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SOSC 300K

SOSC 300K. Lecture Note 3 “Embeddedness”. 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

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SOSC 300K

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  1. SOSC 300K Lecture Note 3 “Embeddedness”

  2. 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.

  3. Market vs. Hierarchy (1) • The Market Approach: Adam Smith’s concept of “self-regulating market” • E. g. market transaction • The Market Failure Literature • One strategy to save the transaction cost in market process is to internalize market transaction into transaction within a hierarchical enterprise • The Hierarchy Approach: neo-institutional school (explaining social institutions from a neo-classical viewpoint) • 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.

  4. Market vs. Hierarchy (2) • Oliver E. Williamson and the Transaction Cost Approach • 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.

  5. Market vs. Hierarchy (3) • 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

  6. Market vs. Hierarchy (4) • A preliminary statement of the transaction cost theory: • 1) Markets and firms (hierarchical organization) are alternative instruments for completing a related set of transactions; • 2) whether a set of transactions ought to be executed across markets or within a firm depends on the relative efficiency of each mode; • 3) the costs of writing and executing complex contracts across a market vary with the characteristics of the human decision makers who are involved with the transaction on the one hand, and the objective properties of the market on the other; • 4) although the human and environmental factors that impede exchanges between firms (across a market) manifest themselves somewhat differently within the firm, the same set of factors apply to both. • Just as market structure matters in assessing the efficacy of trades in marketplace, so likewise does internal structure matter in assessing internal organization.

  7. 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 (5)

  8. C1-0 C2-0 C3-0 D-0 S 1 S 2 S 3 R D-B C1-B C2-B C3-B Market vs. Hierarchy (6: Efficient Boundary) 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

  9. 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.

  10. 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.

  11. 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.

  12. The Strength of Weak ties • Social relations—solution or source of malfeasance? • Ties: interpersonal connections • The strength of a tie: a combination of the amount of time, the emotional intensity, the intimacy (mutual confiding), and the reciprocal services which characterize the tie • Strong ties: 1) larger time commitments; 2) the stronger the tie connecting two individuals, the more similar they are; 3) the “psychological strain”: e. g. in the case of A-B and A-C ties, the psychological strain would occur between B and C: B and C are less likely to interact and less likely to compatible if they do • “Weak ties”: the connection between A and B as well as the connection between A and C is NOT the only path between two points • Strength: B and C has the potential to be connected in a broader network

  13. http://www.wizweb.com/~susan/kyrgyz/pictures.html http://www.nku.edu/~anthro/requirements.html http://www.womenforwomen.org/projectindependence/Afghanphotos.htm Clifford Geertz, the Bizaar Trade (1)

  14. 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”

  15. 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

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