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This book presents an unorthodox identity economics that approaches social identity through a non-classical psychology. Garai applies the modern physics concept of wave-particle duality to economic psychology, finding a corresponding duality in object-oriented activity and historically generated social identity. These two factors interconnect to create a double-storied structure of social identity and its behavioral manifestations. The book then presents a calculation device for mediating between behavioral and identity economics. Garai then applies all these factors to two socioeconomic systems developed during the second modernization: Bolshevik-type “socialism” and post-Bolshevik “capitalism.” In this context, he examines the Eastern Bloc nomenklatura as a duality of bureaucratic and patron-client organization (“state and party”) and the establishment of both today's material capitalism and its other half: human capital economics.



Chapter 1. Identity Economics, Indeed? A Psychological Introduction

I know that my title might sound strange as the title for the introduction to a book whose subject is identity economics. However, this book approaches social identity from the perspective of economic psychology; at the time that it produced its American incarnation, psychology was all about behavioral psychology.
Laszlo Garai

The Structure of Social Identity and Its Economic Feature


Chapter 2. The Double-Storied Structure of Social Identity

Certain social psychologists consider that the question of social identity “is nothing but that of modes of organization for a given individual of his representations of himself and of the group to which he belongs” (Zavalloni 1973, p. 245). For others (see, for example, Sarbin and Allen 1968), it is what the individual does from his position in the social structure that defines his or her identity, not what he or she thinks regarding this identity when comparing him- or herself with his or her group.
Laszlo Garai

Chapter 3. Identity Economics: “An Alternative Economic Psychology”

Mainstream psychology is based on methodological individualism. The proposed monograph presents an alternative to that academism by approaching economic psychology (and a number of aspects of, for example, political psychology and socio-psycho-linguistics) from the perspective of social interaction and social identity as they apply to micro- and macroeconomic issues.
Laszlo Garai

Chapter 4. How Outstanding am I? A Measure for Social Comparison within Organizations

In the 1950s and 1960s, economists, sociologists, psychologists, and philosophers described the phenomenon of craving for status independently of one another and using different terms. They claimed that this motivation might become just as much a passion for human beings in the modern age as the craving for money was for those who lived in the seventeenth to nineteenth centuries, that period of classical capitalist formation.
Laszlo Garai

Social Identity in the Second Modernization


Chapter 5. Preamble

This chapter addresses the society to which Schumpeter referred in a study from the post-World War I period (1922), when he stated that capitalism was transforming so obviously into something else that he considered not the fact itself but only its interpretation to be a point of contention. Whether socialism was what capitalism became after the war and the subsequent revolutions and counterrevolutions, Schumpeter only considered to be a matter of taste and terminology (pp. 41–43).
Laszlo Garai

Chapter 6. Theses on Human Capital

After World War I, fundamental changes occurred in the economic status of human faculties and needs.
Before that shift, during the great—the nineteenth—century of its history, the capitalist economic system might have been able to afford to consider only the material conditions of its operation. Regarding its human conditions, effective mechanisms provided the system’s functioning maximal independence from these conditions. In large-scale industry, the machine freed production from the producing faculties of the population, whereas as a result of capital’s property relations the accumulation process received its liberty from the population’s need to consume.
As far as the system’s functioning still continued to be subject to human conditions, these were trivial: not produced but merely exploited by the economic system. Human resources were treated as something that is available independently of any economic efforts, as if the profit that could be produced from them would be gratis, not received as the interest on capital invested in human beings.
Material conditions were managed by the capitalist economic system in a manner that corresponded to the modernization paradigm: by artificial intervention in natural processes.
In addition, the modern approach to accommodating the material conditions was ensured by investing capital that increased when the product of the manufacturing process in which the capital was invested was marketed.
This phenomenon also occurred when the investor into the manufacturing of an essential condition (e.g., transportation networks) was not a private person or company but the state. Such processes were financed not necessarily by citizen taxes but to an increasing extent by investments, which became profitable when the state started to charge for the use of the given infrastructure.
The mechanisms that enabled the economic system during the nineteenth century to leave human conditions out of consideration had ceased by the end of that century to be effective.
Since this time, the capitalist economic system, its operation no longer independent from human conditions, has been forced to provide itself with human conditions in the same way it did with material conditions; that is, by manufacturing them. From this time, the practice of modernization evoked in Theses 5 and 6 was replaced by that of a second modernization, which, together with the material conditions of the economic system’s functioning, also manufactures the human conditions.
Since this time, the capital and work invested in cultivating faculties have been as productive as investments in the development of machinery.
During this period of the second modernization, any human potential only yields profit if the costs required for its production, allocation, maintenance, operation and renewal are actually assigned. In addition, this assigning is no longer prescribed by pious moral imperatives (which were well known to be hypocritical or impotent in the nineteenth century) but by solid business calculations.
In light of these business calculations, one may no longer hold the formerly evident assumption that costs assigned to the human potential would withhold resources from accumulation and credit them to consumption. Instead, the costs assigned to human potential only regroup resources from one side of the account ledger to the other. “A sizable portion of what is termed consumption means nothing but investment into the human capital,” Theodore W. Schultz argues.
In such an approach, expenditures on education must be included among the production costs for the human potential, health expenditures appear as maintenance costs, housing and transport allowances appear as costs for the allocation of the latter, cultural expenditures appear as costs for the operation of these specific capital assets, and expenditures related to the management of unemployment are regarded as amortization costs for the human potential considered as fixed capital.
A key issue in human capital-related calculations is to define who should be the investor: the household of the individual whose skills are developed by the investment, the enterprise that intends to apply the trained knowledge, or the state.
When the investor is the state, a misinterpretation may be generated by the fact that by this expenditure a type of providence is at issue. However, this providence is not a divine or humanistic type of providence but the pragmatism of the good craftsman, who provides for tools before he starts to work.
During the second modernization, in competition with the material and energy economy, information management comes to the fore. In this information management, the qualified individual is as important a device as the lathe for the material or the power plant for the energy economy.
It is imminent in the nature of information management that its factors become effective not according to their attributes but according to their relations to one another. A particular person only develops his or her communication potential if the correlated potential is similarly developed in other individuals. No one can communicate with others, such as in writing or in a foreign language, if there is no one in his or her environment with the corresponding capacity to also communicate in writing or in that foreign language. Additionally, the communicated information receives its meaning only against its background, in correlation with it.
It follows from the previous thesis that for information management, it is not only the personal attributes of individuals that become economic factors, but also their social interrelations: equality and inequality, exclusivity and commonness, solidarity and struggle for survival. Thus, what traditionally were factors of a merely moral universe that was detached from the world of economics are transformed by the second modernization into factors for this very economic universe.
It follows from Theses 15 and 16 that the output of the information management is determined not only by the input but also, to no less (or not significantly less) an extent, by externalities. Regarding such processes, the natural attitude is what the economic psychology terms free riding. Therefore, the expenses of cultivating faculties according to the norms of information management may only be charged to a limited extent by market measures to the individual’s account.
Instead, these inputs and their outputs can be managed in an organization that has the power to impose a charge or a certain share of risks on the relevant individuals, and counterbalance that charge not exclusively in the manner of the market. Such an organization can be, for example, the state.
What was stated in Thesis 5 about state investment in infrastructural development is also true for the human expenditures administered by the state. The investment in human capital will not necessarily be financed by citizen taxes but in various possible forms of a profitable business enterprise.
However, if the investor in the human capital is the state (or a company), the question of Thesis 12 will be supplemented by another: who profits from the employment of the human potential produced by that investment?
This question is related to its twin question, which was posed by Thesis 12, by an intermediating third question: who is the owner of the produced human potential?
The issue of ownership must be raised with particular emphasis because the capital that is invested by the state or a company in the formation of a person’s potential will be organically integrated in his or her body and mind, and therefore become inseparable from the physical and mental faculties that were originally given to that person. Property means first the power of disposing. Therefore, the question arises for the human potential of whether this indecomposable neo-formation is dominantly disposed by the bearer of the endowments or by the owner of the money invested in its qualification.
The questions raised in Theses 12 and 20 are supplemented by an additional question: who profits from the human potential’s employment?
The correspondence of the answers to the three questions is only an abstract possibility. Two formulations are known in which this abstract possibility is realized:
  • if the interested person invests his or her private savings in the development of his or her skills and abilities, it is he or she who disposes of his or her developed potentials, and it is he or she who gains the profit of the accumulated capital;
  • if the totalitarian state invests in human capital, it invests in such a way that the state has complete control over the manufactured human potential and thereby ensures that it will recover with profit the money that it has tied up in living persons.
The more highly qualified human potential that is involved, the larger the amount of capital that is required for its manufacturing and the larger autonomy that is required for that human potential’s operation. This antinomy represents the basic dilemma of the second modernization. If the required capital is ensured by the involvement of a totalitarian state, the autonomy turns out to be in short supply. However, if the aspect of autonomy makes the state abandon the human business by charging the costs of human development to the individual’s account, capital will be scarce.
The success and failure of both versions of socialism have been linked to attempting to resolve that basic dilemma.
In its successful period, socialism in its Bolshevik version constructed a psycho-economic structure that maintained in operation (by uniting in the nomenklatura the status of the official and that of the commissary, and by operating a self-establishing machinery of democratic centralism) a peculiar processing industry whose final mass product was a peculiar version of the autonomy (i.e., the victim’s complicity)1 andin its social democratic version addressed the antinomy by adjusting modernization’s interest and socialist values in promoting labor power as capital in a capitalist state. The welfare state succeeded in the optimal distribution of the capital’s enlarged reproduction among the multiplied material and the equally multiplied human capital.
The period of socialism’s failure occurred because from the Bolshevik version, everything but the factors that directly and plainly served the consolidation of power became extinct or eroded, and the welfare state, as an investor in human capital without being its owner or beneficiary (cf. Theses 12, 20 and 21), turned out to be unable to function as a profitable business enterprise. This experience reiterated the accusation that again (contrary to what is stated in it), resources are withheld from accumulation.
The failure of these socialist attempts established a claim for the neo-liberal renaissance, although those attempts only catalyzed a trend that did not originate in them but in the compulsion referred to in Thesis 8.
However, the authentically spontaneous functioning of a capitalist market aimed at by that claim seems to supply a radical solution to the dilemma: the new splitting into elite and mass societies at the end of the twentieth century. The capital required for the manufacturing of highly qualified human potential and the autonomy that is required for its operation is focused on the side of the elite (cf. Thesis 24). On the side of the masses, both factors are lacking.
In this context, George Soros’s warning is particularly pertinent: “The main enemy of the open society... is no longer the communist, but the capitalist threat.”
This warning is pertinent in spite of (or just because of) the fact that the new split does not replicate the split that divided the middle class during the nineteenth century into an elite and a mass. This latter division was subsequently compelled to participate in the production of assets, from the consumption of which it was excluded (from this discrepancy, Marx deduced his prognosis regarding a proletariat that is forced by that discrepancy to overthrow its basis: the capitalist system). By the new split of society, the unformed mass was equally excluded from production and from consumption.
The new split is a particular way for the second modernization to manifest the force of its tendency to make schooling a conditio sine qua non of production.
This unprecedented elimination of the unskilled mass from the economy would be enabled by the transformation of the material economy, which left substantial room for the employment of unskilled workers in information management (cf. Thesis 14), and which demands significantly fewer but qualified human resources.
Laszlo Garai

Chapter 7. Determining Economic Activity in a Post-Capitalist System

An activity is a peculiar type of commodity. One may be willing to perform an activity as work in return for a wage or to pay for the favor of performing an activity as a game. This chapter argues that changing the positive or the negative price of an activity does not unambiguously determine the demand for and the supply of this commodity. That is, when the inconvenience of an activity and its profit or the pleasure of an activity and its cost are balanced, a choice occurs, the issue of which is determined by a person’s psychosocial identity as symbolized—positively or negatively—by that activity. The unmotivated choice evokes a cognitive dissonance, and by this means, the price of the activity turns out to be effective psychologically and not economically.
Laszlo Garai

Chapter 8. Is a Rational Socio-Economic System Possible?

In 1922, Max Weber claimed bureaucracy to be, according to all experience, the most rational form of domination for both the master and those mastered. Weber considered that the “bureaucratization” or the “dilettantization” of management were the only alternatives. Bureaucracy’s overwhelming superiority originated in professional competence, which was made indispensable by the modern technology applied in the production of goods and by the economy as a whole, irrespective of whether the economy was organized in the capitalist or socialist manner. This latter economic organization, Weber continued, implied a large increase in professional bureaucracy if it should aspire to the same technical performance.
Laszlo Garai

Psychology of Bolshevik-Type System


Chapter 9. The Bureaucratic State Governed by an Illegal Movement: Soviet-Type Societies and Bolshevik-Type Parties

To reduce the appearances of a society to its substantial relations, Marx developed a method for the critique of ideologies. His method’s starting point was his recognition that the substance of society’s network of connections is in its relations. Accordingly, when an ideological consciousness attributes the cause of a social effect to the properties of a matter, the task is to find the relations that underlie this property.
Laszlo Garai

Chapter 10. The Paradoxes of the Bolshevik-Type Psycho-social Structure in Economics

To reduce the appearances of a society to its substantial relations, Marx developed a method for the critique of ideologies. His method’s starting point was his recognition that the substance of society’s network of connections is in its relations. Accordingly, when an ideological consciousness attributes the cause of a social effect to the properties of a matter, the task is to find the relations that underlie this property.
Laszlo Garai

Half of Capitalism—And Its Other Half


Chapter 11. Inequalities’ Inequality: The Triple Rule of Economic Psychology

Twenty-two years ago, at the Hungarian Academy of Sciences, I delivered a paper about the economic psychology of equality and inequality.1 I had studied the world of the second modernization for a good amount of time and by my lecture, I meant to provoke the learned audience to discuss a basic dilemma of modernization: that such modernization would be impossible without a high degree of economic inequality because only such a relationship will interest those who benefit from that development—but that it would be impossible with a high degree of economic inequality because it would create antagonists of those who suffer in this relationship. Thus, with logical necessity, it would follow that modernization is simply not possible because inequality either is or is not of a high degree. However, notwithstanding this argument, I argued that modernization did occur in some societies.
Laszlo Garai

Chapter 12. What Kind of Capitalism Do We Want?

The first response to the title question may be “no kind”; for more and more of us, this seems to be the answer.
Laszlo Garai


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