SOSC 300K

Lecture Note 3

“Embeddedness”

Market vs. Hierarchy (1)

• The Market Approach: Adam Smith’s concept of “self-regulating market”

• E. g. market transaction• The Hierarchy Approach: neo-institutional school

(explaining social institutions from a neo-classical viewpoint)

• E. g. One strategy to save the transaction cost in market process is to internalize market transaction into transaction within a hierarchical enterprise

From Adam Smith, Karl Polanyi to Mark Granovetter

• 1. Granovetter on Smith: undersocialized in the discussion of the perfect competition in the self-regulating market– “The fact that actors may have social relations with one another

has been treated, if at all, as frictional drag that impedes competitive markets”

– The level of embeddedness of economic behavior did not vanish in the course of modernization

• 2. Granovetter on Polanyi: oversocialized; emphasize the customs, habits or norms that followed mechanically and automatically in economic process– The argument on how social influences individual behavior is

rather mechanical. But indeed culture is not a once-for-all influence but an ongoing process, continuously constructed and reconstructed during interaction.

Neo-institutional School

• Thoughts in the 1970s: Previously, social institutions and arrangements are thought to be the adventitious result of legal, historical, social, or political forces. Now, these institutions and arrangements are viewed as the efficient solution to certain economic problems such as malfeasance, force and fraud.

• The Market Failure Literature

Market vs. Hierarchy (1: the Transaction Cost Approach*)

• * Oliver E. Williamson, “The Economics of Organization: the Transaction Cost Approach,” the American Journal of Sociology, V. 87, No. 3 (Nov., 1981), 548-577.

• The transaction cost approach: to assess the capacities of different structures to harmonize relations between parties and to recognize that new structures arose in the service of these harmonizing purposes

• Unit of analysis: transaction• Where does transaction cost come from? A transaction

occurs when a good or service is transferred across a technologically separate interface. One stage of activity terminates and another begins. With a well-working interface, as with a well-working machine, these transfers occur smoothly.

Market vs. Hierarchy (1: the Transaction Cost Approach*)

• Low transaction cost: the parties to the exchange operate harmoniously

• High transaction cost: frequent misunderstandings and conflicts between the parties to the exchange lead to delays, breakdown, and other malfunctions

Market vs. Hierarchy (2)

• Transaction across a market interface

• Externalized transaction• Problem: Opportunism

encouraged by “information asymmetries and refers to a lack of candor or honesty in transactions, to include “self-interest seeking with guile:

• e. g. imperfect market competition, limited information, sunk costs, and ”specific human capital” investment

• Transaction within Hierarchical firms

• Internalized transaction• Problem: Bounded rationality

the inability of economic actors to anticipate properly the complex chain of contingencies; they can be handled within the firm’s “governance structure” instead of leading to complex negotiations

Market vs. Hierarchy (3: Efficient Boundary)

S 1

D-0

S 3S 2

D-B

C2-0 C3-0C1-0

C1-B C2-B C3-B

R

S1, S2, S3: Core production stages; R: Raw materials;

Component supply: C1-B, C2-B, C3-B (if the firm buy its components); C1-0, C2-0, C3-0 (if the firm makes it own components)

Distribution: D-B (if the firm uses market distribution); D-0 (if the firm uses own distribution.

an actual transaction; a potential transaction

Granovetter’s “Social Embeddedness” (1)

• Unit of analysis: Social networks (emphasize the role of concrete personal relations and structures of such relations in generating trust and discouraging malfeasance)

• Motivation of economic transaction: both self-interest and opportunism

• 1. Nature of Market: Imperfect Competition• Social relations, rather than institutional arrangements or

generalized morality, are mainly responsible for the production of trust in economic life. Networks of relations are the structure that fulfills the function of sustaining order.

Granovetter’s “Social Embeddedness” (2)

• 2. Inter-personal relationship: Trust and Malfeasance• While social relations may indeed often be a necessary

condition for trust and trustworthy behavior, they are not sufficient to guarantee these and may even provide occasion and means for malfeasance and conflict on a scale larger than in their absence. Why?

• 2-1: The trust engendered by personal relations presents, by its very existence, enhanced opportunity for malfeasance.

• 2-2: Force and fraud are most efficiently pursued by teams, and the structure of these teams requires a level of internal trust that usually follows preexisting lines of relationship.

Granovetter’s “Social Embeddedness” (3)

• 2-3: The extent of disorder resulting from force and fraud depends very much on how the network of social relations is structured.

• A. The presence of social relations inhibits malfeasance: More extended and large-scale disorder results from coalitions of combatants, impossible without prior relations. … In the business world, where conflicts are relatively tame unless each side can escalate by calling on substantial happens in attempts to implement or forestall takeovers.

• B. Disorder and malfeasance occur when social relations are absent. … But the level of malfeasance available in a truly atomized social situation is fairly low; instances can only be episodic, unconnected, small scale.

The Strength of Weak ties

• Social relations—solution or source of malfeasance?

• Strong ties:• Definition:• Problems:• Weak ties: • Definition:• Problems:

Clifford Geertz, the Bizaar Trade (1)

http://www.nku.edu/~anthro/requirements.html

http://www.wizweb.com/~susan/kyrgyz/pictures.html

http://www.womenforwomen.org/projectindependence/Afghanphotos.htm  

The Bazaar Trade (2)

• Commodity exchange is less based on truisms but on information flow

• The control of information flow on the message such as product quality, prices, and production costs

• Clientalization: a particular purveyor-customer relationship based on symmetrical, egalitarian, and oppositional interaction

• “Whatever the relative power, wealth, knowledge, skill, or status of the participants—and it can be markedly uneven—clientship is a reciprocal matter”

The Bazaar Trade (3)

• How does clientalization work in the bazaar trade? • 1) spatial localization and “ethnic” specialization of the

bazaar trade• 2) clientalization itself lends form to the bazaar for it

further partitions it, and does so in directly informational terms, dividing it into overlapping shbpopulations within which more rational estimates of the equality of information, and thus of the appropriate amount and type of search, can be made

• 3) circulation of multidimensional information• 4) intensive nature