ecember 2012 saw the passing of the great development economist, Albert O. Hirschman, at the age of 97.
Development economists spend their time these days performing randomized controlled experiments, in which a particular intervention like co-payments for mosquito bed nets are introduced into one group of villages and not into another matched set. This approach establishes causality with a level of certainty approaching that of the randomized trials used in pharmaceutical testing. But while such experiments are useful for evaluating the effectiveness of certain types of public policies, they all operate at a very micro level and don’t aggregate upwards into an understanding of the broader phenomenon of development. It is hard to imagine that all the work being done under this approach will leave anything behind of a conceptual nature that people will remember fifty years from now.
Albert Hirschman operated at the opposite end of the spectrum. He did very little quantitative work, and will be remembered for a series of slender books written in an accessible English that non-economists have no trouble understanding. He did not observe the methodological straightjacket his discipline imposed, but wandered off instead into other fields like politics and philosophy in an attempt to recover some of the unified social theory of the 18th and 19th centuries–hoping to avoid, as he put it, the “specialization-induced intellectual poverty in this field.” His legacy is not data collection or micro results, but rather some very big concepts that continue to shape the way we think about not just development but public policy more generally.
Hirschman’s best known books were Exit, Voice, and Loyalty (1970) and The Passions and the Interests (1977). In the former, he took on an issue central to public administration, namely, the problem of disciplining poor or incompetent managements like those running many American public schools. Milton Friedman had recently introduced the idea of vouchers and competition. He argued that in the private sector, bad management was disciplined by the possibility of exit, either on the part of customers who didn’t want to buy the company’s products, or by shareholders who lost confidence in the company’s management. This discipline didn’t exist in the public sector because it was often a monopoly supplier of the good in question, such as education. If parents were allowed to use a mechanism like vouchers to take their tax dollars away from failing schools and put them into better ones, there would be market-like incentives for both the competitive and failing schools to improve their performance. Since then, an exit option from state-provided public services has been a staple of public sector reform, something that spread widely after the rise of Reagan, Thatcher and orthodox market economics in the 1980s.
Hirschman outlined the logic of the exit option and noted how increased competition could improve government performance. But competition didn’t solve all problems, and the exit option had several important drawbacks. The freedom to exit was often used by the most ambitious, educated or well-to-do users of a particular service, and once they exited, those remaining were even poorer, less educated and less demanding. Moreover, Hirschman pointed out, the possibility of exit weakened the effectiveness of voice, that is, the ability to directly change the management’s behavior through feedback, discussion and criticism. Sometimes loyalty was necessary to build the trust necessary to persuade people to change.
There are many examples of these insights playing themselves out: the end of legal segregation in the 1960s led more ambitious African-Americans to leave inner cities, condemning those who remained to even greater poverty and social breakdown. School vouchers have never quite worked as promised, because public schools were mandated to serve those residual students who couldn’t take advantage of exit. And so on.
The Passions and the Interests: Political Arguments for Capitalism before Its Triumph was basically a work of political philosophy, an interpretation of several writers using a humanistic approach that was and is utterly foreign to contemporary rational choice theorists. Hirschman argued that the rise of capitalism could not have occurred simply as a result of changes in underlying material conditions, as both Marxists and contemporary neo-classical economists believe. The very idea that it was morally legitimate to rationally maximize one’s income, far from being a universal postulate of human behavior, was something that took hold only during the 17th and 18th centuries. Earlier aristocratic societies had moral systems grounded in honor rather than gain, that were contemptuous of money-making and the calculating bourgeois way of life. Virtue lay rather in risk and glory in battle. The theorists that Hirschman covered, like Montesquieu, James Steuart, John Millar and Adam Smith made political rather than economic arguments in favor of capitalism. They maintained that a commercial society would soften manners and morals and, in contrast to warrior societies, would lead to greater international peace. Hirschman pointed out that these arguments have triumphed so completely in the modern world that we do not even perceive their historical contingency.
Hirschman was not just a theorist but a practical economist who spent a great deal of time working in the field, particularly in Latin America, advising countries like Colombia and Brazil on economic policy on behalf of various international institutions. Fernando Henrique Cardoso, the former President of Brazil, recounts in his memoirs how as a young academic he accidentally encountered Hirschman in a remote Brazilian village. I believe that some of Hirschman’s greatest insights came from his practical experience and were contained in his lesser-known books, centering around what he called “reform mongering.”
Albert Hirschman was a progressive. He believed in the importance of economic development, social change, just distribution of resources and the welfare state. But he also had a realistic understanding of how difficult social change was to accomplish, and spent a great deal of time dissecting the modalities of bringing it about. A book I have used frequently in teaching was his 1963 work Journeys Toward Progress, which chronicled reform efforts in Chile, Brazil and Colombia. The Colombian story was about the slow efforts of democratic governments there to bring about land reform, beginning with legislation in response to land invasions in the 1930s and culminating in passage of a landmark agrarian law in the 1960s. He notes all of the misperceptions and outright mistakes of the reformers and their international advisers, and the unintended consequences of their well-intentioned actions. But he also shows how slow reform mongering over the years eventually brought about real progress. Colombia even now has not solved this problem. After Hirschman’s book was written the narco-traffickers took over and the current government of Juan Manuel Santos is seeking once again to redistribute their ill-gotten holdings to poor peasants. But the point remains that reform by democratic governments is both possible and necessary.
Hirschman formalized these arguments in one of his last books, The Rhetoric of Reaction (1991). In it he reviews the strategies that conservatives—well, reactionaries is the term he actually uses—have used to criticize progressive reformers who attempt to bring about social change. One is the perversity argument—the case that well-intentioned social engineering always entails unforeseen consequences that ultimately undermine the reformers’ goals and often leave society worse off than before. He notes that a then-recent example of this was Charles Murray’s 1984 book Losing Ground, in which Murray argued that the Depression-era Aid to Families with Dependent Children (AFDC) program was creating new generations of welfare-dependent single parent families and contributing to the collapse of American inner cities.
Hirschman doesn’t debate the merits of this particular case, but rather notes that Murray’s argument was nothing new. The French Revolution engendered a wave of arguments—most notably those of Edmund Burke—who warned that revolutionary change would bring about terrible consequences. Similar arguments were made throughout the 19th century in opposition to expanding the franchise and poor laws. Indeed, he notes that the moral hazard argument that is central to the contemporary case against welfare was raised by British critics of the Speenhamland poor relief measure from the 1790s. (Those of you who have read Karl Polanyi’s The Great Transformation will know all about Speenhamland and the unintended moral hazard it created.) The welfare-to-work principle embodied in the 1996 Personal Responsibility and Work Opportunity Act that abolished AFDC during the Clinton administration was actually anticipated in Britain’s 1834 Poor Law Amendment Act. This piece of legislation was so harsh in its effort to stigmatize dependency on public assistance that it engendered its own reaction, and explains, according to Hirschman, why moral hazard and perverse consequences arguments were absent from debates on welfare in Britain for the next several generations.
Hirschman did not try to argue that conservatives were always wrong in calling attention to unanticipated consequences. He simply said that to turn the possibility of unintended negative consequences into a universal principle, and a reason for opposing all deliberate efforts at reform, was wrong. Opening up the vote to all adult citizens did not undermine Western civilization, as Gustave Flaubert and Gaetano Mosca argued. He was the polar opposite of Friedrich Hayek and the latter’s theories of spontaneous order.
Hirschman did not approve of revolutionary change. His preferred course of reform mongering was one of slow but steady gradualism under democratic governments. He advocated this approach to Latin Americans in the 1960s when many were dreaming of Cuban-style revolutions. His message to revolutionaries was that democratic change and reformism were slow and often disappointing, but that they worked much better in the end. This is a lesson many still need to take to heart.
One of my favorite Hirschmanian concepts was that of the Hiding Hand, a play on Adam Smith’s Hidden Hand, which he laid out in his 1967 book Development Projects Observed. The book analyzed a number of World Bank projects on which he consulted, and noted how a number of them failed to achieve their objectives or else produced unexpected results. But he argued that the failure to anticipate unintended consequences was actually a good thing. If we could foresee all the possible negative consequences of our actions, we would become completely paralyzed—not just as governments seeking social change, but as individuals wanting to try new things in work, love or life in general. The Hiding Hand that blinded us in this fashion was thus Providential.
They don’t unfortunately make development economists like Albert Hirschman anymore.