CLASSICAL ECONOMIC SOCIOLOGY

1. CLASSICAL ECONOMIC SOCIOLOGY The usual suspects were the founding fathers of economic sociology –Marx, Durkheim, Weber – but we should also include economists Alfred Marshall, Thorstein Veblen, Vilfredo Pareto, Joseph Schumpeter, ... Why should we bother to study the economic sociologies of the classical era (1890-1920s)? Apart from a sociology-of-knowledge perspective, are those classical writings relevant for economic sociology in its 1980s-present revival? What classical concepts, theories, and debates remain useful sources for guiding contemporary research and theory construction efforts? For this week, we’ll rely on contemporary commentaries about the classical economic sociologists, knowing that a fuller understanding & appreciation depends on immersing oneself in those original literatures.

2. Marshall’s Economic Sociology Alfred Marshall’s (1842-1924) Principles of Political Economy (1890) integrated theories of marginal utility, supply-and-demand, and production costs into a comprehensive neoclassical account of micro-economics. • Marshall also contributed to economic sociology (Aspers 1999): • Preferences (wants) are generated by production activities • A theory of action where the prime motive – money – is socially related to the (believed) preferences of other actors (cf. Weber) • Organization & knowledge as 4th factor of production used to satisfy wants (w/ land, labor, capital); customs, training (human capital), firm management, industries, economies, societies • Marshall identified industrial districts (e.g., Third Italy), geographic embeddedness of skilled workers in which a socially formed “industrial atmosphere” prevails: • “In districts in which manufactures have long been domiciled, a habit of responsibility, of carefulness and promptitude in handling expensive machinery and materials becomes the common property of all …The mysteries of industry become no mysteries; but are as it were in the air, and children learn many of them unconsciously.” (Principles of Economics)

3. The Leisure of a Theoried Class? Minnesotan Thorstein Veblen (1857-1929) coined the terms “conspicuous consumption” & “pecuniary emulation” - flaunting wealth to signal status. Veblen’s satiric Theory of the Leisure Class (1899) analyzed how culture, not utility, shapes economic choices. Societies still reflect tribal divisions of labor, where higher-status groups monopolize mental jobs & relegate menial labor to “inferiors.” Silverware, bling, opera, Lexuses all exemplify conspicuous consumption – wasting money to display one’s higher status. A Veblenian ceremonial / instrumental dichotomy stratifies societies by status ("invidious distinctions"), that run against instrumental aspects of the economy. The ceremonial harks backward toward tribal legends; but the instrumental orients forward to the technological control over future outcomes. The Theory of Business Enterprise (1904) is Veblen’s cultural alternative to neoclassical marginalist production. Ceremony reinforces prejudices and advantages that sustain & reward the current power structure. Instrumental decisions, which creating benefits based on scientific and technocratic criteria (e.g., engineers), inevitably subvert the ancient tribal culture. Wanna join her tribe?

4. Self-Regulation, Not Self-Interest David Émile Durkheim’s (1858-1917) project was to explain how social facts enable modern societies to become integrated rather than anomic. Division of Labor in Society (1893), his doctoral thesis, argued: ► Differentiation of labor creates complex interdependencies ► Self-interest run amok into economic anomie wrecks society ► Strong collective consciousness norms can regulate behaviors ► Legal systems evolve from punition to regulation by contract In Durkheim’s functionalism, the organic solidarity of modern society replaces the mechanical solidarity of primitive tribes. Harmonious functioning of industrial nations requires creation of occupational corporations – associations of professions & crafts – whose participants thrive in “a warmth that quickens or gives fresh life to each individual, which makes him disposed to empathize, causing selfishness to melt away” (Durkheim 1893).

5. On Your Marx Karl Marx (1818-1883) proposed a political-economy theory of social change in Communist Manifesto (w. Friedrich Engels) and Das Kapital. Societies evolved historically: from Ancient to Feudalism, Capitalism, future Socialism, ending in a Communist Utopia. Marx’s dialectical materialism theory viewed class struggle as the engine of change. During Victorian-era capitalism, the bourgeoisie oppresses the working class (proletariat), which will organize & overthrow capitalism in a violent revolution. A societal superstructure of culture & laws is built on the economic base, whose rate of change is driven by technological innovation (windmills vs steam engines). In capitalist mode of production, economic means of production change rapidly, but the social relations of production lag behind. Mismatched superstructure & base generate disruption and conflict; thus, modes of production plant the seeds of their own destruction.

6. “… Among these dark Satanic Mills.” Marx’s economic analysis rested on the labor theory of value, in which a commodity’s price is equated to the labor necessary to produce it. Marx assumed that only actual producers created value, not property owners. • Capitalists underpay workers, thus extracting surplus value in the form of profit (labor exploitation). • However, capitalist competition leads to a steadily falling rate of profit, so exploitation ratchets even higher. • Result is working class immiserization as wage rates become inadequate to reproduce decent living standards. “Passing along a rough bank, among stakes and washing-lines, one penetrates into this chaos of small one-storied, one-roomed huts, in most of which there is no artificial floor; kitchen, living and sleeping-room all in one. In such a hole, scarcely five feet long by six broad, I found two beds - and such bedsteads and beds! - which, with a staircase and chimney-place, exactly filled the room. ... Everywhere before the doors refuse and offal; that any sort of pavement lay underneath could not be seen but only felt, here and there, with the feet. This whole collection of cattle-sheds for human beings was surrounded on two sides by houses and a factory, and on the third by the river, and besides the narrow stair up the bank, a narrow doorway alone led out into another almost equally ill-built, ill-kept labyrinth of dwellings.... .” Engels, The Condition of the Working-Class in England in 1844

7. From Ruling Class to Revolution Marx’s political theory was much sketchier. As the proletariat’s class consciousness develops, it transforms from a Klasse an sich to Klasse für sich. Then ensues violent revolutionary overthrow of the capitalist ruling class, installing common property ownership – a classless society. “The executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie.” Marx & Engels (1848) The Communist Manifesto Apogee of Marxism was What Is to Be Done?, Vladimir Lenin’s theory that a vanguard party must organize the proletariat, lead a violent revolution, and establish a global communist system. Eventually, the communist state will “wither-away.” Did Lenin and his Soviet heirs succeed in practicing what Karl Marx preached?

8. Circulating Elites Vilfredo Pareto (1848-1923) contributed to economic sociology concepts of comparative income distribution analysis and indifference curves. Pareto’s optimum: the optimal allocation of resources occurs when no actor’s subjective utility can be made better off while keeping all others as well off as they were before reallocation. This principle is often invoked to evaluate the fairness of a social-welfare or income-redistribution policy proposal. Pareto (as well as Gaetano Mosca and Roberto Michels) developed a political elite theory to discredit Marx’s two-class conflict model of change. “Lions” rule by force of personality, “foxes” by artful persuasion, but the apathetic masses are unfit to participate via democratic government. The circulation of elites occurs because each type elite has inherent weaknesses: while the lions act forcefully, they lack imagination; although the foxes are cunning, they fail to act coercively. Benito Mussolini heard Pareto lecture and later appointed him to a ministry in his Italian fascist regime.

9. Max Weber, Professor of Economics Max Weber (1864-1920) taught economics at Freiburg until a nervous breakdown turned him into a private scholar who developed sociology. His Outline may be viewed either as “a very positive project” (Swedberg 1999) or as “narrow and static” (Peukert 2004). Weber accepted neoclassical marginal utility theory, drew from the German Historical School and its Austrian School challengers. Grundriss depicted economic action as rational and goal-directed: its purpose is to satisfy an actor’s needs by external means. Weber’s economic sociology sought an interpretive understanding (Verstehen) ofsocialaction, its subjective meaning to actors. Economic action is interest-driven behavior oriented to utility and to others’ behavior. Four ideal types of action: ● Traditional action – unthinking behavior guided by custom & habit ●Affective action – emotional and sentimental motives for action ●Value action (Wertrational)–oriented to goals maybe not rationally chosen, but pursued by rational means; religions are major sources of value rationality ●Goal action (Zweckrational) – oriented to achieve a goal that is rationally chosen; economic actions can be assumed goal-rational until shown otherwise

10. The Protestant Ethic … Weber’s classic essay was part of larger project on the effects of religious ethics on economic life, including religions of China, India, ancient Israel. Ascetic Protestantism stressed rational and innovative religious practices. Interest in salvation exemplifies value rationality. Calvinists believed that salvation was predestined, and cannot be changed through good deeds. High ethical and pure moral conduct, but also prosperity, proves one’s “elected” status within the believer community. John Calvin John Knox Weber argued that the theologies of certain Protestant sects encouraged a rational pursuit of worldly activities that were infused with positive spiritual and moral meanings. While desiring to achieve religious salvation, the Protestant adherent “eventually comes to believe that secular work, carried out in a methodical manner, represents a means to salvation” (Swedberg 2003:13). Thus, secular goal-rational economic action was a by-product of the value-rational religious doctrines which fostered planning & self-denial.

11. … and the Spirit of Capitalism Why did a rational capitalism form arise in the West, then diffuse globally? The Spirit of Capitalism is a set of ideas and habits for rationally pursuing economic gain. Although present outside Western cultures, “heroic entrepreneurs” alone could not create a new economic system. “In order that a manner of life well adapted to the peculiarities of capitalism could come to dominate others, it had to originate somewhere, and not in isolated individuals alone, but as a way of life common to whole groups of man.” Factors contributing to a progressive disenchantment of the Western world included pursuits of mathematics and science, jurisprudence, governmental administration. By the time Weber wrote, capitalism had outgrown its religious origins, leaving only the rational economic pursuit of wealth.

12. Max Weber’s typology of capitalism, according to Richard Swedberg (2003).

13. Class, Status, and Party Weber attacked Marx’s class conflict model, proposing three bases of stratification with unequal consequences for a group’s “life chances”: ► Social class - based on economically determined relationship in various markets (owner, employee, creditor, debtor, rentier, etc.) ► Status class - based on noneconomic qualities such as honor, prestige, religion, ethnicity, race ► Party class - affiliations in the political domain “But ‘parties’ live in a house of ‘power.’ Their action is oriented toward the acquisition of social ‘power,’ … toward influencing a communal action no matter what its content may be. ... Parties also differ according to whether or not the community is stratified by status or by class. Above all else, they vary according to the structure of domination within the community. For their leaders normally deal with the conquest of a community.” (Wirtschaft und Gesellschaft)

14. Weberian Power is Relational Power in is inherently the property of a relationship between actors. Weber’s two famous definitions explicitly asserted that power (Macht) is not identical to the resources held by an actor, but occurs during situated interactions involving actors who may have potentially opposing & conflicting interests and goals. ‘Power’ is the probability that one actor within a social relationship will be in a position to carry out his own will despite resistance, regardless of the basis on which that probability rests. (1947:152) We understand by ‘power’ the chance of a man or a number of men to realize their own will in a social action even against the resistance of others who are participating in the action. (1968:962) Some power is based on force (coercion). But, if actors willingly assent or consent to obey another’s commands, power becomes legitimate authority (Herrschaft), which may be based on actors’ traditional, charismatic, or rational-legal beliefs in the rightness of their relationship.

15. (De)volution of Authority Weberian typology of forms of legitimate authority reflects his concept of social evolution trending inexorably to disenchantment & rationalization. • Traditional: customary domination by clan chiefs, patrimonial patriarchs • Charismatic: domination by leaders with divine or supra-human personality • Rational-legal: domination by rules applied by officers of bureaucracies Traditional & charismatic forms evolve (when a charismatic leader’s successors must routinize his authority), toward domination by rational-legal authorities in the bureaucracies that increasingly pervade all modern states and societies. Weber’s metaphor for the rationalized modern economy is an iron cage (stahlhartesGehäuse): “The Puritan wanted to work in a calling; we are forced to do so. … the care for external goods should only lie on the shoulders of the ‘saint like a light cloak, which can be thrown aside at any moment.’ But fate decreed that the cloak should become an iron cage. … No one knows who will live in this cage in the future, or whether at the end of this tremendous development entirely new prophets will arise, or there will be a great rebirth of old ideas and ideals or, if neither, mechanized petrification embellished with a sort of convulsive self-importance. For of the last men of this cultural development, it might well be truly said: ‘Specialists without spirit, sensualists without heart; this nullity imagines it has obtained a level of civilization never before achieved.’”

16. Schumpterian Socioeconomics Joseph Schumpeter (1883-1950) bridged the classical-modern eras in economic sociology, one of the few economists conversant with our field. An Austrian friend of Weber, Schumpeter proposed a different explanation for the origins of modern capitalism (Brouwer 2002). The entrepreneur is the key economic actor, whose risk-taking innovation breaks up the circular flows in a stable economy, and triggers the development of a qualitatively new economic system. “What we are about to consider is that kind of change arising from within the system which so displaces its equilibrium point that the new one cannot be reached from the old one by infinitesimal steps. Add successively as many mail coaches as you please, you will never get a railway thereby.” Theorie der wirtschaftlichen Entwicklung (1912) Social change occurs because the entrepreneur’s wealth & status fade over successive generations.

17. Creative Destruction In Capitalism, Socialism, and Democracy (1942), Schumpeter saw socialism triumphing over capitalism, but for non-Marxist reasons. Creative destruction is the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Competence-destroying inventions – computers, Internet, biotech, inventory-management systems – kill off old industries & give birth to new ones. ► Hostile intellectuals are further de-legitimating mid-20th century capitalism’s already weak and damaged institutional structures. ►As economic growth slowed, huge monopolistic corporations are taking over the R&D investment function of entrepreneurial families. ►Socialism will succeed, not by violent revolution, but as electoral trends filling more parliamentary seats with social democratic parties. Marx & Schumpeter were false prophets of doomed capitalism – why?

18. Discussion Quex 1. Weber depicts market price as a function of both interest struggles between exchanging actors and competitive struggles between sellers & buyers. How/Is his explanation more sociological than the neoclassical market-price model? 2. How/Do the Weberian social action types provide a more comprehensive account of decision-making than rational choice theory? Give some examples. 3. Peukert (p. 1007) says uncertainty and agency are missing from Weber’s economics. How might an interpretive understanding model incorporate those concepts to produce a better explanation of irrational modern financial markets? 4. How/Do Schumpeter’s & Weber’s explanations differ on the sources of savings and investment that helped develop rational market capitalism? Is Schumpeter’s entrepreneur a Weberian charismatic leader for the investment bankers? 5. How did Knight use uncertainty to infer that profit expectations hold the key to investment? Is Brouwer right that 1990s’ “dot.com bubble” reflected this process? 6. What are some alternative explanations to Weber’s Protestant Ethic thesis in explaining the West’s spectacular rise in the global economy since 17th century? 7. Does Marx or Weber offer more useful concepts of class, status, and power? 9. In what ways was Marshall an economic sociologist? Could his neoclassical credentials help to make today’s economists more receptive to sociological ideas?