The Economy of Love and Fear
by Kenneth Boulding
Kenneth Ewart Boulding (1910-1993) had been one of the most imaginative
and creative thinker of last century. Educated as an economist, distinguished
professor of economics, he was also an all-round scientist and philosopher.
Intellectually unbound, he wrote as much as more than one thousand writings.
The Economy of Love and Fear (1973) represents one of his most important books.
In this book, he expresses in a more comprehensive manner the theory of
‘grants economics’, which he already outlined in several of his foregoing
writings
1
. The central idea of ‘grants economics’ (hereafter GE for brevity), is
that exchange does not fully explain contemporary economics, emphasizing
the fact that both exchange and grants are necessary to organize the fabric of a
modern economic system. The book consists of a short introduction and eight
chapters. The first chapter analyses the concept of grant and the micro-theory
involving this. The second chapter is devoted to the macro implications of
grants. Chapter 4 examines the concept of implicit grants, whereas chapter 5
deals with a theory of exploitation and the problem of legitimacy in grants.
Crossroads
ISSN 1825-7208
Vol. 5, no. 3
pp. 109-118
* Catholic University of the Sacred Heart, Milan.
Copyright © 2005 by the author. Contact: raul.caruso@unicatt.it
1
Boulding (1989/1992) designs the broad and complex range of interests he covered in his own
writings. A full bibliography is available on the website http://www.colorado.edu/econ/Kenneth.
Boulding/
Chapter 6 jumps to the international dimension of grants and Chapter 7 is an
attempt to highlight the welfare aspect of grants economics. The final chapter
deals with the evolution of institutions in time, and gives some prospects
about the future of world economy.
The theory of grants economics cannot be disentangled from the
approach and insights on social systems expounded by the author in other
writings. To Boulding, the social system can be divided into three large,
overlapping and interacting sub-systems: exchange, threat and integrative
system. All human institutions and relationships involve different
combinations of all three. Exchange relationships constitute the usual domain
of economics. In its simplest form, two parties agree to exchange something
with something else, usually money with goods and services. It is commonly
understood as a positive sum game in which parties can be better off after the
exchange is concluded. However, it still retains co-operative and competitive
elements. The threat system, in its simplest form, is also a relationship between
two parties and one party is capable to affect the other party behaviour
through coercion. It is summarised in the statement: “If you do not do something
(or you do) I shall do something nasty to you”. Economic activity is full of
examples. It is common sense that an executive can threaten a worker of firing.
The government threatens individuals of expropriation if they do not pay
taxes, or a state can threaten a tariff retaliation if another state (or a group of
states) does not comply with some obligations. The threat system is less
productive than exchange systems simply because exchange of goods
encourages the production of goods, whereas threat discourages the
production of goods. To Boulding, there are several feasible reactions
threatened agents can set in response: submission, defiance, counter-threat, flight,
and integrative response. Threat systems are pervasive in many human and
institutional interactions. Boulding argues that all threat systems experience a
basic long-run instability. The well-known threat system of deterrence,
therefore, is unstable in the long run
2
. When a breakdown in deterrence occurs
the subsequent outcome could take the shape of submission or defiance. If one
party decides to carry out the threat, and the other party also decides to
counter-threat a feasible outcome could be the occurrence of a war.
By contrast, a more stable response to threat appears to be the integrative
action. Using Boulding’s words: “the integrative response is that which establishes
community between the threatener and the threatened and produces common values
and common interest” (Boulding 1963a: 430). Examples falling into this category
of responses are more difficult to find out. It commonly appears mixed with
one of the other responses: Gandhi and non-violent resistance, for instance,
seem to be a mixture of defiance and integrative response. In international
systems a counter-threat response might appear together with an integrative
action.
The integrative system involves many other different concepts. Among
individuals, an integrative relationship involves a complex spectrum of
feelings, such as respect, love, affection and so on. It also involves other
2
The source of Boulding’s argument is the pioneering work on arms race by Richardson
(1960). Boulding espoused and discussed the Richardson argument in his Conflict and Defense
(1962). He also gave a simple explanation in Boulding (1978c).
concepts emerging between individuals as well as organisations: legitimacy,
status, sense of identity, community etc. In its romantic view, an integrative
relationship implies a ‘meeting of minds’ (Boulding 1962a: 425). In general
terms, an integrative system needs a convergence and interdependence of
utility functions of parties involved. An example of integrative relationship is
giving a gift. To Boulding, by abstracting the pure form of giving a gift, there is
neither exchange nor barter. I give you something mainly because of love,
affection or sympathy. Even if integrative relationships appear to occur mainly
among individuals, they also work within other scenarios. In international
interactions, for example, foreign aid flowing from a richer country to a poorer
one can be included into integrative systems.
Cornerstone of the integrative system is the theory of ‘grants economics’
which is exactly the subject of The Economy of love and Fear (hereafter ELF). In
the first two chapter, both micro and macro theories of grants are expounded.
In general terms, a grant is supposed to be a unilateral transfer from an
individual, a group or a social unit to another. When it occurs, the donor agent
does not receive anything in return. In a simple two-actor scenario, it involves
the grantor or donor on one hand and the recipient on the other hand. Note
the deep difference from the exchange system, where an agent A gives an
agent B something for something else. By contrast, a unilateral transfer occurs
only when there is an integrative relationship between actors. A powerful
example of an integrative system could be considered the modern nation-state.
On one hand, states are usually committed to provide grants in different forms
to their own citizens; on the other hand, citizens are expected to pay taxes,
duties and excises. In particular, “the grants economy represents the heart of
political economy, because it is precisely at the level of one-way transfers that the
political system intervenes in the economic system” (Boulding et al. 1972: 21).
Therefore, the existence of GE is a matter of institutions which inform and
govern the economic life of individuals, groups and organizations. Different
institutionalized scenarios contribute to shape different economic systems. The
existence, the measurement and the classification of grant elements in modern
economics ought to be considered as pivotal element in the regular framework
of economics.
Grants can take different shapes. Grants can be either ‘negative’ or
‘positive’. That is, negative grants imply that the utility of grantee diminish
instead of increasing. Using Boulding’s words “Negative grants, unfortunately,
are still an important element in the world system, especially in international system
where the defense industries of the various countries are mainly concerned with
producing the capability of making of negative grants to other countries” (Boulding
1973: 22). Negative grants are costly for both actors. First the ‘negative’ grantor
employs an amount of resources that could be employed in productive
activities. Secondly, the recipient actor ‘the grantee’, is expected to suffer an
injury.
Chapter 4 deals with the concept of ‘Implicit grant’. In Boulding’s
definition, “implicit grants may be defined as redistribution of income or wealth that
takes place as a result of structural changes or manipulations in the set of prices and
wages, licenses, prohibitions, opportunity or access” (Ibi.: 49). A first example of
implicit grants is monopoly. It is expected to distort the distribution of income
in favour of monopolist. Hence, it can be interpreted as an implicit grant
towards the monopolist, given that consumers are obliged to pay higher prices
of monopolized commodity. Consider also a tariff. Once a tariff is levied, it is
intended mostly to favour some home producers negatively affecting both
consumers and foreign producers.
Chapter 5 deals with the theory of exploitation. It is strictly linked with a
threat lacking of legitimacy. In Boulding’s words, “I propose a working definition
of exploitation as a grant or one-way transfer of an exchangeable, whether explicit of
implicit, that is regarded by the grantor at least as illegitimate. I have used this
definition rather than the narrower one of the grants made under coercion or under
threat, even though coercion is a very significant source of the sense of
illegitimacy” (Ibi: 63). The concept of legitimacy is useful for Boulding to bring
light on the difference between socialist and capitalists societies.
Building bloc of Boulding’s approach is the idea that the threat systems,
the exchange systems and the integrative systems do not occur in pure form.
Each situation can contain elements of more than one system. The nation-state
also offers plenty of examples of hybrid relationships. Take again taxes and
transfers: the government threatens individuals of expropriation if they do not
pay taxes; individuals pay taxes, both under threat and also trusting the state
administration to provide some public goods (that is, there is a form of
exchange). Hybrid relationships also emerge in international scenarios.
Consider again foreign aid. It is supposed to be a unilateral transfer provided
to address issues of poverty and development. It does, but it is also designed
to pursue foreign policy objectives of donor countries. In many cases the
recipient country is expected to comply with some political ‘obligations’ in
return. Then, it is possible to roughly classify institutions, regimes,
organisations in regard to the proportions of threat, exchange and integrative
elements they involve. Boulding creates a ‘Social Triangle’
3
to illustrate these
proportions. At any inner point, say A, there is a interconnecting of three
systems. The closer is point A to the apex ‘threat’ the more threat there is and
so on.
The last chapter exactly describes the importance of such triangular diagrams
taking into account also the aspect of possible evolutions of different
3
Boulding presents his Social Triangle both in Boulding (1973, p.107-109) and in
Boulding (1985a, p. 85-87).
Figure 1. Kenneth Boulding’s social triangle
Threat
Exchange
Love
(integration)
.A
institutions. Finally, it also deserves attention to some points for the future of
the world economy.
The complex bundle of intuitions included in the ELF shockingly jumps
in the very modern debate of current economic science. In recent years theories
and analyses have been extended beyond the realm of conventional domain of
economics, namely the behaviour of firms and consumers in both micro and
macro aspects. Many modern economists actually stress the role of institutions
as the “rules-of-the-game” governing economic interactions. The rules of the
game do change and modify choices and behaviours of economic agents
affecting processes of growth and development. Then, the rules of the game
also shape incentives and disincentives occurring in any society.
However, what is hard to pin down is a comprehensive theory on how
institutions emerge, survive and evolve. The theory of grants economics
contributed to this debate thirty years ago. It sheds light on two peculiar
aspects of institutions. Firstly, grants, that is ‘one-way’ transfers, shape the
impact of institutions on behaviour and choices of individuals and
organizations. Secondly, the richness of the intuition is also confirmed when
considering that different sources of ‘one-way’ transfers do exist. This is
exactly the major point in Boulding’s book. It is also the most fruitful reflection
given that different sources of grants evolve in different incentives, and
eventually different norms and institutions. Consider that this line of
theoretical analysis, which considers the interaction between threat, exchange
and integration from the beginning, can have remarkable implications for the
designing of economic policies in societies where the threat system is a
founding feature. Consider for instance the case of post-war societies, some
LDC countries or mafia-infiltrated states.
Eventually, ELF, as well as other writings by Boulding, avoid strict
theoretical and empirical analyses. It is constructed upon narrative stories and
intuitions drawing heavily from simple and ordinary-life examples. Boulding’s
style is often naïf and imaginative unprone to classical scholarly publications.
However, Boulding’s intuitions deserve a new attention and a deep
rediscovering.
Bibliography:
Boulding, K., General Systems Theory-The Skeleton of Science, “Management
Science”, vol.2, no.3., 1956, pp. 197-208.
Boulding, K., Conflict and Defense: A General Theory, Harper & Brothers, New
York, 1962.
Boulding, K., Towards a Pure Theory of Threat Systems, “American Economic
Review, Papers and Proceedings of the Seventy-Fifth Annual Meeting
of the American Economic Association”, vol. 53, no. 2, 1963a, pp. 424-
434.
Boulding, K., Is Peace Researchable, “Background”, vol.6, no.4, 1963b, pp. 70-77.
Boulding, K., Economics as a Moral Science, “The American Economic Review”,
vol. 59, no.1, 1969, pp.1-12.
Boulding, K., Grants Economics: A simple Introduction, “American Economist”,
vol. 16, no.1, 1972, pp.19-28.
Boulding, K., The Economy of Love and Fear, Wadsworth Publishing Company,
Belmont, 1973.
Boulding, K., Evolutionary Economics, Sage, London, 1981.
Boulding, K., A bibliographical autobiography, The Banca Nazionale del Lavoro
Quarterly, no. 171, 1989, re-printed in Boulding K. (1992) pp. 3-26.
Boulding, K., Towards a New Economics, Critical Essays on Ecology, Distribution
and Other Themes, Edward Elgar Publishing, Aldershot, 1992.