Aula 1 Artigo 1

3

Economic Institutions

as

Social

Constructions:

A

Framework

for

Analysis

Mark Granovetter

Department of Sociology,

State

_{Unwersity of}

New York at

_Stony

Brook Institutional economics has moved from a _position, earlier in the twentieth century, of

drawing eclectically

on several other

_disciplines,

to a stance of

_building

its _arguments almost

entirely

out _{of neoclassical materials This paper argues that such} a stance cannot

provide

a _persuasive account of economic institutions, and _suggests a broader toundation based on classical _{sociological arguments} about the embeddedness of economic _goals and activities in

_socially

oriented

_goals

and structures

_Emphasis

is

_placed

on how economic _activity comes to be coordinated _{by groups of}

people

rather than carried out

by isolated individuals Firms in

_developing

countries, busmess groups, and the origins of the electrical

_{utility industry}

in the United States are

_posed

as cases of the ’social construction of economic institutions’ It is

_argued

that,

_although

_proper

_analysis

of such cases involves a

_high

level of contingency. these contingencies can be taken into account in a _systematic theoretical _argument, and that historicist

_pitfalls

can be avoided Such an _argument is

_posed

as the distinctive

_agenda

for a new economic

_sociology

Mark Granovetter, _Department

of Sociology,

State University

of

New York at _Stony Brook,

_Stony

Brook. NY 11794-4356, USA

1.

Introduction: the

new

economic

_sociology

The

_discipline

of economics has seen two

strong

and, at first

_{glance, mutually}

mcon-sistent trends over the _{past twenty years:} a

return to dominance

_by

_{the pure}

neo-classical tradition, after a

_period

of con-tention mth _competing

_paradigms,

and an

attempt

by

economists to

_greatly

broaden their

_subject

matter. This odd, simul-taneous

_narrowing

and

_broademng

of

per-specUve has resulted from the virtual demise of institutional economics in its

mid-century form.

Earlier contention had resulted from the

inability

of the neoclassical

_synthesis

to

explain

the broad institutional framework mthin which economic transactions take

place.

The

_resulting

theoretical vacuum was filled

_by

’mstitutionalist’ economics, whose

explanations

drew on _historical,

_political,

©

Scunclrnuurun

_Sociological

.4ssocitill(),,, 1 YY2

sociological

and

legal

factors, with minimal

use of formal economic _{reasoning. Such}

widely

followed American

_figures

as Thorstein Veblen, John Commons,

_’Ve>lej’

Clair Mitchell and John

_Dunlop

often seemed as

_closely

allied to other

_discipline>

as to economics.

A broad counterattack

_began

m the

1960s,

_{spearheaded by Gary}

Becker, later

joined by

many of the best and

brightest

mathematical economists.

_They

inventively

applied

ngorous neoclassical arguments to

problems previously

abandoned to the insti-tutionalists. The expansion of educational institutions,

_long

considered a cultural

phenomenon,

was declared the outcome of rational individuals _investing m their own

capacities

(Becker

( 196~1),

followed

_by

a

vast

_outpounng

of lterature on ’human

capital’.

See the critical remew m

_Blaug

( 1976)).

Rigid

wages and

long

tenures in

internal labor markets were attributed not to social _pressures or a ’new industrial feu-dallsm’ (a

metaphor

common m 1950s labor

economics),

but to

_’Implicit

contracts’

opti-mally

structured

_by

rational

_employers

and

employees

faced with otherwise difficult

problems

of

_shirking

and bad faith.

(See

the extended discussion in Granovetter

(1988)).

Huge

wage

discrepancies

between

categories

of workers resulted not from restrictions on _entry based on differences in _{group power,} but from

_optimal

arrange-ments for

_distributing

talent m _society

_(e.g.

Rosen

_1982).

Vertical

_integration

occurred not because of the

_{suppliers’ ’conspiracy}

against

the

_public’

denounced

_by

Adam

Smith,

but as an _arrangement to reduce transaction costs in markets where business had become too

_complex

to conduct between

_independent

units

(see

especially

V1’~lliamson

( 1975,

1985)).

This ’New Institutional Economics’ -

dis-tinguished

from the old

_by

its reliance on

arguments for the economic

_efficiency

of observed institutions - was

_closely

allied to the ’New Economic

_History’,

which made similar claims for historical

_settings.

Prop-erty

rights,

enclosures, and all manner of

political

and

legal

institutions came to be

interpreted

as the efficient outcome of rational _{individuals pursuing their} self-interest

_(e.g.

North & Thomas 1973; Ran-som & Sutch

1982).

And these new

inter-pretations

were

_applied

even to

_spheres

far from economists’ traditional domain. such as the

_family,

crime, altruism and animal behavior

_(e.g.

Becker 1976,

1981).

Rep-resentative of the claims of this

_optimistic

new school is Jack Hirshlelfer’s comment, in a 1985 article entitled ’The

_Expanding

Domain of Economics’, that ’economics

really

does constitute the _universal

gram-mar of social science’

_(p.

53).

One

_unifying

theme of _my current work is that the new economic

_imperialism

attempts

to erect an enormous super-structure on a narrow and

_fragile

base. A

more solid foundation can be constructed on the basis of three classic

_sociological

assumptions: (1)

the

_pursuit

of economic

goals

is

_normally

_{accompanied by}

that of such non-economic ones as

_sociability,

approval,

status _{and power;}

(2)

economic action

(like

all

action)

is

_socially

situated,

and cannot be

_explained

_by

individuals motives alone; it is embedded in _ongoing networks of

_personal

relations rather than

carried out

_by

atomized actors

_(for

an

earlier

_programmatic

statement see Grano-vetter

_{(19R5)); (3)}

economic institutions

(like

all

institutions)

do not arise

auto-matically

in some form made inevitable

_by

external _{circumstances, but} are

_’socially

constructed’

_(Berger

& Luckmann

1966).

The extreme version of

_{methodological}

individualism that dominates much of mod-ern economics makes it difficult to recog-nize how economic action is constrained and

_{shaped by}

the structures of social relations in which all real economic actors are embedded. Economists who want to reform the

_discipline

_typically

attack its

psychology -

proposing

a more realistic model of

_{decision-making}

(see,

e.g., Lei-benstein

1976).

While the

_psychology

in neoclassical models may well be naive, I claim that the main

_difficulty

lies elsewhere: in the

_neglect

of social structure.

Psy-chological

revisionism has a

_following

in

part because it does not _require economists to

_give

_{up the assumption} of atomized actors

_making

decisions in isolation from broader social influences.

Mid-century

economic

_sociology

oper-ated at the

_fringes

of economic

activity.

ceding

the central _topics of

_production,

dis-tnbution and

_consumption

to economists. The more recent

_generation

of economic

sociologists,

who constitute what I call the ’New Economic

_{Sociology’,}

have looked much more at core economic institutions,

and are closer to such intellectual forebears as Emile Durkheim and Max Weber - who

regarded

economic action as a subordinate and

_special

case of social action - than to the accommodationist stance of

mid-cen-tury

sociologists.’

I

An _{important part} of this focus is a

socio-logical theory

of the construction of econ-omic institutions. Such a

_theory

must make

dynamics

central, in contrast to most neo-classical economic work on institutions which

(like

many branches of

economics)

emphasizes

the _{comparative statics of} equi-librium states. Without

_{explicit dynamic}

argument, we have the

_irony

that

econom-ics,

_despite

its devotion to

_{methodological}

individualism, finds itself with no

_ready

_way to

_explain

institutions as the

_outgrowth

of individual action, and so falls back to accounts based on _gross features of the

5

environment. There are two such main accounts: culturalism and functionalism.

Culturalist accounts

_explain

economic institutions as

_arising

from cultural beliefs that

_predispose

a _group to the observed

behavior, as in the claim that the stress in

_Japanese

culture on

_{’organic’ unity}

and hierarchical

_{loyalty produces}

trouble-free industrial

_{organization.}

Functionalist accounts _{argue backwards from the} charac-teristics of institutions to the reason

_why

they

must be _present. Andrew Schotter, m his Economic

_Theorv

_of

Social Institutions

(1981)

states this

_principle

in

_unusually

can-did

(and

a

_sociologist

_might

add,

pre-Mer-tonian)

form - that to _{understand any} social institution

_requires

us to ’mfer the

evol-utionary

problem

that must have existed for the institution as we see it to have

devel-oped. Every evolutionary

economic

prob-lem

_requires

a social institution to solve it’

(p.

2).

This

_implicitly

assumes a _system in

equilibrium,

smce a

_{still-evolving}

insti--tution

_might

not reveal

_{by inspection}

what

problem

it had evolved to solve. These

highly elliptical

and often

_tautological

cul-turalist and functionalist accounts become

superfluous

once the social construction of institutions is

_properly

understood.

But it is not

_{enough merely}

to

_chip

_away at the insufficiencies of neoclassical econ-omics. A

_{theoretically}

_persuasive economic

sociology

must also

_provide

an attractive alternative that improves upon the

explana-tory power and

predictive ability

of

_existing

accounts.

_Though

I _argue

_repeatedly

against the reductionist

_{methodological}

individualism of modern economics, I have

no taste for the historicist views of some of its other

_opponents,

who _{suppose that every}

case is unique and

_anything

can

_happen.

I stress the

_{contingencies}

associated with historical

_background,

social structure and collective action, and the constraints

imposed

by

already

existing

institutions; but my aim is still that of

_finding

_general

principles,

correct for all times and

_places.

This

_requires

that the

_{contingencies}

them-selves be

_{systematically explored}

and

incor-porated

into the theoretical structure. It also

_requires

us to understand under what circumstances economic institutions are malleable

_by

the forces of social structure and collective action, or ’locked in’ in such a

way that these forces are

_mainly

irrelevant.

Finally,

and

_closely

related to this last issue, a

_{sophisticated}

economic

_sociology

will neither throw the valuable corpus of econ-omic

_reasoning

out the window, nor be so seduced

_by

it as to

_produce

a ’rational choice’ _argument that loses touch with the classic

_sociological

tradition; rather, it will seek to understand how modern economics can be

_integrated

with a social con-structionist account of economic

msti-tutions, and what the division of labor must therefore be between

_sociology

and econ-omics.

2.

Over-

and

undersocialized

conceptions

of human action

Before

_discussing

institutions as such, I want to make some

_general

comments on

conceptions

of human action. I

_{begin by}

referring

to Dennis

_Wrong’s

(1961)

article ’The Oversocialized

_Conception

of Man in Modern

_{Sociology’. Wrong complained}

that

_sociologists

saw

_people

as so sensitive to the

_opinions

of others that

_they

auto-matically obeyed commonly

held norms for behavior. This ’oversocialized’ view resulted from an _attempt to _compensate for the

_neglect

of social effects in

(what

Talcott Parsons

(1937)

called) the utilitarian tradition, whose view of economic action I would call ’undersocialized’.

(For

a fuller account of this distinction, see Granovetter

(1985)).

As Albert Hirschman

(1982)

has

pointed

out, in classical and neoclassical

economics, traders m

_competitive

markets are

_price-takers

and thus

_{interchangeable.}

The details of their social relations are irrel-evant.

The classical economists thus treated these relation>

_only

as a

_drag

on

_perfect

competition.

In a famous hie from The Wealth of Nations, Adam Smith denounced the use of social occasions

_by

traders to fix prices.

Implicitly

he

recognized

that his image of

competitive

markets was

incon-sistent with a world where economic actors knew one another

_personallv

well

_enough

to collude. In recent _year, a different tend-ency has

emerged

in economists’ treatment of social influences.: that is to take them

seriously

but in terms close to Dennis

Wrong’s

’overocialized’

_conception:

_e.g. James

_{Duesenberry’s (1960)}

_quip

that ’economics is all about how

_people

make

choices;

_sociology

is all about how

_they

don’t have any choices to make’, or E. H.

Phelps-Brown’s description

of the

’soci-ologists’

approach

to _{pay determination’} as

assuming

that

_people

act in _{’certain ways} because to do so is _customary, or an

obli-gation,

or the &dquo;natural

_thing

to do&dquo;, or

_right

and proper, or _just and fair’

(1977).

This

_conception

of ’social influences’ is oversocialized because it assumes that

people

follow customs, habits or norms

automatically

and

_{unconditionally; nearly}

all economists’ treatment of ’norms’ has this flavor, and discussions of ’conventions’ also run the risk of

_sliding

into an over-socialized treatment. But this

_points

to an

irony

of _great theoretical

_importance:

the oversocialized

_approach

has in common

with the undersocialized a _conception of action uninfluenced

_{by peoples’ existing}

social relations.

In the undersocialized account this atom-ization results from the narrow

_pursuit

of

self-interest; in the oversocialized one -which

_originated

as a corrective to the undersocialized one - atomization results nevertheless because behavioral

_patterns

are treated as

_having

been internalized and thus unaffected

_{by ongoing}

social relations. This

_surprising

_{convergence of under and} over-socialized views

_{helps explain why}

economists who _try to

_incorporate

social influences on economic action fall so

_easily

into oversocialized _arguments. Thus it is common to attribute distinctive

_styles

of

decision-making

to members of different social classes, as the result either of class cultures or of each class’s distinctive experi-ence in the eductional _system

(cf.

Piore

1975; Bowles & Gintis

1982).

But this

con-ception

of how

_society

influences individual economic action is too mechanical: once we know someone’s social class,

everything

else in his behavior is automatic, since he is so well socialized - I would say ’over-socialized’. Thus, I _{attempt in my work} to thread my way between under and over-socialized views,

by analyzing

how behavior is embedded in concrete,

_ongoing

_systems of social relations.

3. The

social construction of

economic

institutions

I now

_proceed

to discuss the

_impact

of this ’embeddedness’ on the social construction of economic institutions

_{by focusing}

on a

problem traditionally given

little attention in economic

theory:

how and

_why

economic activities are carried out not

_by

isolated

individuals, but

_by

_{groups that} entre-preneurs get to

_cooperate

in such

_larger

entities as firms, industries and

inter-indus-try groups. In other words, I recast the

problem

of economic Institutions as one

involving

the mobilization of resources for collective action, _{which opens it up} to a whole stream of

_thought

in

_sociology

and

political

science

_previously

considered irrel-evant.

Following Schumpeter

( 1926),

one _may call those who coordinate the economic

activity

of otherwise

_separate

individuals,

’entrepreneurs’.

But the neoclassical

_theory

of the firm

_ignores

the _entrepreneur

because, as William Baumol

_points

out, its model ’is

_essentially

an mstrument of

optimality

analysis

of well-defined

prob-lems, and it is

_precisely

such ...

_problems

which need no _entrepreneur for their solu-tion’

(1968:67).

This comment _suggests that the

_emphasis

in economic

_theory

on the

comparative analysis

of

_equilibrum

states

discourages

attention to

_{entrepreneurship,}

which can best be

_thought

of as

_involving

situations where markets are out of

equilibrium.2

Related to the failure to

pro-vide

dynamics

is the

tendency

to abstract away from institutions on the

_grounds

that

opportunities

for

_profit

will

_{automatically}

be taken; if there are Institutional or other barriers to the

_taking

of such

_profit,

these will be breached, and since one can count on this

_{takmg place,}

the actual _process

_by

which it occurs is not of much theoretical interest.

_{Correspondingly,}

institutions that encourage or

_discourage

entrepreneur-ship

are

_neglected

since it is assumed that it will _{emerge if} there are

_profits

to be

made.~

i

This

_{helps explain}

the remarkable fact that in the

_recently

_burgeoning

economic literature on

_why

firms exist,

_exemplified

by

Oliver Williamson’s work on ’trans-action cost economics’ ( 1~75,

1985),

entre-7

preneurs still make no _{appearance and how} firms come to exist receives no attention.

Instead, it is assumed that _{firms emerge} when needed to reduce transaction costs. In the functionalist

_style

of the New Insti-tutional Economics, this emergence is taken to be automatic.

But economic institutions do not _emerge

automatically

in response to economic needs. Rather,

they

are constructed

_by

indi-viduals whose action is both facilitated and constrained

_by

the structure and resources available in social networks in which

_they

are embedded. We can see _{this in many} accounts from

_developing

countries where firms would

_greatly

reduce transactions costs but cannot be constructed. What are

the difficulties?

Traditional

_{development theory}

took a dim view of social structures where econ-omic

_activity

was embedded in

non-econ-omic

_{obligations, supposing}

that this would

prevent efficient

_operations.

But where this

embedding

is in fact absent, and many indi-viduals appear to be rational

_profit

max-imizers -

_{approximating}

the ’under-socialized’ model of human action I have described above - economic

_activity

is often

_{stymied by}

lack of the

_{interpersonal}

trust

_required

to

_{delegate authority}

or

resources to others

(see,

e.g.,

Dewey

1962;

Geertz 1963; Davis 1973; D. Szanton

1971).

But if such

_problems

of trust are overcome, the

_problem

forecast

_by

traditional theories does indeed come to _pass: the

_fledgling

firm is often

_{swamped by}

the claims of friends and relatives for favors and _support. As one abdicated

_kmg

m Bali told

_{anthropologist}

Clifford Geertz, firms ’turn mto relief

organizations

rather than businesses’

(1963:123).

That m, the welfare of the local

community

is

_put

ahead of that of the busi-ness as such.

Certam groups, however, such as the

overseas Chinese in Southeast Asia,

con-sistently

overcome both

_problems.

Trust is available because the _community m so close-knit that malfeasance is not

_only

dif-ficult to conceal or execute, but often even hard to

_{imagine. Many}

accounts thus indi-cate that Chinese businesses extend credit,

pool capital

and

_{delegate authority}

without fear of default or deceit. How, then, do the

businesses avoid the second

_problem,

that

of excessive claims based on non-economic ties?

Part of the answer is that overseas Chinese are

_typically

a small

_minority,

and there are

_simply

not

_enough

of them for such claims to cause _{trouble. But the} organ-ization of social networks also limits claims,

because

_{people belong}

to

_{non-overlapping}

groups.

Kinship

is so clearcut that the num-ber of relatives with credible claims on a business is small and well-defined.

_People

also divide into groups based on _{recency of}

immigration

and on home area in China. Particular businesses are

_organized

_along

such

_kinship

and

_{organizational}

lines, and it is thus

_sharply

defined which individuals can make claims.

_By

contrast, most non-Chinese Southeast Asian

_kinship

_patterns

are more _diffuse, so it is hard to limit the number of relatives with

_legitimate

claims; and

_{people typically belong}

to many

over-lapping

interest groups, so that if one is the core of a business, its members may still be

subject

to claims from fellow members of others

(Geertz

1963;

Dewey

1962; Davis

1973; Lim &

_Gosling

_1983).

Briefly

put, overseas Chinese social struc-ture has a _pattern of

_coupling

and

dec-oupling

that

_{produces highly}

cohesive groups that are

_sharply

delimited from one

another; thus trust is available but non-economic claims are

_{illegitimate beyond}

these group boundanes. These mechanisms

of coupling

and

_decoupling,

that define the boundanes of trust and social affiliation, must become central matters for a

_theory

of economic institutions. It would be a fair

generalization

to say that across such boundanes, economic actors _{may appear} to act as if

_following

the undersocialized model of action, and within them, as if oversocialized -

_following

the dictates of the _group. But this _way of _viewing the matter shows that the fundamental issue is not to _get the

_right

model of individual

action, but rather to understand

_properly

how variations m social structure create behavior that appears to follow one model

or the other. The locus of

_explanation

moves _{away from the isolated individual} to a

_larger

and more social frame of reference.

Following

out this

_logic,

note that the

argument about Chinese firms

_implies

that under some conditions, it is

_possible

to use

connections

_{of family}

and

_friendship

to

dev-elop

efficient firms. But one _{may suspect}

that the

_consequent

_overwhelming

import-ance of trust in such firms

_drastically

limits

expansion

even when it would be

econ-omically

rewarding.

How can such a limi-tation be overcome? In _{many countries this}

occurs as the result of alliances of families into ’business

_groups’.

This

_widespread

phenomenon

goes under many names: the old zaibatsu and their modern successors in

Japan;

the chaebol in Korea, the grupos economicos in Latin

America,

the

’twenty-two families’ of Pakistan, and on and on.

Though

there are

_analyses

_{of such groups} in

_particular

countries and

_regions,

we have so far no sustained

_analysis

of the

phenom-enon as a whole, and little realization that this is a central

_aspect

of modern

capitalism.

The groups vary in size, structure and

_legal

organization,

and have

_originated

in a num-ber of different ways. One dimension of

variation, for

_example,

is the extent to which these groups

originated

in a

_single

family

group which then extended its domain

_through

_acquisition

or alliance, as in

_Japan

and Korea, or in the coalescence of a number of

_strong

_family

or other groups that

_{began independently}

and later

_joined,

as is more the case in Latin America. But whatever the

_origin

and structure, it is com-mon for them to _span a number of firms and industries, and to coordinate their investment and

_production

decisions, often

through

a bank that is formed

_through

and

closely

identified with _{the group. Such} groups have a _strong and sometimes

dom-inating

role in the economies and

_polities

of their countries.

And

_despite

the variations in

_history

and structure, it is

_typical

for such _groups to be

composed

of

_participants

who are, to _quote one economist who has studied them,

’linked

_by

relations of

_{interpersonal}

trust, on the basis of a similar

_personal,

ethnic or

communal

_{background’}

_(Leff

_1979:663).

In some cases, tne network of

_personal

relations that

_initially

_{builds the group} becomes formalized into institutional pat-terns such as

_holding

_companies

as m Nica-ragua

(Strachan

1979)

or _patterns of mutual

stockholding

as m

_Japan

_(Gerlach

_1991).

And then the

_shape

of these institutions results more from the

_original

structure of

personal

relations than from the

_exigencies

of the market -

_they

are, in effect,

con-gealed

social networks.

Economists

_studying

_{these groups} in

developing

countries,

interpret

them as responses to market

_{imperfections,}

_arguing

that

_they

will vanish as more

_{’sophisticated’}

markets appear

(e.g.

Leff

1979).

But when economists come _{upon them in advanced}

economies, as in

_Japan,

Korea, France, West

_Germany

and others,

they

either argue that

they

are

_vestigial

and will fade -as used to be

_argued

for

_{Japan, though}

this is now

_increasingly

_{implausible -}

or that

they

arise m

_just

those economic cir-cumstances that make them efficient. The

arguments for

_developing

and

_developed

economies alike are functionalist

tauto-logies

that avoid the central tasks of

under-standing

how such alliances can be constructed and

_{why capitalist}

economies,

despite

their

_great

differences,

_rarely

con-sist of

_single,

unrelated firms.

Just as for firms and business _groups, I argue that whether and how an

_industry

is

organized

is a social construction. I use the case of the electrical

_{utility industry}

in the United States from 1880 to

1930.~

We want to

_explain

_why

certain

_plausible

alternatives to the

_private

investor owned utilities now dominant in the United States did not occur: _e.g.

_public

_ownership,

or

_private

generation

of electric power

by

each home and

_large

_{industrial company, which} would have

_consigned

utilities to a minor role.

We find a series of _{stages where the} per-sonal networks of a few individuals were crucial. From 1880 to 1892, Thomas Edison mobilized his considerable

_personal

fol-lowing, includmg

substantial

_capital

from the German

_Empire,

in a bitter

_struggle

to defeat banker J. P.

_Morgan’s

vision of an

industry providing

not

_electricity

_but gen-erators to homes and businesses to

_produce

their own

_electricity

on site - the kind of

system that, in the United States, became conventional for home

_heating.

Edison had

_always

_preferred

central sta-tions and

_though

he was

_finally

ousted from General Electric and the

electricity industry

by

J. P.

_Morgan

in 1892, the dominance of central stations was

_by

then too entrenched for even

_Morgan

to reverse. Note that Edi-son won this battle not because his solution

9

was the

_{technologically}

correct one, but rather because he was able to construct

winning

coalitions of

key

actors.

One of Edison’s main assistants in this battle was his

_personal

_secretary, the

Eng-lishman Samuel Insull. In 1892, Insull moved to

_Chicago

to take over a small, new company,

Chicago

Edison, and

brought

with him a

_unique

set of

_personal

ties: to financiers in

_Chicago,

New York and

London, to local

_political

leaders, and to inventors in both the United States and Britain.

_Many

of these had been

_forged

as the result of his

_long

association with Edison. His combination of financial and technical

_expertise

and

_political

connec-tions allowed him to assemble

_capital,

pol-itical favors and ways of

operating

that other

_{utility companies}

had found

impos-sible to

_implement,

even

_though

some were well aware of their

_potential.

That is, his achievements were due to his

_political

and

entrepreneurial

skills rather than to

tech-nological

or

_{organizational}

innovations.

A close

_study

_{of the way Insull}

_organized

Chicago

Edison, with the

_help

of his exten-sive connections and technical skills, shows that the structure of the entire

industry

derived from the initial

_{organizational}

decisions in what would become the

_largest

and most successful firm. Insull also

_shaped

the

_{industry by encouraging regulation by}

states

(rather

than

_by

the federal or local

governments)

and

_{by developing}

the hold-mg company form, that stabilized relations with local

_industry

and with

_regulators.

Soon, this network of firms,

_holding

com-panies and

regulators

congealed.

Personal networks still mattered, but

only

those of

people

central in the

_{holding companies.}

By

the 1920s, the institutional forms were in

_place,

and the outcome that we now see in the

_industry

was

_already

visible.

4.

Discussion

In the case of the evolution of an

_industry,

as for the

development

of firms and business groups, stable economic institutions

begin

as accretions of

_activity

_patterns

around

personal

networks. Their structure reflects that of the networks, and even when those are no

_longer

in

_place,

the institutions take on a life of their own that limits the forms

future ones can take;

_they

become ’locked

in’.’ Thus, economic

_problems

and

tech-nology

do not call forth

_{organizational}

out-comes in some automatic and unconditional

way. Instead, these economic conditions restrict what the

_{possibilities}

are. Then,

individual and collective action, channeled

through

existing personal

networks, deter-mine which

_{possibility actually}

occurs. So even in identical economic and technical

conditions, outcomes _{may differ}

dra-matically

if social structures are different. Where firms are, m some sense, ’called for’

by

market conditions,

they

still may not arise if no

_group’s

social structure can sus-tain them;

_{inter-industry ’groups’}

may or may not arise in favorable economic

con-ditions,

depending

on the structure of con-nections among

important

families; and industries may be

configured

in

_quite

dif-ferent ways,

depending

on the

_shapes

of the

interpersonal

networks of

_leading

actors. There is thus, in this

_argument,

a

_high

level of

_contingency

in the outcomes. This resembles situations in economic

_dynamics

that are characterized

_{by multiple}

stable

equilibrium points.

Indeed, I believe that a

social constructionist account can

_help

make such

_dynamic

economic models of institutions more

_{sophisticated.}

These models are

_frustrating

because there is little substantive way to resolve their under-determination. As in

_physical

cases with

multiple

equilibria,

you can understand which state the _system has reached

_{only by}

looking

at its

_history.

But the

_{contingencies}

involved in this

history

are

_typically

outside the economic framework, and thus seem ad hoc and

_unsatisfying

to economists; within a

_sociological

framework, however,

they

can be

_given

_systematic treatment.

Notice that such

_multiple

_equilibrium

models, even if underdetermined, are far from the historicist

_argument

that every

case is _{unique and}

_anything

is

_possible.

In all my cases there are

_only

a few

major

possibilities.

In the case of electric utilities, for

_example,

we see, in effect, three poss-ible _system

_{equilibria - public}

_ownership,

private

decentralized

_generation

_{of power,} or

_privately

held utilities. What we _{argue is} even

_given

the constraints of the

_particular

political,

technical and economic

10 America, other outcomes were

_unlikely,

but any of these three

might

have occurred. Individual and collective action, channeled

through existing

networks of

_personal

and

political

relations, determined which

possi-bility

actually

did occur.

An

_important

_part

of

_general

_arguments

about such matters would be to characterize those circumstances under which there indeed are

_{multiple equilibria,}

and net-works of collective action may determine outcomes;

_part

_{of my}

_argument

about the utilities was that later on, once the

_industry

form was locked

in,

the other

_{possibilities}

were foreclosed, and in those

_periods,

less

contingent

theoretical accounts

_might

have sufficed.

Also central to the

_project

is to formulate some theoretical

_{principles concerning}

social structure that will cut across all the cases and offer some

_explanatory

_power. One such

_{general principle}

is that the level of network

_{fragmentation}

and cohesion, or

coupling

and

_decoupling,

is a

_major

deter-minant of outcomes. That was central in the discussion of malfeasance, in the _argument about the overseas Chinese and in the discussion of business groups.

Such an _argument bears also on the case of electnc utilities. If Samuel Insull, for

example,

had been

_socially

located in a

tightly-knit

network of close associates, he

might

well have found it

_impossible

to con-struct the outcomes he did. Instead, he had

relatively

weaker ties into several insti-tutional

_{spheres -}

financial,

political

and technical - that were

_decoupled

from one

another, and this was the reason for his success. The

_{general principle}

may be that the actor whose network reaches into the

largest

number of relevant institutional realms will have an enormous

_advantage.

This may be a case of what I have called the

_’strength

of weak ties’

_(1973).

It relates also to the work of

_Norwegian

anthro-pologist

Fredric Barth, who considers the

ability

to breach

_{traditionally}

closed

spheres

ot

_exchange

as the essence of

entre-preneurship

(Barth 1966).

The ultimate aim, then, m to

_produce

a theoretical _argument with a

_high

level of

contingency

that nevertheless meets scien-tific standards of

_generality,

and does not fall prey to _ever-present

_temptations

of

his-toricism. Such an

_agenda,

_{I argue, is} central to the

_vitality

of the new economic

soci-ology.

Acknowledgements

This paper was

_presented

at a _conference spon-sored

_by

the Centre de Recherche en

Epistmo-logie Applique

of the Ecole

_{Polytechmque,}

on ’The Economics of Conventions’, Pans, 27-28 March 1991. It draws on _my

_{book-m-progress.}

SocteW

and

Economw

The Social Cotzstrtictioti

of Economic

IflSllllllións, to be

published by

Har-vard

_University

Press

Recemed

_September

1991 Final version

_accepted

December 1991

Notes 1

For a more detailed historical account of the economic _arguments of Durkheim & Weber, and of the interactions between economists and

soci-ologists

over the course of the twentieth _century. see Granovetter ( 1990)

2

For elaborations on this theme, see

_Blaug

(1986) and Kirzner (1973)

3

For a more detailed account _{of the ups and} downs in the treatment of

_{entrepreneurship by}

economists, see Granovetter (1991:Ch. 4)

4

This section _reports on collaborative work

originated

by Patrick McGuire and _joined later

by

me and Michael Schwartz

5

The

idea that institutions _{may become} ’locked in

_despite

the

possible

greater

efficiency

of other conceivable forms is a _{generalization} of the _argument for lock-in of inefficient

tech-nologies

by Paul David (1986) and Brian Arthur (1989). Their line of argument parallels that in industrial organization on ’first-mover’ advan-tage.

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