Economic Action and Social Structure Mark Granovetter

Social scientists (not economists) used to think that individualistic calculations were less important in determining actions and the structure of institutions in pre-capitalist societies. The New Institutional Economics argues that this is not so, such calculation were always equally dominant. Adam Smith talked about the propensity to trade and barter, not limiting his assertion to capitalism.

In fact, the present is similar to the past, but not because people were always homos economicus, but because even today they are not.

Non-economists have always seen the need for gov't. In Hobbes' Leviathan (1588 – 1679) men without a strong gov't to mediate their competing claims would devour each other. In such condition, there is no place for industry; because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving, and removing, such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short. — "Chapter XIII.: Of the Natural Condition of Mankind As Concerning Their Felicity, and Misery.", Leviathan

But how will the gov't not be just a tool in the hands of some to oppress the others? Your answer:_________________

To economists the gov't stands in the way According to economists economic agents free of gov't intervention would achieve efficiency. For Hobbes, free competition would bring the end of human existence for the economist it is the only hope. For the economist, social atomization is the prerequisite to efficiency. And good behavior is not a problem either, it will be enforced by competition

Of course, competition is no answer to violence, which was the problem that concerned Hobbes. Granovetter argues that the atomized individuals in the free market behave in a civilized manner because they have created a social structure and a system of norms.

Granovetter objects both to the view that people make choices that are dictated to them by their social milieu and to the view that people are unconnected individuals. He believes that they are ruled by a social structure, but that they shape the social structure at the same time

Economists see the firm, or other market arrangements (stock options), as doing away with the need for economic agents to behave honorably. But Granovetter says that if all people were only self-seeking, there would have been no solutions to their machinations. (No quality guaranteeing price for reasons we have discussed.)

Obviously these are not sufficient Granovetter notes that whenever possible, we rely on personal references to make choices when we shop for either goods or people. Granovetter asks: If there are market institutions that according to economists solve the problem of malfeasance, and if there is general morality (a person is generally moral when she treats everybody equally without discriminating), why do we seek the personal touch? Obviously these are not sufficient

Social Relationships A social relationship creates obligations. Emphasis on CREATES. People operate within a social structure, but they create that social structure. They are not simply automatons who either follow self interest or follow the dictates of the social norm or form. Individuals have social roles: husband and wife in marriage, worker and boss in the work place. But couples create their own husband/wife division of labor and so do bosses and workers.

Criticism of Williamson Williamson starts with the observation that competition cannot guarantee good behavior when there is specific capital Williamson's solution is the same as Hobbes: Submitting to authority (within the firm), to solve the problem of all against all.

But the world is not all against all, not even in the business world, where people have personal relationships in addition to business ones. And within the firm people do not necessarily follow orders

Social Relations Help Obviously within firms, but also among firms—and often obviate the need to have firms. For example: Sclar, Williamson and in particular Holmstron and Roberts pointed out EXCLUSIVE DEALING contracts that occur in the free market! (A social relationship may help the individual and hurt society: Adam Smith warned against the trade association)

Social Relations Help BUT are Not a Panacea “You always hurt the one you love” Embezzlement is not possible without first gaining full trust Enormous trust leads to enormous malfeasance (rating firms) Within firms there may develop social networks that subvert supervision and auditing (Study by Dalton, Men Who Manage, discovered that managers cooperated to subert audits)

Social relations—culture--determine both: --Whether integration (firm) is necessary to avoid opportunism AND --Whether the integrated firm will work The fact that firms thrive shows that the firm does offer an effective solution to problems within our culture

Conclusion Which organizational structure emerges depends in part on the degree of social interactions. Social interactions are important even within firms People determine the social interactions, these are not a given This is why CULTURE and the organization of society matters

Conclusion for Planners When evaluating a case of privatization, the cultural environment must enter the analysis.