CHAPTER VICONCLUSION: ECONOMIC THEORYAND THE GENERAL THEORY OFSOCIAL SYSTEMSThe purpose of this brief concluding chapter is to summarizeour analysis by stages and to point up some implications foreconomic and sociological theory, respectively, and for therelations between them.A SUMMARY OF THE ANALYSISOur central proposition is that economic theory is a specialcase of the general theory of social systems, which is in turnone of the main branches of the developing general theory ofaction. We have applied this proposition to the followingfields of economic inquiry: the general frame of reference ofeconomic theory; the conception of the economy as a specialtype of social system differentiated from other societal subsystems; the place of the economic sub-system in the societyand its relations to cognate sub-systems; the institutionalstructure of the economy; processes within the economy andacross its external boundaries, and the problem of growth andinstitutional change in the economy.By way of preliminary analysis, we tried to show thateconomic theory conceives economic processes as processes ofaction (in our technical sense) oriented to a goal of productionas available means. In so far as this involves interaction, thesupply-demand schema is a special case of the more generalperformance-sanction schema which underlies all socialinteraction. Furthermore, the classification of commodities asgoods and services corresponds to the general distinctionbetween physical and social objects on the one hand andbetween qualities and performances on the other.295
Economy and SocietyBeyond these simple congruences of categories, we demonstrated certain congruences between economic theory and thegeneral theory of action as theoretical systems. Any socialsystem, it will be remembered, can be analysed in terms offour functional problems or exigencies—goal attainment,adaptation, integration and pattern maintenance—which arethe foci of differentiation of types of action, of roles and of thepreponderance of particular types of action at different pointsin time. They are thus the foci of the differentiation of types ofinput and output processes over the boundaries of the system.If an economy is treated as a social system, the four factors ofproduction (land, labour, capital, and organization) and thefour corresponding shares of income (rent, wages, interest, andprofits) correspond exactly to the categories of input and output,respectively, of any social system. Furthermore, the concept ofreal cost relates to the society as a system reference in so far asit refers to the input of factors of production in terms of the"sacrifice" made by non-economic sub-systems. Money cost,on the other hand, is cost to the economy as a system, for itconcerns cost in terms of shares of income to be distributed tocontrollers of the factors.These points, as developed in the first chapter, establisheda presumption in favour of our thesis that economic theory is aspecial case of the general theory of social systems. Thispresumption rested on two grounds: (1) the point-for-pointcorrespondence of the logical structures of the two conceptualschemes, and (2) the fact that the goal of the economy is lessgeneral than societal goals. Production makes sense only asa contribution to the functioning of some larger system.Economic theory cannot be the theory of processes in a totalsociety, but only those of a differentiated sub-system of asociety.In connection with the latter point, we found ourselves indirect opposition to the widely-held view in economics thatutility and welfare are to be defined in the first instance interms of individual preference lists or, in terms of the interpersonal comparison of these lists, i.e., in terms of the satisfaction of the wants of individuals, independent of their socialrelationships. Since, according to our scheme, the categoriesof wealth, utility, income and welfare are states or properties296
Economies and the Theory of Social Systemsof social systems and their units, they apply to the individualpersonality only through the social system. Hence the theoreticalbasis for taking individual wants as given and independent doesnot exist. We defined these concepts in terms of their significance as facilities for the adaptive problems of social systems.We found it possible to test our major thesis beyond thispurely logical congruence. To do this we applied the paradigmof the economy as a social system to external interchangesbetween the economy and its cognate systems, largely becauseof the evident impact of non-economic factors on these interchanges. If, as we maintained, the economy is the primaryadaptive sub-system of the society, it should interchange withthree other cognate sub-systems—a "polity," an integrativesystem, and a pattern-maintenance and tension-managementsystem—each differentiated according to the appropriatesystem exigency. Such a classification is not identical with theconcrete structure of roles and collectivities in the society,but is a classification of modes of relationship and bases ofdecision.We then asked how, specifically, the boundaries of thesefour major societal sub-systems match in their interchanges.We argued that each of the four has one boundary whichinterchanges primarily with one of the other three cognatesub-systems. This yields a total of six boundaries among theprimary sub-systems. In addition, each sub-system possesses afourth, extraordinary boundary concerned with the valuesystem of the society as a whole and the primary societalsub-systems.Because of the special character of the land category ineconomic theory, the input of land factors and the corresponding output of rents is the relevant interchange at theexceptional boundary of the economy. This means that certainfactors of production—physical facilities, cultural factors andcertain elements of human motivation—are committed toeconomic production relatively independently of short-termeconomic sanctions. Such commitment is controlled throughthe institutionalization of values.Reference to the concrete social structures in which economicprocesses take place is of course essential for the solution for awide range of short-term empirical problems, for an exhaustive297
Economy and Societycomparative economics and for an adequate theory of economicdevelopment; we barely touched upon these matters, however,and limited the greatest part of our analysis to the relationshipsamong the analytical sub-systems of society.The first "open" boundary of the economy we consideredin terms of the interplay of performance and sanction is betweenthe goal-attainment sub-system of the economy and householdas units primarily of the pattern-maintenance sub-system ofthe society; the relevant inputs and outputs are labour servicesand consumers' goods, respectively. Consumers' goods arepurchased and contingent labour services are provided byfamily members in representative roles on behalf of the household. Secondly, control of the creation of liquid funds throughcredit is the primary adaptive output from units of the polity;control of productivity is the primary output of the economyat this boundary. Finally, the third open boundary is the sourceof input of organization from the integrative sub-system of thesociety and the source of output of new combinations of thefactors of production.In a highly differentiated economy the exchange of primaryinputs and outputs is largely, but not exclusively, mediated byintermediary mechanisms. In the case of the household, labouris balanced by payments of wages, which are in turn the sourceof consumers' purchases (though not usually to the same firmswhich supply wages to the particular household). At theadaptive boundary, the control of the creation of credit isbalanced by certain "rights to intervene" in the supply anduse of the resulting funds, and the control of productivity isbalanced by certain "encouragements of enterprise." Thecommon element of these two intermediate interchanges isa sort of political endorsement of the credit standing of therelevant economic unit in question. Credit standing is a formof political power (i.e., the power to command facilities); hencethe interchanges at this boundary between the economy andthe polity are not "markets" in the usual sense of the term.Thirdly, at the integrative boundary, the input of entrepreneurial services is balanced by profits and the output of newproduct combinations is balanced by a kind of demand forinnovation.Besides this systematic linking between the economy and298
Economies and the Theory of Social Systemsthe other societal sub-systems, we barely indicated that theother three cognate systems undergo an equally systematicinterchange among themselves. All four related sub-systemsconstitute a coherent system.As a still further demonstration of our "special case" proposition, we submitted several well-known economic theories toan analysis in terms of the general theory paradigm. Schumpeter's "circular flow," for instance, can be interpreted asdealing with only one problematical "open" boundary, theG-boundary of the economy vis-à-vis the household. Theeconomy—the structure of which is provided by the commitment of land factors—adjusts to essentially random fluctuationsat this boundary.The classical theories leave all three of the boundaries open,but assume definite and symmetrical supply and demandfunctions for all of them. The general assumption is of continuity of slope of schedule, so that there is always a price whichwill clear the market of inputs or outputs of the economy.Such an assumption is approximately the same as the assumption that all decisions on the non-economic sides of the respective markets are made primarily on economic grounds.Keynes' modifications of classical theory focused at the Gand A-boundaries of the economy. At the former, he introducedtwo empirical modifications of the perfectly smooth classicalfunctions. For the labour market his assumption is that labourerswill withdraw employment completely at a certain low level ofwage offerings; for the consumption functions Keynes positedthe peculiar shape of the consumption-savings function byvirtue of which the proportion saved rises as income rises, butnot so rapidly. These two functions are the focus of massunemployment of labour. Such imbalances at the G-boundary,operating in conjunction with monetary and capitalizationmechanisms at the A-boundary—which has imbalances of itsown through the operation of "attitudes to liquidity" and itsrelation to expectation of yield, confidence, etc.1—can combineinto a vicious circle of depression. Such a vicious circle isnot possible under the strict classical assumptions.Schumpeter dealt primarily with the processes involved in1Certain aspects of Keynes' treatment of the investment process areinternal to the economy and hence were discussed in Chap. IV.299
Economy and Societythe input of organization and the entrepreneurial function.Indeed, he treated the A-boundary primarily as dependent onprocesses at the I-boundary. In a general way Schumpeter'sanalysis fitted our treatment of organization and its relationto the economy's integration. In sum, the differences between theclassical, Keynesian, and Schumpeterian analyses are attributable primarily to differences at the external boundarieswhich each considered relevant and the assumptions each madeabout the non-economic sides of these boundaries.The next stage of analysis dealt with the capacity ofsociological theory to handle problems on the non-economicside of these boundary relations. As a starting-point we developed an extended analysis of the institutional structure of theeconomy and of its primary external boundaries. We began thisanalysis with the conception of the division of labour and itsnecessary concomitant, exchange. The latter is the primaryprocess by means of which economic adjustments are carriedout. The framework within which exchange processes areregulated and stabilized is the institution of contract. Hencethe structure of the economy as a social system is a network ofinstitutionalized patterns regulating contractual relationships.Each contracting party in any relationship acts on behalf of acollectivity (e.g., the firm or the household), membership inwhich is of primary importance for the contractual relationshipin question; by interacting, the relationship between thecontracting parties or an indefinite plurality of such parties (amarket) constitutes a social system. Hence the same fourfundamental problems apply to the contractual relationshipas to any social system. Any given contracting party, therefore,is concerned with (g) the specific goal obj'ect of the exchangetransaction, i.e., to establish a relation between a "quid" (e.g.,quantity) and a "quo" (e.g., price); (a) the organizationalenvironment in which the settlement of terms takes place,especially power and facilities implications of the structure ofthe collectivities which both contracting parties represent; (i)the diffuse symbolic meaning of the terms of exchange asrelated to the welfare of the collectivity, its standing in themarket, etc., and (l) the patterns of value by means of whicha stable orientation for both parties is established. In general,g and a form the focus of the elements of "interest" in a con300
Economies and the Theory of Social Systemstractual relationship i and l—Durkheim's "non-contractualelement of contract"—the focus of social integration.We then applied this paradigm (which is relevant to anyexchange relationship) to the input of labour through thecontract of employment and the input of capital through thecontract of investment. These two contractual forms are thecentres of the nexus which constitute the institutions of occupation and property, respectively. In the first place, the gcomponent of these (and other) exchanges depends on the levelof generality of the factor of production in question. For bothlabour and capital as factors we discriminated among a seriesof levels extending from the genesis of the factor in the processesof social interaction to its final utilization in the performance ofproductive tasks. The series involves seven steps for each factor.The first three are primarily extra-economic and determinethe primary constraints on purely economic manipulation ofthe resources. The middle stage involves the "factor" itself in afluid state; at this stage the "labour force" and "generalizedpurchasing power," respectively, constitute the direct factorinputs into the economy. The last three steps constitutesuccessive stages of commitment within the economy (to a firm,a role, and a specific task, respectively) which are requiredactually to produce goods and services.Given these g-considerations, contractual relations vary alsoas a function of the a, i, and l components. For instance, therole of the breadwinner in a household is different, in all theserespects, from that of salesman for a firm. The i and l components are important in defining the responsibilities to thehousehold in the contract of employment and the fiduciary"political responsibilities" in the contract of investment.We next explored the relevance of these strictly sociologicalfeatures of contract to the economic problem of the imperfection of market structure. Economic theory, while it provides anexcellent analysis of certain consequences of imperfection,tends to treat the problem in terms of degrees of imperfection andunderplays the qualitative variation of types. On the basis ofour classification of contractual components, we isolated typesof imperfection in the labour market, the market for consumers' goods, and the "market" for productivity, and thecapital market. Thus the "one price" system in the consumers'301
Economy and Societymarket, collective bargaining in the labour market, andfiduciary organizations in the capital market are examples ofinstitutional deviations from the ideal of a system of perfectmarkets, deviations based partly on factors other than size offirm, differentiation of product, or degree of concentration ofpower. Even further deviations are evident in the market forprofessional services, which is characterized by such economically irrational practices as the "sliding scale." In general,therefore, even an approximation to a perfect market ispossible only in cases where both values and interests have cleareconomic primacy. The closest approximations are naturallyin intra-economic markets. In boundary processes in which oneof the contracting roles is anchored in another (non-economic)sub-system of the society, primary economic orientation iseffectively impossible. The qualitative character of the noneconomic anchorages and the specific contractual exigenciesin each of the above categories are the tentative bases for aclassification of sociological types of imperfection.With this background we turned to the problem of economicmotivation in general and the postulate of economic rationalityand the doctrine of "self-interest" in particular. To assume anygeneralized propensity of human nature such as the "rationalpursuit of self-interest" is precluded by our analysis; furthermore, such assumptions have not been borne out either bypsychological or by sociological theory. Economic rationalitywe treated, not as a "psychological" generalization, but as avalue system appropriate to the economy as a differentiatedsub-system of the society; it is institutionalized in the economyand internalized in personalities in their roles as economicagents. Given the generalized commitment to such a valuesystem, economic motivation is not different theoreticallyfrom that of any other behaviour in an institutionalized context.In order to analyse economic motivation, the relevant frameof reference is the generalized success goal as defined in thecontext of economic production. Both performance in the formof effort and achievement and direct monetary and othersanctions are components of the success goal. Further, moneyearnings are significant not only "in themselves," but assymbols (as formulated in the i-component of the contract ofemployment). Responsibility for the affairs of an organization302
Economies and the Theory of Social Systemsis symbolically "recognized"; this recognition is a statussymbol. Investment decisions were analysed on a similarbasis.In the fourth chapter we turned to some technical problemsof economic dynamics, especially the operation of the multiplierand accelerator as mitigated by time lags. Since these processesinvolved both internal and external economic interchanges, wedissected the four primary sub-systems of the economy evenfurther and examined the interchange among these subsystems within the economy.The major problem of dynamic economic analysis is thedegree of determinacy of empirical solution of certain dynamicproblems. We chose several models of the trade cycle—thoseof Samuelson, Kalecki, and Hicks—as illustrations to show thatin economic theory as such there is no basis to choose among arange of different assumptions concerning the values of themultiplier and accelerator functions and the number andduration of time lags. At the same time, empirical results varyover an enormous range, depending upon the particularassumptions.Economists most commonly handle such a difficulty byassuming "given" data for any particular empirical analysis.Such an operation is appropriate in so far as particular dataare in fact decisive in the solution of any specific case. To limitthe values of appropriate coefficients to one set of data, however, limits the empirical scope of the application of the model.The determinacy problem is, therefore, to arrive at a formulation of principles, on other than economic grounds, whichgovern the range of values of the functions relevant to thedynamic model in question.Sometimes this formulation of principles takes the form ofpostulating "propensities" of beh
a presumption in favour of our thesis that economic theory is a special case of the general theory of social systems. This presumption rested on two grounds: (1) the point-for-point correspondence of the logical structures of the two conceptual schemes, and (2) the fact that the goal of the econ
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