Embedded economies, democracy, and the public interest.

Author:Champlin, Dell P.

Over the past four decades, observers have lamented the lack of participation in democratic processes among large segments of the U.S. population. (1) This lack of political engagement seems particularly puzzling, given the growing gap between rich and poor and the preoccupation on the part of many policy makers with policies that benefit a few individuals rather than the public. Economists, political analysts, and pundits have analyzed these issues extensively, with the problem attributed either to flaws in the political system or to failings on the part of the citizenry (Winders 1999; Neuborne 2001). In this paper, we suggest an alternative, economic explanation. Specifically, we argue that the decline of democratic participation and the increased power of private rather than public interest in the formation of policy are characteristics of a disembedded economy.

We begin our argument with the concept of disembeddedness as developed by Karl Polanyi (1957a, b) and others. The purpose of this section is to present our definition of a disembedded economy. In the following section, we explain how disembeddedness results in the relegation of democracy and the public interest to the "noneconomic" sphere of social life. We then turn from the disembedded economy to a discussion of an embedded economy. Specifically, we ask whether embeddedness would result in an economy that gives primacy to the public interest, where the meaning of "public interest" is determined by the full and active participation of all members of society. Finally, we close with some comments on the current disembeddedness of the U.S. economy and future prospects for policies in the public interest.

The Disembedded Economy

A disembedded economy may be defined as one where the dominant ideology as exemplified in economic policies and doctrines is that of disembeddedness. In a disembedded economy, the economic sphere of life is considered separate from the social and political sphere, and each sphere is understood as having its own rules or laws of motion. Disembeddedness is rooted in the belief that the economic system operates according to universal, natural laws. However, a social philosophy of natural law is a necessary but not a sufficient condition for disembeddedness. What is required is the separation of the economic order from the social and political order. The essence of disembeddedness is that the economy operates according to this natural order, but society does not. The will of human beings as expressed in cultural norms or political processes is reduced to a "constraint" on the economic sphere of life. The "natural" economy has no need for overt human control and essentially runs on automatic pilot. Indeed, interference by the state or other institutions threatens the very existence of the "natural" economy.

The idea of a natural order is an old idea in western philosophy found in Aristotle's Politics and in the writings of Aquinas (Clark 1999). The concept was revived during the seventeenth and eighteenth centuries in political theories of the state. Thomas Hobbes linked the natural order to the nature of individuals as did subsequent liberal philosophers (Manicas 1987). The relationship between the natural order and human nature is described by Dell Champlin (2003) in a recent article on the natural law view of community:

According to this tradition, human beings are natural beings before they are social beings. The starting point is the individual, and the basic question is the existence and nature of the social order. The primacy of the individual in this tradition stands in stark contrast to a cultural view of community, which begins with the idea that human beings are social animals. That is, in a cultural community, the existence of an individual existing separate from society would be an anomaly in need of explanation, whereas in the natural community, it is the existence of society that requires explanation. (966) A natural community is one that operates according to natural law. According to Hobbes, a natural law is "a precept or general rule found out by reason, by which a man is forbidden to do that which is destructive of his life" (Eliot 1910b, 407). In Leviathan, Hobbes argued that reason and the natural desire for self-preservation led human beings to recognize that a strong government is necessary to avoid the perils of life in a state of nature, described famously as "solitary, poor, nasty, brutish, and short" (Eliot 1910b, 404-405). In the eighteenth century, Hobbess' inhospitable state of nature was replaced by a Newtonian one. Instead of "continual fear, and danger of violent death" (Eliot 1910b, 405), Isaac Newton's Principia Mathematica brought us a natural world that was subject to universal laws. In France, Newton's laws of motion for the physical world were applied to the world of human beings by the Enlightenment writers Montesquieu and Voltaire. The idea of a natural order was incorporated into economics in the eighteenth century by the French Physiocrats, who gave the world the term laissez-faire (Rothschild 2000). The existence of an inherent order is also implied in Adam Smith's familiar metaphor, the "invisible hand" (1909). The "natural" economy was revealed to be systematic, predictable, and tending toward a state of equilibrium.

Elie Halevy discussed the influence of Newton on eighteenth century thought in his classic book first published in 1929, The Growth of Philosophic Radicalism. Halevy began his exposition of utilitarianism with the Newtonianism of the eighteenth century, which he called the "century of law and order" (1972, 5),

[I]t is possible to conduct one's study of man as an individual and as a social being in the same way that the physicist studies other matters, and here again to apply the Newtonian method with a view to determining the smallest possible number of general simple laws which, once discovered, will enable all the detail of phenomena to be explained by a synthetic and deductive method. (6) The notion that the economy operates according to natural laws has been the subject of much criticism by heterodox economists (Clark 1999; Champlin 1997; Mirowski 1989). Indeed, the natural economic order is something of a bete noire for institutionalist economists. In his classic essay, "Why Is Economics Not an Evolutionary Science?" Thorstein Veblen lamented the removal of intentional human action from economic theory:

In all the received formulations of economic theory, whether at the hands of English economists or those of the Continent, the human material with which the inquiry is concerned is conceived in hedonistic terms; that is to say, in terms of a passive and substantially inert and immutably given human nature. (1950, 232-233) Polanyi also devoted considerable attention to the existence of a natural economic order. He believed that "the economic theory of the classical economists was essentially confused" (1944, 124) because they faced an economy in transition (quoted in Sievers 1991):

[T]he solution hit upon by the classical economists had the most far-reaching consequences for the understanding of the nature of economic society. As gradually the laws governing a market economy were apprehended, these laws were put under the authority of Nature herself. (Polanyi 1957b, 12) Polanyi believed that the classical economists had made a crucial error in concluding that the universal economic problem was scarcity rather than provisioning (Dalton 1990). Provisioning refers to a cultural process, but scarcity is believed to be a law of nature. By basing economic theory on scarcity, classical economists made the organizing principle of market economies a law of nature.

Natural law, utilitarianism, and natural contract theory have been criticized extensively by historians of economic thought, philosophers, and institutionalists (Clark 1999; Mirowski 1989). The point of this brief review is to call attention to the important distinction between disembeddedness and a belief in a natural order. Our argument is that disembeddedness has particular consequences for democracy and the public interest that go beyond the effects of naturalism.

It is not until the nineteenth century that the belief in a natural order gave rise to disembeddedness. According to Emma Rothschild (2000), the eighteenth century society of Smith and John Locke did not possess the characteristic. The market and the state were not grand forces in opposition to one another. Collusion between commercial interests and the state was the very characteristic of mercantilism that so incensed Smith. Social customs and economic laws were also not viewed as separate and potentially conflicting forces. Rather, social custom is an integral part of the analysis of prices and wages in The Wealth of Nations. Most important, Smith's natural order is dependent on ethical decisions. Smith scholar Jerry Evensky wrote that in the ideal society, there is an "ethical balance of sentiments, the moral sentiments, and self-command that ensures that each individual will act in an ethical fashion-that is, in harmony with the deity's design" (1998, 20).

Halevy agreed that during the eighteenth century the belief in a natural order extended not just to the economy but to all of society. He defined philosophical radicalism as "an attempt to apply the principles of Newton to the affairs of policies and of morals" (1972, 6). While based on self-interest as a law of human nature, utilitarianism in the eighteenth century was essentially a moral or ethical theory used...

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