Interview by Richard Marshall.
Lisa Herzoghas worked at the Technical University Munich, Germany, St. Gallen University, Switzerland, and most recently on a research project at the Cluster "Normative Orders" and the Institut für Sozialforschung, Frankfurt, Germany. Her research focuses on the relation between economics and philosophy. Her first book is "Inventing the Market: Smith, Hegel, and Political Theory" (Oxford University Press 2013). In 2014 she published "Freiheit gehört nicht nur den Reichen: Plädoyer für einen zeitgemäßen Liberalismus" [Freedom not just for the rich - a plea for a well-understood liberalism] (C.H.Beck) . Now we're talking...
3:AM:What made you become a philosopher?
Lisa Herzog:I wanted to study philosophy in order to better understand the world, it was a deeply-felt desire that I never questioned. But I was torn about what to combine it with, physics or economics, and I ended up with the latter. And then I simply fell in love with thinking, reading, writing, discussing. I got particularly interested in questions that lie at the intersection of economics and practical philosophy, a field that is still under-explored compared to its real-life importance.
I tried to get away from philosophy a few times, doing internships in other areas such as corporate social responsibility and development cooperation. These were extremely useful experiences, but I also realized that I wanted to continue to do theoretical work, because I came to think that we need better theories in order to change our economic systems, to make them more just and more sustainable.
3:AM:When you discuss the philosophy of markets you begin by pointing out that economists theorizing and modeling markets are inadequate. What’s the problem?
LH:Economic models make simplifying assumptions about human agency and about social interaction. If one only used these models to answer the questions they are supposed to answer, taking into account their methodological limitations, there wouldn't be any problem. But often they are used to make much wider claims. For example, predications are based on a theoretical model, but with insufficient discussion of whether the assumptions of the model also hold in reality. Along the way, one often finds that normative judgments sneak in, but without being made explicit. Thus, one cannot even ask critical questions, for example whether certain theories serve the interests of certain social groups - whether they are ideologies in the classical sense.
3:AM:You also suggest that philosophers like Rawls’s on justice and others discussing social and political issues like Elizabeth Anderson tend to discuss the market as something to be tamed from the outside rather than be the central subject. Can you say something about this?
LH:Markets are often treated as "black boxes" in normative theorizing, maybe because of an implicit assumption that they are the economists' business, not ours. Thinking about the boundaries of markets, and about their place in society, is very important, but it is not the only question we can, and should, ask about them. We also need to think about the internal structures of markets: what is their ontology, what kinds of social relations do they create between individuals, what internal distributive features do they have? Some might say that by treating markets from a philosophical perspective, we bestow too much honor to them, replicating the dominance that the economic sphere already has on our lives. But I think we can best resists the tendencies of markets to colonize the life world, as Habermas put it, if we get a better understanding of what they are, and what is problematic about them.
3:AM:So why do you argue that we need a philosophically sophisticated model of the market itself? Was the 2008 north Atlantic crash a wake up call?
LH:The 2008 crash showed that the models that were used to describe the economy were not at all up to the task. It seems crazy in retrospect, but many macroeconomic models did not even include a financial sector! And although behavioral economics - i.e. economic research that takes human psychology seriously - has been pursued for at least 30 years, the mainstream models of markets were all based on assumptions of perfect rationality: all market participant are rationally maximizing their "utility", without ever making mistakes in how they calculate their options, and without being influenced by effects such as emotions or herding behavior. In addition, the interrelations between the political framework and the internal mechanisms of markets were not considered. And none of these models asked about anything like social justice or the legitimacy of the extraordinary profits that the financial industry made. We need a much broader debate about markets, which takes such dimensions into account.
3:AM:You have two giant figures at the centre of your thinking on this matter: Adam Smith and Georg Wilhelm Hegel. For a long time they were considered giants in opposite camps – one the go-to Chicago-style liberal free marketer, the other the go-to ur-Marxist/socialist central planner. You’re building on much recent scholarship that has eroded this position aren’t you?
LH:Yes, if you consider them in their historical context, they are much closer to one another, and Hegel drew explicitly on Smith's writings. Both have built philosophical systems that include accounts of markets, but also a wider account of human nature, society, politics, history and culture. Of course their emphases and their metaphysical backgrounds are different. But the differences have been exaggerated by the different intellectual traditions that claimed Smith's and Hegel's name for them. The reception histories of both are fascinating case studies about how ideas, and even metaphors such as Smith's "invisible hand", can take on a life of their own, and be used and abused by different groups, in different historical contexts (I have edited a collection on some of Hegel's receptions, see here, which illustrates this phenomenon). We inherit these ideas in the form that recent receptions have given them. It is really liberating to go back and read the actual texts, and to see that their thought is much more subtle and interesting than today's clichés.
3:AM:What do we gain by returning with fresh eyes to Smith and Hegel? What are the debates that you think would be enriched by considering these two giants?
LH:In our societies, markets play an important role - too important a role, many would say. Smith and Hegel describe market societies when the phenomenon was still relatively young, and they explore the various effects markets have on the structures of a society. If we think about social phenomena today, it is easy to overlook the role markets play in them, simply because we got so used to them. In my first book, Inventing the Market, I explore a number of debates in which Smith's and Hegel's thought can help us see how markets are interrelated with other questions: our view of the self, our understanding of social justice, of freedom, or of the way in which societies develop in history. I use their accounts as two paradigms of thinking about markets, the contrast of which sheds light on these debates.
3:AM:Regarding commercial society, what similarities do you find between their positions?
LH:Both think of the relation between the state and the market as a tripartite scheme: the state has to secure a framework of fundamental rights, within which the market can take place, but the state then has come back in again, to correct "market failures", not in the technical sense of the term, but in the broader sense of things that go wrong in markets, or that markets fail to deliver - for example, public education. This way of looking at society is still very widespread: for example, left and right parties often disagree about the relation between levels two and three, the free market and corrective state activities. The modle is helpful in many ways, but one has to keep in mind that it is a model. For example, it diverts attention from the ways in which inequalities in the economic realm can lead to unequal political power, which can lead to distortions not only with regard to corrective state action, but also with regard to the first level, the very way in which the framework of markets is set up.
3:AM:What competing models of this commercial society do Smith and Hegeloffer?
LH:At the risk of oversimplifying, one can say that for Smith, the market solves problems, while for Hegel, it creates problems. Smith draws a very benign picture of the market, as an institution that draws people together, rewards certain virtues, creates more equality in the long run, and makes the society more open and tolerant. For Hegel, markets are an important space for social freedom, but they also lead to inequality and the fragmentation of social life. It is worth remembering that Smith wrote before the Industrial Revolution had really started, whereas Hegel wrote about two generations later, receiving reports from London about the appalling conditions for the working poor. This is one of the reasons why he puts much more emphasis on the role of the state as a unifying force.
3:AM:At one point in your book you put the Smith/Hegel versions of commercial society into play with the Rawls/Sandel debate about the ‘unencumbered self.’ Can you explain what this self is and what the debate is about – and what considering Smith/Hegel adds to it?
LH:Very roughly, the Rawls/Sandel debate was about whether political theorists should start from the notion of a single, autonomous individual, or from the notion of an individual embedded in social structures such as families or religious communities. Smith and Hegel are both very much aware that human beings grow up in communities, and that being part of a community is an important part of human flourishing. They differ in their view of what happens in markets, however: Hegel conceptualized the individual-in-the-market as shaped by the community within which he (it concerned only males, in his day, as the heads of families) worked, with the profession becoming part of his identity. For Smith, in contrast, human beings are embedded in their private lives, but in markets they act as sovereign sellers of their human capital, to use a modern term. What this shows is that we cannot talk about "more" or "less" embeddedness as a one-dimensional relation. There are different ways in which human beings can be embedded or disembedded; even within markets, one can find very different experiences in this respect. It's striking that the difference between Smith and Hegel corresponds to the character of labor markets in different "varieties of capitalism": a fluid, flexible model in the "liberal" economies such as the US or the UK, and a more embedded, long-term oriented model in the "coordinated" economies that one finds in Japan and in many European countries.
3:AM:How do they handle the notion of freedom in commercial society?
LH:The cliché is that Smith is a "negative liberty" guy and Hegel a "positive liberty" guy. In fact, both have very nuanced accounts of how different dimensions of freedom are realized in a modern society; the freedom to do what you want with your property - which is sometimes called economic freedom - is only one of them. For example, for Smith the market is also a school of autonomy, because it teaches individuals to become self-reliant and to take their own decisions about their lives; this may seem naive from today's perspective, but it was written in a time when many people's lives were predetermined by customs and traditions, and markets indeed had some liberating potential. What I find very interesting is that Smith and Hegel do not try to reduce freedom to one basic notion; rather, they acknowledge its various dimensions, and ask about the ways in which these can find a place in the institutions of a modern society. I find this very convincing as a way of thinking about freedom.
3:AM:There’s a lot of discussion recently about inequality and it’s a key thing in your thinking too. What do Smith and Hegel say about inequality? Is inequality justified? What would they do with the recent material being produced by Thomas Piketty? Would Hegel have remained silent?
LH:What is crucial for Smith and Hegel is whether the members of a society have a status as equal human beings, with equal basic rights and equal dignity, and recognize one another as such. For Smith, the decisive contrast between a commercial society and a feudal society is that in the former, everyone has equal rights, and an equal opportunity to participate in the economic and social life of his or her country; in a similar way, Hegel sees equality before the law as the crucial achievement of modernity, for which he saw the French Revolution as breakthrough.
The question then is, of course, how this relates to inequality of income and wealth. Smith and Hegel do not give us formula for how much inequality is compatible with the equal standing of citizens. Roughly, Smith thinks that free markets lead to greater equality because they lift the working poor to a comfortable standard of living and they erode the inequalities of the feudal age, and that's one of the reasons why he endorses them. Hegel, in contrast, thinks that free markets lead to increasing inequality; in fact, he predicts the development of a "rabble" of poor who cannot lift themselves out of poverty any more. This is an aporia in Hegel's account that he never quite resolves.
So Hegel would not have been surprised by Picketty's arguments, although Hegel himself does not have a developed theory of capital. Smith, I think, would have to ask himself whether he would have to revise basic assumptions of his model. He was very interested in empirical data, however, and so I assume he would have been happy to do so.
3:AM:I guess one of the things that Piketty is warning us about is the return to a belle-epoque type of economic reality where inherited unearned capital is the dominant form of making money and the source of the vast inequalities. Does this non-commerce market capitalism change the requirements for theorizing markets?
LH:It is sort of ironic that Picketty warns us about falling back into a situation that is very much the one against which Smith developed his model of commercial society as an alternative: a form of feudalism in which a small class of privileged individuals holds disproportionate wealth and disproportionate power, which helps them to cement their position. Smith was too optimistic, it seems, with his assumption that in a commercial society vast fortunes would be eroded over time. Picketty suggests progressive taxation as a remedy; I think Smith would have been far less opposed to this than many of those who claim his name today. But he would also have asked, I guess, whether there aren't other levers that can, and should, be moved, for example concerning a wider distribution of capital ownership.
It is worth noting that the markets we have today are really different kinds of animals than the markets Smith wrote about, for example when it comes to the role of corporations, or when you consider the network effects that you have in many modern technologies. The problem with many markets today is that they are far less open for new entrants than the rhetoric of "free markets" suggests. But this was what Smith very much cared about. I am working on a paper in which I argue that it is actually misleading to use the metaphor of "trickling down" (which I still use in the book) for the way in which Smith thinks about markets. The mechanism he is interested in is much more a question of giving individuals an opportunity to "work their way up", as it were. He cared about the creation of jobs, about individuals being able to acquire a small fortune and hence economic security, which would give them "tranquillity of the mind". So the question would be: which institutional settings do we need today to make sure that every individual can earn a decent standard of living, and have sufficient economic security - so that people can turn to those things in life that really matter. For Smith, these are not economic things, but things such love and friendship, and time to enjoy literature or music. Hegel would have agreed, by the way.
3:AM:Where do you stand on the Smith/Hegel divide? Are you sympathetic to Hegelian Dionysian forces or are you more with Adam Smith?
LH:I think there isn't one picture of the market that captures all its aspects; different markets can have very different features in different situations, sometimes as benign as Smith thought, but also often as disruptive as Hegel thought, or anything in between. What is important to note, however, is that since the times in which Smith and Hegel wrote we have learned much more about the ways in which markets, rather than being "natural", depend on institutional and cultural preconditions, with legal preconditions playing a particularly important role.
Smith and Hegel assume that the property rights that underlie markets are fairly unified, which is understandable given that they wrote at a time when many of the things for which we have property rights and markets today did not exist. I am thinking in particular about financial markets, on which I work on at the moment. Katharina Pistor, a law professor at Columbia University, has done extremely interesting work on how financial markets are legally constructed (see here). If we want to understand markets, and in particular financial markets, from a broad philosophical perspective, including a normative perspective, we need to talk about these things as well.
3:AM:Aristotle never wrote a book on economics. Ernest Gellner quipped that the mystery is not that Aristotle didn’t but that Adam Smith did. Do you think there’s a need for economics to recalibrate itself so that it is less reliant on models that missed the recent crisis and seems to miss the dimensions your position requires?
LH:At the moment, I am fairly optimistic about many developments in economic theorizing, especially among the younger generation of economists. Pickety's plea for understanding economics as a social science might help things to move along more quickly into this direction: more empirical, more strongly historically situated. But I think there is still some resistance among economists to also engage with normative approaches. What we need is an integrated, interdisciplinary approach to markets, which includes economic, sociological, psychological, historical and philosophical insights - ideally, such an approach can lead to suggestions about how to improve the institutional framework of markets, but also the institutions that we need to correct and embed markets. The academic division of labour has many advantages, but we also need to get together, from time to time, to integrate crucial insights and to learn from one another. This is hard work, and the incentive structures within academia do not reward it very highly. But that shouldn't deter us!
One thing to note, however, is that many things that are blamed on "markets" or on "the economy" actually have to do with the way in which large organizations - in the sense of Weber's "bureaucracies", roughly - function, and what's going on in them. Think, for example, about the diffusion of responsibility: this can take place in markets, but also within organizations. Philosophers have not paid much attention to how organizations shape the moral agency of individuals, maybe because of the division between moral philosophy, which mainly looks at single individuals, and political philosophy, which looks at public institutions. But there is this whole realm of phenomena in between: the way in which we act as the infamous "cog in the wheel" when we act from within our organizational roles. Thinking about markets, and about Smith and Hegel, has led me to thinking about organizations: the ways in they support or undermine the moral agency of individuals, and the additional moral problems they pose, simply by the fact that they are organizations. My next book project is about the way in which individual agency and organizational structures are interrelated, and how organizational practices can function in ways that are morally justified.
3:AM:So, tell us more about your new project.
LH:It's a basic fact about human nature - one that Smith and Hegel were very much aware of - that we are influenced by our social contexts. But arguably, Smith and Hegel still believed that there is some kind of natural or metaphysical process underlying the development of these contexts (and scholars disagree, of course, how exactly to understand them on these counts). If we don't believe in these things, the question becomes: how can we shape our social contexts in ways that allow us to become, and remain, moral agents? Which co-responsibilities do we have for these phenomena, which, by definition, transcend the scope of action of single individuals?
Organizations are one area in which these questions arise, and I think they arise with particular urgency today, because organizations are so important for modern societies - if they function well, they can be extraordinarily effective, but if things go wrong, they can go wrong on a really large scale, not only with regard to how direct stakeholders are treated, but also with regard to effects on the wider society. There is some work in business ethics on organizations, but it is not very well connected to the philosophical debate, and there is a lot of organizational theory, of course, but it mostly considers organizations from a functional perspective, without taking into account their moral dimension. And there are indeed many moral dimensions; I did a series of qualitative interviews with people who work in different organizations when I started this project, and the stories they told me were absolutely fascinating - about alienation and recognition, about being torn whether to use immoral means for moral purposes, about gaming the system in order to protect colleagues, etc. I now try to develop a framework in which I can connect these insights to philosophical debates: about how to deal with rules, about the moral responsibility for handling information, about the ways in which one can reflect about one's professional role. And about the ways in which organizations can make sure that they fulfill their own moral duties, and help their members to fulfill theirs.
3:AM:And for the readers at 3:AM are there five boks other than your own that we should read to get further into your fascinating philosophical world?
LH:If you haven't already read them, both Smith's Theory of Moral Sentimentsand Hegel's Philosophy of Rightare fantastic reads! In terms of more contemporary work on markets and organizations, two recent books that I found very inspiring are Mark R. Reiff, Exploitation and Economic Justice in the Liberal Capitalist State(Oxford: Oxford University Press, 2013) and Christopher McMahon, Public Capitalism. The Political Authority of Corporate Executives(Philadelphia: University of Pennsylvania Press, 2013). And as I currently teach a class on Arendt, I cannot resist recommending her The Human Condition, it's such a fascinating book, full of inspiring insights about how one might think about the place of human beings in the world and about the different aspects of our "vita activa."
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