What is an embedded economy?

by Thomas Storck

Probably nearly everyone would assent to the statement that the economy is meant to serve society, not the other way around. But despite the verbal acquiescence that would most likely be given to this statement, it is my contention that in fact for capitalist modernity most often the very opposite is true: society in fact serves the economy. As it has been expressed, "society itself becomes an `adjunct' of the market."[i] This claim applies most fully to the United States, the place where capitalism has been able to develop most freely and completely, where there are the fewest legal or cultural restraints on the operation of capitalism, and where capitalist ideals and motivations are most taken for granted and lauded.

When the economy serves society it can be said to be embedded in society, that is, it is not primarily looked at as a mechanism, separate or partially separate from society with its own laws and principles, but as a subordinate part of society, whose goals it shares and supports. But when the economy is not embedded in society it functions more or less as a separate and even superior principle, and economic or financial considerations alone determine economic decisions, rather than economic considerations being seen as only part of the complex of factors which should be taken into account.

Consider the question of wages. Under capitalism wages are looked at pretty much only from a purely economic angle. Opinion in the United States tends to regard wages as simply an economic or financial transaction between employer and employee, which in the end comes down to: What is the marginal productivity of the worker? What does he contribute to the profitability of the enterprise? And then, What wage does his contribution justify? Seldom is the wage looked at as the means of support for a family, hence for a community, a parish, a state or region. Those factors are ignored, they are not considered as relevant to the question. But wages and jobs are more than a financial transaction between an individual and a firm, they are an important nexus in the complex of human social relationships which make up a community. Only when their place in society is recognized, and the financial considerations balanced by other concerns, can we say that an economy is embedded in, and hence, subordinate to, the needs of society.

When a company decides to move its factories to another location, where labor costs are cheaper, seldom is there any condemnation of such a move based on the integrity of the society which is being abandoned. Neighborhoods, parishes, cities, entire regions effectively die, but this is seen as something inevitable, simply the way economies work. And indeed, this is true. As long as economic activity is conducted with little or no regard for anything beyond economic considerations, people and the societies they have built will always be at the mercy of those who hold economic power, companies whose only concern is maintaining their profits, or who are even motivated by trying to increase their profit margins over against their rivals.

This is not to say that economic factors can be ignored or wished away. Obviously they must be taken into account, but taken into account not exclusively, but along with other equally or more important factors. I will say more about this below when we look at the difference that distributism could make to this question.

Another example of the lack of an embedded economy can be found in the field of education. In the United States education, and especially higher education, is regarded most often as merely an economic investment. The fact that, at least till recently, those with degrees generally fare better financially is the justification for higher education most often advanced, and advanced with seldom any objection. Now that this appears to be changing, the discussion centers around whether getting a degree still "pays," whether it is still a good investment. Education as initiation into the world of learning, as enabling one to be free of the prejudices of one's time and place and learning to truly think - though occasionally such considerations are brought up, mostly as window dressing for university recruitment literature, for the most part the discussion of higher education is conducted solely around questions of individual financial investment.

The same merely economic questions dominate much of our discussion of both environmental and consumer protections. Will protecting the environment or protecting the consumer destroy jobs? How often is the question even raised as to whether having a job which at the same time subjects the worker or his family or society in general to unhealthy or unsafe conditions or products is a good thing or not? But even a job that pays well but that at the same time injures the worker's health hardly seems like a good bargain.

Now how did such a situation, a situation in which economic or financial considerations are the only factors, or the chief factors, considered, arise? I think that the following from Hilaire Belloc exposes the root of the matter.

But wealth obtained indirectly as profit out of other men's work, or by process of exchange, becomes a thing abstracted from the process of production. As the interest of a man in  things diminishes, his interest in abstract wealth - money - increases. The man who makes a table or grows a crop makes the success of the crop or the table a test of excellence. The intermediary who buys and sells the crop or the table is not concerned with the goodness of table or crop, but with the profit he makes between their purchase and sale. In a productive society the superiority of the things produced is the measure of success: in a Commercial society the amount of wealth accumulated by the dealer is the measure of success.[ii]

If we ask ourselves the question of why mankind needs economic activity, the answer is obvious. God has created us in such a way that we need external goods just to survive, let alone to live a truly human life. It is thus the things that an economy produces, the goods and services, that are important. But capitalism, the separation of ownership and work,[iii] always tends to change the focus from things to money. "As the interest of a man in things diminishes, his interest in abstract wealth - money - increases." A craftsman obviously desires to support himself and his family by his work - but most often he is truly interested in his craft, and sees it as something more than simply a means of making money. He takes pride in his skill and in his productions. A capitalist owner of a factory, on the other hand, tends to be more interested simply in sales. He himself does not work in the factory, he himself does not have the pride of the craftsman. Of course there are exceptions to this, both ways, but this is how capitalism generally operates. In the most developed type of capitalist arrangement, the corporation, the legal owners of the corporation often scarcely know or care what the firm actually does, so long as their dividend checks keep coming or the value of their stock rises. They are completely divorced from the production process and their interest is entirely in financial gain. Hence the money standard reigns supreme in a capitalist or commercial society, and this standard tends to infect all other areas of life.

Distributism, however, offers a remedy for this. If we understand capitalism as the separation of ownership and work, distributism is the union of ownership and work. Its most characteristic form is the small business, in which the owner actually participates in the work, assisted perhaps by family members or trainees (such as the medieval apprentices of journeymen). Of course, distributists recognize that today this form is not suitable for all types of business or industry. Sometimes larger entities are needed. If so, such larger entities can be owned by their employees and run in a democratic manner. This is by no means a fantasy, as the successful operation of the Mondragon cooperatives in Spain shows.

Let us look at how distributism might deal with some of the situations mentioned above, situations that capitalism regards as simply governed by a financial calculus.

For capitalist owners, labor is an expense item. The more that the owners are separated from the actual work, and from the actual workers, the more an owner is likely to think this. A capitalist owner of a small business who works alongside his employees, may well look upon them as human beings or even friends, not just as factors of production or expenses. But the general tendency of capitalism is otherwise: labor is a cost item; hence the pressure to reduce those costs as much as possible. But what for capitalists are labor costs, for workers is a living, their living and that of their families. Moving a factory to a cheaper location may seem to make sense for someone who regards the company as simply a way of maximizing profits, but it can hardly make sense for someone who depends on that factory for the job that supports himself and his family. Just as a professional or small proprietor, when faced with difficult economic conditions where he lives and works, before deciding to relocate, normally will take into account many factors, such as the needs of his family, both immediate and extended, their roots in and attachment to that place, his children's school situations, and so on. When ownership of the means of production is distributed among workers and families, then they also have the opportunity to consider other factors besides the purely economic. In an economic downturn workers who are at the same time owners will naturally look upon themselves and their families as more than mere "labor costs," and hence consider other options besides simply layoffs or plant closings. They will see the economic elements as part of a complex of factors embedded in their community, as something which concerns more than simply money. They will be able to consider their families, their friendships, their parish, their attachment to the locale, and so on, along with purely economic factors. But as long as the capitalist economic structure is in place, the mass of workers will not even have the opportunity to consider such non-economic factors or make these kinds of decisions. Distributism, then, recommends itself as superior, ethically, and otherwise, to capitalism.

Since in a distributist society it is not "the amount of wealth accumulated by the dealer [that] is the measure of success," matters such as education can also be looked at in a different light, and no longer be measured solely by a financial yardstick. Delight in learning, coming to share in the intellectual patrimony of humanity, learning to overcome prejudices of time or place - these elements can now be considered reasonable and respectable criteria, and not be met by the sneer of, What can you do with a degree in philosophy or art history or literature? In a society based on money, love of learning, having little or no cash value, is not taken seriously.

God certainly ordained that mankind should engage in economic activity - but economic activity directed toward use, toward "things," not "abstract wealth." The dominance of markets, and hence the distortion or perversion of what an economy was meant to be, has had profoundly negative effects on human life. It has created the commercial society, in which money and exchange have taken the place of production for use and the economy is no longer embedded in society.

No society could, naturally, live for any length of time unless it possessed an economy of some sort; but previously to our time no economy has ever existed that, even in principle, was controlled by markets.... Though the institution of the market was fairly common since the later Stone Age, its role was no more than incidental to economic life.[iv]

Distributism is not simply a different way of arranging ownership - it implies a different fundamental attitude toward economic activity and its place in society. We need to do whatever we can to encourage all the nascent distributist activity occurring now - such as farmers' markets - but equally importantly, we need to learn the reasons for distributism, to embrace correct views on economic matters, to change our thinking as well as, wherever we can, our behavior.

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Notes:

i Ellen Meiksins Wood, "From Opportunity to Imperative: the History of the Market," Monthly Review, vol. 46, no. 3, July-August 1994, p. 20, summarizing the ideas of Karl Polany's book, The Great Transformation.

ii An Essay on the Nature of Contemporary England (New York : Sheed & Ward, 1937) p. 67.

iii Cf. Pius XI, Quadragesimo Anno, no. 100, where he characterizes capitalism as "that economic system in which were provided by different people the capital and labor jointly needed for production."

iv Karl Polany, The Great Transformation (Boston : Beacon, c. 1944), p. 43.