5.1 The Human Condition of Sociability

This chapter outlines a political economy of the body politic based on the primacy of association, which we define as the network of relational opportunities, constraints, and affordances involved in social interdependence. Our conception of the body politic focuses on the older sense of oikonomia, that is to say, an organised plurality of actors who are governed by ordering principles that aim to achieve correct proportions between the different levels of agency and thereby ensure the viability of the body politic over time. We contrast this ‘constitutionalist’ conception with ‘contractualist’ conceptions of the body politic, which emphasise the formal arrangements between individual or collective units of society. Paolo Grossi describes the contrast as one between ‘the unitary subject of natural law, an a-historical and thus merely virtual subject, a model of human being, and nothing more’ and ‘an intrinsically relational [original emphasis] entity, fully embedded in a cultural, social and economic context, seen in conjunction with the other, the others, and connected to them by necessary and close-fitting bonds’ (Grossi, Reference Grossi2010, p. 617; see also Grossi, Reference Grossi2021, pp. 166–167).

By contrast with the contractualist conceptions of the body politic, we argue that association and the constitution of interests are plural and hybrid (Pabst and Scazzieri, Reference Pabst and Scazzieri2016). This point of view differs from the contractualist tradition primarily because of an alternative approach to individuality and agency. Our approach accentuates the interdependencies and institutions in which individuals and/or social groups are embedded, whereas contractualism emphasises individual preferences and transactions. The difference between association and contract has far-reaching implications for the issue of political agency in the context of the plural spaces of debate, decision, and action that constitute the polity. Our argument is that the plurality of spaces in which political decisions and actions are made rests on diverse forms of human association. These forms give rise to intermediary bodies that are the sources of political agency. Such bodies are constituted by social and intergenerational ties, which are more open ended and view informal norms as more primary than legally enforceable commitments whereas contractual arrangements tend to be time-bound and privilege legal enforcement over social constraints. As such, intermediary institutions embody a human disposition to pursue shared ends by way of collective action over time and space – spanning different generations as well as places. The set of intergenerational and cross-spatial arrangements reflects the idea of a partnership based on relationships embedded in societal structures rather than the notion of a purely formal social contract between ‘virtual’ individual actors beyond space and time.

The latter can be based on an a-social ‘state of nature’ in which original disorder or even violence is regulated by the will of a single sovereign – of which Hobbes’s Leviathan is emblematic (Hobbes, 1998 [1651]). Or else it can rest on a conception of a social condition of humankind, as for Rousseau, who argued that individuals are born free but ‘everywhere live in bondage’ (Du contrat social, Rousseau, 1997 [1762]). The reason is that life in society inevitably leads to interpersonal comparison, rivalry, and ultimately conflict with other individuals. As Rousseau writes, ‘[i]n a word, there arose rivalry and competition on the one hand, and conflicting interests on the other, together with a secret desire on both of profiting at the expense of others’ (Discours sur l’origine et les fondements de l’inégalité parmi les hommes, Rousseau, Reference Rousseau1923 [1755], p. 218). This can only be regulated by a consensus that emerges from the aggregation of individuals – exemplified by Rousseau’s volonté générale. Either way, the contractualist tradition views the body politic as being constituted by a collective person (Leviathan) or by a collection of individuals (Rousseau) rather than by persons or groups embedded within linkages and bonds at multiple levels of association.

Contrary to the contractualist tradition, we argue that association of individuals and/or groups is part of the human condition (Arendt, Reference Arendt1958): human actions and thoughts are intrinsically social by virtue of human beings living in a humanly made environment and by virtue of the disposition to associate around deliberately or implicitly adopted shared ends. As Hannah Arendt argued:

Political life involves sociability. In turn, it presupposes a type of sociability that makes association a condition for the pursuit of ends. However, these ends are always contested, which involves both cooperation and conflict. The complex interaction of rights and obligations involved in social and political relations requires more than legal-contractual ties because trust and cooperation cannot be mandated by law or enforced through coercive means, as Ralph Cudworth contended contra Hobbes (Cudworth, Reference Cudworth1743 [1678]). Human sociability is a necessary condition for the formation of personal identity and the common building of a society, polity, and economy.

One focus in this chapter is on the human disposition towards mutual recognition rather than the mere pursuit of ‘influence’ through political power or economic wealth. Mutual recognition implies that humans are relational beings, embedded in relationships that enable them to organise social, political, and economic associations. Therefore, the conception of human being that underpins the idea of association emphasises the relational nature of human beings and overcomes the idea that humans are either isolated individuals or subsumed under a single collective body. In other words, humanity is a complex compact of relational beings bound together by a common outlook – a natural desire for mutual recognition and prosperity shared within smaller or larger groups, which encompasses a hierarchy of different social spheres and eventually strives for, or adjusts to, a collective aim of the polity as a whole (the ‘public good’). The following passage from Antonio Genovesi’s Lezioni di economia civile expresses this conception well:

Section 5.2 of this chapter presents a critique of contractualism in contemporary political economy, considering in particular the separation of economics from politics and the reduction of political economy to instrumental rationality and maximising choice. Section 5.3 critically engages with the foundations of contractualism in political economy, with a focus on some elements in the writings of Machiavelli, Hobbes, Locke, Rousseau, and Hegel. Section 5.4 builds on Chapter 2 and turns to the work of Paolo Mattia Doria and Antonio Genovesi, referring in particular to Genovesi’s definition of civil economy as ‘the political science of the economy and commerce’ (Genovesi, Reference Genovesi2013 [1765–1767], p. 11). This section develops Doria’s and Genovesi’s analysis of the interlocking institutions that channel human dispositions within the body politic. Section 5.5 considers the formation of a non-contractualist view of the evolution of civil life in the writings of David Hume, Adam Smith, Adam Ferguson, Cesare Beccaria, and Gaetano Filangieri. Section 5.6 draws on elements in the thought of Montesquieu, Burke, and Tocqueville to conceptualise the primacy of intermediate affiliations in the development of the body politic. Section 5.7 concludes the chapter with reflections on the primacy of a general theory of human association encompassing plural levels of aggregation in society.

5.2 Contractualism and Contemporary Political Economy

Political economy differs from both economics and politics. Economics, in the version of it that John Hicks labelled as catallactics (Hicks, Reference Hicks1975, 1982 [1976]), primarily denotes decision-making about the allocation of resources between individuals, whereas politics concerns collective decision-making about the distribution of power and resources between different groups in society (Green and Shapiro, Reference Green and Shapiro1994). Both fields are seen as largely self-contained spaces governed by instrumental rationality. They are characterised by the overriding goal of individual utility or collective welfare maximisation and a trade-off between rival interests – a zero-sun game of winners versus losers in which conflict is more fundamental than mutual adjustment and cooperation.

This approach denies political economy an autonomous space of inquiry and leads either to the absorption of politics into economics or its opposite (e.g. respectively, North, Wallis, and Weingast, Reference North, Wallis and Weingast2010; Blyth, Reference Blyth2013). Either way, the distinction between economics and politics gives way to a dualism that brackets out of relevance the multi-layered structure of social relations in which both the economy and the polity are embedded. However, political economy can in principle straddle the disciplinary divide between economics and politics because it draws attention to the social relations that underpin the state’s strategic and administrative activities and the instrumental activities in the economic sphere (Pabst and Scazzieri, Reference Pabst and Scazzieri2012; Pabst, Reference Pabst2014).

Contractualism views markets, states, and individuals as foundational categories that constitute the economic-political domain. However, what remains unexplained is, first, why these categories are – or should be – seen as given and, secondly, on what type of social relations they depend, that is, the manifold and complex social linkages that underpin the interdependence of individuals and/or groups. For this reason, the contractualist conception of political economy focuses on the purely contractual arrangements between market agents or political actors at the expense of the social bonds on which both economic and political relationships ultimately rely (Pabst, Reference Pabst, Cardinale and Scazzieri2018a). As we argued in Chapter 1, contractualism ends up subsuming the social domain under the logic of exchange or the logic of power, or indeed both at once.

Here we can go further and make the point that contractualist theories ignore the pre-existing social linkages in which individuals are embedded and which are not a matter of personal choice at each point in time. These linkages provide opportunities, constraints, and affordances in relation to conflict and cooperation. A focus on pre-existing social ties can overcome a series of dualisms that characterise contemporary conceptions of political economy, including instrumental versus the non-instrumental action, vertical versus horizontal interaction, intended versus non-intended outcomes, and interdependence between homogeneous versus interdependence between heterogeneous actors. These and other dualisms fail to reflect the complex connections between individuals and/or social groups on which the polity and the economy rest.

The above argument points to a divide between alternative conceptions of political economy. The partitioning of social reality into foundational categories such as individuals, markets, and states correlates with the strict separation of academic disciplines that characterises the relationship between modern economics and modern political science. This disciplinary divide has deepened since the 1870s Marginalist revolution in economic theory, insofar as the theory of rational (economic or political) choice moved the agenda away from the classical analysis of system-wise opportunities and constraints and directed it firmly towards the study of the allocation of given resources/capabilities between alternative uses (Collison Black et al., Reference Collison Black, Coats, Crauford and Goodwin1973; Dobb, Reference Dobb1973; Blaug, Reference Blaug1997). In this manner, marginalism (and, more generally, the rational choice research programme) shifted the emphasis away from the consideration of different systems with their own specific production and exchange relationships towards the claim that all value depends on preference rankings and deliberate comparisons (as in marginal utility theory). This approach made economic analysis focus on maximising choice within a particular system of opportunities and constraints and turned it away from the structural interdependencies that limit human agency. In reality, system-wide opportunities and constraints are associated with different institutional and organisational patterns that affect division of labour and exchange. Therefore, from a constitutionalist perspective, each system encompasses alternative political economies that move beyond the simplified dichotomy of markets versus state and encompass a plurality of economic and political spaces associated with the intermediate associations within the social body (Pabst and Scazzieri, Reference Pabst and Scazzieri2012).

The lack of plural spaces and the limits on political agency, which the ‘catallactic’ approach to economics favoured, highlights a wider problem of contractualist approaches. Since the end of the nineteenth century, the body of social sciences (notably economics, politics, and social theory) has become increasingly fragmented under the pressure of increasing autonomy and ever-greater specialisation, both by fields of inquiry and by analytical tools. However, the respective ‘objects of study’ (the economy, the polity, and society) are closely intertwined with one another. More fundamentally, purely contractualist arrangements that are abstracted from social linkages bring about a situation wherein individuals and/or groups are at once more interdependent in the market sphere and less embedded in intermediate economic and political bodies. As a matter of fact, these bodies are key in defining the boundaries of the economic system and its different institutional and organisation patterns that affect the division of labour and exchange. In the words of Lorenzo Ornaghi (Reference Ornaghi, Baranzini and Scazzieri1990, p. 25 [original italics]),

In consequence, the modern separation of economics from political science is correlated with a split between economic structures and political institutions, which has reduced the scope of political economy and separated the analysis of markets and states from the social interdependencies in which they are both embedded. By contrast, this book develops a conception of political economy that explores the complex links between the economy and the polity with a particular emphasis on the different, and multi-layered, forms of sociability within which interactions between individual or collective actors take place.

5.3 Foundations of Contractualist Political Economy: A Critical Assessment

Contractualism in political economy has roots in a dualistic approach of which there are, broadly speaking, three distinct versions.Footnote ¹ First, the Machiavellian and Hobbesian heritage of inherently adversarial and lawless sociability in the ‘state of nature’ that gives rise to a ‘war of all against all’ which only the absolute power of the sovereign over the people can regulate (Hobbes, 1998 [1651], part I, chap. XIII, p. 84; part II, chap. XVII–XX, pp. 111–139).

Second, the Rousseauian legacy of viewing humankind as born free but constrained by human association, and the Hegelian legacy of seeing civil society as a mere extension of state structure (Du contrat social, Rousseau, 1997 [1762], Book I, 6, 4; Book I, 6, pp. 6–10; Book IV, 1, pp. 1–2, 5, 7; Hegel, Reference Hegel and Allen1991 [1821], II, 1, §§102–112, pp. 130–140; III, 2, §§180–256, pp. 220–274). Both these versions of contractualism lead to conceptions of political economy that emphasise the exclusive and undivided nature of state sovereignty beyond that of multi-layered social linkages between individuals or groups. Third, the Lockean emphasis on commercial society as a set of contractually based interactions between private individuals where the self-interest of some is limited by the self-interest of others (Locke, 1988 [1690], II, §6 and §135). This approach shifts the focus of political economy to the role of market exchanges. In different ways, all three theories subordinate association either to individual or collective agency, thereby ignoring the relational opportunities, constraints, and affordances involved in social interdependence. This dualistic logic underpins contemporary conceptions of the relationship between economics and politics that our conception of political economy seeks to overcome.

5.4 Civil Economy as Political Science: Doria and Genovesi

The priority accorded to ‘commerce’ clashes with notions of civic virtue that are bound up closely with ideas of trust and cooperation. Linked to this is the tendency of powerful economic interests to organise politically in the pursuit of passions and not to be constrained by a substantive conception of an encompassing interest that rests on civic institutions in order to shape the polity and the economy (Hirschman, Reference Hirschman1977). These limits of the social contract tradition open up a space to reconsider two other modern traditions that gave rise to a rather different conception of political economy and the constitution of the body politic, on which the remainder of this chapter focuses. One is the Neapolitan Enlightenment tradition of Paolo Mattia Doria and Antonio Genovesi (with roots in the work of Giambattista Vico) and the other is the tradition of anti-absolutist thinking associated with figures such as Montesquieu, Edmund Burke, and Alexis de Tocqueville. Linking together both traditions is a renewal of older notions of civic virtue and an emphasis on the intermediary spheres of association that mediate between the person, on the one hand, and the institutions of states and markets, on the other hand. An important forerunner of these traditions was Ralph Cudworth, one of the Cambridge Platonists. In his True Intellectual System of the Universe, Cudworth outlines his conception of civil life in explicit opposition to Hobbes: ‘[i]t is manifest, how vain the attempts of these politicians are to make justice artificially, when there is no such thing naturally; (which is indeed no less than to make something out of nothing) and by art to consociate into bodies politick those, whom nature had dissociated from one another; a thing as impossible, as to tie knots in the wind or water; or to build a stately palace or castle out of sand’ (Cudworth, Reference Cudworth1743 [1678], p. 895).

Much like Vico (Robertson, Reference Robertson2005, pp. 185–200), Doria developed a conception of the body politic that is in sharp contrast with the contractualist tradition. Faced with the entrenched privileges of the nobility and the poverty of the peasantry, Doria looked for leadership among the magistracy of the city, the ceto civile. In his book Vita Civile (Doria, Reference Doria1729 [1709]), he contrasts a politics of virtue with a politics driven entirely by self-love (amore proprio), which had given rise to a reductive view of politics as ‘reason of state’ rather than the public and common good. Echoing strands in the Greco-Roman legacy, he suggests that the flourishing of human capabilities is the ultimate end of humankind and that this underpins our natural human disposition towards union with one another (Doria, Reference Doria1729 [1709]), p. 1). Alongside a mixed constitution, Doria’s conception of civil life rests on the division of labour as the coordination of different ‘virtues’, conceptualised as capabilities. Crucially, he views the proper governance of the economy in terms of the just distribution of natural resources and the fruits of human work. For this reason, he warns about the potential domination of the economia naturale (agriculture and human ingenuity) by the economia astratta (the accumulation of abstract wealth as money; see Scazzieri, Reference Scazzieri, Porta and Zamagni2012a). Central to a balance of rival interests was interpersonal cooperation and trust (fede) as the indispensable prerequisite for agreements upon which both production and trade are based – a commitment to the common good above and beyond particular interests (Doria, Reference Doria1981 [1740]).

Doria’s view of economic and political life is characterised by the role of reason in harnessing passions and making them conducive to a proper balancing of dispositions (‘virtues’). Rational images of perfection are indeed essential in driving human practice in view of both individual and social improvement: ‘I do not lay any hope in perfection […] but I cannot withdraw from aiming at it; if I do not strive for it, corrupted nature would certainly lead me to its opposite: and by attempting to attain perfection, I would at least cast a good human being, if not the best; similarly, by altogether forgetting about perfection, I would end up with the worse’ (Doria, Reference Doria1729 [1709], p. 399). Doria’s notion of perfectibility suggests that rational arrangements can enable human beings and societies partially to overcome drawbacks and imperfections and thereby approximate their natural potential for mutual wellbeing:

Important themes of Doria’s Vita civile resurface in Antonio Genovesi’s Lezioni di economia civile (Genovesi, Reference Genovesi2013 [1765–1767]). The starting point is Genovesi’s core analytical argument that the economy is fundamentally political and accordingly that the interdependence between social units (individuals or groups) takes precedence over the specific dispositions and actions of particular actors within the social domain (Pii, Reference Pii1973; Di Battista, Reference Di Battista, Jossa, Patalano and Zagari2007; Pabst and Scazzieri, Reference Scazzieri, Sinha and Thomas2019). For Genovesi, this interdependence highlights the prevalence of ‘forza concentriva’ (concentrating force) over ‘forza diffusiva’ (dispersing force) and is conducive to the analysis of the conditions allowing the mutual fitting of heterogeneous socio-economic groups in a political economy capable of maintaining itself in a state of balance between those two forces (Genovesi, Reference Genovesi1973 [1766]; Guasti, Reference Guasti2006). Our argument is that this attention to the structural conditions permitting a polity to survive and to make progress constitutes a key characteristic feature of Genovesi’s contribution to political-economic thinking.

In the preface (‘Proemio’) to his Lezioni di economia civile, Genovesi discusses the position of his discipline relative to political studies, and outlines a distinction of the latter between ‘civil economy’ (economia civile), considered as that part of political science ‘that encompasses the rules to make one’s nation populous, rich, powerful, wise, and polite’ and ‘political tactics’ (tattica politica), considered as the ‘art of making laws and preserve State and Empire’ (Proemio to the Lezioni, in Genovesi, Reference Genovesi2013 [1765–1767], p. 9). This point of view also distances Genovesi’s ‘economia civile’ from ‘economia’ strictly speaking, which he clearly describes in terms of classical oikonomia: ‘economics looks at the human being as head and prince of his family and instructs him how to well preside over it, and to bestow it with virtue, riches and glory’ (Proemio to the Lezioni, in Genovesi, Reference Genovesi2013 [1765–1767], p. 9). The political character of economia civile is also shown by the three references given in the Proemio: Montesquieu’s Esprit des Lois (Montesquieu, 1989 [1748], Bielefeld’s Institutions politiques (Bielefeld, Reference Bielefeld1760), and Melon’s Essai politique sur le commerce (Melon, Reference Melon1736).

Simultaneously, Genovesi makes clear that political science (which includes economia civile) cannot be addressed without a prior investigation into the inner structure of human beings (their ‘impasto’); the nature of their ‘instincts, affections and motives’; and the ultimate grounds for the good life (‘ben vivere’) (Proemio to the Lezioni, in Genovesi, Reference Genovesi2013 [1765–1767], p. 9). This conception is central to Genovesi’s economic thought because it raises fundamental questions about the connection between human nature, sociability, and commerce.

Genovesi’s philosophical anthropology is remarkably consistent with Doria’s analysis of the relationship between passions and reason, and the role of rational images in governing the acquisition of knowledge and the determination of practice in view of both individual and social improvement (see above). Doria’s ‘mutual exchange of virtues and of natural faculties’ is also at the heart of Genovesi’s approach to social differentiation and division of labour. This makes Genovesi’s view noticeably different from Smith’s grounding of the division of labour in ‘the propensity to truck, barter, and exchange one thing for another’ (Smith, 1976 [1776], Book 1, chap. 2; see, however, Smith, 1976 [1759] for an explanation of that propensity in the relational framework of social mirroring).Footnote ² The emphasis on the congruence of dispositions as the ultimate foundation of civil life is common to Doria and Genovesi, and leads Genovesi to approach civil economy through a preliminary investigation into the nature of ‘political bodies’ (corpi politici), and into the human dispositions on which political bodies are founded. In this connection, Genovesi maintains that political science should avoid a narrow concentration of attention upon certain human dispositions instead of others (see Pabst and Scazzieri Reference Scazzieri, Sinha and Thomas2019). As already indicated in Chapter 2, this is especially true in the case of ‘interest’, whose meaning Genovesi carefully examines:

The distinction between ‘reflexive self-love’ and ‘interest’ leads Genovesi to address the question of ‘virtue’ as central to human dispositions and an ordering principle of human actions towards a viable polity (cf. Marcialis, Reference Marcialis1994, Reference Marcialis and Marcialis1999). In line with Shaftesbury and Doria, Genovesi views virtue as ‘the harmonic consilience between passions and reason, both with regard to ourself and our care for the public good’ (Shaftesbury, Inquiry Concerning Virtue and Merit, Book II, as quoted in Genovesi’s Lezioni, I.2.xii, footnote 1; in Genovesi, Reference Genovesi2013 [1765–1767], p. 38n). In this manner, ‘virtue’ is conceptualised as a means to assess the consilience between passion and reason in the actions of human beings, as well as to gauge the proper balance of different passions that is compatible with a well-ordered polity (building on the idea of a proportionality requirement for the harnessing of passions as discussed in Chapter 2).Footnote ³ Crucially, Genovesi defines virtue not as ‘an invention of philosophers’ but instead ‘a consequence of the nature of the world’ (Lezioni, II.10.xiii, in Genovesi Reference Genovesi2013 [1765–1767], p. 349).

This conception of the polity has important implications for our understanding of political economy. Doria’s work is a critical source for Genovesi’s view of the political economy as a multi-layered system of social and economic relationships (Costabile, Reference Costabile, Negri Zamagni and Porta2012, Reference Costabile, Lunghini, Curzio, Roncaglia and Scazzieri2015; Perna, Reference Perna1999). In Doria, the ‘mutual exchange of virtues, and of natural faculties, which human beings make with one another’ (Doria, Reference Doria1729 [1709], pp. 82–83) is constitutive of ‘civil life’ and underpins his distinction between ‘natural economy’ and ‘abstract economy’ (see Scazzieri, Reference Scazzieri, Porta and Zamagni2012a). The former concerns ‘the appropriate arrangement and distribution, and the increase of real wealth’ (Doria, Reference Doria1729 [1709], p. 318) whereas the latter is about ‘the maintenance and increase of money, which is imaginary’ (Doria, Reference Doria1729 [1709], p. 318). By extension, the embeddedness of economic life within the body politic informs Doria’s other distinction between ‘real trade’ and ‘ideal trade’. ‘Real trade’ follows the principle of mutuo soccorso and provides mutual benefit for trading parties. By contrast, ‘ideal trade’ is based on the logic of zero-sum games applied to the role of price differentials in the transactions between economic actors (Doria, Reference Doria1981 [1740], p. 148; cf. Poni, Reference Poni1997).

According to Doria, what distinguishes a ‘natural economy’ are the right proportions between activities that enable a viable vita civile (civil life).Footnote ⁴ This conception also shapes Genovesi’s view of ‘civil economy’ and his position on internal commerce as well as international trade. Reciprocal needs (bisogni reciproci) and the reciprocal obligation to assist one another (reciproca obbligazione di soccorrerci; Genovesi, Reference Genovesi2013 [1765–1767], p. 22) are the fundamental links between trade and civil life. Genovesi’s argument is that a properly embedded economy pursues mutual benefit based on the exercise of virtue, which is both intrinsically good by forming character and fostering human flourishing, and engenders a more prosperous economy by favouring trust and promoting cooperation. For Genovesi, the economy is no exception to the rule that true happiness – in Doria’s sense of mutual flourishing – involves sympathetic ties, which tend to influence economic transactions: ‘for contracts are bonds and civil laws are […] also compacts and public contracts’ (Genovesi, Reference Genovesi2013 [1765–1767], p. 341). This statement suggests that for Genovesi, there is no strict distinction between formal laws and informal commitments, since both are engendered by Doria’s conception of public faith, which Genovesi defines as follows: ‘Public trust is therefore a bond that ties together and binds persons and families of one State to one another, with the sovereign or other nations with which they trade’ (Genovesi, Reference Genovesi2013 [1765–67], p. 341, n121). Put differently, public faith is not so much the aggregation of private attitudes to trust as a kind of universal ‘sympathy’ that includes a commitment to a shared good (Pabst, Reference Pabst2018b).

Public trust can thus be seen as connecting civil economy to the wider sphere of civil life: ‘public faith is to civic bodies what to natural bodies is the force of cohesion and of reciprocal attraction; without which there can be no solid and lasting mass, and all is but fine sand and dust’ (Genovesi, Reference Genovesi2013 [1765–1767], p. 342).Footnote ⁵ For him, public trust is so central because it promotes the social bonds and civic ties that are indispensable for successful economic interdependence. Criminal activity that undermines public trust leads to a situation where ‘society will either dissolve itself, or it will convert in its entirety into a band of brigands’ (Genovesi, Reference Genovesi2013 [1765–1767], p. 343, here echoing St Augustine’s dictum that ‘without justice what else is the state but a band of brigands’, De Civitate Dei, Book IV, 4). Without reciprocity, individual rights and commercial contracts cannot ultimately work.

5.5 Civil Life as an Evolutionary Process: Hume, Smith, Beccaria, and Filangieri

In the latter part of the eighteenth century several writers addressed the development of civil life as an evolutionary process taking place through history independently of any actual or virtual process of deliberation involving the shift ‘from a set of known individual tastes to a pattern of social decision-making’ (Arrow, Reference Arrow1972 [1951], p. 2). In this line of thinking, David Hume’s and Adam Smith’s non-constructivist appraisals of the development of morals are of central importance. Hume started with the distinction between rational understanding and passions and argued that ‘[w]hen we leave our closet, and engage in the common affairs of life, [the conclusions of reasoning] seem to vanish, like the phantoms of the night on the appearance of the morning; and ‘tis difficult for us to retain even that conviction, which we had attain’d with difficulty’ (Hume, 1978 [1739–1740], p. 455). This point of view leads Hume to maintain that ‘[t]he rules of morality […] are not conclusions of our reason’ (Hume, 1978 [1739–1740], p. 457) and that they are instead the outcome of the gradual establishment of a convention that ‘is not of the nature of a promise’ (Hume, 1978 [1739–1740], p. 490):

The evolutionary (rather than contractualist) character of morals, and of the associated ideas of justice, injustice, and property, is further developed in Smith’s Theory of Moral Sentiments (Smith, 1976 [1759]). However, Smith’s analysis is distinguished by the attention given to the influence of particular circumstances and historical conditions in determining moral customs:

At the same time, and differently from Hume, Smith acknowledges that the variety of morals arising from different customs may in fact be explained by the working of a general criterion determining the propriety of human conduct under specific conditions: ‘[i]n general, the style of manners which takes place in any nation, may commonly upon the whole be said to be that which is most suitable to its situation’ (Smith, 1976 [1759], p. 209). As a result, Smith maintains that ‘we cannot complain that the moral sentiments of men are very grossly perverted’ by the influence of custom on morals (Smith, 1976 [1759], p. 209).

The non-contractualist character of Hume’s and Smith’s views on the development of human dispositions in a social setting provide the conceptual background to Adam Ferguson’s Essay on the History of Civil Society, in which we find an explicit reference to the ‘blindness’ of unintended outcomes in giving shape to human dispositions and institutions:

Cesare Beccaria, writing a few years before Ferguson’s Essay, maintained a similar evolutionary view concerning the introduction of money in economic transactions: ‘the introduction of money was not born from an explicit convention (which never preceded any human institution), but from what people call chance [azzardo], which is an arrangement of circumstances that human beings could not foresee’ (Beccaria, Reference Beccaria1986 [1762], p. 196 [added emphasis]). In a later writing Beccaria also hinted at an evolutionary explanation of social differentiation, which he considered a result of the discovery that ‘everyone could live so much more commodiously and pleasantly if everyone could induce a great number of others to provide such advantages and pleasures, and that such an occurrence would take place more easily and frequently if they could make themselves more clearly visible and distinct from others’ (Beccaria, Reference Beccaria and Beccaria1971b [ms. 1769], p. 615; see also Scazzieri, Reference Scazzieri, Porta and Scazzieri2014b). In other writings on the evolutionary process leading to changes in human dispositions and institutions, Beccaria emphasised that the matching or mismatching between awareness of needs and knowledge of the means to meet those needs is the central criterion for judging, respectively, of the degree of civility (coltura) or barbarism (barbarie) of a nation (Beccaria, Reference Beccaria and Beccaria1971c [ms. 1768], p. 802), adding that one should not confuse ‘barbarism’ with the primitive condition of a society (Beccaria, Reference Beccaria and Beccaria1971c [ms. 1768], pp. 802–805). In this connection, Beccaria also introduced a distinction between ‘objective’ practices, which he calls ‘usanze’ (uses) and ‘subjective’ attitudes, which he calls ‘costumi’ (customs, or mores) (Beccaria, Reference Beccaria and Beccaria1971d [ms. 1768], p. 810). He emphasises that

Indeed, the strength of established uses may be so strong that human beings ‘adjust old uses to new customs [generated by need] even if the old practices are useless and often contrary to the need’ (Beccaria, Reference Beccaria and Beccaria1971d [ms. 1768], p. 811).

Beccaria’s writings call attention to the open-ended character of sociability, which may evolve from barbarism to civility, and vice versa, depending on contingent and often unpredictable factors (azzardo). The evolutionary character of civil life is also central to Gaetano Filangieri’s reconstruction of the emergence of legal structures from a background of fundamental sociability in which the civilization process develops mutual dependencies linked with differentiation between positions and influence across human beings. Filangieri shares Rousseau’s conception of sociability as a natural condition but maintains that primitive society ‘coeval with man, is not […] to be confounded with civil society, for they differ widely from each other’ (Filangieri, Reference Filangieri1806 [1780], p. 5). As a matter of fact, ‘[p]rimitive society […] was strictly a natural union, where the distinctions of the noble, the plebeian, the master, and [the servant], and the names of the magistrate, the laws, civil offices, impositions and punishments, were equally unknown’ (Filangieri, Reference Filangieri1806 [1780], p. 6). In Filangieri, inequality and relationships of dependence are unavoidably associated with the civilization process but, differently from Rousseau, he views civil society and social hierarchies as arising from an evolutionary process generated by the expansion and differentiation of needs rather than from the deliberate surrender of independence to a sovereign authority (see also Giarrizzo, Reference Giarrizzo1981). In short, Filangieri acknowledges the intrinsically dual role of sociability in promoting natural unions but also in triggering distinctions and asymmetric power relationships. In his view, evolution replaces the social contract as the mainspring of civil life, but the uncertain outcome of evolutionary processes makes it necessary for legislation to reduce the corrosive effect of destitution for the well-being of the political body:

5.6 The Primacy of Association: Montesquieu, Burke, and Tocqueville

From a distinct yet related perspective, the tradition of anti-absolutist thinking associated with figures like Montesquieu, Burke, and Tocqueville focuses on the crucial role of mixed constitution to uphold a body politic constituted by autonomous intermediary institutions, which can embed state and market activities in a complex, multi-layered web of social relations. Montesquieu contrasted the autarchy of despotism with the reciprocity of a balanced constitution in which the sovereign, the public, and intermediate associations interact based on civil laws (Callanan, Reference Callanan2018): ‘[d]espotism is self-sufficient; everything around it is empty. Thus when travellers describe countries to us where despotism reigns, they rarely speak of civil laws’ (Montesquieu, 1989 [1748], p. 74). In addition to civil law, Montesquieu argued that intermediary institutions require a strong civic culture – a substratum of ‘mores, manners and received examples’ that complement a body of law to protect the integrity of the ‘intermediate, subordinate and dependent bodies’ that compose political and civil life (Montesquieu, 1989 [1748], p. 187).

These intermediate bodies play a key role in relation to a political economy, as they help to ensure a balance of power and wealth between the sovereign and individual actors, as well as among the three branches of government (executive, legislative, and judiciary). Montesquieu wrote that in balanced constitutional orders, such as the one he saw in eighteenth-century England, there are ‘intermediate channels through which the power flows’ (Montesquieu, 1989 [1748], p. 188), channels which for Montesquieu are ‘established’ and ‘acknowledged’ because they reflect in part the prevailing mores and manner. In addition, ‘the most natural, intermediate and subordinate power is that of the nobility […] no monarch, no nobility; no nobility, no monarch; there can be but a despot’ (Montesquieu, 1989 [1748], p. 188). However, these intermediate bodies have to be counter-balanced by what he calls a ‘depositary of the laws’: ‘it is not enough to have intermediate powers in a monarchy, there must also be a depositary of the laws. This depositary can only be the judges of the supreme courts of justice, [i.e., The Parlements] who promulgate the new laws, and revive the obsolete’ (Montesquieu, 1989 [1748], p. 189).

Key to the plurality of political spaces and the exercise of agency is for Montesquieu the practice of ‘virtue’, which he defines as follows: ‘virtue is a feeling, and not a consequence of knowledge, a feeling that may inspire the lowliest as well as the highest person in the state’ (Montesquieu, 1989 [1748]), V, 2). Not unlike Genovesi, he views virtue as an ordering device for the polity, the economy, and even society as a whole, which mediates between different unsocial dispositions – notably avarice, ambition, and idleness. Without ‘virtue’, man’s base nature ends up enslaving and dominating societies:

A polity without virtue means a lack of plural spaces of political agency, since power and wealth would flow upwards, creating the conditions for an oligarchic and ultimately a despotic system.

Both Edmund Burke and Alexis de Tocqueville went further in their defence of intermediate bodies and the practice of virtue. They viewed intermediate bodies not only as autonomous and self-governing but also as bulwarks against the excessive power of both states and markets. Burke’s rejection of state absolutism (whether the ancien régime or the revolutionary republic) is well known, but what is perhaps less documented is the set of themes that are shared with the thinkers of the Neapolitan Enlightenment:

The emphasis on intermediate bodies leads Burke to emphasise that enforced equality can strengthen the power of the central state over intermediary institutions. Therefore, as Ehrenberg (Reference Ehrenberg1999, p. 160) writes, for Burke,

Of equal importance is his critique of the political economy underpinning the French Revolution, which put in place a new settlement revolving around central state power and debt-funded commerce – in which the autonomy and property of intermediary associations were sacrificed to provide the stable guarantee for a new flood of paper money. The creation of public debt reached a new acme with the French Revolution because the revolutionaries brought about, according to Burke, a new settlement in which

Burke’s critique anticipated not only looming Terror, and political totalitarianism but also the ‘paper-money despotism’ that consists in increasing state indebtedness as a result of corruption and expensive wars. First the revolutionaries converted the confiscated property of the Crown and the Church into money. Then public debt was contracted to wage war. This created a new class of ‘monied interest’ that charged usurious interest rates, making money out of money and generating speculative profits. Then the state taxed the people and robbed them of their assets to service the growing mountain of public debt financed by private creditors. This produced an ‘ignoble oligarchy’ composed of state agents and private speculators who colluded against society, as Burke observed:

Burke also rejects the Hobbesian idea of a violent and anarchic state of nature, which can be merely regulated by the central state and an international system of sovereign states. Nor does he agree with the Rousseauian notion that in the state of nature human beings do not depend on each other – pre-social liberty as self-sufficiency. On the contrary, for him the natural condition of humankind is social and relational, and human nature is intrinsically creative and self-transforming:

In line with this thinking, Burke views rights as social and relational too, such as the right to property by descent, the right to due process (including trial by jury) and the right to education. In the Reflections, he contrasts these ‘real rights of men’ (Burke Reference Burke and Hampsher-Monk2014 [1790], p. 59 [original italics]) with purely individual rights either in the state of nature, as for Rousseau, or in the artifice of political society, as for Hobbes.

Central to Burke’s account of the body politic is his conception of human beings as naturally linked to one another by bonds of sympathy, which prevent fellow human beings from being ‘indifferent spectators of almost anything which men can do or suffer’ (Burke, Reference Burke and Harris1993 [1759], p. 68). Coupled with the passions of imitation and ambition, sympathy helps to produce an order that is not imposed upon some pre-existing chaos but rather emerges from nature. It does so by fusing a concern for others (sympathy) with following the example (imitation) of those who excel and can offer virtuous leadership (ambition). Even though they are ‘of a complicated kind’, these three passions ‘branch out into a variety of forms agreeable to that variety of ends they are to serve in the great chain of society’ (Burke, Reference Burke and Harris1993 [1759], p. 68). Therefore, the key difference between the social contract tradition based on an anarchic state of nature and Burke’s emphasis on ‘natural sociability’ is that the latter evolves with the grain of humanity, starting with the innate desire of human beings to associate with one another. The primacy of association underpins Burke’s conception of community as expressed by his famous invocation of the ‘little platoons’: ‘To be attached to the subdivision, to love the little platoon we belong to in society, is the first principle (the germ as it were) of public affections. It is the first link in the series by which we proceed towards a love to our country and to mankind’ (Burke, Reference Burke and Hampsher-Monk2014 [1790], p. 47). Here, as before, we find the polity embedded in a complex web of multi-layered social relations (see also Collins, Reference Collins2020).

It was Tocqueville who outlined a more fully developed conception of political sociability in which civil society is the fundamental locus in which individual liberty could be balanced with mutual awareness and respect by preventing the monopoly positions of vested interest and guarding against either majority will or mob rule. Tocqueville considers humans as primarily social beings with a unique propensity to associate in manifold ways beyond Smith’s propensity to ‘truck, barter and exchange’. In his view, the complex web of civil associations is indispensable for the purpose of a democratic polity, economy and civil society:

In Tocqueville’s view, the responsibility of the state, which is in principle limited to the political sphere, should however be suitably expanded to protect the ‘inferior classes’ from the inequality and uncertainty of economic conditions associated with industrialization, also in order to ‘make public life the most varied and effective, and of making the inferior classes interested in public affairs in a regular and peaceful way’ (Tocqueville, Reference Tocqueville and Tocqueville2005 [1847–1848], p. 188). This approach, which Tocqueville develops in view of the destitution he discovered in conjunction with economic progress in England, highlights the need of a social polity contrasting the unrestrained working of markets and taking advantage of the complex web of associations constituting the domain of civil society. From this perspective, neither economics nor politics as disciplines can provide first principles or final ends for humankind. Rather, ‘in democratic countries, the science of association is the mother of sciences; the progress of all the rest depends on the progress it has made’ (Tocqueville, Reference Tocqueville1969 [1835–1840], I, p. 110 [added emphasis]).

5.7 Association and the Body Politic

This chapter has explored rival conceptions of the body politic in political economy. Our argument seeks to highlight the fundamental difference between contractualist approaches in political economy, which view relations between individuals and/or groups predominantly in terms of formal arrangements under the aegis of a social contract, and alternative conceptions, which emphasise social interdependence and diverse forms of associations. The former emphasises legal and contractual interactions between the macro and the micro level, whereas the latter shift the focus to intermediate bodies and spaces of decision and action that are plural and hybrid (see also Galli, Reference Galli2010; Manent, Reference Manent2013). We argue that contemporary political economy can build on thinkers such as Doria, Montesquieu, Genovesi, Burke, and Tocqueville who in different ways conceptualised the interdependence between the material and the political dimensions of sociability. In this view, both the fulfilment of human abilities and the meeting of human needs presuppose patterns of interdependence that are inherently political, in the sense that they require the systemic fitting of differentiated activities and interests. At the same time, this view highlights the structural grounding of political life in the web of relations that provides material support to the economy.

Our focus has been on modes of association and the intermediate associations that constitute the body politic. The reason for this is that, first of all, they reflect the relational nature of human beings and their embeddedness in social structures more fully than formal interactions at the level of the market or the state; secondly, intermediate bodies are indispensable to the proper functioning of the polity and the economy, which are itself embedded in multi-layered social relations underpinning both conflict and cooperation. Such bonds pre-exist the emergence of conflict and cooperation and are characterised by more hybrid relationships than the more homogeneous links associated with state sovereignty and commercial society. These bonds are grounded in different types of sociability and point to the existence of a more fundamental domain that can be conceptualised as a ‘primary constitution of connectivity [which] embeds the causal structures determining the relationship between intended and unintended outcomes in any given social domain’ (Pabst and Scazzieri, Reference Pabst and Scazzieri2012, pp. 338–339). This means that the differentiated social linkages that constitute the political-economic domain are not a given fact that economics and political science either ignore or subsume under the logic of exchange or the logic of state power but rather a dynamic reality that gives rise to plural spheres of political agency. Instead of reducing economics to politics or vice versa, our approach shows that these ties also point to partially realised connections that could embed the economy and the polity in a wider social sphere. As the following chapters will argue, this conception of the body politic has far-reaching implications for the structuring of interests, the emergence of institutional architectures, and the design and implementation of policies.

6.1 Positions, Interests, and Structures of Interdependence

As we have argued in the previous chapter, the body politic can be conceptualised as an organised plurality of actors who are bound together by a proper ordering of different levels of agency that ensures its viability over time. We have also shown in Chapters 3 and 4 that the constitution of any given economy involves features of invariance in the constellations of interests arising from the existing pattern of division of labour. This means that constellations of interests are inherently associated with a pattern of interdependence between actors, and that they are central to the political economy conceived as a political body organised in view of economic conditions and objectives.

In particular, the positions of individual or collective objectives relative to one another turn a mere collection of actors into a structured body that is already political and economic prior to its formal establishment through a visible constitutional settlement.Footnote ¹ Constellations of interests differ from one another depending on the relative positions of individual or collective actors. For example, certain constellations of interests introduce a partition of the economic-political domain into distinct nuclei with little or no overlap. Other constellations of interests introduce a partition consisting of partially overlapping nuclei, so that certain actors share certain interests with other actors while allowing for divergence and conflict when other interests are considered.

The structure of any given constellation of interests is captured by the analytical mapping Nicholas Georgescu-Roegen introduced in his analysis of peasant communities in South East Europe:

In Georgescu-Roegen’s analytical framework, the mapping x_iR_hy_s decomposes a given social domain into subsets (nuclei), such that the individual or collective actors x_i (i = 1, …, n) and y_s (s = 1, …, m) are grouped together by the set R_h (h = 1, …, m) of relations, which may express partial objectives (i.e. partial interests) shared by the x_is and y_ss. This formalization shows that constellations of interests with little or no overlap of partial interests are associated with a mapping R_h that includes either a single partial objective or a small number of partial objectives. By contrast, constellations with a significant overlap of partial interests are associated with a mapping R_h that includes many partial interests, if not all of them.

This argument highlights the possibility of classifying constellations of interests by the degree to which different partial interests may or may not coalesce into clusters of overlapping interests that are potentially conducive to a synthesis of interest shared by a significant plurality of actors. Alternative constellations of interests highlight the possibility of establishing connections that may involve different numbers of actors and that may also introduce linkages of different strength between different actors or sets of actors.

The above analytical map brings into focus the possible affiliations and cleavages that may or may not materialize depending on the way in which individual or collective actors map and realise the possibilities open to them in each context. It is also important to note that different mappings of possible affiliations or cleavages have different degrees of relative persistence over time. This provides a heuristic into the dynamics of affiliations that characterise the objective constitution of a political economy at any given stage of its history.

The structure of this chapter is as follows. Section 6.2 examines the constitutional arrangement of a political economy considered as a set of positions of the main actors (both individuals and groups) together with the corresponding mapping of their fundamental interests. This section calls attention to the relationship between the dominant mapping of interests and the institutional architecture of a given political economy. The section also highlights the need of a constitutional heuristic aimed at detecting the matching or mismatching of dominant interests and institutions in a specific context.

Section 6.3 addresses cleavages as an expression of interdependence, which generally results in the formation of separate nuclei of stakeholders. These nuclei determine overlapping or non-overlapping lines of separation between stakeholders and are at the origin of the multiple instances of compromise or conflict that characterise a given political economy. This section emphasises that, in general, any given pattern of interdependence (such as the interdependence between producers through division of labour) is conducive to a plurality of ways in which interests arise and group affiliations are shaped. An example of this is when interests and affiliations follow predominantly horizontal or vertical patterns of interdependence.

Section 6.4 examines conciliation of interests and its prerequisites. This section makes a distinction between two forms of conciliation: first, conciliation as compromise between the partial interests of different actors; second, conciliation as pursuit of partial interests under a condition of ‘systemic interest’. The latter condition implies that both compromise and conflict are subject to a primary prerequisite of sustainability for the political economy as a whole. Section 6.5 switches to the consideration of the different routes from partial interests to systemic interest depending on what is the prevailing mapping of interdependence.

Section 6.6 addresses the schemes of interdependence between actors involved in division of labour, and investigates the way in which alternative patterns of division of labour may be associated with different identifications of systemic interest. Sections 6.7 turns to the consideration of ‘institutional architectures’ seen as the relatively stable constellations of formal and informal rules that determine both which social actions are possible and which ones are to be expected in a given context. This section examines the relationship between path dependence and design as the principal route by which institutional architectures emerge and are transformed in the course of time. In particular, the section calls attention to the possible lack of synchronization between institutions, human dispositions, and systemic interest as the source of mismatch between material interdependencies and their mapping by relevant stakeholders.

Section 6.8 concludes the chapter by discussing the relationship between patterns of interdependence and the dispositions of actors under conditions of institutional change. This section argues that changes in connectivity between stakeholders and in their dispositions bring about important changes in institutional architecture while the latter are a significant influence behind stakeholders’ mapping of interests. This affects in an important way the route taken by policy-making in a political economy subject to the transformation of interdependencies that characterises processes of structural change.

6.2 Constellations of Interests and Constitutional Settlements

The constitution of a political economy is a complex arrangement of positions and patterns of interdependence characterised by relative invariance and allowing a plurality of connections and group affiliations. A constitutional heuristic is needed to detect the most significant constellations of interests together with the most salient mappings of relative positions. It therefore provides a cue into the most stable group affiliations in the political economy under consideration.

As we have seen in the previous section, constellations of interest disclose alternative patterns of compromise or conflict depending on which relative positions are mapped as the dominant ones in a given context. For example, a constellation of interests showing the relative positions of interests based on a classification of activities by industry (such as metal-making, textiles, and so on) is likely to be different from a constellation of interests based on a classification of activities by vertically integrated sectors or supply chains, seeing that each supply chain may include activities belonging to a plurality of industries but delivering intermediate inputs to the same consumption or investment good.

Realised affiliations or cleavages depend on which constellation of interests is principally mapped. A constellation of interests based on a classification by industries highlights the possibility of group affiliations reflecting interdependence of activities delivering intermediate inputs to one another (this is a case of ‘horizontal’ or circular interdependence). In turn, this type of interdependence may disclose different patterns of affiliation depending on the relevant sphere of interdependence, which could be a region, a state, or a multi-state network of activities. Each sphere of interdependence is a possible source of a constitutional settlement that may be adopted as a function of conjunctural factors and/or deeper structural conditions. For example, interdependence at the regional level can engender a political economy whose constitution may or may not be associated with self-government depending on constraints generated at other levels of interdependence. In this connection, a particularly interesting case is that of formal or informal regional affiliations cutting across different states. Examples are multi-state regional affiliations such as the Adriatic and Ionian Region (EUSAIR), the Union of Baltic Cities in Europe, the Pacific Northwest Legislative Leadership, and the Great Lakes ‘region state’ in North America. Here we have affiliations that are conducive to a constitutional settlement independent of, even if not necessarily opposed to, the objective and/or the formal constitutions of the different states to which the regions belong (Ohmae, Reference Ohmae1993).

Other group affiliations may presuppose a multi-state domain while being conducive to a constitutional settlement that cuts across national borders. A multi-state polity such as the European Union is a case in point (Moravcsik, Reference Moravcsik2005; Cardinale, Coffman, and Scazzieri, Reference Cardinale, Coffman, Scazzieri, Cardinale, Coffman and Scazzieri2017a, b). Lastly, group affiliations may generate a set of self-standing normative arrangements independent of formal political units, as in the case of the medieval law merchant (lex mercatoria) (Hicks, Reference Hicks1969; Grossi, Reference Grossi2007) or of their contemporary emergence in the space of non-state international relationships (Trackman, Bernstein, Reference Bernstein2013; Ferrarese, Reference Ferrarese2015).

A classification of activities by vertically integrated sectors suggests a different constellation of collective interests and group affiliations. In this case, the activities involved in a given supply chain generate interests different from those associated with a different supply chain. Here the issue arises whether the linkages within individual supply chains (vertically integrated sectors) generate mutually compatible constellations of interests across several distinct supply chains. Under certain conditions supply chains may generate mutually compatible interests, and can even be compatible with a systemic interest encompassing several or all supply chains under consideration. For example, a number of supply chains can depend on the same material input, or can draw upon the same pool of human capabilities. In this case, connections between activities can give rise to a constellation of interests that brings to light a degree of complementarity between different supply chains.

However, the way in which stakeholders look at possible complementarities is very different as a function of stakeholders’ positions within a particular collection of supply chains. For instance, supply chains depending on the availability of the same essential non-produced resource, such as oil or a particular mineral ore, give rise to alternative interests according to whether we take the point of view of the actors supplying that resource (the ‘delivery route’) or the point of view of its final users (the ‘acquisition route’).Footnote ² Examples of shared interest from the ‘delivery’ point of view are the Organization of the Petroleum Exporting Countries (OPEC), and former organisations such as the International Bauxite Association (IBA) and the Association of Iron Ore Exporting Countries (APEF). An example of shared interest from the ‘acquisition’ point of view could be, at least partly, the International Energy Agency (IEA).

From the suppliers’ position, shared interest is more likely to be visible when substitute resources do not exist or are irrelevant within a significant time horizon (as has been the case with the oil industry), so that differences between qualities of the same resource (e.g. between different oil fields) can be overlooked. From the users’ position, identifying shared interest is more likely in the case of a resource whose users all belong to the same industry (as the steel industry with respect to iron ore).Footnote ³

However, the same conditions may also pinpoint strong potential or actual conflicts of interests between supply chains if supply chains have to compete for the provision of the same material inputs or capabilities. This situation calls attention to the relative openness of constellations of interests with respect to the configuration of connections. For the same pattern of interdependence may alternatively engender complementarity or opposition depending on the historical context and on how stakeholders identify their respective positions and interests in that context. In the case of supply chains based on the same material input, or on the same pool of capabilities, stakeholders may realise that a better provision of that material input or of the relevant capabilities can be secured through collective action across supply chains. This may generate a constellation of mutually compatible interests, in which a type of shared interest can arise across different supply chains. On the other hand, a different configuration of relative positions (and advantages), and a different mapping of them, may lead stakeholders away from identifying a shared interest making them more inclined to highlight opposition and possibly conflict.

6.3 Cleavages, Associations, and the Economic Constitution

As we have seen, the economic constitution of society arises from the existence of multiple patterns of interdependence between economic stakeholders (Chapter 4). By distinguishing between horizontal and vertical interdependence in production networks, different classification schemes allow us to identify different and mutually compatible patterns of interdependence (Pasinetti, Reference Pasinetti and Pasinetti1980 [1973]; Baranzini and Scazzieri, Reference Scazzieri1990; Scazzieri, Reference Scazzieri2022). Horizontal interdependence means that a production network is a collection of activities delivering intermediate inputs to one another (this network is a ‘circular flow’ of system-wide relationships).Footnote ⁴ By contrast, vertical interdependence means that a production system is a collection of activities coordinated with one another along sequences of fabrication stages leading from work-in-process materials to finished products. This production system would be a collection of vertically integrated sectors in which each supply chain is held together by ‘one-way’ connections from one fabrication stage to the next. The switch from one configuration of interdependencies to another presupposes a change in the way activities are grouped together (Stone, Reference Stone1962). However, each classification scheme is also a focal point for the convergence or divergence of interests between social groups (Cardinale, Reference Cardinale, Cardinale, Coffman and Scazzieri2017; Cardinale and Landesmann, Reference Cardinale and Landesmann2022). Each configuration of interdependence highlights a specific way of connecting activities with one another so that the focus of actors’ interests is likely to shift as their consideration moves from one type of configuration to another (Cardinale, Reference Cardinale, Cardinale and Scazzieri2018a).

The possibility of alternative focal points triggering alternative patterns of economic group affiliation has far-reaching consequences. In particular, this possibility suggests that any given focal point is necessarily selective in the sense of inducing identification of a subset of similarity features from among the wider set of characteristics describing the socioeconomic setting under consideration. Similarity features may be distributed between individual or collective actors in a variety of patterns.

This point has important implications considering that economic actors are generally associated with a vector of different characteristics (e.g., goods produced, material inputs required, human capabilities needed). As a result, actors can be grouped together according to a variety of criteria, which may lead to different measures of distance between them. For example, actors A_i and A_j may share characteristic s₁ (which therefore becomes a feature of similarity) while not sharing any other characteristic s₂, …, s_k in the relevant social domain. This implies that A_i and A_j can be considered as close to each other in terms of similarity feature s₁ but distant in terms of any other standard of comparison. For example, two industries may provide intermediate inputs to each other but may also contribute work-in-process materials to a plurality of supply chains (vertically integrated sectors). In this case, the association with the same circular network of intermediate inputs provides a feature of similarity, but that similarity feature may or may not provide a focal point for convergence of their respective interests depending on the degree to which the two industries contribute to the same supply chains. More generally, the joint contribution to the same structure of intermediate inputs by the two industries tends to provide an effective focal point for the coordination of interests only if the interdependence arising from the mutual supply of intermediate inputs is strong enough to overcome the potentially divisive effect generated by the plurality of supply chains to which the two industries contribute. On the other hand, the common interest arising from joint contribution to the same circular network of intermediate inputs is reinforced if the two industries also contribute in a significant way to the same supply chains (vertically integrated sectors).

In short, the plurality of characteristics by which similarity features can be identified may or may not contribute to the internal cohesion of the political economy under consideration. For example, the binary classification of productive activities as contributing either to a horizontal network of intermediate inputs or to a collection of vertical supply chains highlights either the strength or the weakness of the set of interdependencies under consideration. By the same token, the above binary classification shows that activities can be distant from one another by one criterion (say, their contribution to different supply chains) but also close to one another if we consider a different criterion (say, their contribution to the same structure of intermediate inputs). In general, the plurality of relevant characteristics tends to increase the likelihood of similarity features and the potential cohesion of any given collection of activities provided the cleavages arising from the distribution of characteristics across individual or collective actors are non-overlapping (or overlapping only to a limited degree) (Rae and Taylor, Reference Rae and Taylor1970).

Under certain conditions, cleavages between stakeholders leave room for compromise generating convergence towards a common synthetic objective. Multiple, and not fully overlapping, cleavages may be conducive to a situation in which compromise is more likely than destructive conflict (Rae and Taylor, Reference Rae and Taylor1970; Lijphart, Reference Lijphart1968, Reference Lijphart1969, 1975 [1968], 1977; see also van Schendelen, Reference van Schendelen1984). In consequence, ‘[t]he fact that individual or group A may be opposed to individual or group B on issue x, but also closely allied to group B on issue y, may provide an important condition for congruence in a fragmented, heterogeneous social domain’ (Pabst and Scazzieri, Reference Pabst and Scazzieri2016, p. 346). However, ‘fragmentation of interests may also lead to the opposite outcome. Cleavages, even if not coinciding, may still make congruence more difficult rather than easier. This may happen when the social domain is so completely fractured that spheres of shared interest become very difficult, if not altogether impossible, to detect’ (Pabst and Scazzieri, Reference Pabst and Scazzieri2016, p. 347). In a setting like this, identification of a synthetic and shared objective may critically depend on the ability to envision a ‘constitutional’ systemic interest beyond the fragmentation of partial interests in society. Arend Ljiphart discusses this way of overcoming divisive cleavages both in democracies of the ‘consociational type’ (Lijphart, Reference Lijphart1969) and in pre-democratic polities, like the Dutch United Provinces in the early modern age (Lijphart, Reference Lijphart1969, 1975 [1968]).Footnote ⁵ This type of constitutional settlement requires:

A specific feature of the consociational overcoming of divisive partial interests is that several issues take a ‘constitutional’ character and cannot be solved by simple majority rule: ‘[c]onsociational democracy violates the principle of majority rule, but it does not deviate very much from normative democratic theory. Most democratic constitutions prescribe majority rule for the normal transaction of business when the stakes are not too high, but extraordinary majorities or several successive majorities for the most important decisions, such as changes in the constitution. In fragmented systems, many other decisions in addition to constituent ones are perceived as involving high stakes, and therefore require more than simple majority rule’ (Lijphart, Reference Lijphart1969, p. 214). Convergence to a common synthetic objective is more likely when stakeholders share the same ‘list’ of partial objectives (which may involve conflict under limited resource constraints) but attach different weights to different objectives (Pabst and Scazzieri, Reference Pabst and Scazzieri2016). This situation arises ‘when the number of divisive issues is not too great and provided individuals or groups weigh social outcomes in a sufficiently differentiated way across possible social situations’ (Pabst and Scazzieri, Reference Pabst and Scazzieri2016, p. 348).

For example, division of labour may generate multiple cleavages between productive activities, but this plurality of cleavages may or may not reduce system cohesion depending on whether cleavages reinforce one another and therefore enhance the mutual independence of separate tasks (overlapping cleavages), or else increase selective connectivity between tasks by generating mutually offsetting cleavages (and therefore making explicit or de facto coordination more likely). For instance, certain stages of production can contribute to several distinct productive networks that supply intermediate inputs to one another, and at the same time they can contribute to the supply chain for the same finished product. In this case, the potential cleavage due to separation between networks of intermediate products may be offset by the fact that the production stages under consideration contribute to the same supply chain. Alternatively, the shared interest provided by the common supply chain could be too weak relative to the shared interest associated with membership of different intermediate-product networks.

In the latter case, it is likely that for each production stage, the prevailing interest would be the one generated by the corresponding (dominant) intermediate-product network, even if the joint contribution of all production stages to the supply chain for a particular finished product may act as a ‘compensating interest’ reducing the likelihood of conflict between production stages that may arise from membership of distinct intermediate-product networks. (The implications of this complex overlap of production linkages for industrial policy are discussed in Chapter 7; see also Best, Reference Best2018; Di Tommaso et al., Reference Di Tommaso, Tassinari, Barbieri and Marozzi2020).

Cleavages are an important factor determining the economic constitution of society. As we have seen, the economic constitution rests upon the constellation of interests associated with the existing network structure of the economy. Division of labour and connections through the mutual transfer of goods and services are central to the configuration and working of economic networks. They are compatible with multiple classifications of activities, which may in turn generate several distinct nuclei of shared interest. The economic constitution of any given society will be defined by what is its dominant shared interest, and such dominant shared interest will provide the focal point of economic coordination between individual or collective actors.

The above conception of the economic constitution provides a heuristic for analysing the relationship between the economic constitution and the political constitution. For economic linkages and lines of separation do not necessarily coincide with the linkages and separations between different political units. A given activity (say, a production process carried out in a particular establishment) may formally belong to a certain political unit (say, a particular nation state) and yet be part of the economic constitution of another political unit (say, another nation state), or of a supranational constellation of activities. There may be a cleavage between the economic and the political constitution, and this cleavage can be an important factor in determining the character of economic policy in each political unit, as well as the dynamics of the economic and political constitutions over time.

6.4 Conciliation of Interests

To conceptualise the political constitution in relation to the economic constitution, it is useful to draw on the work of the English political theorist Bernard Crick and his notion of conciliation of rival interests in a polity using compromise rather than force. Crick’s conception of politics shifts the focus away from pure ideology towards the praxis of ‘preserving a community’ that has ‘grown too complicated for either tradition alone or pure arbitrary rule to preserve it without the undue use of coercion’ (Crick, Reference Crick1992, p. 24). As with the thinkers discussed in Chapter 5, Crick focuses on the material constitution rather than the formal constitution. His argument is that material interests are the foundation of both political and economic order and that a conciliation of material interests is both desirable and feasible.

Two conditions are necessary for a practice of political conciliation. First, the existence of pluralistic societies that are culturally complex and in which values divide people, which captures our contemporary condition of heterogenous cultures. Second, a commitment to rule out the use of force in settling conflicts, which applies to functioning democracies. In the words of Crick, to conceptualise politics in this manner ‘is to assert, historically, that there are some societies at least which contain a variety of different interests and different moral viewpoints and [also] to assert, ethically, that conciliation is at least to be preferred to coercion among normal people’ (Crick, Reference Crick1992, p. 141).

Key to Crick’s conception of politics is the recognition that diversity of interests and ethical values are themselves goods and that therefore politics cannot be about the imposition of a single truth or set of absolute truths, for that would amount to absolutist rule or even tyranny. Nor can politics deny any sense of truth altogether, for that would lead to anarchy and violent conflict between rival groups. In between those extremes that fuel each other, the goal of politics is to represent ‘at least some tolerance of different truths, some recognition that government is possible, indeed best conducted, amid the open canvassing of rival interests […] that type of government where politics proves successful in ensuring reasonable stability and order’ (Crick, Reference Crick1992, pp. 18, 21). Survival and security are the common interests holding disparate actors or groups together, not ‘some allegedly objective “general will” or “public interest”’ (Crick, Reference Crick1992, p. 24).

It is here that Crick makes the decisive argument about the nature of politics – that there are no absolutely rational or scientific ways of resolving conflicts between incommensurable values or even rival interests. The reverse side of a rational objective order that has supposedly universal validity is the other contemporary tendency of reducing moral judgements to expression of personal preferences based on subjective emotions, which Alasdair MacIntyre calls emotivism (MacIntyre, Reference MacIntyre2000 [1981]). As rationalism and emotivism dominate contemporary political discourse, the conception of politics as the pursuit of shared ends is subordinate to purely rational or emotive standards. In reality, politics goes beyond both rational ordering and human emotions in the direction of what Aristotle calls phronêsis or practical wisdom, by which he means linking our dispositions to the “right” (in the sense of reasonable) course of action.

Such a conception of politics can be found in the works of Edmund Burke, notably his notion of ‘principled practice’, which means striving for a middle path between mere facts without ideas and pure abstraction without practical meaning. Burke’s characterisation of what distinguishes a statesman from a politician illustrates this well: ‘[a] statesman, never losing sight of principles, is to be guided by circumstances’ (Burke, Reference Burke1792, p. 317, quoted in Boucher, Reference Boucher1991, p. 140) and ‘[a] statesman forms the best judgement of all moral disquisitions who has the greatest number and variety of considerations in one before him, and can take them in with the best possible consideration of the middle result of them’ (Burke, 1991 [1782], p. 304, quoted in Fidler and Welsh, Reference Fidler and Welsh1999, p. 39).

Drawing on both Burke and Crick, it is possible to suggest that the continued existence of a polity depends on the conciliation of rival interests, which are central to the emergence of shared objectives and/or to the acknowledgement of shared conditions for the pursuit of objectives specific to particular actors of groups. The idea of shared conditions is akin to Michael Oakeshott’s notion of ‘civil condition’, which he describes as a setting in which actors are ‘acknowledging themselves to be cives in virtue of being related to one another in the recognition of a practice composed of rules’ so that they are ‘related solely in terms of their common recognition of the rules which constitute a practice of civility’ (Oakeshott, Reference Oakeshott1975, pp. 127–128). Oakeshott contrasts this view with the approach that considers the polity as a ‘“community of wills”, with a “common good” and with the specification of this common interest’ (Oakeshott, Reference Oakeshott1975, p. 118). This raises questions about the nature of interest and arrangements of different categories of interest, which the next section explores.

6.5 From Partial Interests to Systemic Interest

Interests can be individual, collective or ‘systemic’. Individual interests reflect the conditions and partial objectives of actors as distinct expressions of agency. Collective interests reflect the conditions and partial objectives of individual actors joined together by a criterion of group affiliation. Systemic interest reflects the condition of different socioeconomic groups joined together by a common set of constraints and opportunities, which may or may not induce a shared or ‘synthetic’ objective deliberately pursued. The concept of ‘synthetic objective’ is introduced in de Finetti (Reference de Finetti1979). The potential mismatch between ‘systemic interest’ and more traditional concepts such as ‘public interest’, ‘national interest’, and the like is highlighted in Cardinale, Reference Cardinale, Baranzini, Rotondi and Scazzieri2015: ‘[s]ystemic interest derives from interdependencies and is a generalization of the traditional category of national interest […] It is worth reiterating that sectors may well constitute potential rather than manifest interest groups: whilst interests are grounded in the structure of the economic system, not every sector may be aware of them and act accordingly at the political level. As a consequence, it is possible that a system of interdependencies affords a systemic interest but the groups involved do not consider it as such in the construction of their own interest’ (Cardinale, Reference Cardinale, Baranzini, Rotondi and Scazzieri2015, p. 203; see also Cardinale, Reference Cardinale, Cardinale, Coffman and Scazzieri2017, Reference Cardinale, Cardinale and Scazzieri2018a; Cardinale and Coffman, Reference Cardinale and Coffman2014).

The shift from collective (group) interests to systemic interest is not straightforward, since it presupposes common constraints and opportunities, and these may lead to different ways of ‘synthesizing’ the interests of different socioeconomic groups. An example is the distinction in the previous section between the horizontal aggregation of production processes within a single ‘circular flow’ of intermediate products, and the vertical aggregation of processes within distinct supply chains leading to distinct finished products. Synthetic interest in a horizontal pattern of interdependence will be different from synthetic interest in a vertical pattern of interdependence between different supply chains.

Horizontal interdependence will bind the relevant stakeholders together by means of a ‘connectivity loop’ such that all processes require one another’s products as essential inputs. On the other hand, vertical connections bind relevant actors together along a ‘one-way’ route from means of production to finished products that is in principle open-ended, seeing that different layers of means of production may be delivered by socioeconomic systems different from the systems of destination of finished products. Vertical connections per se are no guarantee that a systemic interest covering different supply chains will arise. For this reason, the mapping of systemic interest across different vertically integrated sectors requires the identification of a covering condition external to the links within individual supply chains, and yet capable of joining different supply chains in view of a systemic condition. An example of a covering condition of that type is the full employment condition that can be introduced in a pure labour economy (with no intermediate product requirements) to ensure the mutual consistency of different supply chains (or fractions of them) from the point of view of a particular collection of activities, such as the activities carried out in a particular region or country.Footnote ⁶

The distinction between horizontal versus vertical patterns of interdependence highlights two different routes along which it may be possible to identify the systemic interest consistent with a particular collection of activities. This means that dominance of horizontal or, respectively, vertical interdependence suggests a distinction between two different types of economic constitution. Horizontal interdependence means that systemic interest reflects the mutual interdependence of the activities carried out within the relevant economic unit, as in the prototypical case of an economic systems in which all finished products are also intermediate products for one another. Here, systemic interest may coincide with the condition making it possible for the collection of mutually related processes to be self-sustainable, and the corresponding economic constitution may support socioeconomic and institutional arrangements characterised by a criterion of ‘connectivity closure’. This means that the economic constitution is primarily oriented to achieving sustainability of the circular flow of intermediate productions into one another. Other objectives – such as achievement of a satisfactory growth rate in the aggregate or for specific activities, full employment, net export growth, and so on – can only be considered after the principal objective is achieved.

Dominance of vertical interdependence leads to a different mapping of systemic interest. For a systemic condition cannot be extracted from mutual dependencies between production processes, and should be introduced from the outside. One example is when the outside systemic condition coincides with the full employment (or even ‘full nourishment’) condition for the population living on a given territory. Another example may be when the systemic condition is determined by one particular supply chain to the detriment of other supply chains. Economic constitutions would be very different in the two cases. In the former case, the synthetic condition (say, full employment) will constrain the relationship between the different supply chains (and in particular their relative proportions). In the latter case, the whole system will have to adjust its structure to the objective of one particular line of production, and the objectives of the other supply chains will have to adapt accordingly.

6.6 Patterns of Interdependence and Systemic Interest

The approach to systemic interest in terms of consistence of linked activities in a horizontal pattern of interdependence highlights systemic interest as condition for the attainment of a variety of collective objectives reflecting different distributions of weights between actors. In this case, compromise or conflict leads from one distribution of weights to another, and leads the polity from one collective (political) objective to another. However, the systemic consistency condition constrains the distribution of weights between actors’ partial interests (and therefore also the political objective derived from them) within the boundaries of what is compatible with the continued existence of the overall system of interdependencies (its ‘viability condition’).

The situation is different if we switch to a vertical pattern of interdependence. In this case, as we have seen, connections may link activities belonging to different horizontal schemes of interdependence. This means that the partial interests associated with the different vertically integrated sectors (or supply chains) are not directly constrained by a condition arising from within the system of interdependencies. In this case, partial interests are constrained by a condition external to productive interdependencies as such, as is the case if the activities carried out within the different vertical sectors have to meet a systemic full employment constraint. Here we have a situation in which there are structural links between activities carried out within each vertical sector (supply chain) but no significant structural links across different vertical sectors. The coherence of the overall system (considered as a collection of relatively independent supply chains) is to be achieved by an external macroeconomic condition, such as the full employment condition. However, full employment could in general be achieved by a variety of proportions between the different supply chains. This means that in this case too we may think of a variety of solutions (achieved through agreement or conflict) to the problem of identifying a synthetic objective associated with a plurality of partial interests. However, as with the horizontal pattern of interdependence, the variety of possible syntheses is constrained by a systemic condition (in this example, the full employment condition). This variety of solutions highlights that a plurality of political objectives (i.e. objectives de facto pursued by the collection of vertical sectors as a comprehensive system) would be compatible with the condition of full employment.

Of course, the two above cases are a highly simplified picture of what is likely to be a much more varied constellation of positions and linkages. We may have a horizontal pattern of interdependence such that activities (and the corresponding actors) are connected with one another in the sense of being mutually necessary and also sufficient to provide the work-in-process materials and semi-finished products needed to deliver all quantities of goods produced in the system. However, we may also have a horizontal pattern of interdependence that is ‘incomplete’ in the sense that a semi-independent horizontal subsystem exists side by side with inputs flows coming from outside that subsystem and output flows leaving the subsystem and connecting it with external sources of utilisation.

In the latter case, we meet a problem different from the one we have just examined. The issue is no longer how to determine a synthesis of partial interests compatible with the systemic viability condition. For the viability condition would realistically constrain only the activities belonging to the inner core subsystem (the subsystem of mutually necessary activities). The ‘peripheral’ activities would only be interested in the supply chains to which they contribute, not in the viability of the overall system. In this case, the convergence of different stakeholders to a synthetic objective consistent with systemic interest (as expressed, for example, by the viability of the inner core of interdependent activities) is more likely if there are sufficiently strong links connecting peripheral to core activities. Similarly, a vertical pattern of interdependence may also be ‘incomplete’ in the sense that the collection of vertical sectors forming the system includes inputs and outputs external to the system. In this case, finding a synthetic objective consistent with a systemic condition (such as full employment) is, respectively, less or more difficult depending on the degree to which the different supply chains are also connected to one another through links that are internal to the system. We can even think of a collection of vertical sectors such that each sector is a supply chain completely detached from the other sectors in the economy. In this case, finding convergence to a synthetic objective consistent with a systemic condition may be more difficult and may require a criterion different from economic interdependence.

In either the horizontal or the vertical case, convergence to a synthetic objective by a variety of stakeholders does not imply that the systemic interest will be met. For example, in a horizontal pattern of interdependence, stakeholders expressing the partial interests of different industries may converge to a set of industrial proportions incompatible with the viability condition for the whole system of interdependent industries. In a vertical pattern of connectivity between activities, actors expressing the partial interests of different supply chains may converge to a shared objective that may or may not be compatible with whatever systemic condition is considered for the polity under consideration (such as full employment). In other words, structural conditions or circumstances conducive to compromise make the pursue of a shared objective more likely but are no guarantee that the shared objective would be consistent with a systemic interest condition. We may have situations in which stakeholders agree on a set of proportions between industries that is not compatible with viability, or stakeholders may agree on a set of proportions between supply chains that is not compatible with full employment.

Both with horizontal and vertical connections, achievement of systemic interest leaves room for a plurality of political arrangements (a plurality of routes by which different partial interests may lead to a shared objective consistent with systemic interest). However, this plurality of arrangements should not be confused, and indeed does not necessarily coincide, with the arrangements capable of translating partial objectives into a shared synthetic objective compatible with systemic interest, be it viability or full employment.Footnote ⁷

In short, alternative mappings of connectivity between activities call stakeholders’ attention to different features of material structure, which may in turn induce dispositions to act in a certain way rather than others. This means that, depending on which features are highlighted, stakeholders will be inclined to map specific constraints and opportunities and will have a propensity to follow certain courses of action rather than others. As we have seen, there is no guarantee that collective actions resulting from political compromise or conflict would be consistent with a systemic interest condition either of the horizontal or vertical type. However, dispositions triggered by a given mapping of structure make stakeholders open to actions that are potentially compatible with a condition of systemic interest corresponding to that mapping. A significant consequence is that policy actions too are likely to be more or less effective depending on their degree of matching with the prevailing mappings and dispositions of stakeholders.

The world of systemic interest highlights a variety of conditions constraining the possible outcomes of political conflict and compromise within the boundaries of certain structural conditions. These conditions determine to what extent stakeholders’ partial interests are conducive to a solution (attained by conflict or compromise) that is compatible with the objective properties of the prevailing pattern of connectivity between actors. In particular, we have seen that a horizontal scheme of interdependence across industries highlights viability conditions that may be met by the industrial proportions arising from political compromise or conflict between stakeholders in the polity under consideration. We have also seen that a vertical scheme of connectivity within supply chains highlights a systemic condition (say, full employment, or maximum expansion, for the polity under consideration) that may or may not be met by the proportions between supply chains arising from political compromise or conflict.

Mixed cases bring into focus the possibility of alternative mappings of connectivity within the same polity. For example, stakeholders in the same polity may alternatively map a horizontal or a vertical scheme of connectivity depending on their position relative to other stakeholders internal or external to the system under consideration. We have seen that actors who belong to the core of mutually necessary activities (what we may call the ‘structural apparatus’ of the economic constitution in place; Quadrio Curzio and Scazzieri, Reference Quadrio Curzio, Scazzieri, Baranzini and Scazzieri1986, Reference Scazzieri2022) are more likely to map a systemic condition such as viability (a condition constraining the range of industrial proportions compatible with the sustainability of the horizontal pattern of interdependence under consideration). On the other hand, actors belonging to ‘peripheral’ activities (i.e. activities external to the system’s inner core of interdependent activities) are more likely to identify links with stakeholders belonging to their own supply chains independently of whether those stakeholders are internal or external to the polity under consideration (these supply chains identify what we may call the ‘transformation apparatus’ characterising the economic constitution; Quadrio Curzio and Scazzieri, Reference Quadrio Curzio, Scazzieri, Baranzini and Scazzieri1986, Reference Scazzieri2022). ‘Peripheral’ stakeholders are less inclined to map a systemic condition such as viability and more inclined (if at all) to map a macroeconomic systemic condition such as full employment or maximum growth rate for the collection of supply chains coexisting in a given polity.

6.7 Patterns of Systemic Interest and Institutional Architectures

As we have seen in the previous section, different mappings of the relative positions of stakeholders and the corresponding modes of connectivity lead to different ways of approaching the identification and possible pursuit of a systemic interest for the economic constitution under consideration. This has far-reaching implications for what concerns the relationship between systemic interest and institutional architecture. This is because the pattern of relative positions and connections generating a particular economic constitution may or may not be compatible with the institutional arrangements in place at any given time. But what do we mean by ‘institutional arrangements’ in the context of the present discussion? It seems reasonable to take a broad definition of this concept encompassing the formal and informal channels that determine which actions are likely, both in the sense of being possible and in the sense of being expected, in a given context. The distinction between ‘to be possible’ and ‘to be expected’ goes back to the distinction between probability and possibility. On this distinction Lotfi A. Zadeh noted that ‘[t]here is a basic difference between the concepts of probability and possibility. The concept of probability is rooted in perception of likelihood, while the concept of possibility is rooted in perception of possibility. What is the possibility of squeezing six passengers in a five-passenger car?’ (Zadeh, Reference Zadeh, Brandolini and Scazzieri2011, p. 104). The concept of possibility entails a consideration of objective feasibility that is distinct from, even if not incompatible with, the concept of probability.

This view of institutional arrangements involves seeing those arrangements both as constraints and opportunities for actions to take place, as well as activation mechanisms for dispositions to action to arise. In this connection, Ivano Cardinale has noted that ‘structure not only constrains and enables but also actively orients actors toward some courses of action over others. Structure orients: it makes a given actor more likely to settle on some possibilities out of those it enables’ (Cardinale, Reference Cardinale2018b, p. 136 [author’s emphasis]). The relationship between the view of institutions outlined above, Cardinale’s discussion of the relationship between actions and structures, and Doria’s conception of dispositions as principal triggers of human action is worth noting (Doria, Reference Doria1729; Scazzieri, Reference Scazzieri, Porta and Zamagni2012a, see also Chapter 2 above).

Institutional arrangements in the above sense may give rise to relatively persistent configurations of actions and structures that make certain actions possible or impossible and more likely or less likely in particular contexts and under particular circumstances. By the concept of ‘institutional architecture’ we mean any such relatively persistent configuration of actions and structures. The constitution of a political economy arises from a given structure of possible positions, connections, and dispositions to action, and provides a degree of persistence to the range of interdependencies feasible in that structure.Footnote ⁸ Within the domain of a given political economy, the institutional architecture identifies the relatively persistent range of actions that are possible and to be expected in a given context. The economic constitution provides a first condition for the persistence of potential patterns of connectivity. Within any given economic constitution, modes of social action and active connections ‘mark the partial actualisation of the existing potential for cooperation or conflict’ (Pabst, Reference Pabst, Cardinale, Coffman and Scazzieri2017, p. 195). Institutional architecture provides a further condition for the relative persistence of modes of social action and connectivity within the range of possibilities associated with the economic constitution. Institutional architectures derive from habit and history at least as much as from the deliberate actions of individuals or collective bodies. In many cases they have the character of unintended outcomes, as Adam Ferguson noted in his Essay on the History of Civil Society (Ferguson, Reference Ferguson1966 [1767]; see also Chapter 5, Section 5.5).

In several important circumstances, however, deliberate reflection and design also play a role in determining the introduction and development of institutional architectures. The intertwining of unintended path dependence (which is implicit in Ferguson’s argument) and deliberate institution building is emphasised in Masahiko Aoki’s view that ‘[a]lthough the institution is socially constructed as an equilibrium phenomenon, it becomes objectified to the agents in the domain as if it were independent of, and beyond the control of, individual agents’ (Aoki, Reference Aoki2001, p. 200).Footnote ⁹ In a similar vein Vernon Smith argues that deliberate institution building (what he calls ‘constructivism’) ‘uses reason deliberately to create rules of action, and to design human socioeconomic institutions that yield outcomes deemed preferable, given particular circumstances, to those produced by alternative arrangements’ (Smith, Reference Smith2008, p. 31).

However, Vernon Smith also points out that ‘[a]ltough constructivism is one of the crowning achievements of the human intellect, it is important to remain sensitive to the fact that the human institutions and most decision making are not guided only or primarily by constructivism. Emergent arrangements, even if initially constructivist in form, must have fitness properties that take account of opportunity costs and environmental challenges invisible to our modelling efforts: What is depends vitally on what is not’ (Smith, V., 2008, pp. 31–32).

The historical development of certain legal arrangements is an interesting case of the way in which institutional architectures may derive from combining path dependence and design, even if design itself arises within contexts shaped by history and unintended circumstances. The formation of two alternative Common Law traditions in England and Continental Europe is a case in point. Continental Europe saw the emergence of a Common Law corpus from habits and customs introduced as a response to changing historical conditions (in particular, the growth of trade and monetary transactions since the eleventh century). But those habits and customs were interpreted by legal scholars in terms of a formal benchmark provided by Justinian’s Corpus Iuris, and those scholarly interpretations in turn became the foundation of a body of jurisprudence influential across many countries for several centuries (Grossi, Reference Grossi2007, 2010 [2007]).

By contrast, English Common Law took a different course. It started from the legal decisions of the king sent to ordinary courts. Then it developed through the formation of a body of jurisprudence based on those commands and it ended up in a body of law itself subject to interpretation in the courts (Stein, Reference Stein1999; Ibbetson, Reference Ibbetson2001, Reference Ibbetson2006). There had indeed been an historical juncture at which the two traditions crossed each other, when Franciscus Accursius, from the legal school of Bologna, lectured at Oxford University and acted as secretary to King Edward I of England, presumably introducing elements of Continental ius commune into the king’s legal practice and therefore into English Common Law (Ibbetson, Reference Ibbetson2016). The development of English common law and of Continental European ius commune are both instances of the combination of deliberate action and (unintended) path dependence, even if they both highlight that the relationship between intended and unintended outcomes can follow a sequential causation going from unintended to intended outcomes or vice versa depending on circumstances.

In Continental ius commune, interpretive practice is based on a formal normative structure (the Corpus iuris). However, it stemmed, many centuries before, from the systematisation of a pre-existing body of legal practice (Grossi, Reference Grossi2007, 2010 [2007]). In English Common Law, royal writs preceded legal practice but were eventually merged in a body of legal traditions that in turn became the basis of further interpretations and decisions (Ibbetson, Reference Ibbetson2001).Footnote ¹⁰ In a nutshell, the relationship between deliberation and path dependence in institution building highlights the mutual influence of actions and structures in determining the trajectory of institutional practices. As shown by the twists and turns of English Common Law and Continental ius commune between tradition and deliberation, institutional architectures appear to be the result of deliberation when they are in fact the outcome of actions made possible and guided by existing structures of practice, or they may appear as the materialisation of traditions when they are in fact the result of deliberations lost in a distant past (see, for instance, Pocock, Reference Pocock1987). From this point of view, the emergence and functioning of institutional architectures over time shows an interplay of constraining, enabling and ‘orienting’ that underscores the central role of dispositions and their embeddedness in historical contexts.Footnote ¹¹

The above view of institutional architectures suggests that the constitution of a given political economy is subject to both material and cognitive influences. Material conditions and interdependencies introduce constraints and opportunities while also triggering dispositions to act in a certain way, or even to turn one’s eye away from certain courses of action that would have otherwise been feasible. On the other hand, dispositions, while rooted in pre-existing structures, may give rise to changes in structures themselves. For example, actors mapping constraints that arise from a limited availability of resources may be inclined to generate a sequence of technological changes along a decreasing returns trajectory, while actors visualizing opportunities that arise from indivisibilities and bottlenecks internal to production technology may be inclined to generate an increasing returns trajectory characterised by greater division of labour and specialisation of processes (Scazzieri, Reference Scazzieri1993; Cardinale and Scazzieri, Reference Cardinale and Scazzieri2019).

The interplay of material conditions and dispositions is also important for what concerns actors’ mapping of partial interests, and of a possible systemic interest. This is because any particular mapping of material interdependencies draws the actors’ attention to certain partial interests while inducing them to disregard partial interests that may be associated with alternative mappings of interdependence in the material sphere. This would mean disregarding mappings of interdependence that may give rise to alternative conditions for the cohesion of the body politic, and therefore to alternative constraints to the pursuit of partial interests in the polity.

The above argument has several important implications concerning the relationship between systemic interest, institutional architecture, and political compromise or conflict. As we have seen at the beginning of this section, institutional architecture can be seen as the relatively invariant set of arrangements (such as material, customary, and statutory conditions) that constrain, enable, and drive human actions by triggering dispositions. Mapping is central to the driving function of institutional architecture while being firmly rooted in the material structures of connectivity. This means that mapping arises from existing patterns of connectivity even if a given pattern of connectivity may lead to a variety of mappings depending on contingent factors such as actors’ position in the web of interdependencies, and their exposure to certain impulses rather than others.

At the same time, any given mapping of interests is open to a variety of solutions for what concerns the outcome of political compromise or conflict, and therefore the possible identification of a synthetic (or ‘collective’) objective out of the manifold partial interests at play in a given context. The institutional architecture of a political economy reflects the material structure of connectivity as well as the pattern of mapping which prevails at given times. It also drives stakeholders’ dispositions along certain trajectories rather than others, and makes certain policy actions more likely than others. This Janus-faced character of institutional architecture makes it subject to a tension between structural determination and open-endedness: institutional architecture reflects the material structure and mapping of interests from which it arises, but remains open to the manifold avenues along which dispositions may further develop.

As a consequence, a given institutional architecture is subject to a dual influence. On the one hand, the structures of interdependence between actors may follow a trajectory that is not synchronized (at least in the short and medium period) with actors’ mapping patterns; on the other hand, actors’ mapping of their position and prospects (which is itself a fundamental component of the way in which a given institutional architecture works over time) may show features of persistence that are at variance with changes of interdependence, or it may even follow a dynamic path fully disconnected from that. This view of the relationship between the structures of interdependence between stakeholders and the working of institutional architectures within which stakeholders are acting is closely related to Ivano Cardinale’s discussion of the relationship between the positions of actors and their dispositions to act:

Lack of synchronisation between connectivity structure and the mapping of interests is not uncommon. This has important implications for the constitution of political economy seeing that stakeholders’ positions may change over time while their mapping remains stuck in a representation of linkages more in tune with a past pattern of interdependence, or the change of mapping may be out of tune with a more persistent structure of connectivity. The mismatch between connectivity and visualization highlights the importance of time horizons in assessing the relationship between actions and structures, and ultimately the character of the inherent tension within institutional architectures.Footnote ¹² The likely mismatch between time horizons of different objective processes of the social or natural type adds further complexity to the dynamic relationship between connectivity and visualization. Lorenzo Ornaghi highlights the problems due to the mismatch between the time horizon of political decision-making and the time horizon required for transformative action in the economic sphere (Ornaghi, Reference Ornaghi, Baranzini and Scazzieri1990, pp. 36–37). In any case there would be a mismatch between connectivity and mapping, which makes the overcoming of partial interests by conflict or compromise often disconnected from the actual dynamics of interdependence.

For example, actors’ positions may have shifted from a horizontal to a vertical pattern of interdependence while their mapping is still of the horizontal type, or actors’ mapping may have prematurely shifted to a horizontal pattern when their positions are still arranged in a vertical pattern. A polity may think of itself as largely self-contained while in fact many of its actors are strongly connected to supply chains largely external to it; or actors’ mapping may have ‘prematurely’ shifted to a horizontal pattern of interdependence even if still connected to supply chains that are far from forming a pattern of mutually connected activities. The mismatch between interdependence and its mapping has far reaching implications for actions in a political economy. We may expect that mapping of interdependence would be the primary influence in inducing actors to shift from partial interests to a synthetic interest by political compromise or conflict. However, the possible mismatch of actors’ mapping from actual interdependence means that the identification of a synthetic, or ‘shared’, interest may be incompatible with the systemic condition appropriate to the prevailing pattern of interdependence (be it of the horizontal or of the vertical type).

The relative stickiness of either interdependence or its mapping makes it likely that, at any given time, interdependence and mapping will match only to a limited extent, or not at all. Clearly the extent of mismatch is likely to be larger the more dynamic is the political economy in view. In other words, actors are likely to search and try political and policy solutions they are able to conceive, but these solutions are not necessarily compatible with the systemic interest condition corresponding to the prevailing scheme of connectivity and its pattern of transformation. As we shall see in the following section, this mismatch has important consequences for the formation of policies and their effectiveness.

6.8 Institutional Dynamics, Interdependence, and the Formation of Policies

Institutional architectures provide a degree of persistence to actions undertaken in the political economy domain. However, institutions are not a black box. In particular, they are subject to inherent tension between the material structures supporting interdependence between socioeconomic groups, the dispositions arising from that interdependence, and eventually the feedback from dispositions to interdependence itself. This means that any given institutional architecture is in principle subject to an internal dynamic reflecting the relative speeds of change of material structures and dispositions, where the trajectory of transformation followed by institutional architecture will depend on whether changes in material connectivity or dispositions set the trend.

The inherent dynamism of institutional architecture allows institutional persistence only if connectivity structures and dispositions fully match each other, which may only be the case in a stationary or semi-stationary political economy characterised by unchanging or moderately changing but substantially stable connectivity structures and dispositions. A political economy subject to changes in the division of labour is likely to trigger changes in connectivity patterns, which may in turn set off changes in actors’ positions and dispositions. We can also think of a political economy in which changes in cultural beliefs set off changes of dispositions that may in turn induce the introduction of new patterns of connectivity. In either case, the relationship between connectivity and dispositions is the guiding principle of institutional dynamics. In turn, institutional transformation is a fundamental circumstance behind the twists and turns of stakeholders’ mappings, which are an important influence on compromise and conflict taking place in a political economy subject to structural change.

The way actors map patterns of interdependence draws attention to the different routes by which different and often diverging partial interests are addressed. In turn, the ‘collective interest’ identified by compromise or conflict is the central influence on the formation of policy. This makes policy formation dependent on the distribution of dispositions across relevant actors, which means that policies reflect actors’ positions within changing patterns of interdependence and their mapping of those positions. This process of policy formation has far-reaching implications for policy effectiveness. Indeed, effectiveness itself is a contested field, seeing that it may be evaluated in different ways depending on whether we take the point of view of individual actors, of coalitions of actors, or of the political economy as a whole. Individual actors may consider a policy to be successful if of advantage to themselves and nobody else. The same is true for coalitions of actors, when coalitions only include certain actors excluding others.

Coalitions of powerful stakeholders may twist collective decisions towards their partial objectives (often a compromise between different actors’ objectives within the coalition) through their influence on the formal decision-making procedures of parliamentary democracy in what has been described as ‘democratic despotism’ (Pabst, Reference Pabst2016). Interest groups’ influence on the electoral processes by financial intervention in party politics is an important example of the latter situation (see the analysis of this issue in Thomas Ferguson’s investment theory of party competition, as outlined in Ferguson, Reference Ferguson1983, Reference Ferguson1995, and further updated and discussed in Ferguson, Jorgensen, and Chen, Reference Ferguson, Jorgensen, Chen, Cardinale and Scazzieri2018, Reference Ferguson, Jorgensen and Chen2019).

The issue of a ‘universal coalition’ is more complex. We may have a universal coalition in which compromise or conflict attain a policy consensus that approximates ‘collective interest’, considered as consensus reached by synthesis of actors’ partial interests (see above). And yet, consensus policy attained by synthesis of actors’ partial interests at a given time may or may not be attuned to the evolving patterns of interdependence in the political economy due to the existence of lags between changes in interdependence and changes in the corresponding patterns of visualization. Johannes Althusius’ Politica methodice digesta (Althusius, Reference Althusius and Friedrich1932 [1614]) is an early attempt to address the problem of a ‘perverse’ universal coalition (a coalition attaining political consensus incompatible with systemic interest) by decomposition of a universal political-economic domain into a multi-layered system of circumscribed political spaces (see also Duso, Reference Duso1996; Elazar, Reference Elazar1998). Amartya Sen’s theory of ‘spheres of justice’ addresses the related issue of the mismatch between universal and particular normative frameworks (Sen, Reference Sen2006, Reference Sen2009; see also Malloy, Reference Malloy2022). A heuristic aimed at detecting by successive stages of circumscription a hierarchy between spheres of interest of different generality is suggested in Scazzieri (Reference Scazzieri and Brown2006).

As a consequence, we may expect that collective interest (as defined above and has attained by compromise or conflict between actors’ partial interests) would often be unable to map in a sufficiently transparent way the prevailing condition of systemic interest arising from existing structures of interdependence.Footnote ¹³ This means that the process of policy formation may lead to actions that may look effective from a strictly political point of view (i.e. from the point of view of actors’ partial interests) but that may be out of tune with conditions of systemic interest. For example, actors’ visualizations may allow a political compromise based on a horizontal pattern of interdependence when interdependence has muted into a prevailing vertical pattern, or vice versa. The possibility of mismatch between interdependence and visualization highlights by opposition what would be the status and prospects of policy formation attuned to the evolving patterns of interdependence (embedded policy formation). This issue will be the focus of the following chapter.

7.1 Constitution and Policy-Making

In the previous chapters of this book, we have taken the view that both the economy and the polity are embedded in a relational field. This field generates the range of relative positions that individuals and groups may take within it, while also making other positions impossible. From this point of view, both the constitution of the economy and the constitution of the polity reflect objective arrangements of positions that provide constraints and opportunities for human agency. They may also orient actors to follow certain courses of action rather than others.Footnote ¹

As we have seen, objective arrangements of relative positions provide the interpersonal foundations of the economic and political constitution. The economic constitution is the relatively invariant set of relative positions corresponding to the prevailing modes of association in the material sphere. Certain changes of relative positions are compatible with a given economic constitution while other changes require switching to a different constitution of the economy (see Chapter 4). In a similar way, the political constitution is the relatively invariant set of relative positions reflecting the prevailing modes of interdependence between spheres of interest in each social set-up (see Chapter 6). As with the economic constitution, certain changes in the relative positions of group interests are compatible with a given political constitution while other changes are incompatible with it and may require switching to a political constitution of a different type.

In a political economy, policy actions are located at the interface between the economic and the political sphere. Certain policy actions may be compatible with the existing economic constitution but not with the existing political constitution, and vice versa. Only policy actions compatible with both the economic and the political constitution can be carried out without changes in either. A constitutional heuristic is needed to assess whether a certain policy is feasible under a given constitutional settlement or not.

This chapter is organised as follows. Section 7.2 addresses the policy principles consistent with the constitutional point of view developed in the previous chapters. This section focuses on the multidimensional and multi-level architecture that policy design should follow in the light of the above discussion of the economic and political constitution. In particular, the section will consider policy actions as triggered and developed across manifold modes of association in the material sphere and manifold modes of collective action in the political sphere. This section provides the groundwork for the following analysis of policy measures in the industrial, credit, and international trade fields, which will be outlined in Sections 7.3, 7.4, and 7.5, respectively. Section 7.6 suggests a heuristic for assessing the role of embedded policy-making in a political economy facing systemic challenges that may require a new mapping and rethinking of the constitutional principles ordering its economic and political spheres.

7.2 Embedded Policy-Making: Framework and Heuristics

We shall consider policy-making as the pursuit of any given objective or set of objectives whose attainment would change the condition of the polity, and whose pursuit requires collective actions instrumental to the achievement of that objective or set of objectives. It therefore presupposes: (i) identifying objectives, that is, of the state (or states) of the world to be achieved; (ii) identifying actions conducive to that state of the world; (iii) implementing the actions identified under (ii); (iv) assessing whether the actions identified under (ii) and implemented under (iii) have been successful in achieving the state of the world (or states of the world) identified under (i).

In the political economy sphere, policy-making involves identifying objectives at the systemic level (be it the local, the regional, the national, or the supranational level), and the implementation of actions deemed to be instrumental to the achievement of those objectives. Policy-making, as defined above, can be embedded or disembedded. Embedded policy-making requires the following conditions: (i) objectives must be identified consistently with the arrangements defining the relative positions of individual or collective actors in the polity under consideration; (ii) policy actions must be identified consistently with the arrangements under (i) (see also Amable, Reference Amable, Cardinale and Scazzieri2018; Bourdieu, Reference Bourdieu2005; Cardinale and Coffman, Reference Cardinale and Coffman2014; Dubois, Reference Dubois, Cardinale and Scazzieri2018). The two conditions imply that not all actions potentially effective in making the political economy to move, say, from state s to state s* may actually be implemented. Embedded policy-making means that it is only possible to implement policy actions compatible with the relatively invariant constellation of relative positions, and permissible shifts of positions, that are compatible with the polity under consideration. It is also important to emphasise that in embedded policy-making, the success or failure of any given policy action cannot be assessed independently of the unintended consequences of that action regarding the relative positions of relevant stakeholders in the polity. In embedded policy-making, the evaluation of unintended consequences of policy actions is as important as the assessment of whether policy has successfully shifted the political economy from state s to state s*. Collateral damage or collateral benefit must also be considered in policy assessment. Each condition for embeddedness of policy-making reflects the existence of multiple layers of interdependence between individual or collective actors in the polity under consideration.

The identification of embedded policy objectives is a complex exercise requiring consideration of multiple levels of aggregation and identification of different partial objectives as we move from one level of aggregation to another (Cardinale, Coffman, and Scazzieri, Reference Cardinale, Coffman, Scazzieri, Cardinale, Coffman and Scazzieri2017a; Fligstein and McAdam, Reference Fligstein and McAdam2012; McCormick, Reference McCormick2007; Martin, Reference Martin2003; Pabst, Reference Pabst2014; Pabst and Scazzieri, Reference Pabst and Scazzieri2012). This process involves the assignment of weights to different partial objectives at any given level of aggregation (i.e. to the objectives of the different groupings relevant at that level of aggregation), as well as the assignment of weights to the ‘synthetic’ objectives associated with each level of aggregation (as we move from one level of aggregation to another). The assignment of weights to objectives is a hierarchical process in which the plurality of objectives at a given level of aggregation is ‘mapped’ to a synthetic objective that, in turn, must be assessed against other synthetic objectives as we move to a higher level of aggregation. For example, the partial objectives associated with towns in a region must be assigned specific weights in order to identify a synthetic objective for the whole region. Then the partial objectives of different regions may be assigned specific weights in order to shift to the level of aggregation of, say, the state that includes those regions. Then the objectives of different states may be assigned specific weights in order to shift to a larger polity, such as a federation or another type of supranational unit. This hierarchical mapping of objectives in a multi-layered polity has a historical precedent in Johannes Althusius’s analysis of the legal and political organisation of a multi-centred polity (Althusius, Reference Althusius and Friedrich1932 [1614]). A formal scheme for a hierarchical setting of objectives is presented in de Finetti (Reference de Finetti1979): ‘[the scheme] means introducing first of all different functions f₁(P), f₂(P), …, f_n(P), and only subsequently introducing, after assessing the pros and cons of each partial objective, a final function f(P), which will obviously be an increasing function of all the f_h(P)’ (de Finetti, Reference de Finetti1979, p. 645).

The embedded identification of policy objectives involves a plurality of weighing criteria since different interests at any given level must be weighed against one another and eventually synthesized in the objective relevant at a higher level of aggregation. The process by which partial objectives (partial interests) at a given level of aggregation are associated with identification of a synthetic objective at a higher level of aggregation may be repeated several times, and each time the aggregation of interests moves one step forward till we reach the aggregation level corresponding to the polity whose objective we want to identify.

This hierarchical process is a route by which partial interests may find a synthesis in a ‘collective interest’ identified stepwise across different levels of aggregation of social groupings (Cardinale, Reference Cardinale, Cardinale, Coffman and Scazzieri2017; Pabst, Reference Pabst, Cardinale, Coffman and Scazzieri2017). However, this approach is inherently open-ended and context-dependent. In certain cases, as in the example above, the territorial criterion may be relevant. In other cases, the hierarchical composition of partial interests may be based on the industrial classification of productive activities (Leontief, Reference Leontief1941; Stone, Reference Stone1962), so that shifts from lower to higher levels of aggregation are based on the assumption of common interests between actors involved in similar activities.Footnote ² In yet other cases, there may be a composition of interests across activities belonging to different supply chains (vertically integrated sectors) provided all supply chains share the utilisation of the same essential input – for example, the same non-produced resource, or the same infrastructure (Quadrio Curzio, Reference Quadrio Curzio, Baranzini and Scazzieri1986) – and/or depend on the same macroeconomic source of effective demand (Pasinetti, Reference Pasinetti1981, Reference Pasinetti1993). As we have already seen, there is no guarantee that the ‘collective interest’ identified by the above stepwise aggregation of partial interests would be consistent with the ‘systemic interest’ of the economic body and the body politic under consideration (see Section 6.6).

We cannot exclude cases in which different approaches to the composition of partial interests apply. For instance, supply chains cutting across territorial border lines mean that there may be regions, or even states, in which productive activities are split between supply chains internal to their territory and supply chains spread across different territories or states. In this mixed configuration of supply chains, the synthesis of partial interests requires coordination between different levels of governance. For example, a systemic objective expressing the synthesis between internally and externally oriented supply chains may require coordination between a regional level, a state level, and also a number of supra-state levels, which could include a supranational polity (such as the European Union) or international organisations, such as the World Trade Organization, the World Bank, and the International Monetary Fund.

A formal outline of this multi-stage identification of objectives can be given as follows. Let us denote by {C} the classification scheme of individual or collective actors c_is relevant to the policy issue under consideration. Actors c_is, i = 1, …, k are the individual or collective interested parties identified by means of classification scheme {C}. Following de Finetti’s formalization introduced above (de Finetti, Reference de Finetti1979), we assign a different objective f_i(c_i) to each actor c_i, so that the collection of actors {C} ≡ {c₁, c₂, …, c_k} corresponds to the collection of actors’ objectives{F} ≡ {f₁(c₁), f₂(c₂), …, f_k(c_k)}. For any classification scheme {C}, a ‘collective objective’, which we may denote by S {C}, can be associated with the collection of actors’ partial objectives{F} by assigning weights λ_i’s to the partial objectives: S {C} = λ₁(f₁) + λ₂(f₂) + … + λ_k (f_k). This formal argument implies that any classification scheme {C}^j, j =1, …, s generates a different collection of partial objectives f₁(c₁), f₂(c₂), …, f_k(c_k). Switching, say, from classification scheme {C}¹ to classification scheme {C}² involves switching from one set of objectives {F}¹ to another set {F}². This argument highlights the central role of classification schemes in determining both the formulation of actors’ objectives and the way in which those objectives are weighed against one another in determining a collective objective.

This stepwise procedure refers to the derivation of actors’ ‘collective’ or ‘synthetic’ objectives from actors’ partial objectives, and should be distinguished from ‘systemic interest’, which is a structural property. As we have seen in the previous discussion, different classification schemes are often associated with different policy domains, so that the embedding of policy objectives is bound to change depending on which collection of actors is considered and which set of weights is attached to them.

In spite of the open-endedness of policy objectives derived from a synthesis of the partial objectives of different individual or collective actors, embedded policy-making suggests a way by which those partial objectives can be made mutually consistent, not so much through a synthesis reflecting actors’ differential assignments of weights to objectives as through the explicit constraining of partial interests by a common systemic condition (see Chapters 4 and 6). In this context it is important to distinguish between the different levels at which actors’ partial interests may be expressed. Actors’ relative positions and interdependencies suggest a first-level synthesis based on actors’ relative weight and influence. This type of synthesis is often thought as stemming from political compromise or conflict, and it is likely to suggest a trade-off between the partial objectives of different actors. It is a synthesis conducive to the ‘realist’ investigation of collective choice solutions in terms of the relative influence of different socioeconomic groups (de Finetti, Reference de Finetti1979) or to the collective choice paradoxes stemming from the discovery of lack of congruence between different normative goals (Arrow, 1951, Reference Arrow, Durlauf and Blume2008; Arrow, Sen, and Suzumura, Reference Arrow, Sen and Suzumura1996; Sen, Reference Sen1977, Reference Sen1999b, 2017 [1970]).

The synthesis between actors’ objectives takes a different character if we switch from the weighing of actors’ partial objectives to the issue of whether any synthesis of those objectives meets systemic conditions for the sustainability (survival) of the political economy under consideration. In this light, the distinction introduced in the previous chapters between the ‘material constitution’ of a polity (in the sense of the relatively persistent ordering of social forces allowing that polity to survive as a political and legal body), and its economic constitution (in the sense of the relatively persistent structuring of activities allowing that polity to meet the fundamental economic needs of its members) is key.Footnote ³

The material constitution provides a relatively stable framework allowing actors to reach a synthesis of partial objectives compatible with the existing economic order of society. Several different syntheses of partial objectives are compatible with a given material constitution, but there may be other syntheses (whether attained by compromise or conflict) that are not. This suggests interpreting the material constitution as a condition for the existence of a certain political body (body politic). The material constitution may act as a constraint on policy-making, in the sense that it excludes policies whose implementation would endanger the very existence of the fundamental (and often implicit) covenant on which the political body is based.

The economic constitution provides a relatively stable framework for the interdependence between economic activities. It covers the institutional and organisational arrangements allowing division of labour and transactions between actors as well as the resulting network of material flows sustaining the functioning of the economic body. In this case too, several different syntheses of actors’ partial interests are compatible with a given economic constitution. However, it also possible that actors are inclined to attain, by compromise or conflict, political-economic syntheses that are not compatible with the existing economic constitution. This may happen when a political synthesis clashes with institutional or organisational arrangements governing the division of labour and established modes of coordination, but it may also happen, at a more fundamental level, when actors reach a political-economic synthesis incompatible with the viability condition ensuring the maintenance of essential material flows over time (Hawkins and Simon, Reference Hawkins and Simon1949; Pasinetti, Reference Pasinetti1977).

An economic constitution is a multi-layered arrangement of institutional and/or organisational linkages and material interdependencies that are often subject to different modes of connectivity. As a result, there may be political-economic syntheses that are wholly or partially incompatible with the existing economic constitution. For example, a given political-economic synthesis may be compatible with the existing institutional/organisational arrangements but not with the viability condition associated with existing technology, capabilities, and resources. Alternatively, a certain political synthesis may be within the range of the material networks compatible with existing technology, capabilities, and resources but could be incompatible with the existing institutional and organisational framework of society. The multi-layered character of an economic constitution suggests the existence of a hierarchy of conditions that constrain the attainment of a synthesis between different actors’ partial interests. Political (and policy) syntheses falling within the range of existing institutional and organisational arrangements may appear to be consistent with the systemic interest of the economic body. However, those syntheses may be incompatible with the viability condition allowing maintenance over time of the material foundation of that body. This potential source of tension within the economic constitution requires central attention when assessing the extent to which a policy derived from the synthesis of partial interests is compatible with the existing constitutional set-up of society.

Policy embeddedness involves not only the setting of objectives but also the identification of actions taken to implement those objectives. This means that actions instrumentally taken to achieve objectives must be feasible under higher-order constraints expressing the constitution of both the economic body and the body politic. These constraints are directly relevant for what concerns the relative motions required from different actors along the transitional path associated with the implementation of any given policy. Identification of the latter constraints is a necessary condition of embedded policy-making. For certain policy actions required on a particular implementation trajectory may induce changes in actors’ relative positions that are not compatible with the existing pattern of structural invariances and the associated pattern of feasible relative motions. The feasibility stage of policy assessment presupposes the ability to follow the sequence of economic and social transformations resulting from policy implementation through the web of interdependencies that characterises the policy domain. As we have seen, interdependencies may be mapped differently depending on which classification scheme is adopted. For example, the relationships between production processes highlight different transitional paths depending on whether, in the context under consideration, horizontal interdependence between industries or vertical interdependence between vertically integrated sectors (supply chains) is more prominent. Different constraints are relevant depending on the prevailing pattern of interdependence. This means that policy actions theoretically effective in achieving a certain policy objective may or may not be actually feasible depending on which pattern of interdependence is dominant in the given context.

A similar argument applies to the assessment of policy outcomes. As we have seen, embedded policy-making requires that the success or failure of a given policy action be assessed not only in view of the declared policy objective but also considering whether policy implementation generates unintended benefits or damages in other spheres of the economic-political system. Policy embeddedness requires that the state of the economic-political system after policy implementation be compatible with the range of constraints that expresses in its full complexity the objective constitution of the relevant social domain.

To conclude: policy embeddedness requires a structural heuristic, by which what constitutes a given polity at any given time must be evaluated considering both which relationships between actors are relatively invariant and which ones are subject to flexibility in the relevant context. In the following sections we shall explore the consequences of embedded policy principles in the fields of industrial policy, liquidity policy, and international trade policy.

7.3 Industrial Policy: Structural Interdependencies and the Governance of Production

Supply chains are the backbone of a production system based on advanced division of labour (see Chapter 3). This means that division of labour, once it has moved to the stage of coordination between activities supplying and/or receiving intermediate products from other activities, involves a complex network of interdependent stages of production. These interdependencies provide the structural framework for policy measures aimed at facilitating the working of the existing pattern of division of labour, or to induce a shift to a different pattern of interdependence. Embedded industrial policy is a means of intervening in the network of production interdependencies by triggering certain patterns of connectivity in the light of systemic objectives, such as full or satisfactory employment, manufacturing growth and whole-economy expansion, environmental sustainability, or resilience to systemic shocks.

This view of industrial policy makes it necessary to evaluate the objectives, implementation strategy, and results of industrial policy by considering the constitution of political economy. The determination of policy objectives is a contentious issue in the industrial policy literature. It has been argued that targeting specific activities or supply chains can make industrial policy vulnerable to particular sectoral or group interests, or to informational gaps, thus turning it into a channel for misallocating resources (Baldwin, Reference Baldwin1969; Bhagwati, Reference Bhagwati1982; Morris and Stout, Reference Morris, Stout and Morris1985; Ades and Di Tella, Reference Ades and Di Tella1997; Pack and Saggi, Reference Pack and Saggi2006; see also, on the political influence of industrial interests, Ferguson Reference Ferguson1995; Ferguson, Jorgensen, and Chen Reference Ferguson, Jorgensen, Chen, Cardinale and Scazzieri2018, Reference Ferguson, Jorgensen and Chen2019). On the other hand, it has also been maintained that industrial policy can be an effective instrument for achieving objectives that require a sustained concentration of resources in specific production activities, as is often the case at critical stages of the industrialization process (Hamilton, Madison, and Jay, 2003 [1788]; Gioja, Reference Gioja1819; List, Reference List1904 [1841]; Rosenstein Rodan, Reference Rosenstein Rodan1943; see also Hirschman, Reference Hirschman1958; Ames and Rosenberg, Reference Ames and Rosenberg1963; Amsden, Reference Amsden1997; Perez and Soete, Reference Perez, Soete and Dosi1988; Chang, Reference Chang1993; Arora, Landau, and Rosenberg, Reference Arora, Landau, Rosenberg, Mowery and 226Nelson1999; Mazzucato, Reference Mazzucato2018; Chang and Andreoni, Reference Chang and Andreoni2020).

Embedded industrial policy shows a way to overcome the above duality by calling attention to the different policy actions that are required depending on the classification of productive activities, their level of aggregation, and the timing of the corresponding policy objectives (Ames and Rosenberg, Reference Ames and Rosenberg1963; Reinert, Reference Reinert1995, Reference Reinert1999; Chang, Reference Chang2003; Andreoni, Reference Andreoni, Noman and Stiglitz2016). As we have seen in Section 7.2, switching from one classification to another can trigger a shift from one collection of actors’ objectives to another. This has important consequences for identifying the systemic condition relevant to any given collection of partial objectives. For instance, a classification by industry suggests a systemic interest coinciding with the ‘viability’ of the set of interdependent industries, that is, with the capacity of interdependent industries to reproduce itself by supplying one another’s intermediate inputs (Hawkins and Simon, Reference Hawkins and Simon1949; Pasinetti, Reference Pasinetti1977; Bellino, Reference Bellino2018) (see Chapter 4).

In this case, a collection of industries such as I₁, I₂, …, I_k may generate a collection of partial objectives such as {F} ≡ {f₁(I₁), f₂(I₂), …, f_k(I_k)}, which may be weighed against one another by assigning weights to industries that correspond to industries’ shares in gross domestic product or total employment. As we have seen, the viability condition allows certain proportions between industries while excluding others (Sraffa, Reference Sraffa1960). This means that a given collection of industrial interests may be compatible with the viability of the system of interdependent industries provided the weights λ_i’s attached to industrial interests f₁(I₁), f₂(I₂), …, f_k(I_k) are subject to the proportionality condition {λ_1,λ₂, …, λ_k } ∈ {Λ}, where Λ is the set of industrial proportions {Λ₁, Λ₂, …, Λ_k} compatible with the viability of the industrial system under consideration.

If we switch to a classification of production activities based on supply chains (vertically integrated sectors delivering a particular consumption or investment good, or a particular collection of such goods), we may ‘generate’ a completely different industrial policy objective. In this case, the relevant classification scheme is a collection of vertically integrated sectors such as V = {V₁, V₂, …, V_s}, which may give rise to a collection of partial objectives such as {f₁(V₁), f₂(V₂), …, f_k(V_k)}. The switch from these partial objectives to a collective objective corresponding to a systemic condition requires attaching weights to these objectives, which may express the employment shares of the different supply chains, or their shares in the gross production of the collection of supply chains under consideration. In this light, a systemic interest identified with full employment can be expressed by a macroeconomic consistency condition such as $\sum _{i=1}^k {\lambda }_i=1$ (by this condition the employment shares of all supply chains add up to 1) (see Pasinetti, Reference Pasinetti1993, pp. 20–22). However, there is no a priori guarantee that the vertically integrated sectors generating supply chains only include activities belonging to the same economic-political system. Indeed, it is often the case that supply chains consist of components belonging to different economies. As a consequence, the condition for full employment may be satisfied for the whole collection of supply chains as it encompasses a plurality of polities, but not at the level of each economic-political system contributing to one or more supply chains.

There is no a priori reason why the means to achieve a policy objective under a certain classification of activities would also be compatible with the policy objective identified under a different classification of the same activities. For example, the employment shares compatible with systemic viability under a classification by industry are unlikely to coincide with the employment shares that allow full employment under a classification by vertically integrated sectors. This argument leads to the conclusion that industrial policy may follow a plurality of routes depending on the way in which productive activities are grouped together. Switching from one classification to another indicates different ways in which a systemic objective may be identified on the basis of different arrangements of actors’ interests.

A classification by industry highlights a condition (systemic viability) that is embedded in the mutual dependence of activities delivering intermediate inputs to one another. On the other hand, a classification by vertically integrated sectors highlights a systemic interest associated with total employment and its splitting between sectoral employment shares independently of the viability of interindustry product flows in the economic system under consideration. Changing from one classification of activities (and partial interests) to another entails switching from one route to another in the identification of systemic interest. This conceptual framework brings into focus a policy heuristic aimed at identifying the systemic interest that arises from the prevailing pattern of actors’ interdependence in each context.

It is worth noting that the dynamic pattern followed by stakeholders’ interdependence may be central to determining the outcome of policy actions: a policy designed on the basis of a given constellation of stakeholders’ objectives may be thwarted along its implementation trajectory due to a change in the prevailing constellation of interests:

The above situation gives rise to the distinction between ‘progressive coalitions’, that is, a coalition of stakeholders supporting transformation, and ‘regressive coalitions’, that is, a coalition of stakeholders opposing change (Bianchi and Miller, Reference Bianchi and Miller1996; see also Olson, Reference Olson1971 [1965], 1982).

Embeddedness is central in the implementation of industrial policy and in the assessment of its outcomes. As argued in the previous section, policy implementation can be a protracted process, in which a policy action intended to uniformly address a plurality of industrial activities (‘horizontal’ industrial policy) may bring about significant asymmetries between industries, territories, social groups, and so on. On the other hand, policy actions targeting specific activities considered to be of strategic importance may trigger a diffusion process affecting a much larger range of activities, which may eventually encompass the whole economic system (Chang, Reference Chang2003; Best, Reference Best2019). One example could be the possible application of anti-trust legislation to the case of technology platforms (Coyle, Reference Coyle, Moore and Tombini2018, Reference Coyle2019; Pabst, Reference Pabst2019).

The interplay of intended and unintended outcomes is central to assessing policy embeddedness (Bianchi, Reference Bianchi1992; Sainsbury, Reference Sainsbury2020; Cai and Harrison, Reference Cai and Harrison2021). Horizontal industrial policy may be deeply asymmetrical in its implementation and final outcome (Bianchi, Reference Bianchi1992; Bianchi and Labory, Reference Bianchi, Labory, Cardinale and Scazzieri2018; Aiginger and Rodrick, 2020), while targeted industrial policy may generate either a lifting up of the whole industrial system (Rosenstein Rodan, Reference Rosenstein Rodan1943; Lee and Lim, Reference Lee and Lim2001; Best, Reference Best2018, Reference Best2019; Di Tommaso and Tassinari, Reference Di Tommaso and Tassinari2017; Di Tommaso et al., Reference Di Tommaso, Tassinari, Barbieri and Marozzi2020) or a systemic decline of the economy as a whole (Bauer, Reference Bauer1971; Krueger, Reference Krueger1990; Williamson, Reference Williamson2000), depending on the nature of backward and forward linkages within economic structure as a network of production flows (Hirschman, Reference Hirschman1958; Antràs et al., Reference Antràs, Davin, Thibault and Russell2012; Andreoni, Chang, and Scazzieri, Reference Scazzieri, Sinha and Thomas2019; Liu, Reference Liu2019). As a result, the duality between horizontal and vertical policies gives way to a more nuanced picture, which requires considering complex patterns of interdependence and criss-crossing transitional paths as a necessary condition for the design and implementation of embedded policy actions (Andreoni and Chang, Reference Andreoni and Chang2019). The embedded policy framework highlights the context-dependence of industrial policy in its formative and implementation stages, as well as the context-dependence of its outcomes.

7.4 Structural Liquidity and Embedded Credit Policy

Asymmetrical needs for intermediate inputs or final consumption goods characterise the division of labour in a system of interdependent activities. Division of labour, in its simplest form, consists of specialised processes delivering final consumption goods to actors who may or may not be producers themselves, but who are the source of a generic (i.e. non-specialised) demand for goods.Footnote ⁴ In this case, not all consumers make use of their purchasing power at the same time and/or to the same degree at any given time. As a result, debt-credit relationships may arise between individual or collective actors, for some purchasing power may be shifted from actors holding it at a given time, but not needing it at that time, to actors needing it but not having it at the same time. A more advanced division of labour includes specialisation in production processes delivering goods that may enter one another’s production as intermediate inputs. In this case, an additional time asymmetry may arise. For production processes would generally be of different time lengths, so that long-lasting processes may need extended sequences of intermediate inputs without delivering finished products for a significant time interval (Strigl, 2012 [1934]). Here, ‘material’ debt-credit relationships also arise, but they would be different from those characterising the simplest pattern of division of labour considered above. For we may think of the relationship between long and short processes as a type of borrowing and lending situation, in which the short processes lend liquidity to long processes allowing these processes to reach completion in spite of the longer time they take to reach the finishing stage. Advanced division of labour reveals debt-credit relationships embedded in the interdependencies between specialised processes delivering inputs to one another.

The lack of synchronization between production and consumption activities, as well as between interdependent production processes, generates a type of liquidity (structural liquidity) that arises from within the relational structure associated with division of labour itself (Cardinale and Scazzieri, Reference Cardinale and Scazzieri2016; see also Kyotaki and Moore, Reference Kyotaki and Moore1997; Costabile and Scazzieri, Reference Scazzieri, Galavotti, Scazzieri and Suppes2008; Costabile and Nappi, Reference Costabile, Nappi, Costabile and Neal2018). In this case, the central mechanism is the lack of synchronization between specialised activities. This lack of synchronization highlights an important, yet generally neglected, advantage of division of labour. The splitting of complex processes into specialised processes allows the simultaneous activation of specialised processes that are not directly synchronized with one another. Lack of synchronization is already manifest in the simplest pattern of division of labour (pure labour economy) and takes increasing momentum as we move to increasingly advanced forms of division of labour. This lack of synchronization makes division of labour a source of flexibility and leverage for a production economy.

Structural liquidity highlights the potential for liquidity policy as an instrument to enhance coordination over time while also removing bottlenecks and increasing the intertemporal flexibility of the economy. However, the embeddedness of liquidity policy also reveals the conditions that need to be satisfied for its potential to be fulfilled.

In a pure labour economy, with division of labour but no transfer of intermediate goods between production processes, interdependence is reduced to the matching between the composition and timing of different consumer demands. In this case, policy determination is simplified by the pure labour assumption, as this assumption excludes the relevance of levels of aggregation and hierarchies for production processes: all specialised processes are, by assumption, self-contained. In this scenario, the shift from partial objectives associated with individual processes to a systemic objective associated with the polity as a whole may take place in a single step by assigning specific weights to the objectives (interests) associated with different specialised activities. On the other hand, policy implementation is subject to a more complex set of conditions depending on whether we consider a short or long time-horizon.

In a short time-horizon, short processes deliver finished goods, while long processes may only ‘release’ semi-finished products that are not yet ready for consumption. The short-run matching between producers’ specialisation and demand composition requires debt-credit relationships allowing the long processes to be carried out in spite of the extended turnover time of the working activities invested in them. In this case, a full employment objective is likely to require a selective credit policy shifting liquidity from short processes to long processes, so that a sufficient number of the latter processes can be carried out in spite of their longer duration. A necessary condition for successful liquidity policy is therefore that credit conditions be attractive to both categories of actors (namely the actors associated with short and long processes respectively). This means that lending conditions open to short processes should be attractive enough to trigger sufficient flows of funds from short to long processes, while borrowing conditions available to long processes should induce these processes to take sufficient loans from short processes (Cardinale and Scazzieri, Reference Cardinale and Scazzieri2013, Reference Cardinale and Scazzieri2016; Scazzieri, Reference Scazzieri, Cardinale, Coffman and Scazzieri2017).

A successful liquidity policy must strike a balance between seemingly opposed lenders’ and borrowers’ interests.Footnote ⁵ The balancing between lenders’ and borrowers’ interests, which may look difficult to achieve if we think of homogeneous credit arrangements across the macroeconomy, looks more realistic if we think of differentiated debt-credit arrangements between groups of producers connected with one another by the division of labour. This may happen if, say, workers specialised in short process A are prepared to lend liquidity to workers specialised in long process B at favourable lending conditions in so far as workers specialised in process B are prepared to deliver goods to workers specialised in process A at favourable selling conditions. In this case the effectiveness of monetary policy depends on the existence of differentiated credit facilities available to different groups of borrowers and lenders.Footnote ⁶

More advanced forms of division of labour involve the utilisation of intermediate products specialised in a particular task or narrow set of tasks. This is likely to increase the asymmetries between the time profiles of production and/or utilisation of different products. For greater task-specialisation is likely to increase the differences between delivery and utilisation times of different intermediate products. As Charles Babbage noted in his Economy of Manufactures (Babbage, Reference Babbage1835), division of labour in manufacturing allows greater precision in the assignment of tasks to workers (as well as to tools and machines) within the productive establishment (Babbage, Reference Babbage1835, pp. 175–176; see also Scazzieri, Reference Scazzieri1993, Reference Scazzieri2014a). Nicholas Georgescu-Roegen emphasised a different yet complementary line of investigation identifying conditions for the continuous utilisation in the individual establishment of a specific category of productive inputs (what he called fund factors).

In Georgescu-Roegen’s terminology, fund factors are productive inputs that are permanently available in the establishment without being necessarily in use (Georgescu-Roegen, Reference Georgescu-Roegen, Papi and Nunn1969, Reference Georgescu-Roegen1970; see also Landesmann, Reference Landesmann, Baranzini and Scazzieri1986; Scazzieri, Reference Scazzieri1993). Georgescu-Roegen identified a sufficient condition for continuous fund-factor utilisation in the ‘staggering’ of elementary production processes within the establishment, which would allow reduction/elimination of idle times of fund factors by switching them from one productive task to another. This condition, which may be implemented in factory forms of production organisation, is different from the condition that allows continuous fund-factor utilisation in forms of production organisation of the ‘job shop’ type, such as craft production or other forms of product customisation. In this latter case, a necessary condition for continuous fund-factor utilisation is a sufficient degree of variety and proportionality between the different processes carried out in the workshop (Scazzieri, Reference Scazzieri1993, pp. 115–116). This condition makes ‘job shop’ production suitable to conditions of volatile demand but unsuitable to conditions of large-scale production for specific goods (see also Chapter 3).

Greater precision in the assignment of tasks has far-reaching consequences when associated with the introduction of processes specialised in making task-specific tools or machines. In this case, proportionality requirements extend from the individual establishment to the whole economy, or at least to the productive sub-system involved in manufacturing production. This generates a set of trade-offs between: (i) the proportionality requirements ensuring full-capacity utilisation of capital goods specialised in executing specific tasks (or sets of tasks) (by the Babbage law of multiples, which we discussed in Chapter 3); (ii) the proportionality requirements ensuring continuous utilisation of those capital goods over time (by Georgescu-Roegen’s condition for the continuous utilisation of fund inputs); and (iii) the proportionality condition ensuring the synchronization between different time profiles for the production and utilisation of different specialised capital goods.

Debt-credit relationships are primarily associated with proportionality condition (iii), and their effectiveness may depend on what is the dominant pattern of interdependence between production processes in the economy under consideration. Dominance of a ‘horizontal’ pattern of interdependence may require industry-specific, or even process-specific, liquidity provision, while dominance of a ‘vertical’ pattern of interdependence may require liquidity provision designed and implemented at the macroeconomic level (Scazzieri, Reference Scazzieri, Cardinale, Coffman and Scazzieri2017). On the other hand, liquidity policies aimed at coordination over time (synchronization) of specialised and interdependent processes may be incompatible with the Babbage condition for the full employment of workers and/or capital goods at any given time, or with Georgescu-Roegen’s condition for the continuous utilisation of workers and/or capital goods over time (Cardinale and Scazzieri, Reference Cardinale and Scazzieri2016).

The conditions for embedded liquidity policy are likely to change in the presence of structural dynamics involving changes in production and consumption structures. In this case, the design of liquidity policy needs to identify expected or desired patterns of division of labour and demand composition as prerequisite for the effective synchronization of economic activities. This requirement is especially stringent when technical changes involve shifts in the hierarchy of processes within the production system, and the formation of new hubs of connectivity between processes. For example, interdependence between individual specialised processes may be different from interdependence between sets of processes performing the same function in different production networks, which may in turn be different from interdependence between different production networks.Footnote ⁷ As we have seen, determination of a policy objective involves the assignment of weights to the partial interests of actors’ or actors’ groups (see Section 7.2). This implies that the conditions of embedded credit policy under technical change are likely to vary depending on which pattern of interdependence is expected (or desired) for the political economy under consideration.

Policy is also likely to vary depending on changes in the time horizon of policy makers: a longer time horizon is more likely associated within increasingly complex and multi-layered patterns of interdependence. In the medium and long-term interdependence in a complex network of debt-credit relationships is likely to increase the likelihood of feedback loops that may lead to undesired outcomes. For example, ‘increasing capital/liquidity and other requirements [for banking firms] during a prolonged recessionary phase implies that all banks try to simultaneously tighten the lending standards. But this may lead to a negative perverse loop: economic activity falls with a further deterioration in the credit quality of banks’ portfolios, and hence with higher capital requirements’ (Masera, Reference Masera, Cardinale and Scazzieri2018, p. 495; see also Crockett, Reference Crockett2000; Masera, Reference Masera2015).

The above argument brings into focus the complexity of embedded liquidity policy. In particular, it highlights the need to overcome the conventional dichotomy between ‘austerity’ and ‘expansion’, which constrains liquidity policy within the straitjacket of a black box view of the economy. What is needed is switching to a structural, embedded view of liquidity needs identifying which credit provisions are compatible with the economic and political constitution of society and with the dominant pattern of division of labour in it (Cardinale and Scazzieri, Reference Cardinale and Scazzieri2013, Reference Cardinale and Scazzieri2016, Reference Cardinale and Scazzieri2017; Cardinale, Coffman, and Scazzieri, Reference Cardinale, Coffman, Scazzieri, Cardinale, Coffman and Scazzieri2017a, b; Scazzieri, Reference Scazzieri, Cardinale, Coffman and Scazzieri2017).

7.5 International Trade: Multi-Level Arrangements and Relation-Specific Policy

International trade highlights multiple levels of interdependence between economic units, such as countries trading finished goods between themselves, or industrial sectors trading intermediate goods between countries. International trade policy of the embedded type requires a heuristic capable of disentangling the different domains of collective action in which policy objectives are determined as well as the multiple levels of interdependence involved in the implementation of policies. This approach highlights the context-dependent character of the free trade versus protection duality, as it calls attention to the existence of multiple possible cleavages and alliances between actors, who may alternatively support free trade or protection (or any combination therefrom) depending on their position in the local and international environment (Cardinale and Landesmann, Reference Cardinale, Landesmann, Cardinale, Coffman and Scazzieri2017, Reference Cardinale and Landesmann2022; see also, for two opposed classical viewpoints on free trade versus protectionism, Haberler, Reference Haberler1964, and Prebisch, Reference Prebisch1951, respectively).

International trade indicates different policy domains depending on which classification of economic units is adopted (see Stone, Reference Stone1962, for the role of multiple classifications in economic and social analysis). For example, classification of economic units by trading countries or trading blocks (such as China, the European Union, and the United States) shows policy domains that coincide with different ‘trading aggregates’ independently of the internal plurality of interests (and partial policy objectives) characterising each aggregate. In this case, each policy domain leads to the identification of a synthetic policy objective that only implicitly derives from the assignment of weights to the different interests (partial objectives) of different actors in each trading aggregate.

This weighing process often entails attaching weights to different trade policy options, seeing that different actors in each trading aggregate may have different, and sometimes opposed, attitudes to trade policy options, such as protection versus free trade. This weighing of partial interests may lead to a variety of outcomes as in certain cases the process may lead to a collective objective which may require the adoption of a uniform policy across all actors in the economy, while in other cases the composition of partial interests may lead to a heterogeneous policy mix allowing a different trade regime for different activities or groups of activities belonging to the same trading aggregate.

Classifications of trade activities between units different from trading countries or trading blocks may lead to different compositions of the partial interests of relevant actors. For example, economic units can be industries or vertically integrated sectors, and the synthesis of partial interests (partial objectives) into a collective objective (which may or may not be associated with a systemic condition) would involve the assignment of weights to economic aggregates consisting of elements belonging to different countries or different trading blocks.

Here we meet a completely different type of international trade. For in this case trade gets detached from formal ‘political’ units (such as trading countries or trading blocks) and highlights domains in which non-state actors may jostle for influence independently of conventional policymaking practices. The role of non-state actors is often key in explaining policy decisions at state level concerning international trade (Mamalakis, Reference Mamalakis1969, Reference Mamalakis1992; Baldwin, Reference Baldwin1989; Milner, Reference Milner1999; Daunton, Reference Daunton and Narlikar2010, Reference Daunton2018) and may suggest ways to identify patterns of systemic interest (and possible trade arrangements) under conditions in which exchange between political units such as nation states or trade blocks would not allow clear-cut policy decisions between unfettered free trade and a degree of protection.

Paul Samuelson discusses this situation when acknowledging that ‘sometimes free trade globalization can convert a technical change abroad into a benefit for both regions; but sometimes a productivity gain in one country can benefit that country alone, while permanently hurting the other country by reducing the gains from trade that are possible between the two countries’ (Samuelson, Reference Samuelson2004, p. 142). In this connection Samuelson highlights that ‘[i]f the past and the future bring both Type A inventions that hurt your country and Type B inventions that help – and when both add to world real net national product welfare – then free trade may turn out pragmatically to be still best for each region in comparison with lobbyist-induced tariffs and quotas which involve both perversion of democracy and non-subtle deadweight distortion losses’ (Samuelson, Reference Samuelson2004, pp. 142–143). However, he also acknowledges that a situation in which ‘worldwide real income per capita does gain net, so that winners’ winnings will suffice worldwide to more than compensate losers’ losings’ may only bring ‘some cold comfort in a scenario of many semi-autonomous nations’ (Samuelson, Reference Samuelson2004, Abstract).

Identification of systemic interest and of a synthetic policy objective reflects a variety of classification schemes depending on which visualization of trading aggregates is adopted. For instance, international aggregates reflecting the classification of activities by industry may be entirely different from aggregates reflecting the classification of activities by vertically integrated sectors (supply chains). Non-state interests based on classification by industry highlights partial objectives associated with aggregates such as the oil industry, the gas industry, or the steel-making industry. In this case, a virtual policy domain may reflect conflict and/or compromise between different industrial interests, and a synthetic objective may or may not involve state action depending on circumstances. A classification by vertically integrated sectors would generally highlight a different constellation of partial interests, which may be associated with the aggregation of partial interests by supply chain (say, the supply chains for cars, electronic devices, textiles, medical equipment, and so on).

Non-state constellations of interests may or may not give rise to an ‘active’ policy domain depending on whether a significant systemic interest may be visualized across different international actors (say, across actors belonging to the same global industry, or across actors belonging to the same supply chain). Multinational corporations provide a classic instance of unconventional international trade of the ‘intra-firm’ type. In their case, it has been argued that ‘the world as a whole’ benefits from their presence, even if ‘these gains accrue disproportionately to countries whose factor endowment is such that, in the absence of multinationals, they would have few national firms’ (Markusen and Venables, Reference Markusen and Venables2000, p. 231). On the other hand, ‘there may be welfare loss for a country which, in the absence of multinationals, has a large share of the world industry’ (Markusen and Venables, Reference Markusen and Venables2000, p. 231).

A policy objective generated by a non-state constellation of interests may or may not require the action of state actors, or other political actors, depending on the character of the non-state policy domain and of the systemic interest associated with it. Policy domains generated by non-state actors are generally virtual fields that may be activated under particular circumstances, as shown by the contrasting cases of OPEC (Organization of the Petroleum Exporting Countries), which is still an important actor in the relevant sphere of international trade, and of IBA (International Bauxite Association) and APEF (Association of Iron Ore Exporting Countries), which are no longer active.

7.6 Systemic Challenges, Resilience, and Policy Actions

Systemic challenges have recently acquired increased relevance due to the need to confront the current and expected consequences of climate change, pandemic crises, energy crises, and geo-political shifts. Policies demanded from nations states, supranational bodies, international organisations are increasingly seen as responses to challenges threatening the way of life, and sometimes even the survival, of societies around the globe. Policy responses to systemic challenges demand a comprehensive approach to policy design and implementation that makes embedded policy-making a necessary route to follow. Responding to systemic challenges requires a heuristic able to identify whether a challenge is truly of a systemic character, to differentiate between types of systemic challenges and corresponding types of systemic responses, and to detect at which level of the political-economic system an effective response can be found and implemented. Embedded policy-making under conditions of systemic crisis should follow the sequence of steps below:

1. (i) First, determining whether the challenge threatens the whole system, or only parts of it;

2. (ii) Second, identifying the time horizon of the challenge and the corresponding time horizon of a policy response to it;

3. (iii) Third, determining at which layer of the system’s internal hierarchy policy actions can be designed and implemented;

4. (iv) Fourth, assessing whether effective policy actions can be designed and implemented as a composition of partial interests under the existing political constitution; whether they can be designed and implemented under the existing economic constitution; whether they presuppose a transformation of the economic body (such as a radical technology shift); whether they presuppose a transformation of the body politic (such as a fundamental change in the rules and procedures for collective decision-making); whether they presuppose a transformation of the social body (such as fundamental change in the dispositions and modes of association in society linked to cultural and demographic developments).

It is important to emphasise that in order to assess the ability of a given political economy to withstand systemic challenges, political economy’s vulnerability and resilience have to be addressed. Vulnerability may be defined as a system’s ‘susceptibility to harm, powerlessness, and marginality’ both from the physical and social point of view (Adger, Reference Adger2006, p. 269). On the other hand, a system’s resilience may be defined as ‘capacity to self-organise’ by adapting ‘to emerging circumstances’ (Adger, Reference Adger2006, pp. 268–269), even if we should also take into account the earlier view expressed by Herbert Simon and Albert Ando, according to whom the system’s resilience also expresses the system’s capacity to withstand shocks by a process of ‘diminished propagation’ across the different layers of a system’s hierarchical structure (Simon, Reference Simon1962; Simon and Ando, Reference Simon and Ando1961).

Simon and Ando outlined the above view of resilience when discussing the dynamic properties of near-decomposable systems:

Simon and Ando’s view entails that, due to the dominance of stronger ties within subsystems and of weaker ties between subsystems, shocks impacting specific subsystems may take a significant length of time to influence the whole system’s behaviour. This pattern of interdependence may provide some ‘buffering time’ for the system to absorb the shock, as a result either of the gradually diminishing strength of perturbation, or of the system’s restructuring to enhance its own resilience. However, the relationship between the timing of structural transformation needed to meet systemic challenges and the timing of feasible policy responses is a problematic one, due to the specific timing constraints within the political sphere.Footnote ⁸

A heuristic of systemic challenges is a necessary condition for the effective design and implementation of policy responses. The first task of such heuristic is to identify the system level that is most directly affected by the challenge. Is it the contingent political synthesis of actors’ partial interests, or the ‘material constitution’ ensuring the long-term continuity of the political body, or the viability condition allowing the long-term continuity of the economic body? The constraints, opportunities, and requirements for effective policy-making will be different depending on the type of challenge that the system is facing. It is also important to emphasise that challenges may impact on a political economy in different ways depending on the time horizon in which the challenge makes itself felt. For example, the most evident impact of a pandemic crisis involves the short-term and demands an immediate response; energy crises and geo-political shifts may affect systems across short- and medium time horizons and are therefore likely to require a mix of short- and medium-term policy responses; climate change is likely to have short-, medium- and long-term effects, which may require policy responses across a wide range of different time horizons.

A policy response to systemic challenges may be more, or less, effective depending on: (i) the time horizon in which the challenge impacts the system; (ii) the level of the system’s internal hierarchy that is most directly affected by the challenge; and (iii) the congruence, or lack of congruence, between the time horizon of the challenge, the system level directly affected, and the system’s capacity to design and implement a resilience-enhancing response.

Effective policy responses to systemic challenges often requires the system’s capacity to undertake a transformation of its previous structure and mode of operation. However, the feasibility and likelihood of that transformation depends on the type of challenge and on the system level at which the transformation is required. There are cases in which a resilience-enhancing transformation may be achieved by mere restructuring of the political synthesis of different partial interests. These are relatively mild situations, which can normally be solved by compensation policies between socioeconomic groups. However, there are also crises that can only be addressed by transformation requiring a more fundamental change in the constitution of the political body, or in the viability condition ensuring the material sustainability of the economic body. In the latter two cases, it cannot be taken for granted that the economic-political system will have the capacity to visualize and implement the transformation needed to withstand the challenge.

Changes in a political economy’s structure and mode of operation are often a necessary condition for effective policy response to a systemic challenge. However, policy actions can affect system structure differently depending on how fundamental is the required resilience-enhancing transformation. There are cases in which an effective response can be found by modifying the weights (relative influence) between socioeconomic groups while leaving the ‘material’ constitution of the political body unchanged. However, there are also cases in which that constitution must be altered to allow for a more radical shift in the relative influence of actors in the political body. Finally, there are situations in which the viability condition associated with a given technological and organisational configuration of material flows is compatible with the reproportioning of economic activities required by resilience-enhancing measures, while in other situations effective resilience policies cannot be implemented unless the system switches to a different viability condition, which entails a more fundamental transformation in the material organisation of society.Footnote ⁹

To sum up: the effective response to a systemic challenge often requires from policy makers the capacity to move beyond the sphere in which different partial interests may found a synthesis by compromise or conflict. This is the sphere in which ‘normal’ political activity takes place, but systemic crises often require policy makers to directly address conditions of ‘systemic interest’ relative to the material constitution of the political body and/or to the viability of the nexus of material flows supporting the economic body.Footnote ¹⁰ The capacity to identify the fundamental conditions for sustainability of the political body and of the economic body is a prerequisite for policy makers to move beyond contingency and to avoid the ‘parametric myopia’ that could make them blind to the manifold alternative arrangements of partial interests and economic activities compatible with a given material constitution and viability condition. At the same time, the capacity to separate what is essential from what is not essential in the constitutions of the political body and of the economic body is a necessary condition for distinguishing ordinary transformations from fundamental structural changes. Implementing a response to systemic challenge compatible with the existing constitutions of the economic and the political body may be feasible but needs to be visualized as such by policy makers, who may otherwise be inclined to identify the fundamental structure of the economy and of the economic body, respectively, with a contingent synthesis of partial interests and/or a particular arrangement of economic activities. However, there may also be cases in which an effective response to systemic challenge cannot be found within the range of policy actions compatible with the existing constitutions of the economic and political body. These are cases in which a political economy faces a challenge that cannot be met except by shifting to a different constitution of the political body and/or to a fundamentally different organisation of material flows in the economic body.

To conclude this chapter: we have outlined a theoretical framework for embedded policy-making. At the core of policy embeddedness is the view of policy objectives as the result of a multi-layered arrangement of partial objectives and systemic conditions. At any level of aggregation of the actors who are relevant to policy determination, partial objectives may find a political synthesis that identifies the policy objective relevant for economic-political units at that level of aggregation (be it the local community, the region, the state, a multi-state polity). That synthesis may or may not be consistent with the systemic condition for the sustainability (‘systemic interest’) of the group of actors on behalf of whom the policy objective is determined. In a similar way, policy implementation takes place along a trajectory (policy traverse) in which policy outcomes at each stage and level of aggregation may or may not be consistent with the systemic interest of economic-political units at that level of aggregation, or with the objectives of particular actors at those levels of aggregation. Also, at any level of aggregation and stage of policy implementation, it is likely that some policy outcomes will be compatible with systemic interest while other outcomes will not. For a policy action thought to be sustainable to all involved actors at different levels of aggregation may end up delivering results inconsistent with the fundamental interests of some actors at a certain level of aggregation, and/or inconsistent with the systemic interest of the political economy as a whole.

Policy embeddedness brings attention to the constitutional features of policy-making, since both the determination of policy objectives and policy implementation are intertwined with the distribution of interests at the different layers of the polity under consideration. In particular, policy embeddedness requires consideration of the way in which the ‘political’ synthesis of partial interests is achieved at different levels of aggregation and stages of implementation, as well as assessment of the consistency (or lack of consistency) of ‘political’ syntheses with the systemic conditions for group viability (‘systemic interest’) and each level of aggregation and stage of implementation.

The embeddedness of policy-making brings actors’ interdependence to the fore and requires considering three distinct spheres of interdependence: (i) the identification of policy objectives within the hierarchy of partial and systemic interests as one moves across different levels of aggregation, and between different schemes for actors’ classification (say, by territorial membership, by industry, or by vertically integrated sector); (ii) the consideration of which alternative sequences of constraints may arise during policy implementation (different constraints may arise depending on which aggregation criterion is followed); and (iii) the assessment of which policy outcomes are compatible with the systemic conditions expressing the constitution of the economic and the political body.

8.1 Constitutional Principles and Transformation Maps

This book stands back from present and past divides in political economy in order to explore it as a sphere of intertwining economic and political relations. A distinctive feature of current debates in political economy is the duality between the contributions addressing the economy and the polity as instances of means-ends rationality belonging to the larger domain of allocation reasoning, and the contributions considering both domains as largely homogenous aggregates dependent on the actions taken by a sovereign decision maker. In contrast to both these conceptions, we theorise political economy as a multi-layered arrangement of ordering relationships that provide a degree of stability to the economic and the political sphere in the social domain. Accordingly, the constitution of a political economy coincides with the ordering principles behind the economic arrangements in each domain of political relevance and with the range of transformations compatible with maintenance of each domain’s fundamental identity. The constitution of a political economy is not a fixed constellation of relationships but a set of principles governing which conditions and transformations are feasible under the existing constitutional arrangements. This view of constitutional principles means that persistence and change are closely intertwined: a degree of persistence is required to ensure the identity and stability of a political economy, while openness to transformation is necessary to allow resilience to shocks and the introduction of improvements. We call this condition relative structural invariance.

The criterion of relative structural invariance emphasises a condition in which not all elements of a political economy can move together and/or at the same speed under the ordering principles defining the given constitution (see Chapter 5). As we have seen, relative structural invariance implies that magnitudes responding to a dynamic impulse tend to move by following a particular sequence of changes (or a particular range of such sequences), while excluding other sequences (see our reference, also in Chapter 5, to the conception of ‘order of sequence’ in Myrdal, Reference Myrdal1939). In a nutshell, certain final states of the economy and of the polity can only be envisaged for certain constitutions, and intermediate stages of transformation that are feasible under some constitutions may not be feasible under alternative constitutional arrangements. Our conception of the economic and the political constitution is inherently dynamic, but any given set of ordering principles only allows transformation in view of a certain range of final states, and according to a structurally constrained range of feasible sequences of change.Footnote ¹ There can be movements that are compatible with the ‘constitutional’ order of sequence and other movements that do not. This duality brings to light an important feature of dynamic processes in a political economy. On the one hand, ordering principles make certain responses to dynamic impulses possible while excluding others; on the other hand, the ordering principles themselves may change, driving the political economy to a different constitutional arrangement.

8.2 Dispositions, Interests, and Sequences of Change

Human dispositions are of central importance in inducing the way in which the constitution of a political economy responds to dynamic processes, both within the range of transformations compatible with the given constitution and outside it. We have explored the embeddedness of dispositions within existing social and economic interdependencies, pointing out that interdependencies draw actors towards certain actions while excluding others (see, in particular, Chapter 2). For example, the interdependencies associated with division of labour are of central importance in inducing individual and collective dispositions; at the same time, dispositions develop from the intertwining of rational awareness, imagination, and ‘protention’.Footnote ² This makes dispositions responsive to the social structures in which individuals and groups are embedded, but at the same time allows them to move beyond existing structures bringing about new patterns of interdependence and new forms of division of labour.

Chapter 2 examined dispositions as structuring elements of political economies. In that chapter we emphasised the multi-dimensional character of dispositions, seeing that reflexive and un-reflexive modes of thinking and acting interact with each other leading to a social body that is ‘split’ between the rational awareness of situations, and patterns of responsiveness driven by immediate sense experience and ‘phantasy’ (Doria, Reference Doria1724, Reference Doria1729; Vico, Reference Vico1709). The heterogeneous dispositions coexisting in the social body make the body politic (and to a certain extent also the economic body) potentially volatile and hardly conducive to a stable political and economic synthesis.

Our argument called attention to the dual route that is open to the body politic and the economic body in the search of a relatively persistent structuring of the interests arising within either domain. On the one hand, we have the route (which Doria and Vico suggested) of developing rational arguments compatible with the dispositions prevailing in the social body. This approach leads to the pursuit of a rational objective (a balance between the different interests and passions in the social body) by an appeal to sensus communis (common sense), which is often more responsive to verisimilitude and ‘phantasy’ rather than to fully argumentative reasoning. On the other hand, there is the route of rational imagination, which is driven by positional inversion and relies upon actors’ ability to fully understand and use counterfactual reasoning in the assessment of virtual situations. Adam Smith’s theory of social mirroring and the moral sense outlines a route to the governance of passions, both in individual actors and in the social body, which is based on rationally driven imagination. In Smith’s analysis, imagination can exert a moderating influence on passions by lowering the pitch of any passion to the level acceptable to an informed, and internalized, ‘impartial spectator’) (Smith, 1976 [1759]; see also Raphael, Reference Raphael2007).Footnote ³

The view of dispositions adopted in this study makes them central to the constitution of a political economy and highlights the embeddedness of dispositions in the relational make-up of society. This embeddedness reflects the positions of individual and collective actors in the division of labour and material interdependencies but, at the same time, highlights that dispositions are open-ended due to the multiple possible images compatible with any given pattern of interdependence, and to the combined influence of un-reflexive and reflexive thinking in the formation of those images. The open-endedness of the process from which dispositions arise brings to light that the constitution of a political economy, while rooted in objective (‘material’) interdependencies resulting from its history, is conducive to a variety of dynamic trajectories. A political economy will follow one or another trajectory depending on the interplay between structures and dispositions, and on which interests are identified on that basis. The identification of interests in the social body induces coalitions and cleavages in the political and the economic body and drives a political economy along a trajectory compatible with the ordering principles of its constitution, or makes that political economy to shift to a different constitutional arrangement.

Dispositions induce images of interdependence in the social body, and shape the interests that are likely to arise on that basis. In turn, interests are inherently relational, as the concept of ‘interest’ always denotes a distinction between certain objectives and other objectives. Such a distinction allows the identification of what is ‘the something peculiar’ (‘quid peculiare’) specific to individuals or groups (Althusius, 1614). This is a necessary condition for the emergence of social cooperation or conflict (see also our discussion in Chapter 2). As we have seen, a given pattern of interdependence (say, a given division of labour) may be compatible with multiple images of interdependence, and with alternative ways of identifying the interests of individuals or socioeconomic groups. Each economy as a ‘constituted body’ presupposes a particular way of representing the interdependencies arising from division of labour, which in turn leads to a representation of the way in which economic interests give rise to coalitions and cleavages in society. At the same time, each economic constitution may or may not be sustainable over time depending on whether there is a range of proportions between economic activities that allows the replication of the pattern of socioeconomic interdependencies associated with it. This range of proportions identifies the viability condition for the economic constitution under consideration (see Chapters 3 and 4). Our analysis emphasises that each viability condition may be compatible with different patterns of division of labour within a range of variation. Outside that range, the viability condition is not satisfied, and the political economy has to shift to a different constitutional arrangement. A similar argument applies to the body politic. Partial similarities and distinctions between individuals and groups give rise to a complex pattern of affiliations that is compatible with alternative ways of identifying the ‘collective interests’ of groups and with multiple images of interdependence between those groups. Each polity as a ‘constituted body’ presupposes a particular way of representing the interdependencies arising from group affiliations, which in turn leads to a representation of the way in which political interests give rise to coalitions and cleavages in society (see Chapters 5 and 6).

As we have seen, interests provide both bridges and cleavages between human beings embedded in structures of interdependence. The distinctions implicit when identifying the interests of individuals or groups bring to light what ‘lies between’ individuals or groups. At the same time, they also pinpoint that what makes individuals different from some other individuals may also be shared with yet other individuals. The same applies to social groups. In this way, a principle of division (and potentially of conflict) may also become a principle of association (and potentially of cooperation). Indeed, any given individual or group, may express different, and sometimes conflicting, interests. For this reason, group affiliations can be cross-cutting, so that cleavages may coexist with interpersonal bridges within the same social aggregate. In this light, we called attention to the distinction between partial interests and systemic interest, where systemic interest is the quid peculiare that makes the joint (and not necessarily cooperative) pursuit of partial interests in the economic and the political body possible. Our discussion in Chapters 6 and 7 emphasises systemic interest as necessary condition for the continued existence (viability) of the political body, which is conceived as a multi-layered arrangement of partial interests based on intermediate forms of association and agency. In this view, actors pursue their partial interests by weighing them against one another in view of a synthesis (a ‘collective interest’) that may be attained by compromise or conflict, and which may or may not be compatible with the viability condition for the economic body and the body politic.

8.3 Towards a Dynamic Theory of Political Economy

Our approach leads to a constitutionalist view of the political economy in which the relationship between the political body and the economic body is one of mutual dependence. Each economic body, conceived as a constituted body, is identified by a particular division of labour, by a specific representation of interdependencies between economic activities and socioeconomic groups, and by the corresponding dispositions and interests of individuals and groups in the economy. Dispositions and interests are also central in the constitution of the political body, seeing that each political body is identified by a particular definition of systemic interest and by the range of variation within which a given systemic interest can accommodate different ways of satisfying partial interests.

In short, each political economy presupposes an economic body in which relational structures associated with the existing division of labour generate dispositions and interests whose ‘synthesis’ in the political body may or may not be compatible with the existing economic constitution. There may be cases in which the political synthesis of partial interests is compatible with the viability condition for the economic body, but there can also be cases in which partial interests find a political synthesis that does not allow the persistence of the given economic body, or cases in which changes in the division of labour (e.g. changes resulting from a radical transformation of production technology) are no longer compatible with the received composition of interests in the political body. In either case of mismatch, the constitution of the political economy is likely to change by adjusting the economic body to the political body, or vice versa. For example, a national political body may give way to a supra-national level of governance to avoid mismatch with a supra-national economic body (as in the case of economically induced political integration), or a supra-national economic body may give way to a national one to avoid mismatch with a nationally defined political body (as in the case of politically induced autarchy).

The dominant mapping of interests in the political body arises from compromise or conflict between the principal actors and is in turn at the origin of its institutional architecture. The latter results from a conciliation of partial interests, which may be invariant with respect to changes in the weights of the different actors provided such changes take place within certain limits. In this case, the institutional architecture is likely to expresses a mapping of partial interests compatible with the viability of the political body as a whole. In turn, the constitution of the political body may or may not be compatible with the mapping of interests arising from the division of labour in the economic body. In any case, changes in socio-economic interdependencies (such as changes in the dominant pattern of division of labour) are likely to bring about a reconfiguration of partial interests and/or a change in the identification of a systemic interest for the economic body and the political body alike (see Chapter 6).

Under these conditions, a mismatch is possible between human dispositions, systemic viability conditions for the economic and the political body, and institutional architecture. For example: (i) division of labour may introduce a (systemic) viability requirement that is not compatible with the received constitution of the economic body and of the corresponding political body; (ii) the dominant constellation of interests in the political body may shift away from the dispositions and interests associated with the dominant pattern of division of labour, which in turn makes a mismatch possible between the institutional architecture and material viability requirements; and (iii) changes in the constitution of the economic body and of the political body may take place at different relative speeds, so that the coexistence of the two bodies within the same social domain may become difficult to sustain.

Policy-making is a privileged interface between the economic body and the political body. This study has developed the conception of embedded policy-making, which considers economic policy actions as actions designed and implemented at the interface between the economic and the political sphere (see Chapter 7). Interdependencies are a distinctive feature of both spheres but arise from two different sets of conditions. In the economic sphere, linkages primarily reflect the division of labour and the modes of association engendered by it. In the political sphere, linkages reflect the constellations of partial interests and their organisation (through compromise or conflict) into a ‘synthesis’ that makes certain partial interests to be mutually compatible. Division of labour and its modes of association generate a constraint on policy actions due to the complementarity requirements of mutually dependent activities. On the other hand, political synthesis and its modes of compromise and conflict resolution generate a constraint on policy actions reflecting the balancing of different dispositions and interests in the social body. Under certain circumstances, the complementarity conditions arising from division of labour in the economic body are consistent with the balancing of partial interests in the political body. In this case, policy actions are fully embedded in the constitution of the political economy. However, there are also circumstances in which the complementarities in the economic body do not match the affiliations and distinctions in the political body. In this case, the embedded conception of policy-making suggests a heuristic aimed at discovering the conditions for the ‘constitutional feasibility’ and effectiveness of policy actions in view of the existing mismatches between the economic and the political sphere.

In conclusion, it is time to consider what is the central message of our analysis and what is the contribution of the theory of political economy developed in this study to the long-standing discussion about the relationship between economics and politics. As we have seen, that relationship is often viewed in terms of economic constraints limiting the possibilities of politics and policy-making or, vice versa, in terms of political constraints limiting the domain of feasible economic actions and acceptable outcomes. Several scholars voiced discontent about the reductionist duality between economics and politics that the above situation implies, and suggested different solutions for it. John Dunn called attention to the central role of division of labour in the economy and to its ‘political implications’ (Dunn, Reference Dunn and Dunn1990, p. 12); Douglass North highlighted the role of human dispositions in shaping formal and informal constraints on economic choices (North, Reference North2005); Luigi Pasinetti proposed to cut the Gordian knot of the relationship between economics and politics by a ‘separation theorem’ that distinguishes the objective structures of division of labour from the behavioural and institutional conditions characterising each economic context (Pasinetti, Reference Pasinetti2007).

Our view is that the intellectual traditions of political economy suggest a promising, and yet largely unexplored, approach to the relationship between economics and politics in terms of their mutual embedding. In classical antiquity, the dispositional activities included in the notion of household economy (‘oikonomia’) took a distinctly political character once thinkers moved to considering the dispositional activities within the city state (‘oikonomia politikè’) (Migeotte, Reference Migeotte2009; Leshem, Reference Leshem2016). In early modern Europe, Antoine de Montchréstien’s early use of the notion of ‘économie politique’ brought to the fore the objective constraints (both material and social) facing a sovereign authority in the pursue of its goals (Montchréstien, Reference Montchréstien, Funck-Brentano and Paris1889 [1615]; see also Maifreda, Reference Maifreda2012).

These early developments, and the ensuing intellectual traditions explored in this study, suggest that a dual track is inherent to the relationship between the economic and the political sphere. Economic considerations take a political dimension when economic arrangements presuppose distinct but mutually dependent centres of agency, while political considerations take an economic dimension when political agency is constrained by ordering principles in the economy and society that are prior to it. In a system of interdependent economic and political activities, the economy has an intrinsic political dimension due to the formation of converging or diverging interests associated with the pattern of division of labour in society. On the other hand, the polity has an intrinsic economic dimension due to the material interdependencies needed to provide means for the pursuit of political objectives. This conception of political economy makes principles of economic ordering essential to the life of the polity, and political alliances or conflicts unavoidable in the division of labour between centres of agency in the economic sphere. In our view, the consideration of the matches and mismatches between the two spheres opens a line of investigation that is central to understanding the trajectory followed by any given political economy in the course of its history.