The Competitiveness of Nations in a Global Knowledge-Based Economy


Kenneth E. Boulding *

Toward the Development of Cultural Economics

Social Science Quarterly, 53 (2)

September 1972, 267-284.


Classical, Neoclassical & Keynesian Economics

Institutional Economics

Labor Economics

Agricultural Economics

Monetary Economics & Public Finance

Cultural Economics

Grant Economics

Evolutionary Economics


Macroeconomic Models

HHC – titling added

Classical, Neoclassical & Keynesian Economics                                                                  

THE FOUNDING FATHER OF ECONOMICS, ADAM SMITH, HAD A STRONG SENSE of the cultural matrix of economic phenomena.  One of the most interesting of the unasked questions of intellectual history is how the science of economics should have lost this sense and become an abstract discipline void almost of any cultural context.  The loss of interest within the economics profession in the cultural matrix of its own discipline is a fairly continuous process, almost from the days of Adam Smith.  David Ricardo, perhaps, was one of the first culprits in the process of reducing economics to a culturally free abstraction.  By contrast, his great contemporary, T. R. Malthus, had a very strong feeling for the significance of culture, especially as it affected the dynamics of population.  Successive editions of his great Essay on the Principle of Population elaborated and diversified the cultural theme.  Even his much more abstract Principles of Political Economy (1836), a work which foreshadowed the work of John Maynard Keynes a hundred years later, was also significant in attributing to the larger cultural matrix of economic life many of the characteristics which would lead towards development or stagnation.

The work of John Stuart Mill, while in many respects it follows the abstract model of Ricardo and is not as rich as Adam Smith in its observations of economic culture, is nevertheless far from being pure abstraction, and gives a strong sense of the importance of the political and social matrix of economic life and institutions.  Alfred Marshall’s Principles of Economics, closer still to pure mechanical abstraction, represents a further movement away from the richness of Adam Smith, but its sequel, Industry and Trade, has a strong institutional flavor and indicates that he was well aware of the complex cultural reality that lay beneath the abstractions of demand and supply.

The marginalist school, from its very beginnings in Stanley Jevons, Principles of Political Economy and Auguste Walras, Principes d’Economie Pure, both in 1870, found the mathematics of the differential calculus and simultaneous equations highly acceptable in the push towards abstraction, and removed economics even further from its cultural matrix.  The abstractions become more and more rarified as we move toward the beginnings of econometrics in the 1920’s and the 1930’s, where economics is reduced to equations and parameters, time series and regressions.  Even Ricardo at least talked about real commodities - about corn, wine, and cloth, about employers and laborers.  In modern economics these have become x’s and y’s.  There is no sense of the corniness of corn or the clothiness of cloth, or of any qualitative richness and variety, even in the world of commodities, and still less in the world of man.

* University of Colorado


John Maynard Keynes stands a little aside from this movement towards abstraction.  He made a very important contribution in the development of abstract models, but even his models had to be straightened out by his followers.  His sense of the real world, at least of the speculators and financiers which he knew so well, probably hindered him in the development of pure models, but it gives his works something of the richness of cultural detail that one feels in Adam Smith, even though in a more limited range of culture.  Keynes I suspect has no real conception of what it was like to be either poor or working class.  His own cultural setting was very much that of upper middle class dons in Cambridge.

In the present generation, as far as economic theory is concerned, abstraction has completely conquered the field.  One can look in vain, for instance, through issue after issue of the American Economic Review to try to find anything which even remotely suggests a cultural context.  The computer, if anything, has accentuated this trend.  It has enabled economists to put a lot more variables together and to develop more complex models with larger numbers of equations.  But it has not, on the whole, encouraged the search for new data.  It has increased the quick payoffs from the analysis of old data, and by this very fact, has distracted economists from the crucial first stage of the knowledge process, which is the stage from the real world to the data.  One gets a depressing feeling that the typical Ph.D. dissertation these days is done by grabbing a fist full of somebody else’s data and putting it through an elaborate statistical analysis on the computer.  The culmination of this movement, of course, is the use of imaginary data, which is increasingly popular.  This consists of the simulation of more and more complex models, using arbitrary or even randomly generated data.  In the Monte Carlo method, indeed, the table of random numbers becomes the principal source of inputs into the system.  How far from the real world can one get?


Institutional Economics

A very interesting and puzzling question of intellectual history is why the American institutionalists, especially the three great names of John B. Commons, Thorstein Veblen, and Wesley Mitchell, and their later descendants, such as Clarence Ayres, failed to affect the mainstream of economic thought in the United States, when a great deal of what they were saying seems to foreshadow the cultural economics for which I am arguing in this paper.  The problem is not confined to the United States, for what might be called the “European Institutionalists” - Max Weber, Sidney and Beatrice Webb, and the English Fabians - likewise failed to affect the mainstream of economic thought, although they had a profound effect on social policy and political history.  As one reflects also that the New Deal of the 1930’s in the United States was largely an accomplishment of the pupils of John R. Commons, the paradox of apparent political success and apparent intellectual failure becomes even more striking.  One can point, of course, to certain intellectual deficiences in institutionalist writers -Commons, for instance, was certainly deficient in literary competence, but this could not be said of Veblen, who perhaps was too competent, so


that his work was admired but subconsciously dismissed as being merely aphoristic and entertaining.  Mitchell, while he made enormous contributions in developing the empirical basis of subsequent economics at the National Bureau of Research, devoted his life to following a Newtonian wiIl-o’-the-wisp in the business cycle, and never himself developed adequate theoretical models.  When all this is said, however, the puzzle still remains and the answer has to lie deep in the sociology of the professions.

When one looks at the particular fields of economics, the situation seems, in places, a little better.  The field which is perhaps the closest to an interest in the cultural matrix is labor economics and industrial relations, where the emphasis for a long time has been descriptive and empirical rather than analytical.  There is a long tradition in labor economics in the study of the culture of the factory, of the collective bargaining processes, of the trade union organization and so on.  This indeed is perhaps the greatest contribution of the institutional economists in the United States and their counterparts in Europe.  Thus, the classic studies of John R. Commons in the American labor movement and of Beatrice and Sidney Webb in many aspects of English life, with their rich documentation of cultural backgrounds are perhaps the classic expression of what might be called “cultural economics.”  Unfortunately, the almost complete divorce between “analytical economics” and “cultural economics” is reflected in these authors.  The theoretical and analytical foundations of their work are not really adequate.  Neither John R. Commons nor the Webbs really understood the processes of inflation and deflation, and this failure to appreciate larger analytical models of the economy rendered their work inadequate beyond what might be called the micro level.  At this level however the study of what actually goes on in the field and the factory, around the bargaining table and in union meetings, has hardly been bettered since.


Labor Economics

Next to labor economics the field which comes closest to cultural economics is a rather loosely defined area which might almost be called “legal economics,” covered by such titles as industrial organization, government regulation of business and various subfields such as marketing transportation and so on many of which are more apt to be found m schools of business than they are in departments of economics.  Such topics as the interaction of regulatory commissions with the activities which they are supposed to regulate, and the interactions of firms with each other and with the antitrust division of the Department of Justice all reflect at least awareness that economic transactions take place in a legal and cultural setting.  Even here however the emphasis has been on the legal rather than the cultural, on cases, judicial precedents and the details and minutiae of the law rather than on the behavioral component of the problem and the interaction of legal regulations with decisions at different levels and in different organizations.

There is one pioneering attempt by Cyert and March 1 to develop a be-

1. Richard M. Cyert and J. C. March, Behavioral Theory of the Firm (Englewood Cliffs, N.J.: Prentice-Hall, 1963).


havioral theory of the firm, which was based on some empirical study of an almost complete lack of interest on the part of all the disciplines in the learning process in the behavior of business decision-makers. This study does not seem to have been followed up. It can certainly be regarded as a pioneering work in the cultural economics of the firm, but it does not seem to have produced any descendants.


Agricultural Economics

Agricultural economics has had some tradition of studying the interaction between farmers and the institutions around them, but even this in these days seems largely to have run off in the direction of abstract econometrics, and there does not seem to be the cooperation between the agricultural economists and the rural sociologists which one would hope for.


Monetary Economics & Public Finance

As we move towards the fields of money and banking and public finance, we find an increasing reliance on rather formalistic mechanical models and an almost complete lack of interest on the part of all the disciplines in the cultural matrix within which the institutions of money and finance operate.  I have argued for years that bankers were a savage tribe who should be studied by the anthropologists rather than by the economists, and I once tried to persuade Margaret Mead to do a book on “Coming of Age in the Federal Reserve,” with, I regret to say, no response at all!  The culture of bankers, indeed, is more mysterious than that of the Dobuans or the Chuk-Chuks.  The Navaho indeed may have a Harvard anthropologist in every family, but the Federal Reserve Board has, to my knowledge, never allowed a single one to attend the ceremonials in its marble hogan.  Nobody really knows what bankers are like, what kinds of images of the world they have, what they talk about, what kind of gossip they follow, what taboos they have, and how their decisions are made.  The economics of money and banking is almost entirely a matter of the analysis of published statistics and the attempt to find correlations among them.  It is pure “black box” analysis with practically no attempt to pry off the lid to see what are the actual processes which produce the often very peculiar outputs.

Another area where the expansion of cultural economics might be highly useful is in the relation of government to the economy.  This is an enormous field and different parts of it tend to be cultivated with rather different instruments.  Public finance, for instance, the study of government taxation, revenues, and expenditures - is frequently discussed in a rather mechanical way in terms of the impact of taxation and expenditure on the output of various commodities, on employment, on distribution of income, and so on.  There is some justification for a mechanical approach here, as a good deal of the impact of public finance is in fact mechanical.  The culture of the tax collector may make some difference to the efficiency with which taxes are collected, but this difference is likely to be somewhat peripheral to the major impacts of the tax and expenditure system.  The anthropology of the tax collector might be just as interesting as the anthropology of bankers, but it might not be so significant in regard to its total impact on society.  Where a cultural approach might be helpful would be in a study


of the acceptance or legitimacy of taxation, and the study of tax resistance or tax acceptance.  Societies differ widely in this regard.  In the United States, for instance, taxes are paid with quite astonishing fidelity, and the system relies to a very large extent on the individual honesty of the taxpayer, though the efficiency of the Internal Revenue Service in unmasking tax evaders unquestionably has some impact.  There are other societies, however, in which tax evasion is so widespread and so universal that no system of policing could possibly induce the mass of individuals to pay their legal taxes.  This is really a cultural phenomenon, but as far as I know it has been very little studied.

A point at which cultural studies would be of great interest (and are somewhat neglected) is in the political decision-making process by which taxes are in fact passed into law.  The actual legal tax system emerges as a result of the interaction of a number of different governmental subcultures, that, for instance, of the Treasury and Civil Service, which brings a technical point of view and a long memory of previous administrative problems to the task of formulating the details of tax administration.  There is also in the United States the President and the Executive branch which makes proposals to Congress, and there is Congress itself, which is the ultimate source of fiscal authority.  The actual tax system emerges as a result of a long historical process, involving especially the changing culture of Congress, and this in turn reflects the changing culture of its constituencies.  The processes of logrolling and political bargaining are fairly familiar.  Not so familiar are the processes by which certain ideas become fashionable or unfashionable, and even certain interests become fashionable or unfashionable.

The idea that political decisions are made by the raw conflict of interests involved in the bargaining process is certainly inadequate.  Interests, indeed, are often extremely hard to determine.  Iit is extremely hard to estimate, for instance, what would be the effect on the overall distribution of income or wealth of any particular tax proposal.  Any decision, even of private persons, will divide the human population into three possible groups - those who are favorably affected by it, those who are adversely affected by it, and those who are unaffected by it.  In the case of the small decisions of private and unpowerful people, the third category is overwhelmingly the largest.  In the case of decisions by powerful people, the power of the decision-maker could well be measured hypothetically by the size of the first two segments of the population.  In most cases, however, these three boxes are empty.  It is very hard to tell even how many people fall into one box or the other, and still harder to tell who these people are.  It is the perception of interests, not the realities (whatever this may mean), which really affects behavior, and the perception of interest is very much a function of the culture within which the perceiver is embedded.  Therefore, the way in which the culture of government changes as mistakes are made and lessons are learned, as information flows in, creating new ideas, new concepts, and new values, is of great importance


in the study of the process by which decisions are actually made.  A good example of a study of this kind is Herbert Stein’s work on The Fiscal Revolution in America (1969), which shows how a combination of the failure of existing policies, and the perception of that failure, coupled with ideas about alternative policies coming in largely from the academic profession, transformed what might be called the “conventional wisdom” of American government in the space of a little over 30 years, from Herbert Hoover’s tax increase in the middle of the Depression in 1932 to the Kennedy inspired tax cut in 1964.  This book indeed is one of the best examples of “cultural economics” that has been produced in this generation.

Another aspect of government interaction with the economy is regulation of private economic activity by legal prohibitions and government regulating agencies.  There is a large amount of this kind of activity, ranging from regulation of labor relations by the National Labor Relations Board and similar agencies in certain specific industries, to regulatory agencies like the Interstate Commerce Commission, the Federal Communications Commission, the Securities and Exchange Commission, on to the rather looser activities of the antitrust division of the Department of Justice.  Most of these agencies are concerned with the enforcement of prohibitions of various kinds.  Thus, the law defines as illegal, certain “unfair labor practices” on the part of both employees and unions.  It defines certain collusive practices as illegal under the antitrust laws.  By licensing it makes such practices as running a radio station legal for some people and illegal for others.  The whole problem of the cultural interaction between the regulating commissions and authorities of different kinds and the regulated is an extremely interesting subject which has not been studied as much as one would wish.  Each of the commissions and agencies develops a subculture of its own which is transmitted to each new generation of role occupants in ways that are not wholly dissimilar from the way in which a doctor transmits his culture to his successors.

Cultural Economics

It is clear that there is something, which now exists perhaps only in embryo, which deserves the name of “cultural economics.”  Because it has not yet taken an unambiguous form, it is obviously hard to describe it.  Nevertheless, it is at least interesting to speculate what the embryo might look like if it ever lived to grow up.  It may, of course, be just a mythical beast, and the fact that several promising starts seem to have come to very little suggests that it may have some genetic deficiencies which interfere with its growth in the harsh milieu of the academic community.  Nevertheless, even the sketchiest attempt to describe this mythical beast portrays such a gentle and useful animal that it seems a pity not to try to bring it into the world.

Being economics, it would have to start with the phenomenon of exchange, beginning with the exchange of goods, a “good” being something that somebody wants and which has a positive marginal utility, that is, he wants more of it.  There is nothing wrong with the pure economic theory of exchange as an abstract model, and indeed some anthropologists have


failed to understand certain aspects of the economics of primitive societies because they have not seen that exchange was a universal phenomenon, which might be overlaid with all sorts of custom, ritual, and conventional behavior, but which nevertheless always involved some kinds of “terms of trade” or exchange ratios, which were relevant to the satisfaction of the participants and to their continued behavior in the role of exchangers.  The failure to recognize the significance of the phenomenon of terms of trade is by no means confined to anthropologists.  I recall once being on a committee which was considering the question of a university program in industrial relations, with a psychiatrist who was convinced that industrial conflicts could be wholly described in terms of the love life of the foreman or the frustrated sexuality of the workers, and could not be persuaded that wages had anything to do with industrial conflict.  The economist, as economist, therefore, has a professional duty to point out the importance of terms of trade and, indeed, the whole structure of terms of trade that comprise the price system.  This is an integral part of any set of cultural relations.  Furthermore, man’s experience with various terms of trade is a great cultural teacher.  Even though it is a very fundamental principle of economics that no uncoerced exchange takes place without both parties believing that they benefited at the time, this leaves plenty of room for deception and regret, concepts that have very little place in formal economics.  Deception, when it is found out, however, and regret, when the right lessons are drawn from it, are both very important teachers.  It can hardly be said too often that we learn new things only from failure, never from success, and we learn a great deal from our failures in exchange.  We buy a certain brand, and we don’t like it, so we do not buy it again.  We take a job, don’t like it, and quit.

An enormous learning process goes on within the individual as he encounters the market, makes exchanges, whether in the labor market (where he takes a job) or in the commodity markets (where he buys things) or in capital markets (where he borrows or invests).  In any of these experiences, disappointment is likely to lead to some sort of learning.  The emphasis on learning is perhaps the crucial difference between mechanistic economics and cultural economics.  Mechanistic economics tends to take preferences and even skills and techniques for granted, as the data or ultimate determinants of the economic process.  Cultural economics must look upon both preferences, skills, and techniques as essentially learned in the great processes of cultural transmission.  It may well be that one of the things which holds us up in cultural economics is the absence of any satisfactory abstract models of learning in the way, for instance, that we have abstract models of decision-making or maximizing behavior.  Nevertheless, even though the models may be crude, the phenomenon is fundamental.  Social learning, indeed, is the central concept of culture.

Grant Economics

Economics has tended to restrict itself to the exchange of goods and to regard other forms of dyadic relationships, such as what I have called the “grant,” that is, the one-way transfer of an exchangeable, as something a


little outside the main focus of interest of economics. 2  Cultural economics however, would have to include all these dyadic relationships which involve exchangeables or goods, whether they conform to the traditional form of exchange or not.  There are, indeed, two major forms of the one-way transfer, each of which is the door to a very large world of social organization and human relationships.  One is the gift, which is the expression of an integrative relationship, that is, identification of the giver with the welfare of the recipient.  The other is tribute, that is, a one-way transfer made in response to threat, a threat being a conditional undertaking to produce a negative commodity, or a bad.  In its illegitimate form this is the bandit; in its legitimate form, the tax collector.  I must confess that I pay my taxes mainly because, if I did not, something unpleasant would happen to me and I reckon the loss entailed by paying the taxes is less than the loss that would be entailed by suffering the sanctions of the law if I did not pay them.  The threat system has a vast culture of its own which we cannot go into here.  It impinges significantly on economics, for instance, in the legal sanctions which seem to be necessary to induce people to make provision for public goods.  And cultural economics will certainly recognize the complexity of the culture which surrounds the various threat relations.

The dynamics of the integrative system, which produces gifts, likewise has an interesting cultural context.  Why, for instance, do we support children within the family, and, in many cultures, old people as well?  These patterns of behavior are clearly learned, and arise out of the culture.  In the process of the development of culture itself, however, great importance has to be assigned to reciprocity.  This often looks very much like exchange, but it is actually something rather different.  Exchange is conditional.  If I give you A, will you give me B?  Reciprocity is at least hypothetically unconditional, that is, I give you something out of the sheer goodness of my heart and you give me something out of the sheer goodness of yours.  Reciprocity does, of course, tend to slip over into exchange and very frequently is formalized as exchange, in which case it often loses its integrative aspect.  The transmission of culture depends a great deal on serial reciprocity, that is, A gives something to B, which creates a sense of obligation on B’s part, which he releases by giving something not to A, but to C.  We make grants to our children because we received grants from our parents.  We make sacrifices for posterity because our ancestors made sacrifices for us.  The only answer to the famous question, “What has posterity ever done for me?” indeed, is that our ancestors, ourselves and our descendants are all part of a larger community of the imagination extending over time and space.

One of the most interesting questions in cultural economics is the extent to which any particular system of economic institutions will survive or fail to survive because of changes in the cultural matrix which the economic

2. K. E. Boulding, The Economy of Love and Fear (Belmont, Calif.: Wadsworth, 1972).


institutions produce.  A related question is that of changes which spontaneous changes in the cultural institutions may produce in the economic order.  We think of the time structure of society as a series of “layers” of somewhat independent systems, involving, for instance, an economic dynamic, a political dynamic, a religious dynamic, an intellectual dynamic, an artistic dynamic and so on.  Each layer has a certain independence and coherence in its own movements, but also interacts strongly at times with other layers.  This contrasts with what might be called the “monodynamic” view of society, in which one of the layers, such as, for instance, the economic system, is regarded as dominant with an inherent dynamic of its own, which is not much affected by influences from outside and which, as it were, carries all the other processes of society along with it.  The Marxist interpretation of history tends to be “monodynamic” in this sense.  My own view is “polydynamic,” in the sense that I doubt whether there is any single system which at all times dominates the others, though if there were such a system I would nominate the dynamics of the integrative system of legitimacy and community rather than the dynamics of wealth and power, for without legitimacy neither wealth nor power can be preserved.

Examples of this “polydynamic” approach would be Max Weber’s theories of the impact of Protestantism in the transformation of late feudal and early capitalist society, and the views of Schumpeter regarding the instability of late capitalism and its tendency to slip over into socialism because of the inability of exchange institutions to develop an integrative matrix in terms of legitimacy, trust, acceptance, and so on, without which they cannot really function.  The trouble with capitalism isn’t so much that it doesn’t work, as that nobody loves it!  It is unloved because .it depends so heavily on exchange as its social organizer, and neither merchants nor banks are capable of attracting much affection.  It is reciprocity rather than exchange which creates legitimacy and community.  Reciprocity, however, itself tends to be unstable and is formalized into exchange.  A general theory of the interaction of the dynamic sectors of society, however, has not yet been developed and remains as a task for the future.

Evolutionary Economics

Perhaps the most significant attribute of a cultural economics is that it must be evolutionary.  Mechanistic economics can be dynamic in the sense that it can produce models of time sequences of variables.  Indeed, I would argue that dynamic mechanistic economics, as reflected, for instance, in difference equation theory, has made a small but important contribution to the development of a general social science.  Mechanical dynamics, however, has sharp limitations.  It depends for its predictive power on the discovery of stable parameters for its difference or differential equations.  Unfortunately, in real social systems these parameters are very rarely stable.  Thus, even demography, which is perhaps the most successful of mechanical dynamics systems, has been disastrously unsuccessful in its predictions.  National income economics is not much better.  We have tried to solve this problem by “Ptolemization,” that is, the development of in-


creasing numbers of “epicycles” through the addition of new variables, new parameters, and new equations to our models.  Unfortunately, there is not much evidence that this increase in the complexity of models has increased their predictive power, and we may be looking for the famous black cat in the dark room that isn’t there.  It may be, that is, that there are no stable parameters in social systems.  We then have to fall back on evolutionary theory, that is, mutation and selection.  There is no doubt that this is a useful, descriptive paradigm of the dynamics of society as well as the dynamics of biological evolution.  In social systems the mutations consist of new ideas, new inventions (both mechanical, biological and social), new organizations, especially new species of organizations, new patterns of behavior that can be imitated by others and so on.  Selection occurs in the process of total social interaction and learning.  Some mutations are eliminated by bankruptcy, by conquest, by death, by the loss of legitimacy, and other selective forces.  As a result of this vast melee of selective forces some things survive and some do not.

Social evolution is a good deal more complex than biological evolution.  It is harder to define social species, as we do not have the delightful simplicity of biological mating.  Automobiles are not produced by other automobiles as horses are produced by other horses, but by other forms of social organization, such as automobile firms.  As a result of this complexity, mutation can take place at several levels.  We can, for instance, have mutation which will change the rate of mutation itself, and we can have mutations which profoundly affect the selective processes.  Thus, social evolution may be more Lamarckian than it is Darwinian, if only in the sense that it is harder to distinguish the genotypes from the phenotypes.  There is not the nice, clear distinction between mutation in the genotype and selection in the phenotype that we have in Darwinian evolution.  In social evolution, the genetic and the selective processes are much more closely interwoven than they are in biological evolution.

A good illustration of the complexity of these processes is found in the theory and history of invention, which is almost the same thing as social mutation.  Inventions are clearly not “random” in the sense that all inventions have equal probability of being discovered at any time.  In any particular state of the social system, some new inventions are much more probable than others, if only in the sense that a perceived “hole” in the social system is likely to be filled.  In regard to invention the problem of the “levels of mutations” becomes extremely important.  Thus, inventions which reduce uncertainty are likely to increase the subsequent rate of invention.  We see this in the processes of economic development, where the unwillingness of people to change their ways is often closely related to a quite realistic appraisal of the uncertainties involved in so doing.  Reduction of uncertainty, such as took place in American agriculture, following the development of price supports in the 1930’s, may easily set in motion a large process of technical improvement and increasing productivity, as indeed in the above case it did.


The success of revolutionary movements often depends on the fact that they create uncertainties in the society which is being challenged, and hence prevent that society from making the changes which would lead to its development.  The stagnation and failure of the old society then feeds the fires of revolution.  Once the revolution has been accomplished, however, the success of the regime depends a great deal on its capacity to diminish the uncertainties of the society and so permit evolutionary change again.

It is highly significant that the current descendants of the American institutionalists have formed a society which they call The Association for Evolutionary Economics.  The institutionalists’ main criticism of traditional mechanistic economics was on the grounds that it was not evolutionary.  One recalls Veblen’s famous article on “Why is Economics Not an Evolutionary Science?” 3  The criticism basically is that mechanistic economics assumes that there is an equilibrium price structure, that is, an equilibrium set of all prices and money wages, in terms of trade, which is determined on the one hand by the structure of production functions, that is, what inputs produce what outputs, and on the other by the structure of preference functions, that is, what combinations of commodities are preferred to what.  The demonstration, indeed, that corresponding to every set of these determinants there is only one set, or at most only a very limited number of sets, of equilibrium prices, is a beautiful piece of logic and is developed at great length and with much affection in all standard textbooks.  The critical question, however, is what happens if there is a divergence between the equilibrium price set and the actual price set at which exchanges are currently taking place?  Mechanistic economics assumes that under these circumstances pressures will be set up to change the price set towards the equilibrium, though there are still quite serious unsolved problems as to the actual machinery of this process, whether it operates, for instance, through excess demands and supplies or through excess profits or losses.  The exact conditions under which a determinant solution will be reached are extremely complex and are still not wholly spelled out.

The critical question for evolutionary economics, however, is whether a disequilibrium, that is, a divergence between the actual price set and the equilibrium price set, will work back on the supposed determinants of the equilibrium as well as work on moving the actual price set towards the equilibrium.  Thus, if the actual price set is not the same as the equilibrium set, this may have an effect on preferences, according to the famous “sour grapes” principle, for instance, according to which if you can’t get something, you decide you don’t want it.  It may also affect the production functions, in the sense that if there is a commodity in excess demand, resources within the industry will be diverted away from sales towards the improvement of production and productivity; whereas if there is a commodity in

3. In Joseph Dorfman, ed., The Place of Science in Modern Civilization (New York: Viking Press, 1919).


excess supply, there is very little incentive to improve productivity and most of the activity will be centered on sales and marketing.

This is, indeed, a special case of a general question in the evolutionary theory which as far as I know has never been satisfactorily answered.  Evolution takes place by ecological succession, that is, by irreversible changes in the determinants of the equilibrium of an ecological system.  These changes may simply be irreversible physical changes, like the filling up of a pond, or they may be changes in the genetic structure through mutation.  The general assumption of ecological theory is very similar to that of orthodox mechanistic economics; that if there is a divergence between the actual structure of populations of different species in an ecosystem and the equilibrium structure, those populations which are “too large” by this criterion will decline, those which are “too small” will increase, and the movements of the populations will be towards equilibrium.  The critical question flow, of course, is what changes the equilibrium itself, and particularly whether the existence of a disequilibrium has any impact in changing the equilibrium itself.  Ecological theory seems to be in much the same state as orthodox mechanistic economics.  It may well be, therefore, that the reason why evolutionary economics has been somewhat disappointing (one has to I confess, it has not presented up to now a challenge to mechanistic economics which could really unseat it) is that evolutionary theory itself is in a very unsatisfactory state, and that the questions which the evolutionary economists are trying to raise are themselves still unanswered by evolutionary theory in general.

What one looks for, therefore, is a general evolutionary theory which can illuminate not only biological evolution, but cultural evolution, linguistic evolution, economic evolution, religious evolution, class evolution, family evolution, sexual evolution - anything that we would like to mention.  The general outlines for such a theory, indeed, are fairly clear.  It can be expressed, indeed, in three sentences: (1) The dynamic processes of any existing system will produce strain; (2) once strain increases beyond a certain threshold something will give, that is, there will be change in the parameters in the system; (3) a system gives at its weakest point, that is, what adjusts is the most easily adjustable.  Any specific adjustment, however, creates further strain in other parts of the system, so the process starts all over again.

The first part of this theory is perhaps the easiest epistemologically, in the sense that it is fairly easy to detect the on-going, regular processes of a system, and even to perceive that the strain is being increased.  The second process, that of the system giving under the strain, is much harder to predict, much harder to find out about, simply because the weaknesses of the system are frequently only revealed after the event, that is, after the adjustment has been made, and are not necessarily revealed by those ongoing processes of the system which can be easily observed.  The difficulty here is that what we are observing is a “threshold” phenomenon.  It is often extremely difficult to find out where a threshold is until we have reached


it, after which it is frequently too late.  When the strain does not reach the threshold, nothing happens and it is extremely hard to observe nothing, although what does not happen is often a great deal more interesting and significant than what does.  The inventions that were not made, the wars that did not happen, the revolutions that never took place, the depressions that never materialized, the crises that were avoided - these are the things that will tell us most about the social system and yet these are precisely the things which never get into the history books.

The same problem exists in biological evolution: all we know about are the mutations that were successful, at least successful enough to leave a record.  There must have been thousands, perhaps millions as many times the number of mutations that were immediately unsuccessful, and these leave no record.  Consequently, it is quite impossible to estimate even the probability of things turning out the way they actually did, and we tend to have an illusion that the evolutionary record, as we find it on our own planet, had a kind of necessity about it, simply because it existed; whereas, in fact, it may have been the result of a series of extraordinarily improbable accidents.  Some astronomers to the contrary, we really have no way of estimating the probability of life in other parts of the universe, simply because we have no way of estimating the probability of its having developed on our own planet.  We face very much the same problem in human history.  Was it, for instance, just a succession of lucky accidents that turned the dynamics of European society into science, with such incalculable consequences for all the rest of mankind?

The great weakness of evolutionary theory is illustrated by the fact that it is quite impossible to detect evolutionary potential at the time when it occurs.  In evolution we can be wise only very long after the event.  Why did the evolution of the vertebrates, for instance, proceed so much further than that, shall we say, of the octupus, who really seems to have so many advantages?  Why should man have emerged out of the anthropoids rather than out of the felines, who again seem to have so many advantages?  And who could have predicted at the time the enormous significance in cultural evolution of Moses or Jesus or Mohammed, or even Karl Marx?  For all we know, the evolutionary potential of the twenty-fourth century is now being created in an obscure valley in the Andes and nobody will find out about it for at least a hundred years.  Are the hippies an evolutionary potential which will create vast changes in life styles and demands for commodities in the next hundred years?  Or are they just an unsuccessful mutation, a flash in the pan, which will produce only a little dust on shelves of the libraries, while the Mormons or Jehovah’s Witnesses go on to conquer the world?  It is not perhaps, therefore, too surprising that so far, at any rate, evolutionary economics has made little theoretical impact, simply because while it has a good deal to propose, it does not really have very much to say.  The great English economist Alfred Marshall, who was by no means unaware of these problems, headed his great Principles of Economics off with Volume One; Volume Two, alas, which should


have been evolutionary economics, was never written, and I think one has to confess, it is still not written, although it is still in prospect.



In a remarkable new book, The Entropy Law and the Economic Process 4 one of the most erudite and imaginative of the modern economists, Nicholas Georgescu-Roegen, has raised the question as to whether the entropy concept cannot be brought in to give economics a dynamic and a sense of direction, indeed a “time’s arrow.”  The idea is very suggestive.  Economic processes, like evolutionary processes, again, are anti-entropic in the sense that they use free energy to create structures in the way of commodities and organizations, roles, professions, and so on, of increasing complexity and improbability.  Evolution is the segregation of entropy, building of little islands of low entropy and high order in the form of living organisms, artifacts, and social organizations, at the cost of creating more disorder elsewhere.  It is quite tempting, therefore, to try to formulate an “entropy theory of value” in which value is identified in some sense with negentropy or order and the loss of value with the increase in entropy or disorder.  This would certainly seem to make more sense than labor theory of value, which is essentially circular; labor being defined activity which produces value, without defining what the activity consists of.

Nevertheless, in spite of the monumental and suggestive work of Georgescu-Roegen, it seems to me that the attempt to construct an economics or any social science on the basis of the entropy concept has not so far been successful.  There may be a very good reason for this lack of success.  The difficulty with the entropy concept is that it is essentially negative, that is, it is a measure of disorder and the significance of the concept depends on the kind of order that is diminishing.  In thermodynamics the kind of order which is diminishing is a very simple kind of order and could easily be defined, so that the entropy concept is at least moderately clear, though as Georges-Roegen points out, it is by no means clear that we can equate entropy, as Boltzman did, with a probabilistic-mechanistic system.

A good deal of excitement was aroused in the early days of information theory by the fact that the information measure as developed by Shannon and Weaver 5 was formally identical with the Boltzman measure for entropy, or rather for negentropy, as information is a measure of order rather than disorder.  Here again, however, the kind of order which is being measured is a very simple kind of order, very useful for Bell Telephone, for whom the conversations of a teenager and of the President of the United States over the “hot line” represent exactly the same technical problem.  The concept, however, has not turned out to be very useful in the study of social communication and significance or even of knowledge.  There is no “wit” as a unit of knowledge to correspond to the “bit” as a unit of infor-

4. Nicholas Georgescu-Roegen, The Entropy Law and the Economic Process (Cambridge, Mass.: Harvard University Press, 1971).

5. Claude Shannon and Warren Weaver, The Mathematical Theory of Communication (Urbana: University of Illinois Press, 1949).


mation, simply because knowledge is a far more complex kind of order than information.  While, therefore, we may have a fair amount of confidence that time’s arrow in social as well as in biological evolution leads towards order, it is not at all clear what kind of order it leads towards, and the taxonomy of different kinds of order is a task which still remains for the future.  The GNP, for instance, is a certain measure of the order of power and complexity of the society, yet this too, as we are extremely well aware these days, is highly imperfect, particularly inefficient as a measure of human welfare, and yet welfare itself involves orders of a complexity which we find extremely difficult even to describe, and still more difficult to measure.

Regretfully, therefore, I think we have to leave the entropy concept behind, as suggestive but not ultimately very informative, simply because it cannot handle the crucial problem of cultural and economic evolution, which is that of the description and measurement of different kinds of order.  To rely on the entropy concept would be rather like trying to find out about the Catholic Church by studying the people who were not Catholics.  The absence of order does not really tell us very much about the order that is absent.


Macroeconomic Models

Perhaps the greatest achievement of mechanistic economics is the macroeconomic models which come most immediately from the inspiration of Lord Keynes.  Economics, however, has had a long history of what might be called a “total systems approach,” that is, looking at the economy as a totality of interrelated parts and perceiving that propositions which might be true of parts might not be true of the whole.  This is implied, indeed, in Adam Smith, who was the first to develop a concept of a set of “normal,” “equilibrium,” or in his own term “natural” prices, a concept which was later elaborated by Alfred Marshall and Leon Walras.  In the early years of the twentieth century, Irving Fisher in the United States and Knut Wicksell in Sweden each developed systems which had implied macroeconomic models in them.  As often happens in the history of science, however, the great breakthrough came as a result of a double thrust - an improvement in “economic instrumentation” pioneered at the National Bureau of Economic Research in New York by Simon Kuznets (who has just received an extremely well-deserved Nobel Prize), and the theoretical insights of John Maynard Keynes, who perceived with an almost poetic insight, first that profits were a “widow’s cruse,” which would never run dry as long as they were distributed in dividends, 6 and then the further insight in the General Theory, 7 that there could be an equilibrium level of unemployment, at the point at which the total product of the society would just be absorbed or disposed of to households and household purchases, to government and government purchases, or to business investment - that is,

6. John Maynard Keynes, Treatise on Money (New York: Harcourt Brace & Co., 1930; London: MacMillan & Co. Ltd., 1950).

7. John Maynard Keynes, General Theory of Employment, Interest and Money (New York: Harcourt, Brace & Co., 1936).


a willing increase in the total capital stock of goods held by businesses.  The perception that the actual quantities of product produced, consumed, invested, and so on were not the result of the decisions of individual households, businesses, or even governments, but were the result of the interaction of the decisions of all the parties to the system, is perhaps one of the most profound insights to come out of economics.

I have sometimes called these principles the “macro-economic paradoxes.”  They include, for instance, the proposition that a decision on the part of individuals of a closed economy to increase their money stocks does not result itself in an increase in the stock of money, but results only in a decline in the total volume of receipts and expenditures.  This follows from the principle that whereas for an individual, receipts and expenditures are something quite different, which do not have to be equal to one another, for a closed society, receipts and expenditures are exactly the same thing as each transfer of money is a receipt at one end and an expenditure at the other.  Consequently, while an individual can easily increase his money stock by spending less than he receives or decrease it by spending more than he receives, all individuals taken together cannot do this.  The money stock can only be increased by increasing it, or decreased by decreasing it.  It is unchanged by circulating it.  These are very simple and obvious propositions, yet it is surprising how long it took for even economists to perceive them clearly.

Another of the paradoxes is the paradox of saving, that decisions to save on the part of individuals may not result in the net accumulation of capital, but may merely lead to increased unemployment and a decline in output.  It is much more true to say that the aggregate decision to invest determines the volume of saving, than to say that decision to save is determined by what is available for investment, for there can be forced saving through inflation, for instance, as well as voluntary saving.

Another set of propositions which, however, are less generally accepted, relate to the distribution of national income or some similar measure, as between wages or aggregate labor income and the various components of non-labor income - profits, interest, and rents.  The labor market for money wages plays a surprisingly small role in this distribution.  A rise in money wages can easily result in a fall in real wages and redistribution towards profits if there is an inflationary trend and prices rise faster than the money wages.  This principle very severely limits the power of labor unions to redistribute income.  Over the long pull, indeed, this power seems almost non-existent, and it may well be that the main impact of labor unions is to redistribute income within the working class, perhaps a little away from unorganized towards organized labor, but seems to have very little effect on the distribution of income between labor income and non-labor income.  In the United States, for instance, between 1932 and 1942 there was a great rise in the power of labor unions, membership increasing four or five times, and a large part of American industry came under collective bargaining.  Nevertheless, in this period the proportion of national income


going to labor actually fell from about 72 percent to about 62 percent, a result of the economic recovery and the rise in investment and profits.  In this area, indeed, “things are seldom what they seem.”  Skim milk not only masquerades as cream, but cream turns out quite unexpectedly to be nothing but skim milk.

A critical question which is not easily answered, is whether there is anything in the larger framework of cultural economics, or the still larger framework of cultural science as a whole, which corresponds to these macroeconomic paradoxes.  Are there things which can be said about the system as a whole, for instance, which are fundamentally different from what can be said about an individual or else part of it?  Are there general cultural systems in which the sum of individual decisions produces results which are quite contrary to the intentions and expectations of any of the individual decision-makers?  It is certainly tempting to look for propositions like this in the larger cultural framework.  We can find them certainly in the field of the international system, especially in regard to national defense, where decisions to increase national security by increasing armaments frequently lead to the opposite result.  Jay Forrester at M.I.T. has called attention to what he calls “counterintuitive results” in elaborate computer-operated dynamic models of urban development and also of the total world economy. 8  The detailed assumptions of these models are very much open to question.  One is tempted, indeed, to call them “under-the-counter intuitive assumptions,” which are hidden in the mathematics and the procedures of the model, but which determine its results.  Nevertheless, the principle is a sound one, that when we make models of total systems the results are very frequently counterintuitive.

A very early example of this in economics which had a wide cultural framework is the economist’s attack on the old English Poor Law, beginning particularly with Malthus, on the grounds that if the poor were supported in a way that encouraged their propagation, the result would not be ultimately to relieve poverty, but rather to increase it enormously, and to bring the whole society down into ruin.  The counterintuitive model of 1834, then, which bore some resemblances to the rather grim models of Professor Forrester, is that if poverty is to be relieved in the long run, it must be relieved very little in the short run, and under conditions which make it both disagreeable to be on relief and also which discourage procreation.  Here, again, however, one wonders if the counterintuitive model also did not contain certain errors.  If the lot of the destitute could have been made a little more comfortable in nineteenth century England, it is doubtful there would have been much more propagation, and the system might have reached a bearable equilibrium without driving the destitute into horrible workhouses.

Similar problems emerge in the situation of foreign aid to poor countries.

8. Jay Forrester, Urban Dynamics (Cambridge, Mass, and London: M.I.T. Press,1969).


There are circumstances, certainly, under which this could simply lead to a vast proliferation of ultimately catastrophic poverty.  The medical advances of the late 1940’s, which resulted in the virtual elimination of malaria in a large part of the tropics, had a totally unforseen effect in population explosions which have made the ultimate development of these countries much more difficult.  On the other hand, we have to be careful even here against under-the-counter intuitive systems.  It is all too easy to make models which leave out some essential cultural variables.  There have been occasions in history when a rapid rise in population has gone along with an even more rapid rise in productivity.  There are other occasions, however, such as Ireland in the nineteenth century, where a rise in population has been totally disastrous, in this case, perhaps, because of foreign domination and absentee landlordism.  Here I think great vigilance is needed on the part of social scientists to insure that in the building of these models, the essential variables are not left out.  Here, indeed, is perhaps the greatest task of the cultural economics that we hope is somewhere on the way.

I must confess I am not overly optimistic about a quick breakthrough into the sort of cultural economics one would like to see.  Nevertheless, there is quite widespread dissatisfaction in the economics profession with the rather barren mechanistic economics and econometrics which now dominates nearly all our journals.  It may be that the time is ripe for another of Mr. Kuhn’s scientific revolutions. 9  On the other hand, a good many revolutions have never come off; and a good many others have come off, only to be regretted later.  While, therefore, I am prepared to exhibit a certain optimism, I find it hard to avoid restraining the optimism with a modicum of caution.

9. Thomas Kuhn, Structure of Scientific Revolutions (Chicago: University of Chicago Press, 1962).