Author Archives: joshmccabe

The New Sociology of Markets

Posted on June 13, 2011 | 4 Comments

In contrast to the ahistorical, price-taking, utility-maximizing, omniscient actors which fill the abstract models of neoclassical economics (what Coase (1988: 19) mockingly called “blackboard economics”), economic sociologists have made vast improvements in the study of actually existing markets. Fourcade (2007) breaks the sociology of markets down into three primary camps: network analysts, field analysts, and performativists. While the sociology of markets is most associated with the embeddedness program of Granovetter (1985), this is probably the least “sociological” of the three camps. As Krippner (2001) has persuasively shown, network analysts commandeered Polanyi’s concept of embeddedness and gave it a new meaning making it synonymous with network ties. For reasons explained in the short answer below (See #1), this essay will focus on the other two camps – field analysts and performativists.

Markets as Fields

Fields analysis is the older of the two perspectives and has largely taken a center role in the sociology of markets after the decline of network analysis. One of the strengths of field analysis is that it has its origins in several social science disciplines (Scott 2007: 1-18). Field analysts in each discipline saw importance in different topics/subjects and often employed different methods to answer questions about them, but in all cases they put market institutions at the center of their analysis. Scott (2007: 48), synthesizing several strands of thought, defines institutions as “comprised of regulative, normative and
cultural-cognitive elements that, together with associated activities and
resources, provide stability and meaning to social life.” This is a useful
working definition for our purposes here. Institutions are necessary because economic actors live in an uncertain world where preferences, production functions, and resources are not objectively given to all. Homo economicus may know exactly how to act but the rest of us need some guidance. For Max Weber, institutions served to help actors rationally calculate their actions (Swedberg 1998). In this way institutions include a wide variety of structures such as prices
(Hayek 1948), networks (Granovetter 1985), firms (Williamson 1985), cultures
and states (Fligstein 2001).

Field analysts have focused on market institutions as they are embodied in culture/norms, states, and powerful actors with the ability to set the agenda. The project of field analysts has been to show how larger social structures influence market actors (whether individuals or organizations) as well as how actors compete to shape institutions in turn. Cultural arguments date back to Weber’s (1905) argument that a “protestant work ethic” based on Calvinist precepts was rationalized and transformed into the “spirit of capitalism” which led to the modern world. More recently, McCloskey (2010; forthcoming) argues that the industrial revolution and modernity did not come about because of material (i.e. coal) or legal (North 1990) changes. Instead, she looks at the role of rhetorical changes among elites in Holland and Britain and finds what was really important was their reevaluation of the bourgeoisie. Trade, invention, and manufacturing took on a new meaning as “dignified” which unleashed the creative destruction necessary for economic development.

Among modern sociologists, Meyer and Rowan (1977) famously described institutions as “myth and ceremony.” Rather than the formal structures themselves being the most important (Williamson 1985), they saw institutionalized culture and norms as more influential. On the individual
level, Fligstein (1990) examines individual “conceptions of control” which
frame the way individuals see “problems” and “solutions.” On the national
level, Dobbin (1994) looks at the role of what he calls industrial culture in
shaping the economic organization of railway markets the United States,
Britain, and France over the 19th century. These cultures “influence policy-making by contributing to collective understandings of social order and
instrumental rationality in different nations, and modern industrial policies
are organized around those ideas (Dobbin 1994: 2).” Similarly, Meyer et al (1997) move from a national to an international context arguing that there a “world culture” exists shaping the way that nations govern themselves and the economy.

States, with their pervasive presence in modern society, make for another obvious candidate for the embodiment of institutions. North (1990), describing market institutions as the “rules of the game,” puts most of his attention on property rights, regulations, and legal rules enforced by states. Dobbin and Dowd (2000), for example, show how early antitrust laws shaped railway firm business strategies for competition. Until the advent of antitrust laws, Massachusetts railways relied on collusion to avoid ruinous “cutthroat” competition. When antitrust laws outlawed cartels, firms first resorted to intense price competition at a cost to their financiers. Eventually, these powerful banks reigned in this competition by threatening to withhold funds from firms who engaged in price-cutting wars. This in turn led to a merger movement which stabilized the industry and led to the market as we know it today. The “varieties of capitalism” literature probably takes state institutions most seriously (Hall and Soskice 2001). They see states as providing institutional complementarities that give firms in that nation a particular comparative advantage. Liberal Market Economies (LME) are based largely on competitive markets and hierarchies, and conform to the transaction cost view of markets. Coordinated Market Economies (CME), on the other hand, rely more heavily on networks to move information and cooperation among firms. In each case, the state determines acceptable market behavior.

While many economic sociologists have tended to focus on one explanation over the other, it would be a mistake to characterize them as competing explanations. This is made most evident by recent work. Fligstein (2001) has done the best job at integrating the two perspectives within his aptly named political-cultural approach to markets. On the individual and organizational level, people have those particular conceptions of control which shape their outlook. At the same time, political organizations (primarily the state) regulate economic activity from the top down. Krippner (2011), looking at how financial services rose to dominance in the American economy, credits both the triumph of the ideology of shareholder value and a potpourri of legal changes in all dimensions of American law. Continuing the tradition of scrutinizing seemingly “noneconomic” areas of social life, Healy (2006) looks at the market for human blood and organs. He finds that it is regulated and made possible by people’s beliefs about donation, state regulation of the industry, and the rules of the organizations involved.

Field analysts, as they study markets, rely on two major concepts imported from Pierre Bourdieu. The first is the concept of fields of action. In neoclassical theory, atomized actors do not orient themselves to any particular time or place. They act in accordance to opportunities to maximize their objective utility wherever they may arise. Network theorists have narrowed down the scope of actors’ orientation to their industry (White 1981) or their organization (Burt 1992), but this is still not accurate. A field can be described as the social space in which actors orient their actions to each other. Dimaggio and Powell (1983) adopted this concept in their seminal article on “instititutional isomorphism” among organizations. They wanted to understand why organizations interacting in the same organizational field tend to converge on one or a few organizational forms. This proposed that occurs through three mechanisms: “1) coercive isomorphism that stems from political influence and the problem of legitimacy; 2) mimetic isomorphism resulting from standard responses to uncertainty; and 3) normative isomorphism, associated with professionalization (Dimaggio and Power 1983: 150).” As previous examples allude to, fields can take many shapes from interactions among members of a profession (Abbott 1988; Guillen 1994; Babb 2001; Fligstein 2001) to national contexts (Dobbin 1994; Hall and Soskice 2001) or even the whole world (Meyer et al 1997).

The other concept, though not always used explicitly, is habitus. According to Bourdieu (2005: 84), “Insofar as he/she is endowed with a habitus, the social agent is a collective individual or a collective individuated by the fact of embodying objective structures.” In other words, individuals within particular fields internalize the institutional structure in which they act. This does not mean that actors are simply “dopes” who act according to institutional constraints. They actively shape them as well (Dimaggio and Powell 1983). Field analysts have been careful to show that this happens both purposely and in ways actors did not intend (Dobbin and Dowd 2000; Fligstein 2001; Zelizer 2010; Krippner 2011). In keeping with the emphasis on allowing actors to act in an uncertain world, Bourdieu (2005: 85) remarks, “Habitus is a highly economic principle of action, which makes for an enormous saving in calculation (particularly in the calculation of costs of research and measurement) and also in time, which is a particularly rare resource when it comes to action.” For field analysts, it is very much about calculation.

Markets as Performance

Performativity is the newest of the three camps, coming out of the Actor-Network Theory (ANT) program of Bruno Latour and taken into economic sociology by Michael Callon (1998). The origins of each camp are important because it helps explain why they are on their present day trajectories. Field analysis, as we see from Weber and Bourdieu, was originally a reaction against the materialism of Marxist theories of the economy. ANT, on the other hand, can be seen as a reaction against the perceived excesses of social constructionism. It is one thing to reject material determinism, it is some altogether different to completely ignore the material aspects of markets. Against this backdrop, performativists have spent the bulk of their time looking at how socioeconomic technologies and “market devices” have shaped the way people interaction in market settings. Technologies, as conceptualized by performativists, can be either material or nonmaterial. Buenza and Stark (2004), for example, examine the way that the material layout of a Wall Street trading room shapes what goes on there. They find that often ignored aspects, like the use of computers and proximity of desks to each other, have huge effects on the way traders perceive opportunities and act on them. The idea of economic technologies also encompasses the knowledge of economists. MacKenzie (2006) traces the development of the Efficient Market Hypothesis and concomitant Black-Scholes Option Pricing Model and its consequent application on the Chicago Mercantile Exchange. He is able to show how the model did not originally fit what was happening on the exchange. Instead of throwing out the model, economists and officials from the exchange worked to change the behavior of market actors to conform to the model and eventually succeeded. MacKenzie concludes that economic models are “an engine” driving markets rather than just “a camera” taking snapshots of a reality from afar.

In the same vein as field analysts, performativists put much emphasis on market
technologies as “calculative devices.” Although Hayek (1948) would argue that
prices serve as transmitters of local knowledge, he discounts the fact that the
prices themselves must be constructed and interpreted by the actors utilizing
them. This is where the various kinds of calculative devices come into play. Take the evaluation of someone requesting a mortgage as an example. The bank representative must find a cost-effective way of determining whether someone is
worthy of a loan. If they have personal knowledge of the applicant then they might be able to judge their “worthiness” at little cost. But how does this work in the context of a national banking system often detached from the local scene? Poon (2009) details the rise of FICO scores in serving as a substitute for personal knowledge. The use of nominal-level scores allowed banks not only to determine who was creditworthy but even parse them out into degrees of creditworthiness. In other words, they make them commensurable (Espeland and Stevens 1998) and thus create new markets where none existed before the advent of the technology. Performativists, in line with ANT, blur the line between actors and the material environment. MacKenzie (2009: 19-25) describes the actor-network at “agencement.” Performativists see it as impossible to separate actors from their technical environment and even go so far as to attribute agency to non-human material objects. All this action happens in what we might call a particular socio-technical assemblage.

It is worth taking a moment to discuss the aspect of performativity that has received the most attention to date among economic sociologist: the idea of economic theory as a kind of self-fulfilling prophecy. MacKenzie (2006) breaks performativity down into three broad categories. Generic performativity occurs when market actors simply use abstract economic theory in the real world. A good example might be the fact that people drive less when gas prices rise. There is little evidence that the market actors involved explicitly know that economic
theory asserts that demand curves slope downwards, but their actions conform to the theory nonetheless. Effective performativity occurs when economics makes a difference in the outcome. For example, Pigouvian theories of externalities and social costs are actively used by regulators when creating taxes on cigarettes or particular pollutants. These two categories of performativity are rather common in the world. The strong program pushes it one step further. Barnesian performativity occurs when market actors make the theory being used “more true.” What exactly does this mean? MacKenzie compares it to the concept of a self-fulfilling prophecy. Economic theories and models might not actually be true in any realistic sense (with their myriad assumptions, we can easily see why this could be the case) but can become true as market actors conform to the theory in question. The aforementioned work on the Black-Scholes options pricing model fits this criteria.

While this is an interesting and novel concept, I think it is a dead end as performativity as a progressive research program goes. The reason is that performativity relies heavily on institutionalist arguments about the greater social structure within which agents (however you want to define them) act. As Fourcade (2007: 1027) argues, “Indeed, once social conditions are taken into consideration, the radical novelty of the performativity argument is somewhat diminished.” MacKenzie (2009: 181) recognizes this fact argues that performativity is a necessary addition to other embeddedness approaches in economic sociology. They focus on the social but ignore the technical, but “Because the ‘social’ and ‘technical’ are inextricably linked in market construction, the two sets of tools will ultimately need to be integrated full: a challenging but important academic task.” It is worth making a side by side comparison from the above descriptions.

A Critical Comparison

When we examine the two camps together, several similarities emerge. The table below looks at them through the lens of the “five Ws” (plus one H) of markets.

First and foremost, we find that both theories put calculation at the center of their analyses. Why do people create and utilize market institutions and technologies (which are really synonymous)? Because it helps them reduce uncertainty and enables them to act within their field or assemblage (again, the two concepts are largely synonymous). This comparison even shows that both theories have some of the same shortcomings. Schneiberg (2007: 51) repeats the critique often lobbed at field analysts that “institutions create stability and have causal efficacy, until they don’t.” Without a comprehensive theory of social change, field analysts have relied on exogenous shocks (“crisis”) or some heroic
“institutional entrepreneur” to usher in social change. Correspondingly, critics of performativity argue that economic theories perform until they don’t. While there is a name for this, counterperformativity, there is no real theory behind it. Both cases require further research and theoretical development to fill in the holes. In this case, the answer may be somewhere in between performativity’s emphasis on agencement in everything and field analysis’s emphasis on the actions of a single individual or organization – what Aldrich (2011) calls “institutional entrepreneurship NOT institutional entrepreneurs.”

The pragmatic question of “how do we go about doing this” still remains. Scott (2007), in tracing the early history of institutional theory, unknowingly makes a prescient point about the future development in the sociology of markets:

Why was the impact of the early institutionalists blunted? Modern-day commentators offer several explanations. The German Historical School no doubt overemphasized the uniqueness of different economic systems and underemphasized the value of analytical theory. Even sympathetic critics acknowledged that Veblen exhibited ‘an explicit hostility to intellectual ‘symmetry and system-building’’ (Hodgson 1996: 211) and that Commons’ arguments were hampered by his ‘idiosyncratic terminology and unsystematic style of reasoning’ (Vanberg 1989: 343). But a more serious shortcoming was the tendency for the work to generate into naïve empiricism and historicism. Emphasizing the importance of the particular time, place, and historical circumstance, institutional analysis came more and more to underline ‘the value of largely descriptive nature and function of politico-economic institutions’ (Hodgson 1991: 211).

The resemblance to contemporary performativity theory is uncanny. Replace “institutionalists” with “performativists” then “institutions” with “technologies” and all the same critiques would still apply. There is no reason to reinvent the wheel with performativity though. Going forward the best strategy seems to be integrating specific insights from performativity into field analysis. This means dropping the excessively historical accounts and inserting more theory without the unnecessary new jargon. It also means dropping the idea that non-human objects have agency as it adds little value to the analysis. Just as field analysts have cherry-picked concepts from Bourdieu (Dobbin 2008), so they should do the same with performativity. To boil it down to one concept, field analysts should come to grips with the materiality of markets and integrate the study of market technologies into their work. MacKenzie (2006) comes closest to approximating this ideal as do Espeland and Sauder (2007).

As I argue in one of the short essays below, the primary limitation unique to a
political-cultural-technological approach to markets is an inability to comment
on the efficiency of particular institutional arrangements and organizational
forms. By avoiding such a discussion, economic sociologists relegate themselves
to the sidelines of major intellectual and policy debates. One does not need to
go back to neoclassical economics in order to formulate such a theory. New
Institutional economics (North 1990) and network analysis (Uzzi 1997) already
do this so it is only a matter of integrating their insights (or alternatively,
Marxist economic theories) into the framework.

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Hayek and Polanyi on Economy/Society

Posted on June 10, 2011 | 3 Comments

Hayek and Polanyi are often seen as differing in their analysis of the relationship between the economy and society. In the introduction to The Great Transformation, Block (2001: xviii-xxix) argues that Polanyi was explicitly reacting to the work of Hayek and his teacher Ludwig von Mises. Most recently, Fourcade and Healy (2007) put Hayek squarely in the “liberal dream” camp while Polanyi is put in the “commodifying nightmare” camp. Despite the different normative implications each takes away, Hayek and Polanyi actually have similar views on the relationship between the market and society.

According to Polanyi (2001), the market order is not a natural one as Adam Smith and other classical economists claimed. Instead, he sees the market economy as a human invention – one that is at odds with society as the market tries to “commodify” things such as land, labor and money. Polanyi calls these things fictitious commodities as they cannot truly be bought and sold like bread or horses. Therein lays the tension between economy and society. The tension results in a double movement. The market and its logic push further and further into people’s lives and causes severe social disruption. Society, in reaction, pushes back to protect itself from further intrusion. Throughout the book, Polanyi uses society and the state almost interchangeably as society only seems to fight back through state action. Free market capitalism, according to Polanyi, is an unattainable utopia which is bound to fail because 1.) Its mechanisms of self-regulation are flawed and 2.) Society will not allow itself to be crushed by the market.

Confusion on Hayek’s position stems from the fact that The Road to Serfdom was published the same year as The Great Transformation. It is here Hayek (1944) argues that government intervention in the form of planning can lead to fascism. It is important to note that Hayek was strictly referring to government
planning. The book is silent on nongovernmental planning. For Hayek, planning was obviously necessary; it was only a matter of who did the planning. Others have read his work on socialist calculation and the price mechanism (Hayek 1948) as arguing that only the price mechanism can rationally organize society. This view is also wrong in light of his other work.

First of all, Hayek too rejected a neat dichotomy between society and economy. He even went so far as to reject the idea of “the economy” as traditionally viewed by economists. Instead, he used the term “catallaxy” to refer to “what vulgarly are called economic relations (Hayek 1976: 112).” Catallaxy was simply one aspect of what he called the extended or spontaneous order of society. The extended order is, as Adam Ferguson (1767: 205) put it, the “result of human action, but not the execution of any human design.” This includes things such as language, morals, and the market order which have no objective purpose other than what actors attribute to them. The extended order differed from the made order which consisted of things such as the family, firms, states, and other organizations which have purposes. Most importantly, Hayek argued that extending the logic of the made order to the extended order does not make any sense (and could indeed be counterproductive). This is what he termed the “fatal conceit” of government planners (Hayek 1988) who see the economy as something separate from the other spheres of society and thus open to manipulation (Hayek 1952).

In other words, Hayek also saw “the economy” embedded in society just as Polanyi did. Unlike neoclassical theorists, Hayek’s views on properly functioning markets do not necessitate abstracting them away from society. Indeed, that would be impossible. The key difference lies in the assumption on the part of Polanyi that the market order rests on state actions – regulation must come in the form of government laws. Hayek, on the other hand, did not see the market as possessing powers of “self-regulation.” Rather, it was (primarily) regulated by society.

  • Josh McCabe

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Why Econ Soc Needs Bill Baumol

Posted on June 7, 2011 | 2 Comments

Baumol’s (1968; 1990) work on entrepreneurship is probably the most important insight coming out of mainstream economics to escape the watchful eye of economic sociologists. This is true for two reasons. The first is that Baumol is one of the only economists (outside the heterodox Austrian tradition) to take the concept of the entrepreneur seriously. “The theoretical firm is entrepreneurless,” Baumol (1968: 66) declared, “the Prince of Denmark has been expunged from the discussion of Hamlet.” This is unacceptable to Baumol who has spent much of his career inserting entrepreneurship back into economic theory. This, of course, is nothing too impressive in the eyes of economic sociologists. Entrepreneurs play center roles in the work of institutionalists such as Dobbin (1994) and Fligstein (2001). If this is the case, what makes Baumol’s theory of entrepreneurship so special?

Taking Schumpeter’s idea of the entrepreneur as an innovator as his starting point, Baumol (1990) goes on to delineate three kinds of entrepreneurship: productive, unproductive, and destructive. The actions of the productive entrepreneur add value to society. This could be something as obvious as creating a new drug to treat cancer or something less obvious such as the invention of double-entry book keeping which creates new efficiencies. Unproductive entrepreneurship adds nothing to society but simply transfers wealth. Examples would include company lawyers scouring the tax code for loopholes of which to take advantage or filing unnecessary patents to prevent competition. Destructive entrepreneurship, as its name implies, involves actively destroying value in society. This might include the actions of mercenaries and arsonists involved in insurance fraud.

Much like Fligstein’s (2001) political-cultural approach, actors are not confined to taking action on research and investment decisions or price competition. They actively seek to construct the market in which they act. The key difference is that Baumol’s framework allows us to make evaluations of the efficiency of such actions and their institutional consequences. Institutionalist emphasis on stability and legitimacy has caused them to neglect the concept of efficiency (Fligstein and Dauter 2007). Dobbin (1994: 222-227), for example, denies that there is some objective criteria for efficiency. Instead, there are many paths to efficiency economic organization which can be achieved with varying institutional arrangements. Fligstein (2001: 228-236) argues that economists spend too much time talking about efficiency and not enough time talking about efficiency’s prerequisite, stability. In both cases, they show how economic actors used the state to stabilize their particular market so that they can take action by limiting the uncertainty that comes with intense price competition.

There is no reason for this neglect given that both take a comparative institutional analysis approach which allows explicit comparisons under different institutional arrangements. The fact that “when nations broke each other’s core economic rules their railway industries did not fall apart” (Dobbin 1994: 222) in no way means that some were not more efficient than others on the margin. The frameworks of Dobbin and Fligstein do not allow us to parse out productive entrepreneurship, which leads to “good” stability, from unproductive or destructive entrepreneurship, which consists of negative sum rent-seeking that stymies competition to the point of creating monopolies. It also ignores the fact that some institutions actually encourage more rent-seeking than others. Is it any surprise that Ken Lay spent the bulk of his career, not in the private sector, but as a government regulator? There may not be only one best way to organize economic activity valid at all times, but this is no reason to give up on the idea of efficiency in general. Some institutional arrangements can be more efficient than others and Baumol gives economic sociologists a way to join the debate on this.

  • Josh McCabe

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Embeddedness and Network Analysis

Posted on June 6, 2011 | 3 Comments

Early economist sociologists starting with Granovetter (1985) have operationalized Polanyi’s (2001) concept of “embeddedness” as consisting of social networks. As Krippner (2001) points out though, this was not Polanyi’s original intention. For him, embeddedness was more about the “fluid mixing” of economy and society so that it was impossible to study one in isolation from the other (Krippner 2001: 779). Despite cooptation of the original meaning, network analysts have made two important improvements over economics in the way market transactions are theorized.

The main contribution of network analysis has been to chip away at the neoclassical assumption that economic actors behave in an atomistic manner. In this framework, models assume that economic actors take action without regard to other actors in the market. White (1981) was the first to theorize markets as a “reproducible role structures.” The implication of this definition is that firms take the actions of other firms in the same market into account when acting. Previous neoclassical theories simply conceptualized the firm as a production function where costs and benefits were given. Firms were almost always “price takers” and thus output was determined by an equation for profit maximization. In this way, the neoclassical actor is not “undersocialized” as Granovetter (1985) argues. He is just as oversocialized as the sociological accounts he critiques. While such a “black box” approach may be useful for econometric modeling, it gives us little insight into how real world firms make real world decisions.

The relational approach to firm behavior is a step in the right direction. In neoclassical models, there is only the market. In the transaction cost economics (TCE) approach, there are markets and firms (Williamson 1985). In the relational approach, there are markets, firms, and networks (Powell 1990). The contributions of this approach should not be underestimated when put into the context of the economic theory of the time.

That being said, contemporary network analysis has rested on its laurels in that it keeps many of the other assumptions of neoclassical economics. Network analysts implicitly keep the concept of homo economicus (albeit with a broader definition of rational) in search of objective information to exploit (similar to Stigler 1961) at the center of their studies (i.e. Burt 1992). She simply has a new way to maximize her utility. In addition to markets and hierarchies, she now has social networks at her disposal. Social networks are just another means to the same end. If we take serious Weber’s (1978: 40-43) distinction between “associative” and “communal” relationships then network analysis only take the former into account as it is based on “rationally motivated adjustment of interests or a similarly motivated agreement, whether the basis of rational judgment be absolute values or reasons of expediency” where as communal relationships are “based on a subjective feeling of the parties, whether affectual or traditional, that they belong together.” Most contemporary studies only examine associative relationships (Burt 1992; Abolafia 1996; Uzzi 1997; Mizruchi 2010) and thus leave an incomplete picture of markets. While they are indeed embedded in network structures they remain disembedded from society (and even the state) as Polanyi originally argued.

If we see the progress of economic sociology as stemming from our ability to turn assumptions into variables then network analysis has made little progress in the past 20 years. If we really want to fully develop the concept of embeddedness, it would be best for economic sociologists to move away from the operationalization of embeddedness as network structure as has been done by others (i.e. Zelizer 2010).

  • Josh McCabe

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Do Economists Take Institutions Seriously?

Posted on June 2, 2011 | 5 Comments

[I took my comprehensive exam in economic sociology last week and will be posting the essays on here over the next couple of weeks for your summer enjoyment.]

When I hear the complaint that economists do not take ideas and institutions seriously, I am reminded of an economist (an acquaintance who shall remain nameless) who revels in informing me that sociology is “nothing but Marxists and feminists.” It is true that a great number of economists do not take ideas and institutions seriously as it is true that a great number of sociologists are Marxists and feminists, but the picture does not hold up as well now as it did in the 1960s when this particular economist was in graduate school. In the same vein, sociologists who still insist that economists do not take institutions seriously must willfully ignore the Nobel Prizes awarded to George Stigler [1982], James Buchanan [1986], Ronald Coase [1991], Gary Becker [1992], Robert Fogel and Doug North [1993], Vernon Smith [2002], and most recently, Elinor Ostrom and Oliver Williamson [2010] – all of whom did extensive work on the role of institutions (though not necessarily ideas) in economics.

That said, it is helpful to break economic institutionalists down into three primary groups: neoclassical institutionalists, transaction cost economists, and what I will call cognitive institutionalists.  I will examine each in turn and compare them to various sociological approaches to institutions along the way.

Neoclassical Institutionalism

The University of Chicago was home to the first generation of neoclassical institutionalists. It is no surprise that the department known for its economic imperialism was the first to apply economic analyses to areas outside traditional economics. Neoclassical institutionalism (as well as transaction costs institutionalism as we will see) has its origins in the work of Ronald Coase (1988) whose early work on The Nature of the Firm and The Problem of Social Cost began to introduce the idea of transaction costs into economic analysis. Neoclassical institutionalists, while keeping with the neoclassical framework as the name implies, began to explore the ways in which the state could affect the costs of economic transactions. Neoclassical institutionalists studied both the cause and effect of institutions. Those who studied the effect of institutions fall under the umbrella of the Law & Economics (L&E) movement. Posner (1973), for example, examined the law from an efficiency standpoint and came away with the claim that the common law was economically efficient. Becker (1968) examined criminal law through the lens of cost/benefit analysis. He assumed criminals were rational like everyone else and made decisions based on the potential costs and benefits of committing a crime. The law could change crime rates by tweaking the costs of crime.

Those who studied the cause of institutions fall under the umbrella of Public Choice (PC) theory which begins with Buchanan and Tullock’s (1962) The Calculus of Consent where they try to work out the pareto optimal constitutional rules for democracy. They import all the assumptions of neoclassical economic actors and attribute the same assumptions to political actors. Thus, bureaucrats do not look out for the elusive public interest, but rather their own interest in the form of maximizing their budget (Niskanan 1971). Politicians do not seek the optimal level of taxation, but rather they try to maximize tax overall revenues (Brennan and Buchanan 1980). Special interest groups engage in rent-seeking (as opposed to profit-seeking) behavior to stymie competition (Tullock 1967).

Neoclassical institutionalists, despite two key differences, have much in common with neo-Marxist and post-Marxist theories of the state in sociology.  Both differences are methodological. While the former builds mathematical models to be tested by quantitative data, the former eschew mathematical model in favor of logic-based arguments which rely on qualitative historical methods for their application. Secondly, public choice takes methodological individualism as its starting point whereas Marxist theories begin with class analysis (See Barrow 1993 and Mueller 2008 for comprehensive summaries). This is where any differences end though. Both public choice and Marxist theories assume that actors, whether individuals or classes, seek out their material self-interests which they already know beforehand. Take the case of South African apartheid as an example. Bonacich (1981), a neo-Marxist, famously argued that the system was a result of higher price white labor trying to avoid competition from lower priced black labor. Lowenberg and Kaempfer (1998) essentially make the same argument from a public choice perspective (with all the associated mathematical modeling). Another commonality is that both largely deal with the institutions of the state and ignore (or dismiss) the impact of culture, organizations, and ideas on actors.  Whether the state is simply a conduit for special interests or an actor itself, everything boils down to material interests.

There is also an ideological component to each theory. Marxist theories see capitalism in terms of class struggle, accumulation, and crisis. Markets are inherently unstable and therefore capitalists must intervene though the state to stabilize the economy, restore legitimacy, and suppress the working class (O’Connor 1973). Public choice theories, on the other hand, see the market as largely equilibrating, and with a few exceptions (provision of public goods and regulation of negative externalities), efficient and therefore see less need for state intervention (Buchanan 1977; Mueller 2008). Thus the taken for granted assumptions about markets effect their analyses of state institutions. This also explains why broad cross-fertilization between the two schools has not taken place.

Transaction Cost Institutionalism

As previously mentioned, the work of Ronald Coase also contributed to the growth of transaction cost institutionalism. Looking back, Coase (1988: 15) lamented the fact that neoclassical institutionalists had misinterpreted his article on social cost. Rather than assume a world of zero transaction costs, “What my argument does suggest is the need to introduce positive transaction costs explicitly into economic analysis so we can study the world as it exists.” This task has been taken up by Williamson (1985) and North (1990).

Williamson (1985) opens up the “black box” of the neoclassical firm by moving from the view of the firm as a production function to viewing it as a governance structure than can take many shapes and forms. These structures are necessary because there are varying costs to using the price mechanism versus internal production. Firms exist to minimize transaction costs. He modifies several assumptions from neoclassical economics. The first is rationality. Neoclassical theories assume simple utility maximization by actors. Williamson instead assumes bounded rationality where actors intend to be rational but are limited in their cognitive abilities to do so. Secondly, he assumes that actors will engage in opportunism or “self-interest seeking with guile” if given the chance (Williamson 1985: 47) whereas opportunism is simply assumed away in neoclassical models. He also includes three dimensions for rationally choosing different arrangements: asset specificity, uncertainty, and frequency. Williamson explores classical, neoclassical, and relational contracting. Depending on the frequency (occasional or recurrent) of the transaction and the level of asset specificity (nonspecific, mixed, idiosyncratic), we will get particular kinds of governance structures or institutions.

North (1990) largely uses the same assumptions as Williamson but focuses on state institutions. Institutions, according to North (1990: 3) are the “humanly devised constraints that shape human interaction.” They can be both formal and informal, purposely constructed or evolved over time. North is careful to point out a difference between institutions and organizations. The former are the rule of the game while the latter are the players. “The major role of institutions in a society,” according to North (1990: 6), “is to reduce uncertainty by establishing a stable (but not necessarily efficient) structure to human interaction.” We see convergence because of the interaction between organizations and institutions. There are lock-in effects (path dependence) and a feedback process. Institutions can be changed by entrepreneurs but it all depends on the information they receive and how they perceive it.

The major difference between Williamson and North are their views of informal constraints. Although we tend to focus on the formal rules that structure our lives, North agues that they make up a very small portion compared to informal norms, conventions, and moral constraints. Culture, as conceptualized by North, “provides a language-based conceptual framework for encoding and interpreting the information that the senses are presenting to the brain… In the short run, culture defines the way individuals process and utilize information and hence may affect the way informal constraints get specified. Conventions are culture specific, as indeed are norms. However, norms pose some still unexplained problems. What is it that makes norms evolve or disappear – for example, dueling as a solution to gentlemanly differences? (North 1990: 37, 42-43).” In other words, economists still know very little about cultural evolution or change.

Network analysts have been quick to dismiss transaction cost institutionalism. Granovetter (1985), for example, took explicit aim at the work of Williamson on markets and hierarchies. Of course, Granovetter does not actually challenge his general framework. Instead he argues that in addition to markets and hierarchies, there are network forms of organization. How is this any different from Williamson’s challenge to neoclassical economics on nontraditional contracting? If one steps back to think about it, there is no difference. Network analysis is really just an expansion of transaction cost institutionalism within another discipline which asks different questions. The real challenge comes from the varieties of capitalism approach. Hall and Soskice (2001: 15) argue, contra Williamson (1985), that firm strategy follows institutional structure rather than vice versa. Dobbin (1994: 8) points out that North (1981) makes the same argument as Williamson (1985) but he ignores the fact that North later changed his position on this and critiqued his own earlier work. I think this critique is largely correct and has been integrated into later transaction cost institutionalist arguments.

What of the critiques that Williamson ignores ideas, norms, and culture? Again, these critiques are correct and also apply to network analysis. North (1990) includes cultural factors in his analysis but his argues remain relatively undeveloped. Fligstein’s (1990) “conception of control” and Dobbin’s (1994) “rationalized meaning systems” can be seen as a highly developed versions of North’s (1990) “mental constructs” because they are able to explain cultural change in ways North admits economists cannot. This might be expected given the two disciplines’ diverging research interests. Transaction cost institutionalists are more interested in evaluating the efficiency of various institutional arrangements. Sociological institutionalists such as Dimaggio and Powell (1983), Dobbin (1994), and Fligstein (2001) are more interested in explaining institutional stability and change.  North (1990: 83-91) argues that while stability is necessary for complex human interaction but it is not sufficient for efficiency. As noted in short answer question #3 below, sociological institutionalists have been reluctant to comment on the efficacy of particular institutional arrangements. Dimaggio and Powell (1983), in their discussion of coercive, mimetic, and normative isomorphism for example, argue that such changes are not rational in the strict neoclassical sense of the term, but make little attempt to conceptualize ways in which they might be considered rational (i.e. signaling theory, Knightian uncertainty, etc). This affects their visions for capitalist societies insofar as they believe it is legitimate to take positions on the desirability of one arrangement over another.

Cognitive Institutionalism

The last group consists of what I have termed cognitive institutionalism because it is made up of an eclectic group of scholars including Vernon Smith, Elinor Ostrom, Deirdre McCloskey, and the Austrians, who all focus on the cognitive aspects of institutions in a distinctly Hayekian way. Each of them focuses on what may be called the institutions of “spontaneous order.” Hayek’s student, Ludwig Lachmann (1971: 49-50) argued that an institution “provides means of orientation to a large number of actors. It enables them to coordinate their actions by means of orientation to a common signpost.” They are not necessarily embodied in states or organizations and are not always purposefully constructed yet they act as institutions regulating human behavior. Most importantly, they vary depending on the particular circumstances of time and place.

Smith (2003), following Hayek, makes a distinction between constructivist and ecological rationality. Acording to Smith (2003: 468) “constructivism uses reason to deliberately create rules of action, and create human socioeconomic institutions that yield outcomes deemed preferable, given particular circumstances, to those produced by alternative arrangements.” Ecological rationality, on the other hand, “uses reason –  rational reconstruction – to examine the behavior of individuals based on their experience and folk knowledge, who are ‘naïve’ in their ability to apply constructivist tools to the decisions they make; to understand the emergent order in human cultures; to discover the possible intelligence embodied in the rules, norms, and institutions of our cultural and biological heritage that are created from human interactions but not by deliberate human design. People follow rules without being able to articulate them, but they can be discovered (Smith 2003: 470).” Smith uses experimental economics to explore not only how participants act in the laboratory setting but also to examine the rules that emerge to govern their interactions (Smith 1991; 2000). This distinction is important to overcome the critiques of rational choice theory. Cognitive institutionalism use a weak form of rationality which Williamson (1985: 46-47) calls “organic rationality.” Actors do not necessarily have to know how institutions work in order to use them and benefit from them.

Others have taken their research to the field. Ostrom (1990; 2000; 2005) examines what she calls “common pool resources” which mainstream economists assume would result in the “tragedy of the commons.” Instead, her field research finds that individuals are able to construct institutions to govern the use of such resources. She moves beyond markets, hierarchies, and networks to explore “polycentric governance systems” in which centers of decision-making overlap yet are formally independent from each other. Chamlee-Wright (2010) utilizes a framework she calls cultural economy. Cultural economy weaves Austrian economics and new institutional economics together with cultural sociology and network analysis. She finds that New Orleans residents are able to rely on community narratives as a tool for action in the wake of Hurricane Katrina when government rules were uncertain or shifting. For Chamlee-Wright, it is very much a story of spontaneous order.

McCloskey (2010) examines the role of rhetoric in changing the perception of commerce in 17th and 18th century Holland and England. Previous transaction cost institutionalist arguments fell short by conceptualizing institutions as “mere constraints.” Alternatively, she takes culture and discourse more seriously than her predecessors.

How do cognitive institutionalists differ from sociological institutionalists? In many respects, there are no substantive differences at all.  Cognitive institutionalists take both institutions and ideas very seriously and would be able to speak freely across disciplinary boundaries (as most have advocated). Minor differences still persist which have been influenced by the research questions scholars are expected to pursue in each discipline. With the exception of McCloskey, cognitive institutionalists tend to focus on micro and meso-phenomena while sociologists focus on macro-phenomena. This stems from their methodological tools. Smith uses laboratory experiments while Ostrom and Chamlee-Wright rely on fieldwork. McCloskey fits nicely with sociologists simply because she is making a historical argument. There is no reason why sociologists should only employ one or the other though. Zucker (1977), in one of the most important articles of early organizational theory, relied on a laboratory experiment to make her point about institutionalization. More recently, Hallett (2010) relies on fieldwork to make an argument about institutional “recoupling.”

Additionally, it would be safe to argue that cognitive institutionalists effective study both efficiency and stability – a problem which still plagues economic sociology (Fligstein and Dauter 2007). They do this in a way which does not necessarily cause one particular vision of capitalist society to emerge. Because many of the institutions important to actors are the result of human action but not of human design, it would be pointless to try to reform or improve upon them by replacing them with price mechanisms or state planning. Hayek (1988: 76) was quite explicit about this, arguing “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” Although we can observe the efficiency of different institutional arrangements, there is often very little we can do to change them without unleashing a whole slew of unintended consequences.

Most importantly, cognitive institutionalists have paid special attention to the role of civil society in solving many collective action problems. This expands the study of economic sociology beyond market-centered and state-centered approaches. Dating back to Polanyi (2001), some economic sociologists have paid lip service to culture and society but in reality have only seen culture important in so far as it shapes state actions (Dobbin 1994; Babb 2001; Blyth 2002). Cognitive institutionalists join the moralized market approach (Healy 2006; Quinn 2008; Zelizer 2010) and political-cultural approach (Fligstein 2001) in providing an active role for civil society and blurring the line between economy and society.

The evolution of economic institutionalism has closely mirrored that of sociological institutionalism. Both have reached the point where fruitful cross-fertilization is not only possible but necessary for the growth of each as both have a long way to go. Sociologists who complain that economists do not take ideas and institutions seriously should promptly be reported to the Society for the Prevention of Cruelty to Straw Men.

  • Josh McCabe

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Assorted Links

Posted on May 26, 2011 | Leave a comment
  1. Andrew Gelman theorizes on plagiarism. He says plagiarism is less about the quality of the work and more about the laziness of the author.
  2. Lane Kenworthy on heavy taxation. He is the kind of guy you want to emulate for his ability to think critically about empirical evidence.
  3. Chris Bertram shows us that Brad DeLong is equal opportunity asshat. I am amazed people still comment there given the extent to which he selectively edits comments.
  4. Mario Rizzo defends Koch funding at FSU. Lest we forget the central sociological insight that social structures tend to reproduce themselves includes academia. The occasional exogenous shock is good for spicing things up.
  5. Orgtheory and Scatterplot have lively and productive discussions on the Amicus brief filed by the ASA in the Wal-Mart case. Discussions include the nature of causation, science and law, and politics at the ASA.

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Get’em while they’re hot!

Posted on May 24, 2011 | Leave a comment

I recommend chapter two on the Austrian School by McCabe and Pitt. You can get your copy from Amazon. Mine arrived just in time to allow me to cite myself in my economic sociology comprehensive exam:-)

  • Josh McCabe

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Early Institutionalism Redux

Posted on May 18, 2011 | 1 Comment

From Scott (2007: 5) Institutions and Organizations:

Why was the impact of the early institutionalists blunted? Modern-day commentators offer several explanations. The German Historical School no doubt overemphasized the uniqueness of different economic systems and underemphasized the value of analytical theory. Even sympathetic critics acknowledged that Veblen exhibited ‘an explicit hostility to intellectual ‘symmetry and system-building’’ (Hodgson 1996: 211) and that Commons’ arguments were hampered by his ‘idiosyncratic terminology and unsystematic style of reasoning’ (Vanberg 1989: 343). But a more serious shortcoming was the tendency for the work to generate into naïve empiricism and historicism. Emphasizing the importance of the particular time, place, and historical circumstance, institutional analysis came more and more to underline ‘the value of largely descriptive nature and function of politico-economic institutions’ (Hodgson 1991: 211).

Now replace “institutionalists” with “SSF scholars” and replace “institutions” with “technologies” and everything still makes perfect sense. So in my mind, the question becomes: What does the performativity argument add analytically that we don’t already get from some variant of new institutionalism?

  • Josh McCabe

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The Canadian Election

Posted on May 4, 2011 | 1 Comment

Canadians went to the polls on Monday for what turned out to be a fascinating election. I’ve been doing research on Canadian politics in the 1990s so I don’t feel especially qualified to comment on the recent elections. Instead, I turned to some of our good friends at the Institute for Liberal Studies to explain it for us. Here’s what executive director Matt Bufton had to say:

Five weeks ago pretty much everyone in Canada agreed that we were having an election about nothing. Since 2004 no party had been able to win a majority of the seats in the House of Commons. The result has been four elections in the past seven years as governments – first Liberal, then Conservative – were unable to maintain the support needed to govern.

 Conservative Prime Minister Stephen Harper warned that unless his party was able to win a majority of seats the country would face the ruinous prospect of a coalition lead by the Liberal Party with the support of socialists (the New Democratic Party) and separatists (the Bloc Quebecois). These parties countered with claims that Harper wanted to impose a radical conservative agenda on the country. Still, all but the most partisan observers considered this to be standard election rhetoric. The parties and their leaders were simply playing their roles.

 For the first three weeks of the election nothing remarkable happened. The polls moved only slightly as support for the four major parties remained close to where it was as the start of the campaign. Then polls began to show an NDP surge in Quebec – a province that had only elected two NDP members in history. Going into the election it had been assumed that the separatist Bloc Quebecois would continue to win about two-thirds of the seats in Quebec as they had since 1993. There have been massive shifts in Quebec vote patterns before, but no one predicted this one until the closing weeks of the election. Even then, no one suspected the Bloc would be reduced to just four seats.

 The success of the NDP helped to squeeze out a Liberal Party which, despite a long and successful history of owning the centre, has been struggling to find its place in the political spectrum. Left-leaning Liberals began to see the NDP as an increasingly viable alternative. Right-learning Liberals worried about the NDP surge and moved their votes to the Conservative Party.

 This election is being heralded as a political realignment, but it’s too soon to know to be sure. The rise of the NDP in Quebec is reminiscent of the rise of the ADQ, a centre-right Quebec party which jumped from five seats to 41 the provincial election of 2007, only to slip back to six seats a few years later. The NDP traditionally favours a strong national government, an approach not popular in Quebec.

 The new Quebec MPs include an actor (who threatens to blacken the sky with arrows in 300), three students from McGill University, and the assistant manager of an Ottawa pub who lives three hours away from her rural riding and doesn’t speak the language (French) of the people she’ll be representing. Whether these neophytes will be able to earn the renewed support of voters remains to be seen.  The next election is now four years away and with the exception of the Conservatives we can expect major changes in all of the major political parties.

I want to follow up with a few comments from a political sociology perspective. Canada has one of the most unique state structures in the world. It is the only country which combines the Westminster system, with its strong executive, and federalism.  The upper chamber of the national legislature, which represents the states in the U.S. and Germany, is more or less powerless in Canada. Social welfare programs are decentralized among the provinces so regions, rather than national interest groups, are the major players. At the same time, there is a large amount of progressive inter-regional distribution from wealthy to poor provinces. This makes Canada unlike any other country I’ve studied.

The conservatives were wiped the 1993 election after they passed a federal value-added tax (the GST) against massive popular opposition. Much of the political sociology literature assumes that the establishment of such regression taxations leads to a larger welfare state but the opposite happened in Canada. The chart below shows total government expenditures as a portion of GDP in five countries. Canada, in case you can’t read it, is the green line.

While spending is pretty stable in the U.K., France, Germany, and the U.S., we see large scale state retrenchment in Canada where spending dropped from 52.5% of GDP in 1993 to 39.8% of GDP in 2008. The kicker is that all the spending reductions took place under Liberal governments.

This brings us back to Matt’s observation about the NDP in Quebec. Welfare state retrenchment could only happen because different powerful regions of Canada backed further fiscal decentralization (and the prime minister has wide discretion to make this happen). Wealthy provinces got tired of paying for poor provinces and Quebec simply wanted more sovereignty. What happens when sovereignists (BQ) are wiped out and replaced with advocates of national welfare programs (NDP)? We probably won’t find out while the Conservatives hold a majority, but things might get pretty interesting if the NDP can hold on in Quebec.

  • Josh McCabe

Addendum: Jason Sorens over at Pileus and Tina Fetner at Scatterplot also have some thoughts.

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Soros on Hayek

Posted on April 29, 2011 | 2 Comments

George Soros has a piece on Politco today both praising and condemning Hayek all while showing us that he misunderstands Hayek on the most fundamental levels. A few things I just want to point out:

Soros says: “Hayek is generally regarded as the apostle of a brand of economics which holds that the market will assure the optimal allocation of resources — as long as the government doesn’t interfere. It is a formalized and mathematical theory, whose two main pillars are the efficient market hypothesis and the theory of rational expectations.” This is one my pet peeves when reading sociologists writing on Hayek. They figure out that Hayek was at the University of Chicago at the same time as Mitlon Friedman and figure that this is enough evidence to lump them together under the banner of the Chicago School. Wrong! Hayek was not part of the economic department. Rather, he was on the Committee for Social Thought. It is actually rumored that the economics department would not except him because he did not do mathematical economics.

Soros says “Hayek used it to extol the virtues of the invisible hand of the marketplace, which was the unintended consequence of economic agents pursuing their self-interest. I used it to demonstrate the inherent instability of financial markets…Classical economists… sought to eliminate the uncertainty connected with reflexivity from their subject matter. Hayek was one of them.” I don’t think Soros can really make this argument. Hayek’s student, Ludwig Lachmann, went one step further, taking Post-Keynesian arguments on uncertaintly and integrating them with insights from the Austrian School. 

Soros says: But Hayek subordinated his methodological arguments to his political bias. That is the source of his inconsistency. In the Economica, he attacked scientism. But after World War II, when the communist threat became more acute, he overcame his methodological qualms and became the apostle of market fundamentalism — with only a mild rebuke for the excessive use of quantitative methods in his Nobel Prize acceptance speech.” Calling Hayek a market fundamentalist is akin to calling Barack Obama as Marxist-Leninist. I wonder if Soros has ever read The Constitution of Liberty? Also, I don’t see how you can characterize Hayek’s Nobel lecture (combined with his banquet speech) as a mild rebuke. He basically goes up there and tells the economics professor, who just gave him their highest award, that 99% of what they do is bullshit. That’s pretty ballsy if you ask me.

I’m glad to see the renewed interest in the works of Hayek, but it’s still important that we correctly understand him.

  • Josh McCabe

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