Economics for Humanity: Integrating Well-being, Community, and Practical Philosophy

Okabe, Mitsuaki Book Economics for Humanity: Integrating Well-being, Community, and Practical Philosophy Routledge Frontiers of Political Economy Provided in Cooperation with: Taylor & Francis Group Suggested Citation: Okabe, Mitsuaki (2025) : Economics for Humanity: Integrating Wellbeing, Community, and Practical Philosophy, Routledge Frontiers of Political Economy, ISBN 978-1-040-12300-3, Routledge, Oxford, https://doi.org/10.4324/9781003478447 This Version is available at: https://hdl.handle.net/10419/312727 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ “Pioneering work that usefully broadens our common understanding of Economics itself.” Kent Calder, Director, Reischauer Center for East Asian Studies, Johns Hopkins University SAIS, USA “Mainstream economics assumes, most of the time, man as homo economicus, which is very convenient to build up an elegant scientific discipline. Accordingly, economics is often praised as ‘queen of social sciences’. But, if economics integrate more diverse human motives, we can expand the scope and the depth of mainstream economics toward more fruitful humane economics. This book rigorously and convincingly agues, probably for the first time in the literature, that this is the direction of economics to expand.” Nobuhiro Suzuki, Professor, University of Tokyo, Japan Economics for Humanity Economics is often referred to as “the queen of social sciences.” This is because mainstream economics has been established as an elegant academic discipline by assuming mankind simply to be homo economicus— an image of human beings showing interest in only material fulfilment and acting solely in his interest. This book challenges this basic perception of human beings. By replacing it with a more realistic and multifaceted human motive as supported by research in various academic disciplines, the book tries to provide a novel and more plausible picture of human society. Specifically, the book takes in such human aspects as pursuing wellbeing, forming human networks, and the realisation of potential of ability. Thus, if we try to better understand human motives and the society, it becomes necessary to replace the conventional twosector (market– government) social model with a more general and theoretically superior social model, the “threesector model” consisting of market– government– nonprofit sectors. This book demonstrates the validity of this new view by utilising basic principles of economic policy and social welfare analyses. Moreover, the book has introduced a newly developing practical philosophy in Japan over the last 50 years to achieve both individual wellbeing and better human society. Mitsuaki Okabe is Professor Emeritus of Keio University, Japan. Routledge Frontiers of Political Economy Macroeconomics After the General Theory Fundamental Uncertainty, Animal Spirits and Shifting Equilibrium in a Competitive Economy Angel Asensio A History of Capitalist Transformation A Critique of LiberalCapitalist Reforms Giampaolo Conte Economics as Rhetoric The Thought of Bernard Maris Anne Isla Translated by Aude Di Paolantonio Inequality and Stagnation A Monetary Interpretation Capraro, Panico and TorresGonzález Political Economy of PostCapitalism Financialization, Globalization and Neofeudalism Richard Westra The Political Economy of Mediterranean Europe A Growth Models Perspective Luis Cárdenas and Javier Arribas Economics for Humanity Integrating Wellbeing, Community, and Practical Philosophy Mitsuaki Okabe For more information about this series, please visit: www.routle dge.com/ Routle dgeFronti ersofPoliti calEcon omy/ bookser ies/ SE0 345 Economics for Humanity Integrating Wellbeing, Community, and Practical Philosophy Mitsuaki Okabe First published 2025 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2025 Mitsuaki Okabe The right of Mitsuaki Okabe to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Okabe, Mitsuaki, author. Title: Economics for humanity : integrating well-being, community, and practical philosophy / Mitsuaki Okabe. Description: Abingdon, Oxon ; New York, NY : Routledge, 2025. | Series: Routledge frontiers of political economy | Includes bibliographical references and index. Identifiers: LCCN 2024014242 | ISBN 9781032764474 (hbk) | ISBN 9781032764504 (pbk) | ISBN 9781003478447 (ebk) Subjects: LCSH: Economics. | Social sciences. Classification: LCC HB171 .O37 2025 | DDC 330–dc23/eng/20240612 LC record available at https://lccn.loc.gov/2024014242 ISBN: 9781032764474 (hbk) ISBN: 9781032764504 (pbk) ISBN: 9781003478447 (ebk) DOI: 10.4324/9781003478447 Typeset in Galliard by Newgen Publishing UK Contents List of tables ix List of figures x Preface xi Acknowledgements xii Introduction and overview 1 PART I Groundwork for bettering economics 7 1 Need for economics to fully integrate human nature 9 1.1 Developments in economics in recent years 9 1.2 Light and shadow of mainstream economics 13 1.3 From mainstream economics to economics for humanity 21 1.4 Addendum: mathematics is a (powerful) language 26 2 Inheriting from Adam Smith: ethics and other human factors 33 2.1 Adam Smith’s view on human nature and society 33 2.2 Adam Smith’s view on human potentiality and its recent developments 37 2.3 Conflicts between market transaction and good life 43 2.4 Approaches to a good life 52 3 Considering humanity (1): altruism 59 3.1 Significance and various aspects of altruism 59 3.2 Reviewing altruism from various academic disciplines 60 3.3 Altruistic activities contribute to wellbeing and health 64 3.4 An economic model incorporating altruistic behaviour 65 DOI: 10.4324/9781003478447-1 Introduction and overview The area covered by economics is remarkably wide. However, this book is not intended to take up and analyse some specific economic issues. But it is an attempt to broadly question today’s mainstream economics from the fundamental perspective of a desirable social science when dealing with various issues. In other words, in current mainstream (neoclassical) economics, the general understanding is that humans are beings who act with the aim of increasing their own consumption (maximising utility) and that society is a set of such individuals. Both of these perspectives are assumptions that facilitate economic analysis, which has induced the mathematical development of economics, and has also led to the construction of a rigorous and beautiful intelligent system that is not found in any other social sciences. As a result, economics has often been described as the ‘queen of the social sciences’. The basic goal of this book is to provide a critical assessment of the mainstream economics and to propose an alternative and humane economics.1,2 No matter how scientific the research may be, it is unacceptable to ignore humanity. Indeed, Mahatma Gandhi, who contributed to India’s independence, noted in 1925 that ‘science without humanity’ is one of the Seven Social Sins. The other six he listed were: wealth without work, pleasure without conscience, knowledge without character, commerce without morality, religion without sacrifice, and politics without principle (Wikipedia: Seven Social Sins). Thus, it may be natural that such expressions as ‘Humane Economics’ or ‘Humanomics’ can already be found as the title of some books3, as well as in several research papers4. However, they generally and merely assert that ‘economics needs to incorporate more of the diverse nature and aspects of human beings,’ and thus are clearly limited in their content. This book, by contrast, is not only unique in its title itself, but also goes much further in its argument than books with similar titles. The author explores and presents in this book his own answers to a series of such challenging questions as follows. Namely, (1) where we can find a scientific basis for changing the conventional view of human beings assumed by economics, (2) what kind of social view (specifically, the threesector model to 2 Introduction and overview understand human society as presented in Chapter 6) will result from such a change, (3) how we can explain the validity and superiority of such a social view by using the analytical tools of economic and public policy theories (Chapter 7), and (4) whether there is a way to achieve both the pursuit of individual happiness (e.g. selffulfilment) and the building of a better society (Chapters 8 and 9)5,6. This publication is intended to present the author’s academic analysis congenial to international research community. However, he hopes the reader may find that in some respect the underlying value and the way of thinking therein partly reflect the Japanese or Oriental tradition7. Overview of this book This book consists of three parts. The nature of each parts is shown below, and a brief chapterbychapter overview covering the abovementioned issues is presented. In Part I ‘Groundwork for bettering economics,’ we critically review the essence of mainstream economics, and explore key elements that are to be integrated in order to make economics more humane scholarly research. Chapter 1 ‘Need for economics to fully integrate human nature’ presents the current features of mainstream economics in somewhat theoretical way, points out that there are basic problems with it, and suggests the research directions needed to overcome the problem. In other words, the chapter argues that: (1) mainstream economics has traditionally assumed simple characters of human beings (materialism, selfishness, individualism); (2) human society has been understood as a set of such individuals (the way to understand it being termed as ‘methodological individualism’); (3) on the contrary many related fields (psychology, cultural anthropology, sociology, neuroscience, etc.) have demonstrated that human is social creature (having some sense of being connected, ethics, and altruism); and (4) economics needs to be developed as a discipline that incorporates such human characteristics (and need to become Economics for humanity). Chapter 2 ‘Inheriting from Adam Smith: ethics and other human nature’ examines how humans should be understood from the perspective of the history of ideas and social philosophy. The chapter argues that: (1) Adam Smith ‘the father of economics’ actually has, along with The Wealth of Nations (1776), another major work, The Theory of Moral Sentiments (1759); (2) Smith argued in the latter that human beings have not only selfinterest but also sympathy for others, beneficence, and a moral sense; (3) Smith understood further that human beings usually have a potential capacity that is not yet manifested; (4) economics needs to reaffirm and inherit Smith’s view of human nature and develop it in a new way; and (5) it would enable broader arguments that are not solely marketoriented (e.g. also considering ethical aspects of public policy and happiness through the flowering of potential), thus broadening the scope of economics. Introduction and overview 3 Chapter 3 ‘Considering humanity (1): altruism’ defines altruism and outlines traditional understandings of it, by taking into researches from a number of academic disciplines. And the chapter asserts that: (1) altruism is usually understood to include two kinds: pure altruism (cases in which selfinterest is not taken into account at all) and impure altruism (cases in which satisfaction from altruistic behaviour is involved), (2) research from many academic disciplines (psychology, sociology, anthropology, biology, neuroscience, etc.) has shown that humans have altruistic sentiments; (3) there is also a movement to promote altruistic behaviour, to take advantage of the fact that altruistic behaviour brings happiness and health to people; and (4) some theoretical models have been proposed to incorporate altruistic behaviour into the standard model of economics (individual’s utility maximising behaviour with additional constraints). Chapter 4 ‘Considering humanity (2): social networks’ utilises modern network science and discusses the nature of human network, a trait closely related to altruism. It argues that: (1) humans tend to be intrinsically connected (tend to form social networks); (2) this characteristic is supported by research in many academic disciplines (evolutionary theory, genetics, biology, behavioural science, etc.) and there is a strong view that it originates in human nature; (3) individual thoughts and behaviour are influenced by social networks, while conversely they clearly influence others (but only up to three degrees of separation); (4) in social networks, the inescapable awareness of the other generates altruism in humans, while at the same time creates shared resources (‘social relational capital’ useful to human society) that enable human societies to fulfil their potential; and (5) mainstream economics, which is founded on methodological individualism, therefore takes little account of these matters, so that economics needs to broaden its horizons in the future. In the above four chapters, it was argued in turn that there are major problems with contemporary mainstream economics. In other words, it has been assumed that humans are homo economicus (economic man) and that they are subjects who behave in a onedimensional and simple way (Chapter 1); that Adam Smith had a broad view of humans but researchers have long misunderstood or ignored it (Chapter 2); that humans are assumed to be selfish and the view that they have altruism has usually been rejected (Chapter 3); and as a result, mainstream economics has the problem to look at society as an arithmetical sum of selfinterested individuals and lacks the important aspect of human networks (Chapter 4). Part II ‘Overview of economics for humanity’ discusses the direction and the nature of economics for humanity, and provide a theoretical proof of that direction. In Chapter 5 “Towards ‘economics for humanity’ ” clarifies that the basic idea of modern mainstream economics, which have the above problems, is only a too easy way to understand the society (oversimplification) and argues that a broader perspective that incorporates ‘human nature’ is necessary to better understand the human society. Accordingly, this chapter discusses that: (1) there are three main ways or frameworks for understanding 4 Introduction and overview the link between human behaviour and society [(a) methodological individualism, (b) methodological holism, and (c) science of social networks]; (2) the most appropriate view of society is not simply based on the above (a) but is obtained by adding the viewpoint (c) (a view of human beings that may be called homo socialis or societal man); and (3) if based on such a view of man and society, economics can become a social science with a richness that can be expressed as ‘economics for humanity’ . In Chapter 6 ‘Threesector model of the economy’, a detailed argument is presented that, if the human and societal view in the previous chapters is to be embodied to understand the society, it becomes necessary and appropriate to extend the conventional theoretical framework of the socalled ‘twosector (market– government) model’ to ‘threesector (market– government– community) model’. And, the book argues further that: (1) the third sector to be newly introduced can generally be described as ‘community,’ and its form and principles of action are characterised by a more humane element than those of the market or government; thus (2) the threesector model, which has an economicanthropological basis, should become a basic perspective for understanding human society regardless of time and culture; (3) the newly introduced third sector is often referred to as the ‘nonprofit sector’ (NPO) in the United States and the ‘third sector’ in Europe; and (4) this sector, regardless of the name, has the function of providing quasipublic goods or quasipublic services, and brings significant benefits to society. Chapter 7 ‘Theoretical bases of the threesector model’ argues that the paradigm shift from ‘twosector (market– government) model’ to ‘threesector (market– government– community) model’ is valid not only from the viewpoint of economicanthropology, as shown in Chapter 6, but also on the ground of basic theories of economic policy. The argument here is that: (1) the basic policy prescription of mainstream economics is problematic in that it puts too much, if not exclusive, emphasis on efficiency and excludes human or ethical factors so that some such factors need to enter; (2) the addition of policy goals can logically be justified by understanding the economy to consist of three sectors in light of the basic propositions of economic policy theory (Tinbergen’s principle, Mundell’s theorem and Poole’s proposition); (3) public policy based on the threesector model can theoretically achieve a higher level of social welfare than in the case of the twosector model; and (4) although there have already been several proposals for the idea of ‘threesector models,’ no author so far has theoretically discussed the appropriateness and effectiveness of the scheme in terms of economic policy theory or in terms of improving social welfare. Therefore, the author presumes that the theoretical discussions in this chapter is novel. Part III ‘Enriching human society: a practical philosophy’ explains a system of new thought of selfimprovement which deeply relates both to individual wellbeing and better society. This topic may seem to be unusual and too overly an extension for economics. But, given the ultimate objective of Introduction and overview 5 economics, the author conjectures that this kind of academic research may be regarded to one new direction of economic or social researches. Chapter 8 ‘A practical philosophy for wellbeing and better society (I)’ first, (1) takes up a general topic of ‘selfimprovement,’ and consider its significance by reviewing some related books on the topic, including the ‘practical philosophy’ which was born in Japan, then, (2) explains the basic elements and the framework of the practical philosophy. Finally, Chapter 9 ‘A practical philosophy for wellbeing and better society (II)’ explains the essence of that practical philosophy developed by Keiko Takahashi (1956– ) in Japan since the 1970s, and evaluates it by referring such works as Adam Smith and Amartya Sen, as well as referring to modern psychology and the statistical evidence. And, the chapter concludes that: (1) the improvement of human character (personality) is required in order to realise one’s potential, (2) the work for every man or woman has the important function of connecting oneself with society and bringing a sense of purpose to one’s life, (3) the practical philosophy fulfils these conditions effectively, (4) the number of sympathisers and practitioners has recently been increasing both nationally and internationally, partly due to the diversification and flexibility of the study methods of the practical philosophy, and (5) future developments of this practical philosophy is worth closely watching, owing not only to an affinity with the spirituality orientation of modern people but also to a growing number of cases where the practice is contributing to building a better society through the practitioner’ own profession and work. Notes 1 An example of building on this awareness is a recent report by an international organisation (OECD 2020). The report points to the need to break away from the traditional focus on economic growth and switch to a perspective that emphasises four multidimensional concepts (environmental sustainability, improving living conditions, reducing income and asset inequalities, and improving crisis preparedness). It also emphasises the need to switch from the selfish and individualistic image of the human being conventionally assumed by economics to an understanding of the ‘social human being’ (ibid.22). The image of the human being assumed there is consistent with one of the perspectives of this book (see Sections 1.3 and 2.4). 2 Note that a global pandemic of COVID19 after 2020 has a major impact on the lives and wellbeing of people worldwide (OECD 2021) and has been an urgent and important problem to consider. But this book does not discuss that issue directly. 3 As a book title, Humanomics is used in Heuser (2008; in German), Smith and Wilson (2019), and McCloskey (2021). Similarly, Humane Economics is the book title of an edited volume by High (2006). 4 McCloskey (2016: title of article), and Morson and Schapiro (2017: 8, 288). 5 The author of this book once stated the need for a new economics to meet these challenges in his book (in Japanese) Humanity and Economics - Towards a New Paradigm for Social Science (Okabe 2017a). And, he developed that direction 6 Introduction and overview further in a more recent book (in Japanese) Humanomics: Exploring Economics Based on Human Nature (Okabe 2022a). The present publication is, as already mentioned, the condensed version written in English of the latter. 6 Fortunately, a group of researchers in physics, who proposes a new system of understanding from a larger perspective than the current particle physics, has drawn attention to the proposal of a new framework developed in Okabe (2022a) evaluating it as research of similar nature (Sakuma et al. 2024: 19). This observation is very much appreciated. 7 For instance, the author’s earlier book (Okabe 2017a) academically discussed for the first time the Japanborn practical philosophy (as in the present book in chapters 8 and 9). Also the same book took up the importance of morality quoting Indianborn philosophereconomist Amartya Sen’s argument as in this book (as in Chapter 1– Section 3). More broadly, the book reflects such view as the general image of business corporation perceived not as accumulated capital but rather as a human group, which used to be a powerful perspective on the characteristics of Japanese companies (Itami 1987). Still further it has been the historical Japanese view to unify economy and moral (Shibusawa 1938). Part I Groundwork for bettering economics DOI: 10.4324/9781003478447-3 1 Need for economics to fully integrate human nature 1.1 Developments in economics in recent years Economics is the social science that1 studies the production, distribution, and consumption of goods and services (Krugman and Wells 2009: 2). It may alternatively be said that it is a study of the sufficiency of goods and services, for both individual and society as a whole. More specifically, then, from what perspectives or assumptions has economics developed? In this section, we will present a brief framework for understanding the development of economics in recent years and characterise the state of contemporary economics based on this framework. 1.1.1 Assumptions in economics In economics (and especially in its theory) characterised as above, several basic assumptions have been made over the years to facilitate analysis, under which the system of economics has been built. These are, for example, the assumptions of: (1) perfect information (bargaining parties have the same information), (2) rational choice behaviour, (3) profitmaximising behaviour of firms, and (4) selfish utilitymaximising behaviour of humans. However, analyses that do not make such assumptions have gradually developed, as there are aspects of these assumptions that diverge significantly from reality. Examples include the followings. First, with regard to (1) above, the concept of ‘information asymmetry,’ which does not assume perfect information, was introduced, and human behaviour and markets under such conditions have been analysed by Stiglitz and others since the 1970s. As a result, a new understanding of economic transactions has emerged.2 Regarding (2) above, the idea of ‘bounded rationality’ (i.e. that humans do not always behave rationally in their choices) was asserted relatively early on by Simon3 and it became clear that in such cases, human and organisational decisionmaking would differ from conventional understanding. This was the 16 Groundwork for bettering economics • Maximisation target: Lifetime satisfaction = Satisfaction this year + Satisfaction next year + Satisfaction third year + . . . • Budget constraint: The sum of consumption and increase in net assets cannot exceed the sum of wage income and property income. Figure 1.3 Individual optimisation behaviour (meaning of Figure 1.2). Source: Okabe (2022a) table 13. Originally extracted from Blanchard and Fischer (1989: 48). Returning again to Figure 1.2, the meaning of equation (1.1) can be somewhat elaborated as follows: U represents the utility (i.e. degree of satisfaction) of an individual in year s. And, equation (1.1) shows that his or her utility is determined by the amount of goods and services he or she is able to consume (quantity consumed) and that he or she acts to maximise his or her utility (in English, the satisfaction corresponds to utility, so here such an objective function is indicated by U). And, it is the view of modern mainstream economics that a person’s utility can be expressed, more specifically, by the righthand side of this equation.16 That is, the utility u at a given time t depends on the individual’s consumption ct and can therefore be expressed as u(ct). However, in order to evaluate utility at a future point in time at the present time, it needs to be discounted (i.e. to be evaluated in terms of discounted present value), and the second term (the power value of e, denoted by exp)17 is multiplied to indicate this. The utility at one period t is first expressed as a multiplication of these two values. The utility of each succeeding period, expressed is then summed up from the present to the future, i.e. ‘the accumulated discounted present value of utility from one point in time to eternity (in fact, to the end of life),’ which is the total utility Us of the individual at a given point in time, and is understood to be the value of the individual’s total utility at a given point in time. This is the understanding that the individual acts in such a way as to maximise it. However, utility (satisfaction) based on such consumption cannot be increased without limit. This is because individuals face certain constraints. Equation (1.2) expresses that constraint.18 Namely, it is the constraint that ‘the sum of consumption ct and increase in net worth (at) cannot exceed the sum of wage income wt and property income (rt at)’ (which is called the budget constraint). In other words, the constraint is that ‘the sum of consumption and increase in net worth cannot exceed the sum of wage income and property income,’ or, put simply, that individuals ‘cannot consume more than the income they receive in the long run (income from work and from assets held)’.19 This in itself is a natural assumption, and this constraint means that Need for economics to fully integrate human nature 17 satisfaction cannot increase limitlessly. Thus, modern economics understands that individuals base their rational behaviour on maximising their own utility under the condition of an income constraint. In a more general framework, this concept of utility maximisation can also be understood as the rational decisionmaking of a person to compare costs and benefits. In this case, the factors that encourage individuals to act, i.e. incentives (expectations regarding rewards or punishments) and their reactions to them, are studied. In fact, the relatively new fields of economics that have developed in recent years (game theory, contract theory, information theory, agency theory, etc.) can be positioned as researches that focus precisely on ‘incentives’.20 1.2.2 The lights and shadows of mainstream economics The above is a rather rigorous sketching of the human view (behavioural assumptions) underlying contemporary mainstream economics, as well as a look at some new developments in economics in recent years. On the basis of the above, it can be said that mainstream economics has both significant and highly praiseworthy aspects (the light or beauty of the discipline, so to speak) and aspects that have not been fully considered or issues that remain unresolved (the shadow, so to speak). In the following, therefore, the basic character of modern economics will be highlighted from the perspective of ‘light and shadow’. 1.2.2.1 Economics as the ‘queen of the social sciences’ The author has summarised that, broadly speaking, modern economics has three characteristics. These are: (1) elaboration and systematisation, (2) expansion of the scope of analysis, and (3) collaboration with adjacent disciplines.21 This continuing development has led economics to have rigorousness,22 systematicity, and developmental potential, not found in other social sciences.23 For this reason, economics is sometimes referred to as the ‘queen of social sciences’. The first of these features (refinement and systematisation) can be seen typically in the assumption of simple (mathematically expressible) human behaviour, as described above, and the rigorous mathematical development often follows. Incidentally, the papers published in the recent issue of the Japanese Economic Review (Vol. 69, No. 2, published in June 2018), the Englishlanguage journal of the Japanese Economic Association,24 and the human image (utility functionssubject to maximisation) assumed therein, are shown in Table 1.1 (explanationof variable names omitted). As the themes of the articles indicate, the economic phenomena analysed there are relatively general and diverse, but it can be seen that in mainstream economics, even when analysing such matters, the emphasis is on relating various phenomena back to the motives for action (utility functions) of individual economic agents. In such cases, the specific shape of the utility function (U) and the variables that appear in it naturally vary depending on the topic of the paper, but in recent economic papers, even macroeconomic phenomena are emphasised (and in some cases made 18 Groundwork for bettering economics mandatory) to have this kind of ‘microeconomic basis’ (microfoundation). Thus, macro and micro are now integrated and systematised, at least in theory. Furthermore, in such cases, natural scientific methods of analysis can be applied, which leads to an emphasis on three key concepts in mainstream economics: maximisation, equilibrium, and efficiency (Okabe 2017a: 34– 35). In addition, it is often said that one measure of whether a discipline is systematic is the existence of a general textbook on the subject. Let us look at economics textbooks (university textbooks at elementary or intermediate level) from this perspective. For example, the introductory (Mankiw 2021) and intermediate (Mankiw 2018) economics textbooks by Mankiw (Harvard University, USA), as stated by the author himself, were written with the main aim of conveying standard content while avoiding bizarre content (Mankiw 2020: 215– 217). For this reason, these textbooks are used in universities all over the world and a total of 4 million copies (including foreign translations) have been sold to date (ibid.). From this example, it can be said that there is clearly a standardised system in modern economics. Secondly, the feature of economics (expansion of the scope of analysis) is also striking. In particular, there is a trend in research towards a unified understanding of human behaviour and society by applying the abovementioned rational behaviour model of ‘economic man’ to diverse human activities, which has formed one major trend within economics.25 Such research trends have successively incorporated many areas into economics, such as family, discrimination, religion, and other areas of sociology, law, political science, as objects of analysis for economics. This tendency of Table1.1 Microeconomic foundations as emphasised in theoretical analysis (illustrative examples) Themes of the paper Individual utility functions used there Example1. Regional differences in fertility rates and economic transactions U ACm ii i a i a =+    − 1 1 µ µ Example2. Life risks from pollution and economic growth Utcp pd t tt =− () +− () {} ∞ ∫explnln ρσ 0 Example3. Fiscal expansion and market entry of enterprises U uC He dt tt t = () − ∞ ∫ , ρ 0 Example4. Workers’ social status and economic growth ects kt dt t− ∞ () + ()    ∫ ρ loglog 0 Note:The papers in examples1–4 are, respectively, Morita and Yamamoto (2018), Oura, Moridera and Futagami (2018), Chang etal. (2018), and Chen etal. (2018). The meanings (definitions) of variables in each paper are omitted here in this table to avoid redundancy. Need for economics to fully integrate human nature 19 economics to apply its logic (selfinterest and rational behaviour) to noneconomic phenomena has been termed ‘economic imperialism’ (Lazear 2000). A leading researcher advocating such an approach was Gary Becker (1930– 2014)26 of the University of Chicago, USA. Becker’s early work included ‘A theory of marriage’ (Becker 1974), followed by ‘A theory of rational addiction’ (Becker and Murphy 1988), which focused on alcohol and drugs. And, in later years, some such exceptional studies as ‘Suicide: an economic approach’ (Becker and Posner 2004) can be found.27 Meanwhile, Barro and McCleary (2019) of Harvard University, USA, recently published a book Economics of Religion. The authors claim that the book ‘does not concern itself, per se, with theology, doctrine, and the content of religious beliefs. Rather, we are interested in the economic costs and benefits to holding certain religious beliefs and the influence of those beliefs on behaviour’ (p. 4) as their position. In these studies, both the scales for evaluating human behaviour (objective function) and the assumptions of behaviour (rationality) are simple, and the researchers certainly avoid having specific value judgements. However, even if efficiency itself is valueneutral, it is essential to keep in mind that the position of efficiency will naturally change when various other evaluation measures are considered at the same time (there may be cases where it becomes more important to give priority to equity, humanity,28 etc.) before discussing the subject matter. It is important to point out here that it is essential to discuss the subject matter with this in mind (Okabe 2017a: 40). With regard to the third characteristic of economics (collaboration with neighbouring disciplines), as mentioned above, the perspective has been broadened by the active incorporation of the results of psychology and behavioural science into economics, and interdisciplinary research areas (such as behavioural economics) have developed. 1.2.2.2 Strengths and weaknesses both depend on how it views human beings As described above, modern economics has developed in many aspects. However, on the other side of this glorious aspect, a darker side inevitably arises. Therefore, for social science to become truly strong, it is also essential to examine economics once more from the latter perspective. This, the author believes, will make economics and the social sciences more fruitful. The ‘light’ part of mainstream economics, as mentioned above, is derived from the fact that, as repeatedly mentioned, economics assumes a distinctive image of human beings (homo economicus). In other words, to be more specific about the ‘economic man,’ it assumes that human beings are beings with three characteristics: materialism, egotism, and individualism (left column of Table 1.2).29 Materialism refers to an understanding of the object of interest, whereby people are only interested in goods and services that they can actually enjoy. Egotism is an understanding of behavioural patterns in which the pursuit of human beings is to increase his or her own satisfaction based on an increase in goods and services. Individualism is an atomistic view of human beings 20 Groundwork for bettering economics that such individual behaviour is not influenced by, or has no effect on, others. It is precisely on the basis of these three assumptions that mainstream economics is able to analyse and theorise rigorously and precisely (elaboration and systematisation as mentioned above). It also tends to apply its analytical methods to human behaviour other than the economy (expansion of the object of analysis). Furthermore, there is a recognition of the need to seek a broader view of human behaviour and to incorporate it into economics (collaboration with adjacent disciplines). The fact that mainstream economics emphasises such assumptions is understandable in some respects, since axiomatic development is highly valued in academia. However, in developing original economics or original social science, it may be necessary to first clarify the true nature of human beings (the human perspective) and develop it on this premise. This was the basic problematic of my previous book (Okabe 2017a), and I developed this direction further in my most recent book (Okabe 2022a). Table 1.2 Mainstream economics’ view of human nature and the need to expand it Assumptions in mainstream economics Intrinsic view of human nature Matters requiring reconsideration (examples) 1. Materialism People are only interested in what they can enjoy in reality (goods and services). Humans ultimately pursue more general wellbeing (happiness; eudaimonia) rather than goods and services. The need to rethink what happiness is. Also need to reconsider the significance of occupation (work is recognised in economics as negative utility). 2. Egotism Human beings pursue an increase in their own satisfaction (utility) based on an increase in goods and services. Humans have selfish motives to sustain life, but they also have altruistic motives (altruism). The economics view (or interpretation) that altruistic behaviour is actually due to selfish motives needs to be reexamined. 3. Individualism The behaviour of individuals as described above is neither influenced by nor has an effect on others (atomistic view of man). Humans are not atomistic beings, but social beings with mutual interests and mutual influences (social network; community; virtue ethics). The need to understand society from the perspective of the intrinsic nature of human society, including connections (social networks), community and virtue ethics. Note: Prepared by the author. Need for economics to fully integrate human nature 21 1.3 From mainstream economics to economics for humanity In this section, the characteristics of and challenges to mainstream economics described in the previous section are briefly summarised again. It then discusses how this can be modified or expanded to provide a more accurate understanding of human society and an economics that can help to realise people’s wellbeing and build a better society. 1.3.1 Mainstream economics and its distortions As mentioned above, economics is the study of economic phenomena, i.e. the satisfaction of goods and services, from both the level of the individual and society as a whole. For this reason, the central task is to first focus on the demand for and supply of goods and services, and then to elucidate how these are adjusted in the market to reach the fulfilment of society as a whole. In such cases, for analytical convenience, it is explicitly or implicitly assumed that humans are ‘atomistic beings’ in the sense that, as mentioned in the previous section, they are subjects who act selfishly and rationally (homo economicus) and are not influenced by others, nor influence others. And, this view of human beings penetrates current mainstream economics.30 In other words, mainstream economics has a simplistic understanding of human society as consisting of two types of private actors (consumers and firms), but the key point is that in both cases the emphasis is on the ‘individual’. In other words, individuals first appear as consumers who aim to maximise their utility based on the consumption of goods and services. On the other hand, companies that supply goods and services are usually assumed to be economic agents that act with the aim of maximising profits, but they are understood to have been made up of two kinds of individuals, workers who work there and earn income, and managers who are rewarded from company profits, and the theory is built on the understanding (assumption) that both of them ultimately act on the principle of selfinterest maximisation.31 Analysis based on such a human image is easy to process with mathematical rigour, as we have already seen in Section 1.2. This is why the system of mainstream economics has a strength not found in other social sciences, and its theoretical systems (e.g. general equilibrium theory) have a beauty (Okabe 2017a: 12– 16). The basic problem with mainstream economics, however, is that it views human beings only from the narrow perspective of ‘selfish, rational utilitarians’. Amartya Sen32 has bitterly criticised, from an early stage, that this portrayal of individuals as assuming ‘rational fools’ (Sen 1977; for a commentary in the same vein, see Sen 1987: 10– 12).33 It has also been harshly criticised by researchers in other fields (cultural anthropology) as a ‘very simplistic and poor theory of man’ (Takahashi and Tsuji 2014: 189). Indeed, it must be 22 Groundwork for bettering economics said that this is an oversimplification that takes a too onedimensional view of human beings. The costs of economic analysis that makes such assumptions about human nature are not only academically significant, but also practically serious in terms of their impact on public policy. This is because the social and policy theories derived from such analyses place particular emphasis on promoting competition and deregulation (socalled neoliberal policies) in order to increase efficiency through the interaction of selfinterested actors. Certainly, ‘efficiency’ is an important policy goal, and many aspects of it can be quantified and easily evaluated in public policy debate. However, analysis and public policy debate based on such a human image must inevitably be distorted.34 In conceiving and initiating economic policy, it is necessary to be aware not only of efficiency and quantitative expansion, but also of goals that are essential for the construction of a better society (equity, ethics, cultural values, etc.).35 1.3.2 Aspects of humanity that should be emphasised In order to achieve this, it is first necessary to understand economic and social phenomena by removing the assumptions of the ‘economic man’ (materialism, egotism, and individualism) and bringing in an inherent view of human nature and human behaviour, and by drawing public policy theory on such analysis (see the middle column in Table 1.3). In other words, it is first necessary to take the viewpoint that the ultimate pursuit of human beings is not simply goods and services, but, in general and ultimately, happiness. There are, of course, various perspectives and expressions of happiness. For example, in English, these include happiness, wellbeing, wellness, good life, eudaimonia, thriving, and flourishing. These concepts were discussed in detail in my previous book36 and will not be discussed again here, but it is first necessary to reexamine the relationship between them and human behaviour. Let us consider some examples. The usual perception in economics is that work (labour) is the opposite of utility (it is treated as ‘disutility’). However, there is also the important aspect that work or occupation is related to ‘happiness,’ as it includes the aspect of people achieving their mission through it, besides earning. If we think in this way, it is possible to understand work in the opposite way (i.e. instead of understanding it as merely a negative utility, we can argue that its nature is significantly related to happiness through the fulfilment of the mission). In other words, if we move away from the assumption of the ‘economic man,’ there emerges a possibility for such unconventional but realistic understandings about human beings. Humans naturally have selfish motives because of the need to sustain life. There is no doubt about this. However, economics takes this (and only this) as a basic premise of its view of human beings. For this reason, economics often takes the view (interpretation) that, even when humans perform seemingly Need for economics to fully integrate human nature 23 altruistic ‘actions,’ their ‘motives’ are selfish.37 Such a position may be necessary to keep the logic of mainstream economics consistent. However, research in a number of disciplines has shown that humans also have genuine altruistic motives (altruism).38 For this reason, the idea of assuming only selfishness as a motive for human action needs to be reconsidered. Furthermore, understanding humans as individuals likened to independent atoms (atomistic beings) and society as a set of such individuals is also too onesided. Instead of adhering to such a perspective, it is more in line with the reality to understand humans as social beings with mutual interests and mutual influences.39 It has also been concluded in many academic disciplines other than economics that such a great interest in others is one essential element that characterises human beings. Therefore, in understanding society, it is important and indispensable to take the perspective of human society as a social network, or specifically as composed of various communities in order to understand humans and their society, rather than simply viewing humans as atomistic beings.40 In view of this aspect, the conventions, rules, and tacit bindings (virtue ethics) among humans naturally become also important research subjects. To address these difficulties, it is essential to take into account the various human natures found in reality, such as the fact that humans can have selfish motives as well as altruistic behaviour (the idea or action to care about the wellbeing of others)41 and that humans live in relationships (bonds) with one another. In fact, such behaviour is not only a traditional moral or ethical standard common to many religions and cultures around the world, but according to many academic studies and cultural traditions, it is a robust proposition that humans have genuine altruistic motives (See Table 3.1). It was also the view of Adam Smith, the founder of economics, that humans are also always concerned about others, which, in a broad sense, is part of altruism, as will be discussed in the next section. Furthermore, looking at contemporary studies, we find such observations as follows. ‘Our minds are socially entangled, so that many social rules are morally binding’ (Gintis 2016: xi– xiii), or ‘new empirical knowledge of human behaviour might hold for the design of policies and institutions that would work well for people given to both selfinterest and generosity, both moral action and amorality’ (Bowles 2016: xvi). A number of studies suggest that assuming that humans are interrelated beings (social beings) is a superior model of reality. Furthermore, in an extraordinary longitudinal study conducted by researchers at Harvard University (Wadlinger and Schultz 2023), it has been shown that humans are truly social creatures. This Harvard study began in 1938 and has tracked the same 724 individuals for 84 years, asking thousands of questions and taking hundreds of measurements to find out what really keeps people healthy and happy. And, they have firmly concluded ‘good relationships keep us healthier and happier’ (ibid 10).42 24 Groundwork for bettering economics In other words, the assumptions of mainstream economics, i.e. ideas and theories based on what is known as methodological individualism, are too onesided in their view of human beings. As a result, the picture of society that emerges from this is inevitably distorted. In the case of public policy, too much emphasis is placed on achieving efficiency through the promotion of competition, as will be discussed in the next section, and other factors that are important to humans have to be neglected. Human behavioural motives are not only selfish ones, as the results of many academic disciplines have shown (Okabe 2017a: 259– 270; see Chapter 3 of this publication). Also, human beings are not to be recognised as simple independent entities, as if they were atoms, the basic constituent units of matter, but as entities for which contact between individuals and their ongoing relationships with each other are of vital significance. Mainstream economics, lacking this perspective, should be said to have a major and crucial flaw. 1.3.3 Economics for humanity When organised as described above, the current mainstream economics has aspects that deviate considerably from the original nature of social science that is concerned with human beings. For this reason, there is room to bring it closer to ‘humanistic economics’ and the potential to develop new theories from it. This is the basic perspective of this book, which will be discussed in some detail in turn below.43 However, this book does not claim to have newly and systematically constructed a ‘humanistic economics’. Here, the main aims of the book are: (1) to lay out the issues that are indispensable for research in this direction, (2) to provide as many theoretical explanations and evidence as possible to support this direction, and (3) to provide components and semifinished products for developing economics in a new direction on the basis of these components and semifinished products, in the author’s own way. In this spirit, the economics developed in this publication will be referred to as ‘economics for humanity’. The main points in such a case can be contrasted to mainstream economics as shown in Table 1.3. First, mainstream economics assumes that humans are utilitarians and act rationally, and that they are individualists who do not care about the people around them. That is, the purpose of human behaviour is understood to maximise one’s own utility within a certain period of time by increasing consumption of goods and services. At first glance, it appears highly plausible that humans have a behavioural principle of maximising utility (total utility within a certain period of time), as defined in equation (1.1) of Figure 1.2. However, the psychologist Kahneman (therecipient of Nobel Prize in Economics in 2002) has shown that humans are in fact conscious of satisfaction through a different mechanism. His explanation consists of two empirical rules: the peakend rule and duration neglect (Kahneman 2011: chapter 35). The former is an empirical rule in psychology Need for economics to fully integrate human nature 25 thatstates that when people judge an experience (whether painful or pleasant), they tend not to judge the whole experience according to the total amount over the whole period or the average of each point in time, but rather according to their impressions at two points in time: how they felt at the ‘peak point,’ and how they felt at the ‘end point’ (Kahneman 2011: chapter 35; Wikipedia:Peakend rule). This has been confirmed by various studies and experiments over the years. Table 1.3 Mainstream economics and economics for humanity: a contrast Understanding of human beings Purpose of human action How to understand society Mainstream economics Egotism Rational choice and behaviour Individualism Maximising one’s own utility through increased consumption of goods and services. The market is made up of individuals (consumers/ workers) and business firms. The government compensates and complements the market functions. [2sector model]. Economics for humanity Altruism and ethics as well as selfishness. Also takes into account human potential. Shows not only rational behaviour, but also bounded rationality or irrational behaviour in some cases. Humans are not simply atomistic beings, but social beings having bond with others. The pursuit of happiness (pleasant life, good life, meaningful life) rather than simply increased consumption. The private sector actively positions the existence of communities (e.g. the nonprofit sector) in addition to individuals and businesses. Society is understood as being made up of the private sectors, with the government joining them. [3sector model]. The idea that the pursuit of individual happiness can lead to social reform (an idea that complements the market mechanism) is also a point of view to be explored (discussed in detail in Chapter 8). Source: Okabe (2017b) Chart 11. 32 Groundwork for bettering economics 37 See Okabe (2017a: appendix 2, 277– 279). 38 Okabe (2017a: chapter 8, and chart 81 as a summary). 39 This is also the view of mankind revealed in Theory of Moral Sentiments by Adam Smith, the founder of economics, as will be discussed in Chapter 2. 40 Incidentally, in a panel discussion at the Japan Economic Association, a mainstream researcher expressed the opinion that the subject of economics should be intentionally limited, as ‘communities are foreign to economics and an antagonistic concept (omission), so we must be very careful’ (Professor Yasushi Iwamoto of the University of Tokyo). (Genda et al. 2016, 238), but the author (Okabe) cannot help but question the validity of that idea. 41 See Okabe (2017a), chapter 8, section 3, for research findings from a number of academic disciplines in this regard. For example, when the Great East Japan Earthquake occurred (March 2011), many people from all parts of Japan demonstrated their behaviour by going to the affected areas to help by investing their own time, effort, and money. Considering this reality, it is clear that there is a great impossibility to assume merely selfishness as a motivation for human action. 42 They not only characterise their research as ‘the world’s longest scientific study of happiness’ (the book’s subtitle) but also mention, by citing seven similar researches, that the findings are robust across different eras and different kinds of people (ibid. 20– 21). 43 Initially, the author’s main interest was in the Japanese economy (Okabe 1955, 2022). But subsequently, he has continuously put importance to interdisciplinary or multidisciplinary approach to various social issues and public policies, and published relevant articles and books. For this kind of methodology, see Okabe (2003b, 2006b, 2006a). Some concrete issues the author worked on in that spirit are: appropriate perception of the economic system (Okabe 2011a, 2014a, 2018e, 2019a), human nature and economics (Okabe 2012a, 2012c, 2014b, 2014e, 2021, 2022a), happiness or wellbeing (Okabe 2013b, 2014a, 2015a, 2015b, 2020a), altruism (Okabe 2014c, 2014d, 2019b, 2019d), corporate or organisa - tional governance (Okabe 1997, 1999b, 2009a, 2016c, 2017c), structural change from goods economy to services economy (Okabe 2019c, 2019e; and issues relating to Lusch and Vargo: 2014), and importance of integrity (Okabe 2016c, 2017c, 2019f). 44 In addition to these two sectors, the diagram also shows the ‘Rest of the world’ (Overseas sector). 45 See Okabe (2017a: 43– 44). 46 Chief of Research Division 1, Institute for Monetary and Economic Studies, Bank of Japan. 47 See Okabe (2017a, footnote 17 of page 45) for the history of this process of chan - ging the Japanese trade statistics. DOI: 10.4324/9781003478447-4 2 Inheriting from Adam Smith Ethics and other human factors In the previous chapter, we pointed out the problems with contemporary mainstream economics and outlined the direction in which it should respond to them. In reality though very few researchers claim such a view and sense of direction for the state of economics.1 One of the main reasons for this is that the view that Adam Smith, the pioneer of modern economics, is vaguely regarded as ‘the guru of laissezfaire or market fundamentalism based on selfishness’ is persistently widespread,2 which makes it difficult to create a situation that forces reflection on mainstream economics. In this chapter, Section 2.1 points out that such an understanding of human beings as Smith is said to have held contains a major fallacy, and then sets out Smith’s original view of human beings and society. In Section 2.2, it will be argued that Smith also attached great importance to the inherent potential of human beings, and recent research that succeeds this view will be introduced. In the next section, Section 2.3, it will be argued on the basis of many concrete examples from the perspective of social philosophy that the market system is of fundamental importance in the operation of modern society, but that there are aspects of it that conflict with the good life. In the last section, Section 2.4, we will discuss three approaches to the definition of wellbeing in light of the above3. 2.1 Adam Smith’s view on human nature and society This section shows how Adam Smith’s views on man and society have been grossly distorted and misunderstood, and describes what his original views were. 2.1.1 Previous misconception called ‘Adam Smith problem’ Adam Smith (1723– 1790), Scottish economist, philosopher, and moral philosopher, wrote two major books. The best known of these is An Inquiry into the Nature and Causes of the Wealth of Nations (Smith 1776),4 while the other 34 Groundwork for bettering economics which has received less attention is The Theory of Moral Sentiments (Smith 1759, 6th ed. 1790).5 It was once pointed out that there is a major ‘discrepancy’ or ‘contradiction’ between the two books’ views of man, which was discussed as the ‘Adam Smith problem’ (Smith and Wilson 2019: 3; Okabe 2018a: 23– 24). In other words, The Wealth of Nations has traditionally been understood as arguing that the motivation for human action is the pursuit of selfinterest, and that such action results in the realisation of the interests of society as a whole through the functioning of markets or the ‘invisible hand’.6 In contrast, The Theory of Moral Sentiments discusses moral sentiments as opposed to selfinterest, and the controversy arose from the question of whether the arguments of the two works are incompatible. However, this ‘Adam Smith problem’ was a spurious one, arising from ignorance and misunderstanding (Raphael and Macfie 1976: 20). I will not go into the details of how it came about and was settled, but I have summarised arguments of it as Table 2.1. In short, there were no discrepancies or Table 2.1 The ‘Adam Smith problem’ and its correction The Wealth of Nations (1776) The Theory of Moral Sentiments (1759) (1) Characteristics of the two books Characteristics of each book The subject of discussion is more narrowly limited to ‘wealth’ than in The Theory of Moral Sentiments, and the details are discussed. As the domain of economic activity is central, selfinterest is central when discussing motives for action. The book that preceded The Wealth of Nations. Smith discusses man, his motives for action and their consequences from a broader perspective than in The Wealth of Nations. It assumes as a matter of course that humans have selfinterest (the opening sentence of the book), and then analyses the sources of morality, its functions and its relation to the social order. Frequently cited relevant sections ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity, but to their selflove; and never talk to them of our own necessities but of their advantages.’ (Smith 1776: 14, book 1, chapter 2) "How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it. Of this kind is pity or compassion, the emotion which we feel for the misery of others (omitted hereafter). "(Smith 1790: 1– 2, beginning of chapter 1). Inheriting from Adam Smith: ethics and other human factors 35 The Wealth of Nations (1776) The Theory of Moral Sentiments (1759) (2) The assessment of the ‘problem’ ‘The Adam Smith Problem’ The Wealth of Nations argues that the motivation for human action is fundamentally the pursuit of selfinterest, which in turn promotes the interests of society as a whole through the ‘invisible hand’. On the other hand, the preceding The Theory of Moral Sentiments discusses human morality and its social significance in detail, so there is a major discrepancy or contradiction between the claims of both books. It was therefore argued that: (1) it is questionable whether the same person really wrote the two books, or (2) it is necessary to consider that the author (A. Smith) radically changed his views on human behaviour. Assessment of the ‘problem’ The above ‘problematic’ views arose because a small part of the The Wealth of Nations was popularised, while The Theory of Moral Sentiments was neglected for a long time in the 19th and 20th centuries. Such ‘problems’ are ‘false problems’ arising from ignorance and misunderstanding. A careful reading of The Theory of Moral Sentiments, considering the time of publication of the two books and the continuous revision of both by the author, makes it clear that the two books are closely interlinked. (1) The Wealth of Nations extensively discusses not only selfinterest but also credit, law, fair play, and other matters closely related to The Theory Moral Sentiments, in order for markets to function (it is difficult to derive these from selfinterest). (2) The Theory of Moral Sentiments was published in 1759, and Smith revised it a total of six times thereafter until shortly before his death. As The Wealth of Nations was published in the midst of a series of such revisions, it is difficult to believe that he left the content of these two books at odds with each other. Note: Prepared by the author based on Sen (2014), Raphael and Macfie (1976: 20– 25), and Dome (2008). contradictions in Smith’s view of man and society as he developed in both books, and his understanding was consistent. 2.1.2 Microanalysis of social order formation What, then, was Smith’s view of man and society? Here, the author would like to organise them in his own way, referring to the above two works of Smith Table 2.1 (Continued) 36 Groundwork for bettering economics as appropriate, but relying heavily on three books published in recent years (Morson and Schapiro 2017; Bowles 2016; Dome 2008). What Smith sought to elucidate in his two works is ultimately an exploration of the invisible forces that keep human society together and flourishing (Morson and Schapiro 2017: 256). In other words, the question is what is social order and how is it derived from human nature? Here, social order refers to the peaceful and safe life of all members of society by following some rules (Dome 2008: 25). The gist of Smith’s argument is that such a state of affairs can be logically explained by starting from the premise (an axiom, so to speak) that human beings are not merely selfish beings, but that they have an interest in other people. Accordingly, The Theory of Moral Sentiments is not first and foremost a work of moral philosophy, let alone a hymn to altruism. Rather, it is a work of moral psychology and sociology“ (Norman 2019: 49). 2.1.2.1 Generating a sense of morality The starting point of Smith’s argument is ‘sympathy’. This means drawing to one’s own mind the various kinds of fellowfeelings that people have towards others, i.e. joy, sadness, anger, etc. (Smith [1759] 1790: 10, part 1, chapter 1).7 Sympathy is considered to be of paramount importance to the individual because while I have this emotional function, others have a similar emotional function towards me. And because I wish to be endorsed by others, I try to match my feelings and actions with those that others can endorse. Smith’s view is that, as a criterion for doing so, one has an ‘impartial spectator’ within oneself that transcends one’s own interests and concerns. Then, since I try to conform my feelings and behaviour to what the impartial spectator endorses, I act as the impartial spectator endorses by selfregulation. Thus, two general rules emerge from this among humans. The two are: (1) justice (not to commit acts that injure the life, body, property or honour of others) and (2) beneficence (to commit acts that promote the interests of others). The sense that one must have regard to general rules as a criterion for one’s conduct is a sense of duty, which is nothing more than a moral sense or moral faculties (Smith [1759] 1790: 164– 165, part 3, chapter 5). Smith regards it as ‘a principle of the greatest consequence in human life’ (id. at 162), and considers that if one acts contrary to the general rule, i.e. the morality, he is condemned by the impartial observer in his own heart, even if he is not condemned by the world, and cannot keep a calm mind. The idea is that the calm mind is a happy mind. On the other hand, a calm mind (tranquillity) is nothing but happiness (id. at 149). For this reason, one is subject to morality. These are the moral senses that Smith expounds, and his view of morality. Of particular importance to Smith’s argument is that he included selfishness or selfinterest as one of the objects that needs to be controlled by a sense of duty. For this reason, the idea that unlimited selfinterest should be left alone Inheriting from Adam Smith: ethics and other human factors 37 does not emerge from Smith’s thought (Sedlacek 2011: 197; Sen 2011: 265; Dome 2008: 59). As described above, Smith took human emotion (sympathy) as his starting point, and argued that there is an ‘impartial spectator’ in human beings. The result of this is the sequential derivation of morality, law, and social order. In other words, it is an approach that attempts to understand the existence of social matters (morality, law, and social order) concerning many people on the basis of persons feelings. In modern terminology, Smith’s view of society is a theory of morality, law, and social order with a microfoundation, since it is based on the conception of individual human feelings and behaviour. Thus, The Theory of Moral Sentiments is a book that uses the method of ‘model analysis’ and argumentation to explain how humans can build barriers [moral senses] against their emotions, even if humans are selfish in nature (Skinner 2008: 542). 2.1.2.2 Importance of fair play Furthermore, Smith makes the following assertion in The Theory of Moral Sentiments. ‘In the race for wealth, and honours and preferments, he [man] may run as hard as he can, and strain every nerve and every muscle, in order to outstrip all his competitors. But if he should justle, or throw down any of them, the indulgence of the spectators is entirely at an end. It is a violation of fair play, which they cannot admit of.’ (Smith [1759] 1790: 83, part 2, section 2, chapter 2). In other words, it is commendable that one strives to win the competition, whereas it is denounced and unacceptable to give oneself an advantage by dragging others down (Skinner 2008: 563– 564). It is important not to overlook the fact that Smith makes these arguments. 2.2 Adam Smith’s view on human potentiality and its recent developments Adam Smith understood, as discussed in the previous section, that human beings are not only economically or selfishly motivated, but also have various social aspects, such as ethics, justice, and beneficence (charity). It is also important to note that, as Smith believed, all the human beings have potential that has not yet manifested itself in our daily lives.8 And, these potentials are of great importance. This is because whether or not they are realised determines whether or not people achieve a ‘good life’ or ‘happiness’. In the following, we first look into how Adam Smith understood human potential. Then, we trace how this view of man was inherited and developed by Amartya Sen, a philosopher and economist with a broad contemporary 38 Groundwork for bettering economics intellect. Since there is a concrete way for each human being to realise his or her potential, i.e. a practical philosophy, it will be explained later in Chapter 8, Section 8.2. 2.2.1 Adam Smith’s perception of human potential As the title of his book The Theory of Moral Sentiments suggests, Adam Smith had a deep understanding that human beings are social beings who are conscious of each other rather than existing alone in society. Alongside this, Smith was convinced that humans have great potential, and that these abilities are expected to be manifested. This point has not unfortunately been explicitly addressed in the past. One reason for this may be that Smith himself took such recognition for granted and did not explicitly subject it to analysis. However, it is one of the cores of Smith’s thought, and has significant contemporary implications. It is because how to draw out human potential is a question directly related to public policy of education and equal opportunities, and because it is significant to ultimately realise a good life or happiness.9 2.2.1.1 Smith was convinced of human potential Perhaps the greatest contribution to the appreciation of Smith’s understanding (or belief) of human potential and its contemporary development was made by Amartya Sen (Nobel Laureate in Economics). This section provides an overview of Smith’s theory of human potential, referring to the main points made in Sen (2014). Sen notes that ‘it is noteworthy that Smith regarded human potential as equal, lightly eclipsing barriers to class, gender, race and nationality, and recognised no essential difference in natural talents and abilities’ (Sen 2014: 27). He quotes the following passage from The Wealth of Nations, and asserts that the passage shows Smith’s empirical conviction that human capacities are equally endowed is clearly stated. ‘The difference in natural talents in different men is, in reality, much less than we are aware of; and the very different genius which appears to distinguish men of different professions, when grown up to maturity, is not upon many occasions so much the cause, as the effect of the division of labour. The difference between the most dissimilar characters, between a philosopher and a common street porter, for example seems to arise not so much from nature, as from habit, custom, and education’. (Smith 1776: 15, part 1, chapter 2) This view, based on Smith’s experience, is contrary to scientific evidence that there are also genetic differences between individuals (Sen 2014: 28). Importantly, however, that passage reflected Smith’s belief that this is the correct assumption (ibid). The working class has less access to education, Inheriting from Adam Smith: ethics and other human factors 39 especially good education, than those with status and assets. Moreover, the work engaged in by the working class is demanding and they do not have the same opportunities to hone their skills as those with status and assets. So that, class divisions, Smith argued (id. at 30), do not imply differences in natural talent or ability, but reflect inequalities of opportunity. Smith’s tendency, or rather his longing, to believe that all human potentials are equal must by all means be understood (id. at 29). This is also the belief that inequality is the product of society rather than a reflection of inherent differences (id. at 32), and therein lies the outstanding foresight that is still relevant today (ibid.). 2.2.2 Contemporary development of Amartya Sen’s capability theory Adam Smith emphasised the importance of human potential, but did not go as far as to develop the theory. Under these circumstances, Amartya Sen proposed and theoretically developed the theory of potentiality, or the ‘capability approach’ to a happy life (wellbeing or good life). It is a theoretical framework for understanding human beings and their wellbeing. However, the original sources that presented it (Sen 1985, 1988) are rather difficult to understand, and the introductions and explanatory papers written by researchers afterwards are not always plain10 and also vary considerably in their emphasis. In what follow, therefore, we will review Sen’s theory of capability, relying primarily on Robeyns (2016) and Wells (2017), both of which provide relatively easytounderstand explanations of the theory. 2.2.2.1 Two core concepts In understanding human beings in traditional economics, as discussed in Chapter 1, ‘utility’ (the degree of fulfilment of desire) or the amount of ‘income and assets’ closely related to it has been accepted as an important and the standard criterion (as is still followed in current mainstream economics). Sen, however, criticised such measures as being fundamentally flawed in terms of what is more important to human beings (good living or good life) since they only have an indirect relationship. So, Sen introduced two alternative criteria for evaluating them: (1) ‘what kind of being can one be’ and (2) ‘what can one do’. This view introduces two alternative criteria for evaluation: ‘what kind of being can one be’ and ‘what can one do’. This view is based on the idea that the full fulfilment (realisation) of these ‘functions’ is considered to be wellbeing, and that the conditions (freedom, etc.) for realising this state are understood as an integral part of it (the latter also being subject to evaluation), thereby understanding the actual state and potential of human beings. This can be said to be the idea of understanding the actual state and potential of human beings by understanding them as an integral part of the conditions (such as freedom) for realising their state (the 40 Groundwork for bettering economics latter being subject to evaluation). This can be illustrated in Figure 2.1. The twokey concepts are ‘functionings’ and ‘capabilities’. Sen first understands that if a person is improving their quality of life or achieving ‘happiness (wellbeing)’, it is a ‘realisation of functions’ (functioning). And, he considers that this can be expressed as either the realisation of certain states (beings) or the actual performance of certain activities (doings), and argues that in determining happiness, both of these are important. In other words, the capability approach introduces the unique concept of ‘functioning’, and proposes two aspects, the grasping of states (beings) and activities (doings),to evaluate the functioning. For example, the former (beings) include being in good nutrition, having free access to food, being in comfortable living conditions, or being in unhealthy situations. On the other hand, the latter (doings) include doing (being able to do) things such as buying food, travelling, raising children, voting in elections, smoking drugs, or donating to charity. To take a more concrete example, a person’s state of being can be expressed as either being in a ‘moderately heated’ comfortable house (state: being) or consuming ‘large amounts’ of energy to heat their own home (behaviour: doing), both of which are different in character and need to be considered. In this way, it can be understood that the capability approach incorporates both subjective (emotional) and objective (quantitative) perspectives to understand the good life. The above is the state of functioning, but the question is whether it can be realised. The concept of ‘capability’ corresponds to this judgement. This consists of two elements. One is the existence of various states (capability sets) that are actually available, selectable, and valuable to people. The second is the actual availability of ‘freedom’ for people to choose from among them (effective freedom). In other words, a key feature is that it includes the ethical concept of freedom (of choice) as a fundamentally important component of capability. Figure 2.1 ‘Capabilities approach’ to the good life (wellbeing). Souce: Prepared by the author from Robeyns (2016) and Wells (2017). Inheriting from Adam Smith: ethics and other human factors 41 In this respect, Sen’s capability theory goes beyond the standard economic framework and spans ethics. 2.2.2.2 It comes down to two ethical propositions Thus, the above theory of capability as presented by Sen ultimately comes down to two normative propositions (Robeyns 2016). Namely, (1) ‘freedom’ for people to achieve happiness (wellbeing) is fundamentally important from a moral perspective, and (2) people therefore have the opportunity to realise their potentials (capacities), i.e. happiness. In particular, the essence of the capability approach lies in the grasp of freedom as an important element (ethics) (Suzumura and Goto 2001: 188).11,12 These Sen’s arguments do not see human nature (human nature) simply as a subject that acts selfishly, but rather incorporate the underlying fact that it has multiple facets. In other words, the human mind needs to be understood as deeply connected to others and socially entangled (Gintis 2016: xi– xiii). Alternatively, it is assumed to understand that the human mind is connected in a socially networked way and that humans are therefore social beings. Such a view of human beings is a philosophical position that was pioneered by Aristotle, Smith, and Marx in the history of thought, and Sen’s thought as an economist and philosopher is positioned as a continuation of this position.13 He also considers the ‘good life’ (wellbeing) not only as a ‘good’ worth pursuing for individuals, but also as a ‘good’ worth demanding social commitment, and presents a policy theory from a new perspective that considers desirable social assistance and security for such a good (Suzumura and Goto 2001: 24). In summary, the above may be summarised as follows. The capability approach is a way of understanding human wellbeing, which emphasises: (1) freedom of choice, (2) individual heterogeneity, and (3) the multidimensional nature of wellbeing and welfare. 2.2.2.5 Assessment of capability theory (1): features What are the characteristics of the capability theory outlined above, and how can it be evaluated? Although there is some overlap with what has already been said, we would like to summarise them below. First, the theory of capability proposed by Sen in the late 1980s introduced fresh analytical concepts of ‘functioning’ and ‘capability’ to understand ‘happiness’, ‘good life’, or ‘wellbeing’ (Suzumura and Goto 2001: 8). It is not ‘property’ (resource), such as goods or income which has been the focus in the past, nor ‘utility’ which is derived from the use of property, but ‘function’ (functionings) which is a ‘theoretical middle term’ inserted between property and utility (id at 185). It incorporates, as already mentioned, both subjective and objective perspectives (understanding the multidimensionality of the factors that bring about wellbeing), and as a result, it provides a new 48 Groundwork for bettering economics 2.3.2.3 Introduction of remuneration The above example of a nursery school in Israel is a case where the financial incentive is negative (a fine), but when it is positive (a reward), it has the same disruptive effect on intrinsic motivation (Gneezy and Rustichini 2000b: 793). An example of this is Case A above, but an equally interesting example is mentioned in Bowles (2016), which is presented here. It is described as an interesting experience told to the author of a book (Bowles 2016: 39– 40) by Thomas Schelling,20 a friend of the author. It was 50 years ago, in the 1950s, Schelling worked as a staff member in the US presidential administration (White House). His colleagues there worked long hours. They all felt that it was a job of achievement, and that they also felt important as individuals involved in it. Under these circumstances, Friday afternoon meetings usually lasted until 20.00 or 21.00, and when the chair suggested that the meeting be resumed on Saturday morning, no one objected, and the meeting often continued into Saturday. However, shortly afterwards, a presidential decree was issued stating that ‘anyone who works on Saturday shall receive overtime pay’. Schelling’s experience was that after that, Saturday meetings were virtually no longer held. At first glance, it would appear that there would be more Saturday meetings because if meetings were held on Saturdays, they would receive overtime pay, but in fact the opposite was true (ibid.). Why? When there was no overtime allowance, the meetings were alive with a spirit of volunteerism and all participants knew they had an important role to play. This meant that meetings were often carried over to Saturdays. However, this was not always the case, as the financial allowance for Saturday meetings transformed them into mere ‘work’ and changed the meaning of meetings for participants. In other words, it can be understood that the financial incentives involved have ‘corrupted’ the character of the meetings as perceived by the participants, and as a result, contrary to expectations, Saturday meetings have almost disappeared (ibid). When policies that elicit selfinterest are introduced for behaviour that was originally supported by public spirit, they destroy public spirit. We have seen above the case of payment for reading, the case of child pickup and the case of payment for Saturday meetings. If these things are observed, then economists can no longer remain in the realm of conventional economics in explaining the world at that point, but need to step into moral philosophy or anthropology (Sandel 2012: 90). Table 2.1 further refers to economists’ belief that it is rational to give cash rather than goods as Christmas gifts, the recommendation that the sale of kidneys should be allowed (the idea being that trading human kidneys could save many patients by increasing kidney donations) and the international procurement of combatants (outsourcing of warfare through international procurement of combatants using labour markets) are mentioned by economists, all of which are identified as having ethical problems (see Table 2.2 for details). Inheriting from Adam Smith: ethics and other human factors 49 2.3.3 Three problems associated with marketbased policies The above is a rather detailed account of the situation in which the increasing trend towards marketisation in various settings is in conflict with the good life and ethical issues of human beings. So, how should we think about the problem of the conflict between marketisation and the good life or ethics, and what ideas and responses are desirable in terms of economic policy? These are all difficult questions (especially for economists who have avoided value judgments), but here, relying mainly on Sandel (2012), I would like to summarise them into the following three categories. 2.3.3.1 Injustice and corruption The first problem with marketism is that it leads to injustice and corruption. Today, the logic of buying and selling no longer applies only to physical goods, but has finally come to dominate the whole of life, and markets and market values are expanding into areas of life where they do not fit in. This is indeed the era of market triumphalism (Sandel 2012: 6– 8). As a result, market and marketoriented ideas have entered aspects of life previously governed by nonmarket norms, and almost everything has a price tag and is subject to buying and selling (ibid.). This situation needs to be seen as problematic for two reasons (Sandel 2012: 8– 11, 33– 35, 109– 111). One relates to fairness or inequality and the other to corruption. And similarly, the question of what money should and should not buy can always be discussed in terms of these two aspects (id. at 110). This is because, firstly, the more things money can buy, the more important it becomes to be wealthy (or not wealthy). In other words, as money becomes more important, the gap between rich and poor has a greater impact on life in general. Marketisation thus brings problems in terms of equity and perpetuates social and economic inequalities. For example, in the case of the creation of a market for the kidney trade described above (Case D in Table 2.1), the sellers of kidneys are likely to be relatively poor, while the buyers are likely to be wealthy, resulting in injustice and inequality, whereby the wealthy live longer at the expense of the poor. The second reason, ‘corruption’, is a little more difficult to explain (Sandel 2012: 9). It means that, apart from the issues of fairness and inequality mentioned above, markets have a corrosive tendency (tendency to corrupt). If you put a price on the good things in life, there is a fear that they will become corrupt. This is because markets not only allocate things, but also express and promote particular attitudes towards the things and things traded in them (ibid.). When we think of corruption, we often think of illgotten gains, such as illegal bribes to officials or quid pro quo, but corruption here goes beyond such phenomena and refers to a much wider range of things. That is, to 50 Groundwork for bettering economics corrupt a good or a social practice is to degrade it, to treat it according to a lower mode of valuation than is appropriate to it (id. at 34). Extreme examples are easier to understand. For example (id. at 46), having babies in order to sell them for profit is a corruption of a parenthood, because it treats children as things to be used rather than beings to be loved. In this case, it is corruption because parents are degrading and demeaning the baby by following lower norms than those appropriate to the parent’s task. The aforementioned kidneytrafficking market can support the argument of corruption because it sees humans as a set of replaceable parts and promotes a materialistic view of humans. Arguments in terms of corruption may also relate to institutional integrity (id. at 110– 111). When market relations enter (i.e. when treated as a commodity with a price: for example, the buying and selling of university admission rights intrude), they distort, undermine, extinguish, or downgrade the norms and values of their purpose. Many important things in life have market value (value as a commodity) as well as nonmarket value. For example, it is necessary to know the value of the good (the goods) health, education, family life, nature, art, and civic duty. It is important to understand that these are moral and political issues and not just economic issues (id. at 10). If a kidney is bought with money, the kidney will still function physiologically. However, whether a kidney should be the object of sale or not needs to be considered from a moral point of view (id. at 95). As another example, consider the case where a friend gives a heartwarming greeting at your wedding. In that case, anyone would feel bad (feel that it is a corrupted version of a genuine greeting) if they found out later that the greeting had been commissioned to be prepared by a professional company (and bought with money) (id. at 97– 98). In other words, the congratulatory manuscript is, in a sense, a ‘good’ that can be bought. However, if it is bought and sold (i.e. turned into ‘goods’), the character of the congratulatory address changes and its value is lost (id. at 98).21 Modern political and economic policy discourse lacks the concept of the good living, the good life, and a serious discussion of the role and scope of markets. The moral limits of markets have not been considered, despite the need to do so. This has led to a situation in which modern society preserves market triumphalism and the logic of the market (id. at 13– 15). 2.3.3.2 Fallacy that markets are valueneutral The second problem is that what is implicitly assumed in marketbased principles, namely that markets are valueneutral, is incorrect. As already mentioned, economists often assume that ‘markets do not act wilfully and do not influence the subject of the transaction’. In other words, the standard logic of economics states that ‘commodifying a good’ does not change the nature of that good. The argument is that market transactions increase economic efficiency without changing the good itself, and that Inheriting from Adam Smith: ethics and other human factors 51 monetary incentives should therefore be used to guide desired behaviour (Sandel 2012: 113– 114). However, this view is incorrect (id. at 114). This is because the market is not just a mechanism, but encompasses certain norms. That is, it is assumed there that the good to be exchanged is valued in a given way, and this tendency is promoted (id. at 64). For this reason, market incentives destroy or shut out nonmarket incentives (e.g. morality) (ibid.). As is clear from recalling the case of the Israeli kindergarten discussed above, sometimes nonmarket values that should be cherished are crowd out by market values. In other words, markets leave their mark on social norms (id. at 64). Another problem is that, as can be seen from the example of the wedding greeting above, marketisation does not completely destroy it, but it does damage its value. The reason for this is similar to the reason why money cannot buy friends. That is, because the social practices that underpin friendships are constituted by certain norms, and commodification would reduce these norms (empathy, generosity, compassion) by replacing them with market values (id. at 107). 2.3.3.3 Pitfalls of efficiencyoriented economic policy The third problem is that marketbased economic policies, whose basic objective is to improve efficiency, have important pitfalls that are often overlooked. There are two such problems, one of which is the inequalities that arise. Since it is often recognised by economists, and we already discussed above, it is not repeated here. However, there is another important problem. That is that the economists’ idea of using the market to increase efficiency has an aspect of destroying the common good (corruption in the broad sense), a problem that is largely unrecognised. It is experimentally known that humans have a public spirit, a feeling of moral concern, such as a commitment to the common good (Sandel 2012: 115). In other words, it is fair to say that humans have altruism in the broadest sense. This human nature is precisely what Adam Smith analysed and pointed out 260 years ago in his book The Theory of Moral Sentiments, as we already saw in Section 2.1 of this chapter. If monetary measures are introduced in a situation where sentiments and nonmarket values are important in this way, people’s attitudes will change, with the result, as mentioned above, that moral and civic responsibility will be shut out (id. at 116). The economist view of virtue, which emphasises efficiency, extends markets and propels their reach into places they do not belong, thus creating a marketdriven society (Sandel 2012: 130). The downside of such economic policies is that they debilitate values such as virtues, altruism, generosity, solidarity, and civic spirit (ibid). We need to know that the policies advocated by mainstream economists are unconsciously and always accompanied by these biases.22 It is then important to develop ideas and, in this case, public policy theories that correct such biases.23 Adam Smith, on the one hand, appreciated the fact that 52 Groundwork for bettering economics selfinterest is consistent with market functioning, but on the other hand, he stressed the importance of fair play in the market, as well as deep insights into human beings, such as morality and happiness. Economics needs to revisit and develop Smith’s latter argument in particular in the future. 2.3.4 Interaction between incentives and social preferences The above examples show that the introduction of market factors (incentives) such as fines and rewards can destroy the ethics and goodness that enable human societies to function smoothly, causing injustice, or undermining social rules. For example, in the case of the aforementioned Israeli kindergartens (fines for tardiness), the introduction of financial incentives had the opposite expected result (increased late pickups). In other words, a certain interaction occurred between economic incentives and moral behaviour, which resulted in an atrophying of the sense of ethical obligation that the parents of the preschool children had. Using the concept of economics, the introduction of incentives can be described as a crowding out of ethical and othercaring motives. Considering such phenomena more generally, it can be assumed that the interaction between economic incentives and moral behaviour may not only crowd out (push away) ethical motives, but may conversely crowd in (invite in) ethical motives. In fact, Bowles (2016: chapter 3) focuses on these interactions between incentives and ethics and presents a model with generalities to which both crowdout and crowdin concepts can be applied. This provides an interesting perspective as one way to improve the effectiveness of economic policy, but we stop here to point out that.24 2.4 Approaches to a good life Roughly said, economics is the study of the sufficiency of goods and services, but it is also inevitably concerned with the state of human wellbeing and, ultimately, with the state of happiness. A discussion of this headon would lose its limits and exceed the scope of this book, so only two basic points will be discussed here:25 that is, there are three ways of looking at wellbeing, and that it cannot be taken without the aspect of human sociality. 2.4.1 Three approaches to ‘wellbeing’ First, let us consider the concept of ‘wellbeing’, i.e. to be in a good state of life. There are two traditional ways of looking at this, based on an economic perspective, but if we add Sen’s capacities approach, explained in the previous chapter, we can understand that there are three ways of thinking (Table 2.3). Inheriting from Adam Smith: ethics and other human factors 53 The first is to focus on subjective wellbeing or utility, i.e. the extent to which an individual’s desires are satisfied. The second focuses on the objective measure of resources that people possess. Property and income certainly have a significant influence on what we can and cannot do. However, it can also be said that property and income are merely a mean to realise or expand one’s inherent power (potential). Avoiding that issue, a third approach, the capability approach, has been proposed by Amartya Sen, as described in Section 2.2.2 of this chapter, which can be positioned as a novel framework related to wellbeing to avoid these problems. Table 2.3 Three approaches to good living (wellbeing) Utilitybased approach Resourcebased approach Capability approach Basic concept Subjective approach. Utilitarianism, which focuses on subjective wellbeing (utility) in terms of the satisfaction of desires. Objective approach. Material wellbeing theory (resourcism), which emphasises the state of acquisition of the means (income and property) for a good life. An approach that incorporates both subjective and objective elements. Focus on the realisation of ‘functions’ that bring about wellbeing, and the potential factors that make this possible. Representative statistical measures GDP per capita. Assets per capita. UN Human Development Indicatora. Pros and cons Simple and convenient, because wellbeing is captured solely by a flow economic indicator (income). Only onedimensional in the understanding of happiness. Also, the perspective is quite individualistic. Multifaceted to some extent in that it includes various stock indicators (assets) to capture wellbeing. Limitation since it understands happiness solely in economic terms. Not only economic measures, but also wider aspects (life expectancy, access to knowledge, etc.) are taken into. Insufficient theorisation, e.g. on how best to combine which potentials is not clear. Note: a An indicator that synthesises the three components of health, education, and income with the same weights. Sources: Prepared by the author based on Robeyns (2016), Wells (2017), Wikipedia “Capability approach”, Okabe (2017a: Chapter 6). 54 Groundwork for bettering economics 2.4.1.1 Utilitybased approach Generally speaking, people can be understood as living for happiness, wellbeing or the good life. In such cases, these terms and concepts need to be clearly defined, but the simplest and the traditional approach in economics is to focus on subjective wellbeing (utility), i.e. the extent to which an individual’s desires are fulfilled. In other words, the idea that humans act to maximise their own satisfaction (i.e. psychological wellbeing), which, in terms of the history of academic theory, corresponds to the classical utilitarianism current of J. Bentham. And, this can be characterised as a subjective approach. A typical statistical measure based on this idea is gross domestic product (GDP) per capita. This is based on the idea that a higher income increases the amount of goods and services that can be acquired through it, thus increasing utility (making people happier). However, while this is a simple economic measure, it is clearly too simplistic to equate it with the wellbeing of society as a whole. This is because it does not take into account the degree of equality or inequality in the distribution of income or assets. It also has a major limitation in that it does not take into account rights and freedoms, which have an intrinsic value for human happiness apart from utility. 2.4.1.2 Propertybased approach Another common approach in economics is to focus on resources instead of, or in addition to, income. This is based on the understanding that the greater the wealth possessed, the greater the opportunities for goods, services, and activities that can be acquired from it, and thus the better the life. This can be understood as a theory of material wellbeing (resourcism), which emphasises the acquisition of the means (income and property) for a good life. This takes a broader perspective than utilitarianism in that it focuses on the means to a good life. It is also an objective approach (as it is based on objective indicators such as assets per capita), whereas utilitarianism is a subjective approach. However, like utilitarianism, it has significant limitations, since it measures wellbeing based only on economic aspects (the amount of assets). In addition, the amount of assets is less meaningful if people do not seem to have the capacity to make appropriate use of their assets (not taking into account the diversity of human beings in this respect). For example, a person with a severe physical disability will require a much larger amount of income for daily living than a normal person, so that even if their property holdings are equal, there will be a large difference in the enjoyment of quality of life. 2.4.1.3 An approach that focuses on capability Wealth and income certainly have a great influence on what we can and cannot do. For this reason, people tend to focus on the immediate material or financial wealth and forget about the ultimate goal. However, property and income Inheriting from Adam Smith: ethics and other human factors 55 are merely a means to realise or expand one’s inherent power (potential). Sen’s capability approach, described in Section 2.2.2 of this chapter, can be evaluated as a framework that focuses on these problems with conventional approaches and presents a new framework to address the issue.26 The capability approach can be characterised by: (1) the basic recognition that income and property are not the only factors in determining wellbeing, (2) the fact that it does not focus only on the means to wellbeing, but also defines what a good life is and looks at the potential for wellbeing, referring also to social and moral principles (such as freedom) to realise it and, (3) its focus on the potential for happiness, while also referring to the social and moral principles (such as freedom) that are necessary to realise it. This is an idea that simultaneously incorporates both the subjective and objective elements of the two approaches mentioned above. In other words, the capability approach specifies the ‘functions’ that bring about wellbeing and also considers the potential factors that enable its realisation (e.g. life span, access to knowledge, etc.). This approach, which originated with Sen, came to fruition in the early 2000s with the creation of the Human Development Index (HDI)27 by the United Nations. The HDI is a comprehensive index that synthesises statistics on three basic human domains (long and healthy life, access to knowledge and decent standard of living) and publishes a time series of data on an annual basis. 2.4.2 Essence of ‘happiness’ What is happiness or wellbeing? This has naturally been the subject of much debate since ancient times from a variety of perspectives. However, if we look at it from the perspective of economics, it can be understood as a further development of the three ‘wellbeing’ concepts mentioned above. What needs to be emphasised here is that, as many psychologists (e.g. Seligman 2002; Ryff and Keyes 1995) point out, happiness must not be conceived of as simply an individual matter, but must also take into account relationships with other human beings as an important factor. In other words, as individuals cannot exist in isolation, the ‘social aspects’ of human beings, such as connections between individuals, become important factors for wellbeing (Okabe 2017a: 222, 234– 236). Methodological individualism in mainstream economics is too onedimensional in this respect. Understood in this way, economics should not simply discuss individual wellbeing as a perspective, but should also focus on the individual and his or her social connections. Let us conclude this chapter by stating that it is the basic stance of this book, and move on to the next chapter. Notes 1 There are also practical reasons for this, such as the fact that researchers have to become risk averse in securing their position (Okabe 2017a: 44– 48). Based on this recognition, Hiroshi Yoshikawa (University of Tokyo) says: ‘I think that 56 Groundwork for bettering economics research activities in economics are becoming more and more like a “Keynesian beauty contest”. Leading academics set the trends. Then, in the expectation that such “research” activities will catch on to the fad, “research” of the same kind will continue all over the world’ (Yoshikawa 2020b: 93– 94). 2 Adam Smith is often credited with asserting three freemarket slogans: (1) the selfsufficiency of the market economy, (2) the identity of rational behaviour and the profit motive, and (3) the identity of selfinterest and productive behaviour for society (Sen 2011: 258– 259). However, this view is a major distortion of Smith’s view of man and society (ibid). Smith not only analysed morality, as his book title suggests, in The Theory of Moral Sentiments, but also portrayed the multifaceted nature of human beings in The Wealth of Nations (ibid). Incidentally, Smith never used the expression ‘capitalism’ (id. at 259) in his writings. 3 This chapter is based on Okabe (2022a: chapters 2 and 3; 2018a, 2018b). 4 A great deal of research has been published on The Wealth of Nations, and there is also a commentary (Maruyama 2011) that summarises the book’s contents using the standard analytical tools of modern economics (charts and mathematics). 5 The title of the author (Adam Smith) is listed as ‘Professor of Moral Philosophy in the University of Glasgow’ on the middle door of this book. 6 The following passage from The Wealth of Nations is frequently quoted as an illustration of this: ‘[Every individual directs his labour and money with the intention of] his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. [Omitted] By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.’ (Smith 1776: 423, part 4, chapter 2). 7 Smith’s term ‘sympathy’ corresponds to the 20th century term ‘empathy’, which is the ability to recognise the feelings that others are experiencing (Wikipedia ‘Adam Smith’). 8 This section builds on Okabe (2018a, 2018b). 9 There are naturally many policy issues that look at the blossoming of human potential from the perspective of education and equal opportunities, which we do not enter into in this publication. On the other hand, the viewpoint of developing potential through selfimprovement is outlined in Section 2.2.2 of this chapter and dealt with in detail in Section 8.2 and 8.3. 10 For example, Suzumura and Goto (2001: chapter 6) is a commentary by Japanese authorities in this field, but the explanations given there were quite difficult for the present author (Okabe). 11 Sen’s identification of freedom (the existence of the possibility of choice) as an important component of potential has significant implications. For example, even if the result is the same tragic outcome of starvation, a person who dies with dignity through ‘fasting’ by autonomously and responsibly refusing to consume food in protest against political oppression, and a person who starves to death without choice because the food to be consumed is not available due to the debility of extreme poverty, have a point of not eating (functioning). Although common in the two cases, they need to be assessed differently in terms of ‘freedom for a good life’ (wellbeing freedom) (Sen 1988: 7– 8; Suzumura and Goto 2001: 188). This is because in the former case the potential in terms of freedom of choice is large, while in the latter case it is small. Inheriting from Adam Smith: ethics and other human factors 57 12 This is probably why the approach by Sen is named the capability approach instead of the functional approach. 13 Aristotle’s view of happiness (eudaimonia) is closely related to ethics (virtue), which governs the relationships between humans (Okabe 2017a: chapter 7). Smith also emphasised and deeply examined the feelings people have towards others (moral feelings) (Smith 1759; Okabe 2018a, 2018b). 14 The Human Development Index (HDI) is a summary measure of average achievement in key dimensions of human development: a long and healthy life, being knowledgeable and have a decent standard of living. 15 As noted above, Sen cites that ‘the difference between workers seems to be due more to differences of habit and education than to natural birth’ (Adam Smith, The Wealth of Nations, part 1, chapter 2, section 4) (Sen 2014: 28). 16 One example of tackling this point headon is the Practical Philosophy, which is discussed in Section 8.2 and 8.3. 17 The following section is heavily indebted to Sandel (2012). 18 In Table 2.2, we quote five examples of Sandel (2012). In addition, he discusses such other cases as the right to migrate to the USA (USD 500,000), surrogacy in India (USD 6250: a third of the market price in the USA), the right to emit one tonne of carbon into the atmosphere (EUR 13 <about USD 18>), the right to cut into priority lanes in Minneapolis (USD 8, during rush hour), and the trading of university admission rights, among other examples. 19 This study is cited by Sandel (2012) and also by Bowles (2016), as will be discussed below. 20 American economist. He argued that economics should not be limited to the analysis of markets, but should expand its perspective to include human interaction beyond markets, and was awarded the Nobel Prize in Economics in 2005 for his interactional decision theory (gametheoretic analysis). 21 Sandel (2012) cites examples from the USA, but there are similar examples in Japan. For example, a company called Wedding Speech Writing SameDay Delivery.com (http:// www.kekkon shik ispe echspeedd aihi tsu.com/ ). The company sells a service whereby if there is a request for a speech to be written, the client is interviewed by phone and a draft matching their needs is completed and provided. In addition to congratulatory speeches as a friend, the company also offers an early bird course (JPY 24,800) and a sameday delivery course (JPY 29,800). The company also offers a brushed Japanese paper manuscript service (extra charge) on the basis that ‘a high quality brushed Japanese paper manuscript would be a welcome present for the bride and groom after the speeches have been concluded’. 22 The meritocracy associated with these ideas has also divided US society into ‘winners and losers’ over the last 40 years, as well as causing a loss of dignity in work (Sandel 2020: 59, 211). 23 In economic policies relating to various industries (especially agricultural policy which is directly related to nature and land), the perspective needs to go beyond mere competition and efficiency (Okabe 2022a: chapter 10). 24 For details, see Okabe (2022a: chapter 10, sections 13). 25 ‘Happiness’, for example, has many expressions, including wellbeing, welfare, good life, meaningful life, and eudaimonia, in addition to happiness, which is the 64 Groundwork for bettering economics the possibility of human beings having ‘genuine altruism’. On the other hand, those who argued for the possibility of having ‘genuine altruism’ were Butler, Hume, Adam Smith, and others. For a brief survey of the discussion of how the existence of human altruism is positioned in major contemporary research fields (philosophy, economics, psychology, anthropology, evolutionary biology, neuroscience, etc.), see Okabe (2017a: 259– 270). 3.3 Altruistic activities contribute to wellbeing and health As discussed above, altruism is a part of human nature, regardless of culture or era (White 2016 and Table 3.1). And, it has been confirmed by many studies, including psychology and neuroscience, that when people behave altruistically, they experience a sense of happiness (fulfilment and satisfaction). Therefore, one effective prescription for human beings to achieve a sense of happiness may be to actively engage in altruistic behaviour. Psychologists have argued that altruistic behaviour to achieve these goals (i.e. to achieve feelings of happiness) is valid. This may have elements of ‘impure altruism’, as altruistic behaviour is carried out with the aim of increasing one’s own sense of satisfaction, but it is an interesting development, so let’s look at some of the arguments below. It is also important to note that there is room for these elements in altruistic behaviour, as this will lead to a more general understanding of altruism (incidentally, the model analysis presented in the following Section 3.4 is of this nature). 3.3.1 Psychologists and others recommend the concept of ‘helper’s high’ The concept of ‘helper’s high’ refers to the positive emotions that arise from selfless service to others (Dossey 2018: 393). The recognition that altruistic behaviour produces these emotions (which can be described as uplifting, satisfying, and happy) emerged in the 1980s, and the phenomenon has since been studied by a number of academic disciplines (ibid.). Today, not only does it continue to attract attention, but many psychologists (Carter 2014) rather reverse it and preach the ‘recommendation of altruism’ with the aim of enhancing their own sense of wellbeing. ‘Helper’s high’ has attracted such attention, firstly, because it has not only been confirmed by numerous psychological experiments and studies, but also by natural scientific research on humans as living organisms, as mentioned above. This is due to the fact that it has also been proven by research, as mentioned above, in the case of humans as living organisms. For example, many biochemical studies have shown that people who engage in charitable behaviour typically produce endorphins (a weak morphinelike substance) inside their brains, which increases their sense of wellbeing (Dossey 2018; Baraz and Alexander 2010). It is also believed that humans helping other humans in this way has played a major role in the survival of the human species. Considering humanity (1): altruism 65 Secondly, altruistic behaviour does not just bring about a good psychological state (happiness), as it is also considered to contribute to better health and longer life for humans (health benefits) (Carter 2014; Dossey 2018). According to a study by the National Institute of Health in the USA, the joy (happiness) of those who help boosts the immune function of the human body and lowers stress hormones. For this reason, people who volunteer or make charitable donations are more likely to repeat such behaviour, and it has also been noted that this contributes to better health and longer life expectancy. 3.3.2 ‘Helper’s high’ through training ‘Helper’s high’ has many of the favourable outcomes described above for humans, so there are also various claims for active training (albeit conditional) intended to produce that feeling. For example, psychologist Carter (2014) points out that, first of all, it is necessary to recognise that there are several risks associated with altruistic behaviour. For example, the increased stress associated with one’s overloaded schedule, the possibility of burnout, and the possibility of things not going the way one wants them to (frustration). However, Carter (2014) argues that altruistic activities, while taking care not to fall into these categories, can increase happiness, reduce stress and have positive effects on physical health and longevity. In other words, actively engaging in such altruistic activities is beneficial for oneself. Baraz and Alexander (2010) also argue that there are ways to reach helper’s high without actually taking action. For example, they suggest that one can train oneself to ‘sympathise and empathise with the suffering and distress of others’ (compassion meditation) or to meditate (mindfulnessbased meditation practice). Furthermore, all such elements of empathy and altruism are included in the Buddhist teaching of Bodhisattva,4 which suggests that when one becomes a person with the farreaching aim of saving all living beings from suffering and hardship, one attains a state of happiness. They also explain that there is a programme (BodhisattvainTraining) for this purpose. However, acting for the benefit of others with the main aim of pursuing one’s own happiness may better be called as ‘selfish altruism’, which is said to be a playful expression by the Dalai Lama (Baraz and Alexander: 2010). Thus, altruism can naturally be mixed with a selfish element. In the next section, we will therefore review one interesting economic model that also takes such a perspective into account. 3.4 An economic model incorporating altruistic behaviour As we have seen above, humans experience joy and satisfaction (emotional rewards) from performing acts to help others. Focusing on this point, an economist Andreoni (1989,5 1990) presented an interesting economic model to explain how this works. In the following, we review the paper ‘Impure 66 Groundwork for bettering economics Altruism and Donations to Public Goods: A Theory of WarmGlow Giving’ (Andreoni 1990). There are two points to bear in mind here. First, when considering the satisfaction (warmglow) that comes from doing things for others, it is assumed here that this is a selfish pleasure for the person concerned, regardless of the actual impact of his or her generous act. In other words, the perspective of ‘impure altruism’ is introduced here: when people give something to others, there is a mixture of both altruistic and selfish (egocentric) motives. Second, it is assumed that satisfaction (warmglow) is only a nonmonetary quid pro quo. This is because the warmglow phenomenon when there is a possibility of monetary reward is ‘reciprocal altruism’ (altruism with the possibility of direct monetary reward), which is different from the understanding here. The paper by Andreoni (1990), which is discussed below, deals specifically with charitable giving and analyses it from an economic theoretical perspective. The ‘warmglow giving’ donation behaviour described in this theoretical model provides a useful economic framework for considering the supply of public goods, collective action issues, charitable donations, and gift giving. 3.4.1 Economic analysis of altruistic behaviour: Andreoni (1990) Altruistic means the motivation to do what is beneficial to others, and is the opposite concept to selfish (selfinterested; egoistic) (Kraut 2018). Although these two ‘motives’ are diametrically opposed, a single human ‘action’ can be based on both behavioural motives (Kraut 2018). Andreoni (1990) modelled such cases. Whether people donate for a public good (e.g. a charitable fund) that is provided privately rather than by the government. This is influenced by numerous factors, not just altruism. Motivations include gaining social admiration, respect, or as a token of friendship, and there may be other social and psychological objectives as well. They may also be motivated by social pressure, guilt associated with not donating, or warmglow feelings. The following section presents an overview of an economic model (Andreoni 1990) constructed from the perspective of how to increase public good6 or shared assets, which are assets for all members of society, and how to finance them. Assume now the following situation. (1) There is only one type of private good (e.g. passenger cars) and one type of public good (e.g. parks) in the economy. (2) Individual i owns asset wi, which can be freely allocated either for consumption of a private good (xi) or donation for a public good (gi) (and there is no government subsidy for the public good). And, (3) assume that society is composed of n individuals and that the total amount of public goods is financed by G below (donations from all members of society): n G = Σ g i i = 1 Considering humanity (1): altruism 67 In this case, the utility function for each person can be written as shown Ui below. Ui = Ui (xi, G, gi), i = 1, 2, ..., n (3.1) In other words, an individual’s utility is defined by three things: (1) the amount of private goods consumed (xi), (2) the amount of public goods (G), and (3) the amount of money spent on public goods by themselves (gi). It should be noted here that gi enters the utility function twice. The first time as part of the public good (G) and the second time as a private good (third term of the utility function). The reason for this setup is to capture the fact that the gift by the individual himself has the character of a private good, which is independent of its character as a public good. Formulated in this way, equation (1) can be understood as an expression that includes three cases. In other words, when equation (1) above becomes like equation (3.1a) below, it can be understood as a case that represents a ‘purely altruistic’ case, as individuals do not gain utility from their personal donations. On the other hand, equation (3.1b) represents a case where public goods are not taken into account and individuals only donate when they have warmglow feelings, thus representing a purely egoistic case. And, when both G and gi are included (in equation (3.1) above), the person represents an ‘impurely altruistic’ (having a mixture of altruistic and selfish motives) case. Ui = Ui (xi, G) (3.1a) Ui = Ui (xi, gi) (3.1b) Next, let us express the contributions of all others, except for individual i, as: G - i = Σ gi j≠i Then, the individual donation function is obtained by solving the following conditional maximisation problem. Maximise: U i (xi, G, gi) (3.2) xi, gi, G Constraints: xi + gi = wi (3.3a) G– i + gi = G (3.3b) Equation (3.2) implies that each individual maximises his or her utility Ui under two constraints, (3.3a) and (3.3b). While equation (3.3a) implies that individual i will use his or her assets (wi) to purchase private goods (xi) and 68 Groundwork for bettering economics to donate for public goods (gi). And, equation (3.3b) implies that the total amount of public goods consists of the contributions of everyone except individual i (= Gi), and of the contribution of individual i (= gi). Where gi = G - Gi by definition, and substituting constraints (3.3a) and (3.3b) into the utility function equation (3.2), the maximisation problem is finally expressed as follows. Maximise: Ui (wi + Gi - G, G, G - Gi). (3.4) G At first glance, this utility function appears to be the same as the normal utility function7 that appears when consumers maximise their own utility, but in the above, the content is completely different. The reason is this. In the normal utility function, individuals increase their utility (satisfaction) by increasing their consumption, but the utility function in (3.4) above is based on the idea that individuals increase their satisfaction by including both public goods built by individual donations and individual consumption. Solving this maximisation problem (although the calculations are quite complex) leads to conclusions, for example that if the government adopts an asset redistribution policy and redistributes assets from people with relatively small altruistic tendencies to a group of people with relatively strong altruistic tendencies, the supply of public goods can be increased (Antreoni 1990: 473). This analysis shows an interesting aspect of the supply of public goods: namely the question of whether to increase the supply of public goods can be discussed also by using the analytical framework of individuals increasing their own utility under his or her budgetary constraints. While the above is a theoretical model, empirical studies based on it have recently emerged. Namely, OttoniWilhelm et al. (2017) took a charitable organisation as one example. They defined G in the above model as the total amount donated by all individuals to a charitable organisation, and Gi as the amount donated by individuals other than themselves, and conducted an empirical analysis of the activities and fundraising of one local chapter of the American Red Cross in support of fire victims. They concluded that: (1) pure altruistic support by individuals (the joy of giving) cannot be ignored, but (2) rather the ability of charities to expand their activities is the payback for donors (such payback being an important motivation for donation). It is common among economists to believe that people give to others because they expect some return in return,8 and such an idea appears to be at the root of this empirical study. However, the validity of such an understanding ultimately needs to be verified by empirical research.9 For this reason, it is hoped that such research will expand in the future, and that research on another important aspect of human nature (human connections or networks) will also become more active. Therefore, next chapter will focus on human interconnectedness. Considering humanity (1): altruism 69 Notes 1 This chapter is based on Okabe (2022a: chapter 5; 2018a, 2018b). 2 This empirical study is briefly explained in Section 4 of this chapter. 3 The Roman emperor and philosopher Aurelius, in his work SelfReflections, which was also an exhortation to himself, wrote: ‘What else did you expect from helping someone out? Isn’t it enough that you’ve done what your nature demands? You want a salary for it too? And when we do help others- - or help them to do something- - we’re doing what we were designed for. We perform our function.’ (Aurelius 2002: book 9, number 42, page 128). 4 In Buddhism, a bodhisattva is a person who is on the path towards bodhi (awakening, enlightenment) or Buddhahood. 5 Professor, University of California, San Diego, USA. 6 See Okabe (2017a: 318) for definitions and details. 7 By normal utility functions, we mean the various types of utility functions as shown in Figure 1.2 and Table 1.1 in Chapter 1. The reasons of why relying on such utility functions is problematic, see Section 1.3.3. 8 These ideas are clearly illustrated, for example, in gametheoretic analyses of altruistic behaviour (Okabe 2017a: 277– 279, appendix 2). 9 When empathising with the other person: (1) does the person behave in a (genuinely) altruistic manner or, even in such a case, (2) does the person’s behaviour still result from the expectation of some reward for oneself, or (3) does the person behave in the expectation of escaping punishment? One interesting experimental report (Batson et al. 1988) aimed to clarify this. It consisted of five experiments with between 60 and 120 university students, the results of which showed that (1) was indicated while (2) and (3) were rejected in all cases. DOI: 10.4324/9781003478447-6 4 Considering humanity (2) Social networks In the previous chapter, we argued, based on recent research, that humans have a tendency to care about others (the most positive form of it being altruism) as well as selfinterest, and that this is related to their own health and wellbeing. In this chapter, we consider how these human connections can be understood from the perspective of modern network science. In Section 4.1, we discuss how the basic laws of network science can be applied to human connections. In Section 4.2, we look at some specific examples of the effects of social networks. And, in Section 4.3, we argue that social networks have the important function of creating common resources (social relational capital), thus implying society is not a simple arithmetic sum of humans.1 4.1 Network science and human links Mainstream economics usually assumes that ‘each human being has his or her own preferences and makes decisions and acts selfishly and rationally without being influenced by others’ (atomistic view of human beings). However, as seen in the previous chapter, it is clear from research in many academic fields and from actual human behaviour that humans always take into account people other than themselves (their surroundings or other persons). In addition, their own behaviour is conversely often influenced by others. Therefore, man’s true nature lies in the fact that he or she lives in an interconnected way.2 Therefore, it must be said that current mainstream economics, which lacks the perspective that humans are beings living in social networks, is inherently very flawed. What is essential in making economics a more humanistic discipline is to consider and incorporate human ‘connectedness’ (interconnection, or social networks) which has multiple dimensions. Internationally, there are a number of studies in academics that attempt to open up new areas of economics from these perspectives.3 Unfortunately, however, there are very few such studies among Japanese economists at present.4 Considering humanity (2): social networks 71 4.1.1 Reductionism in modern science In modern sciences, ‘reductionism’ has become a universal approach in understanding truth. It is the method of explaining various phenomena and properties, whether physical phenomena or life forms, by tracing them back to a finer dimension. And, it has been considered to be a scientific and rational approach, and research in this direction has been promoted. In other words, reductionism is a research direction in which the smaller elements that make up the whole are examined one after another in order to understand the whole. In physics, this has developed from matter to atoms, from atoms to nuclei, and is explained in terms of the behaviour of subatomic particles in the infinitesimal small world. In life, research has developed from organs to cells and then to genetic understanding. This trend has been promoted not only in the natural sciences, but also in the social sciences. In economics in particular, the idea that macroeconomic phenomena (prices, unemployment rates, etc.) have been thought as can be explained by reducing them to the motives and actions of microeconomic agents (i.e. individuals). That is, the trend towards ‘methodological individualism’, as detailed in Section 5.1, has been gaining momentum over the past 50 years. This trend which is strong in mainstream economics today not only in theoretical research but also in policy research. And, the importance of such ideas is emphasised and praised as an ‘analyses with a microfoundation’ and in some cases are almost mandatory.5 For this reason, in many fields of social sciences, with the exception of economics, the term methodological individualism has ‘critical connotations’ (mean this as criticism), but in the case of economics it is conversely taken as ‘worthy of praise’ (taken it as praise) (Basu 2011: 44). 4.1.2 The need to take account of human interconnectedness Under the reductionist or atomistic view of humans in economics, humans are understood as beings that repeat instantaneous optimising behaviour under everchanging circumstances. However, the reality is that over a period of time, every human being is in contact with a certain range of other people in various situations of social life. Such situations are diverse, and the number of people with whom they come into contact, the density of contact and even the manner of contact are also diverse. For example, there are various forms of contact in terms of distance, density, and contact style, starting with immediate family members, colleagues at work or school, acquaintances, and friends in the community, and even friends who come into contact exclusively via the internet. Human beings act in the context of these connections, so it is fundamentally necessary to emphasise this. In other words, human interconnectedness is one fundamental aspect of human nature. However, this has not been emphasised in mainstream economics, and it will certainly be necessary to restructure the system of economics 72 Groundwork for bettering economics to explicitly incorporate this element in the future. Based on this recognition, this chapter takes this perspective on humans as ‘social networks’. It then draws heavily on the book Connected: The Surprising Power of Our Social Networks and How They Shape Our Lives, by Christakis and Fowler (Christakis and Fowler 2009)6 7which consolidates the cuttingedge results in that field of research. We also cite relevant papers where necessary to present the results of contemporary research on this aspect of human beings. From this perspective, being connected means being aware of the existence of others, and therefore human altruism, to whatever degree it may be, inevitably comes into view. Moreover, as human beings are seen as embedded within others in social networks, they are inevitably influenced by others who are connected near or far (i.e. they inevitably lose some of their independent decisionmaking capacity), but the flip side of this is that by being connected, people are able to transcend their own limitations. 4.1.3 Social networks: examples and laws In this section, we would like to briefly summarise the basic elements and laws of social networks. A network consists of two components. One is a node, which is a point of intersection, a point of junction or a point where a line ends. The other is a link, tie, or connection, i.e. a section of line connecting points (Barabasi 2016: 26– 27; Christakis and Fowler 2009: 8– 12). This is evident if we imagine an intuitive diagram, showing a person by a small circle and connection of individuals by a straight line, as will be discussed shortly. Research on it emerged at the end of the 20th century as network science, which has an interdisciplinary character, and then developed rapidly with the digital revolution (fundamental changes in the possibilities for collecting, sharing, compiling, and analysing data about connections) (Barabasi 2016: 25– 27). Networks are found throughout nature and human society, and the findings of network science have had a significant impact across all disciplines.8 4.1.3.1 An example of a social network To understand the sense of human connectedness (social network)9 and its basic elements, let us refer to a simple diagram in Christakis and Fowler (2009: 14), which shows a network of 105 students (lineconnections indicating close friends) in a university residence hall in the USA. In that diagram (which is not reproduced here for copyright reasons), each small circle represents a student and each line connecting them represents a mutual friendship. On this basis, let us try to understand the structure of the network. First, (1) students A and B both have four friends, but A’s four friends are more likely to know each other (a connection exists between them), while none of B’s friends know each other. This is expressed as A having a greater transitivity Considering humanity (2): social networks 73 than B. Also, (2) C and D both have six friends, but there is a significant difference in the position of their social networks. That is, C has a high degree of centrality, whereas D is relatively peripheral (C’s friends have many friends themselves, whereas D’s friends have few friends themselves or no friends at all). (3) The degree of being in the centre of the network is assessed not only by the number of direct friends, but also by the number of friends of friends, friends of friends of friends, etc. And, in the case of this example, (4) one can point out that on average a student has direct connections with six close friends, and so on (C&F: 13– 14).10 4.1.3.2 Characteristics of social networks and the five laws Social networks have two characteristics (C&F: 16). One is the existence of linkages that indicate who is connected to whom. These linkages or connections can be diverse and complex in character, such as whether they are temporary or lifelong, passing through or dense, personal or anonymous. The other is that some things propagate (contagion) through connections. These two things (linkages and propagation) are essential to understanding why social networks exist and how they function. This is because the existence of connections and what is propagated through them creates a whole that is greater than the sum of its parts (C&F: 16). This is described in economics as having ‘externalities’ (discussed in more detail in Section 4.3). And such effects are due to the fact that the following five laws have been established for networks (C&F: 17– 26). Law 1. Network formation is only possible through our human behaviour. For example, the phenomenon of ‘birds of a feather flock together’, or homophily (the tendency of people to choose to associate with others who have similar attributes to themselves), is nothing more than the wilful formation of groups or networks of people who share common interests, histories, dreams, etc., and is clearly the result of human action. It is clearly a result of human behaviour. The structure of the network is also determined by humans— that is what to focus on, how large the network should be, and how dense the connections should be. Law 2. Networks influence us. In other words, by belonging to a network we are influenced by it. This is the opposite relationship to Law 1 above, and Laws 1 and 2, when combined, show the dynamism of causality working in both directions. The magnitude of Law 2 is determined by the nature of transition (transitivity) of the network. Law 3. We receive various influences from our friends. The influence we receive from the network (Law 2 above) is specifically from our friends. In this case, it is critically important what kind of things (information, beliefs, etc.) flow through the connections. Also, the propensity of humans to influence and imitate each other is one fundamental determinant of the flow (such mutuality is discussed in detail in Section 4.2). 80 Groundwork for bettering economics communities are more likely to imitate each other’s behaviour and thus spread obesity. The other is the propagation of norms. Norms are shared values about what is appropriate or customary rules about the way of behaviour. Specifically, in obese communities, obesity is thought to spread because the greater acceptability of being overweight (less negative image of being obese) more directly influences the person’s behaviour (Christakis and Fowler 2007: 377). More generally,obesity may spread in social networks because cultures and practices become shared (C&F: 116). 4.2.3 The formation of connections has its origins also in human nature Human behaviour has reciprocal spillover effects, as described above, which are caused by humans forming connections. So why do humans seek to be socially connected? The idea that it ‘has its origins in human nature’ is now gaining ground (C&F: 217– 221). Two types of argument can be organised there. In addition, when discussing connection, it is characteristic that the Figure 4.2 A network of 2200 people from the Framingham Heart Study in the year 2000: the obesity ‘epidemic’. Notes: 1. The size of nodes (small circles) is proportional to obesity. The obese and nonobese populations can be seen that they are located in specific places. Note that in the original diagram, nodes and connecting lines are shown in colour for each of the various factors. 2. Based on time series data of the Framingham Heart Study. Source: Christakis and Fowler (2007: 373) and Christakis and Fowler (2009: 174ff). Considering humanity (2): social networks 81 argument of altruism is intertwined with it (this point will be discussed to the main point in Section 5.1 in the next chapter). First, it is possible to explain that humans tend to form connections (forming groups of people close to each other) are partly due to the influence of human genes (C&F: 214– 217). In other words, it can be understood that these behavioural patterns were selected during the evolution of human genes and have been inherited in the genes (id. at 214). If we assume Darwin’s theory of natural selection (survival of the fittest), the genes of individuals who behave selfishly (showing behaviour in which they survive) are passed on from generation to generation, while those who behave altruistically (showing behaviour that benefits others at the expense of themselves) have a reduced chance of survival. So, the number of individuals who inherit the latter gene will decrease and should eventually perish. In human society, however, cooperation and altruism are actually observed. In other words, if people who only think and act for themselves predominate, the chances of survival of those who try to help others should decrease, but this is not the case. This can be understood as due to the fact that people often overlook their own selfish tendencies when interacting (interacting) with connected people (id. at 218). Thus, connections arise in people. In fact, the results of numerous experiments on altruism and cooperation confirm this tendency. In other words, in about half of these cases, people choose to help others at the moment, even if they have no chance of interacting with them in the future. Put differently, if egocentricity always worked in one’s favour, then everyone would exhibit egocentric behaviour, but this is not the case (id. at 218). In the real world, where, unlike in the laboratory, intricate human relationships are longlasting, mutual cooperation (a situation evolutionists call direct reciprocity) can also occur (id. at 218– 219). A second perspective on explaining human connectedness comes from a relatively recent and diverse range of disciplines. One example, which I will not go into detail, is political scientist Robert Axelrod’s famous and original study The Evolution of Cooperation (1984). There, it was shown that adopting a kind of cooperation strategy, known as a retaliation strategy (tit for tat), is even more effective than always being cooperative or always being selfish. In other words, ‘if someone cooperates with you this time, cooperate with them next time, and if someone does not cooperate with you this time, take retaliatory action against them next time (the strategy of reprisal)’. Under this strategy, cooperation (altruism) always occurs (C&F: 219). Another example is the mathematical model analysis of evolution by Fowler (2005) on how human cooperation develops. It shows that not only do cooperators and fee riders exist, but punishers with altruistic punitive behaviour also rise, leading to a world of increased cooperation and connectedness (and the emergence of altruism in the process) (C&F: 220– 221). Incidentally, the online encyclopaedia Wikipedia performs a valuable function as a kind of public good because of the existence of the above three types of actors and the functions they perform.19 82 Groundwork for bettering economics Furthermore, it has been shown that the tendency of humans to form social solidarity is due to the fact that it is biologically imprinted in the human genes (C&F: 232). This is related to the first reason (evolutionary processes of genes), the results of which can be empirically confirmed in contemporary societies. Namely, in a study conducted by the authors (C&F) on 1110 pairs of twins (drawn from 90,115 students in 142 schools in the USA) to determine the role of genes in social networks (Fowler et al. 2009), it has been shown that genes play a role in defining the structure.20 4.3 Social network creates common pool resources Human society, as we have seen above, is not simply an atomistic set of individuals (an arithmetical sum of individuals). There, individuals constitute a social network with diverse relationships. This allows individuals’ knowledge and information to be transferred to each other, amplified and complemented as necessary, so that human society as a whole can fulfil its potential. And, such social networks have the following characteristics (C&F: 290– 292). Firstly, it supplements and stores information communicated between people (norms of trust, reciprocity, oral histories, etc.) and enables, so to speak, arithmetical processes to integrate millions of decisions (determining market prices, selecting the best person through elections, etc.). Incidentally, Hayek (1945), who praised the high function of the market system as nothing less than one large informationprocessing mechanism, which fulfils its coordinating function when information on demand and supply meet, is a view that emphasises exactly this aspect. Second, social networks maintain a memory with regard to their structure and functioning (culture: value criteria), even when the metabolism of their members occurs. This communicates what trust is, irrespective of the individual members, and encourages individuals to change their behavioural norms if necessary. Third, social networks can reproduce themselves as if they were living organisms, transcending place and time. Even if people are replaced, they can reproduce if they know how to connect. And fourth, social networks are often selfrepairing (i.e. if part of the network is missing, others will act to complement it). The function of social networks with the above characteristics can be understood, in other words, as the creation of valuable shared resources. Public goods are goods that are consumed by one person without hindering the consumption of others and without reducing the amount used by others. It is nothing more than a common asset of its members, which has a contrasting character to private goods.21 In other words, a social network is not merely the arithmetic sum of the individuals who compose it, but has a new value beyond that, an external effect in economic terms. It is also called social capital.22 It is the basis for the smooth functioning of society. The above three aspects Considering humanity (2): social networks 83 brought about by human connections (social networks) can be understood as a gratifying gift of this nature. Furthermore, it needs to be added that while the formation and functioning of social networks is an aspect that generates altruism in humans, it also supports connectedness (C&F: 296). If people do not act altruistically, that is if they do not respond in kind to kindness, or conversely if they are always violent, then social connections will dissolve and the networks that surround us will disintegrate. Therefore, a certain degree of altruism and reciprocity, as well as positive emotions such as love and happiness, are crucial for the emergence and survival of social networks. Furthermore, once a network is established, altruistic behaviour (ranging from small acts of kindness to the donation of transplanted organs) will diffuse within it (ibid.).23,24 It should also be recalled that, from the perspective that human beings live in networks, one ethical value— ‘integrity’ (coherence, honesty, sincerity, fairness)— has universality and importance when understanding society (Montefiore 1999). One example of this can be summed up in the expression ‘Honesty is the best policy’. This is one of the aphorisms of Benjamin Franklin (US statesman, physicist, and author of the Founding Era) and has become the most wellknown proverb concerning honesty. Yukichi Fukuzawa, a leading figure in Japan from the end of the Edo period to the Meiji era and founder of Keio University, listed seven items in his booklet Daily Teachings (Fukuzawa 2006) that his sons should learn at home. The first of the seven was ‘not to tell lies’. Also, in modern times, the United Nations has three fundamental values as an organisation, one of which is integrity. These are professionalism, integrity, and respect for diversity, and it is stated that when recruiting for the UN’s executive staff from all over the world, the candidate are required to fulfil these three values (Okabe 2007b: 82). Integrity is thus a value of universality for human beings and their societies. In this chapter, we have seen that the perspective of human interconnections or social networks is indispensable for an accurate understanding of human society. The characteristics and importance of this perspective are discussed again in Chapter 5 (Section 5.2) from a broader perspective. Notes 1 This chapter is based on Okabe (2022a: chapters 6 and 7; 2019b). 2 The Roman philosopher Aurelius, in his SelfReflections, understood the following： ‘Everything is interwoven, and the web is holy; none of its parts are unconnected. They are composed harmoniously, and together they compose the world’.(Aurelius 2002：book 7, number 9, 86). 3 For example, an overview paper discussing how social network structures act on people’s behaviour, economic outcomes, and wellbeing (Jackson et al. 2017), and a study theoretically elucidating the interrelationship between communities and markets from a network perspective (Gagnon and Goyal 2017), among others. 84 Groundwork for bettering economics 4 If we look at the Japan Economic Association, the largest academic society for Japanese economic researchers, the number of papers (in Japanese and English) presented at the 2019 Spring and Autumn Meetings reached a total of 343 papers. However, among the titles of these papers (including the session titles of the panel discussions), those on networks (paper titles having either network or kizuna) numbered five, and those on altruism (paper titles with either altruism or altruistic) only two cases. Furthermore, with regard to networks, most of the articles discussed the networks of companies or supply chain systems, and almost none of them took the perspective of trying to understand society by focusing on human networks or altruism. 5 Okabe (2017a: 36– 37). For the details of formulation and its problems, see appendice 1 and 2 of Okabe (2019d). 6 Christakis is Professor of Medicine and Professor of Sociology, Harvard University, USA (at the time of publication of the book. He is currently Professor at Yale University, USA). Fowler is Professor of Medicine and Social Sciences at the University of California, San Diego, USA. Christakis was listed as one of the ‘100 most influential people in the world’ by Time magazine (2009) and on Foreign Policy’s list of ‘best global thinkers’ (2009 and 2010). 7 Incidentally, a review of the book on Amazon on the internet shows that 394 people have posted ratings for the book, many of them to the effect that the book ‘radically changes the conventional view of humanity’, with the percentages (%) from 5 to 1 star on a 5star scale, with the resulting point of 61, 21, 11, 3, and 3, respectively (the average of all ratings is 4.3 stars, as of 14 November 2022). 8 Examples of complex networks include: (1) cellular networks (sustaining life); (2) neural networks (the workings of the brain); (3) communication networks (the interaction of communication devices); (4) power networks (the links between generators, consumers, and power lines); (5) trading networks (the mechanisms for exchanging goods and services) and (6) social networks (the mechanisms through which professional, friendship, and family ties diffuse knowledge, behaviour, and resources). The results of network science (which has at its core the mathematical theory of graphs) have had a significant impact on these various fields. For an overview, see Barabasi (2016: chapters 1 and 2). 9 In this publication, these two expressions (human connections, social networks) are used interchangeably. 10 In this chapter, the book by Christakis and Fowler (2009) will be referred to below as C&F for simplification. 11 On the validity of the six degrees, etc., see Christakis and Fowler (2009: 26– 27), Wikipedia ‘Six degrees of separation’ (https:// en.wikipe dia.org/ wiki/ Six_ de gree s_ of _ sep arat ion), and Barabasi (2016: figure 3.12). 12 A US online social media and social networking service, the flagship service for which Facebook, Inc (based in California, USA) is named. The company changed its name to Meta Platforms, Inc. in 2021. 13 When religion is seen as ‘a connection with a Higher Power beyond human knowledge’, it can be understood as having a stabilising role in social connections. For more information, see Okabe (2022: appendix 52 in Chapter 5). 14 The study sample was 12,067 people selected in the US state of Massachusetts. 15 For example, this research is also presented as an example of ‘Complex Contagion’ in the major book Network Science (Barabasi 2016: box 10.2, 408), a comprehensive compilation of network theory. Considering humanity (2): social networks 85 16 BMI is weight (in kilograms) divided by height (in metres) squared. A normal BMI is 20– 24, 25– 29 is overweight, and 30 and above is considered (morbidly) obese. 17 Data from an exhaustive survey of residents of Framingham, MA, USA, conducted biennially since 1948 by Harvard University medical researchers on body size and various factors in order to determine the causes of cardiovascular disease. 18 Furthermore, Christakis and Fowler (2007) found that: (1) when adult siblings are observed on a onetoone basis, obesity in one increases the likelihood of obesity in the other by 40%; (2) obesity in one spouse increases the likelihood of obesity in the other by 37%; (3) these trends are not observed between geographical neighbours (social distance has a greater effect than geographical distance); (4) these effects are relatively more widespread between people of the same sex than between people of the opposite sex; and (5) there is no relationship between the spread of smoking cessation and the spread of obesity within the network. 19 For the reasons for this, see Okabe (2022a, appendix 62 of Chapter 6). 20 For example, the results include: (1) people with five friends have a different genetic makeup compared to those with only one friend; (2) genetic makeup also influences position in a social network (central or peripheral position); (3) it influences patterns of friend connections (transitivity); and therefore (4) demonstrate that there are aspects of human group formation in which genes are involved (heritability) (C&F: 232– 235; Fowler et al. 2009: 1720). 21 For more information, see footnote 37 of Chapter 6. 22 See Okabe (2017a: chapter 10, section 5) for more information on its components, functions, and attribution. 23 For example, charitable foundations (charity) are an example of acts of kindness performed through networks. Incidentally, approximately 89% of all households in the USA give to charity each year, with an average annual donation of USD 1620 in 2001 (C&F: 296– 297). Globally, the nonprofit sector is also a much larger economic force than common sense would suggest (Okabe 2017a: 313– 317). 24 In Japanese society with an accelerating ageing population and declining birth rate, the demand for various services for the elderly (e.g. nursing care, medical care for the elderly) is growing rapidly, and it makes more sense to respond to these demands based on a sense of community than on competitive principles (Akiyama and Miyagaki 2022). Part II Overview of economics for humanity DOI: 10.4324/9781003478447-8 5 Towards economics for humanity In the above four chapters, it is specifically argued that while modern mainstream (neoclassical) economics has strengths, it also has weaknesses or major problems when viewed as a discipline concerned with human beings. On the one hand, modern economics has come to be known as the ‘queen of the social sciences’ for its rigorous application of the ‘scientific’ method, by defining man simply as homo economicus (economic man) (Chapter 1). On the other hand, Adam Smith’s broad view of human beings has been misunderstood (Chapter 2), oversimplified to the extent that human beings are selfish beings (Chapter 3), and that society is seen as an arithmetic set of such individuals, missing the important perspective of the interconnectedness of human beings (Chapter 4). This chapter puts the above issues into a larger framework and considers what new direction economics should take as a discipline concerned with human beings. To this end, Section 5.1 shows that there are three ways of thinking as a framework for understanding human behaviour patterns and society, and argues that the network concept is important for understanding human society. Next, Section 5.2 draws out suggestions for incorporating the social nature of human beings by taking up and examining four suggestive books that extensively discuss what human beings and socioeconomic institutions should be. And, in Section 5.3, it is argued that, based on the above, ‘economics’ needs to be transformed into ‘economics for humanity’, a humanistic discipline that incorporates a wider range of human nature.1 5.1 Limits to methodological individualism The previous chapter has sketched out the diverse aspects of human beings if human society is viewed from the perspective of connections (social networks) based on the results of modern network science. This provides a very different picture of man and society from mainstream economics, which is founded on an atomistic view of man (methodological individualism). To illustrate this more clearly, the following section takes three representative perspectives for understanding the relationship between the individual 96 Overview of economics for humanity Perspectives on human society The reason Assessment and issues C Granovetter (2017). [US sociologist and economic sociologist]. Economic behaviour is only one aspect of human behaviour and it is basically impossible to understand human society merely on economic basis. Human beings exist in social networks, so it is necessary to understand society in a theoretical model that is consistent with this view. Economists see humans as selfinterested agents guided by quantifiable incentives, but their understanding (methodological individualism) is too narrow. Human society should be understood to include economic factors as well as the mutually influencing social factors (trust, norms, values, institutions, etc.). It is reasonable to reject the view that man is an atomistic being who lives selfishly, while insisting man should be understood as a being who lives in a social network. On the other hand, although it is claimed that the simultaneous pursuit of all goals is possible, no concrete model for this is presented in the book (the book remains entirely abstract textual descriptions). D Collier (2018). [British economist specialising development economics]. Contemporary Western society is deeply divided on three fronts (urban and rural, elite and nonelite, and between nations) and needs to be repaired. This requires policies that restore ethical behaviour to all three: the state, the corporation and the family. Capitalist societies must be ethical. It is therefore possible to deal with the phenomenon of social fragmentation if it is based on mutual human commitment. In the 1930s, capitalism could be restored through policies such as Keynesianism, so it can be restored again this time with a realistic and comprehensive response. The argument that the majority of human beings are not simple ‘economic man’ but a little more mature (also emphasising consideration for others, fairness, honesty, freedom, etc.) makes sense. On the other hand, it is somewhat questionable whether an exhaustive policy package (ethical state, business and family) is really a pragmatic one. Note: Prepared by the author based on the above four books. Table 5.2 (Continued) Towards economics for humanity 97 it allows for a simple and logical development— individual behaviour can be mathematically attributed to a ‘conditional maximisation problem’.9 However, it is argued in all four books that this limits the motivation for human action too much and misrepresents the nature of human beings. The common understanding of them is that humans have economic and noneconomic (social) goals, and that humans are beings who adopt behaviours that simultaneously achieve these goals. In other words, it is necessary to understand the society on the basis that humans live in a social network (a perspective that incorporates the existence of others, from which norms, trust, etc. emerge), as emphasised by Book C in the diagram. It is also necessary to understand that humans do not act solely from selfish motives, but that there is an aspect of behaviour (i.e. ethical behaviour) that reflects the commitment of humans to each other, viewing them as a little more mature beings (Book D). 5.2.1.2 Narrowmindedness with a bias towards neoliberal economic policies Second, mainstream economics conceives of economic mechanisms and economic policy with the market function at its core, and thus promotes deregulation and free competition, but these policies are denounced in the above four books as neoliberal policies. Such policies have resulted in the spread of income inequality and poverty and the widening gap in treatment between formal and informal employment in the labour market (Book A). They have also made people aware of the finite nature of the Earth’s resources and have resulted in the widening of large disparities by country, which does not bring about human happiness and spiritual fulfilment (Book B). The social divisions thus generated can be addressed on the basis of a communitarian ethic by switching to policies that value mutual human commitment, rather than by market fundamentalism (Book D). And, such policies that do not rely on neoliberalism are politically positioned as social democratic policies (ibid.). In Sweden, as well as in Germany and Denmark, such policies have been introduced, and as a result have been evaluated as successful in bringing about a humane life (Book A, Book B). This can be seen as a major lesson for Japan’s economic policy. 5.2.1.3 The need to understand society by a threesector model Third, if humans are understood as beings living within a social network, then economic society needs to be understood not according to a twosector (market/ government) model, but according inherently to a threesector (market, government, and community) model. In mainstream economics (neoclassical economics), as mentioned above, it is customary to understand society through a twosector model based on the ‘economic man’ assumption. However, there are diverse aspects of human motives for action. In other words, there are communal or charitable motives (Book A) and the existence of the three principles of ‘private, public, and 98 Overview of economics for humanity common’ (Book B) in relationships between people, which makes it essential to take the viewpoint that human beings live within a social network (Book C). In addition to consideration for others, ethics such as fairness, honesty, freedom, and integrity are also said to influence human behaviour (Book D). All of these perspectives strongly suggest the need to consider the existence of a third sector (or the existence of such elements within existing sectors). In the case of Jinno (2010: Book A), for example such a third sector is named the ‘social system’ (common economy), in contrast to the economic system (market economy) and the political system (government or public finance), as mentioned above. However, in terms of both clarity of the meaning and the conventional terminology, the expression ‘market, government’ and community’, as used by Hiroi (2015) would be most appropriate (as suggested by Karl Polanyi. See Figure 6.2). Incidentally, the present author has traditionally advocated the concept and used the naming of ‘threesector model’ (Okabe 2009b: figure 3; 2017a: figure 43), so that it will be used in this book also (Chapter 6). As we show later in the book, understanding society through threesector model gives not only accurate description of human society but also can lead to a more appropriate public policy than by twosector model. Theoretically speaking, a higher level of social welfare can be brought about as an equilibrium (Okabe 2017b: appendix 1). This is one of the core points of the book and is discussed in somewhat more detail in Chapter 7, Section 7.3. It turns out that the arguments of the above four books have at least three clear basic commonalities, as described above. These are: (1) the unrealism of the assumption of the ‘economic man’, (2) the narrowness of vision of neoliberal economic policy, and (3) the need to understand society by a threesector model. They jointly suggest the direction toward the necessity of ‘economics for humanity’, as introduced in the next section and to be detailed later in Chapters 6 and 7. 5.3 From economics to economics for humanity In the above, we have pointed out some of the problems facing modern mainstream economics and sought directions for improving them. What became clear is that: (1) mainstream economics has unfortunately not succeeded the human and social views of Adam Smith, the founder of economics; (2) it is based on the narrow human image of the ‘economic man’ (methodological individualism) when it comes to understanding the nature of society; and (3) there are some recent researchers who argue for a research orientation based on the ‘social man’ rather than the ‘economic man’. Under these circumstances, this section will sketch a sense of the direction that economics should pursue in the future, i.e. an economics that takes in the broad human nature into account. Towards economics for humanity 99 5.3.1 Man as a social being To summarise Adam Smith’s writings first, his system of thought teaches the importance of viewing man as a ‘social being’ (Dome 2008: 270). Social being is the view that man is a subject who is interested in the feelings and actions of others and tries to empathise with them (ibid.). Societies constitute, create and operate morals and laws by such people. This is quite different from the image of human beings assumed by mainstream economics (an atomistic view of human beings and a view of society based on it, in which they act selfishly and without concern for others). From which standpoint should we understand people and society? The simple and incisive approach of mainstream economics naturally has numerous advantages. However, there are still significant limitations in the way it assumes human beings, and therefore the public policy theories derived from that analysis (an emphasis on efficiency generated by competition) may neglect human values and conflict with ethical issues (the last point is discussed in the next section). Naturally, a multifaceted discussion is needed to address these issues, but here, we would like to suggest one basic direction for the future of economics. 5.3.2 Switching from an economic man to a ‘social man’ First, it is necessary to change the basic assumptions of the human image. The conventional viewpoint of understanding human beings assumes an economic man (homo economicus) who acts selfishly and rationally, and positions man as an isolated existence detached from society. In contrast to this, it is necessary to introduce the image of the human being as a ‘social person’ (homo socialis), a person who acts also in relation to others (Bowles 2016: 41). This is because it is more accurate to understand human nature (motives for action) as a human being who acts also in consideration of relationships with others (as argued by Smith above), rather than as an economic man as assumed by conventional economics. And indeed, according to various examples and experimental results, few people in any human group consistently pursue selfinterest alone, and moral and considerationforothers motives are widely observed (Bowles 2016: 41). On this basis, various public policies can be designed to be more human and more effective (ibid.). 5.3.3 From economics to economics for humanity Second, the scales by which the society is assessed also need to be changed. In traditional economics, economic rationality, especially efficiency, is an important concept, and in many case, it is the basis for judging the state of society and public policy. However, efficiency does not solve all ethical problems, nor is the economic dimension paramount for many issues (Morson and Schapiro 2017: 3). Economics inevitably involves ethical issues that cannot be attributed 100 Overview of economics for humanity to economics itself. It is, as Smith pointed out, a concern for others as well as a concern for oneself, and therein lies the core of human nature (ibid.: 10– 19). For example, a healthy respect for ethics is one of the conditions originally required of economics (ibid.: 10– 13), but mainstream economics deliberately avoids entering into it, which requires a reconsideration. Behavioural economics, which has gained momentum in recent years, is certainly an advance in that it has questioned the core assumptions of mainstream economics (rationality of human behaviour) and pioneered a new approach of first observing human behaviour, as mentioned above.10 However, while there is an emphasis on how people actually behave (real behaviour: ‘does’), it does not go into the content of how people should behave (ideal behaviour: ‘should’). That is, it is not accompanied by a normative debate (the importance of the latter has been obscured so far in economics). Behavioural economics is therefore in some ways on the same footing as mainstream economics and cannot be assessed as pointing in the direction of incorporating human nature (Morson and Schapiro 2017: 262– 289). To address this, behavioural economics also needs to be supplemented, where necessary, by insights from the humanities (ibid.: 286– 287). In current behavioural economics, cultural influences are rarely taken into account11 and research is often conducted from the perspective of human behaviour in general, i.e. from the viewpoint of human beings as an organism rather than as people (ibid.: 272). For economists, ethical judgements are usually understood to be external to their own area of expertise (ibid.: 289), which gives the impression that they are exempt from research. However, if economists were to seriously try to incorporate the wisdom of psychology, philosophy, sociology, anthropology, the various sciences and, above all, the humanities into economics, economic analysis would be much richer than it is now (ibid.: 290), and economics could become a ‘humanistic economics’, ‘humanomics’ (ibid.: 288; Smith and Wilson 2019: 2), or economics for humanity, i.e. humanistic social science. In public policy analyses also, it can also lead to recommendations that take into account cultural and ethical values that are integral to human beings,12 rather than just providing prescriptions inclined towards efficiency supremacy. Also, it should be pointed out that the research philosophy of the mainstream economics, especially those of AngloAmerican economics, has an apparent contradiction to the reality of their societies. Namely, the relative size of workers in nonprofit sectors in these welldeveloped economies is significantly larger than in the case of less developed economies (see Figure 6.3 in Chapter 6). So that, it would have been natural that the economic research in these welldeveloped economies should have paid more attention to nonprofit sector. Put differently, AngloAmerican economic research has some internal contradiction in this sense, because it should have paid more attention, not less attention as is actually the case, to nonprofit sector than in the economic research in other countries. Towards economics for humanity 101 ‘Economics is essentially a moral science’ was Keynes’ view (Atkinson 2009: 791), which needs to be recalled again today. However, recent economics has been corrupted in avoiding value judgments (ethical standing) in order to facilitate discussion (ibid.: 794– 799). For example, (1) it treats representative individuals by assuming from the outset that there are no differences in individual preferences or conditions, (2) it assumes from the outset that the criteria for judging welfare are the same for everyone, (3) it does not judge the level of welfare, but rather whether a certain response will improve or worsen the initial level of welfare (if it decreases the welfare of one member of society, it is judged to be a deterioration).13 There is a great concern that policy judgements will be trivialised under such a conception. Shouldn’t economics be more willing to adopt highly generalised value judgements and develop constructive debate? 5.3.4 Two problems facing modern economics and the modification: ‘economics for humanity’ If we take in some of the above broad perspectives, we may be able to cope with two problems facing modern economics that Amartya Sen has pointed out so sharply. The first problem Sen points out is that modern economics has too narrow a view of the genuine motives of human behaviour (narrowness in understanding human motives for action). For many years, economists have understood society by constructing a model that sees human motives for action as pure, simple, and robust (i.e. acting selfishly and rationally) and excludes unwieldy aspects such as good intentions and moral emotions (Sen 1987: 1). However, the criticism is that the motives for human behaviour in reality are diverse and that it is highly unusual for economics to have developed in such a narrowly defined way (ibid.). This criticism can be addressed if the abovementioned image of human beings is assumed in economics or the social sciences. The second problem is that modern economics has been transformed into a discipline of an ‘unethical’ character (deliberate unethicality), which has extremely narrowed its original disciplinary vision and excluded ethical elements (Sen 1987: 2). Historically, economics was originally supposed to evolve as a tributary (offshoot) of ethics (ibid.: x), as indicated by the fact that Adam Smith, the founder of economics, was a professor of ‘moral philosophy’ at the University of Glasgow (Scotland).14 However, modern economics has consciously tried to be a discipline of an ‘unethical’ character, which has resulted in a major discrepancy with its historical evolution (ibid.). In light of these criticisms, a call for a ‘return to Adam Smith’ may be exactly what is needed for contemporary economics. In the following Chapters 6, 7 and 8, the author will present his own research endeavour toward ‘economics for humanity’, in this spirit. 102 Overview of economics for humanity Notes 1 This chapter is based on Okabe (2022a: chapter 8; 2016a, 2017b). 2 A term in economic sociology, created by economic historian Karl Polanyi. It refers to the degree to which economic activity is constrained by such noneconomic institutions as kinship, religious, and political institutions (Wikipedia ‘Embeddedness’). 3 Homo socialis view is suggested also in Bowles (2016), as already discussed in Section 2.1. More broadly, it has also been suggested that the formation of groups and shaping of society by humans has its origins in the human evolutionary process, and thus all humans have an evolutionary blueprint in their genes for building a good society within themselves (Christakis 2019: xxi). 4 For specific manifestations of this, see Chapter 1, Section 22. See also Okabe (2017a: 44– 48) for the reasons for these trends. 5 Incidentally, although there are a considerable number of Japanese Nobel Prize winners in five fields other than economics (28 in total, including a Japaneseborn American), economics is the only field where there are currently no winners. 6 For example, Japan As Number One: Lessons for America (1979) by Harvard pro - fessor Ezra F. Vogel is a classic example. 7 For reference, a look at the programme for the American Economic Association’s 2020 annual conference shows that, in addition to a number of sessions on traditional themes, there are also sessions from multiple perspectives not easily seen at the Japanese Economic Association’ meetings. For example, ‘Beyond GDP’, ‘Deaths of Despair and the Future of Capitalism’, ‘Culture and Norms’, and ‘Economics for Inclusive Prosperity’ (each of these sessions will feature around five Nobel Prize winners or similar leading researchers, in addition to a number of European participants). 8 For more details on the specific selection criteria, as well as some details on each of the four books, see Okabe (2022a: chapter 4). 9 See Chapter 1, Section 2. 10 See Chapter 1, Section 1. 11 However, there are also studies in behavioural economics that attempt to include culture and altruism in their scope (Kubota et al. 2012; Lee et al. 2013), and future developments are expected. 12 In the pursuit of happiness, maintaining a virtue ethic becomes important (Sachs 2013). 13 Expressed in welfare economics terms, judgments should be made according to whether or not they result in a Pareto improvement (Pareto improvement). However, it should be noted that the Pareto approach places too much emphasis on individual welfare, and social decisions may outweigh individual welfare (e.g. value goods may generate positive externalities) (Atkinson 2009: 797). 14 The middle door of The Wealth of Nations lists, the author’s (Adam Smith’s) title is printed as ‘Professor of Moral Philosophy in the University of Glasgow’. DOI: 10.4324/9781003478447-9 6 Threesector model of the economy In the previous chapter, we pointed out that current mainstream economics lacks in considering important human nature (in particular, a sense of social connectedness and altruism), and argued from various perspectives that new economics incorporating these elements is required for economics to become a fruitful science. This chapter then discusses that direction in some detail. Broadly speaking, the basic social view of mainstream economics can be understood as utilising a framework of ‘market and government’ (twosector model), so that we will discuss the necessity of expanding it to a social view of ‘market, government, and community’ (threesector model). In Section 6.1, the basic elements of the twosector model as well as of the threesector model are outlined; in Section 6.2, we show that the idea of the threesector model provides a basic perspective for understanding human society, since it has an economic anthropological basis; and in Section 6.3, we explain the characteristics of the third sector (community or nonprofit sector). In Section 6.4, we focus specifically on nonprofit organisations and clarify their requirements and reasons for existence.1 6.1 Expanding to a threesector model When society is understood as an economic system, the dichotomy of ‘market or government’ has traditionally been adopted. In other words, in markets, people, and companies operate based on selfish motives and profit maximisation, respectively, while governments act to compensate for the ‘market failures’2 that occur in such cases. This perspective, which sees society as being constituted by markets and government, can be called the ‘twosector model’, although it is rarely dared to be called by such a name. This is a clear but obviously oversimplified picture. It is because, as we have already seen in Chapter 3, there are times when the pursuit of altruistic as well as selfish motives or other values (such as happiness, which is, generally speaking, a real value for human beings) is a major concern for human beings, and there are many different entities and institutions in society that are based on these motives. Examples include families, various 104 Overview of economics for humanity private groups, nonprofit private entities, nongovernmental organisations, and intermediary entities that are neither government nor business (e.g. organisations classified in the area of the third sector). These can be broadly understood to be the various ‘communities’ of which humans are a part. In mainstream economics, these have been excluded from view for analytical convenience. However, if society is understood by ignoring them, this naturally entails significant costs in terms of understanding the actual society and of academic study. 6.1.1 Extension from twosector model to threesector model If the abovementioned realities are taken into account, a new framework is needed when understanding socioeconomic systems. Society should not be understood merely in terms of a market (private sector) and government (nonprivate sector) configuration, but should actively include not only marketrelated actors (individuals and companies) in the private sector, but also communities or the various NPOs. In other words, it is essential to understand the nature of society to actively position the community sector as a third sector, which is neither the market sector nor the government sector. Thus, society should be understood to be composed of these two private sectors (market and community) plus government, namely by ‘threesector model’ which we propose in this book.3 4 The threesector model here refers to a view of society that sees society as consisting of three sectors (market and government plus community), as opposed to the twosector model, which understands society as consisting of two sectors (market and government). Put simply, the author believes that the threesector model is a perspective from which society can be better understood, and that it is one of the most intuitive and relatively easy directions in which to integrate existing social sciences. This is illustrated in Figure 6.1. First, Figure 6.1A is the traditional understanding of society in economics and can be described as the ‘twosector model’. Under this view of society, households and companies are understood to act selfishly and decentralised in the market, which is a mechanism for pursuing ‘efficiency’. On the other hand, the government is recognised as having a centralised authority to deal with various problems associated with such private sector activities (such as the provision of public goods that cannot be solved by the market function) and as acting as a compensator for such problems with coercive power. Governments have therefore been understood as actors with a role in pursuit of ‘equity’.5 In contrast, this book argues that Figure 6.1B is a more valid way of understandingsociety. In other words, it emphasises that intermediate groups and organisations (collectively called ‘communities’) that do not fall under either of the traditional dichotomies (market and government) exist in reality in a diversity and scale that cannot be ignored, and that the actors that make up these sectors and their motives for action are also very different from those of markets and governments. In other words, in contrast to the market, where individual selfishness is manifested, the community, when viewed in Three-sector model of the economy 105 perspective, is characterised by ‘altruism’ as its principle of action, and by ‘voluntarism’ as its behavioural feature, rather than by the use of coercive force, as in government. In these ‘communities’, the basic principle is that people act autonomously or altruistically, and the motivation for action differs significantly from the other two sectors in that human value, such as selfrealisation or happiness, are important. Therefore, this sector can be positioned as a ‘new private sector with a public character’, that is different from both the traditional private sector or public (government) sector.6 6.1.2 Overview of the threesector model The threesector model presented as above certainly gives more concrete image of the nature of human society. To make it sure, let us think in turn about what kind of characteristics and traits each sector (see Table 6-1). Figure 6.1 Understanding human society: (A) conventional and (B) desirable perspectives. Souce: Figure 43 in Okabe (2017a: 99); original figure is figure 3 in Okabe (2009b:38). 112 Overview of economics for humanity that various ‘threedivision’ understandings of society had been presented in social sciences.15 What was even more encouraging was that the threesector model (threesector understanding of socioeconomic systems) presented by the author turned out to have a foundation that was directly supported by the perspective of economic anthropology. More specifically, this was because the social model presented by the author in this chapter (Figure 6.1) turned out to be nothing more than a modern development of the ‘threefunction model’ by economic anthropologist Karl Polanyi (Okabe 2018d). 6.2.1 Polanyi’s threefunction model The author subsequently learned that various threesector models had in fact already been presented by some European researchers. They are usually based on an economic or sociological perspective (see Chapter 7, Section 7.4). However, somewhat differently, an economic anthropologist Karl Polanyi (Polanyi 1944: chapter 3; Polanyi 1977: chapter 3) proposed a ‘threesector model’16 from a social or economic anthropological perspective at a relatively early stage. Here, we review the Polanyi model first. Many researchers have traditionally considered the motivations and mechanisms of primitive societies to be of no use in explaining the mechanisms of civilised societies. However, the economic historian Max Weber emphasised that man is invariant in that he or she is a social being throughout the ages, and this idea was proved to be entirely correct by subsequent research in social anthropology (Polanyi 1944: 45– 46). Polanyi, who insisted on the importance of this perspective, also noted that the innate qualities of human beings appear repeatedly in all societies with a certain pattern, regardless of time and place, and judged that the preconditions necessary for the survival of human societies appear to be always the same (ibid.). Polanyi developed the idea that human society is supported and functions by three principles of action. These three are reciprocity, redistribution, and exchange (Figure 6.2). Reciprocity means giving and mutual assistance (where market functions are not involved). Redistribution is centred on power and its obligatory collection and distribution of collections. And, exchange means the movement or trade of goods based on selfinterest in the market. He pointed out that there is a distinctive pattern in the functioning of each of the three. In reciprocity, there is symmetry because giving and receiving have the same character. Redistribution is characterised by centricity because power is central. In the market, the movement of goods is aimed at gains for each individual, so exchanges become the functional pattern. Polanyi emphasised that these three behavioural principles (or a combination of them) enabled human societies and their transformations to be understood. For example, in the case of tribal societies, the two behavioural principles of reciprocity and redistribution ensured the functioning of their economic systems (Polanyi 1944: 48). And, he presented the understanding Three-sector model of the economy 113 that, until the end of feudalism in Western Europe, any economic system could be understood as organised on the principles of reciprocity, redistribution, or the market (or a combination of these three principles each with some importance), and that the institutionalisation of these principles as the organisation of society ensured orderly production, distribution, and consumption (ibid.: 55). In this period, he analysed, profit (the market) was not the most important of these motives for action, but custom, law, witchcraft, and religion worked together to subject individuals to appropriate principles of behaviour, resulting in a system whereby individuals ultimately fulfilled their function in the economic system (ibid.). It then presents an understanding that from the 16th century onwards, the number of markets increased significantly and their importance grew, and from the 19th century onwards, there was a rapid transformation to a new economy due to the strengthening influence of the selfregulating market sector (ibid.: 55). Given this understanding of Polanyi, it is clearly a major flaw that modern mainstream economics does not take reciprocity (where the pattern is symmetry) which is universally observed in human societies into account at all (or rather actively excludes it from consideration). This is because the very idea of market exchange, which is only one of the three functions, is currently sweeping the world (Takahashi and Tsuji 2018: 99). The watchwords there are rationalism, utilitarianism, competition, efficiency, and the ongoing homogenisation of the world in the name of global standards (ibid.). This is why giftgiving and reciprocity (i.e. the role of communities) are now attracting attention (ibid.). Figure 6.2 Polanyi’s understanding of human society: a threefunction model. Note: A diagram by the author (Okabe) based on Polanyi (1944: chapter 3; 1980: chapter 4). Source: Okabe (2018d) chart 10. 114 Overview of economics for humanity Polanyi’s three sectors can be paraphrased as: exchange → ‘market’, redistribution → ‘government’, and reciprocity → ‘community’. This corresponds precisely the expression of each sector (market, government, and community) in the threesector model presented by the author (Figure 6.1). In this sense, it can be seen that the latter model has general nature from the perspective of economic anthropology. Here, it would be appropriate to point out that Raghuram Rajan,17 a leading figure in the global economic discourse, recently wrote a book, The Third Pillar: How Markets and the State Leave the Community Behind, which claims that historically human societies eventually adapted, so that the three pillars restored balance and that the restoration of that balance is now called for (Rajan 2019: 25). This is nothing more than an application of the very idea of Polanyi’s threefunction model (although the author Rajan does not explicitly state that it is an application of the Polanyi model).18 The threesector model in this book is a modern version of the Polanyi model. Focusing on the three functions described above by Polanyi (Figure 6.2), it is clear that each can be expressed in concrete terms as ‘exchange’ → market, ‘redistribution’ → government, and ‘reciprocity’ → community. Based on this understanding, the following two points can be derived. First, there is the problem that in current mainstream economics, ‘reciprocity’ (community), one of the three universally observed sectors of human society, is completely ignored (or rather actively excluded from consideration19). Secondly, therefore, from the perspective of the universal nature of socioeconomic systems, it is necessary to include community explicitly when examining contemporary society. Given this, the author’s representation of the three sectors (market, government, and community respectively) and the resulting understanding of society can be attributed to the ‘threefunction model’ (Table 6.1). And, this way of understanding has two important characteristics. First, it is clear from the above derivation process that the model we presented is a model having generality, supported by an economic anthropological ground. In this respect, it has importantly a theoretical basis. Secondly, when solving problems in modern society, a threesector model can be used more effectively than in the case of twosector model (more desirable and effective results can be obtained). This second proposition is verified to some extent by Polanyi’s assertion that the threefunction model can explain the historical transition of the human socioeconomic system. The author (Okabe 2017b: 35– 37) has provided a contemporary and theoretical explanation of this, which will be presented later in Chapter 7 (Sections 7.2 and 7.3). 6.3 Conceptual clarifications: community and nonprofit sector In mainstream economics, as has been repeatedly mentioned, a ‘dichotomy’ or ‘twosector model’ of market and government has traditionally been adopted as a framework for understanding society. However, this understanding of Three-sector model of the economy 115 society, despite being an oversimplified view, is not only found in US economics, but is particularly prominent in Japanese economics, where economic research has been ‘institutionalised’.20 In real society, the community or NPO becomes an important independent sector, because its characteristics are different from households, businesses, and government. Therefore, in order to properly understand social systems, appropriate positioning of this sector is important and indispensable. And, the addition of the community sector or the third sector (the threesector model) provides a more appropriate framework for understanding society (OECD 2003; Ostrower and Stone 2006; Okabe 2009b, 2016a, 2017a, 2017b). In this section, the significance of ‘community’ is first briefly summarised. It then focuses on the two expressions ‘third sector’ and ‘nonprofit sector’, which are relatively commonly used as specific designations for communities from the perspective of socioeconomic systems, and sorts out the differences between them. It will then be argued that communities need to be positioned as an independent ‘third sector’, rather than as a sector situated between government and the market. 6.3.1 Significance of the community When looking at human society, there are human motivations for forming human groups that cannot be captured by the ‘market and government’ dichotomy, and the importance of it has increased in recent years. For this reason, there is a growing need to explicitly reposition the private sector, which is neither government nor market, i.e. communities of various kinds (connections between independent individuals). These communities are ‘public’, as distinct from the traditional ‘private’, and ‘government’ sectors, and are characterised by the fact that human beings are often involved voluntarily rather than under compulsion, with an added altruistic rather than merely selfish motivation.21 Since the beginning of the 20th century, community has been defined as ‘an area or living space in which people live together in a certain region, and the requirement is that common interests and social consciousness be found among each other’ (Society of Economic Sociology 2015: 115). In other words, the concept used to refer to a group of people (local community) who lived in the same area, shared interests and were deeply connected in terms of customs, beliefs, objectives, and resources, where geographical conditions were important. However, the development of the internet has made geographical conditions less restrictive than in the past, and an increasing number of communities (online communities) have the character of spatially diffuse functional groups that are not limited by regional characteristics. For this reason, in recent years, broad definitions that do not include geographical conditions have come into use. That is, for example recent research defines a community as ‘a group of people or a network of people who are linked by social relationships that are 116 Overview of economics for humanity durable beyond blood and geographical ties and which are mutually regarded as important for their social identity and social activities’.22 In other words, it can be understood that effective communication is a prerequisite for the formation of a community, which in turn creates a social network or social capital that enables a group of people to fulfil a function. This is also connected to the fact that for a market to function smoothly, it is not enough to have neutral rules and procedures, but that the sharing of social norms and morals, which are the elements that maintain a community, is also an essential condition for society as a whole (Okabe 2018a). 6.3.2 Third sector or nonprofit sector? The abovementioned ‘communities’ come in a variety of forms, but when focusing on them, there are two traditional expressions to describing them. One is the ‘third sector’, which is positioned in relation to the market and government, and the other is the ‘nonprofit sector’. The two are sometimes used almost synonymously, but often refer to somewhat different things in European countries and the USA (Table 6.2). First, the expression ‘third sector’ is often used exclusively to describe social reality and policy in Europe. In other words, it is often positioned as a sector with an eclectic character (social midfield; hybrid) between the market and government, and is not seen as an independent sector on an equal footing with the other two sectors (market and government). The reason for this is that the various organisations included in this sector have been founded and developed historically in diverse ways, and there is a strong tendency to understand them as a sector with significant socioeconomic and sociopolitical significance, rather than one that should be understood solely from an economic perspective. In addition, it is not simply the ‘nondistribution constraint’ (as in the case of the USA) that characterises organisations in the third sector, but rather whether or not profits are used to achieve organisational objectives, and it is said to be too mechanical to focus simply on the nondistribution constraint of profits.23 In Europe, the ‘third sector’ is used in this sense largely because of the idea of a mixed system (welfare mix) as a means to realise a welfare society. In other words, the concept was born from the perspective of policy theory in the search for a way of society (a desirable social image) that achieves welfare. It is also unique in that its research was conducted exclusively from the perspective of sociology or political science, and was produced as a result (for this reason, it is sometimes referred to as the European approach).24 In contrast to the above, the expression and concept of the nonprofit sector is often used to describe the reality in the USA, as it was introduced in the USA and research into the actual situation in the country has become active as a result. In the US school of economics, society has traditionally been understood as consisting of two sectors (market and government) with completely Three-sector model of the economy 117 different characteristics, and the nonprofit sector is positioned as an independent sector with different motives and modes of action from these two. The concept emerged in the USA because, with the growing discussion of ‘market failure’ and ‘government failure’, it was a natural move to explicitly introduce a new sector with a function to address these issues. In this case, the most important condition is that NPOs must not distribute profits to Table 6.2 A comparison of two similar expressions Third sector Nonprofit sector Etymology and primary target The term was introduced with the motivation of understanding the reality in Europe. The main focus of the research is mainly on Europe. The term was introduced as factual research in the USA became more active. The main focus of research is mainly in the USA. Target positioning The sector is positioned as a social midfield (hybrid) between the market and the government. It is not seen as an independent sector on an equal footing with the other two sectors (market and government). Positioned as an independent sector with different motives and modes of action from the other two sectors (market and government). Positioning perspective Emphasis on the socioeconomic and sociopolitical sector as a diverse, socioeconomic and sociopolitical sector founded in reality and historically developed. Emphasis on whether profit is used to achieve organisational objectives, rather than seeing it as characterised by nondistributive constraints on profit. The concept emerged from the perspective of a mixed system (welfare mix) as a means to realise a welfare society. Set up as a sector with functions to address ‘market failures’ and ‘government failures’. Nondistributional constraints on profits are the most important condition characterising NPOs. It can be positioned as an independent sector from the perspective of various human behavioural motives (selffulfilment motives, altruistic motives, etc.), the locus of authority in society, the information processing system as a society, etc. (author Okabe’s understanding). Research Perspectives Mainly sociological and political science perspectives (European approach). Pestov welfare triangle, social enterprise, etc. Mainly from an economic perspective (US approach or international model). A threesector model of the economic system (present author’s understanding). Source: Authors’ compilation based on Evers and Laville (2004a,2004b), Prestoff (1998: Chapter 2), Kramer (2004), Laville, Young and Eynaud (2015), Anheier (2012), Wikipedia "Selfactualisation" and Okabe (2017a: chapter 10). 118 Overview of economics for humanity stakeholders (nondistribution constraint of profits), unlike in the case of joint stock companies (where surplus profits are distributed to shareholders). The US NPO is thus positioned as an independent sector alongside the market and government, and its research is characterised by its focus on economic perspectives (hence the term ‘US approach’ or ‘international model’). 6.3.3 Perspective of this publication: the third sector rather than the intermediate sector When understanding NPOs or new sectors that include NPOs, as discussed above, research in Europe has focused exclusively on sociological and political science perspectives, whereas in the USA, the emphasis has been on the economic perspective. In recent years, however, research contacts appear to be gradually being established between the two disciplines, for example through the publication of books that include research from both fields simultaneously (Evers and Laville 2004b). In Japan, however, the majority of research on NPOs and the nonprofit sector appears to be from a sociological or practical perspective, and at present has little contact with economics.25 So, how should NPOs (or the nonprofit sector) be positioned in future research on NPOs (or the nonprofit sector)? The author considers it appropriate to capture the social system by introducing NPOs as a third independent sector that should be placed on the same level as the existing two sectors (market and government). In other words, it is preferable to switch from the standard twosector model of society in economics to a threesector model, and to understand society and develop policies within that framework (the threesector model of the economic system). In this sense, this publication adopts the US approach as its general framework.26 This is because, firstly, the theoretical model for analysis must be a clear and understandable framework. In other words, it is only by establishing three independent axes of coordinates (divisions) that intermediate and eclectic types can be accurately located.27 In the case of the European approach, where the ‘sector’ is considered to be intermediate or eclectic from the outset, it is necessary to clarify what is meant by intermediate or eclectic, but the meaning or content (e.g. the specific content in the case of intermediate or eclectic between the market and government sectors) is not always clear. The nonprofit sector is qualitatively different from the market and government in many aspects in terms of its basic character (e.g. motivations and standards of behaviour of participants and organisations), which makes it necessary to establish the sector as an independent sector. Secondly, to understand social systems, it is necessary to construct sectors with an understanding that goes back to the motivations for human action and the functions of the constituent elements (sectors). In other words, the correct Three-sector model of the economy 119 way to approach social science is to construct a framework of understanding based on the idea of first accurately understanding reality (issuedriven approach), rather than suddenly starting from the idea of policy theory (policydriven approach) as in the European approach.28 Policy theory can naturally be developed on the basis of this understanding of the nature of society. For example, the motives and behaviour patterns of a person acting in the marketplace (usually based on selfish motives) are clearly different from those of that same person engaging in the activities of a NPO (altruistic motives, selfrealisation, etc.). It is also necessary to look at how the various powers that run society are distributed, and furthermore, what kind of processing systems the various types of information in society comprise. Taking these things29 into account, a more fruitful approach is to position the nonprofit sector as an independent sector. This is the perspective of this publication (see explanation in the second box from the bottom in the righthand column of Table 6.2). 6.3.4 A point to remember One important point to the above two understandings needs to be emphasised. That is, the existence of the third sector must not be understood merely from the economic dimension of being a supplier of goods and services, as is the case when understanding commercial enterprises, but it must be understood as a ‘morally and politically valued sector’ (Evers and Laville 2004a: 6).30 In this respect, this publication goes beyond a simple US approach; it incorporates an important aspect of a European approach. Specifically, it is necessary to understand that human behaviour is not only motivated by selfishness and rationalism, but that there are other motives, such as those found in this sector, which are based on human nature, and that these aspects make people involved in the nonprofit sector. Therefore, if such aspects of human beings (diversity of motives for action) are also taken into account, the rationale for the nonprofit sector to be a separate independent sector becomes even stronger. 6.4 Requirements and raisons d’etre of nonprofit organisations The most obvious example of an organisation belonging to the third sector is the nonprofit organisation (hereafter, referred to as NPO).31 NPOs generally refer to all organisations other than forprofit organisations (private forprofit companies such as corporations). For this reason, the motives for establishing NPOs, their organisational forms and activities are extremely diverse, but they are now developing dynamically as an interdisciplinary research area in the social sciences, keeping pace with their growth.32 In this section, we will summarise the conditions for their establishment and reasons for their existence, relying heavily on Anheier (2005). 120 Overview of economics for humanity 6.4.1 Four conditions for the formation of an NPO As the name suggests, NPOs are organisations established to achieve some social purpose without profitmaking objectives. Therefore, their basic character lies in the fact that they do not operate to increase the profits of their owners or operators, and in form they are an institutional form that is intermediate between commercial enterprises and government organisations (Steinberg and Weisbrod 2008: 118– 120). The most general and appropriate definition of what constitutes an NPO is that of the Handbook on Nonprofit Organizations, introduced by the United Nations in 2002 (Anheier 2005: 53– 54). Rather than emphasising the objectives and sources of income of NPOs, it focuses on the organisational structure and operational aspects and defines an NPO as an organisation that has the following four characteristics (Table 6.3, top row). Namely, (1) selfgoverned, (2)nonprofit and nonprofitsharing, (3) institutionally separate from government, and (4) noncompulsory participation in its activities. Table 6.3 Conditions for nonprofit organisations (NPOs), main subject areas, and organisational forms Specific items Four conditions for nonprofit organisations (UN standards) 1. A selfgoverning organisation. 2. A nonprofit and nonprofitsharing policy must be adopted. 3. The organisation must be institutionally separate from the government. 4. Participation in the activity is noncompulsory. Primary target area Health (hospitals, nursing homes, blood donation) Education (primary, secondary, university) Culture, sport, and the arts (museums, etc.) Public sale of local products Social services (welfare organisations, etc.) Environmental protection (recycling) Research (policy advocacy) Law (protection of human rights) Politics (political parties) Foundations Religion Organisational structure 1. Forms with relatively high entrepreneurship: social enterprises (social businesses), incorporated associations, cooperatives, etc. 2. Forms that are relatively more focused on achieving social objectives: aid organisations, grantmaking foundations, political parties, etc. Source: Okabe (2017a) figure 101. Upper row based on Anheier (2005: 54), Middle and lower rows are based on Anheier (2005: 55: table 32), Yamauchi (2004: Chapter 3), Borzaga and Tortia (2007: figure 11). Three-sector model of the economy 121 While the significance of these can be easily understood, only (2) requires some explanation. In other words, requirement (2) not only stipulates that the organisation is not operating for profit, it also means that any profits generated are restricted from being distributed to the owners and managers of the organisation. This means that profits can accumulate within the organisation in order to achieve its objectives (public benefit), but must not be distributed to the owners, members, founders, or managing directors of the organisation. In this respect, it follows that NPOs do not exist to make a profit and are not organisations that act primarily for the profit motive. For this reason, the ‘nondistribution constraint’ has become a central feature when defining NPOs in law and in the social science literature.33 These NPOs operate in a wide variety of areas and have diverse organisational structures (middle and bottom rows of Table 6.3). And, their management also has many characteristics not found in commercial organisations (Drucker 1990). 6.4.2 Significance of NPOs in the overall economy When NPOs are considered as an organisational entity, they come in a wide variety of forms and names.34 But, how important are NPOs in terms of a country’s economic activity? In terms of a country’s overall economic activity, the nonprofit sector is a much larger economic force than is commonly thought (OECD 2003: 11– 12). In a survey of 35 countries around the world, some 40 million of the total number of permanent employees are employed in the nonprofit sector (excluding traditional cooperatives). That employment represents 3.6% of the workingage population, which corresponds to 7.3% of nonagricultural employment, and the nonprofit sector has also shown remarkable growth as a social and economic force in recent years (ibid.). Next, let us compare the size of NPOs by country. Figure 6.3 shows an international comparison of the nonprofit sector workforce as a percentage of the economically active population. From this, the following points can be noted. 6.4.2.1 Developed countries have larger nonprofit sectors First, developed countries have relatively larger nonprofit sectors than developing and transitional countries. On average, the size of the former is about three times larger than that of the latter. The reasons for this are: (1) the low per capita income in developing countries (relatively small urban middleincome groups), which means that NPOs cannot afford to develop; (2) the degree of development as civil society and skills in organisational management are still limited in Central and Eastern Europe, as these countries remain coloured by centralised political systems; and (3) there is insufficient institutional development for NPO activities (Anheier 2005: 82). 128 Overview of economics for humanity Markets fail to provide public goods, while the government’s response is to prioritise political decisions and respond irrationally (market failure and government failure, respectively). And, in the case of NPOs, it should be noted that the human and financial constraints are much greater than in the case of the market or government, and the scale of activities may not be reached as required (failure of voluntary sector). 6.5 Conclusion of this chapter In summary, what has been discussed in this chapter is as follows. (1) In economics, it has traditionally been assumed that society basically consists of two sectors (market and government). However, in real society, in addition to the market (households and companies) and government, the ‘community’, which is different in character from these two sectors, also plays an important role. For this reason, it is realistic and effective to understand society through the three sectors (market, government, and community) and to discuss solutions to problems. (2) The reason why it is desirable to view society in terms of three sectors (or three functions) in this way is that, although there are differences in the importance of each sector at any given time in human history, such three functions are the underlying structure of human society (it has an economic anthropological basis). (3) The ‘community sector’ is often referred to as the ‘nonprofit sector’ (more specifically, NPOs) in the USA and the ‘third sector’ in Europe. However, regardless of the name, this sector (or organisations such as NPOs) has the function of providing quasipublic goods or quasipublic services, from which society can benefit greatly. The above perceptions can be shown more rigorously. Let us therefore move on to the next chapter, which provides an economictheoretical explanation of these. Notes 1 This chapter is based on Okabe (2022a: chapters 8 and 11; 2016a, 2016b, 2017d). 2 Market failure refers to: (1) the occurrence of monopolies or oligopolies that prevent the optimum allocation of resources, (2) the failure to achieve an adequate supply of public goods, and (3) the widening of income and asset distribution (i.e. the failure to guarantee equity), among others. See Table 6.1. 3 When understanding society, two distinctly different typologies thus emerge: the ‘twosector model’ and the ‘threesector model’. The respective outlines of both can be expressed in aggregate as in Figures 6.1 and 6.2. 4 In the following, the terms community sector, third sector, and nonprofit sector will be used interchangeably for convenience (unless a particular distinction needs Three-sector model of the economy 129 to be made). For the differences between the third and nonprofit sectors, see Table 6.2. 5 For example, in the standard introductory textbook of economics, Krugman and Wells (2018: figure 71), only households and firms are depicted as domestic sectors of the economic and social system. 6 The reasons for this understanding, its significance and its academic history will be explained in detail in Chapter 7. 7 Refers to social relations that invite people towards cooperation, such as networks, norms, and trust. For more information, see Okabe (2017a: 322– 327). 8 Inefficiencies that arise when someone hires a representative (agent) to do a certain job (this is called an agency relationship) rather than doing it themselves. This inefficiency is referred to as agency costs, as the interests of the client are compromised because the agent may act in favour of the agent’s own interests over those of the client. 9 See footnote 2 of this chapter. 10 For more information, see Okabe (2017a: 310– 316). 11 Ogaki (2022) considers a social model similar to that described in this book. However, it is referred to as a ‘threemechanism’ (market mechanism, power mechanism, and community mechanism) model rather than a ‘threesector’ model, and argues that virtue ethics is an essential element for the community mechanism to function. 12 One episode that suggests this is worth mentioning. After being diagnosed with a fatal form of cancer and told he had only 6 months to live, renowned computer scientist Professor Randy Pausch (Carnegie Mellon University, USA) said in his final lecture. ‘The United States of America is a country that places considerable emphasis on rights. It should be, but it makes no sense to talk about rights without talking about responsibilities. Rights come from the community and in return we all have a responsibility to the community. Some people call this “communitarianism”, but I would call it common sense. (omitted). By engaging with others, we can become better people’ (Pausch and Zaslow: 175– 176). Note that this final lecture (live) is available on YouTube and has already been viewed 21 million times (https:// www.yout ube.com/ watch?v= ji5_ Mqic xSo). 13 Incidentally, looking at the conference programme of research presentations at the 2016 Spring Conference (total of 210 research papers were presented) and at its Autumn Conference (143 papers) of the Japan Economic Association, there was no presentations at all that included the word ‘nonprofit organisation’ or ‘NPO’ in their titles. Although there is a separate Japanese NPO Society and another society called the Society for Integrated Human Studies, the membership and research interests of these three societies appear to be mutually segregated (The author presented his research at these three conferences in 2016 and also reviewed the research presentation programmes of each conference at that time, and this is his impression). 14 See footnote 42 in Chapter 1. 15 For example, the ‘Pestoff welfare triangle’ (Pestoff 1992, 1998). For the detail of various three sector models, see Section 7.4. 16 Polanyi himself described it as ‘principles of behaviour in production and distribution’ (Polanyi 1944: 47) and did not use such expressions as ‘threesector model’ or ‘threefunction model’. In this publication, however, we use expressions such as 130 Overview of economics for humanity ‘threesector model’ and ‘three morphology’ to clarify the content and facilitate comparisons with other researchers. 17 Professor at the University of Chicago, USA, since 1995. He specialises in monetary and banking theory. He once served as Director of Research at the International Monetary Fund (2003– 2006) and Governor of the Reserve Bank of India (Central Bank) (2013– 2016). He is currently regarded as one of the most influential economists worldwide. 18 It should be noted that Rajan considers a community (proximate community) to be a group of people living adjacent to each other, and as such, it includes a fairly broad range of people, including families, neighbourhood associations, school boards, as well as mayors and local councils. National organisations, on the other hand, are excluded from it, even if they are notforprofit organisations (Rajan 2019: preface xiv). In contrast, the author’s (Okabe’s) definition of the third sector (community) takes the position that it is not defined solely on the basis of neighbourhood residence, but recognise the importance of the behavioural motives of its members. For this reason, the latter includes not only families, neighbourhood associations, school boards, etc. (communities that fulfil residential adjacency and whose motives for action are also nonselfish), but also nationwide nonprofit organisations. In this respect, it differs slightly from Rajan. The Rajan’s concept of community is somewhat weaker from the perspective of an economic theoretical framework, as it emphasises the political power of the third pillar (and thus includes a considerable diversity in the behavioural motives of its members). 19 See footnote 42 in Chapter 1. 20 On the ‘institutionalisation’ of economics research in Japan, see Okabe (2017a: 47– 48). Furthermore, Japanese economics has in some respects inherited (or rather reinforced) distortions of US economics. Incidentally, it has been pointed out that the US economics research community lacks diversity, which has led to certain distortions in the direction of research. This is because: (1) US economists are more likely to be male and White than researchers in other fields (e.g. sociology), (2) survey research shows that male economists tend to favour market solutions over government intervention (female economists are more interested in areas such as income distribution and environmental protection regulations), (3) therefore, there is a lack of diversity in the US economics community, which has led to certain distortions in research directions, (4) market solutions therefore form the mainstream in US economics academia (‘Barriers to entry’, The Economist, 12 May 2018: 65). Consequently, in the Japanese economics community, which consists of a very large number of researchers with degrees from US universities, the above tendencies in US economics add to the marketoriented tendencies even more strongly. 21 A careful explanation of the community concept can be found in Maeyama (2009: part 2, chapter 1). 22 https:// en.wikipe dia.org/ wiki/ Commun ity. 23 In Europe, cooperatives and mutual societies currently distribute part of their profits to stakeholders (Pestoff 1998: 43). 24 There are various variations of this ‘Europeanstyle threesectoral understanding’, including the Pestoff welfare triangle (see Section 7.3). 25 See footnotes 3 and 4. Three-sector model of the economy 131 26 The author is not particular about whether the sector introduced here is called the nonprofit sector or the third sector. This sector is unique in that it has aspects that are intermediate between the two existing sectors (market and government; e.g. efficiency of activities, amount of information held, etc.), while also having its own aspects (e.g. altruistic and selffulfilment motives). 27 Even if the European proximity (hybrid) described above is close to reality, there are difficulties in this sense in using it as a single independent axis of coordinates. It should be noted that in European research in (or about) Europe, the third sector is not so much an independent sector as ‘an entity with an intermediary nature of the third sector’ (Evers and Laville 2004a: 5), ‘a social midfield, a mixed area’ (social midfield, hybrid; Kramer 2004: 229). 28 In Sweden, the 1990s saw an increasing emphasis on the idea of a ‘welfare society’ or ‘stakeholder democracy’ rather than the idea of a ‘welfare state’. This was the idea of ‘integrating rights and duties’, i.e. ‘providing work for those who can work and a secure life (security) for those who cannot work’, which led to the presentation of the idea of the ‘third sector’ (Pestoff 1998: 1). 29 Details are discussed in Section 6.4. 30 In the European approach, the third sector is also discussed more broadly, linking it to social economy theory, civil society theory, democratic values, etc. (Evers and Laville 2004a: 2– 3, Laville, Young and Eynaud 2015: introduction), but this publication will not go into political aspects but limit itself to the aspect of human wellbeing. 31 In addition to NPOs, another organisational entity belonging to the third sector is ‘social business’, which has attracted a lot of attention in recent years. This was proposed by Muhammad Yunus (Nobel Peace Prize winner) and has aspects closer to private enterprise rather than to the community in general. For more information, see Okabe (2017a: chapter 4, 104– 110; Okabe 2012b). Social organisations with similar functions are increasingly discussed in Europe under the term ‘social enterprise’ (Laville, Young and Eynaud 2015). 32 In the USA, the Society of NonProfit Organisations was established in 1971. In Japan, the role of NPOs attracted attention following the Great HanshinAwaji Earthquake (1995), and the Japan NPO Society (http:// www.janp ora.org/ ) was established in 1999. 33 Because of these nondistributional constraints, the monitoring of organisational operations by funders (e.g. donors) does not work so well as in the case of forprofit companies, which in turn reduces the efficiency of activities and the incentives to respond quickly to changes in demand (Steinberg and Weisbrod 2008). This is an important future research question for NPO research. 34 For instance, cooperative, corporation aggregate, social business, advocacy organisation, grantmaking foundation. 35 See footnote 2 of this chapter. 36 In Japan, blood for transfusion used to be secured through blood sales, but in 1964, the Government of Japan passed a Cabinet decision on the promotion of blood donation, and today 100% of blood for transfusion is secured through blood donations (Website of the Osaka Red Cross Blood Centre, Japanese Red Cross Society, ‘History of Blood Business’). In fact, a wide range of parties are involved in blood services, including the national, prefectural, and municipal governments, the Japanese Red Cross Society, manufacturers and distributors of blood products, medical institutions that actually use the products, and other nonprofitmaking 132 Overview of economics for humanity entities (Website of the Japanese Red Cross Society: https:// www.jrc.or.jp/ engl ish/ ). 37 See Chapter 2, Section 2.3. 38 See footnote 36 in Chapter 8. 39 See Table 6.4, for visual economic analytical explanation of this. DOI: 10.4324/9781003478447-10 7 Theoretical bases of the threesector model In the previous chapter, it we concluded that a more accurate understanding of human society and the economy needs to be based on a threesector (market, government, and community) model instead of the traditional twosector (market and government) model, and explained the nature of the third sector was explained in detail. This chapter argues that such a paradigm shift can be grounded in multiple perspectives of economic theory. In Section 7.1, we point out that there are inevitably major distortions in mainstream economics policy theory and show that the threesector model corrects them; in Section 7.2, we show that the threesector model is valid in that it satisfies several basic principles of economic policy; in Section 7.3, we use a theoretical framework to show that public policy utilising the threesector model can enhance the welfare of society as a whole. And, Section 7.3 uses a theoretical framework to illustrate that public policies that utilise the threesector model can enhance the welfare of society as a whole. Finally in Section 7.4, we list various similar threesector models that have been proposed so far, and show that the model in this publication has high generality and validity among them.1 7.1 Rectifying policy distortions of mainstream economics Mainstream economics, as we have pointed out repeatedly, has a strength or ‘bright’ side, but also a weakness or ‘shadow’ behind it.2 One such ‘shadow’ is that the assumption that humans are selfish and rational actors (homo economicus, or economic man) is too onesided and simplistic (Sen 1987: 1). The second is that the view of society built on such assumptions places too much emphasis on the importance of the market, resulting in the distortion of economics into a discipline with an emphasis on efficiency and an unethical character that excludes ethical factors (ibid.: 2). 134 Overview of economics for humanity 7.1.1 Efficiencyoriented distortions Mainstream economics has the danger of distorting public policy through the misuse or abuse of economic logic when it comes to policy discussions. Specifically, mainstream economics’ policy recommendations overwhelmingly prioritise the pursuit of efficiency, and therefore tend to be inclined towards the simple recommendation that ‘any factors that hinder the functioning of any market should be removed and a competitive environment promoted’. Table 7.1 contrasts the public policy recommendations of mainstream economics and those that take a broader perspective (i.e. those that consider policy objectives other than efficiency), taking up agricultural policy, enterprise policy and employment and wage policy, as examples. Although the details of what is presented in the chart are omitted, mainstream economics policy understands citizens only from the perspective of consumers and producers, and not only understands markets as places where goods and services are traded, but even ‘business entities’ are regarded as objects of market transactions. Indeed, there may be a point to such simplification and modelling in understanding society. However, in the management of actual public policy, it is necessary to consider not only such simple logic, but also more diverse aspects of human beings and society, such as the uniqueness of agriculture as a lifegiving industry with multifaceted functions and extensive use of land (see Table 7.1). Such a larger perspective, or consideration or humility towards humanity, is essential in policy management (Sen 1987: 2). Nevertheless, the policy recommendations of mainstream economics are often remarkably simplistic, lacking such awareness. Japanese society has seen many important problems in recent years (e.g. widening income inequality, the trend of increasing nonregular employment, the decline of local communities, etc.), but it cannot be denied that one important cause has been the neoliberal (competitionoriented) policies that were pushed in the past during the Junichiro Koizumi administration (2001– 2006) and persisted thereafter in various forms. The view of society that does not lead to these policy ‘failures’ is the social model (threesector model) detailed in the previous chapter. We will now show in turn that the threesector model, as an alternative view of society to mainstream economics and policy theory, has a strong and clear basis in terms of some of the basic principles of established economic policy. 7.2 Support by basic principles of economic policy In this section, we shall focus on a rather rigorous (but as intuitive as possible) discussion of the theoretical basis for understanding the economy by three sectors.3 Theoretical bases of the three-sector model 135 Table 7.1 Contrasting public policy: mainstream economics vs. broader perspectives Public policy of mainstream economics (prevailing arguments) Criticism to the mainstream economics policy and the desirable public policy based on a broader perspective Agricultural policy ・ Japanese food prices are significantly high by international standards (rice is more than three times higher than in the USA). ・ The elimination of high tariffs on Japanese rice imports would improve the lives of the Japanese people. ・ Economists understand citizens only in terms of consumers and producers (efficiency) thus ignoring other measures (fairness, food safety, culture, etc.). ・ The nonplasticity of agricultural land, the perspective of food security, and the culture of rice paddy cultivation need to be taken into account. Enterprise policy ・ The ultimate holders of a company are its shareholders and therefore the value of the company can be measured by the total value of its shares. ・ Stock trading should be fully liberalised, regardless of the holder, seller, or trading motives. ・ The company’s employees are regarded as mere factors of production and not as human beings with personalities. ・ Organisational bodies and goods cannot be equated. It is necessary to understand that a company is a place also for the development and growth of human capacity and an organisation that contributes broadly to society. Employment and wage policy ・ In companies, the amount of remuneration received, whether by directors or ordinary employees, is decisive for their willingness to work. ・ The company should introduce a profitlinked system for executive remuneration and a meritocratic/ performancebased wage system for general employees, as well as a labour market in which employees can change jobs at any time. ・ Ignores the conditions for unity and strength as an organisation. Leads to disparities in the workplace, an increase in the number of nonpermanent employees, a retreat from a sense of unity and a loss of psychological stability. ・ The meaning of working in an organisation should take into account not only money and promotion, but also the blossoming of abilities, a sense of achievement, a sense of unity, and a sense of contribution to society. Note: The content of the prevailing arguments is based on Noguchi (2007) for agriculture, Arai (2007) for enterprises, and Nakatani (2000) for employment and wages, respectively. Source: Okabe (2011a) table 3. 136 Overview of economics for humanity 7.2.1 Rationale for a threesector view: an explanation by combining the three principles of economic policy The theoretical basis for a threesectoral view of society can be shown from three theoretical propositions in economic policy theory. They are: (a) Tinbergen principle, (b) Mundell’s theorem, and (c) Poole’s proposition.4 As an initial and intuitive explanation, it is possible to explain the validity of the threesectoral model by simultaneously applying two important principles (Tinbergen’s principle and Mundell’s theorem) concerning policy goals and policy instruments (Okabe 2017a: 103– 104). In other words, these two principles can be used together to explain that: (1) even if one policy instrument (or policy actor) is the most effective (absolute advantage) for any of several policy goals, it is not possible to achieve all (several) goals by itself (Tinbergen’s principle) and that other policy instruments (or policy actors) need to be introduced additionally. It can then be derived that: (2) in such cases, it is necessary to allocate policy instruments (or involve the most suitable implementing actors to achieve the goals) based on the principle of comparative advantage for achieving the goals (Mundell’s theorem). In other words, these two policy principles show that society will be better and more efficient at solving some problem if three sectors are involved in the response than if two sectors are involved. Let us now go into this a little further. 7.2.1.1 Tinbergen principle The Tinbergen5 principle can be shown as follows (Tinbergen 1956: 53– 55). That is, an economic system can generally be understood to contain four types of variables xi: economic variables that are not targets (irrelevant variables) yj: target economic variables zk: policy instrument variables (which can be manipulated by the policy authority) ul: exogenous variables that cannot be manipulated by the policy authority. The number of these four types of variables, in order (if each is denoted by a capital letter), is I for irrelevant variables, J for target variables, K for policy instruments, and L for exogenous variables that cannot be manipulated by the policy authorities. The structure of the economy is also assumed to be represented by N equations as follows: φn (xi, yj, zk, ul) = 0, n = 1, 2, ..., N. If the model is consistent, then the number of equations equals the number of economic variables. In other words, I + J = N (if this were not the case, then Theoretical bases of the three-sector model 137 this economic system would have no solution). The economic policy problem in this simplest model is nothing more than finding the value of the policy instrument variable zk (but xi is an unknown, while yj is a given value at this stage). Therefore, there are (I + K) unknowns. Now, if the number of means equals the number of goals, then K = J. Since it can be assumed that the number of unknown economic variables (I) equals the number of equations (N), this economic system will have a solution. In other words, ‘in achieving a policy goal, the same number of policy instruments correspond to the goal’. This is one of the basic propositions of economic policy, which in later years came to be known as Tinbergen principle. 7.2.1.2 Mundell’s theorem While the above Tinbergen principle is the most fundamental principle for economic policy, there is one principle that is complementary to it. That is the principle known as the Mundell’s6 theorem. This is a principle that was initially set out in Mundell (1962), which discussed the nature of economic policy under a fixed exchange rate system,7 but was established as a more generalised policy proposition in a subsequent paper (Mundell 1963). It is the principle that if a policy objective is to be achieved, even if it can be done by several different policy instruments, ‘policy instruments should be used in combination with the policy objective on which they have the strongest impact’ (Mundell 1962: 76). Mundell used to call this the ‘principle of effective market classification’. If this principle is not followed, the economy will tend either to reach equilibrium with oscillations or to destabilise (ibid.). After presenting this principle, in the same paper Mundell points out that ‘there are two important principles in economic policy’ (ibid.: 76– 77) and that a more general principle is Tinbergen’s principle because ‘to achieve a certain number of independent policy objectives, there must be at least the same number of policy instruments’.8 That is, Mundell locates Tinbergen’s principle first (ibid.: 77), because he recognised the Tinbergen principle as a proposition about whether an equilibrium solution exists for the economic system when implementing a policy, and whether its value can be determined. However, he continues, whether or not we can ultimately get there is another matter, and for this, he pointed out that it is necessary to clarify the dynamic path of the economic system, and argued that the principle of effective market segmentation (Mundell’s theorem) provides precisely this answer. Thus, he concludes that Tinbergen’s principle and Mundell’s theorem are ‘a necessary companion’ (ibid.: 77). 7.2.1.3 Poole’s proposition The above two propositions on policy theory implicitly assume that there is a reliable relationship (leading to reliable outcomes) especially between public policy and its outcomes. But Poole (1970) drew attention to the existence