Sources of Contemporary Institutionalist and Evolutionary Theory: Four Unconventional Economists

12.2.1. Karl Polanyi

There are four economists for whom we have not found the right place in the panorama of contemporary economic schools: Karl Polanyi, Nicholas Georgescu-Roegen, Albert Otto Hirschman, and Richard Murphy Goodwin.

We have put them together because we are convinced that their resistance to classification is a characteristic that unites and defines them more clearly than might at first appear. And we have put them with the heretics as we believe that, among the qualities that unite them, the taste for heresy is not the least important.

We shall begin with Polanyi. Born in Vienna in 1886, of a Hungarian father, he spent his youth in Budapest, where he studied law and was politically and culturally active in radical-socialist circles. In 1919 he returned to Austria where, in the incandescent climate of Rote Wien, he defined his political leaning as a Labour-oriented Socialist. Here he worked as a writer and journalist and made his first important scientific contribution by taking part in the debate on economic calculation in socialism. With the advent of Nazism he emigrated first to England and later to the United States. He lectured in these countries between 1941 and 1944 and at the same time wrote his major work, The Great Transformation. In 1947 he began teaching at Columbia University. He died in 1964.

Polanyi is difficult to classify professionally; he was not a fully fledged economist, historian, anthropologist, or social philosopher, but was a little of each. His thinking was largely influenced by the anthropological studies of Malinowski and Thurnwald. From his knowledge of primitive cultures, he derived his conception of man’s eminently social nature and his organicistic vision of archaic and pre-industrial societies as giving expression to the realization of‘natural and human substance’. A community’s organizational structure serves to create social cohesion and human relations.

This idyllic view of ‘natural’ society lies at the base of the harsh critique Polanyi addressed to industrial capitalism, or rather, to market economies. In capitalism, economic activity becomes disembedded and the utilitarian justification for human actions acquires significance. A so-called ‘self­regulated’ market is created, in which the laws of supply and demand operate with ‘absolute ferocity’ to exalt productive efficiency and destroy society’s ‘natural and human substance’. In Polanyi’s opinion, there is nothing primigenial and pre-institutional about the market, whatever its free-trader ideologists may say. The market is, indeed, a set of institutions. As such, it cannot be set up without conscious intervention by the State authority. To be more precise, a ‘self-regulated’ market is one of the four fundamental institutions on which modern capitalism is grounded. The other three are: the Gold Standard system and related finance and banking apparatuses, which regulate the production of money; the State’s constitutional and lib­eral base, which regulates juridical relations; the balance of power system, which enables the market and capitalism to expand worldwide. Polanyi, incidentally, was one of the first theorists of capitalist globalization.

The latter three institutions play a decisive role in creating the ‘self­regulated’ market. Nevertheless, the modern market develops only when the three crucial ‘fictitious commodities’ of industrial capitalism are created: labour, land and money. These things, by their very nature, are not com­modities. Labour is none other than the expression of man’s social and creative vocation. Land is another name for ‘nature’ and was certainly not created by human activity. Money is merely a system of conventions. The State, through regulatory and coercive intervention, creates the institutions that regulate exchanges and determine the price of these three goods which, precisely in this way, become commodities. There is very little self-regulation in the ‘self-regulated’ market. It cannot be ruled out that the Marxian theory of fetishism in some way influenced Polanyi’s analysis of ‘fictitious com­modities’, but he developed this theme in a completely different direction from that pursued by Marx. He did not hold that capital generates fetishism by transforming everything into commodities in its drive towards self­valorization. His humanistic and naturalistic approach prompted him instead to criticise capitalism on account of its unnatural and dehumanizing nature. In reality, to the extent that the birth of capitalism is explained as the con­sequence of the artificial and intentional creation of the market and the three fictitious commodities, capital is seen as a consequence rather than the origin of fetishism.

Polanyi’s critique concentrated more on the market itself than on capit­alism. Again, the Hungarian theorist’s analysis of social classes widely differed from that of Marx. His organicist and functionalist conception of social structure induced him to consider class interests and class formation as processes generated by the interests of society and which might be either functional or disfunctional to its cohesion. The Marxian dichotomic con­ception of class relations, as governed by conflicting and basically irrecon­cilable interests, is a far cry from his vision of the world.

Instead the famous ‘double movement’ doctrine was developed. If it is true that ‘the market advances on the desertification of society’, it is likewise true that its destructive thrusts generate defensive reactions. Faced with the destructuring movement of the expansion and penetration of markets— worldwide expansion, penetration in the human spirit—society protects its cohesion by creating in turn associative apparatuses and bodies, organizations and institutions, to safeguard man’s social nature. Legislation directed at protecting the environment and regulating use of the earth; the Central Bank and its management of finance markets; antitrust regulations and demand-management policies, implemented to stabilize the macro economy; consumer protection agencies and associations; authorities dealing with the protection and care of children and the elderly; trade unions and civil associations that protect the interests of certain social categories; even great industrial corporations: these are all forms of social action which contribute to create that defence ‘movement’ with which society endeavours to contrast the devastating effects of the advancing market.

Polanyi did not only criticize the capitalist market, he also made important contributions to exposing the ‘fanaticism’ and ‘evangelical fervour’ of the economic theories that justify it. Polanyi’s critique closely analysed and subsequently demolished all economic schools with a liberalist leaning, from the Ricardian to the neoclassical, and the Austrian school in particular. Their negatively utopian nature was emphasized and, above all, their sur­reptitious psychological foundations were brought to light. In a similar way to Veblen, Polanyi accused the liberalist economists of naturalism, indi­vidualism and formalism. But he was more interested than Veblen in the ethical and political implications of those theoretical foundations.

The most important contribution made by Polanyi’s thinking, at least insofar as economic theory is concerned, is his criticism of the concept of the market as a natural entity. The idea of the market as an institution, a system of social relations created artificially and regulated by the institutions, was to become a fundamental divide between evolutionary neo-institutionalists, on the one side, and utilitarians and contractarians on the other. Whereas the latter start from the theory that ‘in the beginning there were markets and egoistic atoms’, the former, following in the wake of the Hungarian scholar, are able to say, ‘in the beginning there were institutions and social relations’.

12.2.2. Nicholas Georgescu-Roegen

Georgescu-Roegen, after beginning his career in Romania as a mathematical statistician, started his economic studies in 1934-6 at Harvard, where he was a student of Schumpeter. The first phase of his economic work focused on consumer theory, input-output analysis, and the theory of production. In this phase he published the fundamental articles ‘The Pure Theory of Consumer Behaviour’ (1936) and ‘Choice, Expectations and Measurability’ (1954).

The first article dealt with the problem of integrability in the theory of demand and produced a devastating result for the neoclassical school. The orthodox analysis of demand is founded on the theory of consumer behaviour which, in turn, is based on the assumption that the consumer is a rational subject who maximizes a utility function—either cardinal or ordinal—under a budget constraint. It matters little that this assumption cannot be verified empirically, as the neopositivist epistemological statute from which the system draws scientific legitimation would require. After all, no science, even natural science, can do without its axioms or so-called theoretical terms.

In his article of 1954, Georgescu-Roegen showed that if consumer’s preferences are lexicographic, the indifference curve does not exist. It is therefore impossible to construct a utility function from which to extract the familiar demand curve. Although the notion of lexicographic ordering (so-called because it recalls the order in which words are listed in a dictionary) was already implicit in the works of Cantor, Hausdorff was the first to use it in scientific language in 1914. It made its appearance in eco­nomics in the very early ‘fifties in the works of W. Gorman and G. Debreu, who did not, however, consider it of any great significance. When referred to baskets consisting of only two goods, lexicographic ordering can be expressed as follows: basket x is preferred to basket y, if x₁ > y₁ or if, when x₁ = y₁, x₂ > y₂. It is easy to see that with this kind of rankings, it is impossible to build an indifference curve endowed with the usual properties. In demonstrating the general case (with baskets containing n goods) Georgescu-Roegen was able to point out the ‘ordinalist fallacy’ inherent in the neoclassical consumer theory: despite appearances, the ordinalist approach is not substantially different from the cardinalist, and therefore the movement from the latter to the former would not constitute a real theoretical advance, as Robbins and others had believed.

On another research front, three contributions deserve a mention. One concerns the non-substitution theorem, which Georgescu was the first to discover. The other two concern two of the most intractable problems of macroeconomic dynamics, those of non-linearity and discontinuity, prob­lems which he dealt with in ‘Relaxation Phenomena in Linear Dynamic Models’ (1951). In this article, on the basis of an innovative application of the theory of oscillations, Georgescu produced a fundamental result for the study of regime changes.

The second phase of Georgescu’s scientific work began with the famous 1966 methodological essay, Analytical Economics: Issues and Problems, a book that contains a pitiless criticism of ‘standard economics’. The main accusation was of having reduced the economic process to a ‘mechanical analogy’ and of having confined economic theory to the sphere of applicability of rational mechanics. The proposal advanced was that of a new alliance between economic activity and the natural world, a proposal which in the following years was to become his ‘bioeconomic programme’. The keystone of this ambitious programme was to be found in the entropy law, ‘the most economic of the physical laws’, consideration of which induced Georgescu to study the survival conditions of humankind. Moving along the borders between economic and thermodynamics, in the book The Entropy Law and the Economic Process (1917) Georgescu formulated a new law, the ‘fourth law of thermodynamics’, concerning the impossibility of perpetual motion of the third type, defined as a closed system capable of carrying out work indefinitely at a constant rate. The economic implication of this law consisted of the rejection of the ‘energetic dogma’, a dogma according to which ‘only energy counts’, with no consideration for the ‘material’. This line of thought later ended up in the ‘funds and flows’ model presented in Energy and Economic Myths (1976). This model was a radical alternative to the model of the pro­duction function as well as to the model of activity analysis, both judged as incapable of accounting for the role played by the time element in productive activity. Recently, the funds and flows model has been receiving increased attention from theoretical economists and analysts of productive organization. Finally, we will mention the long introductory article Georgescu wrote in 1983 to the English edition of Gossen’s famous book, The Laws of Human Relations and The Rules of Human Action Derived Therefrom, an essay which is much more than a splendid intel­lectual biography, and which demonstrates not only the depth and breadth of Georgescu’s knowledge of economics but also his extra­ordinary ability to go beyond the narrow limits within which economic discourse is often confined by official science. This may help us under­stand the generalized fin de non-recevoir of the profession in regard to Georgescu’s critical message, the message of an author who can not easily be confined within a rigid school of thought.

12.2.3. Albert O. Hirschman

The other great master of the contemporary liberal left in America is Albert Hirschman. He received his degree in 1937 at Trieste, where he began working on statistical demography and the Italian economy. In his first book, National Power and the Structure of Foreign Trade (1945), he dealt with historical and theoretical aspects of the relationship between national power and the structure of foreign trade, with explicit reference to the policies of Nazi Germany. Already in this work Hirschman had taken up a critical position in regard to several of the theoretical foundations of the dominant economic doctrine; he continued to develop his own arguments by making use of the analytical instruments of orthodox theory, but almost as if he wished to demonstrate their potential for alternative cognitive objectives. In The Strategy of Economic Development (1958), one of his most important books, and in Journey toward Progress (1963), Hirschman proposed a really heterodox analysis to tackle the problems of developing countries. The Strategy focused on the ‘search for the primum movens', or the historical, psychological, and anthropological conditions for economic development. The conclusion was that development is possible even with scarce natural resources; that, in appropriate conditions, productive abilities can be learned by the whole population; and that it is not true that savings can be chron­ically insufficient, nor entrepreneurial abilities. More important is the fact that development depends on the ability to mobilize hidden, dispersed, and badly utilized resources and capabilities. Hirschman's development analysis is centred on observation of social and political aspects of growth, a line of research that found its full expression in the remarkable collection of articles A Bias for Hope: Essays in Development and Latin America (1971).

In 1977 Hirschman published The Passions and the Interests, an important book on the history of ideas which reconstructed the long sequence of thought which, initiated by Machiavelli, led to the seventeenth-century doctrine of the predominance of interests over passions. In the Theory of Moral Sentiments, Smith had placed the non-economic impulses at the ser­vice of economic ones, making them lose the specific autonomy they had previously enjoyed. Then, in the Wealth of Nations, his analysis was founded on the idea that men are mainly motivated by the desire to improve their economic conditions. Subsequently, his utilitarian followers developed the idea that even ‘sympathy' and other moral sentiments are themselves definable in relation to self-interest. This was the beginning of modern political economy: a great intellectual conquest which was, however, to bring with it a significant restriction of the field of investigation as well as an impoverishment in the conception of human nature.

Here is the first strong thesis of Hirschman's thought: it is necessary gradually to complicate the economic discipline, which, so far, has been based on over-simplified assumptions. Such a criticism is mainly directed towards neoclassical theory, but does not spare many alternative approaches, from Keynesian to institutionalist, from Marxist to neo-institutionalist. A constant characteristic of Hirschman’s work is his refusal to respect the traditional limits of the discipline—a characteristic that has been transformed, over time, into the art of violating frontiers. This is the central message of Essays in Trespassing: Economics to Politics and Beyond (1981),abook which contains a strong invitation, specifically addressed to economists, to take into consid­eration those human actions and kinds of behaviour which cannot be reduced to the traditional notion of ‘interests’.

In Shifting Involvements (1982), Hirschman focused on the problem of the oscillations of human commitment between the private and the public sphere. Finally, in ‘Against Parsimony: Three Easy Ways of Complicating Some Categories of Economic Discourse’ (1984) he again took up the subject of the complication of the economic discourse. This complicating process should occur by means of the introduction, into the scope of the discipline, of two fundamental modalities and two inherent tensions of the human con­dition. The former were ‘self-reflection’ and the ‘voice’, the protest, with which Hirschman had also concerned himself in Exit, Voice and Loyalty: Responses to Decline in Firms, Organizations, and States (1970). The latter concern the distinction between ‘instrumental’ and ‘non-instrumental’ modes of behaviour and that between personal interest and public moral­ity. In this way, the economic problem would be removed from simplistic orthodox reduction to the principle of constrained maximization.

12.2.4. Richard M. Goodwin

The other great heretic of this generation of economists is Richard M. Goodwin, the ‘deviant Marxist’, as he defined himself. He received his degree at Harvard in 1934, and was converted to Marxism under the pressure of the economic events of the great crisis; then he studied with Harrod at Oxford, where he read the proofs of the General Theory, which fascinated him. He returned to Harvard in 1938, and followed the lectures of Schumpeter and Leontief. There he took a Ph.D. in 1941, and taught physics and applied mathematics until 1945 and economics until 1950. Later he emigrated to Europe, where he taught in England and Italy. Marx and Schumpeter were his great spiritual fathers, as he himself acknowledged: ‘only Marx had understood the truth... only Schumpeter had taken Marx seriously’, he wrote in the preface to the Italian edition of Essays in Economic Dynamics (1982, pp. 12-13). This book contains the best of Goodwin’s contributions to the theory of economic dynamics. Another book, Essays in Linear Economics (1983), contains the best of his work in the field of multi-sector linear modelling. Here we shall mention the most important of these articles.

In the field of the business cycle, it is worth mentioning ‘The Non-Linear Accelerator and the Persistence of the Business Cycle’ (1951), in which he tried to solve a fundamental problem of cycle theories based on the interaction between the multiplier and the accelerator: that of their ‘non-persistence’. Goodwin understood that this problem was essentially connected to the linearity of the models, and solved it by introducing non-linearity, obtaining a motion determined by relaxation oscillations: the economy expands until it reaches full employment or full utilization of plants; then it relaxes and enters into a depressive phase, in which it will remain until a zero level of gross investments is reached.

Even more important, perhaps, was the model formulated in ‘A Growth Cycle’ (1967), in which Goodwin used Volterra’s equations to formalize Marx’s cycle theory. The philosophy is that the main cause of economic fluctuations lies in the relationship of conflict and dependence which ties together the two fundamental social classes of the capitalist economy, workers and capitalists. Each of these wishes to increase the size of its own slice of the cake. But the rules of the game prescribe that neither can take the whole cake. Neither of the two slices can increase indefinitely at the expense of the other. In the long run they will be constant; in the short run they oscillate. The mechanism ensuring the oscillation is made up by the negative effects that an increase in the wage share has on investments and the negative effects that a reduction in investments has on employment.

These two articles, respectively, reveal the Harrod-Keynesian and Marxian components in Goodwin’s intellectual background. The Schum­peterian component is present in another work, ‘Innovation and Irregularity of Economic Cycles’ (1946), in which the theoretical message, according to a recent reinterpretation, lies in the demonstration of the ‘resonance’ effect that the irregularity of innovative investments would give to cyclical move­ments. In ‘Dynamical Coupling with Special Reference to Markets Having Production Lags’ (1947), Goodwin attempted to account for the coexistence of cycles of different length, by coupling equations of the business cycle with equations of the building cycle. More recently, he has used dynamic coupling to graft a Marxian short-run cycle onto a long-wave movement, explaining the latter in a Schumpeterian manner, that is, in terms of basic innovations and their tendency to appear in bunches.

As to Goodwin’s other major research area, that inspired by Leontief’s influence, the two works which seem to us the most important are: ‘The Multiplier as a Matrix’ (1949), an article followed by another two on the same subject, and which gave rise to an interesting debate in the early 1950s; and ‘Static and Dynamic General Equilibrium Models’ (1953), where Goodwin tried to introduce into Leontief’s model an original tatonnement process capable of generating small oscillations.

Goodwin has sometimes been criticized for being eclectic, a criticism which seems to be quite unjustified. It is true that he has been influenced by authors of the most diverse theoretical schools. But it is also true that he has endeavoured to bring to light some important characteristics these authors have in common: the view of capitalism as an intrinsically unstable dynamic system, awareness of the insufficiency of traditional static and equilibrium analysis as instruments to understand the laws of movement of that system, the acknowledged centrality of the behaviour of collective economic agents, and the associated judgement of irrelevance in regard to microeconomic analysis. It is also true that his research has been constantly dominated by the need to integrate ideas from those authors into an organic view. The real problem is that his research has not reached the form of a complete theor­etical system. But this is a problem of all contemporary post-Keynesian and post-Marxist theoretical approaches. Goodwin’s work is however making a fundamental contribution to these research programmes.

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