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THE SITUATEDNESS OF ECONOMIC RELATIONS Stephen Toulmin (Los Angeles)
Skebo meeting: May 1997 Introduction Looking back at political debate and policy formation in our time, historians will be struck by the hegemony of economic theory. This belongs, not to all economic theory, but to one system of economics in particular: viz. neoclassical equilibrium economics, which has developed a body of analysis, and algorithms, that are applied to situations and problems of any kind, in any country, regardless of social and cultural differences. For the economists immediately involved, this system of theory has the same authority over all more specific human and social sciences that basic physical theory has over all more specific natural sciences: as regards all human problems (that is) it presents itself as the Master Theory. Recently, one familiar outcome has been the dominance of a particular concept - that of the "market" - which is offered as the key to successful reform of political theory and practice: above all, in countries or regions whose policies were for long distorted by an excessive commitment to centralized control. So by now we are accustomed to debates on national and international policy that end in appeals to the virtue of "market forces" and so on. Such arguments assume that market phenomena are universal and general: operating with equal force in all countries and times, without regard to intangibles like social history or cultural tradition, let alone religious customs and institutions. So, the soundness of many current policy decisions depends on the strength of this particular style of economic theorizing: meanwhile, conversely, the limitations of such theories undermine their practical applications, and throw doubt on their policy implications.


Taken in its own terms, the question whether economic theories of market behavior apply equally to all kinds of social communities and economic exchanges has for long - if intermittently - been a topic of contention for writers on economic ideas: e.g. George Polanyi or Frank Knight. Yet, although the issues they discussed and the doubts they raised about the universality of markets are useful, their discussions were inconclusive, and it is time to go behind the idea of "markets" and look at other, deeper questions about the foundations of theoretical economics.


One starting point is Adam Smith's essay on Astronomy, which explicitly points to Isaac Newton's Principia Mathematica Philosophiae Naturalis as the intellectual system that can best serve as a model for an as-yet-to-be-constructed science of human society. Here, we see how the Newton's axiomatic treatment of dynamics and planetary motion won the place in the methodology of the social sciences, as a paradigm of explanation, that it still preserves in the current Age of Economics. This Newtonian model takes it on faith that a rational theory of the universe will prove that the Solar System is stable, or in equilibrium. What Newton's mathematical arguments were required to reveal was the exact balance of centripetal and gravitational forces that maintained this equilibrium. Newton wrote with some pride of this proof in the General Scholium that he added to the 2nd edition of the Principia: by contrast, Leibniz attacked his theory only because it did not fully succeed in demonstrating the "mathematical necessity" of that equilibrium. (As we know, of course, the "n-body problem" made Leibniz's demand infeasible; but that is another story.) Relying on a Newtonian model defined what was to count as rational or rationality in the human sciences of the future: Adam Smith's founding theories set an example of "equilibrium analysis" that has, ever since, been seen as classical. What is not noticed, however, is that calling Newtonian physics "classical" contrasts it with those theories in contemporary physics - relativity theory, quantum mechanics and (more recently) chaos and diversity theory - that differ from Newton's analysis, precisely, in not embodying any assumption of equilibrium. For a long time - it is true - most branches of physics continued to assume that changes typically take place uniformly; but the development of non-linear mathematics and chaos theory undercuts even that assumption. Meanwhile, biologists focussed more and more on changes of an historical kind. Even the belief that the planetary system was - and rationally must be - in equilibrium did not long survive Newton. In 1755, Immanuel Kant published his monumental Allgemeine Naturgeschichte und Theorie des Himmels: this extended Newton's modes of argument in ways that generated an historical cosmology. In geology, too, the next 75 years saw Hutton, Werner and Buffon developing speculative histories of the Earth, and even life histories for the different planets; until, finally, the Philosophy of Nature was irreversibly historicized in Charles Darwin's Origin of Species.


As an ultimate irony, the branch of mathematics that still studies the ramifications of the Newtonian theory for their own elegance, ignoring the embarassing fact that they no longer have any relevance to the world of Nature, is now called "rational mechanics". In physics, allusions to the "rationality" of a mathematical inquiry may thus indicate that the writer no longer cares about the empirical relevance of its results. They are rational only in the sense of being formally systematic, not of explaining anything in the world of Nature. (Elsewhere, we might ask whether "rational choice theory" has any more to do with reasonable decisions than "rational mechanics" has to do with actual motions.)


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My purpose, here, is to raise questions about the universal relevance of neoclassical equilibrium economics. I offer a series of vignettes showing the limitations of this style of theory: in its current practical applications, these are more serious in actual fact than is commonly admitted, and we can escape damaging errors and distortions, only if we are ready to "de-universalize" the applications of economic analysis to practical issues - i.e. treat them as specific aspects of the social, cultural and historical situations in which they are located in real life.


Vignette #1: Bali This first vignette combines several of the difficulties that afflict contemporary economic analysis, which I will try to sort out and illustrate later, in simpler cases. I have an anthropologist friend, with a Dutch wife, who does field work on Bali. His research has been on the system of "water temples" whose priests - by tradition - controlled the shedule by which irrigation water was shared between the rice fields of different farmers or communes. For 800 years, these temples were a central feature of Balinese society; yet the Central Government of Indonesia - the former Dutch colonial administration as much as the Indonesian Government today - treated the water temples as "cultural monuments", and never saw them as having any economic significance. In the late 1960s and early 1970s, the Indonesian National Government decided to introduce to Bali, on a massive scale, the new strains of "miracle rice" developed at the International Rice Research Institute in the Philippines. So - - my friend points out --


Balinese farmers were forbidden to plant native varieties . . . Instead, double-cropping or triple-cropping of IR-36 [or similar varieties] was legally mandated. Farmers were instructed to abandon the traditional cropping patterns and to plant high-yielding varieties as often as possible. With this policy went a major engineering project, launched by the Asian Development Bank in 1979, and based on a report by consultants in Milan, Italy, and Seoul, Korea. From a purely technical and economic point of view, this project was a perfectly good - a strictly "rational" - recipe to increase rice production, and so help make Indonesia self-sufficient in rice, which was the aim of Government policy. What happened? For two or three years the policy succeeded as forecast: the rice crop soared and farmers put money in the bank. But in the 1980s the local authorities began to record "explosions" of insect pests, and infestations of funguses, both old and new. Soon, all the Biblical plagues of Egypt were afflicting the farmers of Bali : By the mid-1980s, Balinese farmers had become locked into a struggle to stay one step ahead of the next rice pest by planting the latest resistant variety of Green Revolution rice. Despite the cash profits from the new rice, many farmers were pressing for a return to irrigation scheduling by the water temples to bring down the pest populations. But to foreign consultants at the Bali Irrigation Project, the proposal to return control of irrigation to water temples was interpreted as religious conservatism and resistance to change. The answer to pests was pesticide, not the prayers of priests. Or as one frustrated American irrigation engineer said to me, "These people don't need a high priest, they need a hydrologist!" Until matters reached crisis point, economists at the Asian Development Bank did not admit that the traditional irrigation schedules operated by the water temples might be functional: what "worked" was not the prayers of priests, but centuries of experience embodied in the schedules. As they first saw it, temples - as "religious" institutions - must be economically irrelevant; so this was a hard lesson to learn. Don't misunderstand me. I do not tell this story out of any dislike for technology: I am not a "machine breaker." I do so to illustrate another point. We too easily assume that economic and technical issues can be abstracted from their situation: that we know in advance what things are, or are not, economically and technically "relevant" to policy decisions. If engineering and economics are scientific (we assume) their principles will be universal: the view from Milan, Italy, or Seoul, South Korea may, thus, be not less but more clear-sighted than the view on the ground, in Bali itself.


As a result, the decision to replace the traditional planting and irrigation schedules by uncošrdinated multiple cropping had the effect of destroying, at a stroke, both the material of Balinese culture - structures and practices developed over the history of the Island,to minimize the exposure of crops to insects, diseases, drought, flood and other natural enemies; and the moral infrastructure of Balinese society - the institutions that embodied the people's respect for traditional customs. At the same time that the crops were blasted, the loyalties of the people were undermined.


Vignette #2: Cairo A second, more cheerful story helps to focus our attention on a related point. Until recently, all waste disposal in Cairo, Egypt, was the work of a community of rag pickers and trash haulers known as the "Zabbaleen". These people camped on top of refuse dumps, and lived in the most horrible conditions. They were, to quote from a recent report to the UN Development Program by the NGO known as "Megacities" - a marginalized and undervalued community with little or no organization or power [that] suffered from environmental devastation, little economic opportunity, lack of education, and a host of other problems endemic to urban slums. The original Zabbaleen had been landless laborers from Upper Egypt, who ended up in Cairo and picked up a living as they could. When the City's refuse overwhelmed their efforts, local and global agencies - their own self help organizations, together with the Ford Foundation, the World Bank International Development Association, Oxfam, and Catholic Charities - jointly sponsored the Zabbaleen Environment and Development Program. This transformed the Zabbaleen mode of life: their ways of handling refuse were updated, new brick homes were built, educational classes were started, and their whole social and economic baseline was raised. Many American economists and politicians would caricature this transformation of the community as a hand out: not a wise investment with prospects of solid economic return, but welfare payments unjustified in economic terms. Yet the Zabbaleen are not the only people whose lives the Development Program improved. All Cairo benefited. Even in the narrowest economic terms, this Program transformed the "market"; and the Zabbaleen now became consumers. Their new manner of life brought to the City, not social improvement alone, but also prosperity. By helping the Zabbaleen to a decent life, the Development Program thus helped, not merely its immediate beneficiaries, but the entire City and Country.


Here again, the crucial point is the interrelations of the material and social changes. American economists see the first - material - aspects of the changes as an "investment" capable of yielding a financial return; but the idea of "investing in people" sounds too like charity, and therefore presumably uneconomic. As we shall see, this distinction between material and social investment is easier to define than to apply.


Vignette #3: Boston There is another, more basic reason, too, why economic forecasters find it hard to evaluate the kinds of change involved in the Zabbaleen project. The very possibility of "economic forecasting" - using the standard methods of neoclassical equilibrium theory or theories in the Marxian tradition, too - depends on initial assumptions. In particular, we can compute the outcomes of industrial activities in economic terms, only if we can assume that, for the time being, the state of technology does not significantly change: currently, economic forecasters have no way of estimating the effects of technological changes in advance. This need hardly surprise us. What algorithm could have forecast the exact results of the transistor, the contraceptive pill, or lasers? For policy purposes, this limitation - like the "n-body problem" in physics - hid from view the possibility of unforeseeable changes: what it is fashionable these days to call "chaotic" events. Nor is this a chance similarity. Like the uniformities of "classical" physics, the stability of technology is a basic assumption of "classical" economics; and is equally vulnerable to criticism in the light of contemporary "post-classical" analysis. What is true of technological change is true of changes in the material infrastructure of the economy. When I arrived in Boston thirty years ago, the Massachusetts State government had just decided to build a Ring Road round the City: this was allotted the number "128". At the time, economists and politicians greeted this decision with scorn: Route 128 (they said) was a road from nowhere that led nowhere. What happened next? Cabot, Cabot and Forbes, an imaginative development firm, picked on the new Route 128 as the location for a pioneer science-based industry park. Fifteen years before Silicon Valley, it was the place where Harvard and MIT scientists experimented on technological applications of their discoveries - for instance, Charles Townes's new-found lasers. The spectacular success of Cabot, Cabot and Forbes's decision was one that no economic algorithm would enable us to compute: it was a radically unpredictable source of new prosperity for the Boston area.


At a time like the present, when the products of human activity on all levels are so much influenced by changes in material infrastructure and technology, it is paradoxical that the dominant theory of economics still clings to "classical" ideas about stability and equilibrium, and resists attempts to move it into the "post-classical" world.


Vignette #4: Holland Let me bring the lessons of these earlier vignettes nearer home, by applying them to a more familiar example. Consider the system of dikes and canals that controls the flow of water in the rivers of the Netherlands, and protects half its territory from being inundated by the North Sea or the Rijn and Maas Rivers. My first example - the Bali water temples - had the charm of the exotic, but the insights it leads to in no way depend on this fact. On the contrary: it is not at all far fetched to speak of the Netherlands system of dikes and canals as the material infrastructure of the Netherlands; nor is it far fetched to see the institutions that embody and support the Dutch water control system as its moral infrastructure. What guaranteed the feasibility of living in the Netherlands over these centuries is not just the physical presence and solidity of the dikes: it is the unthinking habits by which Netherlanders respect and value this system. Since Holland is habitable at all only thanks to this cošperative spirit, the Dutch are not accustomed to acting in purely self-serving ways. The story of the Boy with his Finger in the Dike may be dismissed as a sentimental myth: yet, in Winter 1995, the rest of the World watched admiringly as the threat of a major flood evoked from the Netherlanders their old and unthinking habits of cošperation.


Vignette #5: The valuation of everyday events These vignettes illustrate how economic theory deviates from - even misrepresents - the values we put on things in everyday experience. Do we value (say) "work" only "in the market" - only if a worker competes for the chance to be employed, and is then paid a monetary wage by the employer? Faced with that question cold, we may reply, "Of course not!"; yet dig a little further, and we shall find reason to think that much in current politics takes this measure implicitly for granted: this is one more unexamined presupposition behind current debate.


Unexamined? More exactly, too little examined. In the last few years, economists have at last begun to ask if their standard comparisons of value have not been faulty and misleading. In order for a transaction to be valued, must money always change hands? Recently, OECD (the Organization for Economic Cooperation and Development) issued a report which implies that these traditional economic indicators may, at last, need to be reconsidered. While driving home, I hit a lamp post and wreck my car. So, I make work for the tow truck and insurance assessor, and may even end by buying a new car to replace the one I lost. All these transactions involve payments and - in economic terms - generate "value": increasing the gross domestic product and adding to the country's economic prosperity. By contrast, if I drive home with care and keep my car in good condition, I deprive the national economy of the contribution I would have made by crashing. Does this make sense? Not much, but worse is to come. All the work a housewife or couple puts into family and home is unpaid. It makes no difference to the gross domestic product if this work was creative and productive, or slovenly and demoralized. In the economists' eyes, all such work goes on outside the system of national accounts, and doesn't count. More exactly, it isn't counted. It is good that OECD has seen - belatedly - that all these indices can be questioned. Yet we inherit generations-long time series that rely on just such questionable indices, and the economists' calculations still take them on trust. For these calculations begin only after all the crucial questions have been answered, or begged. They presuppose a certain technical measure of "utility" (and "value") which is built into the very concepts; and it takes a criticism like OECD's to challenge their relevance. Yet, if these economic measures are wrong, it follows that statisticians have been collecting the wrong figures, and our economic comparisons therefore lack a solid basis. People who have faith in economics should be unhappy about this discovery. Like the man who drops a coin in the gutter, and looks for it by the street lamp, because that is the only place he can see, they prefer to rely on misleading calculations, rather than no calculations at all.


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Two rival interpretations In this paper, I have been using a phrase that will be unfamiliar to policy analysts: moral infrastructure. Economists and politicians know about material infrastructure - the roads, bridges etc. that make production and commerce possible, even though no single business by itself can afford to finance them. The point our different vignettes help to bring into focus is this: that, in thinking about institutional continuity and social change, we must regard the material products of any culture as existing alongside, and interacting with, its habits of life. Students of organic evolution were at first distracted by the solidity of the skeletons that the paleontologists dug up, and thought too little of the activities of the organisms from which these material skeletons came. Those who study the economics of social institutions are, likewise, in danger of being distracted by the tangible products of social life - the Great Wall of China, the Bali water temples, the Dutch canal system, and so on - and so risk thinking too little about the human activities and customs of which they are the tangible products. Yet the dikes, pumps and canals of the Netherlands - like the irrigation canals, sluice gates and water temples in Bali - are functional because (and only because) of the place they hold in the institutions and culture of the country; and in both cases the "institutional and cultural location" of the water control system, today, is the outcome of more than 500 years of institutional and cultural history. These relationships have not, of course, escaped notice in Institutional Economics; but they are described in terms different from those used here. Instead of material and moral infrastructure, an economic contrast is drawn between different kinds of capital: rather than moral infrastructure, we are given "social capital". Yet this terminology has curious implications. When we apply the term capital, we see objects or systems as an investment: money is not spent on consumption, but saved and put to productive use. In the case of material infrastructure, this is reasonable enough. The resources invested in a sluice or lock gate are not available to pay for a new school or hospital: the choice which of the investments to make represents a genuine human decision. But the habits and attitudes (mentalitŽs) that motivate peoples are not something they "decide" whether or no to invest in. They are the fabric of their entire cultural and social situation, whose character defines the problems facing us in ways that demand a description drawn from history, not from economic theory.


The distinction facing us here is familiar to all those who work in clinical medicine. Biochemistry, physiology and the other "biomedical" sciences are valuable resources for physicians, in dealing with patients who arrive in their consulting rooms or hospital wards suffering from illnesses that must be diagnosed and treated. But the procedures that go into this diagnosis and treatment always begin with taking the patient's history: piecing together the story of the patient's life - personal and social, as well as medical - that is needed to throw light on his present condition. This history cannot be stated in terms drawn from scientific theory alone. It represents a genuinely historical document: about a particular individual, who was born here, lives there, had a Father who died at (say) 45 of a heart attack, works at such and such a factory, has mildly elevated blood pressure, smokes heavily, may have been exposed to an infection, and so on. Biomedical research workers also, of course, have good reasons to be interested in patients on a particular hospital ward: as objects of observation, useful for studying the "phenomena" of a given disease. But undertaking biomedical research on a disease is one thing; treating individual patients who may - or may not - be suffering from that disease is another, and the two tasks demand different styles of thought. In particular, the terminology used to describe (say) the physiological or biochemical features of "disease states" is insufficient for describing entire organisms, let alone individual humans, with their complex, personal backgrounds and characteristics. The problems I addressed in this paper thus raise questions about the methods and motives of theoretical economists on the one hand, and practical problem solvers on the other. Academic economists aim, above all, at improving the Science of Economics: not to solve particular practical problems, but to develop general theoretic explanations of (e.g.) transactions in a market: in this, they are like molecular biologists, for whom patients in a hospital ward are objects of experimental study. Practical problem solvers, by contrast, are like clinical physicians, for whom all particular patients have individual histories: general scientific theories are of limited help to them in diagnosing or treating their patients' ills. Orthodox economic theory is divorced from policy making because, in dealing with social or cultural situations and fitting general ideas to particular cases, economic theories take us only part way. Like the medical condition of a sick patient, the economic problems of a society or culture have a back history that is indispensable to their solution.


Like biomedical scientists advising physicians, economists advising policy makers thus have a clinical, not a scientific role. By now, most doctors recognize that Science and Clinical Medicine differ from one another; but in economic affairs we are not yet at that point. Conceived by Adam Smith at the high point of Modernity, and made more rigorous by mid 20th century positivists, the dream of Economics as a Hard Science is still in command, and the differences between timeless theory and local practice are not yet sufficiently recognized. This is true, at least, in advanced industrial countries like Sweden and the U.S.A. It is no accident that the most creative thinkers in development economics today - e.g. Partha Dasgupta and Amartya Sen - are not from a fully industrial country, but from India, where the cultural and historical matrix within which problems of development must be solved is evident to all. Even before the catastrophe in Somalia, Sen showed that famines are products of human failure (notably political breakdown) more than of natural disaster. Meanwhile Dasgupta has argued, on economic grounds, that the best investment a developing country can make is in educating its women, as the basis for sound, self sustaining institutions. So things are on the move. In particular, lenders like the World Bank are showing new interest in the "microcredit" movement, initiated by (e.g.) the Grameen Bank of Bangladesh, which makes small loans for local projects - notably to women community leaders whose default rate is minimal. What Dasgupta has argued in theory, the Grameen Bank confirms in practice: the contribution educated women make to a country's moral infrastructure.


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To end with my final Vignette #6, about an American cultural anthropologist who went to work in Japan: Why did he go, and what did he do? He went, because the Nissan Company asked him to run their strategic planning unit, and advise them about the best ways to break into the U.S. market. That's the whole story. Someone in Japan evidently realized that, in practice, all economic problems are cultural and social problems, too: strategic planning that fails to take this fact into account is shortsighted and unproductive. For people in Europe, as much as in the United States, this story is worth reflecting on for the light it throws on what Jean-Jacques Servan-Schreiber might have called le dŽfi japonais.


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