Posted by: Dirk | January 29, 2010

(Book review) The Passions and the Interests – Political Arguments for Capitalism before Its Triumph

Rereading Albert Hirschman’s 1977 classic today gives one a strange feeling. Hirschman review political arguments for capitalism before its triumph, while we are in a time where capitalism is clearly in crisis. Therefore, the book might be highly relevant to shed light on the the question why capitalism has failed to bring peace and prosperity to the people. Starting with the end of the book, the defense of capitalism by John Maynard Keynes was as follows (General Theory, p. 374):

Moreover, dangerous human proclivities can be canalised into comparatively harmless channels by the existence of opportunities for money-making and private wealth, which, if they cannot be satisfied in this way, may find their outlet in cruelty, the reckless pursuit of personal power and authority, and other forms of self-aggrandisement. It is better that a man should tyrannise over his bank balance than over his fellow-citizens; and whilst the former is sometimes denounced as being but a means to the latter, sometimes at least it is an alternative.

Keynes thinks that the accumulation of wealth will keep people busy and stop them from terrorizing their neighborhood. However, and this is the key point of Hirschman, it is not so clear whether this is really true. Thinkers like Montesqieu, Sir James Steuart and Adam Smith have discussed the subject in a richer way. This discussion has been lost, and Hirschman’s quest had been to bring it back into the mainstream.

He points out with Joseph Barnave that:

The mortals of a commercial nation are not completely those of merchants. The merchant is thrifty; general morals are prodigal. The merchant maintains his morals; public morals are dissolute.

Hirschman rightly points out that this is exactly what ecomonist’s are calling fallacy of composition: “an aggregation of private virtues can result in a state that is anything but virtuous.” Therefore, it cannot be said that a capitalist society will be peaceful because it is capitalist. This is bad news for the thinkers of the 17th and 18th century that hoped capitalism would create a strong check against the power of the prince (monarch, dictator,…). The problem they had faced was constant war and terror in European states. The cause they saw in passions determining actions. If that was so, then how could the passions of man be tamed?

Three possibilities come to (my) mind. Follow the idea of Buddhist thought and understand the emptiness of passions to overcome them. Follow the path to comprehensive truth and understanding (this one is not in the book). Or, let passions be countered by laws that put a price on them. However, this was hardly an option since legal systems were not very advanced by the time and enacting laws would have been a difficult political process that was far away from the one we know today. Third and last possibility, let passions be countered by passions. To make this happen, one would have to know which are the “good” (like aggressive pursuit of riches) passions with which to counter the “bad” (like fear of death) passions.

The term “interest” came to stand for “economic interest(s)”, and this was singled out as a “good” passion. Given some division of labour, any gains relied on the cooperation of people to exchange goods and services. You don’t want to rob the people you trade with, so this would give people – as we would say today – incentives to act peacefully. So, today’s incentives are the result of (endogenous) changes in culture. They are not external, like many modern economists believe.

Defending capitalism in our times should then not be based on the argument that it transforms “bad” passions into “neutral” money making. The story is more complicated than this, and one cannot take it for granted that capitalism will sustain peace by itself during all times. The aftermath of the Great Depression had undone this point. However, this episode has been largely ignored by the economics discipline and free markets have been praised to an overwhelming extent while social and cultural factors have been neglected. “Those who do not remember the past are condemned to repeat it”, Hirschman quotes Santayana at the end of his book (p. 133). The near future will show how the varieties of capitalism can cope with stress: Anglo-Saxon capitalism in the US and UK, the soziale Marktwirtschaft in Germany and Scandinavian countries, the Japanese economy and state-led capitalism in China.

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