, minorities, the elderly, the chronically or terminally ill, the handicapped, criminals, foreigners, refugees, and so forth, are beyond the ken of the classical version of social contract theory. For instance, modern feminists could raise the question, “are women included in the social contract?”

2  Approval Theory and Social Contract

41

In the classical literature, we read only such a comment that those who cannot attend the “public assembly” due to weakness or business must obey the decision-­ making of the “majority” (Locke 1988, p. 352, §98). However, which is the majority, participants of the “public assembly” or nonparticipants? Is it possible to conceive of an inclusive social contract that contains those aforementioned groups? In our opinion, classical social contract theory virtually excludes all of these groups because of its assumption that the “war state” is the core device which leads individuals into the social contract. Reflecting on our explanation of the necessity of social contract, we realize that it lingered on a discussion of the “normative” domain without referring to the “real” domain of interest and sentiment. In my approval theory summarized in the previous section, exchange, not war, is performed in this “real” domain, and a generalization of the media of value is supposed. This suggests the possibility of the formation of the grounds of the social contract based on the sentimental solidarity that can be attained through the exchange of individual’s interests. Grounding the normative domain over the real domain of sentiment reminds us the following text, which Rousseau included at the beginning of his Contract Social (1762). I want to inquire whether in the civil order there can be some legitimate and sure rule of administration, taking men as they are, and the laws as they can be: In this inquiry I shall try always to combine what right permits with what interest prescribes, so that justice and utility may not be disjoined. (Rousseau 1997, p. 41)

The “interest” and “utility” mentioned in this citation are already included in my approval theory. However, in order to conceive of human beings in their “reality” according to Rousseau, we must trace his thought from his former work, Origin of Inequalities. In this work, not only the “self-conservation” (amour propre) but also “pity” (pitié) is mentioned as the nature of human beings. There is, besides, another Principle… which—having been given to man in order to soften, under certain circumstances, the ferocity of his amour-propre or the desire for self-­ preservation before the birth of this love—tempers the ardor he has for his own well-being by an innate repugnance to see his fellow suffer. (Rousseau 1992, p. 36)

Rousseau regarded “pity” as being fitted to the art of human being and its nature. I speak of Pity, a disposition that is appropriate to beings as weak and subject to as many ills as we are; a virtue all the more universal and useful to man because it precedes in him the use of all reflection; and so Natural that even Beasts sometimes give perceptible signs of it. (Rousseau 1992, p. 36)

According to the scheme of our approval theory, what works in the real domain is the sentimental (emotional) orientation and judgement. Here, we will use S to represent its function. The variable of this function denotes the sympathy ignited by the input of Agent I’s situation of possession goods j  –  Hi(Pij). Here, Hi(Pii) is Agent I’s self-respect to be i. In this case, I (the individual) is represented as

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Agent A, and my sentimental judgment of being myself is Sa(Ha(Paa)). Usually, this is the manifestation of the self-respect. The case in which A has sympathy for the situation of Agent B is expressed as Sa(Ha(Pbb)). Here, if we were to introduce the sentimental judgment of the Counterpart Agent B, a similar development could be written with my approval scheme of ownership/ property. However, in the case of sympathy, real exchange is not conceived.9 Sympathy is not an act that expects a return from its recipient, and Rousseau characterizes it as one that emerges before reflection. Since he expresses sympathy as a “direct identification,” the equation should express the sympathizer’s identification with those to whom he directs his sympathy. Thus, both sides of the sympathy equation that express this “direct identification” are included in my sentiment.10 What I feel in this “identification” is that my heartful judgment becomes closer to the imagined feeling of those to whom my sympathy is directed:

Sa  H a  Pbb    Sa  H b  Pbb   .



(2.22)

In this case, nearly all members of the society sympathize other members, and the identification contained therein may bring forth a euphory, in which nearly all social members, including the weak, feel that their self-respect Hi(Pii) is received and blessed by others. This was likely the dream of the ultra-Romanticist Rousseau. However, Rousseau’s remark on the utility of the action ignited by sympathy for conservation of the species is worth noting. Rousseau’s intuition anticipated the theme of modern ethology (i.e., the utility of altruistic behavior for species). It is very certain…that pity is a natural feeling which, moderating in each individual the activity of love of oneself, contributes to the mutual preservation of the entire species. It carries us without reflection to the aid of those whom we see suffer… (Rousseau 1992, p. 37)

Here, if we suppose the imaginary representative of the human species G, we can acquire the equation for the “utility” of this imaginary agent and that of his experience of feeling sympathy for others:









Si Hi  Pij   Sg H g  Pij  .

(2.23)

 In case the exchange of sympathy from both sides exist, it brings forth the situation of social exchange, which I discuss in the later chapter. 10  Another way of introduction of the “sympathy” into social theory is that of David Hume and Adam Smith. Though they did not deny the human nature to sympathize to fellow beings, they did not believe that the effect of “direct identification” is so strong to concur the selfish interest. Thus, their use of sympathy was more reflective that they would understand the utility of fellow beings by exchanging the position in their reflection. K. Binmore (1998, 2005) distinguished this sort of reflexive observation from the “direct identification” by naming it as “empathy.” D. Hume constructed his utilitarian theory on this ground, while A. Smith traced the development of the sentiment of “propriety” on the similar ground. See the following section. 9

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Exchanging the right sand left sides of this equation results in a new equation in which everyone’s self-respect by a general entity:









Sg H g  Pij   Si Hi  Pij  .

(2.24)

This may be called “another type of social contract,” one which can contain all groups of people in a society. It is valid insofar as communion of general direct identification prevails. However, as the “direct identification” is often betrayed by reality, this remains to be a Romanticist dream.

2.4  Discourse Ethics and Naturalized Social Contract 2.4.1  Discourse Ethics and the Kantian Imperative Jürgen Habermas formulated his idea of discourse ethics first in 1983. Though he had kept the stress on the rationality of communication that differs from instrumental rationality from the beginning, he could not have developed it into ethics without the idea of transcendental pragmatics that was advocated by his Frankfurter colleague Karl-Otto Apel. “Transcendental” is not necessarily metaphysical—it just means the implication of the reasoning that y would not be possible without x. Then, if y is true, x becomes also true transcendentally, even though we cannot confirm the truth of x directly. This “transcendental” reasoning does not explain the causality that x is the reason of the result y. It only presupposes the necessary condition x for the phenomenon y. Apel applied such transcendental reasoning to linguistic communication and presupposed a consensus among its participants (Apel 1973). Habermas, who reconstructed his critical theory on the domain of “communicative action” in the mid-1970s, found in Apel’s “transcendental pragmatics” the possibility of an ideal consensus that results from the reasonable argumentation of the participants. So long as the communication is oriented to rational argumentation on public matters (not to propaganda or manipulation), it is possible to form an agreement on a norm, such that all participants agree to follow it, since biased norms would be excluded by the ideal and rational discussion. Thus, Habermas formulated the universalization principle as follows: (U) A norm is valid if and only if all those affected can accept the consequences and side effects that its general observance can be expected to have for the satisfaction of everyone’s interests.11

 Borrowed from Heath’s paraphrasing in English (Heath 2003, p. 227), in the original text, it is as follows: “daß die Folgen und Nebenwirkungen, die sich jeweils aus ihrer allgemeinen Befolgung für die Befriedigung der Interessen eines jeden Einzelnen (voaussichtlich) ergeben, von allen Betroffenen akzeptiert (und den Auswirkungen der bekannten alternativen Regelungsmöglichkeiten vorgezogen) werden können” (Habermas 2009, Bd. 3, S.60). 11

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If this universalization principle is valid for a norm, that norm automatically fits the following discourse principle: (D) Only those norms can claim to be valid that gain (or could gain) the approval of all affected in their capacity as participants in a practical discourse.12

Heath admits that the discourse principle as a new version of the Kantian categorical imperative fits well with Habermas’s discourse ethics. However, as for the universalization principle, he rejects it due to its overly strong demand on discourse. He argues that the normative implication that can be derived from the communicative action is limited usually to the common indication of meaning. It cannot solve the collision of the interests of the participants. In his view, Habermas’s discourse ethics imposes too heavy a burden on public discourse. Another main criticism of Heath is that Habermas exaggerated the power of instrumental rationality and missed its flexibility in dealing with a problem’s solution. In other words, he was against Habermas’s sharp distinction between instrumental action and communicative action. Under the constraints of norms and institutions, it goes together with communicative rationality. Thus, his recommendation is to start anew from the fact that the actions of individuals are constrained by norms. Heath’s next book (Heath 2008), which was discussed at the workshop we mentioned earlier, represented his investigation in this direction. However, let us spend more time comparing Habermas and Kant. It is easy to find similarities between Habermas’s discourse ethics and Kantian deontological ethics. In the Groundwork of the Metaphysics of Morals (1785, 2016), Kant formulated his categorical imperative as follows: Act only on that maxim whereby thou canst at the same time will that it should become a universal law. Act as if the maxim of thy action were to become by thy will a universal law of nature.13

The demand of universality is common to two versions of ethics. While Kantian ethics is formulated in a monologue style as an “imperative” for the citizens of the Kingdom of Ends, Habermas shifts it to a community of discourse and gives it a procedure of collective argumentation. However, as Heath noted in his criticism, this shift had the result of assuming the validity of the principle of universalization for the consensus that is reached through this process. Therefore, Habermas had to imagine an ideal community where every participant is oriented to attain an u­ nbiased

 Borrowed from the English paraphrasing by Heath (2003, p. 212). In the original text, it is as follows: “Der Diskursethik zufolge darf eine Norm nudann Geltung beanspruchen, wenn alle von ihr möglicherweise Betroffenen als Teilnehmer eines praktischen Diskurses Einverständnis darüber erzielen (bzw. erzielen würden), daß diese Norm gilt” (Habermas 2009, Bd.3, S.60). 13  Translated by Thomas Kingsmill Abbott in 1895. In the German original, it is as follows: “Handle nur nach derjenigen Maxime, durch die Du zugleich wollen kannst, daß sie eine allgemeine Gesetz werde” (5939). “Handle so, als ob die Maxime deiner Hanslung durch deinen Willen zum allgemeinen Naturgesetz werfen sollte” (5944) (Kant, Grundlegung zur Metaphysik der Sitten, 1785, in kindle edition (Kant 1785)). 12

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solution to a public problem and gives it priority over his/her peculiar interests. While Apel does not involve himself in the relevance of such an idealized assumption, Habermas finds there a rich field for positive social sciences that can help people to realize a truly rational and democratic society. The subordination of individuals’ interests to general agreement is explicitly formulated in Habermas’s universalization principle. In the Kantian imperatives, it is expressed in the contrast between the universal law and maxims. Kant explains the differences between the two in a note on the term “maxim”: A Maxim is a subjective principle of action, and must be distinguished from the objective principle, namely, practical law. The former contains the practical rule set by reason according to the conditions of the subject (often its ignorance or its inclinations), so that it is the principle on which the subject acts; but the law is the objective principle valid for every rational being, and is the principle on which the subject acts; but the law is the objective principle valid for every rational being, and is the principle on which it ought to act, that is, an imperative. (Kant 2016, footnote 9)

Kant does not deny the working of maxim (Ni) that individuals hold in their minds. He was not so totalitarian as to state that a definite universal law (Ng) should be imposed over individuals to attain an ideal state. He admits two different orientations of the “interest” that individuals hold: “practical interest in the action” and “pathological interest in the object of action.” In the former, the conformity of the action itself to the reason is concerned, while in the latter, the effect of the object of the action (such as pleasure or advantage) is concerned. This can be described using the following terms14: legitimation or the judgment of validity L, the norm that would govern human action N, and the action itself of an individual to another A, with suffixes that signify its subject (g: general, i and j: individual). Then, the Kantian categorial imperative is expressed in the following equation:









Li N g  Aij   Li N i  Aij  .

(2.25)

The imperative orders individuals to arrange their norm (maxim) so as to bring the same result as the judgment that follows from the general norm (universal law). So long as individuals follow their “practical interest” guided by reason, this is possible. However, if the “maxim” is guided by “pathological interest” (I) that is oriented to the consequences of i’s action toward individual j, there appears a sharp discord between general interest and individual interest. Instead of legitimatization (L), there appears approval grounded on sentiment (S). The approval guided by general interest (Ig) differs from the individual approval of his/her own material interest (Ii).

 Yagi (2001). Here we use Aij (action of individual i toward other individual j) in place of Dij (domination of individual i over goods j), because the original formulation was invented to explain the relations of approval of ownership. See its introduction later in Sect. 2.3.

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Si I g  Aij   Si I i  Aij  .

(2.26)

S: approval grounded on sentiment, I: material interest, A: action, g: general, i: individual, j: goods This contradiction between (2.25) and (2.26), and the prevalence of (2.25) over (2.26), is the reason why Kantian ethics is called “deontic.” Habermas’s universalization principle is the revival of this sort of deontic ethics. In the Kantian case, the kingdom of practical reason and the real world of material wants are clearly separated. The function of morals (categorical imperative) is to elevate individuals into the kingdom of reason, where every person is respected as an end per se. However, Habermas’s universalization principle contains the substantial element of interest and its satisfaction. Thus, as Heath envisaged it, the burden for the rational argumentation of all possible participants becomes heavier than that of the Kantian imperative.

2.4.2  Naturalized Social Contracts In contrast to Kant, Habermas introduced possible consequences into his ethical discourse. Without this return to reality, deontological ethics has to remain feeble in the realm of Gesinnungsethik (ethics of attitude). Is there no way left to appreciate Habermas’s return to the world of substantial interest and still search for universalization? One candidate lies in the idea of a social contract. Since the core of a contract is an exchange of interest on both sides, so long as it covers all members of a society, such a contract fulfills the postulate of the universalization principle. In a social contract, people gather to establish laws and governments to protect their interests. They lose their natural liberty and acquire freedom and protection under the civil society (a society with laws and a government). We should note that a contract binds both sides, as long as its obligation is valid. In a social contract, obligation emerges on two levels: one between members of a society and the other between members of a society and its representing body (government). However, as the postulate of universal coverage of the act of making contracts is unrealistic, it remains as a fiction for interpreting the social state with certain orders. The real act of making a contract occurs only in the range of persons that have concrete interests to exchange on both sides. Habermas’s intuition is that one can transcendentally assume the existence of such a consensus from the existence of a common language in a society. However, so long as this assumption refers to the substantial interests of individuals, the peculiarity of their interests collides with the postulate of universality. So then, is it possible to begin with an individual contract and follow its diffusion and development up to universal coverage? Since the emergence and refinement of game theory in the later years of the twentieth century, a group of social scientists and philosophers decided to apply the analysis of evolutionary game theory to the idea of social contracts. To them, not

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Jean-Jacques Rousseau but David Hume, who focused his attention on convention, was their forerunner. Brian Skyrms called this direction a “naturalizing social contract” (Skyrms 2004, 2012): Much of human behavior is governed by habits, conventions and norms. These were themselves less a product of rational decision, rather than of a gradual adaptive process. The social contract evolved. The appropriate theoretic tool for pursuing a naturalistic theory of the social contract was only suggested by Hume, but is now in full flower—evolutionary game theory. (Skyrms 2012, p. 107)

Skyrms’ use of game theory is different from usual game theorists in that he introduces correlation and adaptation into the evolution of the game. He argues that even in the case of the prisoner’s dilemma, a considerably high correlation of cooperative strategy on both sides makes this strategy survive. Rational choice theorists deny the possibility of such a correlation; however, naturalized game theory makes it possible. Skyrms used a parable of stag and hare hunt that appeared originally in Rousseau (1755). To acquire a stag, two men must cooperate. However, one cannot refrain from catching a hare that appears in his front and neglects his role of watching the stag. In this case, where otherwise the certainty of a hare capture dissuades a partner from a hunt, the emergence of trust can lead hunters to cooperate.15 In Skyrms’s view, network learning, which enhances the correlation of a cooperative strategy, is the core of the dynamics of social evolution. Another Humean game theorist is Kenneth Binmore.16 He enters into the depth of the structure of the imaginative social contract as conceived by John Rawls in his social contract in its original position under the veil of ignorance. What Binmore proposes are the concepts of “empathetic preference” and “empathy equilibrium.” In reference to the development of academic terms after Adam Smith, Binmore distinguishes “empathy” from “sympathy.” In his words, Adam sympathizes with Eve when he so identifies with her aims that her welfare appears as an argument in his utility function. … Adam empathizes with Eve when he puts himself in her position to see things from her point of view. Empathy is not the same as sympathy because Adam can identify with Eve without caring for her at all. (Binmore 1998, p. 12)

An empathetic preference is what Adam conceives when he imagines how he would feel if he should be in Eve’s position with her peculiar preference. As most of us know well, the difficulty of such a conception is the root of the quarrel between the couple, while the endeavor to conceive the empathetic preference of the partner is the preconditions for the reconciliation. In the Rawlsian original position, Pandora, who is not certain whether she is Adam or Eve, endeavors to construct the empathetic preference of Adam and Eve to

 The case of the stag hunt and hare hunt has its origin in Rousseau’s Origin of Inequality (Rousseau 1755). In this case, hunters facing two Nash equilibria (Stag-Stag and Hare-Hare) are tempted to choose the latter to avoid a bad result. 16  Skyrms counted Binmore and Robert Sugden (Sugden 1986) as fellow Humeans in the direction of naturalizing social contracts (Skyrms 2012, p. 108). 15

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choose the best state for her real life. Binmore supposes here that Pandora applies her scale for the empathetic preference and gains the overall evaluation of the possible state under selection. Such a selection of the agents attains a stable state sooner or later, particularly in the form of a symmetric equilibrium. Thus, Binmore presents the following criterion for this empathy equilibrium: Suppose that you could deceive everybody into believing that your empathetic preferences are whatever you find it expedient to claim them to be. Would such an act of deceit seem worthwhile to you in the original position relative to the empathetic preferences that you actually hold? The right answer for an empathy equilibrium is no. (Binmore 1998, p. 224)

Here we can see the principle of universalization à la Habermas return to the front with the change of rational argumentation to empathetic preference. However, as Binmore is also conscious of them, empathetic preferences reflect cultural and historical elements. The state of an empathy equilibrium is the result of historical evolution. In a society with slavery, we should assume that the empathetic preference of a master for his slave is prejudiced by the dominant norms and preconceptions of that society. Even slaves may accept them. There, an empathy equilibrium can correspond to the unequal structure of society.

2.4.3  Preliminary Conclusion After the dispute over discourse ethics, Habermas turned to legal theory to reconstruct the legal order on the ground of public discourse. While the validity of the legal system as a social fact can be guaranteed by obedience to the law, the legitimation of the law must encounter the demand for its normative recognition. Here we can see that in his application of discourse theory to the real legal institutions of a democratic society, he must face the dual structure of the normative domain and the social domain where citizens live with their public and private interests. On the other side, in his second book, Heath tried to develop the theory of “norm conformity” in the framework of the theory of rational action. This was also an attempt to naturalize the Kantian deontological ethics that can go side by side with theories of naturalized social contracts. To conclude this appendix, I will suggest the spheres that need further investigation by presenting the dual dimensions scheme of the ownership recognition presented in my previous article, as surmised in the second section if this chapter. I believe that the dual domain scheme helps to compensate for the partiality of both the idealist and naturalist directions of the investigation. From the viewpoint of the evolutionists, the emergence of norms and institutions is not a one-trick pony. It covers the process that rotates all four areas of the dual domains of the norm-real structure in Fig. 2.1.17  The social contract as viewed in evolutionary social science covers all four areas of the proposed scheme. We should note that the two types of social contract that Rousseau described in his two 17

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References Apel K-O (1973) Transformation der Philosophie, 2 Bde. Suhrkamp, Frankfurt a. Barshay A (2007) The social sciences in modern Japan: the Marxian and modernist tradition. University of California Press, Berkeley Binmore K (1998) Just playing: game theory and the social contract II.  Cambridge University Press, Cambridge Binmore K (2005) Natural justice. Oxford University Press, Oxford Habermas, J. (1983) Diskursethik. Notizen zu einem Begründungsprogram. In Moralbewußtsein und Kommunikatives Handeln. Suhrkamp, Frankfurt a. M.  Included in Habermas (2009), pp 31–115 Habermas, J.  (2009) Philosophische Texte, Studienausgabe in 5 Bde. Bd.3, Diskursethik. Suhrkamp, Frankfurt a. M Heath J (2003) Communicative action and rational choice. The MIT Press, Cambridge Heath J (2008) Following the rules: practical reasoning and deonticconstraint. Oxford university Press, Oxford Hegel GWF (1807) System der Wissenschaft. Erster Theil: Die Phänomelogie des Geistes. Joseph Anton Goebhardt, Bamberg and Würzburg Hume D (1994) In: Haakonssen K (ed) Political essays. Cambridge University Press, Cambridge Kant I (1785) Grundlegung zur Metaphysik der Sitten. J. F. Hartknoch, Riga. Included in Gesammelte Werke, idb 2015, Kindle ed Kant I (2016) Groundwork of the metaphysic of morals (trans: Abbott TK in 1895). Uploaded to Wikisource in 2016 Locke J (1689) Two treatises of government. Awnsham Churchill, London Locke J (1988) Two treatises of government, edited with an introduction and notes by Peter Laslett. Cambridge University Press, Cambridge Marx K (1859) Zur Kritik der politischen Ökonomie. Duncker, Berlin. (Included in Marx 1961) Marx K (1867) Das Kaoital. Kritik der politischen Oekonomie. Band 1: Der Produktionsprozess des Kapitals. Otto Meissner, Hamburg Marx K (1954) Capital. A critical analysis of capitalist production, vol 1. Progress Publisher, Moscow Marx K (1961) Zur Kritik der politischen Ökonomie (Original pub. in 1859), in Karl Marx  – Friedrich Engels Werke, Band 13, Institut für Marxismus-Lenismus beim ZK der SED, Dietz Verlag, Berlin, 1961. (English translation, Marx 1904 and Marx 1970) Nozick R (1974) Anarchy, state, and Utopia. Basic Books, New York Rawls J (1971) A theory of justice. Belknap, Cambridge MA Rousseau J-J (1755) Discours sur l’origine de L’inegalité parmi les hommes. Included in tome 1 Politique, Collection Complète des Oeuvres de J.-J. Rousseau, 1782, Genève: uploaded to Wikisource in 2017 Rousseau J-J (1762) Le Contrat Social. Included in tome 1 Politique, Collection Complète des Oeuvres de J.-J. Rousseau, 1782: uploaded to Wikisource in 2017 Rousseau J-J (1992) In: Masters RD, Kelly C (eds) Discourse on the origins of inequality (second discourse). Polemics, and political economy. The collected writings of Rousseau, vol 3. University Press of New England, Hanover Rousseau J-J (1997) In: Gourevitch V (ed) The social contract and other later political writings. Cambridge University Press, Cambridge Skyrms B (2004) The stag hunt and the evolution of social structure. Cambridge University Press, Cambridge

articles entail the transmutation of the individual itself. While in the social contract that proceeds as civilization changes individuals from natural humans to civilized humans, in the ideal renovation of the social contract, individuals are reborn as citizens of the new nation state.

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Skyrms B (2012) Aspects of naturalizing the social contract. In: Aoki M, Binmore K, Deakin D, Gintis H (eds) Complexity and institutions: markets, norms and corporations, IEA conference volume no. 150-II. Palgrave Macmillan, Basingstoke, pp 107–120 Sugden R (1986) The economics of cooperation, rights and welfare. Blakwell, New York Yagi K (1977) “Shoyu Mondai to Keizai Riron” (Economic theory and the property problem). In: Aoki M (ed) Keizai Taisei-ron I: Keizagaku-teki Kiso (Economic systems I: foundation in economics). Toyo Keizai Shimposha, Tokyo, pp 261–293 (In Japanese) Yagi K (2001) Trust and sympathy in the social and market order. In: Shionoya Y, Yagi K (eds) Competition, trust, and cooperation: a comparative study. Springer, Berlin, pp 20–41 Yagi K (2011) Austrian and German economic thought: from subjectivism to evolution. Routledge, London Yagi K (2018) Road to evolutionary and institutional economics in Japan: a personal memoire of the decade of founding the Japan Association for Evolutionary Economics. Evol Inst Econ Rev 15(1):1–9

Chapter 3

Economic Exchange and Social Exchange Kiichiro Yagi

Abstract  This chapter extends the analysis of approval theory to sociological exchange theory. In contrast to economic exchange, the network of social exchange makes binding constraints in and out of the organization. The market conditions outside of the organization, including “risk,” influences the internal structure of the organization. The interaction between the market and organization consists of the complex micro–macro linkages that emerge from both economic and social exchange. Keywords  Social exchange · Micro–macro linkage · Local order · Organization · Combination of approval

3.1  Social Exchange Reconsidered The concept of social exchange is an extension of “exchange” that has been dealt with mainly by economists for the analysis of market economy into sociological relations. Since the end of the last century, this concept has emerged in various ways in social economics and economic sociology. The origin of social exchange theory can be traced back to the sociological works of George C. Homans (1961) and Peter M.  Blau (1964) in the middle of 1960s. It was then adopted by James Coleman (1990) who would establish a systematic sociology on the ground of rational choice theory. In Japan from the side of economists, Yasusuke Murakami not only applied this concept in the explanation of Japanese economy (Murakami and Rohlen 1992) but Kiichiro Yagi, Keizai-teki Kokan to Shakai-teki Kokan: Seido Keizaigaku ni okeru Micro to Macro (Economic Exchange and Social Exchange: Micro and Macro in Institutional Political economy), Chiba Daigaku Keizai Kenkyu (Economic Studies of Chiba University), vol. 25, no. 3 (December 2010), pp. 113–146. Economics Society of Chiba University. K. Yagi (*) Setsunan University, Neyagawa, Osaka, Japan e-mail: [email protected] © Springer Japan KK, part of Springer Nature 2020 K. Yagi (ed.), From Reproduction to Evolutionary Governance, Evolutionary Economics and Social Complexity Science 20, https://doi.org/10.1007/978-4-431-54998-7_3

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also regarded it as an indispensable element of his new scheme of political economy (Murakami 1994). From the side of sociologists, Kenichi Tominaga that had started under the influence of Talcott Parsons’ system theory would consider social exchange as the micro-foundation of his economic sociology that covered social relations both in market and business organizations (Tominaga 1997). In 2001, Masahiko Aoki who had analyzed economic systems of Japan with the concept of “institutional compatibility” advanced to a general theory of comparable institutional analysis (Aoki 2001), revealing his view that economic activities are “socially embedded” through their connections with social exchange in the sociological domain. It’s no wonder that researchers in institutional economics focused their attentions on nonmarket exchange. In 2009, Oliver E. Williamson that established the economics of business organizations and Elinore Ostrom that studied the collective autonomous control of common resources were honored as the Nobel Prize laureates. The Royal Swedish Academy of Sciences that decided to award to the two scholars declared that the two scholars made mutually supplementary contributions for the investigation into the economic governance by organizations or institutions that are not reduced to market mechanism.1 In psychology, Leda Cosmides and John Tooby that explored new frontiers of evolutionary psychology argued on the psychological grounds for the human behavior of social exchange (Barkow et al. 1992; Cosmides and Tooby 1994). The group headed by Toshio Yamagishi advanced the structure of “trust” that supported social exchange by international comparative experiments. According to Yamagishi, “trust” was not to be mistaken for “in-group assurance.” It was rather a “social intellect” that enabled individuals to make relations with non-acquaintances, while the latter remained as a conservative attitude (Yamagishi 1998; Yamagishi et al. 1998). These two research programs in psychology seem promising for the advances of evolutionary economics, too. Now, we define first economic exchange as the mutual action performed by plural agents of giving economic goods which are evaluated with more or less common value measure under their considerably fixed correspondence. In the exchange in a market, common value measure is apparent in the form of money. In the economic exchange under nonmarket economy, the common value measure may remain latent or take different shape from that of money in the market economy. Even in such case, goods that are exchanged and agents (persons) that exchange each other are separated. The driving force of performing exchange is the “utility” that the agents find in the goods in the hands of their counterpart. We can regard social exchange generally as those exchange that are not fitted to the above definition of “economic exchange.” By reading the above definition of “economic goods” conversely, we can also define “social exchange” as the “exchange” that is characterized by the inseparability of goods exchanged and the exchanging agents (persons). In “social exchange,” those subjective traits such as

 Prize announcement. The Sveriges Riskbank Prize in Economic Sciences in Memory of Alfred Nobel 2009 (https://www.nobelprize.org). 1

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obedience or respect that are usually not regarded as economic goods can serve as the objects of exchange, and their correspondence in the exchange may be often very ambiguous. Following Tominaga (1997: 23f), let’s take the case of the relation between a newcomer and his senior in a workplace in which the latter teaches the former the practical know how for the job. Considering it from the formal organization of the workplace, both of them perform their roles that are expected according to their positions in the workplace. From the viewpoint of social exchange, they are doing an exchange based on the interests of both sides. By teaching know-hows to the newcomer, the senior can enhance his prestige in the workplace and may expect further the return from the former in some possible cases in the future. Thus, it is not a burdensome task for the senior. On the newcomer’s side, he may think that the benefit from receiving the guidance from the senior excels well his obedience to the senior. As both sides enter into an exchange relation or accept such relationship voluntarily, the organization of the workplace functions without the exertion of compelling force. In the case of economic exchange, the driving motive of exchange is the utility of agents of the goods concerned in the exchange relations, apart from the degree of its abstraction in general monetary measure. Thus, the personality of exchanging agents and their social relation can become thin, though they do not disappear at all. As we do daily at a supermarket, taking commodities from the showcase to a cart and paying the price at the counter without words make in itself a perfect economic exchange. In the case of social exchange, as we defined social exchange above, the goods that are exchanged are connected to the exchanging personalities, apart from the degree of precision of goods concerned. Though we need not deny the driving motivation to increase the utility by the exchange, both the contents of the goods exchanged and their utility (valuation) depend on the person-to-person relations that are combined by the exchange (see Fig. 3.1). The personal relation of social exchange tends to continue long, while that of economic exchange can terminate soon. In social exchange, the contents of the goods in exchange are often not objectively definite. They depend on the subjective images of the agents concerned and on their personal relations. How the newcomer evaluates the guidance of the senior and how he uses it in practice depend on him. Admitted his gratitude to the senior, the way of his return to the senior is not determined. Thus, the attitude of scholars Fig. 3.1  Perspectives of economic exchange and social exchange. (Source: The author)

㻵㼚㼐㼕㼢㼕㼐㼡㼍㼘㻌㻭㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻵㼚㼐㼕㼢㼕㼐㼡㼍㼘㻌㻮 㻿㼛㼏㼕㼍㼘㻌㻱㼤㼏㼔㼍㼚㼓㼑 㻼㼑㼞㼟㼛㼚㼍㼘㼕㼠㼥 㻯㼛㼚㼠㼕㼚㼡㼕㼚㼓㻌㻾㼑㼘㼍㼠㼕㼛㼚 㻼㼑㼞㼟㼛㼚㼍㼘㼕㼠㼥 㼁㼠㼕㼘㼕㼠㼥㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻌 㻯㼛㼙㼜㼘㼑㼠㼑㼐㻌㻱㼤㼏㼔㼍㼚㼓㼑 㻱㼏㼛㼚㼛㼙㼕㼏 㻱㼤㼏㼔㼍㼚㼓㼑

㼁㼠㼕㼘㼕㼠㼥

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on the theory of “social exchange” is divided. Its supporters appreciate it as suited to the analysis of enduring relations that contain community-like character. However, from the viewpoint of its critics, it is a “notorious” theory of “inappropriate generalization” that projects the image of exchange in the place where no substance of exchange exists. Then, from what reasons does the theory of social exchange attracted the attentions of researchers? First, an expectation has emerged among sociologists that this extension may enable them to apply analytical tools and concepts that economists have developed in their analysis of the behavior in the market economy. What is conceived in most of these cases is the neoclassical microeconomics including game theory that is grounded on the rational action of agents for the maximization of their utility. In this respect, James Coleman is probably most advanced. On the one hand, indeed, Tominaga also counted social exchange theory in the camp of rational choice; however, he refrained from the use of such tools as box diagram and equilibrium equation on the ground are of no use other than parables. On the other hand, socioeconomists such as Murakami hoped by the introduction of social exchange to acquire a scope that can integrate the informational interaction of the images of the “living world” of economic agents. He grounded this from the need of the information on “the frame of trust and consensus” for the realization of economic activities. In social exchange, according to Murakami, such “sticky information” both in the continuity and human relations as “trust grounded on the commonality of the world image” plays important roles. He regarded principal–agent relations or continuous transaction relations as the economic exchange that contains elements of social exchange considerably. This is the second expectation that is shared mainly by the economists who would gain a promising societal scope for their advance into social economics. If we look for the expectation in the side of sociologist that correspond to that of social economics, we can mention several topics following that social economics would accept willingly. Thus, the third is the hope that those relations that contain cohesive element such as subordination and submission, leader and follower, direction and acceptance can be explained by the introduction of social exchange from the decision of rational agents. Peter Blau aimed to explain “power” from the two imbalances in exchange in which the unilateral provision of valuable service is compensated by the unilateral imbalance in the power relation (Blau 1964: 28). James Coleman, too, regarded the peculiarity of the social exchange that differs from economic exchange in the possibility of “the increase in utility by the desertion of the own control” (Coleman 1990: 169). In the case previously mentioned, the newcomer returns to his senior not by concretely defined acts but by his alienation of his control to the senior or to the community to which the latter or both belong. Then, employment relation becomes a significant area of social exchange relation. The employment relation certainly contains the element of power relation in which workers alienate the control of their action. However, they enter this relation from their own evaluation that they can improve their situation by entering it. Recently, as the organization study advances, the research into the situation of the one-sided control has made progress

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in economics and management science. Under the canon of neoclassical economics that presupposes the sovereign individuals, except for the contract that binds the individuals partially by the concretely defined contract, a voluntary alienation of total control over them is not conceivable. Contrastingly in the theory of social exchange that considers individuals in their surrounding social relations, submission can enter in the list of rational choices of the agent. The fourth, in the social choice, which is as itself the aggregation of long-term multifaceted actions, can contain the possibility to overcome the difficulties in voluntary exchange on the grounds of the noneconomic “social capital” or rights and norms. That is, even in the case of prisoners’ dilemma or social dilemma, where the cooperation cannot emerge under the assumption of rational economic man, if an agent with a prestige (a variant of “social capital”) should exert the leadership, or a normative value against the betrayal should be felt seriously, the situation differs considerably. In Coleman’s description, norms generate from the externalities. In the social life, where various externalities exist, actions of an individual directly influence the situation of others, and they are origins of the formation of norms and institutions with which most of the agents can avoid the negative outcome from these externalities. Simulation researches in the game theory since Robert Axelrod tells us the possibility of the emergence of cooperation under prisoners’ dilemma type score of gain and loss. However, simulation itself tells us nothing on the reason why the agents choose cooperation under the condition where they are not secured to be cheated by their counterpart. The game may be played with the choice of noncooperation to defend the position of agents. In this respect, social exchange theory aims at the elimination of the dilemma by norms or institutions. The fifth is the expectation that social exchange theory may provide an appropriate scheme to understand the linkage between the individual action at the microscopic level and the social form and outcomes at the macroscopic level. Coleman decomposes the macro–micro linkage in three parts: (1) the effect of system level on the behavior of agent in the microscopic level, (2) the alteration of the behavior of agents, and (3) the repercussion of this alterations on the system level. In the prevalent model of the neoclassical economics, (1) is the information of prices, (2) rational adjustment of agents in their choice, and (3) the distribution of goods and services that reflect on the prices in the next sequence (1). Contrastingly, the social exchange theory grasps (1) and (3) as the effects of “institution” over the behavior of individual agents and the aggregated results of individual behaviors on the institutional level. Taking the case of political institutions, we can interpret (1) the influence of governments over the electorate, (2) the change in the support/opposition of the electorate, and (3) voting behavior. While the government forms itself out of the collective result of voting (3), it can influence the electorate by its policies and propaganda (1). Tominaga seems to assume “social system” (or “organization”) as the system of roles at the macroscopic level and conceive the loop in which macroscopic system is decomposed into microscopic behavior and reintegrated into a new constellation of “social system” (Tominaga). Using the term “institution” or “social system” as you like, it suggests that the social exchange theory focused its attention on the micro–macro linkage that differs from the neoclassical monolithic price theory.

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In the following, we arrange the theory of social exchange in comparison with that of economic exchange in reference to these expectations according to our approval theory. We hope that the two exchange theories may provide new vision on the relation of market and organization and on the micro–macro linkage in the both.

3.2  Approval as the Precondition of Exchange In both economic exchange and social exchange, a mutual recognition of the exchanging persons and the goods they hold in a definite or indefinite way must exist before the exchange. As Murakami (Murakami 1994) maintained, in the case of social exchange, this framework of exchange itself may belong to the “informational interaction,” which is inseparable from the exchange itself. As the two components of the “social support” that makes the base of social cohesion, Blau mentioned “social approval” for the decision, action, and opinion of the relevant agents beside “intrinsic attraction” that appeals on the sentiment to the agents (Blau 1964: 61f). However, the relation of mutual or unilateral approval is conceivable even out of the range of activity of exchange. It serves as the ground of value judgment on individual cases as well as of general social norms. The consciousness of the possibility of receiving approval or disapproval from the disinterested observer makes the inner base of social ethics that controls the action of individuals. This is the basic element of the social theory that Adam Smith presented in his Theory of Moral Sentiments (Smith 1759). In a clear contrast, the studies on “social support” by Blau and researchers in sociometrics concentrate on the formation of norms and sentiment on local level (i.e., in the level of collectivity). On the one hand, the vision of economic exchange in its “ideal type” in which sovereign individuals behave rationally in the market without barrier corresponds to the universal social state/market state in our approval theory. In other words, it represents the vision of ideal “civil society.” On the other hand, theory of social exchange focuses its attention on the local level where the peculiar collective order is formed that attracts the attention of sociologists. However, so long as a one-shot accordance such as “social contract” is not fulfilled, we must suppose the development process of the order from the primitive mutual approval of two persons’ exchange to that of local or collective level and further to the universal level in which every individual is approved under some general standards. On the other hand, even in the study of local level formation of the order where “social approval” and “intrinsic attraction” within a collectivity influence directly, the possibility of the effect of the speculation of “approvals” in higher level cannot be excluded. Every individual keeps the knowledge and norms that are acquired out of the collectivity concerned. When we take the individuals that are indirectly concerned or that are imagined, the universal reflection of social philosophers regains its position even in the positivistic scope of sociologists. We surmised our approval theory in the second section of the previous chapter. In the following description, we use the term and equations that are introduced in

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that section. It starts with three directions to reach the goal of the state of general order. Direction 1: The significance of the interdependence and possible deviations between normative consciousness and sympathetic approval for the interest to consider the formation of social order. Direction 2: Two types of agents in giving their approval. The existence of synchronous agents (comformists) that give approval to the claims of the counterpart following the latter’s norm (and/or interest) beside autonomous agents that give approval to the counterpart’s claim according to their own norm (and/or interest) is essential for the formation of general order. Direction 3: It is not expectable that subordination of other agents by mighty autonomous agents should bring about norms or value standards with general validity. However, the successive exchange may refine the norms or value standards with increasing general validity. Following these directions, our approval theory would attain the state of order (civil society) with both sides of norms and sentiment. Goal: The refinement in the normative domain through the exchange of approval will bring forth norms of general validity, while that in the interest domain brings forth not the general interest of the community but the general standard/media in the exchange. In this stage of the dual structure of social order and market order, the distinction between autonomous approval and synchronous approval is downgraded into the private difference that does not threaten the social order. From this viewpoint, we can consider social exchange that remains in the level of the formation of local order as the exchange in the state where the generalization of norms and interest standards are missing (Table 3.1). To make the logical relations in exchange clear, let us use approval equations. The state in which the possession P of goods p by agent A, Pap, is approved in the social order is the state in which Agent A’s legitimation La of his possession Pap on his accepted norm of the society Ng is in accord with the legitimation of the society (i.e., jurisprudence) Lg on the general norm of the society. L and N are functions that determine valid or invalid according to the given variables: La (N g (Pap )) = Lg (N g (Pap ))



(3.1)



If this is the approval of the state resulting from the monetary exchange, it must include the sympathetic approval according to the general measure in exchange in the form of money. Using function S to represent the giving/refusal of sympathetic Table 3.1  Social exchange as local order General scale of interest Yes No Source: The author

General norm Yes Monetary exchange Direct exchange

No Illegal transaction Social exchange

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approval, function I for the interest standard in exchange, the accord of the approval of the relevant agent and the general judgment of the society on the result of exchange represents the order in exchange: Sa ( I g ( Pap )) = Sg ( I g ( Dap ))





(3.2)

What characterizes social exchange is the lack of general norm Ng and general standard of interest Ig. Then, the question arises, how it is possible that social exchange can maintain itself without general norm and general standard of interest. In our approval theory, we argued that the existence of synchronous agents contributed to the occurrence of mutual approval in the stage where neither general norm nor general standard of interest emerged. While mutual approval occurs rarely in the interaction between autonomous agents that judge the matter of others from the viewpoint of their own norms or interests, it occurs with considerable probability in the interaction of agents whose at least one side is a synchronous agent. Though this is only a formal answer, we will apply this to social exchange, too. We draw the logical structure of social exchange by placing autonomous agent and synchronous agent in the two axes of normative legitimization and interest-based justification. Neglecting the interaction between autonomous agents where the accordance both in the normative legitimization and in interest-based justification is considered difficult, the types of possible approval relations between two agents, A and B, are shown in Table 3.2. If agent A is autonomous and agent B is synchronous in the normative domain, the legitimization of A’s possession of goods P is expressed as La(Na(Dap)) and that of B’s possession of goods q is La(Na(Dbq)) = Lb(Na(Dbq)). In the case that both A and B are synchronous agents, the equations are La(Nb(Dap))  =  Lb(Na(Dap)) and La(Nb(Dap)) = Lb(Na(Dbq)). Though the deviation between the ranges of legitimization according to Na and Nb is not excluded, it will cause no serious problem thanks to the mutual understanding. In the interest-based domain, we can assume three cases of the combination of : , , and . Thus, Table 3.2 consists of six columns. However, two of the six become the same pattern by exchanging A and B, and we acquire five patterns of approval to which we add peculiar headlines in the table. Table 3.2  Patterns of approval combination Approval on norm (A/B) Approval on interest (A/B) Autonomous/Synchronous Autonomous/Synchronous 1.  Despotic rule: domination and obedience Synchonpus/Synchronous 2.  Neutral rule: order and transaction Synchronous/Autonomous 3.  Representative rule: order and support Source: The author

Synchronous/Synchronous 4.  Representative interest relation: principal and agent 5.  Community/Civil society 6.  The same with (4)

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First, we consider (1), (2), and (3) in the left. Since the agent A imposes his legitimization norm on agent B, they can be classified as a group of “power relation” or “control relation.” However, the three are different in the structure of interest-based approval. Though A is in the superior position and has the “power” to impose his norm on B, from the viewpoint of substantial economic interest A is not always in the definitely superior position than B. In the case (1), the equations of the interest-based mutual approval are

Sa ( I a ( Pap )) = Sb ( I a ( Pap )) and Sa ( I a ( Pbq )) = Sb ( I a ( Pbq )).



(3.3)

In this case, B not only accepts A’s norm but follows also the standard of A’s interest in the substantial domain of interest relations. B’s possession is approved only from the viewpoint of A’s interest. B receives A’s approval in exchange for his obedience to A. This is a case of genuine despotic control in which A dominates B in both domains of the normative and the substantial. Economic activities in a despotic state where civil rights and freedom of citizens are not recognized run in this type of structure. However, in the limited area of collectivities or organizations, such despotism is not rare even in a democratic state. In the case that they have the hierarchical structure, competencies and resources are allocated from the higher position to the lower position. Thus, the interest and valuation of the members of organization are easily molded to fit with the given organizational structure. In the case of (2), in contrast to the normative dimension where agent B obediently accepts A’s norm, they are synchronous in the substantial dimension of interest. We have two isomorphic equations:

Sa ( I b ( Pap )) = Sb ( I a ( Pap )), and Sa ( I b ( Pbq )) = Sb ( I a ( Pbq )).



(3.4)

The interaction of numerous agents, B′, B″, B‴····, is the same. Agent A brings forth the order by imposing his norm on others; however, it does not hinder the development of the transactions in which economic interests of agents are sought. Agent A himself has to approve the possession of others by admitting the standard of interest with which their economic interest is expressed. We can name it as a “neutral rule” in the sense that the “rule” remains in the normative dimension only and does not interfere the development of transaction of agents in the substantial domain. We can call this pattern as “neutral rule.” In the case of (3) where the receiver (agent A) of the norm of the other (agent B) reformulates the giver of the norm according to his standard of interest, the equations are as follows:

Sa ( I b ( Pap )) = Sb ( I b ( Pap )) and Sa ( I b ( Pbq )) = Sb ( I b ( Pbq )).



(3.5)

In the case where B represents a collective of numerous agents, the collectivity of B’s interest defines the structure of substantial interest of the norm giver A. A’s rule functions to maintain the relations of agents B, B′, B″, ···, in the domain of their

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substantial interest. In this sense, agent A is a representative ruler for the interest of those agents B that are ruled by him. We can call this pattern as “representative rule.” We know this pattern in the idea of “representative democracy” where the law givers are elected by the voters who act from their substantial interest. Now, let’s move to the columns in the right of the table. In the case of (4), though there is no subordination of the norm of mighty agent over others, agent A imposes his standard of interest to agent B.  The relation is presented by the following equations:

Sa ( I a ( Pap )) = Sb ( I a ( Pap )) and Sa ( I a ( Pbq )) = Sb ( I a ( Pbq )).



(3.6)

Such a relation emerges, say, when agent A asks agent B to act for A’s interest. In this case, A is called the principal (the person who asks to act), while B is called the agent (the person who is asked to act). We can call this pattern “representative interest relation.” Beside the “despotic relation” that we saw in the case of (1), this pattern appears often in the structure of organization. However, the distinction between (1) and (4) is not apparently clear to outsiders, because the adoption of the norm of the superior or of the organization occurs in the mind of agents. Further, even the agent B’s synchronicity to the standard agent A’s interest is not completely known to others including A.  So far as considerable amounts of resources are allocated to B, A’s monitoring of B’s performance may often tend to be incomplete. This is also true in the case of despotic control (1) despite of less degree. In the domain of substantial interest relations, there exists always a range of private discretion with a distinctive standard. B’s performance depends considerably on the nature and the standard of this private range. In the case of (5), the interest of the counterpart is the reference standard of the both agents A and B. In equations:

Sa ( I b ( Pap )) = Sb ( I a ( Pap )) and Sa ( I b ( Pbq )) = Sb ( I a ( Pbq )).



(3.7)

Here, whether the generalization of the norms and interest standards occur in the development of real social exchange or not would divide the resulting social state between that of a closed communitarian nature and that of an open civil society. Whether the generalization of norms and interest standards from the refinement occurs in the process of repeated social exchange depends on the possibility of the abstraction of personal elements (or its social backgrounds). It depends also on whether the synchronous mutual recognition occurs in a fixed area or in a wider unfixed area. Since a synchronous recognition presupposes the norm and interest standard of the counterpart, the social exchange based on it tends to end in the mutual recognition of the peculiar relations between them. It is true particularly in the case of exchange, where the goods in exchange cannot separate themselves from the persons of agents, or the range of exchange is fixed. In such cases, what results is not the generalization of norms and interest standards but their differentiation.

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The primary form of the labor in present years, the employed labor, belongs to the pattern (4), that is, a sort of principal–agent relations. What makes it different from other forms of labor, for example, the working of professionals such as lawyers and medical doctors or from the relation between managers and shareholders of a company, lies in the nature of the employment relation in which the principal (employer) has the comprehensive competence to order the contents of the work of the agent (employee). In the case of work of professionals or service of managers, agents have a wide range of their works and services, so far as they are not fixed by the contract. Contrastingly, in the case of employed labor, workers must follow the order of the employer, so far as it does not contradict the laws and the normal presumption of the work. Thus, the controllability of the principal (employer) is far mightier than other principal–agent relations. Thus, it contains the elements of the pattern (1) that accompanies power relations under hierarchical structure. Thus far, we have considered the patterns of social exchange applying the approval scheme to them. We can surmise the result as following; while the generalization of norms and interest standards may likely occur in the pattern, even in such pattern the adverse direction to the “differentiation” cannot be excluded particularly under the condition of inseparability between goods in exchange and exchanging persons. “Social exchange” as is often contrasted with economic exchange is combined with this direction, which confined the direction of generalization to the local level.

3.3  Micro and Macro in the Social Exchange In the previous section, we positioned “social exchange” in the direction of differentiation of the norms and interest standards in contrast to the generalization direction. Then, the norms and standards that have general validity does not appear from the range of collectivity where “social exchange” is prevalent. If they should exist there, they must be brought from other origins out of this collectivity. Therefore, if we construct a macro phenomenon that is beyond the individual’s concern from the micro phenomenon of the actions of social exchange and the motivation of individuals behind them, it remains in the local level with no general validity. The locality of this phenomenon consists in the area where mutual complementarities can exist in the particular relations of agents both in the normative and the substantial domain. Differentiated norms and differentiated interests produce a balance in each domain and reinforce each other. The norm must be differentiated according to the positions in the structure of the collectivity concerned and be arranged to enable the balance of interest of the individuals allocated to those positions. In the sociology and the management study, what we called differentiated norms are named as “role,” and a social system is conceived as a structure that consists of the role expectations in plural levels. When we conceive a social system in the higher level beyond the actions of individuals and would consider a micro–macro linkage there, we cannot avoid dealing

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with the following two problems. The first is the question on the objective condition of the emergence of the social system and on the reason why it must remain as a local system in contrast to universal institution such as market and law. The second is how social dilemma, which is often dealt with in the consideration as one of main problems in the emergence of social institutions, is solved in the mutual relations of social exchange and social institution. In the consideration of the first problem of the objective condition, the inseparability of the goods and persons in the exchange provides its basic element. The low independency of the goods in exchange suggests the significance of the difference in the resources belonging to the persons that are involved in the social exchange. In the case of the newcomer and his senior that we introduced in the first section, the senior excels the newcomer both in knowledge and skills in the early stage at least. While the senior can teach the newcomer the knowledge and skill necessary for the work, the newcomer is obliged to compensate him by offering him his respect and gratitude, which is the intangible resource that is combined directly to the personality of the newcomer. If the newcomer should be not interested in acquiring the necessary knowledge and skill, or he should be unwilling to pay respect to his senior, this social exchange may suffer from disfunction. On both sides concerned, that of the senior who is allotted to perform the futile effort of guiding the newcomer and that of the newcomer who has to receive the unwilling guidance of his senior, the balance of interest is not seen. In order to emerge the social exchange that has sufficient stability to be the constitutive element of a social system, not only the difference in the resources belonging to the persons concerned but also the balance in the interest on the both sides is necessary. A way to restore the balance of interest in social exchange is to introduce the exchange of the goods whose need are really felt on both sides. If the senior provides the newcomer with the precious knowledge he acquired from his accumulated experience and the newcomer provides the senior the advanced technology he learned at the college, the balance of the interest can be restored. If such a new give and take relation should continue in the workshop, it can change the pattern of the structure of workshop. However, from the viewpoint of social system, the complementarity of the assets of the members of a social system does not need to be so strict as to secure the direct exchange of members in every part of the system. From the viewpoint of the system of a firm, young newcomers make complementarities against veterans in respect with the latent assets of their learning capacity in contrast to the accumulated knowledge of veterans. The respect or gratitude of newcomers to their seniors may not be necessary for the functioning of the workshop as a part of firm. In that case, the rank, honor, encouragement from the manager, bonus, and so on that are given to the seniors by the firm can contribute to maintain the balance of interest of the seniors. In this case, seniors who directly serve newcomers as their mentors are making the exchange with the firm as a social system. Similar measures are taken for the newcomers by the firm to enhance their motivation to learn. The two ways we just mentioned suggest the possibility to move from social exchange to economic exchange. If the newcomer should employ the senior as his

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instructor, or the senior should register himself at a computer school, the economic exchange appears instead of the social exchange. In case the firm sends newcomers to the off-the-job training run by other institutions or the firm pays the senior an extra allowance for the newcomer guidance, despite the penetration of economic elements, the frame of social exchange is conserved. The answer to the last half of the first question is given by considering the grounds of the difficulty of the perfect marketization. It is the difficulty in the standardization or detailed description of the goods demanded and the time-consuming nature to recognize the effect. In those cases mentioned above, the reason why the frame of the firm remains despite the overwhelming penetration of market economy is that the environment in which the goods concerned are needed is the firm as a social system. The second problem of social dilemma is problematic in which the difficulty in the prisoner’s dilemma game is extended to the game whose players are more than three persons. The reason that the social dilemma is discussed separately among researchers is that the possibility of the cooperation in the repeated prisoner’s dilemma cannot be applied to social dilemma due to the “second-order dilemma” that accompanies with the punishing of the agent that does not punish the agent that betrayed. In the case of social exchange, so far as it has the structure of a social system, it is beyond a mere two-person game. It may consist of a simultaneous exchange game of numerous agents or of the chain of exchange games. Thus, it cannot evade the difficulty of the social dilemma. In such situation, as the micro-based approach that would explain the cooperation (formation of a social system) from the interest of exchanging agents is blocked, the attraction of the macro-based approach that would explain the behavior of agents from its function to the social system may increase contrastingly. Ekeh maintains that there are two different traditions in the theory of social exchange, namely, the “individualistic tradition” and the “wholistic tradition.” While the former is polished by American sociologists (Hommans and Blau), the masterpiece of the latter is Levi Strauss’ kinship theory. Following the “wholistic tradition,” Ekeh presented the concept of “generalized exchange” that is not reduced into “limited exchange” of two persons direct relation. The “wholistic exchange” contains two patterns of exchange: the pattern of a chainlike circulation of the exchange (A → B → C → D→, , ,→Z → A) and the pattern of a netlike exchange that consists of the member–collectivity relations (A  →  BCDE, B  →  ACDE, C → ABDE, D → ABCE, E → ABCD). As we remind the kinship theory of Levi Strauss, the social exchange in this “wholistic tradition” is not reduced to the interest of individuals concerned. It is a sort of super individual exchange whose rule is given by the structure of the social system concerned. What is related to the motivation of individuals is the norm to follow the rule given by the tradition or structure of the social system. The incest taboo is not explained from the desire or reason of individuals but from its function as the organization principle of the kinship. The residents of islanders of Trobriand Islands will not keep the kula, because it represents a holy chain.

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This is a fresh proposal that would explain the micro phenomena from the macrostructure. From this viewpoint, the exchange relation between the newcomer and his senior is more appropriately considered when it is regarded as a result of the structure of the roles and resources that are allocated by the firm. From this viewpoint, the exchange relation between individual agent and his affiliated social system (firm) is the core of the organization. Though sociologists may complain, this macro-oriented view fits more to the organizational study of the management science. Then, is it possible to conceive a “social exchange” between individuals and the “society” in general? In this respect, Yamagishi’s study on “trust” is very suggestive. He studied the ground on which the “generalized exchange” can guide them to be cooperative. His answer is that the situation of the interest of the participants is that of the N persons trust game and not that of N persons prisoner’s dilemma game. In the case of trust game, the rational solution of mutual cooperation is realized on the “trust” that the counterpart chooses cooperation when I choose the same. This is the same that we argued that the mutual complementarity is the objective base for the social exchange in our examination of the answer to the first question. The topic Yamagishi investigated is from what the first “trust” emerges and whether this “trust” is not undermined by the “second-order dilemma” on the practicability of the sanctioning on the uncooperative behavior. By way of simulation, Yamagishi confirmed that so far as the structure of interest has the pattern of N person’s trust game the mutual cooperation can be realized with not so large mutual sanctioning. As for the origin of the first trust, it is the main theme of Yamagishi’s sociopsychological investigation. In Yamagishi (1998), he argued that the high grade of “generalized trust” (the level of trust under no information of the counterpart) is the result of coevolution with other qualities such as “trustworthiness” and “social intelligence” (the intelligence that can detect the trustworthiness of the others) under the consideration of the environmental condition such as social institutions and uncertainty. Yamagishi’s “generalized trust” has a bad fit to the social exchange that is not exempted from the localities of the given organizations or communities. In the social exchange that is found in the given social organizations, the norm is differentiated into the role expectations. Such social exchange is supported by the collective identification and the monitoring and sanctioning apparatus of the social system concerned. Yamagishi argued that the “generalized trust” as the “social intelligence” that functions beyond the particularities of “social exchange” is conceivable. On the other hand, Yamagishi admits that the social faculty of “trust” has been influenced by the culture and social structure. In respect that he admits that this faculty is generated evolutionary in the long social process, his basic position is common to the investigation of the evolutionary psychologists (Kosmides and Tooby) who have far longer time span. They investigated into the working of intelligence of man that is relevant to their interaction and cooperation prior to the emergence of the distinction between social exchange and economic exchange.

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3.4  M  arket and Organization as the Complex of the Micro– Macro Linkage In the preceding section, we discussed the micro–macro linkage in the case of social exchange. Then, what about the micro–macro linkage in the case of economic exchange? As we saw before, the separation between goods and the persons (exchangers) is presupposed in the economic action. Thus, the macroscopic phenomenon in the case of economic exchange has the dual appearance of the generalized norm (law) on the dimension of exchanging persons and of the generalized measure of interest (money) on the dimension of goods exchanged. My approval of the right of the counterpart based on the law does not necessarily depend on the counterpart’s approval on my right. It depends rather on my trust in the society in general and in its legal system including its enforcers in particular. The money that an agent receives in exchange with his goods is not usual goods with some useable value. Thus, the reason he receives money consists in his trust in its purchasing power, in other words in the possibility of the acquisition of other goods in the society in general. This does not correspond to the “limited exchange” but to the “generalized exchange” in Ekeh’s terminology. Thus, in the order of the market where economic exchange is played, the trust in law and in money supports the circuit that returns from macro-level institutions to microlevel of economic activities. In the economic exchange, goods whose possession is to be approved on the common norm receives pecuniary valuation. As in the theoretical tradition of the social contract, in the case of the vindication of a social norm for the relation of persons, individual wills are socialized to form a general will that takes the form of law. In the case of economic exchange that starts from the interest of individuals, socialization takes the form of the integration into the domain of exchangeable value whose expression is the price. In Marx’s words, the duality of the use value and the exchange value of a commodity is transformed into the apparent opposition between supply (commodities to be sold) and demand (money as the form of purchasing power) and generates prices as the socialized form of the exchange value. The mainstream of neoclassical economics regards the price as a sole micro–macro linkage that has the effect on the supply and demand activity of individuals. Marxian economics has the superiority in its insight into the necessity of monetary socialization in the base of the market mechanism, and the theoretical task to mold this monetary socialization into the concept of “effective demand” was entrusted to John M. Keynes. In the Marxian economics, the micro–macro relations are considered in the relations between individual capital and social capital as a whole. The reproduction of an individual capital proceeds in the complicated relations with the movement of other individual capitals. As these micro–macro relations represent themselves in the monetary circulation of capital, their smooth movements depend on the stable money supply. From the viewpoint of the result, the reproduction of individual capitals is parts of the reproduction of the social capital as a whole. In this reproduction

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process of a capital as a whole, the reproduction and replacement of the exhausted means of production and the reproduction of the employment relation (capital–labor relation) on the ground of the conservation of the labor force are the two axes of the whole process. Thus, the French régulationists precisely regarded the “monetary constraint” and the “wage labor relation” as two institutional forms that represented the micro–macro linkage of the modern capitalism (Boyer 2000). However, as we can understand from our preceding discussions, employment relations (wage labor relations) keep the duality of economic exchange and social exchange. In respect to the working in exchange to the payment of the wage, it is an economic exchange. In respect to the working under the order of the employee at the allotted position for the interest of the employer, it is a local social exchange. Marx regarded the former as the trade of the commodity “labor force” and the latter as the use of the purchased commodity “labor force.” However, since “labor force” means the person of the worker, the trade of persons violates the modern civil order. Thus, Marx’s conception of the commodity “labor force” must be taken as a one-­sided theory from his peculiar view of capitalist production. On the one hand, particularly in the case of long-continuing employment, in contrast with the one-shot contract of the casual employment, the element of the complexity of the position, competence, and benefit that are determined differently by individual organizations (firms) increases its significance. On the other hand, the wage and salary stay under considerable influence by the situation of the labor market. Further, the employer keeps the power of dismissal from the viewpoint of the profitability of the relevant employment. Thus, we should regard the employment relation as the complex of the economic exchange that reflects the elements of market economy considerably and the social exchange that takes the form of organizational structure as a social system. From this viewpoint, the organizational structure of a firm means the range of institution in which formal and informal social exchange is performed on the ground of economic exchange that represents itself as the employment relation. Then, the question naturally arises, as to why such an institutional range of the formal and informal social exchange in the form of the organization of a firm emerges in the market economy where money and capital are equipped with. To answer this question, economists usually refer the “transaction cost” theory of Ronald H. Coase (1937) and the “uncertainty” theory of Frank H. Knight (1921). Since the concept “transaction cost” was born as the extension of the cost that was traditionally limited to the production cost into the “transaction” in general, it seems to have affinity to social exchange. However, the transaction cost theory assumes that the cost of the use of market and that of organization can be measured and compared. This assumption is difficult to apply to the social exchange. The transaction cost of social exchange, if such should be conceivable, is the cost that has no general measure and keeps the heterogeneity depending on the particular human relations. The assumption of the measurability and comparability of the nonmarket forms of the cost has the presumption of the similarity and stability of the institutional structures and their environment.

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In this respect, Knightian concept that the organizational structure of the firm emerges in the confrontation with “uncertainty” that is not reducible to the statistically manageable “risk” is more fundamental. According to Knight (1921), ­employment relation is the contract between the worker that would receive secure income under an uncertain environment and the entrepreneur that would confront the uncertain situation. The former works under the order of the latter in the exchange with the fixed payment (wage). The latter is obliged to deliver a fixed amount of his sales to the former but acquires the rest (the surplus of his business). From the viewpoint of the entrepreneur, too, the formation of organization is the reaction to the uncertainty. The necessity to procure the specialized productive element (labor) at each time in the everchanging outer environment (market) increases the uncertainty for the firm considerably. Contrastingly, since the employment, contract gives the employer a comprehensive right to order the employee concrete sorts of work in exchange for giving him the assurance of the wage payment. The entrepreneur need not go to market and can perform the production using the employed workers correspondingly to the changing outer environment (market). He can also promote the employed workers to prepare for the change in the needed works. Such a relation corresponds in the classification of Table 3.2 to that of the combination of an agent that is autonomous in his interest dimension (employer) and an agent that is synchronous in this respect (employee). An entrepreneur or a firm employs workers and sets them in the production for his own interest. On the one hand, paying the wage is also for his interest. On the other hand, the worker (employee) serves for the interest of the employer (firm) despite of his right for the stipulated wage. However, the effect of the service of worker is affected by the degree of his commitment to the interest of his employer. This is not directly controllable for the employer. Thus, there is asymmetrical contrast between stipulated wage and the uncertainty in the workers’ commitment for the interest of employer. The employer (firm) develops the monitoring and sanctioning apparatus within the organization. This relation is represented by Samuel Bowles and Herb Gintis as the theory of “contested exchange” (Bowles and Gintis 2001). Further, the concept of “loyalty” invented by Albert O. Hirschman (1970) suggests the degree of this commitment of workers for the interest of the organization. The relations between the entrepreneur and the workers have the normative dimension, too. Workers are allotted to the various positions whose situation differs considerably according to the variety of material equipment and the structure of collaboration and division of work. Their work is supported by the various norms and customs that are not reducible to those of the outer society in general. The commitment of workers to the organization (firm) is maintained by these local norms. This, too, is the reason why the business organization needs the social exchange that is not reducible to economic exchange. In the case of market exchange that completes in one shot, there is no need for such reinforcement by local norms and customs. The classical organization with hierarchical structure in which the entrepreneur in the top level makes decisions and distributes them in jobs of the corresponding levels is not always efficient when the scale of the organization is enlarged or the

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complexity of informational environment increases. In his classification of the types of information-efficient business organizations, Masahiko Aoki provided two important axes (Aoki 2000). The one is the high and low stochastic correlation of the uncertainty between that of the systemic environment that the firm faces in total and that of the local environment that the particular sections of the firm face. Another axis is whether there is “complementarity” between the activity level of sections and “competition for resources” in which they struggle for the scarce resources. When the local informational uncertainty in the sections is extraordinaly higher than the systemic uncertainty, the decentralized hierarchy structure under the reservation of the determination of the organization rule, in which sections determine their activity on the ground of their own search of the local informational environment, becomes information efficient. However, when the uncertainty of the systemic environment, too, increases, the second axis becomes significant. When the “complementarity” among sections is high, the type of “informational assimilation” in which joint determination of activity level grounded on joint investigation into the systemic environment is appropriate. Contrastingly, when the “competitivity” of resources is high, the type of “information heterogeneity” in which each section observes the informational environment and decides independently becomes relevant. Aoki further conceived a “horizontal hierarchical type” of the business organization that makes most of the merit of “complementarity” under the condition of the medium degree of the correlation of the uncertainty. In the extension of such decentralized organization structure of the firm, the grouping and the network of firms that surpass the range of single firm will be discussed. Apart from the discussion of the types of organization, the formation of organizational structure and various social exchange within it accompanies the related cost. So far as this cost is not paid, the organizational structure of the firm is abandoned, and the direct economic transaction at the market becomes prevalent. In the comparative institutional analysis, Alfred Marshall’s concept of “quasi-rent” that an artificially made scarcity of productive elements (Marshall 1890) acquires attracted the attention of researchers as the origin for the covering this cost (Aoki 1984). If “quasi-rent” is expended to the formation of organization and to the formation of skill and knowledge, it can promote the productivity of the firm and continue to produce “quasi-rent” further. However, we must take care that the acquisition of the “quasi-rent” is not always grounded on the higher productivity. It may generate from nonproductive conditions such as formal or informal monopoly, artificial product differentiation, and manipulation in the market. The quasi-rent may be invested to maintain such distortion of the market. If the “quasi-rent” is paid for the maintenance of organization cost and social exchange, it may offer the target for the speculators in the market economy. If a speculator should acquire the firm that pays for organizational cost and for social exchange, he can reduce the cost by replacing the long-term employment with the market transaction and thus transform the difference into extra profit. Such type of restructuring does not secure the extra profit long, but for the time being, he can raise the share by way of higher return to the shareholders.

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3.5  Complex System of Exchange and Its Governance In this last section of this chapter, we would consider the governance and the change of the complex system of exchange. In the first section, we showed a basic view of micro–macro linkage. Looking back the discussion of the previous sections, we are tended to think that some area is needed to evaluate the condition and performance of a system within the system itself. Most social systems have some measures and apparatus to judge their performance to continue or change the way of operation. As we introduced in Sect. 2.4 of the preceding chapter, Oliver Williamson (1996) named this as “governance” and offers the three layers organization model (Fig. 1.3 in Chap. 1). The “governance” of a system (relative efficiency) is the amalgamated outcome of the “behavioral traits” (microscopic elements) and the influence of the “institutional environment.” The area of “governance” retains its own autonomy in its manifestation and in the ways of change. The evaluation of the state of “governance” is transformed into various sorts and grades of the signals for the individuals and contributes to modify the “behavioral traits” of individuals. Thus, this makes a small loop of individuals and the governance. However, this scheme shows another large loop that includes “institutional environment.” The evaluation of the “governance” may introduce the modification of the “institutional environment” (“strategic feedback”) that affects the total structure of the social system. An “endogenous preference” is assumed for individuals that are influenced by the “institutional environment.” With these two loops, most of social systems function as auto-poetic entities. The concrete form and measure of the “governance” may be various. Who and how of the functioning of governance are not defined. However, this scheme has many commonalities with novel concepts of social systems. What is the content of the “governance”? Williamson seems to have thought that it is ultimately reduced to “efficiency,” despite the recognition of the organization-­ specific autonomy. Sociologists may oppose him by saying the “ritual” or “symbolic” elements may be superior to the “efficiency” in the behavior within organizations (Alexander et al. 1987; Collins 2005). Indeed, such criticism may be legitimized in the case of social exchange in which the measure of “efficiency” itself is ambiguous and situation dependent. However, I believe, most sociologists will not deny the criterion of the self-maintenance and reproduction for any social systems. From our viewpoint, “governance” has to be considered in both domains of the normative and the substantial (interest related). “Efficiency” is originally the measure of performance in the domain of substantial interest. However, it is our view that this measure is deeply influenced by the nature and constellations of norms within the social system and by the ways of approvals reflecting them. If we consider “governance” at the minimum level of the capacity in survival and reproduction, as is suggested by the preceding section, the management of “uncertainty” emerges in the front. Especially as the direction to manage the “uncertainty” in the human relations, we have two alternatives of the strengthening the ties (organization-­oriented approach) and the provision of substitution (market-oriented

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approach). Following the former, we build up the situation where the mutual benefit is guaranteed or the penalty within group or by the third person is institutionalized so that the members would not deviate from the expected role. In short, this is oriented to the reinforcement of the organizational bondage. Surely this direction reduces the “uncertainty” by suppressing the “opportunistic” behavior of members. However, as this direction does not accompany the increase and renovation in the resources of the organization, this is not fitted to a large scale of the change or to the high-grade “uncertainty.” On one hand, the second direction or the market-oriented approach is the preparation of the replacing candidates to deal with the “uncertainty.” To those members that may betray the group, this direction solves the problem by replacing him with a more reliable person or by refraining him by the existence of such an option. Against a larger-scale “uncertainty,” this direction can minimize the damage by separating the unfitted part and deal with the new possibility with fresh members. Thus, this direction may fit the environment with larger-scale “uncertainty.” On the other hand, however, this approach must deal with a new sort of “uncertainty” in finding the truly needed persons in the labor market. In the case when the management of this “uncertainty” should prove to be unsuccessful, the market-­ oriented approach would end in the dissolution of the organization. In order to avoid such unsuccessful outcome, the employer has the capability to discern the aptitude of the candidates. The candidates must show their capabilities and skills honestly. In a word, the labor market must be sufficiently efficient from the viewpoint of both sides. This is a rarely met postulate in the case of labor market.

References Alexander JC, Giesen B, Münch A, Smelser NJ (eds) (1987) The micro-macro link. University of California Press, Berkeley Aoki M (1984) The cooperative game theory of the firm. Oxford University Press, New York Aoki M (2000) Information, cooperate governance, and institutional diversity: competitiveness in Japan, the USA, and the transition economies. Oxford University Press, Oxford. Transl. by Stacey Jehlik Aoki M (2001) Towards a comparative institutional analysis. MIT Press, Cambridge Barkow J, Cosmides L, Tooby J (eds) (1992) The adapted mind: evolutionary psychology and the generation of culture. Oxford University Press, New York Blau PM (1964) Exchange and power in social life. Wiley, New York Bowles S, Gintis H (2001) Contested exchange: a new microeconomics of capitalism. In: Hodgson GM, Itoh M, Yokokawa N (eds) Capitalism in evolution: global contentions—east and west. Edward Elgar, Cheltenham Glos. Boyer R (2000) Is a finance-led growth regime a viable alternative to Fordism? A preliminary analysis. Econ Soc 29(1):111–145 Coase RH (1937) The nature of the firm. Econ New Ser 4:386–405 Coleman JS (1990) Foundations of social theory. Harvard University Press, Cambridge Collins R (2005) Interaction ritual chains. Princeton University Press, Princeton Cosmides L, Tooby J (1994) Better than rational: evolutionary psychology and the invisible hand. Am Econ Rev 84(2):327–332

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Hirschman AO (1970) Exit, voice, and loyalty: responses to decline in firms, organizations, and states. Harvard University Press, Cambridge Homans GC (1961) Social behavior: its elementary forms. Routledge & K. Paul, London Knight FH (1921) Risk, uncertainty and profit. Houston Mifflin, Boston Marshall A (1890) Principles of economics. Macmillan, London Murakami Y (1994) Han-Koten no Seijikeizaigaku Yoko (Summary of the anti-classical political economy). Chuo Koron-sha, Tokyo (In Japanese) Murakami Y, Rohlen TP (1992) Social exchange aspects of the Japanese political economy. In: Kumon S, Rosovsky H (eds) The political economy of Japan, vol 3: cultural and social dynamics. Stanford University Press, Stanford Smith A (1759) The theory of moral sentiments, 1st edn. A. Miller and A. Kincaid, London and Edinburgh Tominaga K (1997) Keizai to Soshiki no Shakaigaku Riton (Sociological theory of economy and organization). University of Tokyo Press, Tokyo (In Japanese) Williamson OE (1996) The mechanisms of governance. Oxford University Press, New York Yamagishi T (1998) Shinrai no Kozo (The structure of trust). University of Tokyo Press, Tokyo (In Japanese) Yamagishi T, Cook KS, Watabe M (1998) Uncertainty, trust and commitment formation in the United States and Japan. Am J Sociol 104:165–194

Chapter 4

Institutional Dynamics of the Capitalist Market Economy Kiichiro Yagi

Abstract  Adam Smith’s concept of division of labor is an inexhaustible fountain for evolutionary ideas in economics. It not only enhances productivity and generates diversity but also gives birth to the peculiar institution of money and capital. Under capitalism, the transaction between employer and employee reflects the relationship between the class of capitalists and that of workers. Its result depends on the strategies and resources of both sides. However, each class is not always united; the distribution of the members within each class must be considered. This chapter further discusses collective action in the form of “voice,” along with its relationships to another type of action, “exit.” In several cases, “voice” and “exit” are incorporated into the institution as a tool of “governance.” Keywords  Division of labor · Emergence of money and capital · Emergence of institutions · Relations between classes · Voice and exit

Kiichiro Yagi, The Development of the Market Economy and the Formation of Voice, in G. M. Hodgson, M. Itoh, N. Yokokawa (eds.) Capitalism in Evolution: Global Contentions – East and West, 2001, pp. 48–59. Edward Elgar Publishing Ltd. (Partly used in Sects. 4.1 and 4.2). K. Yagi (*) Setsunan University, Neyagawa, Osaka, Japan e-mail: [email protected] © Springer Japan KK, part of Springer Nature 2020 K. Yagi (ed.), From Reproduction to Evolutionary Governance, Evolutionary Economics and Social Complexity Science 20, https://doi.org/10.1007/978-4-431-54998-7_4

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4.1  Division of Labor Generates Money and Capital 4.1.1  Division of Labor as the Source of Evolution It is well known that Charles Darwin took inspiration from Thomas Robert Malthus’s An Essay on the Principle of Population1 in developing his theory of ‘natural selection’. In his autobiography, Darwin wrote, “I happened to read for amusement Malthus on Population, and being well prepared to appreciate the struggle for existence which everywhere goes on from long-continued observation of the habits of animals and plants, it at once struck me that under these circumstances favorable variations would tend to be preserved and unfavorable ones to be destroyed” (Darwin 1958: 120). Surely, the idea of poverty and disease resulting from overpopulation, as discussed in Malthus’s work, could be transferred to the “struggle for existence” in the biological world. However, another element of natural selection, the generation of diversity, is missing in Malthusian theory. Accordingly, some researchers seek another potential source of inspiration for Darwinian theory in the classical idea of the division of labor. Although there is no evidence of Darwin reading Adam Smith’s Wealth of Nations (1776), Darwin was surely acquainted with the idea of division of labor, because it was very familiar to that of his contemporaries.2 We shall not go into the entangled relations between biology and economics here. However, it is possible to count Smith’s theory of the division of labor as one of the origins of evolutionary economics. Consider Smith’s discussion of the diversity of dogs in Book I, Chapter 2 of The Wealth of Nations (Smith 1976a: 20). The strength of the mastiff, the swiftness of the greyhound, the sagacity of the spaniel, or the docility of the shepherd dog are almost all the result of artificial crossbreeding and selection in successive generations to make them suitable for guarding, hunting, petting, or shepherding. According to Smith, in the case of the division of labor among men, the difference in the original constitution of the mind and body of men is rather small. However, once they have entered economic life, after being engaged in various occupational activities, men become diversified not only in their skills but also in their dispositions and habits. Smith argued that this diversity in the division of labor is an unintentional result of the natural development of exchange among people. Since men, by their nature, have a propensity to exchange, they can benefit from diversification—dogs cannot.

 Darwin read the sixth edition of Malthus’s Essay (Malthus 1826). Several studies address the significance of Malthus’s reading for the formation of Darwin’s theory. Many of these works opine that Darwin could have developed his theory even without the stimulus given by Malthus. 2  Hodgson (1993), ch. 4. Smith’s Theory of Moral Sentiments (Smith 1759, 1976b) was surely one of Darwin’s favorite readings whose influence can be traced in Darwin’s another Magnus Opus, The Descent of Man (Darwin 1871). 1

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Modern economists know Smith’s analysis by its famous theorem: “The division of labor is limited by the extent of the market.”3 For those individuals or firms that are specialized in some particular trades or industries, the market is the place where they purchase goods that they need but do not produce and the place where they sell their own products. Accordingly, this theorem has a twofold meaning. First, for the emergence of a particular trade or industry, the market must already have a complementary structure of other trades or industries. Second, sufficient (actual or potential) demand for the products of the emerging trades or industries must exist beforehand. The complementary relation in trades or industries is the division of labor by definition. Viewing specialization from the perspective of division of labor presupposes the complementarity of specialized trades that were confined to a self-­ sufficient entity in the past. The demand in the market is, in one sense, the shadow of the existing division of labor in the sphere of exchange. Without the need for specialized products, their production cannot be separated as independent trades in the market economy. However, from Smithian viewpoint, the driving force of the division of labor consists of the “improvement in the productive powers of labor” (ibid: 7). Specialization can occur because the improvement in productivity it brings about is more advantageous than continuing nonspecialized production. If the increased productivity leads to a decline in the price, the demand for the goods and services that are the product of the specialized labor could increase. Further, if such improvement of productivity could occur from the introduction of new production methods as well as the introduction and diffusion of new goods and services that enhance the satisfaction of people’s wants, the improvement in productivity can be the driving force of the diversity and welfare of the social economy as a whole.4 Thus, the relationship between the division of labor and the extent of the market involves circular causation. The division of labor diversifies the commodities in the market by producing attractive new goods and broadens the market further by supplying existing goods or substitutes more cheaply than before as a result of increased labor productivity. Thus, the extent and structure of the market that limits the present division of labor is the product of the past development of the division of labor. New emerging trades or industries contain the possibility of restructuring and broadening the existing market. This theorem sees economic development as the interaction of the market and the division of labor. However, Takashi Negishi (1989) reminded us of the existence of the second theorem of the division of labor in Adam Smith.5 It indicates the significance of the accumulated stock, that is, capital for the determination of the degree of the division and subdivision of labor.  The title of Chapter 3, Book 1, of The Wealth of Nations (Smith 1976a, p.21).  Whether Smith’s theory of division of labor can account for the concept of diversification, including new activities and new goods, may be controversial. However, if the types of divided labor were to be limited to the activities that previously existed in the undivided labor, the progress in productivity would remain miserably feeble. 5  On this second theorem and its relation to the factory division of labor, see Negishi (1989, p.98). 3 4

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As the accumulation of stock must, in the nature of things, be previous to the division of labor, so labor can be more and more subdivided in proportion only as stock is previously more and more accumulated (Smith 1976a, p.291f). Smith renamed this accumulated stock as “capital” when it is in the hand of a private man and is invested with the aim of acquiring profit (Smith 1976a, p.294). A producer that would proceed to the subdivision of labor needs capital to pay the workers he employs. In the tradition of classical political economy, “capital” signified “stocks to support and assist productive labor” and included wages and goods such as food and clothing for workers in addition to tools, raw materials, and machinery, and so on. The wage capital forms the core of “circulating capital,” which, in collaboration with “fixed capital” (tools and machinery), dominates the production process. In this case, division of labor is not limited to the specialization in trade or products at the market level but includes the “subdivision” of labor within the workshop. The productivity of the labor employed reflects the depth of specialization with the assistance of machinery in the production process, which depends on the size of the accumulated capital. The volume of production depends on the demand that appears in the market, which, in turn, depends on the price and diversity of the commodities in the market. Capital represents itself as the production unit in the market economy. The causal interrelation between the market and the division of labor is now transferred to the interdependence of the market and capital as the unit of production that represents the internal subdivision of labor.6 Thus, Smith explained the emergence of money and capital from the logical necessity of the developed division of labor. Money is a general means of exchange that facilitates the exchange of specialized products acquired from the divided, or specialized labor, while capital is the necessary stock of goods that must be compiled to continue specialized production in the situation where production and circulation take time. In a developed market economy, money links the dispersed exchange activities of the branches of the division of labor, and capital becomes the unit of the productive entity (firms); these are the knots of circulation of money and commodities.

4.1.2  Emergence of Money as an Unintended Consequence The history of economics has provided a variety of explanations for the emergence of money. Apart from the theories of the noneconomic origin of money, theories of the economic origin of money are divided into two groups. One conceives a conventional accord for its origin, while another considers it as the spontaneous outcome of market participants looking for an efficient way of transacting. The most definite version of the former is Chartalism, advocated by Georg F. Knapp (1905) and others,  This type of division of labor is designed for efficient production by the employer and was analyzed by Charles Babbage (1832), a friend of Darwin. The nature of the organization principle of the factory division of labor is “designed” rather than “evolutionary.” 6

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according to which, the state can give a certain token the full validity of money in its territory. Before the appearance of Chartalism in the late nineteenth century, the mainstream view was based on the latter, which considers the emergence of money as the spontaneous selection of a special commodity that has general purchasing power. Most economists that would ground the value of money in the real value of its materials stood on the side of the commodity theory of money, that is, metallism. In The Wealth of Nations, Adam Smith explained the origin of money as owing to the difficulty of bartering, which presupposes a mutual willingness to receive the offers on both sides. In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labor, must naturally have endeavored to manage his affairs in such a manner, as to have at all times by him, besides the peculiar produce of his own industry, a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry (Smith 1976a, p.26).

The direct consequence of this explanation of the origin of money is the theory of commodity money. However, as Smith attributed the first step of indirect exchange to the invention of “prudent men,” he left room for the conventional theory of money that grounds money in a collective accord, as believed to have occurred under Solon’s reforms in ancient Athens. In this respect, Carl Menger was more conscious in clarifying his position against the pragmatic interventionist view that is reflected in the state theory of money. In the so-called Controversy on Method against Gustav Schmoller, Menger presented his vision of the emergence of institutions with public benefit as the “unintended consequence” of the actions of selfish individuals (Menger 1883). He mentioned the emergence of money as its significant example in his 1883 book and later published it in in an article titled “On the Origin of Money” in 1892 (Menger 1892). The economic interest of the economic individuals, therefore, with increased knowledge of their individual interests without agreement, without legislative compulsion, even without any consideration of public interests, leads them to turn over their wares for more marketable ones, even if they do not need the latter for their immediate consumer needs. (Menger 1963, p.154; in original Menger 1883, S.176)

The core of Menger’s theory is that commodities have different “marketability,”7 and market participants gradually learn the advantage of using commodities with higher “marketability” as the means of exchange. Thus, the process of the emergence of money conceived by Smith and Menger is surmised as follows: Difficulty in barter trade ⇒ Recognition of the difference in the marketability of commodities/Discovery of a commodity with higher marketability ⇒ Trial use of the former as the means of exchange ⇒ Its diffusion by way of imitation of the success of others ⇒ Growth of the habit to use the special commodity in indirect exchange (Increase in the marketability of the commodity concerned) ⇒ Obsolescence of barter trade ⇒ Emergence of money (Extinction of barter trade)  The original German term is Absatzfähigkeit. The translator of Menger, K. (1892) coined the term “saleableness” as the English equivalent. 7

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The first point that we must make clear is that there is the possibility that traders cannot find a suitable commodity whose high marketability can immediately replace the barter trade. However, if we allow the transitory period in which traders use barter trade and indirect exchange simultaneously, the hurdle of selecting the appropriate means of exchange is considerably lowered. Let us denote a (0  ϕ′ > 0. There is possibility that f(a) intersects 45° line before it marks 1. The point f(a) = F(a) is the “stable propagation equilibrium” of f(a)’s trajectory. Despite its allowance of the deviation of individual action, the stability of the rule as an institution is guaranteed. Such a stable equilibrium may emerge in the case of ϕ′ 0, the successful institutionalization is not guaranteed. As is shown in Fig. 4.2, the possibility is divided. Because f(a) < F(a) has the diminishing effect to F(a), the institution suffers the danger of decay in this area. However, if f(a) could cross the 45° line from below, it would move upward further and successful institutionalization would be anticipated. In this case, the intersection with the 45° line is unstable equilibrium point. How is it possible for an institution such as the use of indirect exchange (use of money) could develop without falling into the menace of so to say below the 45° line menace? So far as all of the members of the society are reluctant to use indirect exchange and would follow the new mode only later behind other people, it seems to be of no hope. However, let’s remind that population thinking is one of the cores of evolutionary theory. Every society is equipped with individuals that plays pioneer’s role in every fields. Our case of the transitory period in which the direct and indirect exchange coexist is an appropriate case for Witt’s model. However, even the conservative individuals may be involved in the general development, if others produce the movement of F(a). Figure 4.3 explains the diffusion of commodity money through the learning/

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F(a)

Fig. 4.2  Difficulty in the area below 45°line. In the area where f(a)0. F(a) moves leftward and f(a) moves downward. However, if f(a) crosses 45°line from below, a successful institutionalization can be anticipated. (Source: Figure 3 in p. 161 of Ulrich Witt “The evolution of economic institutions as a propagation process,” Public Choice, 62, 1989. Springer Nature)

1: rapid learners 1: 2: 3:

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Fig. 4.3  Propagation of indirect exchange by learning. A society is composed of rapid learners and slow learners. In this simulation graph, two groups have different adaptation speeds while they start from close positions. If the adoption of the indirect exchange by the former raises the average frequency of indirect exchange, the latter may be involved in its diffusion, following the former afterwards. (Source: The author. Simulated by Stella)

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imitation process of individuals. The individuals whose products have different marketability discover the merit of the use of goods with higher marketability and gradually conquer the anxiety of indirect exchange. As the marketability of the commodity money increases as it acquires new users, those who have been reluctant to use it are forced to use it in the meantime. Figure 4.3 illustrates the outcome of the economic society that is composed of those who are keen to the advantage of new method and are ready to introduce it (rapid learners) and those who are reluctant to get accustomed to new ways and adopt them only after seeing them being used generally (slow learners). In this simulation graph drawn by STELLA, two groups have different adaptation speeds while they start from close positions. The rise of the average probability of indirect exchange mainly due to the rapid learning of the first group let the second group move to the use of indirect exchange (money) with some intervals. However, if the proposed commodity were to have poor marketability, or the psychological barrier were to be generally strong, the mode to use such a medium of exchange would not diffuse. The extent of the market and the reliability of the means of exchange (money) are the preconditions for the producers in a society to specialize themselves. The capital that is needed for a producer to go into specialized trade reflects not only the necessary material goods and services but also the period necessary for production and circulation (purchase of necessary goods and services and sales of products). Thus far as the trust in money is maintained, the estimate of the risk in the specialization is reflected in the absolute and relative amount of the cash money on the balance sheet of the business.

4.2  Transactions Under Capitalism Another problem that accompanies the division of labor is the allocation of ownership. In the second chapter, we discussed the logic of how the particular interest related to the possession is generally approved. However, we did not discuss the situation that shows the real inequality in the initial distribution or in the resulting acquisition. Now, we have to take up this inequality and discuss the formation of social classes. In such a voluntary exchange, which Adam Smith stipulated in The Wealth of Nations, every participant improves his or her situation, or at least does not worsen it. However, in the distribution of ownership, when it has the features of a zero-sum game, where the gain of one person is the loss of others, the voluntary accord is not likely to appear. In the preceding chapter, we discussed the approval of individual possessions according to the norms and interests that the individuals concerned perceive and extended it to the agenda of the social contract. Our conclusion is that the norms and interests of individuals are not free from those of the typological social groups (classes) in the society and are often no more than a reflection of them. In reality, as is the case of John Locke’s application of “social contract” to the New World, it legitimized the right of possession of the colonists over uncultivated lands and the indigenous, as well as the slaves imported from Africa.

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Table 4.1  Transaction of capitalist and landed worker

Employed Worker Nonemployed

Employer (capitalist) Cooperative Exploitative 6 9 6 3 4 4 2 2

Source: The author Table 4.2  Transaction of capitalist and proletarian worker

Employed Worker Nonemployed

Employer (capitalist) Cooperative Exploitative 6 9 6 3 4 4 0 0

Source: The author

From the viewpoint of reproduction, the initial condition itself is not more significant than the reproducible conditions that appear both as conditions and results. Even if we started from the egalitarian assumption that equally sized estate lots were allotted to every member of a society, unexpected disasters and individual failures on one side and fortunes and successes on the other side would bring forth a differentiation among them. If a mighty ruler or government does not take effective measures to maintain the equality of their subjects, we can consider a differentiated situation of possession as the initial position from which the economic transactions of agents are played. In the case of capitalist production, the transaction between workers and the employers (capitalists) is the core of production relations. Workers offer employers the use of their ability (labor force) in the specialized labor allotted in the production system of their firms. Employers pay the worker’s wages or salaries. Historically, a transitory stage has been seen where workers and capitalists own the land on which they can barely maintain their existence. In the age of the developed capitalism, workers become proletariat that own nothing except for the abilities inherent in their bodies and minds. They have no choice to leave the labor market to acquire their independence. Tables 4.1 and 4.2 show the result of a transaction between a worker and his employer (capitalist). In these two tables, the case of cooperation from both sides shows the equal distribution of the productivity gain from capitalist production, while the exploitative case presents a situation in which almost all of the gain is appropriated by the capitalist. In the transitory stage, landed workers would not be employed if they did not receive wages that could afford them a better life than the peasant life generated by the cultivation of their small patch of land. In other words, the wages of workers would be slightly over the living standard of a small peasant, but could not rise much beyond this bottom level. In the case of developed capitalism, where workers

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are freed from the possession of land to become proletariat, they cannot maintain their lives without entering into employment, while capitalists have the advantage of being able to live on their possessions. The proletarianization (losing possession) of workers opened the risk of severe exploitation and pauperization. However, at the same time, the possibility of the improvement in productivity by way of the intensification of labor and the introduction of modern production systems with advanced machinery were born. In both of these tables, the employed–exploitative cases represent Nash equilibria. In order to exit from exploitative equilibria, there must be two strategies to diminish the gains of the capitalist in exploitative cases or to increase them in ­cooperative cases. If the workers resist the exploitation by capitalists, such resistance might contribute to a shift in the distribution of gains that is favorable to workers. The labor unions were organized with such aims. This can be assisted by legislation in the area of industrial relations. This may also change the combination of gains in Table 4.2 to be closer to the cooperative-employed case. Another strategy involves the recognition of the two partners of the positive effect on productivity in the cooperative case. If productivity were to increase by 50% in the cooperative case, the capitalist’s gain would be the same as in the former exploitative case. The transaction between workers and employers under capitalism has a twofold nature. The one is the direct and individual relationship between two individual agents. Another is the collective relationship between workers and capitalists on several levels. At the level of individual firms, we can discern the difference between the attitude of the individual worker and that of their collective body, such as that of their union. At the industry level, we also recognize the difference in the attitudes of firms against labor. However, the interactions of the attitudes and the activities on both sides of capital and labor result in the production and distribution that provide the conditions for the decisions of both sides. In the case of the individual firm level (or industry level), where the wage level is determined by the collective bargaining between labor union(s) and management (or federation of managers), union leaders can demonstrate their power by showing their organization rate. However, a number of workers do not like to join unions due to the obligation to pay the membership fee and to participate in union activities, reducing their leisure time. Further, the application of wage hikes or bonuses acquired by the unions to nonunionized members may cause the increase of free riders in this area. Most of the workers are grateful for the activities of union, but their willingness to participate is likely to gradually deteriorate. Thus, so long as some form of shop agreement is not fixed, the organization rate of unions will not reach 1. This is a case to which Witt’s Fig. 4.1, where 0