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posted April 2003

Communities and Social Goods:

The case of the missing social realm

Rick Wicks   (Doctoral Candidate, Economics Department, Göteborg University, Sweden)


Markets and three related potential problem areas

The core of economics, insofar as it relates to policy, is directed to keeping markets running satisfactorily, keeping production efficient and growing, etc. Related to this market core are three potential problem areas: 1) market forces may result in poverty, or in income differentials which undermine democracy and the political environment; 2) market forces may threaten the natural environment; 3) market forces may threaten the social environment. Without wishing to slight the market core or either of the other two related potential problem areas, my concern here is with the latter, the social environment. And while there is some conceptual overlap (just as there can be with intermediate goods used in production, which might also be used directly as consumer goods), my concern is not with social capital used in production or exchange processes, but with social goods which enter the consumer's utility function directly.

The need for reform of economics: The missing social realm

Many technical problems have been pointed out with neoclassical economic theory, (e.g., see Keen 2001). But one of the biggest problems with its content -- pace Becker (1976) and others (e.g., Coleman 1990-94, Iannaccone 1998, Becker and Murphy 2000) -- is its near-total omission of the social realm: communities and the social goods we derive from them.


Communities are groups based on kinship, location, or ideology (see Nisbet 1953/70, Bell 1993, and Etzioni & Etzioni 1999), while social goods are such things as a sense of purpose, belonging, security, and identity, as well as love and friendship, even tolerance and common courtesy.


We seem to have a deep need for communities and social goods (Lewis, Amini, and Lannon 2000), even though it may not always seem "rational" to invest in them. Many aspects of traditional culture may have co-evolved in order to guarantee satisfaction of these needs despite their apparent "irrationality" (Chwe 2001). Thus it's not always clear that it's the expected consequences for an individual now which matter; rather, what matters may well have been what shaped our character primordially, the expected consequences in the "ancestral environment" in which we evolved (Wright 1994, Sober and Wilson 1998, Boehm 1999).


Ever since the advent of capitalism, and even since the much earlier advent of markets (Pryor 1977), many observers have been concerned about market effects on this social realm of communities and social goods. Many students are aware of and share these concerns.


But neoclassical economic theory ignores the social realm almost entirely, not even noting its absence in fundamental discussions of utility and welfare, which is where "the bullet hits the bone"; cf. Walras 1874-26/1954, Pigou 1920-32/1962, Arrow 1977/83, Boadway and Bruce 1984-93, Myles 1995, Jha 1998.


Consequently, policy-advice based on neoclassical economic theory increases its risk of being highly unrealistic in terms of true overall social welfare.


And the teaching of neoclassical economics increases its risk of being sterile and unrewarding, as it is in fact often found to be.

The three realms of society, and the specifically social realm

For economic theory to include (or even to discuss the omission of) communities and social goods will require recognition that such a social realm both exists and is different from the market (or economic) realm. As Fullbrook (2001, pp. 7-8) says: "[T]he blockage of the first phase [of Bhaskar's (1979) "three-phase schema of scientific development"] -- the identifying of phenomena -- has stalled economics…" Thus it might be helpful if economics were to return to one of the most fundamental of scientific questions, of basic taxonomy (cf. Ruhlen 1994, p. 195): What are the social phenomena to be understood, and how can they be usefully categorized?


A very natural distinction in social science seems to be that between economic, political, and social phenomena.


This may be slightly confusing because of course they're all social, so what are the differences between them, and what is specifically social (as differentiated from political or economic)?

·         While "economic" can refer to any method for production and distribution of goods and services, in this context it most usefully refers to exchange in markets, based on mutual benefit.

·         Prior to the development of markets, there was political redistribution, that is, based on power relationships.

·         And previous to the rise of political power with agriculture and cities, hunter-gatherers distributed according to tradition or custom, that is, socially, based on identity in communities.

·         (While a Robinson-Crusoe "economy" is interesting analytically for some purposes, it collapses all three of these into a single individual, and thus isn't very useful for social analysis.)


This simple three-fold taxonomy of economic, political, and social phenomena seems fundamental to the social sciences, so much so that it is often used without explanation, seemingly unconsciously. But Kenneth Boulding (1980, 1985, 1990), for example, explained it as follows (in reverse order from above):

·         I can give to you or you to me, which is the basis of community, the fundamental social realm (Gudeman 2001 prefers the terms "allot" or "apportion" rather than give).

·         I can take from you or you from me, which is the basis of government, the political realm.

·         We can exchange, which is the basis of markets, the economic realm.


These three principles (giving, taking, and exchanging, based respectively on identity, power, and mutuality) can be mixed together in a variety of ways, and are perhaps never found alone and pure. Nevertheless a wide variety of social scientists use this three-fold categorization -- sometimes under slightly different names -- so it would seem to represent something fundamental in our experience. Under Goodman's (1985, pp. 79 & 81) "Principle of Objectivity" -- "Anything which is practically real should be taken as objectively real" -- neoclassical theory must find a way to deal with the social realm.

Interactions between markets and the other two realms

Since the days of Adam Smith and before, economics has explored the effects of politics and government on markets, and to some extent it has also explored the reverse effect, of markets on politics and government (or, at least, politics and government as a market, as in public-choice economics).


And similarly, development economics in particular has begun (with social-capital theory) to explore the effects of communities and social goods on production for, and exchange in, markets.


But as noted above, the reverse effect -- of markets on communities and on their social goods which enter the consumer's utility function directly -- has been almost universally ignored in neoclassical theory.

Is the market realm separable from the social realm?

While it may be true that "social capital" plays a role in the production and exchange of market goods and services, is it possible that markets are otherwise "separable" from the social realm, having no reverse effects (positive or negative) upon communities and social goods? If so, this could account for the total absence of analysis of such effects in neoclassical discussions of utility and welfare.


But while it is perhaps not easy to "prove" either way, there is substantial evidence that there are significant effects of markets on communities and social goods.


Mishan (1967-93) explored the effects of markets on communities and social goods both anecdotally and theoretically and found substantial reason to suspect that those effects have been significant (and not all positive).


Putnam's (1995, 2000) massive empirical study explored many possible causes for recent social (or, more specifically, "civic") decline in America -- many of them economic -- and finally pinpointed three causes (the first two of which are clearly related to markets):

·         changing living and working patterns;

·         changing consumption patterns (TV); and

·         generational change (the decline of the generation that found comradeship in fighting World War II together).


Hirschman (1986/92) reviewed the literature of the last 2+ centuries and came up with a four-fold classification (below) of possible interactions between the market realm and the social realm.


Diagram:  Four possible interactions between the market realm and the social realm

 Adapted from Hirschman (1986/92, p. 136.)


It is Hirschman's top two hypotheses we are here concerned with, especially the second, the possibility that market effects might be negative ("self-destructive"). The first ("doux-commerce") refers to the hypothesis that markets might improve manners and civic behavior, thus generating positive "social capital" (a possibility which neoclassical theory also seems to ignore, though it would probably not conflict with the usual welfare conclusions).


Plumb (1972/88) even goes so far as to suggest that we are at the "end of an epoch". Plumb says that our fundamental institutions (the family, religion, schools, the city, and government) which have held us in good stead throughout the Neolithic Epoch (since the rise of agriculture 10,000 years ago, and the rise of cities 5,000 years ago) are being undermined at their roots, due to the effects of science and technology (largely mediated through markets).


Thus for a variety of theoretical and empirical reasons it would seem appropriate for neoclassical economics to consider the effects of markets on communities and social goods.


Any theory of markets or scarcity must include the social realm

Markets, and even neoclassical theory about markets (see Marwell and Ames 1981, as well as Frank, Gilovich, and Regan 1993), seem to affect communities and the provision of social goods, so it would seem that any thorough theory of markets would have to deal with communities and social goods.


Similarly, social goods are scarce, and the communities which produce them are both scarce themselves and affected by the scarcity of other goods (including money), so again it would seem that any thorough theory of scarcity would have to deal with communities and social goods.


But neoclassical theory -- which presents itself as the theory of scarcity, and often also assumes itself to be (and is perceived by many as) the theory of markets -- conveniently neglects to deal with communities or social goods (at least not thoroughly, for example in fundamental discussions of utility and welfare).


How has economics managed to ignore the social realm?

Economics prides itself on tracing and elucidating all of the effects, whether direct or indirect. So it's hard to understand how effects of scarcity and markets on communities and social goods could have been left out.


But even those (e.g., Johansson-Stenman 1998) who point out that humans act in a social context -- and hence that we may need to go beyond reductionist individualism (also known as "methodological individualism") -- often miss social goods and social utility, being usually more concerned with social capital.


Welfarism -- including individualistic or welfaristic social-welfare functions -- also comes close to the issue of community, without quite finding it. We can accept that we should consider only the welfare of individuals without in any way denying the importance of the welfare of communities, because if the communities suffer, so will the individuals. But we will have to consider the effects of social goods on individuals, or we will miss something of fundamental importance.


Ironically, where we seem to finally eliminate social goods is in the restriction to the Bergson-Samuelson "social-welfare" function, which excludes externalities (and, failing to recognize social goods, accepts only consumption of market and public goods).


And the key is indeed "methodological individualism", which economic sociologists Smelser and Swedberg (1994, p. 5) characterize as "the actor is uninfluenced by other actors", or, in the words of economic anthropologists Douglas and Ney (1998, p. 5), the actor is "a generalized human individual conceived as nonsocial or presocial".


Economist Frank Knight (1921/40) -- who spelled out the assumption clearly and honestly -- put it this way (p. 78, italics added): "Every member of society is to act as an individual only, in entire independence of all other persons. To complete his [sic] independence, he must be free from social wants, prejudices, preferences, or repulsions, or any values which are not completely manifested in market dealings."


What a nice simple (or perhaps not "nice", but simple) world it would be.


Empirically it may be difficult to include the social realm in economics


It is of course convenient for neoclassical theory to omit communities and social goods because, admittedly, dealing with them would be messy. Just as with many aspects of environmental economics, communities and social goods are not easily quantifiable. (And as environmental economics attempts to implement community-based environmental measures, the overall results may be still harder to measure.)


But in thus being "clean" and easily measurable, neoclassical theory is also sterile, and sterility isn't especially attractive to students. Including communities and the social goods derived from them in utility and welfare theory (or, to the extent that they cannot be included, at least openly acknowledging and discussing the implications of their omission) would make neoclassical economics vastly more interesting to students. It would also greatly improve the real-world applicability of any policy conclusions derived. Just as environmental economists have taken the plunge into less easily measurable aspects of welfare, so must we develop social economics.


It's deceptive not to include the social realm in economics

For economic theory to leave out communities and social goods while presenting itself as the theory of scarcity and markets is fraudulent. Intentionally or not, language such as the following is deceptive:

·         "social welfare", when communities (the basic social units) -- and the social goods derived from them -- are overlooked;

·         "complete contracting", when the fact that there are (and can be) no contracts for social goods is overlooked;

·         "universal markets", when the fact that there are (and can be) no markets for social goods is overlooked.

These and many similar usages give economic theory an air of dishonesty (and unreality) which cannot help its public acceptance or genuine usefulness.


Including discussion of communities and social goods in fundamental discussions of utility and welfare could help to dispel that air of dishonesty and unreality by alerting students and others (including policy-makers and the ultimate consumers of policy-advice, the general public) to the many real social issues beyond the more narrowly "economic" ones which current theory and practice address. It would also help to liven up the subject.


Including the social realm is a matter of intellectual honesty and rigor

Including communities and social goods (or at least including a thorough discussion of the consequences of their omission) in fundamental discussions of utility, in policy recommendations about welfare, and thus in resulting public debate, is not a matter of whether or not one "likes" (or "believes in") markets. It's a matter of intellectual honesty, and of -- dare I say it -- rigor.





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