Economics

In modern usage, the term “economic” has several meanings. These different meanings are not exclusive, yet each is a core idea that anchors a distinct approach to defining the subject matter of economics.

First, the term economic is sometimes used to refer to a way of doing things, as in the word “economically.” If we use the term in this way, it carries the connotations of efficiency, minimum effort, and close adaptation of means to ends. Second, the term economic sometimes refers to a kind of activity, usually aimed (as in production) at acquiring things we want or need. The term “provisioning” expresses this sense of what is economic. A third usage of economic ties it to market institutions. These institutions seem to embody most forcefully the achievement of efficiency in the activities aimed at acquiring for us the things we need. Economists often argue that we will be most efficient in satisfying our wants if we organize the process through market institutions. Mancur Olson notes that in nineteenth-century Britain, the very word “economist” was taken to mean an advocate of laissez-faire and “the belief that economic theory is applicable only to goods that fetch a price in the markets of capitalist economies... [that] has survived to the present day” (1969: 140-1).

These three meanings of economic do not map neatly onto schools, theories, or approaches. Nonetheless, each theory tends to favor one of the meanings over the others. Because of this, we can learn something important about the differences between theories by exploring the different ways we use the term economic.

Conceptions of economics

Economic calculation. The first meaning of “economic” directs our attention to a way of thinking and an associated orientation of the individual to the world. Sometimes termed the “economic approach,” this way of thinking seeks to understand human action as an effort to achieve given ends in the face of external constraints. Such constraints originate in the limited supply of means, or resources. How well we can satisfy our wants depends on the means to which we have access. This depends both on what is available over all, and on the part specifically available to us. The latter depends on the way society defines property rights and allows property to be allocated among its members.

Economic calculation is a way of utilizing what is available, given wants. It is a way of judging institutional arrangements for using available means according to how well they satisfy wants. It is also a way of understanding social action as the outcome of private calculations of the likely impact of action on private want satisfaction.

While currently dominant in economics, this approach has broad expres­sion in the social sciences. In sociology, Max Weber ([1956] 1978) emphasized the link between rational calculation (understood as a relation of means and ends) and economic activity. His work provides a broad perspective on the link between rationality, efficiency, and the definition of the economic ad­vocated by many modern-day economists.

When based on the idea of calculation, economics defines its subject matter in terms such as efficiency and constrained choice. Economics in this mode begins with the activity of a choosing agent, the individual, attempting to do the best he can to satisfy wants to the greatest degree possible in the face of opportunities and constraints. From this starting point, analysis proceeds to consider the implications of want satisfaction in the context of a group of individuals characterized in this way. The better we adapt our means to our ends, the more efficient we are in using our resources.

This way of thinking about what is economic has a static quality that follows from the notion of limited resources and given ends. Economizing is a way of adapting to the way things are, not a process of change and devel­opment. The central metaphor is allocation. We attempt to allocate our means among our ends so as to achieve as much as we can with what we have. “Economizing” carries this connotation of constraint captured in the maxim “There’s no such thing as a free lunch.” If we are more efficient, we can sometimes get more with what we have, but we cannot have more. If we could, we might orient ourselves toward getting more rather than using efficiently what we have.

Joseph Schumpeter (1942) made the point that an inefficient system might grow more rapidly and in the long run achieve higher levels of productivity. Schumpeter thought that capitalism is such a system because monopoly gains from entrepreneurship stimulate innovation. In his theory, inefficiency im­plied in monopoly is necessary to economic development. If this is so, the goal of efficiency recedes in importance. Our first notion of the economic rejects this claim and holds that the economic problem is that of doing better with what we have.

The approach to economics centering on the notion of calculation is dis­tinguished by its static orientation, with emphasis placed on constraints and allocation. It is also distinguished by its generality. Unlike the other two ways of thinking about what is economic, this approach makes the term broadly applicable to human affairs. Indeed, it becomes a way of thinking about all of our activities. The approach centering on calculation makes constrained choice virtually synonymous with human action. This attribute is of special importance for political economy, which concerns itself with the boundaries between economics and politics. Identification of economic with a way of calculating implies no restriction of the economic to particular sets of human relations and activities.

Within the means-ends framework, understanding why people do what they do means knowing their ends and the means available for them to achieve those ends. Because we can characterize all human action and motivation in terms of the ends pursued and the means available, the link between the economic and the act of economizing makes all human action potentially economic. This link makes it possible to evaluate instrumental action ac­cording to economic criteria: Is it efficient in its use of means to achieve the stated ends?

Weber emphasizes the rise of economic calculation and what he terms “instrumental rationality” as the hallmark of the modern age. Modern man relates to the world outside as means to his ends. Thinking about and un­derstanding the world resolve themselves into making calculations of the way we can best use it for our ends. Rationality is instrumental when it treats things and other persons as means and not ends in themselves. Economists working within this framework assume that individuals adopt an instrumental attitude. They explain human behavior and judge human institutions ac­cording to an economic calculation of outcomes. In principle, this approach can be applied to any human behavior and to all human institutions. Econ­omists and other social scientists influenced by this vision have applied it to political processes and personal life (marriage, voting, suicide) as well as to economic affairs more narrowly conceived.^[2]

While economists who understand their subject matter in the language of calculation treat the problems of production and circulation of goods as instances of economic activity, they do so not because such activity is in­herently economic (as would be implied in our second meaning), but because it can be interpreted on the basis of the notions of choice and efficiency.

Material provisioning. The second usage of the term “economic” characterizes earlier thinking about economic activity from Aristotle to Adam Smith and Karl Marx. It also motivates the work of modern economists influenced by the older traditions in economics.^[4] These economists also use the term “eco­nomic” to refer to a kind of activity. They identify this activity not by its characteristic mode of calculation, however, but by its purpose: the produc­tion and reproduction of goods, or the material provisioning of wants. Econ­omists working within this framework do not deny that activities can be done more or less efficiently. They do, however, consider production of the ma­terial things needed to sustain life economic whether or not it is done effi­ciently, and whether or not those engaged in it are conceived as making choices.

This approach tends to equate economic activity with the “material life process of society” (Sahlins, 1972:xii) and with concern for the “material, substantive, things that sustained human beings” (Polanyi, 1957:83). The interpretation of economic life as a process of material reproduction receives its most general and deliberate formulation in the work of Karl Marx. For Marx, “it is quite obvious from the start that there exists a materialistic connection of men with one another, which is determined by their needs and their mode of production, and which is as old as men themselves” (1964:41). Notions such as material life and material connection refer to the processes by which the members of a social order participate in the activities that lead to their collective reproduction.

This emphasis on the “material” merits further consideration. From a modern-day standpoint, identification of wants with material things seems less compelling. Many of the goods economies provide (information or entertainment, for example) are not primarily material. During the period of the classical economists (considered in Chapter 2), however, the material dimension dominated, and it was not unreasonable to assume that provi­sioning of needs was a matter of providing things in appropriate material form.

A more general interpretation of the idea would focus our attention not on the physical makeup of goods, but on the use of our human energies in providing them. This provision of goods has two important dimensions: production and circulation. Economic activity either produces the goods that satisfy needs or moves those goods from those who produce them to those who need them. This latter is the circulation of goods most often identified with exchange.

The physical makeup of a good does not determine whether we use human energy to create it or whether it can circulate from owner to owner. Property rights in nonmaterial things (such as ideas) also change hands, and in this sense circulate from one owner to another. Thus, we can employ the pro­visioning idea whether or not we think that most wants demand material things for their satisfaction.

Yet the spirit of the provisioning approach emphasizes material goods over nonmaterial, often giving the former a special status and larger role in eco­nomic affairs. While not inevitable, this emphasis follows naturally from the perspective that sees provisioning as a kind of material circulation of the things necessary to sustain life - to provide nutrition, warmth, and shelter. The provisioning approach focuses our attention on basic needs and the goods that sustain life in its more elemental senses.

The term “material connection” depicts the relation of person to person and of the individual to social institutions in a way different from that of economic calculation. This difference centers on the perception of individual agents and of the constraints in which they operate. It also centers on the way the agents are understood to relate to the social structure and material universe that sustain them. We will briefly consider each of these differences.

When we identity the economic with a way of calculating, we immediately place emphasis on the mental processes of the individual agent who does the calculation. That is, the economic occurs in the mind of the agent, or at least it begins there. Further, the specific calculation centers on subjective ends ultimately known only to the individual. We outside know them only by inference from the actions taken in their pursuit (the choices made by the agent tell us something about his preferences). In the provisioning concep­tion, the economic does not refer us to an attitude or mode of calculation on the part of the individual, but to a systemic process.

In this framework, the starting point is not the individual and his pref­erences, but the system or structure of reproduction of the society as a whole, or at least of that aspect of society tied to satisfying wants. Here, we imagine a system of interconnected needs determined not by the individual’s private, subjective life, but by objective social facts. What we need depends not on our subjective lives, but on our place in a larger structure.

The classical economists discussed in the next chapter provide us with two instances of the structural or objective determination of wants: the placement of the producer in a social division of labor, and the placement of the indi­vidual into a social class. Placement of the producer in a social division of labor refers to the way he depends on other producers for inputs needed to produce his specific output - how the carpenter depends on those who provide wood, nails, glue, paint, and other things needed to make a table, chair, or house. The producer’s needs do not depend on his subjective preferences, but on what he produces and the technique used to produce it. Knowing what he produces and the technology determine the nature of inputs required. These required inputs are determined objectively, and the need for them is likewise determined objectively. The economist influenced by this way of thinking tends to focus on the objective determination of wants within a system of the reproduction of a social division of labor.

The emphasis on provisioning links motivation to need rather than choice. Through our economic pursuits, we seek to acquire things we must, in some sense, have. These objects are requirements of life. As such, we do not prefer to have them, or simply choose the best option among numerous alternatives. Instead, we do what we must to assure provisioning of our needs.⁵ Choice and preference fall away, and with them the framework of thinking favored by those seeking to identify economic with a form of calculation.

Even within the provisioning framework, of course, there remain wants not immediately linked to reproduction of a division of labor: the wants of the individual for means of consumption. Economists favoring the calculation approach direct our attention to these wants and interpret them in terms of preference and choice. The classical economists, or those influenced by their method, do not operate this way. They understand consumer wants to be determined socially and objectively rather than individually and subjectively.

To arrive at this social determination, theorists generally refer us to the class position of the individual, especially his position with regard to own­ership of the means of production. In Marxian language, your class position depends on whether you own and gain your income from capital or whether your only property is your laboring capacity. If the latter, then you are a worker and your consumption needs are determined by the “subsistence.” The subsistence is an important idea in models such as these; we explore it somewhat further in the next chapter. For the moment, we introduce it only to emphasize that the idea of a worker’s subsistence allows us to circumvent any reference to the subjective state of mind and preferences of consumers

For a further discussion see Levine (1988:ch. 1). when we think about the consumption needs of most of the population. What these consumers need is their basic subsistence - food, clothing, shelter - in a form and amount determined by objective social, historical, and cultural factors. Differences among individuals have less importance than social prac­tices in determining what workers eat and wear or where they live.

Reference to class position and to the social division of labor solves prob­lems in the material reproduction approach that are correspondingly solved by notions of subjective preference and choice in the economic calculation approach. It solves those problems in a way that places less emphasis on choice and calculation of how to maximize satisfaction, more emphasis on objective structure, objective needs. The activity of the agent is understood differently in this second conception of the economic.

How we understand constraints also differs here. This difference stems from a shift toward a more dynamic conception of economic affairs, one centering on reproduction and growth rather than allocation.^[5] The notion of fixed resources for satisfying wants plays little or no part. How much we have available to satisfy wants depends on how much we invest in production of goods. Without a notion of fixed means, it is difficult to apply the econ­omist’s notion of efficient allocation. Inputs are themselves products of past production, rather than given resources. This shift alters many of the basics of the analysis in important ways.

Piero Sraffa suggests this shift in the title of his short essay toward a critique of economic theory, Production of Commodities by Means of Commodities (1960). Sraffa’s framework is one in which needed inputs to production are themselves produced. The emphasis is on reproduction rather than allocation. What constrains the system is not limited resources, but the history of the economic process. In particular, the historical constraint has to do with the size and utilization of the economic surplus.^[6]

The term “surplus” refers to the difference between output and the nec­essary costs of its production. If we take the total product in a given period, the surplus is that part not needed as inputs for the reproduction of the same product in the next period. The surplus enters into the constraints of the system because its magnitude and use determine whether the economy grows or remains the same.

With a positive surplus, the opportunity exists for investment in additional inputs that will make the level of output increase in the future. The surplus is a fund for investment and economic growth. It represents the potential to break the constraints on want satisfaction built into the existing level of economic activity. The economic problem is not primarily that of using existing available inputs efficiently (this is more of a technical or engineering problem), but of assuring the investment of the surplus so that the quantity of inputs available will increase. Thus, constraints have an historical quality about them: how much has been invested in the past, and how much is currently being invested.

Identification of the economic with reproduction of a system of provisioning of wants takes us in a different direction than does the idea of economic calculation. Both see the economic as a kind of activity, but the nature of the activity varies in significant ways. Our third way of thinking about what is economic does not identify it simply with an activity, and thus takes us in a distinct direction.

The economy. The separation of society into an “economy” and a “polity” does not flow directly or inevitably out of either of the two approaches considered so far (although it probably fits more easily into the approach that identifies economic with provisioning rather than calculation). The idea of the economy as a socially and historically specific institution is, nonetheless, an important one. When we speak of the economy, we already assume the existence of a separable entity: a place (perhaps the market if we can consider that a place), a sphere (as Marx would have it), a moment of the whole in the Hegelian sense, a distinct set of relations between persons not in essence political or familial.

This usage parallels the historical emergence of the economy as a separate institution. Karl Polanyi, more than any other contemporary thinker, has drawn our attention to this aspect of modern social organization.

A self-regulating market demands nothing less than the institutional separation of society into an economic and political sphere. (1944:71)

As is shown in the next chapter’s discussion'of the classical approach, the argument for the self-regulating market is an argument for the separateness of the economy as an institution.

References to the separateness of the economy immediately invoke objec­tion and doubt from those convinced that the modern project of political economy is to rethink that separation and explore the interpenetration and integration of economic and political processes. Because of this, the third sense of the economic, since it insists on separability, raises most clearly the central theme of this book. It will prove helpful, therefore, to explore it more closely to assure that we are clear on what separateness connotes.⁸

Separateness of the economy does not mean its independence of the other aspects of social life. It does not mean that the economy can, in fact, stand

See Levine (1989). alone. Even those economists most committed to the idea of market self­regulation maintain that the market depends on the state for a set, albeit a limited set, of requirements for its own survival. Adam Smith insists that the state not only maintain internal order and security from foreign invasion, but also engage in substantial public works where the private sector lacks the means needed given the scale of the project. Separateness does not, then, mean either autonomy or the absence of significant state involvement in economic life.

In order to understand what it does mean, it may prove helpful to suggest an analogy. When we speak of the separateness of persons, of their autonomy or independence, we do not mean that they could survive by themselves, that they are not in important ways socially formed and determined, or that they relate to others with indifference, unaware of the ways in which, together with those others, they form a single larger whole. We mean instead that each is recognizably distinct, related to others yet different from them. Sep­arateness allows us to speak intelligibly about the individual.

The same holds for the separateness of the economy. It means that the economy is distinct, different from, and not equivalent to polity or family. When engaged in our economic affairs, we are not directly engaged in family life or politics. This holds true when the economy is indeed separate, even though our economic affairs presuppose a political and legal framework. Considering it separate allows us to talk intelligibly about the economy.

The reality of an economy as a distinct system of relations is not contingent on individual preferences and choices. Economic institutions endure; indi­viduals find their way in and through them. Individuals may not form them as means to satisfy their wants, although economic institutions have a purpose bound up with want satisfaction.

When we refer to “the economy,” then, we move away from the more individualist methodology favored by those who identify economics with a mode of calculating. The notion of an economy understands it as an enduring social reality of its own kind capable of influencing, forming, and even de­termining motivations and ways of thinking. The economy has its own social purpose irreducible to those we associate with politics and family life. This purpose is not contingent on the preferences of agents or the universal de­mands of material reproduction. We can think of preferences and of material reproduction without thinking about the economy. When we think about the economy, we must have in mind something more than, and something different from, the central concepts of economic calculation and material reproduction. What is this something more and different?

The answer refers us to the institutions of private property and contract. These institutions involve us in a distinct set of relationships with others and in a specific orientation to our private ends. The economy is a sphere of

pursuit of self-interest, a place that validates preoccupation with our private concerns. The relations we enter into are normally understood to be instru­mental to those private concerns. This makes the economy at least potentially a set of relations between persons distinct from the social relations that connect persons politically or personally.

For this reason, Polanyi links the separateness of the economy to the prevalence of the institution of contract. The economy connects independent property owners pursuing private interest through the use and exchange of their private property. So long as family and polity are not formed by links of exchange and pursuit of self-interest, they are not part of the economy. Neither, then, is the economy part of family or polity.

Thus, so long as we think the buying and selling of votes is antithetical to the political process, voting is not part of the economy. We can impose other demands on the election process than those associated, in the economy, with self-interest. Similarly, so long as we consider it inappropriate to treat the family as a sphere in which members pursue their respective self-interests and contract one with the oth⅛, we do not consider family a part of economy. If we treat family members as ends in themselves, such relations are not instrumental and not subject to economic calculation. When we recognize the obligation, in certain spheres of social interaction, to treat others as ends, we narrow the domain of economy, separating it off as a distinct sphere.

If we understand the economy as an enduring reality, we can begin to think about institutional imperatives built into its structure. Such institutional imperatives do not derive from the preferences of individuals. We can derive the goals of social structures from individual ends only if we make the struc­ture contingent on those ends. This would violate the notion of the structure as an enduring social reality. The structure precedes the participant. If the actions of the participant are to be intelligible, that intelligibility must stem from attributes of the social structure that envelop him. One way to put this is to note that this approach implies that the economy understood as a struc­ture sui generis moves the individual according to its own structural imper­atives and that economics needs to consider what those imperatives are. We will pursue this possibility further in the next chapter. In anticipation of that discussion, we mention here some salient features of the problem.

The end or goal most closely associated with the institutional reality of markets has traditionally been that of capital accumulation and economic development. Adam Smith considered accumulation of wealth the main jus­tification for free-standing markets. Within such institutional arrangements, individual self-interest works for the goal of the maximization of the national revenue. Karl Marx continues this theme of the revolutionizing impact of market economy in his famous discussion of the progressive mission of cap­italism in The Communist Manifesto (Marx and Engels, [1848] 1955). And, in the twentieth century, Joseph Schumpeter developed his argument for capitalism as a system of change and development whose raison d’etre was the transformation of the methods of production, the means of consumption, and the forms of organization of economic institutions.

These classic contributions to economics all treat economy as an organi­zation that drives us in a particular direction, and economics as primarily the study of the logic of that organization and the ends likely to be achieved by it. This is the logic of the self-regulating market, the sphere of voluntary contractual relations between property owners including owners of labor and means of production. The institutional reality of the (market) economy be­comes the subject matter of economics.

Economics and political economy

The three different meanings of economic bear on how we think about the relation of economics to politics. It is not simply a matter of how we relate economics to politics, but of what we mean by the terms. How they are related follows from how we define and use them.

When we use “economic” in the sense of economic calculation, then politics becomes one place to apply such calculation. Economics is a way of acting, politics a place to act. In politics, we can exhibit economic behavior or not. If we do not, however, this poses a problem for those who identify economic with a form of calculation. For them, the intelligibility of our action depends on the connection between means and ends. The action becomes intelligible when we can show how it follows from a means-ends calculus. If action does not make sense in this way, it does not make sense. Thus, if it is not ultimately economic, it does not make sense. Those favoring this approach tend to assume that economic refers us to a basic perspective on human motivation and behavior so that it is necessary to assume economic calculation in both if we are to think coherently about politics or markets.

One result of placing emphasis on economic calculation is that economics tends to dominate. The economic approach explains what we do and why we do it. Politics simply describes the context. If we wish to explain politics, we need to think in terms of economics. This dominance of economics ex­presses an important and enduring theme of political economy as we suggest in the Introduction. Political economy has been less about the interrelation between economics and politics understood as separate endeavors, more about the subordination of the political to the economic.

This dominance clearly has to do with the necessity, given the identification of the economic with a mode of calculating, that we start out with the interests of the individual agent when we attempt to explain both individual and group activity. Emphasis on calculation leads to emphasis on subjective preference, individual motivation, and self-interest. The approach centering on calcu­lation necessarily involves us in a method that starts from and refers back to individual states of mind and calculations.

The use of economic in the sense of calculation works against the idea of the separation of the economic from the political. It tends to expand the terrain of application of economics well beyond its traditional boundaries either in market relations or in the material provisioning of wants.

The idea of material provisioning does tend to limit the economic and thus allow for a meaningful separation of economic activity from political. It does not, however, require such a separation. In some systems, material provi­sioning takes place within a political system and in some it takes place through familial relations. Indeed, in its original meaning, the term economic referred to household management. The reference was not to an economy, but to one of the dimensions of family life. Economic relations were also familial rela­tions. This statement makes sense within the provisioning definition of the economy.

The generality of this approach allows it to consider economies separate from or integrated into the political system. At the same time, the approach exhibits some difficulty in conceiving of the economy as a system of social relations. Thinkers following the logic of the notion of provisioning tend to attempt to do so in technical-material language - for example, depicting economic activity in the framework of an input-output system. This makes the social world of the economy an external context within which economic activity takes place. The term economic tends, then, to refer us to nonsocial relations that follow nonsocial laws.

The third approach, as we have already seen, emphasizes the separateness of the economy. It focuses our attention directly on the social relations that define economic affairs and not on pre- or extrasocial processes variously integrated into the economy or left separate. This approach gives up the generality of the first two in exchange for a deeper social rooting of the economy. Here, the economy is one social sphere, rather than material activity or private calculation situated in relation to the genuine social realities of life outside of economy.

We can refer to this approach as a kind of benchmark precisely because it does emphasize the separateness of economy rather than its merger into the other social realms. It allows us to focus attention on the implications of (1) the modern penchant for diminishing the separateness of the spheres of social life, and (2) the associated tendency to make one or the other (often the economic, as we have seen) dominant.