The discipline of economics, like the discipline of sociology, often attempts to account for almost everything in its domain; economics for the domain of the commercial, physics for the domain of the social.  In recent years, though, this division has become a blurry one.  Phin Upham reviews and synthesizes the different seminal views in the field.

Garry Becker, who won the Nobel Prize in economics in 1998, and others have used economics to explain not only the pricing of airplane tickets, but also a broader range of phenomena – the effects of war on savings rates, why we vote or do not vote, and why people discriminate on a racial basis.  Recently, sociology, has followed the maxim that the best defense is a good offense and has staged a counter-incursion into the field of economics.  But this incursion, unlike Becker’s effort, is one in which the economic and the sociological are blended together to support and reinforce each other.  Rather than trying to supplant economics, they attempt to place economic transactions in a social context.  Transactions do not exist in a vacuum, and the embeddedness and social trust or distrust, investment or lack of investment, interconnectedness or independence, all make an enormous difference.  Given the very different economic systems across the world, across domains, and even within domains, there seems to be a clear need beyond a simple RCT explanation to explain why these variations occur.  Perhaps we finally have one.  It may not be as neat nor as quantifiable as economic analysis likes, but it seems a powerful explanatory mechanism, despite multiple hurdles, nevertheless.

Randall Collins work on the Rational/Utilitarian school of thought traces out the roots of this tradition from the early philosophies of Locke, Hume and Smith to modern policy implications of the understandings.  Lock saw human beings as ceding certain freedoms to have their rights and property protected.  He was humans as rational creatures who could make judgments based ones personal observations about the nature of the world.  Hume added to this a more arbitrary perceptional factor, he thought the order of ideas mattered and introduced a certain skepticism of truth and inferential type decisions.  Adam Smith forged this sort of practical examination of the individual into an economic system of laissez faire economics.  As Utilitarian philosophy emerged, a social dimension was added, and this social consideration – how ought and how do social considerations affect the individual – became central to sociology.  Social explanations to explain real world phenomena, and to describe the structures in which we function and live proved powerful.

Smeltzer and Swedberg’s work on economic sociology gives a modern summary and analysis of how this interaction is a actually occurring.  With the newly emerging evidence of limited rationality, sociologists were able to explain how people actually made decisions rather than how they might – and this explanation depended heavily on their context, their norms, and their social structures.  It is in the field of social policies, and explaining and structuring social systems, which have long been more heavily influenced by economics, Collins, Smeltzer, and Swedberg conclude, that sociology is likely to have the most impact and generate the most controversy.

Ronald Dore in his essay Goodwill and the Spirit of Market Capitalism, through cross cultural and cross temporal analysis, tries to pry apart the role of goodwill and social trust in modern societies.  He first illustrates that goodwill is not taken into consideration of in the proper way in many modern economic theories, and he then demonstrates that this is a significant error.  He demonstrates this through cross cultural analysis in a study of Japanese Keiretsu enterprise groups.  But I think he intends us to take this analysis and apply it to the finer and less obvious differentiations in all economic systems.   Think he means us to start to see goodwill, and other social influences, on all aspects of economic systems.  His example is extreme inorder to illustrate, not to limit.  Japan, he argues, has interlocking systems of trade partnerships and these partnerships are cemented by goodwill.  This goodwill functions as both a trust and a demand on both parties.  He shows through this example that the shape of economic systems is heavily influences by the social structures and norms which surround them.

The idea of Social Capital as introduced by James Coleman is a useful, though problematic, construct.  He draws form economics the motivational attributes and goal-oriented core but places this drive into a deeply social context.  How embedded one is in iones community, the level of trust, integration, feedback, etc, makes a large difference in how successful one in in reaching ones goals and being successful by any given matrix.  He grants that social capital is not a single thing in and of itself, but rather is “defined by function… [with] two elements in common: they all consist of some aspects of social structures, and they facilitate certain actions of actors” (98).  If there is a tightly integrated community, for example, one would expect to see more trust and higher performance due to the ability to socially monitor and the closedness/closeness of the system.  This holds true for Jewish NY diamond markets and religious schools.  It is difficult, though, to see how social capital can be quantified or measured.  Coleman finds measures such as one-parent vs. two-parent, or attends_church or does_not, as proxies for this measure, but in the end the examples would benefit from some way of directly measuring at least some basic aspects of social capital.  This problem, I think, is that he has an open system where the measure is functional and thus, one imagines Coleman is committed to saying they, ALWAYS exists where actors trust, demand, expect, etc in order to facilitate their actions in a social setting.  But there is no limit to how this can be accomplished, so no test can therefore capture this number.  But perhaps some basic measures such as trust, etc could be captured.  Interestingly enough, Coleman does not mention this, but social capital can be “wasted” as well.  A community with high social capital can fail to use it to facilitate action.  By Coleman’s functionalist definition this community does not have social capital, but by his “closed vs. non-closed” kind of structural logic it does.  Is this a contradiction or a problem in this thought?

Mark Granovetter’s piece on Embeddeness generalized on the principle that Coleman explored.  He argues that while economic action is embedded in social structures, it is a mistake to err on the side of over socializing this action as well as under socializing it.  Through examples and literature review he tries to outline the ways in which this social embeddedness works and to try to understand its limitations.  While he does not generate new theories or state explicit hypothesis, this essay is a sophisticated and helpful guide to understanding the interconnect between Sociology and Economics.  Clifford Geetz, whom we have read before, it s wonderful example of a close case study of one way in which social structures and economic systems interact.  He studies a Middle Eastern bazaar in Morocco in a town called Sefrou.  The system of exchange and barter is heavily social and economic simultaneously.  The ways in which the social dimension acts to balance and compensate for the lack of guarantee of quality and to create a rich context for information exchange and gathering is a wonderful example of how dynamic, self-referential, and interconnected such social/economic systems are.

Geetz’s Analysis of the Bazaar illustrates how heavily social an economic system can be under certain conditions.  But it also strikes the reader that such a system is also intensely inefficient.  So much time and energy is spent finding out about the quality of the product and the honestly of the dealer that one cold hardly imagine that this effort would not be internalized into the price of the product.  In larger communities (not like small diamond exchanges or local bazaars) where such social monitoring is impossible, laws and customer loyalty seem to take the place of much of this social dimension.  Is this a cause or an effect?  Do laws spring up where community monitoring is impossible or does community monitoring spring up where laws are impossible?  Or, alternately, could laws OR community monitoring be adapted to rule over most (I believe that some types of exchange may HAVE to be in one or the other camp) kinds of transactions?

Cultural norms must also heavily influence what sort of monitoring (social or rules-based) an economic system has.  One could see certain societies having a propensity for bartering and others for more rules-based exchange, but this would be misleading.  As we saw in the case of Japan, different systems can exist on different levels.  On the B2B level one norm can exist, on the B2C another, and on the C2C another.  Further, in communities in each case even different norms can exist.  I would hypothesize that a lot of these norms have to do with certain macro factors.  While there will be variance for culture, I think culture changes to accommodate structural realities as much as structural realities are shaped by culture.

Readings:

Neil J. Smelser and Richard Swedberg, “Introduction” to the Handbook of Economic Sociology (Princeton, NJ: Princeton University Press, 1994), pp. 3-26.

Randall Collins, Four Sociological Traditions, Chapter 2: The Rational/Utilitarian Tradition.

Mark Granovetter, “Economic Action and Social Structure: The Problem of Embeddedness.” American Journal of Sociology 91(3)(November 1985):481-510.

Ronald Dore, “Goodwill and the Spirit of Market Capitalism.” British Journal of Sociology 34(1983):459-482.

Clifford Geertz, “The Bazaar Economy: Information and Search in Peasant Markets.” American Economic Review 68 (May 1978):28-32.

Coleman, James S., “Social Capital in the Creation of Human Capital.” American Journal of Sociology 94 (1988):S95-121.

Phin Upham has a degree in Applied Economics from the Wharton School (University of Pennsylvania).  Phin is a Term Member of the Council on Foreign Relations.  He can be reached at phin@phinupham.com