After Oliver Williamson, a pioneer of the new institutional economics — studying the logic of firm organization from within the logic of neoclassical economics — won the Nobel Prize for economics, Orgtheory.net linked to “Economic Action and Social Structure: The Problem of Embeddedness” by Mark Granovetter, which it described as “the seminal piece of economic sociology.” The paper pertains to a question that has bothered me recently about the degree to which the neoclassical view of markets works ideologically, shaping the subjectivity of those living in societies in which neoclassical economics secure respect and sway policymakers.
In other words, does the analytical presumption of perfectly competitive markets and atomized, highly rational actors affect the way in which we end up assessing our own economic behavior privately? Does it constrain it, blind us to alternatives? Does it prompt us to adopt efficiency as an end in itself, so much so that we begin to forget (or begin to demonize) the other aims we might seek to achieve socially? In what ways has supposedly “irrational” behavior become taboo, or become unthinkable? In what ways does capitalist culture glorify the absence of emotional ties, celebrate impersonality? Is a chief goal of marketers and other would-be agents of economic malfeasance to convince us of our rationality (i.e., we are persuaded that our economic choices are ipso facto rational and defensible)? These are among the many issues that the “common sense” notion of markets occludes.
Granovetter’s paper touches on many of these occluded issues. He argues for a middle ground between what he calls oversocialized and undersocialized views of economic behavior, one which takes into account the fact that social relations are always pertinent to economic transactions and always in process, but don’t necessarily determine the outcomes in advance. “Culture is not a once-for-all influence but an ongoing process, continuously constructed and reconstructed during interaction. It not only shapes its members but also is shaped by them, in part for their own strategic reasons.” And what is to be regarded as rational is not entirely as a matter of economic efficiency; economic behavior also simultaneously aims at “sociability, approval, status, and power.”
Prior relationships matter to what sort of transactions occur, and how frequently, and to what primary purpose and so on. We are much more likely to do business with people we know or have learned to trust. Yet “in classical and neoclassical economics,” Granovetter argues, “the fact that actors may have social relations with one another has been treated, if at all, as a frictional drag that impedes competitive markets.” That is, social relations are an impediment, something that ideally would not exist since they distort market behavior. Without prior and ongoing personal relations, economic behavior would be more “efficient,” more tractable to analysis. If perfect competition, uncorrupted by social relations, was guaranteed to keep everyone honest, it would make all our transactions more “convenient.” We wouldn’t have to know a guy in order to get our car fixed. We wouldn’t have to worry about the mom-and-pop hardware store’s fate when we go to Home Depot. Market discipline would grant us a self-centered paradise in which firms had no choice but to offer us the best deal regardless of who we bothered to get to know, regardless of any of our past behavior or future promises.
The ideal of convenience is a product of capitalism not a reason why capitalism has succeeded.
Convenience and selfishness thereby become closely intertwined, a connection that market ideology validates. Having to engage with other people is draining and unpredictable. Better a self-service world of frictionless exchanges. Granovetter cites Albert Hirschman, who in “Rival Interpretations of Market Society” (jstor) described the perfect competition model as allowing us to believe that “the various operators that contract together need not enter into recurrent or continuing relationships as a result of which they would get to know each other well.” Instead, we can remain ignorant of one another, isolated, happily preoccupied with ourselves and our intrinsic desires. (As if those exist.)
Built into the assumptions of neoclassical economics is the idea that humans have yearned for this peculiar sort of convenience and evolved the market as an institution that made it possible. But it could be that a market society produces subjects that adopt asociality as an ideal. The ideal of convenience is a product of capitalism not a reason why capitalism has succeeded.
The obvious problem with a world of perfectly competitive agents permanently free of any pre-existing social relations is that such a world would be a Hobbesian war of all against all. One of Williamson’s insights, as Granovetter notes, is that “real economic actors engage not merely in the pursuit of self-interest but also in ‘opportunism’ — ‘self-interest seeking with guile; agents who are skilled at dissembling realize transactional advantages.’ ” (If you read anything about the vanilla option and financial complexity, that observation shouldn’t be surprising. Banks amplified complexity to profit at the expense of general macroeconomic health.) With no “reputational concerns” — with no ongoing social relations to worry about — what would stop market actors from doing whatever they could to increase their chances to be opportunistic by sowing confusion and spreading disinformation? “As Hobbes saw so clearly,” Granovetter points out, “there is nothing in the intrinsic meaning of self-interest that excludes force or fraud” as methods of gaining advantage. Clearly there would be nothing convenient about that.
So social relations are not to be wished away unless we want to invite a nasty, brutish, and short existence of lonely vulnerability and cruel predation. This seems so obvious that it needn’t be argued, but what’s striking is the way neoclassical economics idealizes such an outcome by reconfiguring it as total freedom. Nevertheless, we must be careful not to idealize a thick web of social relations either. These can be confining as well — they are the basis for all the prohibitions favored by social conservatives. And social relations also set in motion the entire apparatus of corruption and nepotism and the like that foil fantasies of meritocracy.
Trust among strangers doesn’t spring from a market economy like Athena from the head of Zeus. It is extrapolated from pre-existing social relations and reinforced, possibly nurtured, by conduct in markets. But it always remains fragile, often no more than a matter of blind faith. Granovetter argues that social networks are integral to fostering and maintaining trust, but he also quick to point out how these same networks “may even provide occasion and means for malfeasance and conflict on a scale larger than in their absence.” (This is one reason Facebook may yet prove to be nefarious. The atmosphere of trust the site seeks to establish is a cover for the commercialization of friendship, the systematic exploitation of social ties by third parties.)
The density of social relations necessarily complicates economic transactions, but the results from this are not necessarily positive or negative, just difficult to predict or extrapolate from. In some cases, social relations become social capital — the golf games among the power elite; the inside information passed at lunches. In some case they engender sweetheart deals between contractors. They preempt excessive lawyering. In other cases they constitute an insulating web protecting a community from outsiders. Social relations prompt mimetic purchasing, determine the relative value of positional goods and the degree of conspicuous consumption, the general usefulness of consumerism in signaling. (If no one sees you in your American Apparel, was it worth putting it on?) Social relations likely amplify the biases identified by behavioral economics. All these contingencies play into how goods are priced, contracts are drawn up, and arrangements are settled — rendering supply-demand-equilibrium models much less useful in explaining actual economic behavior.
It may be that social relations at play in the economy enable a certain amount of corruption in order to prevent the more generalized chaos of total atomization.
It may be that social relations at play in the economy enable a certain amount of corruption in order to prevent the more generalized chaos of total atomization. The degree of corruption will be kept within bounds predictable from those given social relations, and as they change, expectations about corruption can be adjusted accordingly. Hence regulation, which in practice functions as a valve calibrating that amount of corruption so that it remains tolerable, and society stable.
But how can we trust regulators? Who will be immune to capture? Who watches the watchers, particularly when they can intentionally obfuscate that which they are supposed to keep transparent? We saw what happened to the rating agencies, who coached banks on how to secure AAA ratings for structured securities the risks of which neither party seems to have accurately gauged. In retrospect, that looks like collusion at the expense of investors and, ultimately, bailout-financing taxpayers. The lesson there is that the presence of regulators tends to foster moral hazard in the form of unjustified trust. But in the absence of regulation, the willingness to trade may dry up, halting circulation and inhibiting economic growth. (Marx seemed to think this sort of freeze-up was cyclically inevitable and would eventually topple the system completely; 2008 almost proved him right.)
If Granovetter is right, social relations operate independently within all manner of economic organizations and affect every transaction, whether in an open market or internal to vertically integrated firms. The volatility of the effects of these relations supplies a good reason for firms, or any institution with established power, to try to suppress them — hence the ideological ramifications of neoclassical economics and the glorification of impersonality. Consumerism, filtering down from these firms and the state, becomes the vector for these ideas; it enshrines social isolation as the highly-sought-after value of convenience and discourages communal ties in favor of competitive consumption and private pleasures of ownership.
Rob would love to hear from you. Drop him a line at horninggenbub [at] gmail [dot] com.
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