Economic Networks E-Book

David Knoke

• Herausgeber: John Wiley & Sons
• Kategorie: Geisteswissenschaft
• Serie: PESS - Polity Economy and Society Series
• Sprache: Englisch

Seitenzahl: 366

Veröffentlichungsjahr: 2014

Beschreibung

Social relations are crucial for understanding diverse economic actions and a network perspective is central to that explanation. Simple exchanges involving money, labor, and commodities combine into complexly connected systems. Economic networks span many levels of analysis, from persons (consumers, employees), to groups (households, workteams), organizations (corporations, interest groups), populations (industries, markets) and the rapidly expanding global economic system. David Knoke blends network theories from a range of disciplines and empirical studies of domestic and international economies to illuminate how economic activity is embedded in and constrained by social ties among economic actors. Social capital, in the form of connections to others holding valuable resources, is vital for finding a job, buying a car, creating a new industry, or triggering a global financial crisis. In nontechnical terms the author explicates the core network concepts, measures, and analysis methods behind these phenomena. The book also includes many striking network diagrams to provide visual insights into complex structural patterns. This accessible book offers an invaluable critique for both undergraduate and graduate students in economic sociology and social network analysis courses who seek a better understanding of the multifaceted economic webs in which we are all entangled.

Leseprobe

Economic Network

Economy and Society

Markets, Patrik Aspers

Economy and State, Nina Bandelj and Elizabeth SowersMoney and Credit, Bruce G. Carruthers and Laura AriovichGlobal Capitalism, Miguel A. Centeno and Joseph Nathan CohenInstitutions and the Economy, Francesco Duina

Economic Networks, David Knoke

Economic Networks

David Knoke

polity

Copyright © David Knoke 2012

The right of David Knoke to be identified as Author of this Work has been asserted in accordance with the UK Copyright, Designs and Patents Act 1988.

First published in 2012 by Polity Press

Polity Press65 Bridge StreetCambridge CB2 1UR, UK

Polity Press350 Main StreetMalden, MA 02148, USA

All rights reserved. Except for the quotation of short passages for the purpose of criticism and review, no part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

ISBN-13: 978-0-7456-6290-9

A catalogue record for this book is available from the British Library.

The publisher has used its best endeavours to ensure that the URLs for external websites referred to in this book are correct and active at the time of going to press. However, the publisher has no responsibility for the websites and can make no guarantee that a site will remain live or that the content is or will remain appropriate.

Every effort has been made to trace all copyright holders, but if any have been inadvertently overlooked the publisher will be pleased to include any necessary credits in any subsequent reprint or edition.

For further information on Polity, visit our website: www.politybooks.com

For Felix, grandson extraordinaire

But the truth, even more, is that life is perpetually weaving fresh threads which link one individual and one event to another, and that these threads are crossed and recrossed, doubled and redoubled to thicken the web, so that between any slightest point of our past and all the others a rich network of memories gives us an almost infinite variety of communicating paths to choose from.

Marcel Proust

Time Regained (1927)

Contents

List of Figures

Preface

1    Economics and Social Networks

Mainstream and Alternative Economic Theories

The Economic Sociology Perspective

The Social Network Perspective

Summary and Outline of the Book

2    Markets and Networks

Labor Markets

Consumer Markets

Producer Markets

Summary

3    Networks inside Organizations

Micro-Network Concepts

Social Capital

Forming Employee Networks

Network Outcomes

Team Networking

Summary

4    Networks among Organizations

Business Startup Networks

Business Groups

Interlocking Directorates

Strategic Alliances

Evolution of Interorganizational Networks

Summary

5    Global Networks

International Networks

Supply and Commodity Chains

World Cities Networks

A Transnational Capitalist Class?

Networks of the Global Financial Crisis

Summary

6    Looking Forward

Theory Construction

Empirical Tools

Connecting Economy and Polity

Appendix: Network Resources

References

Index

List of Figures

2.1  Neoclassical and networked markets

2.2  Ann’s egocentric job search network

2.3  Broadcast and two-step flow models of opinion formation

2.4  Doctor #20’s egocentric network exposure to a medical innovation

2.5  Structural equivalence in two producer markets

2.6  A revenue-against-volume market profile

3.1  Post-merger communication in a pharmaceutical R&D unit

3.2  Ego’s social capital as probability of accessing alter resources

3.3  The social capital of structural holes

4.1  Network of equity ties among 8 Japanese blocks

4.2  Alliance network among 13 Global Information Sector computer and software companies 1990

4.3  Alliance network among 13 Global Information Sector computer and software companies 1995

4.4  Alliance network among 13 Global Information Sector computer and software companies 2000

4.5  A small world with high local clustering and low average path distance

4.6  Skeletal structure of the largest component in the US alliance network 1988–90

5.1  Block positions in the world city network 2000

5.2  Global network of sovereign wealth investments

6.1  Macro-micro-macro relations in labor markets

Preface

Economic network analysis grew almost exponentially over the past three decades, spurred by the revival of economic sociology and belated interest in networks by some mainstream economists. It benefited from general improvements in network data collection and methods for analyzing them. Most importantly, the quality of explanation and understanding of economic action as both cause and consequence of relations among social actors greatly advanced. This book assesses and interprets diverse economic behaviors from a network perspective. It blends theoretical explanations about structural relations among economic actors – persons and organizations – with empirical evidence from network research on domestic and international economies. Its central themes are: economic actions are embedded in, and are explained by, the social connections among actors; an actor’s social capital consists of others’ resources that can be accessed by the actor; and benefits and costs within economic systems are jointly determined and constrained by the network ties among participants.

The six chapters examine economic networks spanning levels of analysis from individuals, to teams and firms, to markets and interorganizational systems, to the global economy. I strive to explicate core network concepts, measures, and analysis methods in nontechnical terms. Several network diagrams convey visual insights into complex structural patterns. The primary audiences are undergraduate and graduate students taking courses in economic sociology, organizational studies, and social network analysis. The book draws heavily from my experiences in teaching those courses during the past quarter century at the University of Minnesota. I thank the many students from diverse disciplines who participated enthusiastically and contributed in numerous ways that helped me to become a better teacher and scholar. I also thank two anonymous reviewers, Jonathan Skerrett, and Lauren Mulholland at Polity for their invaluable assistance in bringing the project to fruition.

David Knoke

Minneapolis, Minnesota

January 18, 2012

1

Economics and Social Networks

On April 20, 2010, the Deepwater Horizon – a gigantic rig leased by BP plc to drill its exploratory Macondo Prospect oil well 50 miles off the coast of Louisiana – exploded, killing 11 workers and injuring 17 others before sinking a mile deep into the Gulf of Mexico. As much as five million gallons of oil spewed from the borehole before two relief wells plugged it four months later. The spill contaminated coastal marshes and beaches, killed untold numbers of birds and sea turtles, wreaked havoc on four state economies, and further eroded President Barack Obama’s public support. Even before a presidential commission finished investigating the nation’s worst environmental disaster, evidence quickly surfaced about a tangled web of incompetence, criminality, and collective delusions by BP and the regulatory agency charged with overseeing the oil and gas industry. The Bush Administration had allowed the industry to write its own regulatory rules, scrapped environmental impact reviews, and fast-tracked drilling permits. The Interior Department’s Minerals Management Service (MMS) had a structural conflict of interest: it collected royalty payments from the very companies it was supposed to regulate. MMS let oil firms regulate themselves; for example, BP employees penciled in report forms for inspectors to trace over in ink and sign. In 2008, MMS granted BP, a corporation implicated in all major oil disasters beginning with the 1989 Exxon Valdez spill, an exemption from submitting an emergency plan for deepwater blowouts. Instead, BP submitted a “regional plan” to deal with general spills anywhere in the Gulf. Despite the Obama Administration’s reform rhetoric, business continued as usual under the new Interior Secretary, Ken Salazar, who failed to remove many long-serving MMS bureaucrats. Just two months after he took office, MMS approved BP’s Deepwater Horizon well application, which consisted of boilerplate apparently copied from an Arctic drilling plan (it mentioned walruses and other cold-water sea mammals). The plan contained neither discussions of potential deepwater blowouts, nor any site-specific plans to respond to a spill (Dickinson 2010). BP cut many safety corners at Deepwater Horizon, most notoriously in deploying a blowout preventer without a remote-control trigger. When a series of human and technological errors culminated in the April explosion, BP had neither effective means to shut off the flow nor to mop up its impact.

Behind this farce turned tragedy lay a social network explanation, the cozy connections between regulatory agents and corporate employees that skirted ethics and violated laws. Just weeks before Deepwater Horizon exploded, the US Interior Department’s Office of Inspector General completed a report on MMS corruption between 2005 and 2007. It found a flourishing culture of corruption and criminality. Employees watched porn, used coke and crystal meth, accepted gifts, travel, and sports tickets from oil and gas companies. “When agency staffers weren’t joining industry employees for coke parties or trips to corporate ski chalets, they were having sex with oil-company officials” (Dickinson 2010). One MMS employee “conducted four inspections on drilling platforms when he was also negotiating a job with the drilling company” (Urbina 2010). Bureaucrats at the Lake Charles MMS office repeatedly went on hunting and fishing trips with employees of the Island Operating Company, whose Gulf drilling platforms they regulated. When investigators showed Lake Charles District Manager Larry Williamson photos of two inspectors at a 2005 Peach Bowl game tailgate party paid for by Island Operating, he explained:

Obviously, we’re all oil industry. We’re all from the same part of the country. Almost all our inspectors have worked for oil companies out of these same platforms. They grew up in the same towns. Some of these people, they’ve been friends with all their life. They’ve been with these people since they were kids. They’ve hunted together. They fish together. They skeet shoot together … They do this all the time. (Office of Inspector General 2010: 3)

A revolving-door phenomenon, also known as regulatory agency capture, emerged as early as the nineteenth century in the canal and railroad industries (Levine and Florence 1990). The failure of agencies to act on behalf of the public interest, but instead serving special interests, is prevalent in the federal and state governments. One common capture mechanism, exemplified by MMS negligence preceding the Gulf oil spill, is the web of interpersonal ties spun among personnel routinely flowing between agencies and corporations. Also relevant is “cognitive capture,” a consensual taken-for-granted mindset emerging among people who share numerous formative experiences, which can blinker them to looming dangers and alternative solutions.

This introductory chapter provides brief and broad sketches of mainstream and heterodox economics, economic sociology, and social network theories that set the contexts for more detailed examinations of economic networks in subsequent chapters. Readers interested in learning more about broader debates within economics and economic sociology should consult the huge primary literatures of those disciplines. The Appendix lists sources for instruction, software programs, and datasets for further self-study. Economic networks operate at multiple levels of analysis, including individuals (consumers, employees), groups (households, work teams), organizations (firms, interest groups), and populations (industries, markets), as well as across these levels. An important goal for this book is to develop concepts and principles useful for understanding complex economic relations.

Mainstream and Alternative Economic Theories

This section summarizes the core assumptions and principles of mainstream economic theory and its application to actors and markets. A discipline’s mainstream “consists of the ideas that are held by those individuals who are dominant in the leading academic institutions, organizations, and journals at any given time, especially the leading graduate research institutions. Mainstream economics consists of the ideas that the elite in the profession finds acceptable, where by ‘elite’ we mean the leading economists in the top graduate schools” (Colander et al. 2004: 490). After describing the neoclassical synthesis that dominates mainstream economics, I briefly review some critiques and describe some alternative theories proposed by heterodox economists seeking to diversify the dominant paradigm. These developments prepare the stage for the economic sociology and social network approaches discussed in subsequent sections.

Mainstream Economic Theory

The dominant paradigm of mainstream economists originated in the neoclassical theories of late nineteenth-century economists, who built on the ideas of such classical founders as Adam Smith, David Ricardo, and John Stuart Mill. Among the key contributions of neoclassical economists – including William Stanley Jevons, Carl Menger, Léon Walras, and Alfred Marshall – were general equilibrium, marginal analysis, and price theory. By the middle of the twentieth century, a neoclassical synthesis, combining neoclassical microeconomics with the macroeconomic approach of John Maynard Keynes, became the mainstream economic theory presently taught to generations of countless undergraduates in introductory economics courses. Mainstream economic theory encompasses decision making at both micro- (individuals, firms) and macro- (markets, industries, whole economies) levels of analysis to explain the production, exchange, and consumption of economic goods and services. Key components include rational actors, independence of decision making, and utility maximization. In simplified terms, the core assumptions of mainstream economic theory are:

•    Economic actors – whether individuals, households, or firms – are rational; that is, their preferences among a set of two or more alternatives, such as purchases of goods and services or investments in production machinery, are logically consistent (follow a transitive ordering).

•    In deciding which alternative to choose, individuals always try to maximize personal utility (benefit, satisfaction), within the constraint of a limited budget. Similarly, firms seek to maximize profits on the goods or services they produce and sell. Choices occur on the budget line not below it, although actors may spend more than their current incomes by borrowing or spending savings.

•    Atomization, or methodological individualism, prevails in economic decisions. One actor’s preferences and choices are not influenced by the behaviors of others and all pursue their self-interests.

•    Decision making applies the law of diminishing marginal utility. Utility decreases with each incremental amount of a good, and the maximum utility for two alternative goods occurs at that point on an actor’s budget line where the marginal utilities of both goods are equal.

•    All economic actors possess perfect information: complete and up-to-date knowledge about the prices of all commodities and services available in an economy. Information is free, that is, available without cost in time or money (Knight 1985 [1921]: 76–9).

•    Markets, consisting of sets of buyers and sellers who may exchange with one another, are perfectly competitive. Because buyers and sellers are numerous and small (control few resources), no individual’s actions can influence market prices; thus, all actors are price-takers not price-makers.

•    Price, the amount of money a buyer pays a seller for a specific good or service, is determined at market equilibrium by the intersection of demand and supply curves, which are aggregations across all buyers and sellers in a market. No quality of a good or service except its price is relevant to market exchanges. The demand–supply intersection also determines the aggregate quantity sold at the particular market price. The price mechanism enables exchanges to occur smoothly and efficiently with minimal transaction costs (e.g., acquiring information; negotiating and haggling).

•    The point where supply and demand curves intersect, and thereby determine market prices and quantities, may shift through diverse exogenous factors, such as population changes, wealth increases, government regulation and price supports, catastrophic weather. The capitalist market remains the most efficient mechanism for allocating private resources in a free economy. With few exceptions – e.g., instances of market failures, such as the underproduction of public goods (roads, harbors, national defense) – governments should not intervene in the market process.

Mainstream economic theory’s simplifying assumptions enable modern economists to apply powerful deductive methods to its axioms, specify elegant systems of mathematical equations, and apply sophisticated statistical procedures to empirical data to generate precise predictions and forecasts about economic activity. Consequently, economists have become highly influential in shaping a wide range of public policies affecting individuals, families, firms, and industries. However, hosts of critics inside and outside the discipline raised doubts about the realism, validity, and accuracy of mainstream economic theory as both explanation of economic action and guide to policymakers.

Criticism and Rebuttal

A persistent criticism, voiced principally by economists themselves, is that the core assumptions of the neoclassical synthesis vastly oversimplify economic reality, and hence provide a shaky foundation on which to construct accurate theoretical explanations of empirical observations (e.g., Rappaport 1996). For example, Geoffrey Hodgson argued that mainstream theory “is steeped in the metaphors and presuppositions of classical physics,” creating “an artificial world where time is reversible, where individuals are self-contained, atomistic units, and where both extreme complexity and chronic problems of information and knowledge are excluded. The idea of rational, maximizing actors interacting and reaching an equilibrium is modeled precisely in these mechanistic terms” (Hodgson 1992: 757). Similarly, Steve Keen (2001) cataloged numerous instances where mainstream theoretical premises are either inconsistent or lack empirical evidence. For example, Keen and Standish (2006) argued that Alfred Marshall’s assumption that firms in a perfectly competitive industry do not react strategically to one another’s actions is demonstrably false. “As a consequence, the Marshallian model of atomistic behavior leads to industry output being independent of the number of firms in it, in contradiction of standard neoclassical pedagogy and belief” (p. 82). Other critics complained that mainstream economists grew too reliant on simplifying assumptions because they permit tractable estimates of complex mathematical models.

Milton Friedman, in his famous 1953 essay, “The Methodology of Positive Economics,” defended the epistemological bases of mainstream economic theory against the complaint of unrealism. Mainstream theory is an ideal type that isolates crucial features of a particular economic problem, and is not intended to be descriptively accurate. Whether businessmen really make their decisions by rationally calculating marginal costs and revenues, and seek to maximize utility in every economic transaction, is irrelevant. Instead, Friedman argued, the theory hypothesizes only that, over a wide range of economic situations, people and firms behave

as if they were seeking rationally to maximize their expected returns (generally if misleadingly called “profits”) and had full knowledge of the data needed to succeed in this attempt; as if, that is, they knew the relevant cost and demand functions, calculated marginal cost and marginal revenue from all actions open to them, and pushed each line of action to the point at which the relevant marginal cost and marginal revenue were equal. (Friedman 1970: 21–22)

The ultimate criterion for judging a theory’s usefulness lies, not in the realism of its untestable assumptions, but in its simplicity in making precise predictions about observable economic phenomena of broad scope. Friedman concluded that mainstream theory makes demonstrably superior economic predictions, in comparison to alternative theories which all produce inferior predictions.

If predictive accuracy is the criterion for judging theory, then mainstream economic theory did a very poor job of anticipating and explaining recent speculative bubbles and busts, particularly the high-tech or dot.com bubble of 1998–2000 and the Global Financial Crisis of 2007–9. Mainstream finance economists proposed an efficient markets hypothesis: because stock prices and other financial assets reflect complete economic information, investors always have realistic expectations about future prices and hence will act rationally. Irrational beliefs and actions, such as betting on continually rising stock and housing prices, could never occur because financial markets are self-regulating, and, thus, require no interference or constraints by government. But, by excluding bankers and investment institutions from their simplified economic model, mainstream economists ignored the possibility that both lenders and consumers could lack complete information and might inaccurately assess the high risks of buying and selling the complex securitized mortgage bundles which inflated an enormous subprime-mortgage bubble. Mainstream economists “turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets – especially financial markets – that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation” (Krugman 2009: 2). Chapter 5 examines the social relations that exacerbated the 2007–9 Global Financial Crisis.

Alternative Economic Theories

Challenges to mainstream economic theory arose throughout the discipline’s development. Nonmainstream, or heterodox, theories make diverse assumptions that are incompatible with mainstream conceptualizations of economic actors and markets (Colander et al. 2004). In rough order of their historical emergence:

•    An early alternative, grounded in the nineteenth-century writings of Karl Marx, was based on a labor theory of value rejected by mainstream economists. Marx adapted an assumption of classical economists, notably David Ricardo, that the value of a commodity is determined, not by its sales price at the market’s supply and demand intersection, but by the “average socially necessary labor time” necessary to create it (Marx 1981: 375). Capitalists, as owners of the means of production, pay wages below the full labor value embedded in commodities produced by their employees. In extracting this surplus value, and thus exploiting workers by not fully compensating their labor, capitalists expropriate economic value in the form of rents, interest, and profits. Marx predicted that relentlessly competitive capitalist economies, increasingly reliant on technological innovations to increase labor productivity and capital accumulation, will push workers’ wages toward subsistence levels while the long-term average rate of profit inexorably falls. The eventual outcome of steadily worsening economic crises will be a proletarian revolution abolishing the capitalist mode of production. Socialist economies will emerge to distribute wealth according to the full labor value embedded in commodities. Although that utopia seemed ever-more remote after the collapse of twentieth-century communism, contemporary Marxist economists continued to defend and refine Marx’s labor value theory (e.g., Kliman 2007).

•    The Austrian School flourished in Vienna from the late nineteenth into the early twentieth century, but its present-day adherents are spread across the world. Although some of its founders contributed to the neoclassical theory of marginal utility, the School split from the mainstream in rejecting statistical modeling and experiments as methodologies for testing economic hypotheses. Its preferred approach was logical deduction from axiomatic assumptions. For example, the opportunity costs of production factors and reservation demand define economic values; economic choice involves uncertainty rather than complete information; and markets should be analyzed from “a dynamic perspective, by defining competition as a disequilibrium process rather than a state of affair” (Gloria-Palermo and Palermo 2005: 65). In early 1929, Friedrich Hayek applied Austrian business cycle theory to warn of a looming financial crisis – later known as the Great Depression – due to an unsustainable expansion of the money supply.

•    The “old institutional economics” (OIE) – developed in the early twentieth century by Wesley Mitchell, Thorstein Veblen, Clarence Ayers, and John R. Commons – emphasized how social, political, legal, and financial institutions jointly shape economic markets. Institutions are systems of rules and regulations, including customs and habits, that facilitate and impede social actions. Laws, court decisions, collective bargaining agreements, governmental regulations, and ethical norms are all examples of institutions influencing economic transactions. Commons’ economic institutionalism “provides a theoretical framework for an integration of the economic and social dimensions of human behaviour” (Kaufman 2007: 6). Commons accepted but modified some key neoclassical assumptions. For example, he qualified the utility-maximization principle by arguing that individuals’ preferences are often interdependent and affected by emotions such as envy and status-seeking (Veblen’s “conspicuous consumption”). The “new institutional economics” of the late twentieth century, rooted in Ronald Coase’s transaction cost theory, is usually considered more compatible with mainstream economics than was the OIE.

•    Evolutionary economics drew inspiration from Darwinian biological evolution to posit that economies, rather than functioning in the static general equilibrium of mainstream theory, experience dynamic structural transformations. Evolutionary economic theory assumes uncertainty, “cumulative causation, path-dependency, and irreversibility” (Hodgson 1992: 758). Evolutionary processes involve variation, selection, and retention or inheritance, with market competition as the primary environmental mechanism for choosing the fittest economic actors and institutions. Equivalent to genetic inheritance in biological evolution is the organizational routine, a recurrent pattern of thought and action that enables a firm to gain competitive advantages over its rivals in the struggle for economic survival (Nelson and Winter 1982). Through innovation, organizational learning, and knowledge transfers, firms can acquire new routines that improve their chances for success. By fostering technological innovation, entrepreneurs launch “gales of creative destruction” that shake apart an old macroeconomic order and propel it in radically unpredictable directions (Schumpeter 1942). Economic evolution involves not gradual transformations but discontinuities similar to biologists’ punctuated equilibria model: “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” (Schumpeter 1934 [1912]: 64).

•    Behavioral economics imported insights from psychological theories and empirical research on cognition and emotion to explain seemingly nonrational decisions by consumers, investors, firms, and other economic actors. Challenging the assumption that rational actors make utility-maximizing calculations based on complete information, behavioral economists argued that a more realistic decision-making assumption is bounded rationality (Simon 1957). Faced with limited time and incomplete information, people typically follow a satisficing strategy to choose actions perceived as achieving a satisfactory outcome, but not necessarily a maximal result. For example, rather than trying to maximize profits, firm managers aspire only to profit levels that will satisfy share owners and other stakeholders, so that management can pursue its own interests (Cyert and March 1963). Prospect theory (Kahneman and Tversky 1979) provided another empirically grounded, psychologically realistic alternative to the utility-maximization assumption. People who face choices among risky alternatives with large rewards, such as investments in financial markets, tend to be risk-averse, and thus give greater weight to potential losses than to prospective gains when making decisions. In an amusing application of prospect theory, the risky choices by contestants in a high-stakes TV game show, “Deal or No Deal,” were better explained by their previous experiences in playing the game than by expected utility theory (Post et al. 2008).

•    Recent additions to the lengthening list of heterodox theories include complexity economics, game theory, ecological economics, computer modeling and simulation, feminist economics, and neuroeconomics (Colander et al. 2004). The only commonality among these diverse perspectives is rejection of the neoclassical synthesis within which the majority mainstream economists continue to work.

The preceding summaries of mainstream economic theory and its heterodox challengers reveal substantial disagreement and intellectual ferment. Some observers perceived unprecedented opportunities for alternative approaches to move from the discipline’s periphery toward the center where transcendent syntheses might occur (Colander et al. 2004). Others saw mainstream economics as deeply entrenched and resistant to change (Hodgson 2007). With no fully integrated alternative theory to the neoclassical synthesis yet at hand, the prospects for the radical transformation of mainstream economics appear dim. “None of these is at present strong enough or complete enough to declare itself a contender for the title of ‘the’ economic theory of the 21st century” (Keen 2001).

A few economists grew more receptive over the past two decades to using network ideas and methods to explain economic behaviors. Some challenged mainstream economics to develop network theories and methods to improve understanding of global economic interdependencies and reduce the risks of catastrophic failures: “We need, therefore, an approach that stresses the systemic complexity of economic networks and that can be used to revise and extend established paradigms in economic theory” (Schweitzer et al. 2009: 422). Matthew Jackson was possibly the earliest and most persistent advocate, exploring stylized models of network stability and efficiency (Jackson and Wolinsky 1996), network evolution (Jackson and Watts 2002), and labor markets (Calvó-Armengol and Jackson 2007). His methodological tome, Social and Economic Networks (Jackson 2008), drew heavily from sociology, game theory, computer science, and physics to illustrate analytic techniques and exemplify substantive research. Adalbert Mayer (2009) argued that economists take a distinctive approach to modeling social networks that emphasizes the role of choices under constraints, for example, in educational attainment and matching workers to jobs. Nevertheless, Nobel laureate Kenneth Arrow succinctly expressed the prevailing skepticism of many mainstream economists: “Network theory has been imported into economics as a tool, although it may not be all that useful or needed” (Arrow 2009: 14). The economic sociology perspective discussed in the next section can best be seen as yet another challenger to mainstream economic orthodoxy.

The Economic Sociology Perspective

This section sketches a history of economic sociology and summarizes some core principles of the new economic sociology that emerged over the past three decades. This overview provides the context for a more detailed examination of social network perspectives on economic activity in the following section.

A Brief History

Although an economist, William Jevons, first used the term “economic sociology” (Jevons 1965 [1879]: xvi; see Swedberg 2003: 5), it was quickly appropriated by several founders of classical sociology – including Max Weber, Émile Durkheim, and Georg Simmel – for their investigations of the great eighteenth- and nineteenth-century transformations from agrarian to industrial society, typified as the transition from community (Gemeinschaft) to association (Gesellschaft). Weber’s distinctly sociological understanding of the economy still provokes lively debate a century later, with some scholars viewing him as increasingly relevant today (e.g., Swedberg 1998; Parsons 2006), while others are skeptical that he truly transcended neoclassical conceptualizations of rationality and utility maximization (e.g., Peukert 2004). Ironically, Weber never held a professorship in sociology, but was an economics professor in the 1890s at Freiberg and Heidelberg universities before mental problems forced him to become a private scholar. However, he briefly headed a new institute of sociology at the University of Munich shortly before his death in 1920. Weber’s typology of action, as applied to economic behavior, is explicated below among the core principles of contemporary economic sociology. Durkheim’s main contribution to classical economic sociology, in The Division of Labor in Society, was a functionalist argument: strong collective consciousness norms are necessary to overcome tendencies toward economic anomie arising from the pursuit of self-interest in modern, highly differentiated societies. He advocated the creation of occupational corporations – associations of professions and crafts – where participants could 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 1984 [1893]: lii). Simmel, in The Web of Group Affiliations 1955 [1922], influenced the subsequent development of social network analysis through his investigations of dyadic and triadic forms of group structure (see chapter 3). Other contributors to classical economic sociology include heterodox economists Thorstein Veblen, Karl Marx, and Joseph Schumpeter, briefly discussed above, as well as Vilfredo Pareto who influenced the economic sociology of Talcott Parsons.

After its classical flowering, economic sociology experienced two notable developmental phases. Between the 1930s and 1960s, Parsons developed his general structural-functionalist “action theory” of society involving four subsystems, one of which is the adaptive subsystem or economy (A), which interchanges with the political (G), integrative (I), and cultural-motivational (L) subsystems to achieve overall societal development and coordination (Parsons 1951). In Economy and Society (1956), Parsons and Neil Smelser further developed the AGIL framework, theorized about the generalized media of exchange between each subsystem, and appealed for economists and sociologists to collaborate on a grand socioeconomic theoretical synthesis. Obviously, their call to action was ignored by both disciplines. In its most recent phase, beginning in the 1980s in the US, economic sociology revived through a convergence of neoinstitutionalism, cultural, and social network perspectives on economic phenomena (Convert and Heilbron 2007). Mark Granovetter’s manifesto (1985) and later programmatic statements (1992, 2002, 2005a) challenged sociologists to supplant both the neoclassical synthesis in economics and the old economic sociology with a distinctively contemporary social action theory. Components for an ambitious imperialistic agenda include socially constructed economic institutions, economic action embedded in social relations, and integration of culture and economics. The next subsection explicates core principles of the new economic sociology.

Core Principles

A serviceable definition of the new economic sociology is the use of sociological ideas to analyze economic phenomena: “the application of frames of reference, variables, and explanatory models of sociology to that complex of activities which is concerned with the production, distribution, exchange, and consumption of scarce goods and services” (Smelser and Swedberg 2005: 3). Economic sociology morphed into a “strange other” that is dissimilar to both sociology and economics (Finch 2007: 124). In contrast to mainstream economics, the discipline of sociology never had a dominant theoretical tradition comparable to the neoclassical synthesis. Absent any sociological mainstream, economic sociologists eclectically borrowed and freely adapted the principles, concepts, and theories of diverse specialties, including organization studies, political sociology, sociology of work, culture, historical-comparative research, and social network analysis. Economic sociology maintains affinities to several heterodox economics theories discussed above, especially Marxist economics, old institutional economics, and the Austrian School (Mikl-Horke 2008). Among these heterogeneous roots, a few core elements of the new economic sociology may be discerned:

•    Economic actors are more broadly conceptualized than the mainstream economics idea of rational, utility-maximizing individuals and firms transacting in atomized markets. Following Karl Polanyi (1957 [1944]), economic sociologists emphasized that both persons and firms are embedded within complex social, political, cultural, and economic contexts that shape their beliefs and behaviors. “Actors do not behave or decide as atoms outside a social context, nor do they adhere slavishly to a script written for them by the particular intersection of social categories that they happen to occupy. Their attempts at purposive action are instead embedded in concrete, ongoing systems of social relations” (Granovetter 1985: 487). Economic actors are connected to one another, by multiple types of direct and indirect ties, and those enduring relations enable them to influence one another’s thoughts and actions. Prevailing societal norms can constrain the legitimacy and desirability of economic activities, such as religious prohibitions against lending money at interest. Economic decision making may involve collective actions to achieve common ends; for example, by consumers forming cooperatives, employees forming unions, and firms forming business associations to influence prices, wages, and profits. Although some economic sociologists proposed jettisoning the neoclassical synthesis altogether and replacing it with a uniquely socioeconomic approach (e.g., Etzioni 1988; Granovetter 1992), others acknowledged that mainstream economic theory provides fairly accurate explanations when its core assumptions approximately hold. Such conditions occur where markets comprise many small buyers and sellers that are incapable of price-making during exchanges involving products of indistinguishable quality. Commodities markets for agricultural products (corn, wheat, cattle) and metals (gold, copper, steel) may approximate the market model prescribed in the neoclassical synthesis. But, economic sociologists argued, such conditions are more exceptional than typical. In markets dominated by a few large producers, corporate market power offers a better explanation of economic transactions (a situation acknowledged in mainstream economics theories of monopoly and oligopoly). Other interest groups, such as consumers and unions, similarly use power to influence governments to intervene in the marketplace. Hence, much about economic life remains poorly explained by mainstream economics and requires a more comprehensive perspective that takes into account the social, political, and cultural contexts within which economic actors are embedded.

•    Economic action takes diverse forms, beyond the utility-maximizing calculus assumed by mainstream economists. Perhaps the most famous framework was Max Weber’s typology of social action, based on his interpretive method of analyzing “human behavior when and to the extent that the agent or agents see it as subjectively meaningful” (Weber 1978 [1922c]: 7). As summarized in Economy and Society, his four ideal types of social action, classified by primary modes of actor orientation, are: instrumental or goal-rational (zweckrational), value-rational (wertrational), affectual, and traditional (Weber 1947 [1922b]: 115–18). The first type corresponds to the utility-maximizing actor of mainstream economics because it involves “the actor’s own rationally chosen ends” (p. 115) and “the end, the means, and the secondary results are all rationally taken into account and weighed” (p. 117). In contrast, the value-rational type involves the pursuit of an ultimate end or absolute value for its own sake; for example, religious, spiritual, ethical, or artistic goals. Affectual actions are emotionally based, “determined by the specific affects and states of feeling of the actor” (p. 115), such as love for family, friends, and country. Traditionally oriented actions are customary behaviors that emerge “through the habituation of long practice” (p. 115). Empirical actions often combine these analytic types, depending on the subjective meanings to the actors, and may also include nonrational behaviors to which actors attach no subjective meaning. In his renowned application of the typology to explain economic behavior, The Protestant Ethic and the Spirit of Capitalism (1930 [1904]), Weber argued that the goal-rationality motivating Western capitalism originated in various Protestant Reformation sects’ value-rational orientations toward nonreligious work as a “calling” in the service of God.

•    Economies are social subsystems with multifaceted relations to the larger societies in which they operate. Some economic sociologists embraced the AGIL structural-functionalist framework of Parsons and Smelser (1956). Marxists preferred a base-superstructure imagery: “The totality of these relations of production constitutes the economic structure of society, the real foundation, on which arises a legal and political superstructure, and to which correspond definite forms of consciousness” (Marx 1989 [1859]: 521). Regardless of the specific relationship between economy and society, most economic sociologists regarded them as mutually influencing one another’s development. Rejecting the mainstream economic assumption of a static equilibrium, and agreeing with heterodox economists’ views on economic evolution as described above, many sociologists adopted historical-comparative perspectives in which economies and their societies constantly change. Nineteenth-century capitalism radically differed from its twenty-first-century descendants, taking distinctive forms in Europe, North America, East Asia, and elsewhere (Groenewegen 1997). Contemporary transitions from communist command economies toward market-based economies took alternative paths in Russia, Eastern Europe, and China (Hsu 2005). And the development of a global economy ebbed and flowed dramatically over the last half-millennium (Wallerstein 1979).

•    Economic sociology’s eclectic branches are rooted in three main theoretical perspectives: neoinstitutionalism, culture, and social network analysis (Granovetter 1985; Swedberg 2003: 32–52). Although each perspective emphasizes different important influences on economic behavior, their common theme is that “economic action is always shaped by institutions rooted in history and by the structures of social relationships in which economic actors are embedded; with the consequence that the former cannot be explained without including the latter in the explanation” (Ballarino and Regini 2007: 338). Institutions, cultures, and networks influence the preferences and decisions of economic actors in ways much more complex than assumed by mainstream economic theory. Or, as James Duesenberry, himself an economist, only half-jokingly put it, “Economics is all about how people make choices. Sociology is all about how they don’t have any choices to make” (Duesenberry 1960: 233).

•    Neoinstitutional theories in sociology and organization studies, like the old institutional economics discussed above, reject the rational-actor model at the heart of mainstream economics. Neoinstitutionalism examines systems of rules and regulations that influence social action, stressing “an interest in institutions as independent variables, a turn toward cognitive and cultural explanations, and an interest in properties of supraindividual units of analysis that cannot be reduced to aggregations or direct consequences of individuals’ attributes or motives” (DiMaggio and Powell 1991: 8). W. Richard Scott’s typology classified variations among institutional theories under three major pillars – regulative, normative, and cultural-cognitive – which differ in their assumptions and principal dimensions, such as the bases of compliance, order, and legitimacy (Scott 2001: 52). For example, the regulative pillar involves “informal mores or formal rules and laws” (p. 53), which rest ultimately on coercive power of governments but usually achieve normative compliance through legally sanctioned bases of legitimacy. Given the broad diversity among neoinstitutional theories, their applications to economic phenomena span every level of analysis: job searches, employment contracts, workplace regulations, management practices, markets, industries, organization fields, and international trade and development (for overviews, see Fourcade 2007; Krippner and Alvarez 2007).

•    Cultural theorists followed Weber’s interpretative lead in paying attention to the subjective meanings that actors attach to social objects and actions. Meanings are socially constructed frames arising through interactions as actors seek to make collective sense of events. Routines, customs, and habits become taken-for-granted beliefs and practices in organizations, scripts to be enacted reflexively rather than questioned and challenged (Meyer and Rowan 1977). As noted in the preceding paragraph, the cognitive-cultural pillar is also a mainstay of neoinstitutional theories. Pierre Bourdieu contributed two important cultural concepts to economic sociology: habitus, defined as dispositions that organize the economic practices of daily life (Bourdieu 1979), and cultural capital, reflecting families’ investments in developing their offsprings’ cultivated personalities (Bourdieu 1986). Drawing from anthropological views of culture as the entire way of life of a people, some sociologists examined the impacts of national cultures on economic beliefs and behaviors; for example, divergences among European, American, and East Asian managerial practices (Guillén 1994). Others revealed how cultural beliefs shape economic transactions in disparate commodity and services markets, including contemporary art (Velthuis 2005), life insurance and personal intimacy (Zelizer 1994, 2005), corporate law (Uzzi and Lancaster 2004), blood and human organs (Healy 2006). Peter Levin argued that economic sociologists have treated culture both as a “constitutive element of markets and as an externalized variable that affects markets” (Levin 2008: 127). The challenge for researchers is to combine both aspects simultaneously in a multidimensional fashion.

•    Social network theories, a major tributary to economic sociology, are the topic of the next section and, of course, examined throughout the book.

Economic sociology is far less formalized and mathematical compared to mainstream economics’ emphasis on the rigorous quantification of economic transactions. Consequently, economic sociology theory is less capable of generating precise testable hypotheses. Its analysts are more disposed toward discursive historical-comparative, ethnographic, and thick narrative description of socioeconomic phenomena. However, as discussed next, social network analysis applies a quite rigorous methodology to examine structural patterns in economic relations.

The Social Network Perspective

Social network analysis is a multidisciplinary perspective in which structural relations among social actors are core explanatory concepts and principles. The web of ties among actors in a social system comprises the larger contexts that affect the perceptions, beliefs, attitudes, and actions of individuals and groups. Social influence and collective action may be both facilitated and constrained by direct and indirect transactions among actors possessing diverse resources, such as information, money, authority, and power. Network analysts view social actors as highly interdependent decision makers whose preferences and behaviors mutually influence one another to varying degrees through their network connections. By engaging in micro-level dyadic and triadic transactions, whether exchanging economic services or bodily fluids, actors collectively generate the macro-level sociospatial contexts within which all are embedded. In turn, these network structures may impede or assist subsequent transactions. Furthermore, network structures are themselves the result of dynamic processes, changing continuously over time as actors form new relations or drop old ties, enter or leave the system. Social network analysts seek to identify specific mechanisms through which social influence transpires and social structure evolves. Used in conjunction with neoinstitutionalism and resource dependence theories, network analysis reveals how rules and regulations gain acceptance and legitimacy within a population; how conformity to social norms is enforced and deviant behaviors penalized; and how information, ideas, and innovations diffuse or dissipate. In short, social network analysis captures the complex interactions that collectively constitute ongoing social systems.

In emphasizing relations among actors as basic units of analysis, social network theory diverges sharply from predominant substantialist explanations, which treat an actor’s attitudes and attributes, such as gender and race, as the basic units. Many sociologists depict “individuals as self-propelling, self-subsistent entities that pursue internalized norms given in advance and fixed for the duration of the action sequence under investigation” Emirbayer 1997: 284). Other sociologists take a “variable-centered approach” in which fixed entities with attribute variables cause outcomes that are also measured as attributes (or, as the Nowhere Man pithily put it in Yellow Submarine, “causes of causal causation”). Similarly, in mainstream economics and game theory, the self-interested rational actor chooses the alternative that maximizes personal utility, independently of any other actor’s choices. Social network analysts reject such atomized, noncontextual approaches in favor of structural-relational explanations that take into account the embeddedness of actors and their actions in concrete connections.