SOSC 300K

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SOSC 300K

• Lecture Note 3
• Embeddedness

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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.

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Market vs. Hierarchy (1)

• The Market Approach Adam Smiths 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.

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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.

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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

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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.

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Market vs. Hierarchy (5)

• 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 firms governance structure
  instead of leading to complex negotiations

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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
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Granovetters 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.

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Granovetters 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.

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Granovetters 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.

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The Strength of Weak ties

• Social relationssolution 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

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Clifford Geertz, the Bizaar Trade (1)
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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 participantsand it can
  be markedly unevenclientship is a reciprocal
  matter

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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