Handbook Of Economic Sociology For The 21st Century: New Theoretical Approaches, Empirical Studies And Developments [1st Edition] 3030616185, 9783030616182, 9783030616199

Table of contents :
Where We Came from, Where We Are, and Where We Expect to Go: New Challenges and Developments in Economic Sociology Today......Page 6
Acknowledgments......Page 9
Contents......Page 10
Part I: Theoretical Perspectives and Developments......Page 12
1 Introduction......Page 13
2.1 Alexis de Tocqueville......Page 14
2.2 Karl Marx......Page 15
2.3 Max Weber......Page 16
2.4 Joseph Schumpeter......Page 17
2.5 Karl Polanyi......Page 18
2.6 Mark Granovetter......Page 20
2.7 Pierre Bourdieu......Page 21
2.8 Single Contributions to the Classic Tradition......Page 22
3 Concluding Remarks......Page 23
3.2 Reconceptualization......Page 24
References......Page 25
1 Economics and Sociology in Europe at the Beginning of the Twentieth Century......Page 28
2.1 Max Weber......Page 30
2.2 Joseph A. Schumpeter......Page 31
2.3 Karl Polanyi......Page 33
3 The Changing Character of Economic Sociology......Page 34
4 The Relevance of the Classics......Page 36
References......Page 38
1 Social Capital Defined......Page 41
2.1 Trust......Page 43
2.2 Information Flows......Page 45
2.3 Effective Norms......Page 46
2.4 Organizations......Page 47
4 Developing Social Capital......Page 48
5 Social Capital and Education......Page 49
6 Conclusion......Page 50
References......Page 51
1 The Double-Face of Success......Page 54
2 The Research Program of New Economic Sociology......Page 55
2.1 Background and Aims......Page 56
2.2 Principles and Essential Tools: Causal Explanations......Page 57
3 The Idea of Explanatory Sociology and Action-Based Explanations......Page 58
3.2 Main Forms of Action-Based Explanations in Sociology......Page 59
3.3 Analytical Mechanism Approach......Page 61
3.4.1 Using a Default Option in the Framework of DBO......Page 62
3.4.2 Built-in Mechanism Models Such as the Mechanism of Belief Formation......Page 63
3.4.3 How to Move Forward Through Collaboration......Page 64
4 How to Enhance a Sociological Perspective on Modern Economy......Page 65
References......Page 66
5: A French Institutionalism in Economic Sociology?......Page 69
1 Economics of Quality and Economics of Singularities......Page 71
2 Economics of Convention......Page 72
3 Economics of Qualities and Performativity......Page 77
4 Critics and Limits......Page 79
References......Page 81
1 Introduction......Page 84
2 Uncertainty and the Social Constitution of Expectations......Page 85
3 Expectations in Contemporary Capitalism......Page 87
3.2 Investment......Page 88
3.3 Innovation......Page 90
4.1 Where Do Expectations Come from?......Page 91
4.2 How Do Expectations Spread and Gain Momentum?......Page 92
4.3 The Moral Economy of Expectations......Page 93
5 Conclusion......Page 94
References......Page 96
1 Introduction......Page 100
2.1 The Directions of Aestheticization......Page 101
2.2 Aestheticization and Uncertainty......Page 103
2.3 How Is Aesthetic Quality Attributed?......Page 104
3.1 How Does the Aesthetic Discourse in the Wine Field Develop?......Page 108
3.2 The Use of Judgment Devices to Overcome Quality Uncertainty......Page 109
3.3 What Part Do Aesthetic Criteria Play in Price Formation on the Art Market?......Page 110
4 Summary......Page 111
References......Page 113
8: Economization: How Neo-Liberalism Took Over Society......Page 117
1 Economized Modernity: A Functionally Differentiated Capitalist Society......Page 118
2 Economizing since the Mid-1970s: The Logic of Compare and Replace!......Page 121
2.1 From ``Organized Modernity´´ to a Society ``Managed by the Markets´´......Page 122
2.2 Non-profit Organizations: Cost Reduction Through New Public Management......Page 123
2.3 For-Profit Organizations: Profit-Making by Commodification......Page 125
2.4 The Underlying Logic: ``Divide et Impera´´ Through Shopping Around......Page 126
3 Societal Costs: Erosion of Functional Differentiation......Page 127
4 Perspectives......Page 129
References......Page 130
Part II: Empirical Studies and Research Topics......Page 133
1 Introduction......Page 134
2 The Trust Problem and Its Solutions......Page 135
3 Reputation and Markets in Historical and Contemporary Societies......Page 137
4 Reputation in Online Markets......Page 140
5 The Downside of Reputation Systems......Page 144
References......Page 145
Internet Resources......Page 148
1 The Emergence of Attention Markets......Page 149
2.1 Attention as an Economic Commodity......Page 150
2.2 The Constitution of Attention Markets......Page 152
2.3 Social Change: Attention, Media, and Persuasion Markets......Page 153
2.4 An Economic-Sociological Framework of Attention Markets......Page 154
3 Attention Markets in the Digital Age......Page 155
4 A Concluding Remark......Page 156
References......Page 157
Internet References......Page 158
Chapter 11: Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces......Page 160
1 Contested Sites of Exchange......Page 161
2 Spatial Interventions in Informal Markets as Economic Policy Indicators......Page 163
3 Forced Closure: Moscow´s Cherkizovsky Market......Page 164
4 Market Relocation: Bangkok´s Talad Rot Fai......Page 166
5 Old Site, New Market: Encants Vells, Barcelona......Page 169
6 Arizona Market: Top-Down Appropriation of Survival Economies......Page 172
7 Conclusion......Page 174
References......Page 175
Internet References......Page 176
Chapter 12: Economic Change from an Institutional Perspective......Page 178
1 Limits of Institution Building......Page 179
2.1 Institutional Change from Below......Page 180
2.2 A Case for Second-Best Solutions......Page 183
3.1 Social Networks......Page 185
3.2 Culture......Page 187
4 Conclusion......Page 188
References......Page 189
1 Introduction......Page 192
2 Theoretical Approaches to Financial Services Governance in the EU......Page 193
3 The Pre-Crisis Framework for Financial Regulation in the EU......Page 194
4.1 Banking Regulation in the EU......Page 195
4.2 Securities Markets Regulation in the EU......Page 197
4.3 Financial Supervision in the EU......Page 198
5 The Banking Union......Page 199
6 The Capital Markets Union and Brexit......Page 201
7 Conclusion......Page 202
References......Page 203
1 Introduction: General Attitudes Towards Capitalism and Socialism in Ukraine......Page 205
2 Description of the Data (The Ukrainian Society Survey)......Page 208
3.1 The Evolution of Attitudes Towards Private Entrepreneurship......Page 209
3.1.1 The Generational Gap......Page 213
3.2 Support to Socialism......Page 215
3.2.1 The Generational Divide......Page 216
4 Concluding Remarks......Page 217
References......Page 218
Internet References......Page 219
1 Introduction......Page 220
2 How to Position Alternatives in Social Change......Page 221
2.1 Food Regimes......Page 222
2.2 Quality Turn and Conventionalization of Emerging Alternatives......Page 223
2.3 Nested Markets......Page 225
3.1 Markets as Control Projects......Page 227
3.2 Change in Competition Regime......Page 228
4 Quality as an Institutional Order......Page 229
4.1 Alternative Qualification Paradigms......Page 230
4.3 Markets Regimes, Towards a Media Regime......Page 231
5 Conclusive Considerations......Page 232
References......Page 233
Internet Resources......Page 234
1 Introduction: The Emergence of Digital Money......Page 235
2 The Case of Sardex Money......Page 237
3.1 The Construction of Locality and Commonality......Page 238
3.2 The Sardex Functioning for a Different Social Relationship......Page 239
3.3 The Emergence of We-ness and Collective Action......Page 241
4 Money for (Un)Sustainable Communities......Page 243
5 Conclusion: Money as a Social Tie......Page 246
References......Page 247
Internet Resources......Page 249
1 Introduction......Page 250
2 The Role of Groups in a Sociology of Entrepreneurship......Page 251
2.2 Entrepreneurship as Future-Oriented Activity Bundles......Page 252
2.2.2 Entrepreneurial Opportunity......Page 253
2.3 Entrepreneurship as Collective Action (Re)producing Groups......Page 254
3 The Dual Problem of Solidarity......Page 255
4 Two Types of Entrepreneurial Groups, Two Sets of Embeddedness......Page 256
4.1 The Entrepreneurial Family in German Family Capitalism......Page 257
4.2 The Start-Up Team in the Berlin New Venture Field......Page 259
5 Variety of Groups, Variety of Entrepreneurial Activity......Page 261
References......Page 262
Part III: Societal Views on Economy......Page 266
1 Introduction......Page 267
2.1 Rational Organization of Formally Free Labor......Page 268
2.2 The Capitalist Firm: A Rational Organization?......Page 269
2.3 The Labor Market......Page 270
2.4 A Closed System of Markets......Page 271
3.1 Structural Innovations at the Company Level......Page 272
3.2 Growth as the Main Achievement of Capitalism......Page 273
3.3.1 State Socialism......Page 275
3.3.2 Cooperative Socialism......Page 277
4.1 Does Growth Come to an End?......Page 278
4.2 Negative Effects of Economic Growth......Page 280
5 Non-socialist Reforms of Capitalism......Page 281
References......Page 283
Internet References......Page 284
1 The Age of Responsibilization......Page 285
2 Defining Responsible Economic Action......Page 286
3.1 Action Theoretical Approaches......Page 288
3.2 Contextual Embeddedness......Page 289
4 Empirical Studies of Social Responsibility in the Economy......Page 291
5 Grand Challenges, Responsibility and Economic Sociology in the Twenty-First Century......Page 293
References......Page 294
Index......Page 299

Citation preview

Handbooks of Sociology and Social Research

Andrea Maurer Editor

Handbook of Economic Sociology for st the 21 Century New Theoretical Approaches, Empirical Studies and Developments

Handbooks of Sociology and Social Research Series Editor Richard Serpe Department of Sociology, Kent University, Kent, OH, USA

The handbook series includes the latest and up-to-date overviews on topics that are of key significance to contemporary sociological and related social science research. Several of the volumes discuss important topics from an interdisciplinary social science perspective, covering sociology, anthropology, psychology, and psychiatry. This prestigious series includes works by some of the top scholars in their fields. These seminal works seek to record where the field has been, to identify its current location, and to plot its course for the future. John D. DeLamater initiated this series with the encouragement of Howard Kaplan in the early 2000s, and since then, under his aegis and constant effort, it has published some stellar volumes by the top academics in their specializations. DeLamater continued to be the series editor on this prestigious series until his death in December 2017. If you are interested in submitting a proposal for this series, please contact senior editor, Shinjini Chatterjee: [email protected]. More information about this series at http://www.springer.com/series/6055

Andrea Maurer Editor

Handbook of Economic Sociology for the 21st Century New Theoretical Approaches, Empirical Studies and Developments

Editor Andrea Maurer FB IV - Soziologie Universitat Trier Trier, Rheinland-Pfalz, Germany

ISSN 1389-6903 ISSN 2542-839X (electronic) Handbooks of Sociology and Social Research ISBN 978-3-030-61618-2 ISBN 978-3-030-61619-9 (eBook) https://doi.org/10.1007/978-3-030-61619-9 # Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Where We Came from, Where We Are, and Where We Expect to Go: New Challenges and Developments in Economic Sociology Today

Society and economy are facing tremendous challenges these days. In the last few decades, globalization has reached a new dimension; digitalization has brought about new action patterns and organizational forms; crises have changed how we look at the economy; and social inequalities have increased greatly. We have observed variations in capitalism, a decline of centrally planned economies, and a rise of markets accompanied by alternative forms of coordination. Only recently have we recognized that China as well as parts of Latin America have combined markets, state, and social ties in a new way to reorganize economy. In modern Western economies, we see the challenge of reaching sustainability while increasing economic output. A final challenge comes from economic and societal crises. The most far-reaching economic crises shook modern economic institutions, confidence in global markets, and social structure in 2007–2008 and 2020. All in all, much has happened since the turn of the century. Economic sociology is facing a tremendous change, too. After it was developed in the 1970s, successfully centered around the idea that social factors matter for economic structure and outcome, more sociologists have entered the research field coming from different backgrounds and asking different questions. While the well-known program of new economic sociology has been established as a branch of US sociology since the 1970s, the new lines refer to recent and classic approaches of European thinking and sociology. The founders of new economic sociology, Ronald Burt, James Coleman, Mark Granovetter, Richard Swedberg, and Harrison White, have studied social factors that support modern market exchange and entrepreneurship in order to overcome the shortcomings of standard economic and sociological theory. The newer approaches that have entered the field during the last two decades take new perspectives and emphasize the various interrelationships between economy and society. Some new lines adopt and widen the concept of “social embeddedness.” Some of them bring in cultural factors and analyze beliefs, values, conventions, or practices and how they shape economic thinking and actions, while other newcomers focus on societal aspects, socioeconomic processes, and even economic forms such as market capitalism. Whereas the mainstream of new economic sociology studies social relations in modern markets, most of the newcomers take a more societal and critical perspective such as socioeconomics and political economy, among others. v

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Where We Came from, Where We Are, and Where We Expect to Go: New Challenges. . .

At the beginning of the twenty-first century, economic sociologists are reconsidering their origins, where they are now, and where they expect to go in the future. The challenges described, along with these new developments, demand a Handbook of Economic Sociology for the Twenty-First Century. Not only have European sociological traditions been reinvented, but a young international community of economic sociologists has emerged, giving rise to new research topics, and questioning the initial perspectives. This handbook aims to bring researchers together from different countries and traditions to provide an overview of what is current cutting-edge research in the field of economic sociology. It will also document which shoulders economic sociologists stand on—to use the phrase once coined by Robert K. Merton. The handbook also highlights what makes economic sociology special and an attractive partner for other social scientists. It shows what we know about the classical roots, draws a picture of what is going on in the field, and demonstrates what questions might be of interest in the future. The handbook is organized into two parts. Part I is concerned with theoretical approaches and developments, and Part II covers empirical studies and topics that define special fields. The first part deals with foundational concepts that redefined economic sociology at the end of the twentieth century and looks at how reconsidering classical writings might work as a basis for future work. Richard Swedberg, Gertraude Mikl-Horke, and Peter Marsden, three well-known experts, demonstrate how the classical foundations still influence economic sociology, and why they should be used in the future. Richard Swedberg elaborates a guideline for using classics such as Alexis de Tocqueville, Max Weber, or Karl Marx. Gertraude Mikl-Horke discusses the different understandings of economic sociology in the writings of Max Weber, Joseph A. Schumpeter, and Karl Polanyi, emphasizing a historicalempirical orientation. Peter Marsden focuses on the work of James S. Coleman and investigates the notion of social capital as a key tool for economic sociologists. New lines of thought, which have been developed only recently, are introduced in Part I as well. Andrea Maurer discusses how new economic sociology could improve by collaborating with mechanism approach for exploring how and why social factors shape economy. Pierre François investigates the French tradition of institutionalism and how it contributes to economic sociology by analyzing various institutions. Jens Beckert and Timur Ergen explore how imaginations of the future influence economic actions and processes, and thus, offer a new perspective. Jörg Rössel, Patrick Schenk, and Sebastian Weingartner illustrate how the idea of aestheticization influences markets and links societal processes to markets. Uwe Schimank and Ute Volkmann emphasize how economic criteria have spread out and how this process could be analyzed in the framework of differentiation theory. All chapters provide deep sociological insights and tools to analyze the modern economy and especially how society and economy are intertwined. Part II illustrates that in the last few decades, much has happened in the research field of economic sociology. Recent studies emphasize the social constitution and structuration of particular markets, institutional settings and innovation, alternative forms of organizing the economy, and how social

Where We Came from, Where We Are, and Where We Expect to Go: New Challenges. . .

vii

movements and societal views influence the economy. In Part II, the first subsection presents recent studies on the emergence and functioning of special markets. This is done through empirical research on online markets by Andreas Diekmann and Wojtek Przepiorka using experiments. Attention markets are brought in by Philipp Bachmann and Gabriele Siegert studying attention as a valuable resource in the digital age. Helge Mooshammer focuses on informal markets using ethnographic methods and offering a lively picture of informal markets in Bangkok, Moscow, Barcelona, and the former Yugoslavia. Another strong line in economic sociology highlights social and informal institutions and institutional change as a framework of economy. This is shown in the second subsection in Part II. In her research, Sonja Opper investigates the importance of private actors and local culture for institutional change, mainly with reference to East Asia and Eastern Europe. Lucia Quaglia outlines the gaps and weaknesses of the formal institutional governance system in the EU—mainly the European Systemic Risk Board and the General Council of the European Central Bank—when it comes to crises. Alberto Veira Ramos and Tetiana Liubyva study attitudes of different social groups in Ukraine toward socialism and markets to explain the slow pace of transformation after 1989. All chapters offer new insights on how social institutions shape economic outcome and innovation. In the third subsection in Part II, empirical results on alternative forms of organizing production and consumption of goods and services are given. Gilles Allaire analyzes the development of alternative food markets (AFD) by describing them as a project of control defined by individual actors, social movements, and NGOs. In his brand-new study on the interest-free digital money introduced in Sardinia in 2010, Giacomo Bazzani gives evidence that the social organization of digital money could be a way for communities to overcome crises and for using their particular social capital. Isabell Stamm describes groups as a form of social support for family firms and gives a new interpretation of the notion of social embeddedness. In the fourth and final subsection, Johannes Berger draws a picture of the history of modern capitalism, weighing its positive and negative sides. Sebastian Koos refers to the challenge, in capitalist democracies, of reaching socially defined goals and of improving social and corporate responsibility. The collection of chapters demonstrates that economic sociology is a still growing and highly inspiring research field. Moreover, the handbook shows that researchers from all over the world are developing sociological perspectives on essential economic issues. On the one hand, economic sociologists aim at providing more realistic explanations, analyses, and empirical studies of economic topics than standard economic theory. On the other hand, they also claim to fill the gap left by modern sociologists who ignored economic issues during the twentieth century and therefore missed one of the most exciting topics in modern society. In this sense, both classical and new developments in economic sociology contribute to a better understanding of modern economy and of how to improve sociology. University of Trier, Trier, Germany

Andrea Maurer

Acknowledgments

Economic sociologists, as we all know, work in socially embedded and institutionalized contexts. During the last few decades, a number of working groups, partnerships, and national as well as international associations have been established or reinvented. I want to thank all the colleagues who have joined me in institutionalizing economic sociology in Germany, in Europe, and in international associations. I am especially grateful to the ESA Research Network “Economic Sociology” and the Section “Economic Sociology” of the German Sociological Association (DGS). I owe much to many fellow researchers, who have helped to make economic sociology a lively research field and who supported my work on this new handbook. I would also like to express my deepest appreciation to all the authors who gave their ideas and contributed in many ways to make the project enjoyable and successful. I would also like to express my appreciation to Laura Lee, Susanna Nagel, Clemens Schmidt, and Lea Reinhardt for all the detailed work on formatting, checking, correcting, and proofreading every chapter. Their work, together with the well-established collaboration of Springer VS and a new partnership with Springer Nature, has been the solid ground for finalizing the project. I want to dedicate the handbook to my beloved brother, Karl Maurer.

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Contents

Part I

Theoretical Perspectives and Developments

1

The Classic Tradition in Economic Sociology . . . . . . . . . . . . . Richard Swedberg

3

2

Austrian and German Classics as a Foundation? . . . . . . . . . . Gertraude Mikl-Horke

19

3

James Coleman, Social Capital, and Economic Sociology . . . . Peter V. Marsden

33

4

Social Factors in the Economy: New Economic Sociology and the Mechanism Approach . . . . . . . . . . . . . . . . . . . . . . . . Andrea Maurer

5

A French Institutionalism in Economic Sociology? . . . . . . . . . Pierre François

6

Transcending History’s Heavy Hand: The Future in Economic Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jens Beckert and Timur Ergen

47 63

79

7

The Aesthetic Moment in Markets . . . . . . . . . . . . . . . . . . . . . Jörg Rössel, Patrick Schenk, and Sebastian Weingartner

8

Economization: How Neo-Liberalism Took Over Society . . . . 113 Uwe Schimank and Ute Volkmann

Part II

95

Empirical Studies and Research Topics

9

Trust and Reputation in Historical Markets and Contemporary Online Markets . . . . . . . . . . . . . . . . . . . . 131 Andreas Diekmann and Wojtek Przepiorka

10

How to Buy, Sell, and Trade Attention: A Sociology of (Digital) Attention Markets . . . . . . . . . . . . . . . . . . . . . . . . 147 Philipp Bachmann and Gabriele Siegert

xi

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Contents

11

Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 Helge Mooshammer

12

Economic Change from an Institutional Perspective . . . . . . . 177 Sonja Opper

13

Financial Services Governance in the European Union (EU) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191 Lucia Quaglia

14

Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights in the Context of Institutional Transformation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 Alberto Veira-Ramos and Tetiana Liubyva

15

Alternative Food Networks and the Socialization of Food . . . 221 Gilles Allaire

16

Digital Money for Sustainable Communities: The Sardex Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 Giacomo Bazzani

17

Groups Matter: Social Embeddedness of Entrepreneurial Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 Isabell Stamm

Part III

Societal Views on Economy

18

Capitalism: On the Past and Future of an Economic System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 Johannes Berger

19

Social Responsibility in the Economy . . . . . . . . . . . . . . . . . . . 289 Sebastian Koos

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303

Part I Theoretical Perspectives and Developments

1

The Classic Tradition in Economic Sociology Richard Swedberg

1

Introduction

Economic sociology is more than a century old, which means that it covers a huge amount of material. Since the revival of economic sociology in the mid-1980s, the literature in the field has grown very quickly and become increasingly hard to survey for the individual researcher. What should one read and what can be disregarded? What is there to learn and what to ignore? These questions point to the problem of cumulation in sociology (e.g., Gans 1992; Collins 1999; Abbott 2006). Here the general rule is (paraphrasing Whitehead) that a science that hesitates to forget what is not worthwhile, is lost. The reason for this is that unless a generally agreed upon tradition exists, which clearly states what is valuable, each individual researcher is faced with the task of making their way through a jungle of studies and deciding this on their own. This has a number of negative consequences, which should be spelled out. First, it means that the wheel will be periodically reinvented. How many times have economic sociologists shown that the neo-classical economists’ ideas of profit maximization, rational choice, and in more general terms, homo economicus are unrealistic? Another drawback is that new studies run the risk of easily being forgotten, since they are not R. Swedberg (*) Cornell University, Ithaca, NY, USA e-mail: [email protected]

linked to other research and therefore cannot be incorporated into the existing tradition. Who, for example, remembers today Erving Goffman’s work in economic sociology (e.g., Goffman 1972, 1982)? Finally, and perhaps most importantly, some of the most valuable insights of earlier researchers, which could be of great help to today’s economic sociologists, have been forgotten. This is the case with much of what Weber says in his chapter on economic sociology in Economy and Society. It is also true, more generally, for his interpretive sociology (Weber 1978). What should be kept and what can be forgotten in a research tradition? This is obviously a key question for all sciences, and not easy to answer. One interesting answer, however, can be found in C. Wright Mills’ idea of what he calls “the classic tradition” (see especially Mills 1960, 1–17). In this chapter, Mills’ notion will play a central part. While it is common among sociologists to refer to and praise the classics, Mills’ approach is different. First, by the term classic he means the general qualities of a work that make a study classic, regardless of whether these are found in contemporary studies or in studies that are old enough to qualify as a classic in the conventional sense. Secondly, he spells out what it is that makes a study classic; and on this point he has some suggestive ideas. As a concrete example of how Mills envisioned the classic tradition in sociology, one can take his reader in sociology, Images of Man:

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_1

3

4

The Classic Tradition in Sociological Thinking (1960). As one would expect, it contains excerpts from the works by sociologists such as Marx, Weber and Durkheim. However, it also contains some writings by non-sociologists such as Walter Lippman, and by more recent sociologists such as Karl Mannheim. In explaining what makes a study a classic, Mills advances the following argument. In a classic you will find a model of how something of consequence for society works, which can inspire a number of different theories. While the model itself cannot be tested, according to Mills, the individual theories can. Even if an individual theory turns out to be wrong, the original model will still stand; and it is this quality that makes it a classic. Mills’ idea of what constitutes a sociological classic is, to some extent, similar to what Robert K. Merton means by the Phoenix Phenomenon (Merton 1984, 1091). According to Merton, there are a small number of sociological theses, which after being proven incorrect, reemerge like a phoenix from the ashes. The best-known example of this is The Protestant Ethic and the Spirit of Capitalism by Max Weber (1930). Unlike Mills, Merton does not try to nail down the qualities that make a classic into a classic. He is satisfied to point out that sociologists should avoid the mistake of believing that every new piece of research represents an improvement over what is already known. Merton refers to this latter tendency as “the fallacy of the latest word;” and it is clearly part of Whig history or the tendency to look at the past exclusively from the perspective of what is dominant today (Merton 1984, 1092). In the following pages I will try to be more precise than Mills and Merton in explaining why the works of Marx, Weber, and some others qualify as contributions to the classic tradition in economic sociology. I will argue that a classic has something new to say on a number of different topics. It can transmit a strong vision in combination with a research program; point to one or several new economic phenomena; use a new type or a new source of data; introduce a new method for collecting data or for analyzing these; or transgress the boundaries of economic sociology and neighboring sciences in a successful

R. Swedberg

manner. After a presentation of some of the people and works that are part of the classic tradition in economic sociology, I will conclude by outlining a few ways in which it is possible to work in the classic tradition and add to it.

2

The Classic Tradition

2.1

Alexis de Tocqueville

Sociology became an academic discipline at the end of the nineteenth century, but the sociological type of analysis, including economic sociology, goes further back. The early parts of the nineteenth century are especially interesting thanks to the work of Tocqueville (1805–59) and Karl Marx (1818–83). Both saw their analyses as a form of political economy and that the economy should be regarded as an organic part of society, with links especially to the state. In brief, the split, which would later develop, between the way in which sociologists and economists view the economy did not yet exist. Tocqueville wrote two major works during his lifetime, one on the United States in the 1800s, Democracy in America (Tocqueville 2004), and one on the Revolution of 1789 in France: The Old Regime and the Revolution (Tocqueville 1988). Both contain a number of interesting analyses of the economy which, to repeat, was seen as an organic part of society (e.g., Swedberg 2009). Just as Tocqueville drew on several different sources for his analysis, including early forms of the interview and the survey, he also viewed economic phenomena as the result of many different forces, such as work, greed, and emotions. Tocqueville’s work was undoubtedly influenced by his vision of society as moving from being controlled by an elite (aristocracy), to the elite losing power to people in general (democracy). This is also how he viewed the economy; there was a movement in the Western world from a small aristocracy controlling most of the land, to common people owning increasingly more of the land as well as other properties. Tocqueville was also deeply concerned that the idea of equality, including economic equality,

1

The Classic Tradition in Economic Sociology

would become so strong in modern society that it would threaten the idea of freedom. In his study of the French Revolution, Tocqueville provides a portrait of the tense relations that existed in France between the social classes since the Middle Ages. He emphasized the great impact that taxation has on the social structure through the ways in which it is organized. In this manner, he pioneered what would later be called fiscal sociology. He also had many interesting things to say about the ways in which the confiscation of property, which took place during the Revolution, affected the general morality of the population, including the sense of honesty. However, it is in his analysis of the U.S. economy that Tocqueville made his most important contribution to economic sociology. He stressed that in the 1830s, when he visited the United States, the main culture of the country (by which he meant the Northern states) was already thoroughly commercial in nature. Here, as elsewhere in Democracy in America, Tocqueville emphasized the entrepreneurial spirit of the American population, which, in other words, existed long before the country was industrialized. There were no peasants in the United States, as there were in Europe, only farmers. These farmers were not as deeply attached to the land as peasants were attached in Europe. Americans took advantage of every opportunity to sell goods. The same strong commercial spirit was everywhere. Americans liked to make money and in the absence of a fully developed class system many opportunities existed. The type of rigid classes, which characterized feudalism in Europe, did not exist in the United States; and a new type of classes, with more open boundaries, was appearing. Tocqueville also emphasized how much the Americans liked to take risks with their money, in the hope of making a profit. Failures did not deter them. Bankruptcy was not seen as discrediting, as was the case in Europe. Tocqueville also noticed that when U.S. ships sailed across the Atlantic, they were much faster than European ships. The reason for this had nothing to do with the construction of the boats, nor that the sailors on the American ships were

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better paid, in fact they were not. The reason was something else: Americans enjoyed taking risks. They sailed even when the weather was bad, always venturing ahead, in the hope of making more money. The United States, in brief, had a profit-oriented and entrepreneurial culture already in the 1800s. Through his emphasis on the role that culture and emotions play in the economy, Tocqueville made an important contribution to economic sociology. His obsession with inspecting things for himself, and always using primary sources, even when secondary sources were available, has also raised the bar for later generations of economic sociologists.

2.2

Karl Marx

Like Tocqueville, Marx had a vision of how economy and society are linked to one another; neither can be understood without the other. While Tocqueville pointed to the movement from the elite to the common person, Marx saw the key to historical change in labor (cf. Lukács 1980; Marx 1990). In all societies one must work for a living, according to Marx; this is an existential condition for individual beings. According to Capital, “labor . . . is a condition of human existence which is independent of all forms of society” (Marx 1990, 133). The focus on human labor and the need to make a living were related to Marx’s materialistic view of human beings. While modern sociologists have tended to single out the relational nature of society, this was not the case with Marx. People do not only interact with one another but also with nature. Long before Bruno Latour, Marx also understood the importance of material objects for human beings. From the beginnings of history, Marx argued, people have organized themselves in groups. There are those who exploit the work of others, and those who are exploited. As history moves on these two groups take on a number of different forms; and technology plays an important role here. Yesterday’s masters and slaves eventually became today’s capitalists and workers. The antagonism between capitalists and workers,

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who constitute the two basic classes of capitalist society, will eventually result in a revolution. In communist society, property and work will be shared in an egalitarian manner. What characterizes capitalist society, according to Marx, is that everything is either a commodity or turning into one. This includes the individual whose work now becomes something that can be bought and sold, resulting in alienation and exploitation. Work creates surplus value, which drives capitalist society. “Accumulate, accumulate! That is Moses and the prophets,” we read in Capital (Marx 1990, 742). While the basic law of capitalism is simple enough, its impact on society is not. Many different factors, Marx explains, help to account for the uneven and at times catastrophic course of capitalist society. There are, for example, tendencies within a capitalist economy which push the capitalists to increase exploitation. There also are factors that make the workers grow in number and eventually become radicalized. Unlike Engels, Marx lacked personal knowledge of life inside the factories. He did however locate one very rich empirical source on industrial work in England, namely the reports of the factory inspectors. These were full of details and figures on what was happening inside the factories and became an important source for Capital. Marx described the ill-treatment and exploitation of the workers with a realism that is still hard to match. Marx’s second great source for Capital was the literature of the economists. Unlike Tocqueville who had only read a few works in political economy, Marx was an expert, or rather, he turned himself into an expert after arriving in London in 1849, where he settled down for good. What Marx wrote on economic theory is still of great interest to economic sociologists. He should, for example, be credited with having developed a pioneering analysis of the way that the categories of economics have come into being. He criticized the economists for using economic concepts without understanding that these presupposed the existence of very specific social conditions.

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Marx is also unique among economic sociologists for his organic mix of a historical approach and an analytical perspective. It is not easy to combine a diachronic and a synchronic approach in a single analysis, but Marx succeeded. There is also his call to action in his writings. One of his most famous quotes reads, “philosophers have hitherto only interpreted the world in various ways; the point is to change it” (Marx 1978, 144). One may or may not agree with this statement, but it is hard to find a more effective way of raising the issue of whether or not knowledge of the economy should have a practical value.

2.3

Max Weber

In a formal sense, it was Max Weber who founded economic sociology. It was he who first used the term economic sociology (Wirtschaftssoziologie) and who also provided the very first detailed account of what it studies and how to approach the topic. From this time on, economic sociologists were also academics. Marx was a revolutionary and Tocqueville a politician; both rejected the university as a place to work. Weber laid the academic foundation for economic sociology in Chap. 2 of Economy and Society. The size of this chapter is that of a small book; and it contains an extremely valuable presentation and discussion of the basic concepts of economic sociology (Weber 1978, 63 ff.). Weber’s approach also differs from the broad, societybased analysis of the type one can find in Tocqueville and Marx. He preferred a considerably more narrow and academic approach, namely an economic sociology that could complement economics. Weber essentially applied his interpretive sociology to economic phenomena, creating in this way an interpretive economic sociology. What is distinctive about Weber’s type of sociology is the importance that is assigned to the element of meaning. When one studies the economy, one always has to consider the meaning with which the actors invest their actions. This means

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The Classic Tradition in Economic Sociology

individuals since Weber rejected the idea that corporate entities can act. In the second chapter of Economy and Society, “Sociological Categories of Economic Action,” Weber outlines the basic concepts of economic sociology. In addition to the general sociological concepts that are presented and discussed in Chap. 1, some new ones are added. The concept of economic action should, for example, be constructed in the following way. First, in order for behavior to become an action, it has to be invested with a meaning. Second, this type of action is only social if it is oriented towards other actors or to an order (Ordnung). Economic action also has to be peaceful to qualify as economic action; and it is aimed at the satisfaction of a desire for utilities. These utilities refer not only to the consumption of goods, which is the standard goal of economic action, but also to profit. By adding profit Weber could include profitmaking in his concept of economic action. In this way Weber laid a conceptual foundation for his interpretive analysis of the economy, which he also applied to a series of economic phenomena in Chap. 2 in Economy and Society. All economies, he here says, are based on either the principle of house-holding or that of profitmaking. The former is centered around the satisfaction of basic needs, the latter around making more money. A firm, for example, is a profitmaker, while the family is a household. The medieval manor and the welfare state are two other examples of households. There are also economic phenomena that display a mixture of Weber’s two categories. A family firm, for example, has elements of both profit-making and household; and the neo-liberal state is a household that encourages profit-making. While Chap. 2 in Economy and Society represents the theoretical part of Weber’s work in economic sociology, the essays in his 3-volume work Collected Essays in the Sociology of Religion contain many of his most important studies in this field. The most famous of these is The Protestant Ethic and the Spirit of Capitalism. It should, however, be pointed out that this study was part of a giant project on the economic ethic of the world religions (Weber 1930). One

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important aim of this project was to extend the analysis in The Protestant Ethic to religions in other parts of the world, such as Hinduism, Buddhism, and Taoism in India, and China. Similar to Marx and Tocqueville, Weber did not limit his analysis to Europe. Another important goal of Weber’s project on economic ethics was to draw attention to the role of work. This was especially done in The Protestant Ethic. Weber’s emphasis on the centrality of work in capitalism was not very different from that of Marx. Marx, however, had viewed labor as the motor of all economies, and emphasized how it had become a commodity in capitalism; Weber’s emphasis in The Protestant Ethic was quite different. He focused on the meaning of the work to the individual, more precisely on work in the form of a calling. In capitalist society one has to work all the time; and work is never finished. Weber and Marx agreed, however, that modern capitalism severely constrains the individual, and in this sense impoverishes her life.

2.4

Joseph Schumpeter

Weber’s idea of an economic sociology was not followed up by many sociologists in Europe nor in the United States. But as always, there are exceptions; and one of these is Joseph Schumpeter (1883–1950). Schumpeter quickly established himself as a brilliant young economist of the Austrian school. By this time, it can be added, it was the rule in academia that economists should work on the economy and sociologists on society. Schumpeter, however, did not feel that he had to limit his views to economics in this sense, and early showed an interest in economic sociology and economic history. In order to understand economic life, he argued, one has to go beyond economics of the type that existed in academia. Towards the end of his life, Schumpeter summarized his vision of the study of the economy as one of social economics (Sozialökonomik). This type of economics draws on four disciplines: economic theory, economic history, economic sociology, and statistics

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(Schumpeter 1954, 12 ff.). The primary task of economic sociology is to study economic institutions, and that of economic theory to analyze economic mechanisms (see also Schumpeter 1951). Economic historians add the historical dimension to the analysis, and the statisticians contribute a concern with data. During the early stage of his career, Schumpeter wrote three articles that he referred to as his work in sociology. These dealt with taxation, social class, and imperialism (Schumpeter 1991a, b, c). While all of these studies are well worth reading and studying today, the article on taxation with its full program for a fiscal sociology is of special importance. But Schumpeter’s most interesting contribution to economic sociology cannot be found in any of these three essays. For this, the reader has to turn to his most important contribution to economic theory, namely his theory of entrepreneurship. In his late 20s Schumpeter had worked out the basic ideas for his famous theory of the entrepreneur, which can be found in The Economic Theory of Development (1934). Before Schumpeter’s book on entrepreneurship was published, economists had been unable to account for much of the dynamics of economic life since they relied heavily on some form of equilibrium analysis. Schumpeter broke this trend, even if he never succeeded in presenting a formal theory of entrepreneurship. His verbal theory, however, is impressive enough and still very suggestive. Schumpeter’s basic idea is that the entrepreneur creates a new combination of already existing elements. This results in a number of different types of innovations, such as new goods, new methods of production, and/or new markets. However, it is not enough to produce a good that represents an innovation, the entrepreneur must also overcome the resistance against doing something new. This resistance is very strong, and can be found among the workers, among the population at large, and in the mind of the entrepreneur herself. While it may be argued, as Schumpeter does, that the idea of combining economic resources of different types belongs to economics, it is nonetheless clear that the part of his analysis that deals

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with resistance is squarely sociological. What Schumpeter had created can either be seen as a mix of elements from two academic disciplines, or as a very successful combination which illustrates that a full analysis of economic phenomena must draw on elements from both economics and sociology. The same boundarycrossing tendency can be found in what has always been Schumpeter’s most popular work, Capitalism, Socialism, and Democracy (1942). This book consists of a series of essays in which Schumpeter deals with such topics as the nature of democracy, how to make sense of Marx, and what modern socialism is like. The main focus of the work, however, is on contemporary capitalism. In Schumpeter’s view, modern capitalism was in deep trouble by the mid-1900s since the capitalists had become too weak to stand up and defend it. While the early capitalists had heartily embraced profit and property, modern managers and owners did not. As a result, the future of capitalism looked very gloomy to Schumpeter at the time of his death. This happened in 1950, long before the revival of enthusiasm for capitalism that Schumpeter longed for and that came with neoliberalism.

2.5

Karl Polanyi

Much of Schumpeter’s sensibility was formed by what happened in Europe during World War I and its aftermath. as opposed to Tocqueville, Marx, and Weber who were all part of the Old World. The same can be said about Karl Polanyi (1886–1964), who, like Schumpeter, had grown up in the Austro-Hungarian Empire, only to see it disintegrate after World War I Polanyi had an academic background, but not in economics. He learned economics on his own but never became an expert like Marx or Schumpeter. However, he did have a deep interest in economic affairs; and this made it easy for him to work as an economic journalist. He worked as a journalist in Austria in the 1920s and early1930s; and his articles from these days represent an important part of his work.

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The Classic Tradition in Economic Sociology

Polanyi escaped to England in 1933 as the political situation in Austria became increasingly tense. It was here that he transformed himself into a serious scholar. This is similar to what took place in England with the young Marx, when he became the Marx of Capital. What Polanyi studied in England, which turned him from a journalist into a scholar, was economic history. What especially fascinated him was the history of early capitalism in England. He poured over books on the historical emergence of factory workers and industrial capital. The main result of Polanyi’s research in England was the work that was to become his most famous, The Great Transformation (1944). Its central theme is that the birth of capitalism had unleashed greed of a type that had never before existed in human history. It was a level of greed that in Polanyi’s mind, would end up by tearing human society apart and completely destroy nature. Capitalism was a threat to human beings as a species; it was absolutely imperative that it should be stopped. However, there were also forces that countered the onslaught of capitalism, and these were mainly the workers. Each time the capitalists made a new attempt to squeeze more profit out of the workers, these responded with resistance in the form of strikes. According to Polanyi, there is a general tendency in society to respond to the activities of capitalists with a countermove, something he termed the “double movement” (1944, part II). The results of the double movement, however, were not always positive. Many people who had their livelihoods destroyed by capitalism were not progressive. The emergence of fascism and Nazism was an example of this (1944, part III). In Polanyi’s view, the original impulse to these extreme right-wing movements could be traced to England in the 1840s, when capitalism was unleashed for the first time. Polanyi defined himself as an economic journalist in Austria and as an economic historian in England, but he turned into an economic anthropologist in the United States in the 1940s. Drawing especially on the work by anthropologists, Polanyi started to write about economic life in pre-industrial societies (1966, 1968). This

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represented an innovation from the perspective of economic sociology, which usually focused on the period from the early 1800s and onwards. Another innovation from this time was Polanyi’s writings about Africa, a continent which no earlier economic sociologist had written about (Polanyi 1966). Today’s student of economic sociology will also want to read Polanyi’s study of the beginnings of economic thought in Classical Greece, “Aristotle Discovers the Economy” (Polanyi 1957). While modern economists view Adam Smith as the father of economics, according to Polanyi, it was Aristotle. Another result of Polanyi’s work from his anthropological period was his typology of economic action. While Weber had argued that all economies were either profit-making entities or households, Polanyi introduced a different set of basic categories that described how key economic actions in a society must be embedded or anchored in society’s institutions. This can only be done in three ways: through reciprocity, redistribution, or exchange. Polanyi lacked both the encyclopedic knowledge of Weber and the capacity Marx to meld historical and analytical perspectives. Contrary to Weber and Marx, however, Polanyi left a set of categories behind, which are extremely flexible and easy for today’s economic sociologist to work with. These are embeddedness and the three modes of economic action reciprocityredistribution-exchange. Exchange is linked to the institution of the market; redistribution to the institution of the state; and reciprocity to the institution of the family. There were also many other topics, besides these three institutions, which can be analyzed with these categories. There is a similar flexibility to the concept of embeddedness. It should also be noted that what all of Polanyi’s studies have in common is a critical attitude to the way modern markets operate. In his view, capitalist markets have been dis-embedded from the rest of society and have become a threat to humanity. As a consequence, this type of market must be re-embedded in the social and political institutions of society. It is imperative not to think that the capitalist market

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is the only type of markets that can work. This idea is central to the thought of Polanyi, who famously referred to “our obsolete market mentality” in the title of one of his articles (Polanyi 1968).

2.6

Mark Granovetter

Both Schumpeter and Polanyi were lone voices in a field that had more or less stalled as an academic enterprise after the death of Weber. It is true that an attempt was made in the 1950s and early 1960s by Talcott Parsons and his student Neil Smelser to revive economic sociology, but it lacked intellectual force and did not gather much academic support (e.g., Parsons and Smelser 1956; Smelser 1963). It was not till the mid-1980s that economic sociology started to come alive again. This time it came in a different shape that earned it the name new economic sociology. The strengths and the weaknesses of the economic sociology that now came into being have much to do with its relationship to the past. The insights in economic sociology of Marx, Weber, and Tocqueville were little known to the sociologists who now took center stage and ushered in the new type of economic sociology. Instead, these sociologists relied heavily on the type of sociology that had developed in the United States during the twentieth century. Mark Granovetter (1943–) is the foremost new economic sociologist and the author of a brilliant dissertation using networks to explain why some people succeed in getting a job while others do not (Granovetter 1974). Granovetter had originally set out to explain why friends and family can be of more help in this enterprise, than what fleeting contacts and acquaintances can. He, however, found that the opposite to be true. The result was expressed in the title of one of his most cited articles, “The Strength of Weak Ties” (Granovetter 1973). Reading through Getting A Job (1974), the book based on Granovetter’s dissertation, the reader is also struck by the author’s knowledge of economics. One gets the same impression when reading the article that Granovetter

published in 1985 and which was to become the manifesto of new economic sociology, “Economic Action and Social Structure: The Problem of Embeddedness” (Granovetter 1985). It is clear that Granovetter viewed his own work as being in dialogue with economics, as evidenced by his many references to Arrow, Williamson, and other economists. In his manifesto for new economic sociology, the term economic sociology is however not to be found. Instead, Granovetter viewed his article as a contribution to structural sociology, by which he meant the network type of analysis that his thesis adviser Harrison White had helped to develop. In fact, what Granovetter seems to have taken as his primary aim was not so much to continue and add to the tradition of economic sociology, but to reform economic analysis in general, with the assistance of sociology. In an interview from this period, he stated for example that what he hoped to accomplish with his work was to advance economic analysis itself, and to do this by solving problems that the economists had failed to grasp (Granovetter 1987). This, however, was not to be. The economists were not interested in meeting sociologists halfway, as Granovetter had hoped, something that forced him to, instead, turn his energy to developing economic sociology. He eventually also redirected the rest of his work in sociology to economic sociology. The attentive reader of his work in economic sociology will find a number of creative ideas, as well as solid empirical analyses. Two of his most productive ideas from these years are his theory of business groups and his analysis of economic institutions as social constructions (Granovetter 1994; Granovetter and McGuire 1998). In a recent volume, entitled Society and Economy, Granovetter has summarized his theoretical approach (Granovetter 2017). A special mention should also be made of Granovetter’s popularization of the term embeddedness, which he had borrowed from Polanyi and which can be found in his 1985 article. The concept of embeddedness was recast mainly with the help of networks. All economic actions, Granovetter argued, are embedded in

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The Classic Tradition in Economic Sociology

social structures that are made up of networks. While his students have sometimes advocated a quantitative approach to the idea of embeddedness, Granovetter himself has continued to view it as an umbrella term, that is, as a sensitizing type of concept that needs to be complemented by other concepts (Granovetter in Krippner et al. 2004, 133).

2.7

Pierre Bourdieu

New economic sociology did not, as mentioned, try to anchor itself in the tradition of the economic sociology of Tocqueville, Marx, and Weber. Instead, it created a number of contributions of its own, drawing mainly on various strands of sociology that were prominent in the 1980s in the United States, such as structural sociology, industrial sociology, sociology of consumption, just to name a few. European economic sociologists did something similar in the 1990s, even though it was heavily influenced by U.S. sociology at this time. The work by Pierre Bourdieu is an exception to this trend. Trained in philosophy and close to ethnography, Bourdieu began his social science work in Algeria and quickly displayed his great potential as a sociologist. Bourdieu, however, was more interested in general sociology than in any of its sub-areas, including economic sociology; and this was especially true during his early period. It is, however, possible to extract a distinct analysis of the economy already from Bourdieu’s work in Algeria and view it as a contribution to economic sociology. By proceeding in this way, one will find a very interesting analysis of the way that Algerian peasants and workers looked at economic life, including their work. Two fine examples of this are Travail et travailleurs en Algerie (Bourdieu 1963) and Algeria 1960 (Bourdieu 1979). Once Bourdieu had identified himself as a sociologist, he began to study all of society and its major institutions, including the economy. Together with two colleagues he, for example, initiated a pioneering study of a bank, in which he focused on the way that common people look

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at the official economy, including such topics as loans from banks and the rate of interest (Bourdieu et al. 1963). In today’s terms, The Bank and Its Customers (which was never completed and published) can be seen as a study in economic literacy. Bourdieu was also the author of a hugely successful study of consumption, called Distinction (Bourdieu 1986). Less spectacular, but equally penetrating, is his study of real estate from some 20 years later, in which Bourdieu mapped out how people think and how they approach the project of buying a house (Bourdieu 2005b). The same powerful imagination that the reader first encountered in the studies of Algeria is here directed at common people’s ways of thinking and dreaming about owning a home. Bourdieu also analyzed the role of the state in the housing market and showed how it had switched from supporting public housing to encouraging people to own their own house. Bourdieu’s commitment to certain political values was clearly mirrored in his critique of the French government. He is also the author of a number of short texts, in which he discusses various economic questions of the day, such as the policies of the IMF, the European Central Bank, among others (Bourdieu 1998, 2003). Taken together, these writings contain an early and insightful critique of neoliberalism. According to Bourdieu, elements of this neoliberalism could also be found in the new economic sociology that had emerged in the United States. U.S. network sociologists were, for example, criticized for not understanding the role of power in the economy. They traced the interactions of the actors with the help of networks but failed to understand the way that structural power operates in a field. During this period Bourdieu also wrote an important essay on general economic sociology, in which he forcefully attacked the tendency of economists to analyze economic life as if social relations did not exist. The economists’ view of human beings, he charged, is distorted and cannot be used for scientific purposes. “Homo economicus . . . is a kind of anthropological monster” (Bourdieu 2005a, 82).

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2.8

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Single Contributions to the Classic Tradition

So far, in discussing the classic tradition in economic sociology, only major figures in economic sociology have been discussed. However, a tradition consists of individual contributions, not of individual people. The following question therefore needs to be asked: do also single articles and monographs produced by lesser figures belong to the classic tradition, as defined by Mills? The answer is naturally yes. It should also be added that while Mills exclusively speaks of what he calls, models as making up the classic tradition, one may also want to add a few other forms that these contributions can take. One can, for example, contribute to the classic tradition also by introducing new methods, new types of data, and/or new topics in economic sociology. Since the time of Weber, many important studies of the economy have been carried out with the help of the following four innovations in the sociological method: the interview, participant observation, the modern survey and regression analysis. These methods have been used to analyze such topics as life in the workplace, people’s consumer habits, and stratification (e.g., Gouldner 1954; Dalton 1959; Lazarsfeld 1959; Blau and Duncan 1967; Lazarsfeld et al. 1971; Moss Kanter 1977). It is more difficult to single out individual studies from the years after the mid-1980s that constitute contributions to the classic tradition in economic sociology. One major reason for this is that these studies are much closer to today, something that always makes it difficult to decide what will last and what will not. Of the ones that will be mentioned in the next few pages, posterity will probably eliminate some and add a few others. There is also the additional problem that much of modern sociology, including economic sociology, has rather tenuous links to what was produced in sociology before the advent of U.S. mainstream sociology. The latter mainly emerged after World War II and is still very strong; and this has had some negative consequences which are worth mentioning since

they affect the issue of cumulation in economic sociology. There is a danger, for one thing, that the wheel will be reinvented at regular intervals. New contributions may also be lost because they will not be properly anchored in the classic tradition. There are, however, studies in contemporary economic sociology that represent important contributions to the classic tradition. Most of these do so by virtue of opening up new areas or topics in the economy. One of these is the area of finance or the sociology of finance. Studies in this genre often describe how some financial institution has come into being, how different financial institutions operate, or what physical objects are used in their operations such as computers and telephones. The leading scholar in this field is Donald Mackenzie (e.g., Millo and MacKenzie 2003; MacKenzie 2006), Greta Kipper’s work on the emergence and nature of financialization (Krippner 2012) should also be mentioned. Another topic that has been opened up by today’s economic sociologists is that of children and their relationship to the economy. There are currently studies on children and consumption, as well as studies on children’s work and their socialization into the world of money. A pioneering work in this field is Pricing the Priceless Child by Viviana Zelizer (1985). Drawing on court records, which represent a rarely used source in economic sociology, she documents how children in the past were valued in terms of their labor and how today they are instead valued in terms of the emotions they evoke. Zelizer has also made another innovative addition to economic sociology, this time to money. In contrast to the general tendency of looking at money as something neutral and non-social, she has shown how money is often differentiated according to the purpose for which it is intended. Housewives may put aside some money for food, other for the children, and so on (Zelizer 1994). There is no neutral money of the type that economists speak of, according to Zelizer, only “social money.” Finally, Zelizer has also helped to introduce emotions into economic sociology, which was a topic that had lain dormant since Tocqueville’s

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The Classic Tradition in Economic Sociology

pioneering work. She has emphasized how emotions and economic values do not represent two separate spheres in people’s lives but intermingle and co-exist in various ways (e.g. Zelizer 2007). Another powerful study of the role of emotions in the economy can be found in The Managed Heart (1983) by Arlie Hochschild. Airplane stewardesses, she shows, have to smile and look happy as part of their work. Bill collectors, in contrast, have to pretend to be angry and threaten people in order to make them pay. Both perform a special type of emotional work, according to Hochschild. Another interesting addition to the classic tradition can be found in the recent work on valuation in economic life. Weber’s interest in the role of values in economic life, especially in his many volumes on the economic ethics of world religions, is foundational here. He did not, however, address the question of how a price is placed on items that are hard to evaluate, such as art, wine, or nature. This, however, is something that recent economic sociologists have done (e.g., Beckert and Aspers 2011). Something should also be said about a topic that may well represent the most important contribution of new economic sociology to the classic tradition, in the sense that it has a generality that goes well beyond specific economic topics. This is the role of gender in the economy. There is no general model for this, in the sense of C. Wright Mills. Still, gender does play a role in a huge number of economic phenomena and should therefore, in principle, be included in all economic-sociological analysis. As to studies in new economic sociology on the role of gender in the economy, it is clear that some of the works already mentioned by Zelizer and Hochschild contain important contributions to this area as well (e.g., Hochschild 1989; Zelizer 2005). Besides the topics that these two scholars have analyzed, one can also mention male versus female work in the household, caring work, unequal pay, under- and overrepresentation of men and women in various jobs, and the mistreatment of pregnant women and mothers in the labor force (the penalty of motherhood; e.g.,

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England 1992; England and Folbre 2005; Correll et al. 2007; Zelizer 2013). What has been written so far in this chapter about single contributions by various economic sociologists only covers part of the richness of the classic tradition in economic sociology. There are also many other interesting monographs and articles, especially on individual topics, such as markets or work, to just name two. Also, historians, anthropologists, economists and economic journalists have made many excellent contributions to economic sociology in a broad sense. The names of people such as Fernand Braudel, Marcel Mauss, John Maynard Keynes, Nancy Folbre, and Michael Lewis are a reminder of this. It is also easy for someone who is interested in economic sociology to read too much, which means that little energy is left over for one’s own contribution. In the concluding remarks, where the issue of cumulation is taken up once more, also this issue will be addressed. Some suggestions will be given for how to work in a practical way with just a few of the works in the classic tradition in economic sociology.

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Concluding Remarks

So far in this chapter, the focus has exclusively been on the accumulation of knowledge in one particular subfield of sociology. One is however, also justified in asking what this means for sociology as a whole. How exactly does the communication of insights from economic sociology to sociology in general take place? Similarly, how are insights from sociology in general communicated to economic sociology? What about insights from one subfield to another? There is finally also the related issue of codification or the systematic arrangement of findings (Merton 1968, 155). In trying to answer these questions, it should first of all be noted that accumulation in sociology is currently mainly taking place in its subfields (e.g., Collins 1999). It is also clear that most of the questions about cumulation, which have been mentioned in this chapter, point well beyond its

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primary concerns. Suffice it to say that some of the key figures in economic sociology have developed models that are applicable to all of sociology. This is the case with Tocqueville, Marx, and Weber. There are also some insights in economic sociology that seem to be applicable to sociology as a whole. As examples of this, one can mention Polanyi’s notion of embeddedness and Schumpeter’s theory of entrepreneurship. Finally, a few words should be said about the need to strike a balance between how much one needs to read in the classic tradition sociology, and how much energy one should devote to developing one’s own ideas. While a thorough knowledge of the whole classic tradition in economic sociology is commendable, what may be more realistic for most people is to just acquaint themselves with most works in the classic tradition, in combination with making an intense study of a few of these. Mastering a limited number of models, as C. Wright Mills defines these, should be part of the education of any economic sociologist. Students who are interested in entrepreneurship should also focus on Schumpeter’s model of the entrepreneur. Those who are interested in capitalism should also focus on the models of Marx, Weber and Polanyi. All of these thinkers are very rich, and working through their key writings a few times is highly recommended. At each reading one usually discovers several new ideas. It is also clear that the most important way to deal with the classic tradition is not to comment on it, but to attempt to develop it further. This means to actively use some of its ideas and insights, build on these, and try to go beyond them. By proceeding in this way, one can combine the strength that comes from being part of a tradition with one’s own strengths and interests. The tradition is kept alive and is further developed; and the individual researcher benefits from being part of it. How exactly can this be done? How does one take something from the classic tradition and add to it? Should this be done when working with the empirical material or when trying to develop a theoretical argument? It is not easy to give a concrete answer to this kind of questions. Below

R. Swedberg

I have nonetheless tried to outline three practical ways in which this can be done. The two first were developed and taught by Robert K. Merton in his course on theorizing in sociology from the 1950s and 1960s (Swedberg 2019). The third comes from my own work with Schumpeter. All are applicable to economic sociology as well as to sociology in general. The three ways of proceeding are called respecification, reconceptualization, and recombination. A brief description of each follows:

3.1

Respecification

All phenomena that are analyzed in sociology must be empirically specified. Adding to or subtracting from the current ways of doing this is the job of respecification. What constitutes what sociologists call work has for example been greatly expanded during the twentieth century, with household chores being added. Should one also include the effort it takes to keep one’s own body healthy, as Hannah Arendt (1958, 96 ff.) has suggested? A phenomenon that, in contrast, has shrunk in scope is that of class. In the work of Marx, class was a broad social, political and economic category, while in modern stratification theory it has become a narrow sociological term.

3.2

Reconceptualization

Economic sociology has its own set of concepts, from those discussed by Max Weber in Chap. 2 of Economy and Society to those that have been added in new economic sociology (see e.g. the list in Swedberg 2016). All of these can be added to or redefined, a bit like empirical phenomena can be respecified. This is often done by changing the meaning of an existing concept, for example, embeddedness. One can also take a concept in general sociology and focus on its economic part, using say habitus to create economic habitus (e.g., Bourdieu 1979). There is also the strategy that Weber himself often used, namely, to take concepts from other sciences, change them a bit,

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The Classic Tradition in Economic Sociology

and turn them into sociological concepts (e.g., charisma).

3.3

Recombination

Schumpeter defined entrepreneurship and innovation as a new combination of already existing elements. In the classic tradition there are a number of concepts and ideas that can be recombined into new and interesting constellations. C. Wright Mills notes that “very many social theories seem to be, at least immediately, the rather direct result of combining ideas which no one has previously thought of combining” (Mills 1960, 9). As an example, he mentions Marx’s theory of capitalism which was the result of a combination of ideas from German philosophy, British economics, and French socialism. That these three ways of working with insights from the classic tradition in economic sociology all start with the prefix re is no accident. It indicates that while they represent ways of moving the analysis forward in new and interesting ways, they are at the same time drawing on and grounded in a tradition. Other ways of dealing with the heritage of economic sociology are no doubt possible, as well as necessary. The reason for mentioning this is that it is imperative for the healthy development of economic sociology to be able to distinguish between what should be kept alive and further developed, and what should be forgotten and discarded. A science that does not care for its classic tradition is lost.

References Abbott, A. (2006). Reconceptualizing knowledge accumulation in sociology. The American Sociologist, 37(2), 57–66. Arendt, H. (1958). The human condition. Chicago: University of Chicago Press. Beckert, J., & Aspers, P. (Eds.). (2011). The worth of goods: Valuation and pricing in the economy. New York: Oxford University Press. Blau, P., & Duncan, O. (1967). The American occupational structure. New York: Wiley.

15 Bourdieu, P. (1963). Travail et travailleurs en Algérie: Etude sociologique. In P. Bourdieu (Ed.), Travail et travailleurs en Algérie (pp. 257–562). Paris: Mouton. Bourdieu, P. (1979). Algeria 1960: The disenchantment of the world (R. Nice, Trans.). Cambridge: Cambridge University Press. Bourdieu, P. (1986 [1979]). Distinction: A social critique of the judgment of taste (R. Nice, Trans.). London: Routledge. Bourdieu, P. (1998). Acts of resistance: Against the tyranny of the market. New York: New Press. Bourdieu, P. (2003). Firing back: Against the tyranny of the market 2. London: Verso. Bourdieu, P. (2005a). Principles of an economic anthropology (R. Nice, Trans.). In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (2nd ed., pp. 75–89). New York and Princeton: Russell Sage Foundation and Princeton University Press. Bourdieu, P. (2005b). The social structures of the economy (C. Turner, Trans.). Cambridge: Polity Press. Bourdieu, P., Boltanski, L., & Chamboredon, J.-C. (1963). La banque et sa clientèle: Eléments d’une sociologie du crédit. Unpublished manuscript. Paris: Centre de Sociologie Européenne. Collins, R. (1999). Socially unrecognized cumulation. The American Sociologist, 30(2), 41–61. Correll, S., Benard, S., & Paik, I. (2007). Getting a job: Is there a motherhood penalty? American Journal of Sociology, 112(5), 1297–1339. Dalton, M. (1959). Men who manage: Fusions of feeling and theory in administration. New York: Wiley. England, P. (1992). Comparable worth: Theories and evidence. New Brunswick, NJ: Transaction Publishers. England, P., & Folbre, N. (2005). Gender and economic sociology. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (2nd ed., pp. 627–649). New York and Princeton: Russell Sage Foundation and Princeton University Press. Gans, H. (1992). Sociological amnesia: The Noncumulation of normal social science. Sociological Forum, 7(4), 701–710. Goffman, E. (1972 [1969]). Strategic interaction. In Strategic interaction (pp. 83–145). New York: Ballentine. Goffman, E. (1982 [1967]). Where the action is. In Interaction ritual (pp. 149–270). New York: Akldine. Gouldner, A. (1954). Patterns of industrial democracy. New York: The Free Press. Granovetter, M. (1973). The strength of weak ties. American Journal of Sociology, 78(6), 1360–1380. Granovetter, M. (1974). Getting a job. Cambridge, MA: Harvard University Press. Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91(3), 411–510. Granovetter, M. (1987). On economic sociology: An interview with Mark Granovetter. Research Report from the Department of Sociology, Uppsala University, 1, 1–26.

16 Granovetter, M. (1994). Business groups. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (2nd ed., pp. 453–475). New York and Princeton: Russell Sage Foundation and Princeton University Press. Granovetter, M. (2017). Society and economy: Framework and principles. Cambridge, MA: Harvard University Press. Granovetter, M., & McGuire, P. (1998). The making of an industry: Electricity in the United States. In M. Callon (Ed.), The Laws of the market (pp. 147–173). Oxford: Blackwell. Hochschild, A. (1983). The managed heart: Commercialization of human feeling. Berkeley, CA: University of California Press. Hochschild, A. (1989). The second shift. New York: Viking Penguin. Krippner, G. (2012). Capitalizing on crisis: The political origins of the rise of finance. Cambridge, MA: Harvard University Press. Krippner, G., et al. (2004). Polanyi symposium: A conversation on embeddedness. Socio-Economic Review, 2 (1), 109–135. Lazarsfeld, P. (1959). Reflections on business. American Journal of Sociology, 65(1), 1–31. Lazarsfeld, P., et al. (1971 [1933]). Marienthal: The sociography of an unemployed community. London: Routledge. Lukács, G. (1980). The ontology of social being: Labour. London: Merlin Press. MacKenzie, D. (2006). An engine, not a camera: How financial methods shape markets. Cambridge, MA: MIT. Marx, K. (1978 [1845]). Theses on Feuerbach. In R. Tucker (Ed.), The Marx-Engels reader (2nd ed., pp. 143–145). New York: Norton. Marx, K. (1990 [1867]). Capital. Vol. 1 (B. Fowkes, Trans.). London: Penguin. Merton, R. K. (1968). Social theory and social structure (Enlarged ed.). New York: Free Press. Merton, R. K. (1984). The fallacy of the latest word: The case of ‘pietism and science’. American Journal of Sociology, 89(5), 1091–1121. Millo, Y., & MacKenzie, D. (2003). Constructing a market, performing theory: The historical sociology of a financial derivatives exchange. American Journal of Sociology, 109, 107–145. Mills, C. W. (Ed.). (1960). Images of man: The classic tradition in sociological thinking. New York: George Braziller. Moss Kanter, R. (1977). Men and women of the corporation. New York: Basic Books. Parsons, T., & Smelser, N. J. (1956). Economy and society: A study in the integration of economic and social theory. New York: Free Press. Polanyi, K. (1944). The great transformation. Boston: Beacon Press. Polanyi, K. (1957). Aristotle discovers the economy. In K. Polanyi et al. (Eds.), Trade and market in the early

R. Swedberg empires (pp. 64–96). Chicago: Henry Regnery Company. Polanyi, K. (1966). Dahomey and the slave trade: An analysis of an archaic economy. Washington, DC: University of Washington Press. Polanyi, K. (1968). Our obsolete market mentality. In K. Polanyi (Ed.), Primitive, archaic and modern economies (pp. 50–77). Boston: Beacon Press. Schumpeter, J. A. (1934 [1912]). Theory of economic development (R. Opie, Trans.). Cambridge, MA: Harvard University Press. Schumpeter, J. A. (1942). Capitalism, socialism, and democracy. New York: Harper & Brothers. Schumpeter, J. A. (1951 [1949]). Communist manifesto in sociology and economics. In Essays (pp. 182–295). Cambridge, MA: Addison-Wesley. Schumpeter, J. A. (1954). History of economic analysis. London: Allen and Unwin. Schumpeter, J. A. (1991a [1918]). The crisis of the tax state. In The economics and sociology of capitalism (pp. 99–140). Princeton: Princeton University Press. Schumpeter, J. A. (1991b [1919]). The sociology of imperialisms. In The economics and sociology of capitalism (pp. 141–219). Princeton: Princeton University Press. Schumpeter, J. A. (1991c [1927]). Social classes in an ethnically homogenous environment. In The economics and sociology of capitalism (pp. 230–83). Princeton: Princeton University Press. Smelser, N. J. (1963). The sociology of economic life. Englewood Cliffs, NJ: Prentice-Hall. Swedberg, R. (2009). Tocqueville’s political economy. Princeton: Princeton University Press. Swedberg, R. (2016). Theorizing economic sociology. In P. Aspers & N. Dodd (Eds.), Re-imagining economic sociology (pp. 34–54). Oxford: Oxford University Press. Swedberg, R. (2019). How to make sociology out of data: Robert K. Merton’s course in theorizing (Soc 213–14). The American Sociologist, 50(1), 85–20. Tocqueville, A. (1988 [1856]). The old regime and the revolution. Vol. 1 (A. Kahan, Trans.). Chicago: University of Chicago Press. Tocqueville, A. (2004 [1835–40]). Democracy in America (A. Goldhammer, Trans.). New York: The Library of America. Weber, M. (1930 [1904–5]). The protestant ethic and the spirit of capitalism (T. Parsons, Trans.). London: Allen & Unwin. Weber, M. (1978 [1921/2]). Economy and society: An outline of interpretive sociology (G. Roth et al., Trans.). Berkeley, CA: University of California Press. Zelizer, V. (1985). Pricing the priceless child: The changing social value of children. New York: Basic Books. Zelizer, V. (1994). The social meaning of money. New York: Basic Books. Zelizer, V. (2005). Culture and consumption. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (2nd ed., pp. 331–354). New York:

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Russell Sage Foundation and Princeton University Press. Zelizer, V. (2007). The purchase of intimacy. Princeton: Princeton University Press. Zelizer, V. (2013). Economic lives: How culture shapes the economy. Princeton: Princeton University Press.

Swedberg, Richard is professor emeritus at Cornell University and lives in Stockholm, Sweden. He received an LLB juris kandidat at Stockholm University in 1970 and a PhD in sociology at Boston College in 1978. He was professor of sociology at Stockholm University during 1996–2001, and professor of sociology at Cornell University, USA, 2002–2019.

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Research interest: Economic sociology and social theory, with an emphasis on theorizing. He is currently working on various topics in theorizing and economic sociology. Recent publications: Swedberg, Richard. 1998. Max Weber and the Idea of Economic Sociology. Princeton: Princeton University Press. Smelser, Neil J., and Richard Swedberg, eds. 2005. The Handbook of Economic Sociology. 2. Auflage. Princeton: Princeton University Press. Original edition, 1994. Hedström, Peter, and Richard Swedberg, eds. 1998. Social Mechanisms. An Analytical Approach to Social Theory. Cambridge: Cambridge University Press. Swedberg, Richard. 2014. The Art of Social Theorizing. Princeton: Princeton University Press.

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Austrian and German Classics as a Foundation? Gertraude Mikl-Horke

1

Economics and Sociology in Europe at the Beginning of the Twentieth Century

In texts dealing with the history of economic sociology, one usually encounters names like Karl Marx, Emile Durkheim, Georg Simmel, Max Weber, Joseph Schumpeter, and Karl Polanyi figuring as classics in the field (see also Chap. 1). They include a preponderance of scholars whose origin lies in what is now Germany and Austria (see Biggart 2002; Swedberg 1991a, 1996, 2003; Trigilia 2002). There are various reasons for this, which cannot be dealt with here, but the turbulent political history in the first half of the twentieth century and the economic condition of relative backwardness of the central European region played a role (Gerschenkron 1962). In the first half of the twentieth century, questions of economic organization were at the forefront of public, as well as academic discussions, and politicians and intellectuals were concerned about the future development of the economy and the society amidst the turbulent political and social situation. The discussions among economists took into consideration not only the economic, but also the political and ideological aspects of various economic forms and organizations. Liberal economic G. Mikl-Horke (*) Vienna University of Economics and Business, Vienna, Austria e-mail: [email protected]

theory declined, and historical economics transformed itself into diagnostic analyses of society and culture, while sociology was still not widely recognized as an academic discipline at this time. Early economic thinking, as in the classical economics of Adam Smith, John Stuart Mill, or Jean Baptiste Say or in historical economics, which was dominant in the nineteenth century in German universities, paid attention to social aspects, albeit in different forms. It was when economists strove to develop a pure economic theory without the social, political, or historical encumbrances that there was mention of a field of economic sociology. The British economist, William Stanley Jevons, stated the need of developing such a discipline as a new branch of Mr. Spencer’s Sociology, which should serve as an auxiliary science for economics within an aggregate field of economic sciences (Jevons 1879, xv). That statement, with which he invented the concept of economic sociology as a subfield of an independent science of sociology, marked the beginning of the separation of economics and sociology. In France, Durkheim’s sociology had acquired a certain recognition as a special field of social sciences, and both Spencer and Durkheim had paid attention to economic matters within their sociological systems. Thus, it would have seemed more appropriate that Spencer or Durkheim should be referred to as the founding fathers of economic sociology. For France, anyway, currently there is a great tradition of

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_2

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economic sociology, or rather of sociological economics (Lebaron 2001). Within the political, social, and intellectual context of Germany and Austria, the meaning of sociology was still vague. It was more a figure of speech or a perspective than a definite field of scientific research. Social thinking in Germany and Austria either took place within the framework of the historically based Volkswirtschaftslehre or in that of a Marxist or otherwise socialist understanding of the evolution of the production relation. Historic and social perspectives also played a great role in the liberal economic thought of Carl Menger and his successors, in spite of their insistence on theory based on an individualistic methodology. Menger and his successors assumed subjective rationality, thereby, allowing for an indefinite range of motives, while not reducing action to specific economic motives or self-interest. German and Austrian economists, whether adhering to the historical approach or to a theoretical one, did not eliminate social aspects from economics. This situation delayed the development of sociology as a consistent, independent discipline with an object of research of its own. Consequently, still for some time to come a discipline of economic sociology, based on explicitly sociological methods and object definitions did not exist. When sociology was mentioned, it was connected with widely divergent meanings. Thus, the economists of the Menger-school, who were members of René Worms’ Institut de Sociologie, referred to sociology and understood it as a science of society with individualistic economic theory as the core. Friedrich Wieser saw economic theory as a way of preparing for the development of sociology and paid great attention to power. Ludwig Mises identified marginal economic theory with sociology, which he understood as a metascience based on the logic of action (Wieser 1927; Mises 1949; Mikl-Horke 2008). Another group, that used the concept of sociology, was the thinkers who strove for the

G. Mikl-Horke

establishment of a field of sociology as an alternative socialist science. Especially those who had written social reform on their banners, frequently saw sociology as a science for promoting social reform (see Neef 2012). In both cases, the economy was basic for the understanding of society as the object of sociology. For the Austrian economists, it was the theoretical logic of economics, for the socialist authors, it was the real economic condition and organization that was foundational to the meaning of society. They understood economy and society as inseparable from each other, society as the basis of the economy and the economy as constituted by social actions. This holds true also for Max Weber, Joseph A. Schumpeter, and Karl Polanyi, who figure most prominently in today’s economic sociology. On an international scale, they are regarded as the thinkers who provided a conceptual foundation for the discipline. Georg Simmel, who comes closest to being a genuine sociologist with his formal sociology, is often mentioned as having made a contribution to economic sociology. However, in his case attention is mostly restricted to his work on the philosophy of money (Simmel 1900). There were many others in Germany and Austria who contributed to a social view of the economy. Among them were some who paid attention to promoting a sociological view of the economy, but who are almost unknown in international sociology circles or in economic sociology in particular (see Köster 2011). In order to look for reasons why Weber, Schumpeter, and Polanyi became classics of economic sociology, we will briefly look at their work, their ideas on the economy, and its relation to society, pointing out what is of special importance from the perspective of economic sociology (Sect. 2). Then I will refer to the changes that occurred in the understanding of economic sociology in the course of its development (Sect. 3). Finally, I will discuss the relevance of the classics for an economic sociology that meets the challenges of our time (Sect. 4).

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2

Weber, Schumpeter, and Polanyi on Economy and Society

Max Weber, Joseph A. Schumpeter, and Karl Polanyi, all of them from Central Europe, were economists, at least with regard to their education and/or their institutional positions, even though their interests went far beyond economic concerns. They all shared a background of historical economics, were well aware of Marx and other socialist thoughts, and were educated in Austrian economic theory. These influences shaped their thinking about the economy and its relation to society without the need to work from within an independent discipline of sociology.

2.1

Max Weber

Max Weber looms prominently as a classic of economic sociology, to whom a tradition is attributed (Swedberg 1998; Maurer 2010). That seems justified on the grounds that he himself, in his later years, often used the concept of sociology and the expression of sociological categories of the economy (Weber 1976, 31 ff.). However, we shall see that sociology had a special meaning for him. Although rooted in the historical school of Volkswirtschaftslehre and influenced by the interest he took in Marx’ work, Weber shared with the economists, of what was known as the Vienna or Austrian school, an individualistic approach to the economy and an emphasis on subjectively meaningful action. He was engaged in the methodological disputes of his time and aimed at overcoming the separation between historical and theoretical methodologies. He saw explanation (Erklären) and understanding (Verstehen) as both necessary for research, and placed special emphasis on the conceptual instrument of the idealtypes. The influence of his friend, Heinrich Rickert, and his cultural science (Kulturwissenschaft) was of great importance for Weber regarding his methodological standpoint, but also for the perspective, which he applied to the

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study of social and economic objects. Throughout his life, he retained a strong foundation of historical insight, as well as an awareness of the necessity of empirical analysis for causal explanation, while subjecting analysis to the overall goal of understanding the cultural meaning (Kulturbedeutung) of actions and institutions which he (Weber 1988a) called understanding sociology (verstehende Soziologie). Weber’s view on economics was close to that of the Austrian school’s approach, which coincided with his individualistic orientation regarding the conception of social and economic action, as being subjectively meaningful. Weber did not aim at contributing to the development of economic theory. Instead, he saw the cultural meaning of actions, institutions, and of economic theory in close relation with the rationalization process of Occidental culture. That led him to place means-ends-rationality of action as the idealtypically modern form of acting. Economic action was also social action in Weber’s view which he understood as subjectively meaningful, reacting either to others or to the norms and institutions of society. Taking up the concept of capitalism from Karl Marx, Weber analyzed the historical development of economic business practices and organization, from earlier forms to the emergence of modern industrial capitalism. The characteristics of modern industrial capitalism were, in his view, the rational organization of labor and the formal methods of capital accounting (see also Chap. 18). In a historical and realistic way, he showed how the social structures and institutions had come into being. Weber’s basic outlook was an idealistic interpretation of history, which led him to focus on the impact of religion on the development of capitalism. While not totally rejecting Marx’ materialist view, he showed the secular impacts of the Protestant Ethic on the development of the spirit of capitalism. He undertook comparative studies of world religions and their implications for economic thinking and acting in order to be able to explain and understand why modern capitalism developed in Europe and America.

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Weber was also aware of the changes that capitalism and culture were undergoing in his time. The emergence and the effects of large organizations and bureaucratic tendencies led him to questions concerning the future development of capitalism and of modern culture generally. His historical orientation and his emphasis on ideas made him understand that the changes in the real world imply changes in perception and cognition, which have consequences for conceptualization in the social sciences, too. Social science must change together with the changes in the real world, which means, above all, that its concepts must be constantly reformulated. In his opinion, economic theory was a cognitive construction based on ideal assumptions, made possible by the historical process of the rationalization of thought, which he understood as being the underlying force of modern European history. However, as such, theory is also a product of history and must change together with the changes in the real constellation of economic and social conditions, as well as with the changes in perception, cognition, and valuation. However, in Weber’s time the process of the rationalization of thought and culture was still progressing, and he was aware that it could produce ambivalent effects; it could even result in the destruction of individual freedom and lead to an increase of social inequality. In Economy and Society (Wirtschaft und Gesellschaft), which was posthumously arranged and published by Weber’s wife, Marianne Weber, and later on by Johannes Winckelmann, the word sociology appears in the first two fundamental chapters, which Weber had written later than the rest of the chapters. The first chapter on sociological categories constitutes, for many scholars, Weber’s sociology. It is, however, a very special understanding of sociology, which does not refer to discussions that were going on during his lifetime about the meaning of sociology. It takes no notice of Durkheim’s, or anyone else’s conceptions of sociology, but presupposes a meaning of its own. In his later work, Weber placed great emphasis on conceptualization, so that the term, sociological acquired the methodological meaning of a stricter formulation of

G. Mikl-Horke

concepts. However, the historical development and cultural meaning of modern capitalism are central to his definitions of objects and problems of social science. In this sense, Weber referred to social economics (Sozialökonomik) and its objective in the introduction to the economics series (Grundriß der Sozialökonomik), which he co-edited (Weber 1988b). In this essay, he also stressed a historical and realistic approach that represented his fundamental orientation of social science and which should constitute the basis for a science of reality (Wirklichkeitswissenschaft) (Weber 1988b, 170 f). The orientation towards a cultural science (Kulturwissenschaft) that underlies his work had inspired many to undertake studies of the cultural meaning of capitalism, highlighting certain values and ideas that characterize modern culture. Talcott Parsons has brought Weber’s work to the attention of American social scientists since the 1930s. In his book on Weber’s conception of social and economic organization, he presented it as economic sociology (Parsons 1937a, 1947, 30 ff.). In the US context, the interpretation of Weber’s work emphasized his individual action approach and the conception of modern industrial capitalism as a social and rational form of organization. The attention given to Weber in the Englishspeaking world helped to make him well-known in the international academic community, in which the American social sciences became dominant.

2.2

Joseph A. Schumpeter

Joseph A. Schumpeter began his career as a student of Austrian economic theory at the University of Vienna. From early on he had an interest in social and historical issues and pursued this in many studies also throughout his life. The influence of Marx, Weber and of his mentor, Friedrich Wieser,1 had great impact on Schumpeter’s thinking. He was also influenced by the equilibrium 1

He was successor to Menger’s chair in Vienna.

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theory of Leon Walras, and in his time in Harvard he focused strongly on neoclassical theory and formal methods. This constituted a contrast to his social and historical interests, but also resulted in distancing him from the representatives of Austrian economics in the US, especially from Ludwig Mises. His work retained, nevertheless, many traits which are of importance for Austrian economics as well, especially an emphasis on action, and an interest in the dynamics of the economic process. In the second edition of his early work, The Theory of Economic Development (Schumpeter 1926), Schumpeter argued that the foremost task of economics was to explain the internal dynamics of the economic process. He understood the concept of development not in the sense of a gradual evolutionary process, influenced by external factors. Capitalism develops, as he explained, from within, by the spontaneous and discontinuous occurrence of new combinations of the means of production, for example, by technical innovations, new goods, new markets, new forms of organization, and/or new ways of financing. In spite of this focus on the inner forces driving the capitalist economy, Schumpeter admitted that social, political, cultural, and historical circumstances play a role, but they enter the scene through their impact on the entrepreneur, the agent of economic dynamism. The entrepreneur is a prominent figure in Schumpeter’s thinking. He is not a representative of a social class, as the capitalist was for Marx, but stands for a type of behavior that is creative and risk-taking, but also economizing and displays a capacity for leadership. His behavior is characterized by non-institutionalized actions, through which the individual entrepreneur can even become alienated from his social environment. The emphasis on the dynamics of change led Schumpeter to take a critical stance towards Marx’s closed conception of class. He argued that in the course of economic development, the structure and the composition of classes change constantly by the ascent of some individuals or families and the descent of others. Like Marx, he saw crises as the normal characteristics of the capitalist process and dedicated a voluminous

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study to the Business Cycles (Schumpeter 1939). The historical transition from a commercial society to a capitalist society occurred historically due to the establishment of institutions that were favorable to individual initiative and risk acceptance, thus enabling innovations and the unfolding of the creative capacity of capitalist entrepreneurs. Schumpeter was, however, ambivalent in his evaluation of economic development; he pointed out that the ascent and descent of groups, families and individuals, as well as changes in forms of living, working, and thinking, often lead to disruptive effects on the economy and the society, but he saw these consequences as unavoidable for the sake of the dynamic development of capitalism. In his later diagnostic essay, Capitalism, Socialism, and Democracy (Schumpeter 1942), Schumpeter saw the institutions that had been the basis for the development of capitalism, undergoing changes due to the mechanization of progress, which made the innovative, creative role of the entrepreneur obsolete. He foresaw that the rationalization and functionalization of large-scale modern enterprises must unavoidably result in the transition to some kind of socialism. In this sense, although his argument is based on a different evaluative perspective, it is reminiscent of Marx’s prediction of the self-destruction of capitalism due to its very success. Regarding his conception of the relation of economics and sociology, he followed the neoclassical view of drawing a clear line between the two fields. He was aware, however, that economic theory is not an end in itself, but constitutes a basis for economic analysis, which is oriented toward practical purposes. This requires taking the findings of economic history, statistics, and economic sociology into account, which means that he, like Jevons, saw economic sociology as one of the economic sciences. Schumpeter was conscious, as was Weber, of the conditions that underlie the production and the effects of economic knowledge, and of the influence of ideology. He dedicated an unfinished chapter entitled, Sociology of Economics, to this problem in his posthumously published History of Economic Analysis (1954, 33 ff.). Schumpeter’s reception

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in sociology was focused on his sociological texts (see Schumpeter 1991). His economic works are also of relevance in this respect, because his conception of economic theory was not a conventional one, even though he had embraced neoclassical theory and methods (see also Swedberg 1991b).

2.3

Karl Polanyi

In the 1920s the future of capitalism and the path to socialism were widely discussed. One of the young intellectuals interested in socialism and its transition from capitalism was Karl Polanyi, who, in a discussion on socialist accounting with the liberal economist Ludwig Mises, defended the possibility of socialism (Polanyi 1924). He suggested a concept of functional socialism that was somehow close to Guild socialist ideas, but also contained insights into the functional differentiation of modern society, which later became a fundamental conception of sociology. In Polanyi’s opinion, the conflict of interest in the economy does not lead to the development of antagonistic classes, pitted against each other, as Marx had described. Instead of a conflict between different classes or groups, he perceived a conflict between different positions or interests, which all people have in common, namely, that of producers on one hand and consumers on the other hand, both sharing common goals. In his vision of a functional society, the goal of the economy is to achieve maximum productivity of goods, as well as to pursue social productivity measured in terms of the common good and of social rights. Therefore, he argued that social costs, caused by institutionalizing social rights, must enter into socialist accounting. Polanyi’s most well-known work is The Great Transformation (Polanyi 1944), in which he investigated the causes for the development of a market economy in nineteenth century England. This, he argued, came about through dis-embedding land, labor, and capital from their social and cultural contexts by legal means and by political decisions, and thereby gradually transforming society into a market society. He rejected the

claim of economists who saw the market as a sort of natural law or logical principle that is in operation in all societies. Instead, he understood the market economy as an historical system that remains in existence only as long as liberalism dominates the political system. The existence of the market, therefore, is dependent on political decisions and does not come about by itself. Polanyi attributed great influence to historical conditions, events, and political actions in shaping economic organization. He pursued this in historical and anthropological studies, which became his major lines of research after his emigration to England, and later to America. In studies of ancient trade in various parts of the world, he showed that the market logic is not applicable to pre-modern societies. He explained that the economy for most of human history was embedded in society, and that economic behavior was inseparable from social, religious, and political worldviews, values, and practices (Polanyi et al. 1957). Land, labor, and money, then, did not follow a special economic rationality, nor was the economy represented by distinct institutions or structures. Economic actions in premodern societies were embedded in the forms of living, centered on the household as an economic, social, and emotional organization, or took place in the context of reciprocal relationships or redistributive hierarchies. Markets, where they existed in premodern societies, were local affairs, and non-economic rituals, rules, and emotions pervaded the dealings. The transition to market society brought a disruption into this state of affairs and led to a reversal of the relation between society and the economy by embedding society in the economy. For the market to become systemic, as Polanyi concluded, economic rationality must become distinct from other motives and ways of thinking. To turn land, labor, and capital into commodities and make the market into a mechanism, which encompassed the whole of society, required a change in the way of thinking about the economy. This came about when liberal economic theory, with its formal-logical model of the market, replaced the substantivist perception of the economy as the livelihood of man (Polanyi 1977). This

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emphasis on the effects of thinking demonstrates that Polanyi attributed a strong performative effect to theory for making the economy. Polanyi argued that in the real life of the people in modern societies the non-logical dimensions are still present. This forces individuals to live and act in two worlds, in one of market conditions and market logic, and in the other, dedicated to the concerns of everyday life. Polanyi pleaded for a return to a substantivist understanding of the economy and for the recognition of the embeddedness of economic actions in social, political, and everyday conditions. He emphasized the historically limited relevance of market logic and saw another Great Transformation under way, by which labor, as well as capital would have a say in economic decisions, thus introducing democracy into economic relations (Polanyi 2014, 214 ff.). Polanyi had pointed to the difference between premodern and modern societies and had challenged the claim of the general applicability of market logic, which he attributed only to the modern economy (Polanyi 1968). In this analysis, he did not differ fundamentally from Weber and Schumpeter. All three were conscious of the historical relativity of economic thinking and organization, as well as of the important role of ideas, including scientific logic. Polanyi placed the economy in a wider context of time and differences of culture and ideological preconditions, as Weber had, and he specially emphasized political decisions and actions. In the 1960s, therefore, his work became the object of discussion among those within the political sciences. In economic sociology, the relevance of Polanyi was recognized when criticism of neoliberalism set in and modern capitalism spread worldwide.

3

The Changing Character of Economic Sociology

Weber used the concept of economic sociology, but he referred also to social economics, connecting the former with a conceptually stricter approach, the latter with a broader view of the

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cultural meaning of economic phenomena. Schumpeter explicitly referred to economic sociology in his History of Economic Analysis as one of the contextual disciplines within the group of economic sciences. Polanyi turned to historical and anthropological studies of the economy but did not expressly aim at an economic sociology. All three, and many more in the same period, combined economic and social elements based on an understanding of economics that included social, cultural, and historical elements. In the first half of the twentieth century, there were discussions taking place on the relation between economics and sociology, mostly under the heading of socioeconomics or social economics as a combinatory field (Åkerman 1938; Sombart 1930). Adolph Lowe called his conception of a synthetic science based on middle principles, i.e., time-space related constructs from both disciplines, economic sociology (Lowe 1935). It should bridge the widening gap between economics and sociology as the latter gradually acquired academic recognition. To pursue this goal, he founded The American Journal of Economics and Sociology, together with Franz Oppenheimer in 1941. He was known among historians of economics as one of the reform economists, who sought to combine market theory with a socialist orientation. Lowe is, however, hardly remembered today as one of the founders of economic sociology. His conception of economic sociology was that of a practical, political social science that combines structural and instrumental analyses. In the US, sociology was developing in a different way from what Lowe intended. This became clear in Talcott Parsons’ review of Lowe’s Economics and Sociology (Parsons 1937b). Although Parsons also intended to link economic and social theory, it was with another aim in mind, that is, to develop a metafield of action sciences (Parsons 1937b; Parsons and Smelser 1956). Lowe, henceforth, spoke of political economy and not anymore of economic sociology (Lowe 1965). However, for a long time in Europe, economic sociology was still seen as a symbiotic field of economics and sociology with the aim of providing information for the decisions in economic policy (Fürstenberg 1956, 406).

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Sociology, as it gained recognition and academic status, and introduced the American conception of empirical social science, turned away from the traditionally close relation with economic science, as well as from a practical, political orientation. Intent to prove its scientific objectivity, sociology was focused on the theoretical construction of society as an object of its own, in which the economy played a minor part as an object of research, and from which history and polity were excluded. Another reason why sociologists paid little attention to the economy had to do with the highly formalized theory and research in economics that made it difficult for non-economists to deal with economic aspects. For several decades after World War II, economic sociology, where it existed as an academic field, either dealt with the non-economic aspects in the economy or focused on redundant criticism of their exclusion in neoclassical economic theory. The core subjects of modern economy, as they figure in neoclassical economics, that is, the market, prices, competition, to mention a few, however, were not touched. The change in the political climate in the UK and the USA of the late 1970s and the 1980s, which promoted a Chicago school view of a liberal market economy, influenced by the neoliberalism of the Mises-Hayek version of Austrian economics, brought a renewal of interest in economic sociology (Baron and Hannan 1994). As the market advanced into the focus of public and political perspectives, sociologists felt it increasingly unsatisfactory to restrict their research to the contextual aspects of the economy. Instead, they ventured to undertake a genuinely sociological explanation of markets (Burt 1992; Granovetter 1985; White 1981). This brought forth new economic sociology, spreading internationally from its origin in the US. It aimed at showing markets as constellations of social relations using the method of network analysis (White 2002), studies of social structure and an individualistic conception of economic action (Dobbin 2004; Guillèn et al. 2002; Granovetter 1985, 2002). The concept of embeddedness that appeared in some of these studies means that economic actions are seen as elements of the social structure of markets

G. Mikl-Horke

(Granovetter 1985). This differs from the concept of Polanyi and came along at first without reference to his work. Embeddedness referred to a microsocial network approach and became in this sense one of the core concepts of new economic sociology. The emergence of neo-institutionalism also had an impact on economic sociology by adding normative, cultural, and cognitive perspectives to the embeddedness of markets (DiMaggio and Powell 1991). The outlook extended beyond the microsocial study of markets to embrace institutional, political, and comparative elements. However, in much of new economic sociology, the understanding of institutions is that of neo-institutionalism and focuses on decision-making and on the organizational development of firms. Comparative studies of business systems or of the Varieties of Capitalism caught the attention of many in the field of economic sociology (Whitley 1992; Hall and Soskice 2001). This broadened the microsocial orientation of new economic sociology, however, without relinquishing methodological individualism, which constitutes an analogy to microeconomic the predominance within economic theory (Beckert 1996). The concentration on markets, moreover, seems to identify the economy with the market and private enterprise economy (Beckert 2003). There were studies on the public sector, the household economy, the third sector of nongovernmental and/or non-profit organizations, the shadow economy, and even on non-economic fields like culture, politics, religion, emotions, but this resulted often in seeing these fields as markets. Criticism from those who do not want to look at the economy from a market and business perspective, led to introducing Polanyi’s alternative conception of embeddedness, as well as recognizing the importance of his work for economic sociology (Krippner 2001; Krippner et al. 2004). The field of economic sociology was broadened by a new interest in the works of the classics, of Weber, Schumpeter, and Polanyi, and others who had applied a historical and transdisciplinary view to the relation between economy and society. Mark Granovetter, in particular, also integrated historical and anthropological dimensions (Granovetter

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2002). By returning to the study of the classics their relevance for the tradition of economic sociology was established (Beckert and Zafirovski 2006; Granovetter and Swedberg 2001; Smelser and Swedberg 2005; Zafirovski 1999). The main theme of Weber, Schumpeter, and Polanyi had been the development, the consequences and the future of capitalism or the market system respectively, and this concern had lingered on in discussions in Europe. In the 1990s in the wake of the disintegration of the Soviet Union and the transformation of the successor states, the discussion about the future of capitalism and its different forms was revived and became a topic even in the USA, where the term had previously had little meaning, being used as a synonym for the market economy. Instead, studies on capitalism and its changes were taken up once again, mostly in the field of political sciences and political economy, but also in economic sociology (e.g., Beckert 2016; Nee and Swedberg 2005; Streeck 2016). After World War II, economic sociology was a peripheral study within the discipline of sociology, concerned with the non-economic elements in the economy or the application of sociological concepts to economic phenomena. It gained new recognition by claiming to provide a sociological theory of markets, thereby, dispelling the notion of the self-regulating mechanism of the market by showing that it is people and their actions, which make the markets, while at the same time focusing too much on markets and their microsocial structure. In recent decades and under the impact of globalization discourses, the pendulum swung back to concerns that had been already in the center of interest at the beginning of the twentieth century, that is, the changing character of modern capitalism, the transformation of society, and the cultural meaning of new developments.

4

The Relevance of the Classics

Weber, Schumpeter, and Polanyi were influenced by the economic, social, and political situation of their times, the methodological and scientific discussions, and their perception of the social,

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political, and cultural situation. If we look at their work, we must ask, in what way it can be relevant for economic sociology today beyond its historiographical interest. Economic sociology today must tackle situations that are quite different both in the real world and in the social sciences. The concept of the economy, as it has evolved by the processes of industrialization, rationalization, and modernization to become modern Western capitalism, is being challenged currently, but not by the transition to a bureaucratic or socialist society, as Weber, Schumpeter, and others had thought. In the focus of the social sciences today are processes such as the transformation of socialist economies into market economies in Central and Eastern Europe within only a few decades (see also Chap. 12), or the transition processes in many parts of the world, changing traditional forms of economic behavior to fit into a global capitalist system, as well as the counter-tendencies of nationalism and protectionism. The conditions underlying, forming, and changing the economy then and now differ greatly, but in both cases, there are profound, manifold, and often contradictory or ambivalent processes to consider. The globalization of production, trade, and communication has changed some of the preconditions of economic organization. It has spread the practices and institutions of modern capitalism on a worldwide scale. They often have disruptive effects on traditional economic practices and forms of living, sometimes leading to conflicts in which economic, social, political, and cultural-ideological elements mingle. The global expansion of Western forms of economy and society has led to responses emphasizing differences of institutional, social, political, and cultural conditions, but it has also led to criticism of and antagonism towards Western capitalism. The Western way of working, of dealing with one another, of organizing has come under critique, and also the whole conception of scientific thinking, including the social sciences, is being challenged. Huge multinational enterprises and powerful global internet firms control the field of competition globally. This has led to the diminishing

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power of the nation states over the economy, to which also the increase in the swiftness of financial transactions in the global markets for money and capital has contributed. Schumpeter had already seen the financial sector as the apex of modern capitalism. Today the process of financialization has reached a level that endangers the real economy by unleashing an increasingly wider gap of economic inequality. The dynamism of capitalism resulting from the unrelenting striving for economic growth endangers the environment and makes our planet less habitable for many people (see also Chap. 18). On the other hand, the conception of the economy is gradually changing from a restricted one, concentrating on markets, firms and business systems to a more varied perception, which takes diverse forms of economies, some traditional, some criminal, and some based on solidarity into account. What we mean by the concept of society has changed considerably because of the development of worldwide, electronic communication networks (social media) and the impact of digitalization on the lives, relations, and perceptions of people. The increasing inequality, the persistence of poverty, the unemployment of many young people, as well as the post-democratic, post-colonial, or post-modern movements and the development of new global conflicts on ideological, religious, and cultural grounds, the rise of nationalism and protectionism, have turned the economy and societies into contested terrains. Sociology cannot deal with all those problems, but it equally cannot content itself to focus only on its professionalism, on standardized methods of research and publication, on networking for academic institutional success. This invariably places more focus on concepts, theories, and methods of research as an end in themselves, and leads to losing sight of reality. In Weber’s view concepts and theories were instruments or guidelines to approach reality; they were not ends in themselves. This was also true for Schumpeter, apart from his more formal, theoretical works. Polanyi’s demand to return to a substantivist way of thinking and speaking about the economy reflects this realistic attitude.

G. Mikl-Horke

Reading the works of the classics one gets the impression that they were driven by the desire to understand what was going on in their time and society. It is perhaps this quality, which still makes reading their works so interesting. The classic authors were not naïve as to the possibility of cognition of reality. They were certainly conscious of the relativity and reflexivity of concepts, but they assumed a reality out there. Realism, for them, meant striving for cognition of the real world by means of social science and possibly approaching, though never reaching it. A realistic science means finding questions corresponding to the changes and problems perceived, and changing concepts and methods accordingly. Therefore, social science must be based on studies of history, not in the sense of focusing on the past, but in the sense of paying attention to the processes that shape the future. Sociology must regain its historical orientation, which it has lost since the time of the classics, in spite of some recent revival of a historical sociology (see MiklHorke 2011, 13 ff.). Taking history into consideration means focusing on time processes, on events and changes, and their consequences. The focus on structures cannot grasp the reality of the present that is only an imagined entity between past and future. Since high-speed changes and unforeseen events seem to characterize our time more than the time of the classics, the attention attributed to social structure must be complemented by acknowledging processes and how they shape and change present conditions, as well as the expectations for the future. The real social world is not presenting a consistent picture, because there are contradicting elements and divergent perspectives pervading reality at any point in time. Reality, as well as its perception, is ambivalent. The classics were aware of the ambivalence of reality. Social science must take this into consideration again and leave space for uncertainty. A historical-realistic approach to society and economy leads to a broad view that does not stop at the frontiers of disciplines, for which the classics provide good examples. Weber is claimed to be a classic by quite a number of disciplines, from legal history, economic history,

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political science, the science of religion, to sociology. Schumpeter’s work touches on a wide range of fields from history, economics, social psychology, to sociology. Polanyi was combining political issues, social themes, economic history, and economic anthropology. Currently in the social sciences, there is a growing recognition that the clear separation of disciplines is not conducive to solving the problems of a changing society that is becoming increasingly more complex, diverse, and dynamic. This results in demands for interdisciplinary studies and discourses, which in practice, however, prove difficult because of the closure of theoretical languages. In this sense it is indeed necessary to Open the Social Sciences (Wallerstein et al. 1996). The call for interdisciplinary studies has led again to discussions about the relationship between economics and sociology, often under the heading of socioeconomics. In the current, complex, global, social, and economic situation and its manifold interrelations with social, political, cultural, ideological, technological, and communication-related aspects, social research must reach out farther and engage in exchanges with political economy, the political sciences, anthropology, and the historical sciences, and moreover, with voices from the real world. When we turn to the classics for guidance, we cannot find it in the objects addressed or the problems raised, but rather in their historical consciousness, their realistic perspectives, and their wide range of interests that enabled an implicitly transdisciplinary approach, as well as in their recognition of the ambivalence of reality. In this way their approaches can enable us to see how our world and the perception of it have changed and are changing, and how we can come closer to grasping some instances of the reality of our own world. Tackling the relation between economic and social aspects of reality under the heading of economic sociology means not so much applying sociological concepts, theories, and methods, but taking a social stand towards the economy. This means remembering that the ultimate goal of science is to serve the livelihood of man, that is, the

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survival and well-being of humanity, or better, of all people on this earth, and, if possible, in cooperation with them. To this end, economic sociology as a part of a developing global social science, must be undertaken and must allow for the discovery of ideas that can contribute to solving the problems of our time by taking history and the future into consideration.

References Åkerman, J. H. (1938). Das Problem der sozialökonomischen Synthese. Lund: Gleerup. Baron, J. N., & Hannan, M. T. (1994). The impact of economics on contemporary sociology. Journal of Economic Literature, 32, 1111–1146. Beckert, J. (1996). What is sociological about economic sociology? Uncertainty and the embeddedness of economic action. Theory and Society, 25, 803–840. Beckert, J. (2003). Beyond the market. The social foundations of economic efficiency. Princeton: Princeton University Press. Beckert, J. (2016). Imagined futures. Fictional expectations and capitalist dynamics. Cambridge, MA: Harvard University Press. Beckert, J., & Zafirovski, M. (Eds.). (2006). International encyclopedia of economic sociology. London: Routledge. Biggart, N. W. (Ed.). (2002). Readings in economic sociology. Malden, MA: Blackwell. Burt, R. S. (1992). Structural holes. The social structure of competition. Cambridge, MA: Harvard University Press. DiMaggio, P., & Powell, W. (1991). The new institutionalism in organizational analysis. Chicago: Chicago University Press. Dobbin, F. (Ed.). (2004). The new economic sociology: A reader. Princeton: Princeton University Press. Fürstenberg, F. (1956). Die soziologische Dimension wirtschaftstheoretischer Aussagen. Zeitschrift für die gesamte Staatswissenschaft, 112(3), 398–409. Gerschenkron, A. (1962). Economic backwardness in historical perspective. Cambridge, MA: Harvard University Press. Granovetter, M. (1985). Economic action and social structure: The problem of Embeddedness. American Journal of Sociology, 91, 481–510. Granovetter, M. (2002). A theoretical agenda for economic sociology. In M. F. Guillèn et al. (Eds.), The new economic sociology (pp. 35–59). New York: Russell Sage Foundation. Granovetter, M., & Swedberg, R. (Eds.). (2001). The sociology of economic life (2nd ed.). Boulder: Westview Press. Guillèn, M. F., et al. (Eds.). (2002). The new economic sociology. New York: Russell Sage Foundation.

30 Hall, P. A., & Soskice, D. (2001). Varieties of capitalism. Oxford: Oxford University Press. Jevons, W. S. (1879). The theory of political economy (2nd ed.). New York: Kelley. Köster, R. (2011). Die Wissenschaft der Außenseiter. Göttingen: Vandenhoeck & Ruprecht. Krippner, G. (2001). The elusive market: Embeddedness and the paradigm of economic sociology. Theory and Society, 30, 775–810. Krippner, G., et al. (2004). Polanyi symposium: A conversation on embeddedness. Socio-Economic Review, 2, 109–135. Lebaron, F. (2001). Bases of a sociological economy: From François Simiand and Maurice Halbwachs to Pierre Bourdieu. International Journal of Contemporary Sociology, 38, 54–63. Lowe, A. (1935). Economics and sociology. London: Allen & Unwin. Lowe, A. (1965). On economic knowledge. Toward a science of political economics. New York: Harper & Row. Maurer, A. (Ed.). (2010). Wirtschaftssoziologie nach Max Weber. Wiesbaden: VS Verlag für Sozialwissenschaften. Mikl-Horke, G. (2008). Austrian economics and economic sociology. Socio-Economic Review, 6, 201–226. Mikl-Horke, G. (2011). Historische Soziologie–– Sozioökonomie––Wirtschaftssoziologie. Wiesbaden: VS Verlag für Sozialwissenschaften. Mises, L. (1949). Human action. A treatise on economics. Hodge: London. Nee, V., & Swedberg, R. (Eds.). (2005). The economic sociology of capitalism. Princeton: Princeton University Press. Neef, K. (2012). Die Entstehung der Soziologie aus der Sozialreform. Frankfurt: Campus. Parsons, T. (1937a). The structure of social action. New York: McGraw-Hill. Parsons, T. (1937b). Book review: Economics and sociology by Adolf Löwe. American Journal of Sociology, 43, 477–481. Parsons, T. (1947). Weber’s ‘economic sociology’. Introduction. In T. Parsons (Ed.), Max Weber. The theory of social and economic organization (pp. 30–56). New York: Hodge. Parsons, T., & Smelser, N. J. (1956). Economy and society: A study in the integration of economic and social theory. New York: Free Press. Polanyi, K. (1924). Die funktionelle Theorie der Gesellschaft und das Problem der sozialistischen Rechnungslegung. Archiv für Sozialwissenschaft und Sozialpolitik, 52, 218–228. Polanyi, K. (1944). The great transformation. New York: Farrar & Rinehart. Polanyi, K. (1968). In G. Dalton (Ed.), Primitive, archaic and modern economies . Essays. Garden City: Anchor. Polanyi, K. (1977). In H. W. Pearson (Ed.), The livelihood of man. New York: Academic. Polanyi, K. (2014). In G. Resta & M. Catanzariti (Eds.), For a new west. Essays, 1919–58. Cambridge: Polity Press.

G. Mikl-Horke Polanyi, K., et al. (Eds.). (1957). Trade and markets in the early empires. Glencoe: Free Press. Schumpeter, J. A. (1926 [1911]). Theorie der wirtschaftlichen Entwicklung (2nd ed.). Leipzig: Duncker & Humblot. Schumpeter, J. A. (1926 [1939]). Business cycles. A theoretical, historical and statistical analysis of the capitalist process. New York: McGraw-Hill. Schumpeter, J. A. (1926 [1942]). Capitalism, socialism and democracy. New York: Harper. Schumpeter, J. A. (1926 [1954]). History of economic analysis. London: Allen & Unwin. Schumpeter, J. A. (1926 [1991]). In R. Swedberg (Ed.), The economics and sociology of capitalism. Princeton: Princeton University Press. Simmel, G. (1900). Philosophie des Geldes. Leipzig: Duncker & Humblot. Smelser, N. J., & Swedberg, R. (Eds.). (2005). The handbook of economic sociology (2nd ed.). New York and Princeton: Russel Sage Foundation and Princeton University Press. Sombart, W. (1930). Nationalökonomie und Soziologie. Jena: Fischer. Streeck, W. (2016). How will capitalism end? Essays on a failing system. London: Verso. Swedberg, R. (1991a). Major traditions of economic sociology. Annual Review of Sociology, 17, 251–276. Swedberg, R. (1991b). Introduction: The man and his work. In J. A. Schumpeter (Ed.), The economics and sociology of capitalism (pp. 3–98). Princeton: Princeton University Press. Swedberg, R. (Ed.). (1996). Economic sociology. Cheltenham: Edward Elgar. Swedberg, R. (1998). Max Weber and the idea of economic sociology. Princeton: Princeton University Press. Swedberg, R. (2003). Principles of economic sociology. Princeton: Princeton University Press. Trigilia, C. (2002). Economic sociology: State, market, and society in modern capitalism. Oxford: Blackwell. Wallerstein, I., et al. (1996). Open the social sciences. Stanford, CA: Stanford University Press. Weber, M. (1976 [1922]). Wirtschaft und Gesellschaft. Grundriß der verstehenden Soziologie (5th ed.). Tübingen: Mohr. [Weber, Max. 1978 [1921]. Economy and society: An outline of interpretive sociology. Edited by Guenther Roth et al. Berkeley CA: University of California Press; Weber, Max. 2019. Economy and society. A new translation. Edited by Keith Tribe. Cambridge, MA: Harvard University Press.]. Weber, M. (1988a). Über einige Kategorien der verstehenden Soziologie. In M. Weber (Ed.), Gesammelte Aufsätze zur Wissenschaftslehre (7th ed., pp. 427–474). Tübingen: Mohr. [Weber, Max 1949: The Methodology of the Social Sciences. Edited by Edward H. Shils and Henry A. Finch. New York: Free Press.]. Weber, M. (1988b). Die ‘Objektivität’ sozialwissenschaftlicher und sozialpolitischer Erkenntnis. In M. Weber (Ed.), Gesammelte Aufsätze zur

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Wissenschaftslehre (7th ed., pp. 146–214). Tübingen: Mohr. [Weber, Max 1949: The methodology of the social sciences. Edited by Edward H. Shils and Henry A. Finch. New York: Free Press.]. White, H. C. (1981). Where do markets come from? American Journal of Sociology, 87, 517–547. White, H. C. (2002). Markets from networks. Socioeconomic models of production. Princeton: Princeton University Press. Whitley, R. (Ed.). (1992). European business systems. Firms and markets in their national contexts. London: Sage. Wieser, F. (1927). Social economics. New York: Adelphi. Zafirovski, M. (1999). Economic sociology in retrospect and prospect: In search of its identity within economics and sociology. The American Journal of Economics and Sociology, 58, 583–627.

31 Gertraude Mikl-Horke is a retired professor of general and economic sociology at the Vienna University of Economics and Business Research topics: History of the social sciences with special emphasis on Austria, social economics, economic sociology, industrial sociology, Japanese society, and labor relations. Recent publications: MiklHorke, Gertraude. 2018. Zur Aktualität der Finanzsoziologie Rudolf Goldscheids. In Aktuelle Probleme der Finanzsoziologie, ed. Max Haller. Wien and Münster: LIT. Mikl-Horke, Gertraude. 2017. Die Österreichische Schule der Nationalökonomie und die Wirtschaftssoziologie. In Schlüsselwerke der Wirtschaftssoziologie, ed. Klaus Kraemer, and Florian Brugger, 135–44. Wiesbaden: Springer VS. Mikl-Horke, Gertraude. 2011. Historische Soziologie––Sozioökonomie––Wirtschaftssoziologie. Wiesbaden: Springer VS. Mikl-Horke, Gertraude.

3

James Coleman, Social Capital, and Economic Sociology Peter V. Marsden

I appreciate helpful comments from Derick Baum, Maleah Fekete, Mary Ellen Marsden, and editor Andrea Maurer.

Foundations of Social Theory (Coleman 1990; hereafter FST) was the principal intellectual project of James S. Coleman’s long and distinguished career in social science, notwithstanding his extensive and enduring impacts on other fields including education, mathematical sociology, organization studies and social policy. FST’s theoretical framework is rooted in the assumption that social phenomena are the outcome of interactions among goal-oriented, self-interested actors situated within social contexts that shape and modify their actions. Coleman’s broadly conceived rational choice approach sought to incorporate and explain those settings, rather than assuming them away as some other models based on similar individual-level postulates do (see also Chap. 4). This framework served as his point of departure for analyzing sociological phenomena; he also hoped that it would encourage better understanding of problems in economics by directing attention to constraints that social structural conditions impose on them (Coleman 1994a). Coleman had a special interest in microto-macro problems in which multiple interdependent individual actions combine in some manner to produce a collective outcome, viewing these as the most important and difficult problems for social science (Coleman 1986). P. V. Marsden (*) Department of Sociology, Harvard University, Cambridge, MA, USA e-mail: [email protected]

Coleman’s conceptualization of social capital is a key element of FST; broadly cast, it regards social capital as any aspect of social structure that can be employed as a resource toward the attainment of valued ends. A quarter century after his death, Coleman’s (1988a) article about social capital has drawn more attention from other scholars than any other of his many works; as of early 2020 it had been cited more than 50,000 times according to Google Scholar estimates. Together with other related conceptualizations of social capital, Coleman’s work has prompted very rapid growth in research about both predictors and consequences of aspects of social capital (Kwon and Adler 2014). This chapter reviews Coleman’s ideas about social capital in the context of FST, situates them within his empirical work on education, and provides selected illustrations of their use by researchers who study economic and organizational sociology. Different forms of social capital may advance the fortunes of individual entrepreneurs or workers, as well as of organizations/firms and collaborations among them.

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Social Capital Defined

The expansive definition of social capital offered by Coleman (1988a, 98) is that it “. . . is defined by its function. It is not a single entity but a variety of different entities, with two elements in

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common: they all consist of some aspect of social structures, and they facilitate certain actions of actors . . . within the structure.” The reference to social structures indicates that social capital resides in some sort of social relationship among actors. Coleman later (1994a, 175) explains that in using the term capital he refers to “a resource or factor input that facilitates production, but is not consumed or otherwise used up.” His remark that social capital facilitates certain actions acknowledges its limited domain of applicability, and he grants that—depending on circumstances within particular settings—social structural forms can be liabilities as well as assets: “[a] given form of social capital that is valuable in facilitating certain actions may be useless or even harmful for others” (Coleman 1988a, 98). He recognized that the social relations undergirding social capital are not unconditionally beneficial, referring at times (e.g., Coleman 1988b, 14) to an overabundance of social capital in past societies that created oppressive social controls and normative pressures that could stifle innovation. He also acknowledges social capital’s contingent effectiveness when he observes that solidary ties in closely-knit communities might “entangl [e] potential entrepreneurs in a net of obligations that keeps them hobbled to the past” in settings where a traditionalist ethic prevails (Coleman 1994a, 176). Elsewhere, Coleman (1988c, 392) describes social capital as “most generally, social organization, including both the informal organization of the sort described in the case of communities and formal organization.” Many of his examples refer to processes of informal organization,1 but his social capital concept clearly encompasses any element of social structure that can further the capacity to act. Indeed, its informal and formal elements can augment one another, as for example when informal adaptations within formal organizational designs at once provide individuals with certain advantages and improve organizational performance (e.g., Blau 1981). In Coleman (1994a, 170) he limits social capital to “any aspect of informal social organization that constitutes a productive resource.”

1

P. V. Marsden

Other sociologists employ understandings of social capital suggesting, at least implicitly, that its scope is limited to informal elements of social organization comprised of social network channels.2 Lin and Erickson (2008, 4), for example, refer to “resources embedded in social relations and social networks,” and Cook (2005, 8) advocates a similar definition. These authors contend that their more specific definitions facilitate theoretical development and empirical work, in particular by making falsification possible. In the same vein, Burt (2005, 4) defines social capital as “[t]he advantage created by a person’s location in a structure of relationships,” suggesting that research should focus on discerning the specific network mechanisms involved; he identifies brokerage (open networks) and closure (closed ones) as two of special importance. These definitions are largely aligned with one another, apart from Coleman’s inclusion of formal organizations—which certainly can be conceived as networks—within the scope of social capital (see also Burt 2005, 5). Many of the specific forms of social capital Coleman identifies (e.g., norms, trust) depend in part on the presence of specific patterns of network relationships. Coleman’s concept insists that social capital arises only when networks assume a form useful toward pursuing some end. Including organizations within the scope of social capital was crucial given the prominent place that Coleman accorded to deliberately-designed social structures in the project that led to FST. Indeed, he anticipates his later definition of social capital when referring to organizations (corporate actors) as “vehicles through which [individual persons] could express and use their new-found power” (Coleman 1974, 27).3 2

See Adler and Kwon (2002, 20) for numerous other definitions. Putnam (2000, 19 f.) calls attention to repeated inventions of social capital, stating that “Coleman put the term firmly and finally on the intellectual agenda.” Trigilia (2001, 428) makes a similar observation; see also Lin (2001, Chap. 2). 3 Putnam (2000) regards voluntary associations as important indicators of social capital that can contribute to civic engagement. Individual-group (two-mode) networks offer a suitable approach to representing affiliations with

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Coleman was certainly aware of the breadth and generality of his social capital concept. He thought its wide scope helped advance his objective of constructing theory that integrates rational action assumptions with social structural settings. He writes (Coleman 1990, 304 f.) that his conception of social capital groups together and blurs distinctions among several processes discussed elsewhere in FST (see below). He notes its multilevel applicability: “[social capital] aids in both accounting for different outcomes at the level of individual actors and making the micro-to-macro transitions without elaborating the socialstructural details.” He regarded it as a useful tool for studies that employ qualitative indicators and analyses, expressing uncertainty as to its utility in quantitative research. While he acknowledges that research might reasonably seek to understand details of how resources residing in social structure come to be useful, that was not his principal concern; he seems to have viewed the idea primarily as an interpretive device. Apart from social capital’s potential—often in combination with other resources including human and financial capital—to contribute to achieving valued ends, its relational locus, and the recognition that it may be effective only in certain domains, Coleman’s discussion also draws a distinction between structural and functional aspects of social capital. Structural ones refer to the presence of relationships (e.g., the formal designation of senior or peer mentors for newly hired employees), functional ones to the operational quality of those channels (e.g., the frequency and depth of mentoring conversations).

2

Some Forms of Social Capital

Coleman’s expository statements about social capital (1988a, 1990) ground the idea via discussing several specific forms that it assumes. All are rooted in underlying social relationships arranged such that goal-oriented actors may employ them productively. Coleman does not organizations as network-based social capital (e.g., Burchard and Cornwell 2018).

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claim that these forms are exhaustive. A reflection on his thinking about social capital (Sandefur and Laumann 1998) takes a different route to illustrating the concept’s heterogeneity by distinguishing different types of benefits it may offer: access to information, a capacity to influence or control others, and social solidarity.

2.1

Trust

In FST (1990, Chaps. 5, 8), Coleman conceives of trust as a decision under risk, in which one party (trustor) allows a second (trustee) to use some resources without immediately receiving compensation, in the expectation that the eventual gain from doing so will exceed the anticipated loss incurred. He likens the trustor’s extension of trust to issuing a credit slip or promissory note, observing that it creates a reciprocal obligation on the part of the trustee. Trust arises, then, in uncertain situations in which any returns to the trustor materialize at some point in time after s/he transfers the resources to the trustee. Uncertainties may exist over the magnitude of the gains and losses involved, but Coleman contends that the trustor’s principal challenge lies in estimating the probability that the trustee will perform in good faith after the trustor relinquishes her/his resources. The greater the absolute difference between the estimated gain and the anticipated loss, the more crucial it is that the trustor make a high-quality assessment of the probability that trust will be maintained. Alluding to loss aversion, Coleman contends that potential trustors tend to overestimate trustworthiness when the ratio of gains to losses is high and understate it when losses are large relative to gains. Numerous circumstances can affect the trustor’s assessment of a potential trustee, including information disseminated by the latter. Several features of social relationships and social settings can be key supports for trust. Ordinarily, though not invariably (Smith 2005), trust will be greater in stronger relationships than in weaker ones; a history of exchanges between two parties certainly enables the trustor to make a more

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nuanced assessment of a potential trustee’s reliability, and often a relationship will not have become strong unless the parties to it offer at least some signs indicative of their trustworthiness to one another. Reciprocal relationships in which parties have mutual obligations to one another likewise promote trust. Relationships entailing repeated exchange—as distinct from one-time transactions—can increase a trustee’s incentive to prove trustworthy (see also Chap. 9). Third party intermediaries who facilitate the placement of trust may be additional supports. Formal variants of these include brokers who create indirect trust relationships, arranging transactions while providing assurances to both trustor and trustee. Both formal and informal advisors who provide assessments of a party’s quality but do not participate directly in a transaction themselves are common, letters of reference being a widespread example. Social settings in which trustees are in competition with one another may serve to promote trust. Social density or closure is an element of several trust-enhancing mechanisms. Such settings can enable potential trustors to make vicarious assessments of trustworthiness by allowing them to observe or learn about a trustee’s performance with respect to other trustors. Tightlyinterconnected community structures can deter bad faith actions on the part of trustees via the rapid diffusion of information about trustee performance and reputations to potential trustors. Buskens and Raub (2002) argue that these social foundations for trust operate via two distinct mechanisms. Learning about a prospective partner’s past behavior can occur via experience derived from past exchanges or information disseminated through third-party connections. Control over a partner can be realized either through threats to terminate a dyadic trustortrustee relationship or the actual administration of sanctions within a broader network context. Coleman gave many examples of economic phenomena that assign important roles to trust and the social organization that undergirds it (see also Chaps. 16 and 17 for recent examples from economic sociologists). Extensive trust can facilitate economic exchanges, e.g., allowing

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diamond merchants to privately inspect expensive goods prior to purchasing them, without providing bonds or other guarantees (Coleman 1988a). This occurred within a closely-knit, ethno-religiously homogenous community in which dense relationships and frequent interaction among members substituted for more cumbersome formal insurance devices. Among other exemplars (Coleman 1984) are long-term contracting arrangements within vertical production networks as alternatives to vertical integration, and rotating credit associations within ethnic communities that serve as alternatives to formal financial institutions. In these associations, the ongoing ties among members ensure a borrower’s creditworthiness, standing in for the credit histories and related standards of reliability that institutional lenders recognize. Cook (2005, 2015) outlines a relational understanding of trust that resembles Coleman’s in many respects, contrasting it with generalized trust, “a ‘default’ belief in the beneficial nature of humans in general” (2005, 9). She also highlights some of the limits of relational trust, noting that excessive embedding of trust judgments within closed, homogenous networks may unduly limit the extent to which people consider entering into potentially advantageous exchanges. Cook questions whether trust can provide a sufficient basis for cooperation and mutually beneficial exchange on a large scale, calling attention to other devices and conditions for accomplishing that. Among these are formal contracting, organizational and legal incentive, control, or sanctioning systems, and institutional legitimacy. Cook suggests that reputation systems offer an alternative to relational trust in settings that lack closure such as e-commerce, as potential trustees are strongly motivated to guard their reputations. For his part, Coleman (1990) pointed to several ways in which trust could prove disadvantageous. As Cook suggests, strong trust among members of a subgroup can limit overall group performance to a locally optimal level rather than a global maximum. Collusive trust among oligopolists may further their ends but be socially harmful. Group performance may also be

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compromised if leaders prioritize trustworthiness over capability when engaging members, as in nepotistic arrangements. Unduly optimistic extension of trust followed by its sudden and contagious withdrawal can prompt panics of disinvestment, as in bank runs or the breaking of stock market bubbles (Coleman 1984). A study of consumer purchasing experiences and preferences (DiMaggio and Louch 1998) suggests a substantial role for trust relations. It found that buyers often prefer market transactions that involve previous acquaintances in some capacity, e.g. as sellers, dealers, or intermediary agents. This held especially for purchases of goods—such as homes or used cars—having uncertain condition and quality (see also Chap. 7 for more examples); buyers believe that they will obtain more candid disclosure of information from preexisting contacts.4 Related experimental research (Buskens and Weesie 2000) indicates that subjects are more apt to express trust in a used-car dealer when they are linked to the dealer via past purchases, shared affiliations, or third-party contacts. Among studies of conditions underlying trust in organizational settings is Burt and Knez’s (1995) examination of features of relationships and personal networks associated with more and less trust within a sample of managers. Subjects were more apt to describe other managers as trustworthy when the relationships linking them were stronger (closer, more frequent, longerstanding); to a lesser extent, tie strength also increased the likelihood of deeming a contact untrustworthy. Closure within a manager’s network—connections via multiple third parties— tended to amplify expressions of both trust and distrust. Gulati’s (2007) studies of the formation of interfirm alliances—e.g., licensing agreements or joint research and development partnerships—assign a substantial role to trust. Such interorganizational ties promise many benefits, but also expose partners to a risk that the other party may make opportunistic use of the 4

Interestingly, sellers prefer to avoid transacting with prior contacts under these same conditions.

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information-sharing and cooperation they entail. A firm’s network contacts—including its prior alliances with the partner in question, shared directors, and contacts with banks or other investors—can offer information about the reliability of potential new partners, and reciprocally provide the firm with information about its own conduct. He shows that when partners lack experience with each other, firms often employ relatively strong but cumbersome devices to assure mutual cooperativeness—equity-based alliances involving some form of shared ownership. Such “cautious contracting gives way to looser practices as partner firms build confidence in each other,” however (Gulati 1995, 105).

2.2

Information Flows

Coleman (1988a) wrote comparatively little about information-related forms of social capital, but indicates that acquiring new knowledge via social relations can be expeditious. He offers the example of two-step communication flows and opinion leadership (e.g., Weimann 1994) in which an actor relies on information relayed by intermediaries who follow (and distill developments in) a domain such as fashion or politics, rather than tracking it her-/himself. Obtaining advice about a specialized part of a vast medical literature from expert colleagues in lieu of maintaining currency with it oneself (Keating et al. 2007) is another instance. Although Coleman’s presentation does not dwell on the social structural basis of such information flows, many of them would appear to depend on network openness rather than closure: the recipient of the information forgoes forming a direct link to the information source, opting instead to rely on an indirect relation to it via her/his betterinformed intermediary. Much research in economic and organizational sociology examines flows of information mediated by social networks in some depth, however. Prominent within it is Burt’s (1992, 2005) sustained research program on structural holes. This highlights the information-access advantages enjoyed by actors lying in brokerage

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positions: interstitial locations that connect otherwise-unlinked clusters of others. Such actors hold a “vision advantage” (Burt 2005, 58) by virtue of their familiarity with diverse segments of a group, and are likely to become aware of and appreciate opportunities for synthesis and creativity sooner than those whose networks are more firmly embedded within a particular subgroup. In an especially compelling intrafirm study that invited managerial participants to set forth ideas for improving their subunit’s performance, Burt (2004) demonstrates that managers with open networks that span structural holes were more apt than those whose networks exhibited greater closure to propose ideas that their superiors rated as having high potential value to the firm. They were also more likely to propose any idea at all, and to report discussing it with others. As well, those in positions that facilitate such entrepreneurial actions tend to receive greater individual benefits, including higher performance ratings, greater compensation, and more rapid promotion. Other intrafirm information studies examine both features of particular dyadic relationships and broader network properties. Following Granovetter (1973), Hansen (1999) argues that weak relationships may facilitate a wide search for useful knowledge, while strong ones (involving frequent contact and close collaboration) may ease its transfer. His study of an electronics company’s projects that required actors to obtain information from other units found that knowledge complexity was an important moderator. When the information transferred was wellcodified, weaker inter-unit ties were associated with shorter project completion times; when the knowledge involved was tacit, stronger relationships were more advantageous. Related research on the ease of knowledge transfer among employees of a research and development company (Reagans and McEvily 2003) reported that stronger relationships more readily conveyed information, especially when it was less codified. Those surrounded by closed, interconnected sets of contacts also indicated that communication with

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others was easier5; at the same time, those in contact with wider arrays of other units also communicated more readily, perhaps because of their greater experience in addressing diverse audiences. Assembling and sharing information are not the only problems actors face in managing it. When information is proprietary or otherwise confidential, or when actors are collaborating in some clandestine or counter-institutional activity, maintaining secrecy by limiting its diffusion can be vital. Under these circumstances, cellular structures comprised of loosely-coupled clusters can be advantageous; such structures feature not only closure, but also very high fragmentation or modularity. Coleman refers to student groups involved in the pre-1987 South Korean democracy movement (see also Chang 2015 on both student and religious groups) as an example of such arrangements. Additional instances include price-fixing conspiracies within markets (e.g., Baker and Faulkner 1993), and criminal or terrorist networks (Gerdes 2015).

2.3

Effective Norms

Coleman (1987, 1990) conceptualized norms relationally, as understandings that some set of beneficiary actors holds the right to control certain actions of a set of target actors.6 Such understandings identify actions that “are regarded by a set of persons as proper or correct, or improper and incorrect” (Coleman 1990, 242). Proscriptive norms discourage or prohibit an action, while prescriptive ones encourage or mandate that it be taken. Finding explanations of behavior based on conformity to norms unsatisfying without an account of how norms arise, Coleman sought to develop an understanding of how and why a set of purposively-oriented The finding that closure can promote some kinds of knowledge transfer resonates with Centola’s (2018) distinction between simple and complex contagion processes. In simple ones, something spreads after a single contact between a source and a prospective recipient; in complex diffusion, transmission requires wide bridges that provide reinforcement via multiple channels. 6 The two sets can be identical, in which case a norm is said to be conjoint; otherwise it is disjoint. 5

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individual actors might collaborate to establish a norm. It assigns a large role to social structural conditions in making this micro-macro transition. Coleman contended that purposive actors can be prompted to create a norm when two conditions hold: (1) the action in question has either positive or negative spillover effects (externalities) on others, and (2) control over the action cannot be achieved via social exchanges between beneficiary and target actors.7 Additionally, a sanctioning system that serves to enforce a norm by rewarding conformity or penalizing violations must be present if the norm is to be effective in shaping behavior (i.e., if beneficiary actors are to be able to exercise the rights of control it confers). Developing such a system can be problematic because applying sanctions is effortful; for an individual beneficiary, the costs of doing so often exceed the benefits received when a target complies with the norm.8 When social structures allow beneficiaries to communicate with one another, however, this barrier may be overcome. Closed social structures linking them once again serve as a resource: these may, for example, facilitate the monitoring of compliance to a norm; likewise, they may support shared provision of low-cost sanctions such as shunning or publicizing a target’s reputation for noncompliance. Additionally, they may enable second-order exchanges that create incentives for an individual beneficiary to administer more costly sanctions. A widely known example of norms within organizational settings arises when members of a workgroup establish an understanding about the appropriate amount of output to be produced, and subsequently enforce it using a number of informal sanctions (e.g., Roy 1952). Coleman (1994a) cites this as an instance in which both conventional cost-benefit criteria and the social structure 7 Apart from bilateral exchanges, one form these might take is that of an action rights bank that allows potential targets to purchase a limited supply of rights to take counter-normative actions. Proposals for carbon credit exchanges to limit greenhouse gas pollution are one example; see Coleman (1987, 140). 8 If a norm has been internalized, targets self-administer sanctions. Socialization—or instilling an internal sanctioning system—is also costly; see Coleman (1987).

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need to be taken into account when designing incentive systems that seek to elicit optimal levels of worker productivity.

2.4

Organizations

Using the term corporate actor to underline his view that organizations are elements of society having both interests and action rights, Coleman (1974, 1982, 1990, part III) wrote extensively about organizations as instruments that allow ordinary persons to combine resources in pursuit of a shared purpose. Corporate actors are constructed out of simple authority relations in which one actor grants rights to control her/his actions within some domain to a second actor, in anticipation of benefiting in some manner. Elaborations of these that permit the second actor to delegate the exercise of those control rights to a third-party agent allow for the development of complex organizational structures. Distinguished by their specificity of purpose, such deliberately-constructed organizations, Coleman argued, have assumed an increasingly significant role in contemporary society, at the expense of primordial groups like families and communities as well as individual (natural) persons. In his view, individual life chances have come to depend largely on the affiliations someone has with corporate actors. After such an activity system is established, it can serve as a resource for the individuals who jointly created it by accomplishing its manifest purpose. Its efforts may also be diverted toward the achievement of the distinct objectives of the subordinate agents who operate it. In both of these senses corporate actors can provide social capital for individuals. Coleman’s analyses suggest that in practice, organizations often fail to serve the interests of persons as well as they should. He observed that corporate actors develop autonomous interests—distinct from those of their founders/sponsors and agents alike—and that these can lead them to take actions that harm natural persons. The relentlessness with which they focus narrowly on pursuing particular goals makes them prone to neglecting the

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P. V. Marsden

negative side effects of their activities, such as environmental pollution. He argues that over time, corporate actors have acquired an increasingly large share of social power at the expense of individuals, and that this has reduced individual welfare. In FST (1990, 531) Coleman writes that “[c]orporate actors merit existence only insofar as they further the ends of natural persons.” He made many proposals to restructure organizations such that they might better advance the interests of persons, including broadening control over their governance structures (e.g., codetermination as practiced in Germany or inclusion of consumer representatives on boards of directors) or strengthening the role and resources of outside corporate directors. He suggested external audits, amended tax laws, and maintaining competition among organizations as approaches that would manipulate environmental conditions in order to increase their responsiveness. These and other approaches to reasserting social control over corporate actors would serve to better align their actions with those of natural persons, increasing the extent to which they provide social capital that benefits individuals.9

forms of social capital may have an inegalitarian character. Notably, however, Coleman and Hoffer’s research findings indicate that social capital may instead compensate for human capital deficits in some educational settings. Others too discuss interactive effects of social capital and other resources.10 A notable example is a finding from Burt’s (1997) intrafirm study of managers, that benefits associated with wideranging networks—greater compensation and more rapid upward mobility—were largest among those who have few peers within their rank and business function. These tended to be more senior managers in boundary-spanning roles. Burt contends that this is a result of the fact that senior managers hold more unique positions, face lower competition, and possess less legitimacy, conditions that allow more room for variations in their social capital to distinguish them.

4

Developing Social Capital

Economic production functions often combine factors of production such as human and physical capital multiplicatively rather than additively. Coleman (1994b, 42) suggests that this also may apply to outcomes that result in part from social capital, observing for example (Coleman 1988c, 383) that a parent-child link will foster cognitive development only when parental human capital is also present. His educational research (Coleman and Hoffer 1987, 231) draws on expectation states and labeling theories in developing a theoretical case for anticipating that those with greater human capital will derive more advantages from social capital; this suggests that at least some

A basic postulate of FST is that social phenomena are the outcomes of purposive action on the part of individual actors, and this of course applies to the development of social structural forms. Since forming and maintaining social relationships is costly, this logic implies that such structures will arise when actors deem the net benefits of creating them to be in their interest. Those who found business organizations, for example, are in a position to realize the value that an entrepreneurial venture yields (Coleman 1988c). In Coleman’s view, however, the social structures that provide social capital often produce public goods that benefit actors other than those responsible for producing them. He cites parent-teacher associations in schools as one example (Coleman 1990, 313); subgroups of parents contribute the time, effort, and resources needed to create and maintain them, while their benefits extend to all families served by a school. Attempts to create these and similar voluntary associations often fail

9 See Swedberg (1996) for more about Coleman’s thinking about organizations and their redesign.

10 Kadushin (1983, 196) suggests that many if not most network effects are contingent rather than direct.

3

Combination of Social Capital and Other Resources

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to surmount the collective action problem highlighted by Olson (1965). For Coleman, this implies that the level of investment directed toward producing social capital is typically lower than what would be socially optimal. Social capital also may be found within already-existing social structures, however, if these can be repurposed. An instance of this, well-known in organization studies, is the reorientation of the March of Dimes—an association originally established to combat polio. After an effective anti-polio vaccine was developed, the organization might have disbanded; instead, the efforts of its activity system were redirected toward improving maternal and child health (Sills 1957). Key to this process of appropriation are multi-stranded or multiplex relationships that allow social resources developed in one setting to be used in others. In Coleman’s understanding, such re-use of existing social organization as social capital is widespread: “most forms of social capital are created . . . as a by-product of other activities” (Coleman 1990, 317). As a result, access to social capital may be uneven and somewhat haphazard, dependent on the other elements of social organization with which an actor happens to be affiliated. This contributes to the social capital inequalities that are, in Kadushin’s (2012) view, largely unexplored.11 Preexisting social organization may also play an important role in developing new relationships. Burt (1992, 13) points to referrals as one of the principal information benefits of bridging structural holes in networks. Gulati’s (2007) discussion of the formation of interorganizational relationships identifies social network resources as both sources of information about potential partners, and of more textured experiential and reputational data about their reliability. Actors who have more elaborate prior networks therefore are better positioned to assess the prospective benefits and drawbacks to extending them. Closed social structures—in which an actor’s direct contacts are also in direct contact with one another—can further the creation of certain forms 11 See, however, Lin (2000) on race and gender inequality in individual social capital.

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of social capital to which Coleman devotes much attention. He highlights the role of closure in sustaining both effective norms and systems of trust and obligation. As discussed above (see Sect. 2), closure supports both the monitoring of adherence to normative expectations and the sanctioning of behaviors that contravene norms or fail to satisfy obligations. In discussing the role of social capital in local development, Trigilia (2001) suggests that governments may be able to redress the undersupply of social capital identified by Coleman’s analysis. Avenues toward accomplishing this include providing collective goods (e.g., business services and other infrastructure) that can support firm learning and competitiveness, as well as encouraging cooperative rather than regressive (collusive, rent-seeking) use of existing social networks.

5

Social Capital and Education

Much of the empirical research Coleman conducted during his career was on educational attainment and equity, and their implications for social policy. He viewed educational systems as instances of constructed social organization that seeks to develop human capital, and he had a long-standing concern with how to improve the performance of educational organizations. The largest body of his empirical work invoking the social capital concept was situated within this context. It appears that Coleman first used the term social capital in Coleman and Hoffer (1987), in an effort to account for their findings that student outcomes varied among U.S. public, Catholic, and independent private schools. Catholic schools exhibited higher rates of achievement growth than public schools in certain subjects and retained students through graduation at much higher rates than did schools in the other sectors; such differences were greatest among socioeconomically disadvantaged students. Coleman also featured these differences in retention in his general discussion of social capital (Coleman 1988a). Well-known differences in educational outcomes

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related to family background factors can reflect both familial financial resources and parental human capital. Coleman and Hoffer point to both structural (e.g., presence of parents, number of siblings) and functional (e.g., time spent with children and parental educational aspirations) features as aspects of family social capital. They observe that human capital resources within a family may be inconsequential when such social capital is lacking. Coleman and Hoffer attributed some differences in educational outcomes across school sectors to the greater community-level social capital to be found around Catholic—and more generally religious—schools, asserting that “religious community is one of the few remaining strong bases of functional community in modern society which includes both adults and children” (Coleman and Hoffer 1987, 215). Noting that all schools provide custody for children and convey some cognitive and vocational skills, Coleman (1991) argues that religious schools have a capacity to mold values via moral and character education that is not found in other settings; parents and educators elsewhere cannot reach a consensus on the direction it should take. Among other things, this operates via social structures that promote intergenerational closure: dense and mutual relations among parents, teachers, and children. Such structures, in turn, support the development of parent-teacher agreement about disciplinary standards and achievement-promoting norms. Coleman and Hoffer also observed that such community-level social capital might compensate for deficits of human and/or social capital within families; they recognized that this would constitute an exception to ordinary situations in which human- and social capital-based advantages tend to be cumulative. They suggested that this might be attributable to an egalitarian ethic within religious communities. While many public schools serve residential communities that could offer a basis for similar solidarity, Coleman (1991) notes that neighborhood ties have weakened. Independent private schools can draw on neither religious nor residential commonalities and must make deliberate efforts if they are to create social capital among

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students and parents. The emphasis on student engagement in extracurricular activities found in such schools is interpreted as one step toward the end of creating cohesion among students (Coleman 1988b).

6

Conclusion

Social capital has certainly proven to be a fecund concept, employed widely in studying diverse social science subjects including civic engagement (Putnam 2000), development (Woolcock 1998), health (Kawachi et al. 2008), immigration (Portes 1995), inequality and stratification (Lin 1999), and organizational analysis (Leenders and Gabbay 1999; Adler and Kwon 2002), among others. James Coleman’s influential understanding of social capital has much in common with other sociological conceptualizations that define it as social network-related resources, but is distinguished by his emphasis on the idea that social networks must assume some useful form in order to constitute social capital, by his stress on the micro-macro transitions that underlie much social capital, and by his explicit grounding of social capital on micro-foundations that assume purposive action. Accompanying the upsurge in research invoking social capital across these fields are numerous critical examinations of the concept’s foundations; among well-known critiques are Portes (1998), Kadushin (2004, 2012), and Adler and Kwon (2002). In closing, we call attention to a few of the issues that these authors raise about social capital. Some critics question the aptness of the analogy drawn between economic forms of capital and elements of social structure. In particular, they ask whether actors selfconsciously invest in social capital, building relationships in anticipation that they will receive instrumental returns in the future; Kadushin opines that “most people probably derive immediate gratification from making friends” (2012, 166). Coleman’s emphasis on how the public goods character of much social capital disincentivizes deliberate investment in its production, and on already-existing social

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organization as a common source of social capital, suggests some sympathy on his part for such reservations. Many discussions of social capital have a somewhat celebratory tone, stressing the positively-valued outcomes found to be associated with it. Portes (1998), among others, calls for a more balanced assessment that considers social capital’s less desirable consequences, too. Among these are the exclusion of outsiders when closed networks hoard opportunities, the tensions between social solidarity and individual autonomy, the downward pressures on aspirations that discourage individual achievement, and the effective use of social capital to further socially undesirable ends. Commenting on individual variability in access to social capital, Kadushin writes that “social networks are essentially unfair” (2012, 168), often serving to maintain or even accentuate particularistic advantages. Certainly some social capital-related processes implicated in reward allocation within competitive arenas, e.g., nepotism and insider trading, are readily seen as such. Coleman’s observations about social capital’s limited scope, potential liabilities and inegalitarian character indicate that he recognized some of these limitations. Beyond these lie concerns about the novelty of the social capital idea. Portes writes that “the set of processes encompassed by the concept are not new and have been studied under other labels” (1998, 21). Numerous authors point to prior studies of social networks as vectors that can transmit valued resources, for example. Acknowledging this does not, however, gainsay the important advances made by recent theorizing and research conducted under the rubric of social capital. These works detail, clarify, and specify mechanisms through which social networks convey value (Lin 2001; Burt 2005). Notwithstanding these concerns, the implications that social organization holds for many social and economic processes remain underappreciated in many quarters. Coleman’s concept of social capital is much more than a resonant label that highlights “the positive consequences of sociability” (Portes 1998, 22).

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In particular, he provides accounts grounded in individual action for how and why those consequences arise. Presenting the idea in a manner that attracts such widespread attention and interest to it, however, is a considerable contribution in and of itself. By developing it in such a compelling way, elaborating its foundations, and detailing its forms, Coleman markedly advanced a central purpose of FST: to more fully incorporate a serious concern with social structure into transdisciplinary analyses of both social and economic phenomena.

References Adler, P. S., & Kwon, S.-W. (2002). Social capital: Prospects for a new concept. The Academy of Management Review, 27, 17–40. Baker, W. E., & Faulkner, R. R. (1993). The social organization of conspiracy: Illegal networks in the heavy electrical equipment industry. American Sociological Review, 58, 837–860. Blau, P. M. (1981). Consultation among colleagues and informal norms. In F. N. Kramer (Ed.), Perspectives on public bureaucracy (3rd ed., pp. 110–127). Boston: Little, Brown and Company. Burchard, J., & Cornwell, B. (2018). Structural holes and bridging in two-mode networks. Social Networks, 55, 11–20. Burt, R. S. (1992). Structural holes: The social structure of competition. Cambridge, MA: Harvard University Press. Burt, R. S. (1997). The contingent value of social capital. Administrative Science Quarterly, 42, 339–365. Burt, R. S. (2004). Structural holes and good ideas. American Journal of Sociology, 110, 349–399. Burt, R. S. (2005). Brokerage and closure: An introduction to social capital. Oxford: Oxford University Press. Burt, R. S., & Knez, M. (1995). Kinds of third-party effects on trust. Rationality and Society, 7, 255–292. Buskens, V., & Raub, W. (2002). Embedded trust: Control and learning. Advances in Group Processes, 19, 167–202. Buskens, V., & Weesie, J. (2000). An experiment on the effects of embeddedness in trust situations: Buying a used car. Rationality and Society, 12, 227–253. Centola, D. (2018). How behavior spreads: The science of complex contagions. Princeton, NJ: Princeton University Press. Chang, P. Y. (2015). Protest dialectics: State repression and South Korea’s democracy movement, 1970–9. Stanford, CA: Stanford University Press. Coleman, J. S. (1974). Power and the structure of society. New York: W.W. Norton.

44 Coleman, J. S. (1982). The asymmetric society. Syracuse, NY: Syracuse University Press. Coleman, J. S. (1984). Introducing social structure into economic analysis. The American Economic Review, 74, 84–88. Coleman, J. S. (1986). Social theory, social research, and a theory of action. American Journal of Sociology, 91, 1309–1335. Coleman, J. S. (1987). Norms as social capital. In G. Radnitzky & P. Bernholz (Eds.), Economic imperialism: The economic approach applied outside the field of economics (pp. 133–155). New York: Paragon House Publishers. Coleman, J. S. (1988a). Social capital in the creation of human capital. American Journal of Sociology, 94, S95–120. Coleman, J. S. (1988b). Social capital, human capital, and schools. Independent School, 48, 9–16. Coleman, J. S. (1988c). The creation and destruction of social capital: Implications for the law. Notre Dame Journal of Law, Ethics & Public Policy, 3, 375–404. Coleman, J. S. (1990). Foundations of social theory. Cambridge, MA: Harvard University Press. Coleman, J. S. (1991). Changes in the family and implications for the common school. University of Chicago Legal Forum, 153–170. Coleman, J. S. (1994a). A rational choice perspective on economic sociology. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (pp. 166–180). Princeton, NJ: Princeton University Press. Coleman, J. S. (1994b). Social capital, human capital, and investment in youth. In A. C. Petersen & J. T. Mortimer (Eds.), Youth unemployment and society (pp. 34–50). New York: Cambridge University Press. Coleman, J. S., & Hoffer, T. (1987). Public and private high schools: The impact of communities. New York: Basic Books. Cook, K. S. (2005). Networks, norms, and trust: The social psychology of social capital. Social Psychology Quarterly, 68, 4–14. Cook, K. S. (2015). Institutions, trust and social order. In E. J. Lawler, S. R. Thye, & J. Yoon (Eds.), Order on the edge of chaos: Social psychology and the problem of social order (pp. 225–244). New York: Cambridge University Press. DiMaggio, P., & Louch, H. (1998). Socially embedded consumer transactions: For what kinds of purchases do people most often use networks? American Sociological Review, 63, 619–637. Gerdes, L. M. (2015). Illuminating dark networks: The study of clandestine groups and organizations. New York: Cambridge University Press. Granovetter, M. S. (1973). The strength of weak ties. American Journal of Sociology, 78, 1360–1380. Gulati, R. (1995). Does familiarity breed trust? The implications of repeated ties for contractual choice in alliances. The Academy of Management Journal, 38, 85–112.

P. V. Marsden Gulati, R. (2007). Managing network resources: Alliances, affiliations and other relational assets. New York: Oxford University Press. Hansen, M. T. (1999). The search-transfer problem: The role of weak ties in sharing knowledge across organization subunits. Administrative Science Quarterly, 44, 82–111. Kadushin, C. (1983). Mental health and the interpersonal environment: A reexamination of some effects of social structure on mental health. American Sociological Review, 48, 188–198. Kadushin, C. (2004). Too much investment in social capital? Social Networks, 26, 75–90. Kadushin, C. (2012). Understanding social networks: Theories, concepts, and findings. New York: Oxford University Press. Kawachi, I., Subramanian, S. V., & Kim, D. (Eds.). (2008). Social capital and health. London: Springer. Keating, N. L., Ayanian, J. Z., Cleary, P. D., & Marsden, P. V. (2007). Factors affecting influential discussions among physicians: A social network analysis of a primary care practice. Journal of General Internal Medicine, 22, 794–798. Kwon, S.-W., & Adler, P. S. (2014). Social capital: Maturation of a field of research. The Academy of Management Review, 39, 412–422. Leenders, R. T. A. J., & Gabbay, S. M. (1999). Corporate social capital and liability. Boston, MA: Springer US. Lin, N. (1999). Social networks and status attainment. Annual Review of Sociology, 25, 467–487. Lin, N. (2000). Inequality in social capital. Contemporary Sociology, 29, 785–795. Lin, N. (2001). Social capital: A theory of social structure and action. New York: Cambridge University Press. Lin, N., & Erickson, B. H. (2008). Theory, measurement, and the research enterprise on social capital. In N. Lin & B. H. Erickson (Eds.), Social capital: An international research program (pp. 1–24). Oxford: Oxford University Press. Olson, M. (1965). The logic of collective action: Public goods and the theory of groups. Cambridge, MA: Harvard University Press. Portes, A. (Ed.). (1995). The economic sociology of immigration: Essays on networks, ethnicity, and entrepreneurship. New York: Russell Sage Foundation. Portes, A. (Ed.). (1998). Social capital: Its origins and applications in modern sociology. Annual Review of Sociology, 24, 1–24. Putnam, R. D. (2000). Bowling alone: The collapse and revival of American community. New York: Simon & Schuster. Reagans, R., & McEvily, B. (2003). Network structure and knowledge transfer: The effects of cohesion and range. Administrative Science Quarterly, 48, 240–267. Roy, D. (1952). Quota restriction and goldbricking in a machine shop. American Journal of Sociology, 57, 427–442. Sandefur, R. L., & Laumann, E. O. (1998). A paradigm for social capital. Rationality and Society, 10, 481–501.

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Sills, D. L. (1957). The volunteers, means and ends in a national organization: A report. Glencoe, IL: Free Press. Smith, S. S. (2005). “Don’t put my name on it”: Social capital activation and job-finding assistance among the black urban poor. American Journal of Sociology, 111, 1–57. Swedberg, R. (1996). Analyzing the economy: On the contribution of James S. Coleman. In J. Clark (Ed.), James S. Coleman (pp. 313–328). London: Falmer Press. Trigilia, C. (2001). Social capital and local development. European Journal of Social Theory, 4, 427–442. Weimann, G. (1994). The influentials: People who influence people. Albany: State University of New York Press.

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Woolcock, M. (1998). Social capital and economic development: Toward a theoretical synthesis and policy framework. Theory and Society, 27, 151–208.

Marsden, Peter V. is Edith and Benjamin Geisinger Professor of Sociology, Harvard University, Cambridge, MA United States of America. Research topics: Organizations and work, public opinion, social networks, survey research. Recent publications: Marsden, Peter V., Tom W. Smith, and Michael Hout. 2020. Tracking U.S. Social Change over a Half Century: The General Social Survey at Fifty. Annual Review of Sociology 46: 109–134. Kalleberg, Arne L., and Peter V. Marsden. 2019. Work Values in the United States: Age, Period and Generational Differences. Annals of the American Academy of Political and Social Science 682/1: 43–59.

4

Social Factors in the Economy: New Economic Sociology and the Mechanism Approach Andrea Maurer

1

The Double-Face of Success

Sociological studies on the economy have established an international research field during the last four decades. It was the underlying research program of new economic sociology that inspired the re-establishment of sociological perspectives on modern economy from the 1970s onward. We can call new economic sociology a research program because it is defined by certain principles, aims, and tools that come from the notion of sociology as an explanatory social science. The key idea is to explore social factors in the real social or economic world by taking individuals and social structure as key elements. What made new economic sociology a successful research program was the concept of social embeddedness that asks for causal models1 that offer theses for how and why social relations such as network patterns or institutions matter in markets. So, at the core of new economic sociology stands causal models that answer how and why particular social factors are used by individuals to handle all types of uncertainty. Empirical studies have been conducted to give 1 This is not the place to go into the far-reaching debate on causality. For an overview of recent lines of thoughts see Little (1991) and for the herein adopted logic of causal explanations see Weber (1949).

A. Maurer (*) University of Trier, Trier, Germany e-mail: [email protected]

proof of the importance of networks and institutions in modern market economy. Since the 1970s, new economic sociologists have been offering some important models and empirical insights on network patterns that shape economic action and improve economic outcome. When analyzing social factors in this way, scientific knowledge is offered to organize economy from a sociological point of view. In light of this, new economic sociology is part of the wider program of the modern social sciences and explanatory sociology.2 The essential idea is to provide empirically tested knowledge by investigating relations in social reality in the form of causal models, so that living conditions could be improved. Based on considerations about what makes social sciences special, sociology was established by Max Weber and Emile Durkheim. Both defined

2 The modern social science approach, as it was introduced by proponents of the European Enlightenment such as David Hume, Adam Smith, or John Locke assumes structural patterns in social reality which can be explained and reorganized by humans because of their ability to think logically, to sense empirically, and to act reasonably. Max Weber later defined sociology as a social science offering causal explanations based on the assumption that humans set meaning to the world and could act meaningfully. So, social scientists can construct explanations by exploring the meaning of the individuals in a real context. For evidence reasons starting with the simple version of means-end rationality works as guideline (Weber 1949). This kind of rational analyses was re-considered and has been developed from the 1980s on (Maurer 2016b; for a more detailed description see Sect. 3).

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_4

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sociology as an explanatory social science; Weber based his on the assumption of meaningful individual action and Durkheim based his on macro laws (Smelser 1994). New economic sociology started as a variant of action-based sociological explanations like Weber, using the assumption of intentional individual actions related to real-empirical contexts. Economic sociologists also aimed to explore which social factors improve economic outcome. Surprisingly, not much thought was given to this methodological parallel and foundation after the successful start. Instead, new economic sociology invented a research field, which, since that time, has been attracting a lot of new concepts, coming from a multitude of different backgrounds. So recently, some economic sociologists began to ask what this openness and the many newcomers could mean to the original research program, and how to investigate and develop the core program (Fligstein 2015; Maurer 2021, 2020). In light of this, the chapter highlights the foundational research program and evaluates ways of and collaborators for moving forward. Thus, those newcomers who share the essential goal of explaining social factors in modern economy and, therefore, are working on causal models using assumptions on the micro and macro levels, should certainly be considered as collaborators. Other approaches that enrich the research field by bringing in new perspectives, but which do not share the background, could also contribute, but may explore their own lines of development.3 If we know more about the background and the foundational program, we might find reasons for the observed vagueness and loss of identity and 3

As is well-known, sociology covers different methodological premises and is therefore multi-paradigmatic working with a huge variety of concepts and dualisms such as micro versus macro, grand theory versus middle range concepts, ideal versus materialistic, explanatory versus critical or understanding and so on. (Giddens and Turner 1987; Smelser 1988). Nowadays, we find proponents of nearly all the different sociological programs using a variety of concepts in the field of economic sociology. So, reconstructing and outlining the backgrounds, aims, and tools is an important task to organize the field and to decipher how the different approaches could be developed by working together or separately.

A. Maurer

set out a clear course for the future (Smelser 1994, 36). Also, newcomers from different backgrounds might be inspired by exploring where they came from and where they want to move on. In the next section, the principles and aims of new economic sociology, as it was established in the 1970s and 1980s are reconstructed. It is highlighted that causal models, which combine individual and social levels and especially explore mutual interrelationships between both levels, are an essential tool for further developments of this research program. This is based on the principle that causal models are abstractions from the real world that highlight how and why forms of social embeddedness reduce uncertainty and therefore could and should sometimes enriched to offer more realistic explanations for why social factors improve economic outcome. In the third section the principles, recent developments, and main forms of explanatory sociology are outlined in order to gain a better understanding of the wider program of action-based explanations. It is shown that newer developments within this framework, such as analytical mechanism approach, use more realistic models by linking action and structural levels and thereby slightly change the logic and form of action-theoretically based explanations. It is summarized, that proponents of action-based explanations can collaborate on reflecting methodological rules and forms of constructing their theories as well as improving, systemizing, and sharing models. The conclusion given in section four argues for taking new economic sociology as a special variant of actionbased explanations and therefore, allowing it to collaborate with other action-based approaches to tackle methodological issues and build a pool of models using a theoretical guideline.

2

The Research Program of New Economic Sociology

Economic sociology has made a lot of progress since the 1970s but needs to reconsider its principles, aims, and means in order to set out a course for the future. In the following section, it is

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Social Factors in the Economy: New Economic Sociology and the Mechanism Approach

shown what defines new economic sociology as a research program.

2.1

Background and Aims

In their well-known The Handbook of Economic Sociology, Neil Smelser and Richard Swedberg defined economic sociology as the application of sociological tools, models, and perspectives to economic issues. They not only defined new economic sociology, they also highlighted that new economic sociology needs to sharpen a sociological focus and to synthesize its theoretical findings in order to move forward (Smelser and Swedberg 1994a, 20). In the late 1970s and early 1980s, Mark Granovetter introduced the notion of social embeddedness in order to develop a sociological view of market economy. He also highlighted that the main shortcoming of classical views such as neoclassical economic theory, new economic institutionalism, Parsonianism, and Structural Functionalism was the neglect of social relations. Instead, Granovetter has been calling for explanations that explore how and why social relations and institutions matter in modern economy due to their ability to reduce uncertainty. In order to shed light on the importance of social relations in modern economy he introduced the notion of social embeddedness. This concept covers three main elements: (1) Due to methodological reasons contextrelated models that link both social and individual levels are preferred. (2) In order to improve realism, it is assumed that intentions as well as cognitive aspects are shaped and changed by social context. Whereas founders of new economic sociology, like Mark Granovetter,4 used rational choice theory as a “working hypotheses” at the very beginning (see for this Burt 1982; Granovetter 1985, 506). This principle was 4

Early proponents of new economic sociology as well as those of the micro-macro movement, were linked to Harvard University and became more skeptical about Parsonianism, Structural-Functionalism, variable sociology, and survey research due to the writings of Robert K. Merton and Harrison White (see for an overview Swedberg 1990; see also Chap. 3).

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gradually set aside in order to enhance realism by taking the social constitution of intentions into account. (3) New economic sociology has been integrated by the problem-driven perspective of uncertainty and searching for social factors that help individuals handle uncertainty when it comes to exchange or investment in market structures. In other words, the leading question has been how network patterns reduce uncertainty in a huge variety of constellations. Accordingly, also conventions, institutions, and valuation processes that establish or stabilize social expectations have been highlighted and attracted many newcomers. Those newcomers introduce different action models for different reasons, e.g., they focus on human judgement (Hannah Arendt, Lucien Karpik), on collective experiences (Karl Marx, Pierre Bourdieu), or on interpretative acts (Berger and Luckmann). While new economic sociologists have been offering important new insights into social mechanisms that arise from networks, they have not spent much effort on elaborating the underlying logic or forms of explanations. Granovetter himself explored and empirically studied two central models on how network patterns influence economic outcome: weak ties and strong ties. However, he did not explicitly ask about methodological foundations or principles, or exactly what the explored causal forces were. In his early writings on labor markets, he highlighted the strength of weak ties as a way of improving information flow between randomly connected people. The observed information effect of weak ties is explained as an effect of numbers and distance; so, the distribution of information becomes quicker and more widespread, the more different people are, the more people are connected. So, every person means new or more information, and every network with more people from different backgrounds offers more information more quickly. Granovetter also emphasized strong ties as a way to improve trust; families, ethnic or religious groups, and regions are then seen as an important aspect in economic life because they can stabilize trust when formal order does not work. The effect of trust-building can be explained either due to monitoring and

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sanctioning related to cost and benefits or related to shared values and collective identity. The notion of social embeddedness has been a key for developing a sociological view on the economy and establishing the research field. The main concern of new economic sociology is exploring how and why social factors shape and support markets and business firms. One of the most inspiring perspectives has been network analyses of markets, entrepreneurs, innovators, and managers (Burt 1980, 1992; Uzzi 1997; Podolny 2001; Mizruchi 2004). Although rational choice was used quite often as a working hypothesis at an early stage, later on, proponents of new economic sociology elaborated structural-action models. The idea of exploring social contexts from the view of individuals and their intentions was increasingly abandoned. Nevertheless, new economic sociologists inspired sociological market models (Granovetter and Swedberg 1992; Swedberg 1994)5 and developed sociological perspectives on modern economy.

2.2

Principles and Essential Tools: Causal Explanations

In the foundational writings of new economic sociologists (Smelser 1963; Coleman 1985; Granovetter 1990, 1992; Smelser and Swedberg 1994a, b) we find explorations of causal relationships described in simplified, abstract models like those of the network approach. Economic sociologists criticized fallacies of pure macro theory and grand theory. Instead, new economic sociology, aimed at opening up black boxes by offering causal explanations based in context related models and assuming cognition sometimes an important factor in sociological explanations (see Boudon 1996; Hedström 2005). In this sense, models can be found either in a general action law (action-theoretically based models) or in context-related action models. If we put new economic sociology in the light of the history of the social sciences, we can see that new 5 For general overviews of network analyses, theories, and methods see Lin (2001).

economic sociology offers a special way to deal with major controversial topics (see Weber 2019) linked to explanations in the social sciences and thus, established itself as a special variant of explanatory sociology working with action models but with more realistic ones. Because new economic sociology assumes socially embedded individuals its models can be widened by taking in mutual interrelationships, mainly between an individual’s intentions and social context. The dualism between abstraction and realism is answered by using context-related models that assume mutual interrelationships and feedback loops between network patterns and intentions, and sometimes also between cognitive aspects—such as emotions, empathy, normative beliefs, evaluation standards, or knowledge—and context. Thus, explanations are more realistic while analytical strength and theoretical guidelines are weakened (see Fig. 4.1). The reinvention of new economic sociology was deeply inspired by criticisms of standard economic and sociological theory for using action models such as Homo oeconomicus or Homo sociologicus, ignoring cognitive aspects and the social constitution of intentions on the one hand, or decision-making processes on the other. Since then, researchers from Europe and the US restarted working on action models, forms, and logics of action-based explanations. New economic sociology has been an important driver in reinventing action-based explanations. Especially in the 1970s and 1980s, most proponents of action-based explanations worked more or less explicitly, based on the assumption of rationalintentional actions. They asked how and why social networks or institutions shape actions by influencing benefits and costs (Coleman 1994; Hedström et al. 1998; Burt 2005). This can be called action-theoretically based explanations or rational situational analyzes.6 Those who emphasize context-related models (Swedberg 2005), or

6

For differences and commonalities between pragmatism and rational choice see Joas (1993) and Coleman (1986b), and for a more recent debate on these approaches in light of economic sociology see Thévenot (2001) and Maurer (2021).

4

Social Factors in the Economy: New Economic Sociology and the Mechanism Approach intentions of actors

social context

network patterns

actions of individuals cognitive aspects of actors

Fig. 4.1 Models of social embeddedness. Source: Own Diagram

structural theories of social action (Burt 1982; White 1992) aim to provide more realistic explanations than action-theoretically ones, especially rational choice based approaches. Later one, some of the founders of new economic sociology criticized rational choice theory for ignoring or abstracting from the social constitution of an individual’s motives. However, they accepted the aim to open up black boxes by detecting how individuals and social factors are interrelated. It seems, that recently economic sociologists have lost sight of the core idea of interpreting social constellations from an intentional point of view. Instead, more approaches have been attracted by the field, that do not, at first glance, directly contribute to the core research program or its principles.

2.3

Strengths and Shortcomings

New economic sociology has been established successfully as a research program that inspired a broad research field since the 1970s onwards and reinvented the challenge of building up sociological perspectives on economy. Within the core program of new economic sociology, the perspective since then has been to figure out how and why social factors reduce uncertainty, and thereby support economic action.7 The notion of social embeddedness was introduced and related to uncertainty in capitalistic market economies. The founders of new economic sociology have mainly been working on causal models that explore mechanisms and processes that emerge 7 Other studies focused on how network patterns improve entrepreneurship (Portes 1995), stabilize socio-economic regions (Saxenian 1994; Crouch et al. 2004), or overcome economic crises (Maurer 2016a).

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due to network patterns. Such causal models are based on more realistic assumptions at the individual level than those that rational choice theory considers. They especially take interrelationships between an individual’s intentions and network patterns into account. Some new economic sociologists, such as Mark Granovetter and Harrison White, figure out how network patterns shape action orientation, motives, and even cognitive abilities, or the identity of individuals. That has motivated a lot of empirical studies. Due to the openness of the field, newcomers have been able to join easily. While founders of new economic sociology focused on more realistic explanations, and therefore highlighted the social constitution of actors, some new lines of thought turned away from the initial principle of exploring social factors in the economy. So, we find the so-called contextrelated models that explore the functioning and effects of particular network patterns related to intentions and cognitive aspects of individuals. In this vein, causal action-based models are the central tool of new economic sociology and the essential criteria when discussing how to develop the research program. If we take new economic sociology as a research program working on causal models that explore why social factors influence modern economy, building a pool of such causal models is a way of moving forward. However, that is not supported by all newcomers (Maurer 2016a). The opening of the core research program has weakened the concept of social embeddedness as an integrating foundation. Economic sociologists could try to regain clear methodological guidelines and research programs by discussing ways to enhance and theorize old and new models.

3

The Idea of Explanatory Sociology and Action-Based Explanations

If we explore the methodological background and typical forms of action-based explanations, our understanding of what makes new economic

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sociology part of explanatory sociology and what makes it special will improve.

3.1

Background and Methodological Ideas of Action-Based Explanations in Sociology

After 1945, macro theories, especially Marxism and Structural-Functionalism, which aim to explain social phenomena by using general laws on the social level, were highly criticized because no macro laws could be empirically proven, and there were inherent shortcomings (Merton 1936; Boudon 1974).8 Social scientists started rethinking the construction and logic of explanations and how to explore causal relations in social reality. Robert K. Merton initiated the reinvention of explanatory sociology working on theories of middle range. Additionally, the notion of situational logic as it had already been outlined in the writings by Max Weber and Karl Popper was reconsidered as a key element for sociological explanations. Situational analysis, in Weber’s use, emphasizes abstract models that explore the meaning situations have for individuals and what actions are thereby to be expected. Such models were thought to be enriched either due to empirical information, that is what Weber (1949) had in mind, or to theoretical arguments stemming from the underlying action theory and adopting economic theorizing (Lindenberg 1992). Proponents of the explanatory approach often use the assumption of rational action as a starting point for its analytical strength and for linking intentions and situational aspects in a fruitful way. So, the rational choice approach has been reaching out to all of the social sciences and has spread throughout Germany, Europe, and the US, inspiring new economic sociology until now. In this sense, the commonly shared notion of social science explanations is to offer testable theses for why social phenomena are to be expected because

8

For the classical criticism on pure macro perspectives such as functional analyses and evolutionary theories see Max Weber (2019, chap. 1).

of the intentions of individuals who are facing a particular social reality.9 Sociologists reconsidered Max Weber’s idea that social situations can be described from the view of meaningful individuals, so that certain action patterns make sense and can be explained. For example, according to Weber, actors follow orders if they define rules and rulers as legitimate in a context. As we all know, Weber transformed the general thesis of legitimate orders leading to meaningful and expectable obedience into three abstract models that guide analyses of history, as well as the modern world to date. In other words, sociologists reconsidered the core principle, of modern social scientists, of working on causal models, which are abstractions from the real world and offer causal explanations by taking individuals, due to their ability to act reasonably and intentionally, as a point of reference. In this sense, social reality is interpreted from the angle of individuals. Explanations of this kind mean stating how individuals act in certain ways due to the social embeddedness or context in a meaningful way. This notion in theorizing has led to a reinvention of the general logic of action-based explanations since the 1980s.

3.2

Main Forms of Action-Based Explanations in Sociology

In response to the challenges of the postwar phase, not only the American but also European sociologists were guided towards action based explanations in the 1970s. Attempts of actiontheoretically-based models developed especially in the methodological framework of Critical Rationalism by Karl Popper (Lindenberg et al. 1986). The idea of multi-level explanations, detecting situational logics was successfully 9 Sociological classics Max Weber and Emile Durkheim established sociology as a social science that explicitly aimed to explain real social phenomena. Weber emphasized using action models or types to take meanings of individuals and empirical context into account. This has been essential for action-based explanations using situational analyses that explore the social reality from the viewpoint of intentional or rational actors.

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Social Factors in the Economy: New Economic Sociology and the Mechanism Approach

invented and inspired other forms of constructing explanations, such as mechanism approach or rational choice-based theories in sociology. The first attempts, in the US (Burt 1982; Coleman 1986a, b; Swedberg 2001) as well as in Europe (Collins 1975; Boudon 1979, 1987; Lindenberg 1986), constructed models based on rational choice theory in order to provide strong causal theses that could be empirically tested. Prominent proponents of explanatory sociology took Methodological Individualism and the principle of causal models seriously, and widely used rational choice theory as a micro-foundation at the end of the twentieth century (Coleman 1986a; Lindenberg 1992); visualized with the wellknown bathtub or boot (Coleman 1990, 8, 10). Inspired by Max Weber and Robert K. Merton to make explanations more realistic than rational choice-based models, researchers started to enrich action models and to focus on interrelationships between intentions—or cognitive aspects—of individuals and situations (see Fig. 4.1 in Sect. 2). This shift partially changed the logic of actionbased explanations and brought about new forms. At least two trajectories within action-based approaches come from this. First, there is the attempt to use empirically described intertwinements between all kinds of individual and social factors. Second, there is the attempt to use the logic of action-theoretically based explanations10 and to widen models step by step, focusing mainly on more realistic assumptions on social factors. Some newcomers in the field of economic sociology even combine both ways. For example, mechanism approach emphasizes different interplays between individual and social factors either empirically investigated (Weber 2019) or in logical combinations of individual and social factors (Hedström 2005).

10 If rational choice theory is used as a micro-foundation the guideline is interpreting different social situations in light of the intentions—and most of all context-related interests—of individuals. Cognitive abilities matter only if they are important for defining expected costs and benefits of actions.

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While the founders of new economic sociology began by constructing their explanations based on the assumption of intentional actions, recently we see more concern over constructing more realistic models that, in consequence, dismiss the idea of exploring social constellations from an intentional individual perspective. Today, one of the biggest challenges in sociology and economic sociology is reconsidering how to deal with realism when building causal models and how to systemize models so that our knowledge improves. We can see that from the 1970s onward, the reinvention of action-based explanations was elaborated in two main forms, which come with two logics. One way to construct explanations is building models by abstraction from concrete empirical contexts—content-related models or middle range theories—, which were reinvented by Robert K. Merton in the 1940s. Different scholars, like new economic sociologists, new institutionalists, and proponents of mechanismbased explanations, among others, have adopted this way from the 1980s onwards. Especially proponents of the analytical mechanism approach take rational choice-based explanations as a special case. The other way to build action-based explanations is using a general action theory and exploring all kinds of social contexts in light of the theory e.g., constellations of interests. James Coleman did this based on rational choice theory and the concept of social rights by differentiating situations where individuals have the same or complementary interests. Anthony Giddens used the assumption of individuals, minimizing fear and using the notion of structuration (see right side of Fig. 4.2). What links new economic sociology to explanatory sociology is the aim of causal explanations. However, economic sociologists seek more realistic theories that cover the social change of motives and action orientation. Mechanismbased explanations are to some extent, a reaction to internal criticisms of rational choice approaches (Hedström and Swedberg 1996; Hedström 2005) and work on all kinds of action models. The important question lying ahead is, what could new economic sociology gain from

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A. Maurer social constellation

action-based explanations

middle range theories

context-related models eg. Weber, Merton

mechanismmodels eg. Hedström, Boudon, Schelling

models of network patterns eg. Granovetter, Burt, White

grand theory

action theoretically based eg. Coleman, Boudon, Blau

Fig. 4.2 Forms of action-based explanations. Source: Own Diagram

debates on constructing explanations and working on action models?

3.3

Analytical Mechanism Approach

The mechanism approach,11 that has emerged recently, is also inspired by the aim of providing causal explanations and of overcoming the fallacy of macro approaches and the shortcomings of rational choice theory. For most of new economic sociologists, middle range theories are highlighted as a way to move forward. Mechanism models investigate interrelationships between individual and social levels in order to explore social processes and describe them in mechanism models, similarly to what new economic sociology does. The analytical mechanism approach is found in the DBO concept and explores all kinds of constellations of desires, beliefs, and opportunity structure as well as the social mechanisms and processes that are generated (see Fig. 4.3). Mechanism models enhance realism through focusing on logical interrelationships between the three factors and focus on the ways they are shaped and changed by one another. In contrast to action-theoretically 11 The term mechanism is often and widely used in sciences Mayntz (2004) and with a special focus on sociology Maurer (2016b). It gained a precise understanding within analytical sociology which uses mechanisms as a metaphor for abstract causal explanations (Hedström 2005; Hedström and Ylikoski 2010); therefore the term analytical mechanism approach is used when refering to this approach.

mechanism models cogs & wheels

explanandum

Fig. 4.3 Mechanism-based explanations. Source: Own Diagram

based explanations, mechanism models assume that there are mutual interactions between the social context and the individual’s intentions and beliefs (see Fig. 4.3). Rational choice theory can be seen as a simple model that explores how the actions of others change the opportunity structure through a change in costs and benefits (see Sect. 3.2) while neglecting possible changes in beliefs and intentions. Nevertheless, mechanism-based explanations cover rational choice-based explanations as special cases, but do not take them as an analytical starting point. Proponents of the analytical mechanism approach are quite often linked to the micro-macro debate and action models. Moreover, most current proponents of analytical mechanism approach started working on the methodological background of actionbased explanations and action-theoretically based approaches due to its analytical strength as a micro foundation. So, not surprisingly, Robert K. Merton, Thomas Schelling, John Elster, Raymond Boudon, and others have been studying forms of action-based explanations intensely since the 1970s (see for a recent overview Maurer 2016b; Hedström and Ylikoski 2010). While economic sociologists primarily focus on how and why social context shapes individual’s actions and vice versa, mechanism models focus on a variety of constellations of desires, beliefs, and opportunities. To explain means then to explore mechanisms which emerge due to social constellations such as belief formation, self-fulfilling prophecy, or rational imitation. Peter Hedström systemized social constellations by assuming that some interrelationships or mechanisms are more important in social life than others, because they trigger and drive social processes through special wheels, resulting in a chain of events. Like Oliver Williamson (1996), who theorized transaction costs, Peter Hedström

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Social Factors in the Economy: New Economic Sociology and the Mechanism Approach

rumor on insolvency

self-fulfilling mechanism Di Aj

bankruptcy

Ai Bi

Ah Bh

Bx

Fig. 4.4 Model of belief-mediation through actions of others. Source: Hedström (2005, 59)

explores mechanisms as logical constellations of desires, beliefs, and opportunities. To investigate mechanisms, he emphasizes agent-based simulations.12 Explanation means to point out why special mechanisms emerge due to a particular constellation of DBO and what social processes arise from them. So, different mechanisms of belief formation (see Fig. 4.4) can be explored by investigating how the actions of others shape and change beliefs and the action patterns that arise. All types of belief-formation mechanisms enhance action-based explanations by bringing in the beliefs of individuals as a causal force in social life, and by describing when and how beliefs influence actions. Proponents of mechanism-based explanations try to explore all kind of cogs and wheels to construct mechanism-based explanations. Thus, for new economic sociologists it might be worth asking what particular mechanisms help enhance the core program of NES. The analytical mechanism approach offers a variety of mechanisms that can be ordered for analytical reasons by the factors involved and the interrelationships which are detected. For example, mechanisms of beliefformation can be taken as a special type of mechanism, from which other mechanisms such as a change of desires by beliefs or a change in the opportunity structure by beliefs might result. The relevant wheel in a first initial step is belief formation. So, systemizing mechanism models by the in-built wheels or by exploring directions of social change could be the basis for collaboration by sharing a pool of mechanism models that are more realistic than rational choice models are.

12

3.4

Dh

Other researchers also use backward reconstruction of empirical-historical processes to detect relevant constellations (Boudon 1998; Weber 2009).

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How Could New Economic Sociology and Analytical Mechanism Approach Work Together?

New economic sociology and analytical mechanism approach stand for causal models that explain social phenomena by considering individuals and social structure as key elements to enhance realism. New economic sociologists take social relations, and especially network patterns, and institutions as relevant factors that shape the actions of individuals and are shaped by them. New economic sociologists highlight mutual interrelationships between social and individual levels, especially working on the social constitution of intentions. Consequently, new economic sociologists have silently abandoned the idea of interpreting social structure from the perspective of intentional actors. Therefore, the program is losing its integrational power and theorizing. This is why systemizing models needs to be reconsidered nowadays. Partnering with analytical mechanism approach as a collaborator then helps deal with these issues and shows us that the initial research program could be enhanced in two different ways by elaborating new logics and forms of action-based explanations. One way would be to start with a simple default model that is broadened by considering the rule of economic theorizing. The other way would be to integrate one or more mechanism models through empirical evidence or by intuition.

3.4.1

Using a Default Option in the Framework of DBO It is essential for economic sociologists to work on the recent vagueness mentioned and to reconsider the research program’s methodological foundations and principles such as those of action-based explanations. They can help select collaborators and discuss what direction to move in and for what reasons. It has been argued that collaboration with the analytical mechanism approach would make sense because both approaches share the notion of action-based

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explanations and the related methodological background of modern social sciences; especially working on abstract causal models. They also relate in some way to the underlying concept of analyzing social situations from the viewpoint of actors. While the classics worked on rational situational analyses using the guidelines to add empirical information prior to the social factors that are assumed to influence actions of individuals for different reasons, new economic sociology and mechanism approach stepped away from this idea of economic theorizing. Enhancing models in an economic way, then, means to add empirical information prior to the description of social context. The analytical mechanism approach covers this idea but changes it through simple models that work as opportunity-driven mechanisms on the one hand, and individual mechanisms of desire-belief-formation on the other hand. The models of belief formation can be broadened either by starting with other mechanisms or by exploring what processes one mechanism such as belief formation (Rydgren 2009) could set in motion. What new economic sociology can take away from mechanism approach is, therefore, to think about a default option and to decipher wheels that drive pathways of change and naming trigger points, paths, and crossroads that can be studied empirically. For example, if a sudden change in opportunities reduces the resources of particular actors, this improves the opportunities of others even more. Thus, certain steps can be studied and explored by backward reconstruction, like Norbert Elias (2000) has done, to explain the emergence of monopolies. If explanations explore wheels that lead from one constellation to another, it is important to state the main causal factors and to use empirical information about why those particular social factors become relevant. Analytical mechanism approach elaborates how and why social processes emerge due to mechanisms brought about by particular constellations of desires, beliefs, and/or opportunities This covers the idea that starting from a single mechanism, a chain of events is set in motion by one or more wheels (Maurer 2016b).

A. Maurer

New economic sociology could benefit from the idea of using and connecting models that progressively reveal and explain ongoing processes of network structuration. For example, illustrating a particular network, with its strong ties and shared professional standards, allows one to see actors asking for ideal goods, a strong reputation, or a change to a social action orientation, while reaching out for collectivistic goods such as the maintenance of the group. The wellknown effects of strong ties, especially in small groups that share common values such as the Amish people, Protestant sects, or merchant groups, are then explained as a result of an ongoing process of network patterns shaping intentions of individuals and vice versa. Widening models should help gain a better understanding of how and why network patterns sometime guide or direct actors to ideas, or to reach for collectivistic goals, instead of maximizing egotistic utility. It seems that in his early writings, Granovetter worked in this way and constructed more realistic explanations then classical sociological and economic theories had, by bringing back social relations. If new economic sociologists continue using the concept of social embeddedness, it will help to look at the analytical Mechanism Approach in order to get a deeper understanding of what it means to make explanations more realistic and to keep to economic theorizing. Strengthening a sociological view of modern economy means, above all, to theorize network models so that the influence of social relations is explored. Surprisingly, to date, only a little attention has been given to such methodological based considerations that claim to improve, systemize, and select models from other approaches within new economic sociology.

3.4.2

Built-in Mechanism Models Such as the Mechanism of Belief Formation It is a worthwhile endeavor to consider theorizing and expanding network models based on the idea of economic theorizing, in order to choose and build elements into mechanism models.

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Social Factors in the Economy: New Economic Sociology and the Mechanism Approach

Mechanism models could explore additional factors and interrelationships that are used in network models, especially cognitive aspects, and intentions. Such models connect quite well to network models because they elaborate and explain ways in which network patterns could shape an individual’s cognition or beliefs. Exploring how and why network patterns shape beliefs could be an essential tool for making explanations more realistic. In analytical mechanism approach, Peter Hedström detects several logical ways for how and why beliefs are influenced. Using models of belief formation in economic sociology could also be combined with other well-known models from sociology that explore different factors and ways, which lead to a change in beliefs. By using network models it could be assumed and empirically tested that such a change in beliefs is the result of direct observation in small networks, particular positions in networks such as opinion leaders or brokers, adaptation based on groups with shared values, or using tacit common knowledge when it comes to conventions or trigger points as described by Thomas Schelling (see for this Tilly 1998; Rydgren 2009). Contrary to network analyses, the analytical mechanism approach offers models based on the DBO concept, assuming all kinds of logical interrelationships, between an individual’s cognitions and opportunities, as explanatory factors. The analytical mechanism approach provides models that explore how beliefs are changed or constituted in social processes such as belief formation, by observing actions of others in bank runs. Those models of belief formation could also start by the simple assumption that actions of others change the opportunity structure, and thereby set complex processes in motion covering the change of belief systems. One simple case could be described by assuming that the change in the opportunity structure might cause new action patterns that are observed in a wrong light, so that self-fulfilling mechanisms might take place. Theorizing and expanding network approach with the help of mechanism models could also start by selecting a model of belief formation that assumes particular network

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patterns might trigger belief formation in uncertain situations due to powerful actors or rational imitation. Collaborating in this sense means that network models take models of belief formation that fit particular network patterns and figure out what assumptions, concerning the network patterns, would enhance realism and help social scientists learn more about the way networks cause and drive belief formation, and the other way round. The remaining challenge is to provide theoretical arguments for why forms of networks shape beliefs, in which ways, and to work on theoretical links between different explanatory steps so that chains of belief formation can be investigated and explored.

3.4.3

How to Move Forward Through Collaboration If we take new economic sociology as a variant of explanatory sociology that aims at providing more realistic explanations, we can suggest collaboration with the analytical mechanism approach. Both lines could work together by reconsidering methodological principles, by discussing the functions and forms of actionmodels, and by systemizing models so that both camps could use the same pool. Sharing and introducing mechanism models in new economic sociology seems to be a milestone for enhancing the initial program. We can conclude that collaborating with other proponents of actionbased explanations could help enhance the initial program by reconsidering methodological principles and by sharing, broadening, and improving models. One way to do so is to theorize the concept of social embeddedness by starting with simple models. Another way would be to choose mechanism models such as belief formation to build into network models. Both ways would enhance the core idea of sociologists constructing, improving, and sorting explanatory models that could be used in different fields. The model of belief formation might be worthy of consideration as an important tool. Models of belief formation offer theses about why network patterns, or other kinds of social embeddedness, might change beliefs, which bring about typical processes and events. Last, but not least,

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economic sociology can work with the analytical mechanism approach when it comes to empirical studies and methods. For example, economic sociologists and proponents of mechanism approach could work together on backward reconstructions of what had happened in concrete situations, or develop and use agent-based simulations and big data in order to explore trigger points and pathways (for a recent overview see Hedström and Bearman 2009).

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How to Enhance a Sociological Perspective on Modern Economy

The founders of sociology, Max Weber and Emile Durkheim, started out to define sociology as a social science that asks for causal explanations on the social world. Realism in this sense refers to the aim of exploring what is going on in social reality instead of constructing an idealized world. The challenge of constructing empirical-related explanations was outlined in the framework of explanatory sociology early on. The main methodological principle and form of action-based explanations, Methodological Individualism, was already outlined by Max Weber (2019) and developed by Karl Popper (1999) who introduced the notion of economic theorizing as a central principle. Economic theorizing in action-based explanations means, first of all, focusing on social factors and providing better knowledge about how they work in reality. Another principle used in explanatory sociology is rational situational analyses that interprets context from the perspective of meaningful and intentional individuals. That inspired action-theoretically based explanations in the 1970s and 1980s, using one general action theory as a micro foundation. From the 1970s and 1980s onward, criticisms of rational choice theory as a general micro foundation rose, and sociologists in favor of realistic explanations turned away from the logic of action theoretically based explanations. Instead, in sociology as well as in economic sociology, scholars started to explore social life from a variety of viewpoints,

some even gave up exploring causal relationships in social life. This process is a big challenge to new economic sociology because it weakens the theoretical guideline and the original research program and calls for the reconsideration of how to explore function and effects of social factors in the economy. This chapter suggests reviewing social science background and the methodological principles and aims that once helped establish new economic sociology as a research program. Seeing it as a part of the social science approach and especially of action-based explanations helps discover shortcomings and evaluate who might contribute to a reconsideration and further development of the core program. Only if we have a clear understanding of the underlying principles and aims of a research program such as new economic sociology, can we investigate weaknesses and seek tools to deal with them. For a long time, the most important tools in new economic sociology have been network models. Network models need to be theorized by other theories in order to provide causal explanations for how and why particular network patterns help individuals deal with uncertain situations. One way to theoretically found network models is using rational choice theory as a microfoundation. Another way would be taking more complex models of analytical mechanism approach (see also Chaps. 16 and 19), different kinds of institution and convention theories (see also Chaps. 5, 12 and 13). All those models provide explanations for why social factors support market exchange and offer testable theses about the mutual interrelationships between social factors and intentions and cognitive aspects of individuals. Mechanism models enhance network models because they add the concept of precisely outlining interrelationships between social context and an individual’s desires or beliefs. Most of all, mechanism approach highlights the idea that changes trigger other changes, so that social dynamics emerge that lead to special phenomena. Explanations consist of theoretical models that are linked in a way, so that ongoing interrelationships are explored by particular wheels and pathways.

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Social Factors in the Economy: New Economic Sociology and the Mechanism Approach

In light of this, improving action-based explanations has been the most important task recently. Approaches that provide methodological rules to work on and enhance causal models or offer relevant models are important collaborators. All approaches in the framework of action-based explanations can be considered as reliable partners, especially when they aim at constructing realistic models that explore the function and effects of social factors in modern market economy. We have seen that recently new logics and forms of causal models have been elaborated to be more realistic. In this sense, the analytical mechanism approach offers content and actionrelated models that explore how complex social constellations cause macro phenomena. From the observation that many newcomers from different approaches have stepped into the field of economic sociology, the challenge has arisen of rethinking the identity and future developments of the original research program. With this focus, other research programs could do the same check on their aims and tools and choose their way to develop. If we see new economic sociology as a particular line of sociological thinking, committed to causal explanations, we can investigate essential aims and main tools in the broader framework of action-based explanations. To enhance the initial research program means to outline how collaboration might help to theorize and systemize models that explore social factors in the economy. It was shown that particularly those newcomers who work on more realistic causal models are moving in a similar direction. Additionally, it was brought to light that reconstructing methodological principles, essential goals, and main tools helps investigate the core of a research program and its main tools and challenges. Thus, developing the initial research program means working on causal models that explain how social factors shape modern economy and society.

References Boudon, R. (1974). The logic of sociological explanation. Harmondsworth: Penguin.

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60 A. F. Robertson (Eds.), Beyond the marketplace. Rethinking economy and society (pp. 89–112). New York: Aldine de Gruyter. Granovetter, M. (1992). Problems of explanation in economic sociology. In N. Nohria & R. G. Eccles (Eds.), Networks and organizations. Structure, form, and action (pp. 25–56). Boston: Harvard Business School Press. Granovetter, M., & Swedberg, R. (Eds.). (1992). The sociology of economic life. Boulder: Westview Press. Hedström, P. (2005). Dissecting the social. On the principles of analytical sociology. Cambridge: Cambridge University Press. Hedström, P., & Bearman, P. (Eds.). (2009). The Oxford handbook of analytical sociology. Oxford: Oxford University Press. Hedström, P., & Swedberg, R. (1996). Social mechanisms. Acta Sociologica, 39, 281–308. Hedström, P., & Ylikoski, P. (2010). Causal mechanisms in the social sciences. Annual Review of Sociology, 36, 49–67. Hedström, P., Swedberg, R., & Udéhn, L. (1998). Popper’s situational analysis in contemporary sociology. Philosophy of the Social Sciences, 28, 339–364. Joas, H. (1993). Pragmatism and social theory. London: University of Chicago Press. Lin, N. (2001). Social capital. A theory of social structure and action. In M. Granovetter (Ed.), Structural analysis in the social sciences. Cambridge: Cambridge University Press. Lindenberg, S. (1986). How sociological theory lost its central issue and what can be done about it. In S. Lindenberg, J. S. Coleman, & S. Nowak (Eds.), Approaches to social theory (pp. 19–24). New York: Praeger Publishers. Lindenberg, S. (1992). The method of decreasing abstraction. In J. S. Coleman & T. J. Fararo (Eds.), Rational choice theory. Advocacy and critique (pp. 3–20). Newbury Park: Sage. Lindenberg, S., Coleman, J. S., & Nowak, S. (Eds.). (1986). Approaches to social theory. New York: Russell Sage Foundation. Little, D. (1991). Varieties of social explanation. An introduction to the philosophy of social science. Boulder: Westview Press. Maurer, A. (Ed.). (2016a). New perspectives on resilience in socio-economic spheres. Wiesbaden and New York: VS Springer. Maurer, A. (2016b). Social mechanisms as special cases of explanatory sociology: Notes toward systemizing and expanding mechanism-based explanation within sociology. Analyse & Kritik. Journal of Social Theory, 38 (1), 31–52. Maurer, A. (2021). German economic sociology. Soziologische Revue, special issue Soziologie German speaking sociology, 2021, 39-52. Mayntz, R. (2004). Mechanisms in the analysis of micromacro-phenomena. Philosophy of the Social Sciences, 34, 237–259.

A. Maurer Merton, R. K. (1936). The unanticipated consequences of purposive social action. American Sociological Review, 1, 894–904. Mizruchi, M. S. (2004). Network theory. In G. Ritzer (Ed.), Encyclopedia of social theory (pp. 534–540). London: Sage. Podolny, J. M. (2001). Networks as the pipes and prisms of the market. American Journal of Sociology, 107, 33–60. Popper, K. (1999). All life is problem solving. Oxford: Routledge. Portes, A. (1995). The economic sociology of immigration: Essays on networks, ethnicity, and entrepreneurship. New York: Russell Sage. Rydgren, J. (2009). Beliefs. In P. Hedström & P. Bearman (Eds.), The Oxford handbook of analytical sociology (pp. 72–93). Oxford: Oxford University Press. Saxenian, A. L. (1994). Regional advantage: Culture and competition in Silicon Valley and route 128. Cambridge, MA: Harvard University Press. Smelser, N. J. (1963). Sociology of economic life. Englewood Cliffs, NJ: Prentice Hall. Smelser, N. J. (Ed.). (1988). Handbook of sociology. Newbury Park: Sage. Smelser, N. J. (1994). Sociology. Cambridge, MA: UNESCO and Blackwell. Smelser, N. J., & Swedberg, R. (Eds.). (1994a). The handbook of economic sociology. Princeton: Princeton University Press. Smelser, N. J., & Swedberg, R. (1994b). The sociological perspective on the economy. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (pp. 3–26). Princeton: Princeton University Press. Swedberg, R. (Ed.). (1990). Economics and sociology. Redefining their boundaries. Conversations with economists and sociologists. Princeton: Princeton University Press. Swedberg, R. (1994). Markets as social structures. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (pp. 255–282). Princeton: Princeton University Press. Swedberg, R. (Ed.). (2001). Sociology and game theory. Contemporary and Historical Perspectives. Theory and Society, 30, 301–335. Swedberg, R. (Ed.). (2005). Interest, concepts in the social sciences. Maidenhead: Open University Press. Thévenot, L. (2001). Pragmatic regimes governing the engagement with the world. In T. Schatzki, K. KnorrCetina, & E. von Savigny (Eds.), The practice turn in contemporary theory (pp. 56–73). London: Routledge. Tilly, C. (1998). Durable inequality. Berkeley: Westview Press. Uzzi, B. (1997). Social structure and competition in interfirm networks. The paradox of embeddedness. Administrative Science Quarterly, 42, 35–67. Weber, M. (1949). Essays in the methodology of the social sciences (Transl. and eds. E. A. Shils & H. A. Finch). New York: Free Press.

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Weber, M. (2009). The protestant ethic and the 'spirit' of capitalism. The Talcott Parsons translation. A Norton Critical Edition (Ed. R. Swedberg). New York: Norton Original Edition. Weber, M. (2019). Economy and society. A new translation (Ed. and Transl. K. Tribe). Harvard: Harvard University Press. White, H. C. (1992). Identity and control. A structural theory of social action. Princeton: Princeton University Press. Williamson, O. E. (1996). The mechanisms of governance. New York: Oxford University Press.

Maurer, Andrea is professor of sociology with a focus on economic sociology, University of Trier, Germany. She currently serves as chair of the Economic Sociology Research Network (ESA) and was chair of the German Section of Economic Sociology from 2011–15.

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Research topics: Economic sociology, sociological theory, new institutionalism, mechanism approach, social construction of markets, digitalization. Recent publications: Maurer, Andrea. 2021. German Economic Sociology. Soziologische Revue, Special Issue 2021: 39-52. Berlin: DeGruyter. Maurer, Andrea. 2016. Social Mechanisms as Special Cases of Explanatory Sociology: Notes toward Systemizing and Expanding Mechanismbased Explanations. Analyse & Kritik, Special Issue 1/2016: 35–52. Maurer, Andrea. 2016. In Search of the Golden Factor: Conceptualizing Resilience in the Framework of New Economic Sociology by Focusing on ‘Loyalty’. In New Perspectives on Resilience in SocioEconomic Spheres, ed. Andrea Maurer, 83–109. Wiesbaden: Springer VS. Maurer, Andrea. 2012. Economic Sociology: Bringing Back Social Factors. In Sociological Landscape: Theories, Realities and Trends, ed. Dennis Erasga, 77–100. IntechOpen.

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A French Institutionalism in Economic Sociology? Pierre François

Among the many proposed approaches that arose at the beginning of twentieth century to define what sociology was and what its object was, the idea that sociology was the science of institution was explicitly set by the Durkheimians (Fauconnet and Mauss 1971; Durkheim 1990). The concept of institution may be used in the definition of sociology, in part because it can be used to designate a broad set of realities: categories of thought, routine practices, but also organizational forms may be described as institutions. Relying on this Durkheimian tradition, François (2011) gives a more precise definition of what an institution is. He says that it is a frame that makes the world a place which can be interpreted and where social actors can act. First, an institution designs a set of rules, practices, or categories of thought that are stabilized. These rules and practices are not dependent on those who use them; they were there before the users and will continue after the users are gone. Second, an institution is shared within a group. Third, an institution has a normative dimension; it says what is right and what is wrong, what should be done and what should be avoided. Fourth, an institution is a priori. It is subtracted from the verdict of experience. For example, if after a rain dance, the rain does not fall, it is not because the institution (magic) does not work, it is P. François (*) Sciences Po, Centre de sociologie des organisations, Paris, France e-mail: [email protected]

because the rain dance was not properly executed (Hubert and Mauss 1985). Defined in this broad sense, institutions have played a crucial role in the development of contemporary economic sociology. This chapter will be devoted to the discussion of what can be retrospectively designed the French version of institutionalism in economic sociology. A few remarks should be made to explain this somewhat problematic terminology. Almost no French economic sociologist has indeed defined himself as an institutionalist. Rather than using the terminology of institutions, French sociologists would use a lexicon filled with devices, equipment, tools, or conventions. In spite of this terminological gap, we think that at least part of the theoretical developments devoted to these terms can be related to the concept of institution, as we have defined it (for a more systematic discussion, see François 2011). In spite of their differences, these approaches share a set of common assumptions. They focus on micro-sociological situations, and more precisely on market situations, where decisions need to be made in situations of uncertainty. Institutions such as devices, equipment, and conventions develop to make these decisions possible. The most influential theoretical developments of this French institutionalism took place during the 1990s. This is not to say that there have been no discussions or developments since then, but the basic propositions were set in 2000. These proposed theories come from very different intellectual

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backgrounds such as the sociology of professions, Keynesian economics, Bourdieusian sociology, the history of statistics, and the science studies. However, most of them converge on a set of intuitions which are in some ways close to each other, and therefore share the same blind spots. All these developments are by and large, independent from those inspired by US new institutionalism (Powell and DiMaggio 1991; Greenwood et al. 2008), be it in the US or in Europe. While French institutionalists focused on market situations, US new institutionalists addressed classical questions dealing with organizations. Meyer and Rowan (1977), and DiMaggio and Powell (1983) asked how firms or public administration converged to a set of shared organizational principles. A classical answer of organization theory would be that these organizational principles have proven to be more efficient. New institutionalists proposed an alternative answer, as simple and as powerful as the efficiency hypothesis: organizations converged towards a model, not because this model was efficient, but because it was legitimate within a certain space of inter-influence, which they called a field. The influence of new institutionalism has been surprisingly low in France over the last three decades. This influence is found in very specific places. New institutionalist authors, especially Neil Fligstein (1990, 2001), may be summoned by Bourdieu and Bourdieusian sociologists to back their positions on certain topics. These topics include firms and their place in the financialization process. Very few empirical studies have been conducted in France on this process (for recent contributions in a Bourdieusian perspective, see Benquet et al. 2019). However, the somewhat rhetorical compatibility of new institutionalism and Bourdieusian perspectives does not rely on the notion of institution, but rather on the concept of field. The discussion of institutional concepts is more central in another very different branch of French sociology, the one identified with the sociology of organizations in France. In this community of organization specialists, discussions with new institutionalism are more related to the most cutting-edge developments of

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organization theory, especially when they discuss the links between institution on the one side, and action, agency, and entrepreneurship on the other (Bergeron and Castel 2016). A third locus of connection between French economic sociology and new institutionalism has developed since 2000, on more empirical grounds. A set of studies was conducted to document the changes in firm strategies and organizations in France, over the last three decades (Viallet-Thévenin 2015; François and Lemercier 2016; Foureault 2018). The purpose of these studies is explicitly to test the assumptions made by new institutionalists in the US context (Fligstein 1990; Davis et al. 1994), and sometimes documented for European countries as well (Fiss and Zajac 2004). A final contact point, certainly the most connected to new institutionalist community, lies outside sociology. Business scholars, who are barely connected to the sociological community in France, have published important contributions to new institutionalist literature (see, for example, Rao et al. 2003). Almost none of those discussions are directly related to the debates and theories I identify as a French institutionalism. US new institutionalism and French institutionalism have almost nothing in common: their seminal empirical settings (market vs. organization), the scope of their analysis (micro vs. macro) and their main methods (ethnographic methods vs. statistical analysis) are completely different. We will focus here on the presentation and discussion of French institutionalism, setting aside the connections between US inspired new institutionalists and French economic sociology. During the 1990s and the 2000s, a variety of theories arose in a burgeoning French economic sociology. Some of them presented arguments which were similar in many ways (see Gadrey 1994; Hatchuel 1995; Cochoy 2002). In order to keep the review short, we present the three most ambitious, systematic, and influential sets of theories which were created at the time: economics of quality or economics of singularities, proposed by Lucien Karpik; economics of convention; and the performativity approach, as developed by Michel Callon and his colleagues.

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A French Institutionalism in Economic Sociology?

We shall end this review presenting the main criticisms addressed to these theories.

1

Economics of Quality and Economics of Singularities

Between the late 1980s and the mid-2000s, Lucien Karpik proposed a set of important contributions to the debate regarding the relations between quality and value, based on a couple of intuitions. First, when social actors are to make a choice on a market, they face situations of high uncertainty. Second, devices develop to help them make choices (see Karpik 1989, 1996, 1999, 2002, 2010). Karpik started thinking about developing what would become an ambitious, systematic account of what he initially called an economics of quality, but which later became an economics of singularities, while working on the lawyer market. When someone needs to find a lawyer, he faces a situation which is both dramatic (usually one needs a lawyer when the stakes are high), and uncertain. Then, the question is: How can one be sure that the lawyer he chooses will be trustworthy, committed, and competent? In a market situation as it is described by basic, neo-classical economics, price should help you make a choice. However, within many markets, including that of lawyers, Karpik argues that price is not a reliable indicator on which one can base his choice. In these markets, the price of what is received is less important than the quality of the good or service one is seeking. So, in these markets, quality is not only crucial, it is also highly uncertain. In the lawyer market, there is no system of public information that might help the client make his choice. Even worse, the quality of the service is impossible to assess before the service is provided. Its quality greatly depends on the commitment of the producer on this specific transaction, and on the quality of his interactions with the client (de Bandt and Gadrey 1994). In this situation, clients do not rely on price to make their choice, but rather on the recommendations given by people they know. The market relation is no longer a relation between a customer and a producer, it is a

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trilateral relation between a customer, a producer and, in this case, an adviser, sometimes called a prescriber (see Hatchuel 1995). The adviser makes it possible to create equivalence in the market between situations, which at first seemed difficult to compare. An important aspect that makes the information reliable is that it is not, in this case, influenced by the producer, because one relies on the advice of a third party. The producer plays no role in defining the information the customer will use to make his choice. Karpik calls this kind of market a market-network (marché-réseau). He later developed a systematic account of these situations where assessing the quality of what the customer might receive is both crucial and difficult. In his article published in 1996, Sociologie du travail and, later on, in his (translated. 2010) systematic Economie des singularités of 2007, Karpik develops a typology of the situations where these choices might be made, and of the solutions, which he calls devices, that might arise to solve these problems. This typology crosses two dimensions. First, where does the uncertainty come from? Markets can produce situations, where the customer does not know what he is buying, for two different reasons. These two situations reproduce, in some way, a distinction close to the one proposed by the economics of information (Stiglitz 1987), between information asymmetry and moral hazard. In the first situation, the quality of what is bought is set once and for all, or rather, the product one buys will not change, but its quality is difficult to evaluate. If one buys a bottle of wine, or a CD of a piano player from the 1960s, the quality of the good is already set, but the customer ignores it before he tastes the wine or listens to the CD. He might need help to make his choice. In the second situation, the quality of what is bought is uncertain, because it depends on the reliability of the producer, and on his potential untrustworthiness. If the customer does not want to buy a CD but goes to a concert, then the quality is not set. It depends on the commitment of the pianist. Will he be inspired tonight? Will he even show up? If the customer goes back to a restaurant, the quality of his dinner depends on the commitment of the kitchen’s team and on the

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quality of the food they obtained that morning at the market. In these two situations, devices will develop to help the customer make his choice. However, these devices obey different kinds of logic. Karpik calls the devices that are used in the first situation judgement devices, and those people rely on in the second situation he refers to as trust devices. Karpik adds another criterion to this first dimension that helps him build his typology. Are the devices, whether judgement or trust devices, personal devices or impersonal devices? In the first case (personal devices), the customer relies on advice and prescriptions, (i.e., recommendations, given by people he personally knows and therefore trusts). When he relies on abstract devices to make his choice such as a label, a brand, a charter, or a contract, these devices are said to be impersonal devices. Strictly speaking, only impersonal devices can be assimilated to institutions; but for the sake of the argument, we will develop the four cases Karpik identifies. Judgements devices are those which help the customer make a choice when the quality is set but unknown. In this case, the customer might turn to his network, by asking someone he trusts for advice. If he has a friend who is a wine connoisseur, he might ask which producer of Puligny-Montrachet he should chose. If the customer cannot rely on such a personal judgement device, then he could turn to impersonal judgement devices. In this category, Karpik distinguishes three main kinds. First, there are rankings. Their purpose is to make hierarchies publicly visible, and therefore available to everyone. Second, there is appellation. In order to benefit from an appellation, a producer needs to respect a set of rules and criteria that help reduce the uncertainty about quality. For example, what kind of grapes are used to produce the wine, and where were these grapes grown? The last kind of impersonal judgement device that Karpik identifies is the guide, whose soft authority offers preferences and explanations. The many guides available on the market offer a selection and a ranking, and they differ from one another by the set of criteria they use to produce their selection,

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or to rank the producer selected (Teil 2001). So, these principles might change over time, even though the reputation of the guide is well established, as Karpik demonstrated in the case of the Guide Rouge Michelin (Karpik 2000). When the situation is uncertain because the producer might act as an opportunist, the customer can rely on trust devices. The personal trust device Karpik identifies is the same as the personal judgement device, that being the customer’s network. This is the same situation that Karpik analyzes in the market of lawyers. However, the customer might also rely on impersonal trust devices, which aim at neutralizing the consequences of opportunism, and therefore guarantee the execution of incomplete contracts. These normative devices, as Karpik calls them, consist of both material and symbolic settings, which carry principles internalized by the partners of the exchange and associated to some explicit, and by systematic social sanctions. They both differ from judgement devices, upon which one can decide to rely on or not, and also from formal, explicit, compulsory rules. Karpik does not try to give a systematic list of these devices (he refers to Williamson 1993), but he distinguishes several of them, based on their origin. The unilateral norm is defined by one of the partners of the exchange, a professional oath, for example. The coproduced norm relies on the co-construction of the norm by the partners of the exchange. An example of this is seen in a contract where they deliberately and explicitly detail their mutual commitment, to restrict and control it. These devices arose, first and foremost, in markets for services such as the market for lawyers, or in Business to Business markets, where market relations are often stable and repeated (Sako 1992; Mariotti 2005).

2

Economics of Convention

In the very same year that Karpik published his first paper formalizing his économie de la qualité, the French Revue économique published a special issue entitled, Economics of Conventions. The authors came from very different fields of expertise and schools of thought. Some were

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A French Institutionalism in Economic Sociology?

statisticians working in the French institute of public statistics, the INSEE (F. EymardDuvernay, L. Thévenot), others (also coming from the INSEE) were economists formerly identified as heterodox regulationists (A. Orléan), while others were sociologists who had worked for decades with Bourdieu (L. Boltanski). They proposed a very broad, ambitious, and heterogeneous framework, based on separate but complementary hypotheses coming from very different intellectual traditions. Among them, one can see an economic tradition, related to Keynes, and a sociological one, relying, among others, on Bourdieu. The first set of hypotheses came from a radical reading of J.M. Keynes’ work. In an early contribution, Olivier Favereau proposed a reading of Keynes, which was very different from the presentation of his work in classical macro-economic handbooks (Favereau 1985, 1989). According to Favereau, the real project of Keynes went back to his dissertation later published as A Treatise on Probability (Keynes 1973b). In this work, and in later works as well (see, for example, the chap. XII of the General Theory Keynes 1973a), Keynes distinguishes between two kinds of situations where decisions are to be made. In the first situation, it is possible to establish a set of possible futures, and to match this list with an assessment of their probability to occur. In this situation, it is possible to calculate this, and the assumption of rationality made by neo-classical economists is valid. In the second situation, it is impossible to propose a list of future scenarios and then match it with probabilities of occurrence: as Keynes puts it, “we simply do not know” (Keynes 1973a, 113 f.) and therefore it is impossible to calculate. In this kind of situation, how can a decision be made? If we are unable to follow the results of our calculation, Keynes argues, it is still possible to decide if one relies on convention, conceived as a stabilized and shared way of doing things, which Keynes sometimes refers to in the General Theory, as our animal spirits. Using a very different path than Karpik, Favereau comes to the same conclusion. Neo-classical economics is incomplete. If we are to develop a general account of economic

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behavior, we need to consider that, people rely on conventions to make their choices when uncertainty is very high (Karpik called them devices). These conventions should be identified and described, and the way economy really works should be reappraised. The second set of hypotheses comes from a very different, more sociological background. This sociological tradition devotes a great deal of attention to the operation of classification, performed by scholars or by social actors on a daily basis. One can relate this program of research to the anthropological work developed by Bourdieu on the operations of classification which were produced by Kabyle in the 1960s in Algeria. This first set of results was used by Boltanski to propose his analysis of the history of the category of Cadres (Boltanski 1987), and at that same time Desrosières and Thévenot devoted their work to the history of statistical categories (Desrosières and Thévenot 1988; Desrosières 2002). A series of intuitions emerged from these works, which the economics of convention developed and generalized. First, the systems of classifications are never natural. Even though they are used in such a way that their history is forgotten, they are always the result of choices and debates that can be brought to light by a systematic investigation. Second, these categories are never neutral. They are always political when they shed light on certain aspects of reality while overshadowing others, hence making some actions acceptable and others inconceivable. Third, these categories help building equivalences between things that otherwise would be incommensurable, while making other comparisons impossible. These two sets of hypotheses are more or less present in the works which, for at least a decade, developed a self-designed framework known as the economics of convention. Among the many empirical (see, for example, Stanziani 2003) or theoretical (Batifoulier 2001) contributions to this stream of research, there are three seminal works which we will focus on. Eymard-Duvernay and Marchal dedicated their work to the conventions used to assess the quality of a candidate in the labor market. It is an exemplary piece of

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empirical work, inspired by the program of the economics of convention. The problem raised by Eymard-Duvernay and Marchal (EymardDuvernay and Marchal 1997, 2000; Marchal 2015) is a very simple one. When one hires someone for a job, how will the candidate’s competence be assessed? The main thesis of the book is that evaluating a candidate’s competence can be done in many ways, using different scales or criteria. The issue that researchers should focus on, therefore, is not the intrinsic competences of the candidates, but the way these competences are evaluated by those in charge of hiring. The book presents the conventions of competence that Eymard-Duvernay and Marchal identified. These conventions can be identified crossing two dimensions. First, does the recruiter interact directly with the candidates (through a network or in informal interviews), or is recruiting done at arm’s length (using market matching techniques or institutional criteria)? Second, are the situations of recruitment based on individual interactions, or are they mediated through collective devices, such as networks or institutions? If one crosses these two dimensions, four conventions emerge. The first convention is called the institution, where judgement is based on explicit rules that organize the matching process between general job description categories (kinds of firms, or positions) and candidate qualifications and experience. These rules are not applied automatically. The recruiter interprets them, acting as a regulator. The candidate is described in the lexicon of the institution by considering the qualifications. When using the second convention, the market, the recruiter aims at hiring someone on a strictly rational basis. He prospects as many candidates as possible and organizes their competition in order to optimize the quality of the hired candidate. The recruiter is a breeder. His main problem is not to be fair, but to be efficient in his selection, according to simple criteria. The last two conventions no longer involve abstract or general criteria and rules. They are based on interpersonal relations and therefore can no longer be considered as institution, according to the definition we gave in the introduction of this chapter. The third one still

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involves a group; it relies on a network. There are no general, abstract, formal, or explicit rules or criteria the recruiter should rely on, but rather a set of relations is used to collect information, from one recruiter to the other. The recruiter acts as a mediator. In the fourth convention, the interaction, the recruiter works to build a trust relationship with the candidate. The evaluation is built upon a symmetric commitment in the relation, and the recruiter should be careful to get the signals (of competence, or reliability) the candidate sent to him. Once these conventions have been described, the researchers identify the places where these different conventions might be used, combined, and how they might enter in conflict, in the hiring processes. Eymard-Duvernay and Marchal’s contribution is exemplary of an empirical approach using the economics of convention. It is also a microsociological approach, using dense ethnographic data to analyze hiring processes. Another contribution, by Michael Storper and Robert Salais (Storper and Salais 1997), also relies on the framework of the economics of convention, but they use it to develop a theoretical macroeconomic approach. The problem Salais and Storper wanted to tackle is very close to the one addressed, a few years later, by Hall and Soskice in their 2001 book, Varieties of Capitalism (Hall and Soskice 2001). The problem is how to account for the heterogeneity of national ways of organizing contemporary capitalisms, in a context of growing interdependence and slowing economic growth. The authors ambitiously intend to answer this question based on a renewed conception of social action, that might avoid what Granovetter (1985) would have called an underor over-socialized conception of the individual. Social actors, they argue, are not these closed monads who might know, better than anyone else, what their interests are and how they should attain them. However, they are also not cultural fools, whose actions are completely determined by internalized norms. Because social actions always need to be coordinated among each other, they are always uncertain; hence, they need conventions on which they could rely. These conventions might concern many aspects

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A French Institutionalism in Economic Sociology?

of economic life, and for Salais and Storper the choices made about elementary conventions dealing with products qualities, technology, and market uncertainty, combine to define what they call worlds of production. Salais and Storper identified four worlds of production. In the industrial world, the risk remains predictable and calculable, standardized products are produced in long production runs in order to achieve economy of scales. The market world is organized to cope with situations highly unpredictable, the products are still standardized but the production cycle is much shorter so that it can be adapted in case of great changes in the demand. In the interpersonal world, economic actors also face high uncertainty, but the products are much more specialized and are designed to meet individual demands. Last, the world of intellectual resources faces a predictable and calculable risk, but develops specialized products and services adapted to individual needs. Each of these worlds are characterized by a specific set of conventions, central to the organization of cooperation. For example, the authors identify three kinds of conventions of work: the conventions of productivity, the conventions of wages and the conventions of unemployment. Taken altogether, these conventions define a way to adapt to economic risk either by duration of the work or by the workforce employed. In the interpersonal world, the convention of wage defines a wage that is either fixed and attached to the person, or related to the product, and the adaptation to economic risk depends on personal responsibility. In the market world, the worker is a travailleur à la pièce1 and he is supposed to be available. If there are wide economic variations, his work volume varies accordingly. In the industrial world, jobs are ranked in a classification of positions and wages which define an internal market, and unemployment develops only in periods of serious economic crisis. In the world of intellectual resources, the worker is considered to be an expert and the locus of an investment, so the adjustment to economic shocks relies on the 1 The French travailleur à la pièce is a free-lance worker who is paid by the number of pieces produced.

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circulation of knowledge. Equipped with this abstract and systematic set of tools, Salais and Storper compare national trade specialty cases: fashion and high technology in France, designintensive manufacturing and precision metal work in northeast central Italy, and the high technology regions in the United States. They also analyze the role of industrial policies. According to them, these policies should pursue different goals from one place to the other, since all the different worlds of production are not supposed to converge towards a market world, under the impulse of the State. The final important contribution we would like to present is possibly the most influential: the book published in 1991 by Luc Boltanski and Laurent Thévenot, De la justification (Boltanski and Thévenot 2006). The book is an impressive attempt to provide a systematic, theoretical framework devoted to the analysis of disputes between social actors. It deals with how they argue when they criticize each other’s positions and justify their own. How do they reach an agreement? How do they deal with the many situations where it is simply impossible to reach an agreement? For the authors, these situations of disputes can be explained by the identification of typical ways of justifying one’s position, typical ways they propose to describe as polities (cites). Each of these polities is characterized by a set of typical answers which they provide to issues which were identified. What do all members of the polity have in common? What are the different positions members can achieve within the polity? What is the hierarchy of these positions? How can one get from one position to the other? The hypothesis is that this move is costly; it implies a sacrifice. Using these dimensions, it is possible to identify six different polities, which the authors typify, using great texts of the philosophical traditions. In these texts, the principles underlying these polities are supposed to be more explicit than elsewhere: the inspired polity, based on Saint Augustin’s The City of God; the market polity, exemplified by Adam Smith’s The Wealth of Nations; the civic polity, relying on Rousseau’s Social Contract; the industrial polity, as it can be typified by Saint Simon; the polity of fame, which

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can be characterized using Hobbes’ Leviathan; and the domestic polity, drawn on Bossuet’s predications. Boltanski and Thévenot’s purpose is not only to describe these polities, but also to propose a theory of how people engage these principles of justice within a dispute. They distinguish two typical situations. In the first situation, two actors argue about how to assess a situation, but when they agree on the relevant criteria used to assess the situation, they place themselves in the same polity. In this case, the dispute might be settled by purifying the situation, in order words, by getting rid of all the elements, which are not directly related to or coherent with the polity. In the second situation, the dispute is first about the relevant polity that should be mobilized to evaluate the situation. For example, a poet who sells very few books is said to be little, according to the market polity, but great in the polity of inspiration, if he is recognized by his peers. Reaching an agreement in this second case might be more difficult than in the first one, since the actors involved in the dispute should clarify the principles for evaluating the situation. Very often, reaching this kind of agreement on competing principles is impossible, and settling of the dispute goes through what the authors call a compromise, in other words, a situation where the actors involved in a dispute agree to end it without clarifying the principles on which the agreement is built. The somewhat rococo and sophisticated framework proposed by Boltanski and Thévenot has inspired many empirical works, including Chateauraynaud’s analysis of professional disputes (Chateauraynaud 1991), Auray’s sociology of hackers (Auray 2013), and de Blic’s analysis of financial scandals (de Blic 2005). On a comparative and more macro-sociological ground, Lamont and Thévenot use this framework to systematically compare justification logics in France and in the United States (Lamont and Thévenot 2000). The most visible contribution extending Boltanski and Thévenot’s On Justification remains the book written by Boltanski and Chiapello, The New Spirit of Capitalism (Boltanski and Chiapello 2005), which can be

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read as a very long post-script to On Justification. The purpose of Boltanski and Chiapello is twofold. First, they describe a new way to justify contemporary capitalism and, more precisely, the role of managers within it. In the 1960s, managers justified their working for a firm because it was necessary to satisfy the needs of the customer; in the 1990s, work was supposed to be meaningful for the managers. This shift had organizational consequences. In the 1960s, the job of a manager, who worked in a hierarchical and bureaucratic area could make sense in and of itself, in his own eye and in those of his colleagues. In the 1990s, it was no longer the case: to make sense of his job, a manager needed to be engaged in a project-based organization. Hence, the new polity identified by the book is called projective. The aim of the book is also to understand how new justifications emerge, and the role of criticism in this emergence. The justification of the role of managers evolved from the 1960s to the 1990s. Because the justification of the 1960s faced sharp criticism, the relationships between the managers and their work evolved. Boltanski and Thevenot’s 1991 book has been very influential, but is this the case of the economics of convention at large? If one takes the program of the 1989 special issue of the Revue économique seriously, the situation might be found as rather misleading, especially from the perspective of an economist. What was supposed to be an alternative program, even more general and broader than the orthodox, neo-classical paradigm, did not shift the balance of power, not even in France, where over the last three decades the influence of heterodox economists has considerably decreased, and where heterodox scholars have engaged into sometimes violent debates (Postel and Sobel 2001; Amable and Palombarini 2005). In sociology, the situation is more balanced. The most systematic attempt to provide a grand sociology, On Justification, has been almost completely disowned by their authors (see, for example, Thévenot 2006; Boltanski 2011). However, the Economics of Conventions has been influential over the last two decades, in France and abroad, even though not in the form of a turnkey or all-inclusive theoretical system. It

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A French Institutionalism in Economic Sociology?

provided a toolkit from which social scientists can pick and choose intuitions, which they can combine with their own perspectives. In this way, the posterity of the economics of convention is not so different from Karpik’s writings. This may be so because their basic assumptions are quite close. Many economic sociological works published in French, especially when they deal with market situations, considered these intuitions and concepts as classical propositions, in the best sense of the word. They are part of the basic toolkit of the economic sociologist. Be it to study the market of undertaking (Trompette 2008), of interior designers (Ollivier 2011), or of schools (Dronkers et al. 2010) the authors refer to conventions or devices that allow the actors to face situations of market uncertainty. The way these conventions or devices are characterized rely on empirical matters: sometimes, Karpik’s typology is more useful, sometimes conventionalist distinctions make more sense.

3

Economics of Qualities and Performativity

The last approach we would like to present was published a decade later than the seminal intuitions of the economics of quality and of the economics of conventions. It identified the alleged shared weaknesses of these two approaches and attempted to overcome them. For Callon and his colleagues (Callon et al. 2000; Callon 2002), a first weakness came from the fact that both Karpik and the conventionalists identified two kinds of situations. There were situations where it was possible to calculate, and situations where uncertainty was too high to rely on probabilities to make a decision. For Callon, this distinction was only possible if one perceives what is exchanged as a good with stable characteristics. Instead, Callon explains that one should consider what is exchanged as a product, something without set characteristics. The product is always engaged in an ongoing process of transformation, be it during the period of its production (in a factory, for example) or during its career in the market, when it goes from hand to hand and when

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it is framed by brands, rankings, or appellations. In other words, the characteristics of what is exchanged are always changing and negotiable. It is because these characteristics keep changing that a match between a specific customer and a specific supplier is possible. Analyzing a market, therefore, consists in focusing on specific dyadic relationships. Analyzing a market, then, presupposes an understanding of how a specific product can be successfully detached from someone (the seller) and attached to someone else (the buyer). Callon and his colleagues claim to advocate for a complete and radical change and yet, after getting rid of their rhetorical strategies, what they propose seems quite classical. When Callon explains that one should not analyze a market, but should rather focus on the way a product is detached and attached from this or that actor, one can wonder if he adds anything to the idea that, in a market situation, someone decides to sell something (to detach this product from oneself) and someone decides to buy it (to become attached to it), which is a rather trivial idea. More importantly, Callon explains that the market process through which the product is changed is a process of qualification: the product evolves because it is ranked, or evaluated, or assessed by what Karpik would have called a device. At the end of the day, the differences between Karpik and the conventionalists on the one side, and Callon and his colleagues on the other side seem to be ontological at best, and maybe only rhetorical. Karpik and conventionalists consider social entities to be stabilized at times, while Callon perceives these entities as always being fluid. From a metaphysical point of view, these differences of conception matter. Their consequences, for an empirical sociology of economic life, are not so dramatic. What should be analyzed to understand how concrete market interactions actually evolve is quite close, regardless of using Karpik, conventionalists, or Callon. Another weakness identified by Callon in the approach of Karpik, or of the conventionalists, comes from the fact that a distinction is made between the kind of reasoning actors mobilize in different situations. Sometimes it is possible to

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calculate a price, or a quantity, and sometimes it is not, and then one relies on qualities. For Callon and Muniesa (2005), this distinction is a formal one at best. In each and every situation, one relies simultaneously on prices and on quality to make up one’s mind, one calculates and evaluates qualities. Moreover, in order to calculate or to evaluate quality, an economic actor needs to rely on tools that support his decision. Callon and Muniesa (2005) draw on this idea to propose an enlarged conception of economic decision, they call calculation conceived in a very broad sense: Calculating does not necessarily mean performing mathematical or even numerical operations . . . Calculation starts by establishing distinctions between things or states of the world, and by imagining and estimating courses of action associated with those things or with those states as well as their consequences. By starting with this type of definition (wide, but usual) of the notion of calculation, we try to avoid the distinction (also conventional, but too sharp) between judgement and calculation (Callon and Muniesa 2005, 1231).

One can, of course, wonder if taking a term and broadening its definition in such a way, that its new meaning is in no way related to its usual use is the best conceptual strategy (for sharp criticism of these rhetorical practices see Gingras 1995). In the specific case of Callon and his colleagues, the most important consequence of this concept has been to stress the importance of certain devices in specific situations (see Callon 1998). When they calculate (in the classical sense of performing numerical operations), economic actors use devices that incorporate hypothesis and reasoning of economic theory. Therefore, economic theory changes the reality: in Callon’s lexicon, economic theory performs or transforms economic reality (Callon 2007). The argument is easy to grasp. When actors need to make a decision, they may sometimes rely on devices that incorporate economic theory. When they want to calculate the price of a financial asset, they draw on models that calculate this price, using a hypothesis based in financial economics. Consequently, in these fields, the economy (as a set of practices) may validate the predictions of economics (as a discipline), not because economics

properly describes the economic reality, but because it contributes to shape it. This argument, which was already formulated by Cournot (2001) or by Weber (2005), when it comes to the relations between economics and the economy, can be very powerful when mobilized to analyze some very specific markets, where the tools used to calculate prices rely on cutting-edge economics. This is the case, especially in finance, and this is where this argument has been extensively used and discussed (see, for example, Muniesa 2000; McKenzie 2006). The performativity argument is very useful when it comes to financial markets. It has been verified in other markets as well, such as the energy market (Reverdy 2014). It is less relevant, though, when it comes to many markets where the connections between economics, as a theory, and economy as a set of practices, are much looser, as is the case in so many markets. While the arguments of Karpik, the conventionalists, or Callon, were very close to each other and almost redundant, the performativity argument is much more specific. Its main point is not to say that actors need tools to help them make decisions, but rather to stress the fact that choosing to rely on this or that tool makes a difference: it has consequences. Tools, in other words, are not neutral. This point was already stressed by conventionalists, but Callon and his colleagues made it very clear on technical grounds and through precise mechanisms. How far can these devices be assimilated to institutions? As we proposed in the introduction, one of the key dimensions of an institution is that it is a priori. An institution is not a hypothesis; it is a frame. An institution helps frame the world; it is not a hypothesis that should be tested. If it is proven wrong, it will be used nonetheless, at least for a while. Or course, in Callon’s conception of performativity, models that shape the economy are supposed to emanate from scientific theories, and hence may be considered as a hypothesis rather than an institution at times. In this light, the way McKenzie and Millo (2003) describe the use of the Black-Scholes formula in the development of derivatives market is illuminating. When the market for derivatives

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A French Institutionalism in Economic Sociology?

started to (re)develop in the 1970s in Chicago, two groups of traders competed with each other. The younger traders used the Black-Scholes formula to elaborate their strategies. They beat the older ones, who had been trained as traders on the grain market, and who completely ignored financial mathematics. After 10 years, at the beginning of the 1980s, old traders had almost all disappeared, and all traders used the BlackScholes formula. However, they used it as an institution: they had no reflexivity in their use of the models, and they did not pay much attention to their conditions of validity. In 1987, a crisis hit the market that completely changed the traders’ relation with the formula. They now knew that using this formula might lead to a crash. Therefore, they decided to be much more careful, and if the formula was not used as a hypothesis (the aim of the traders was not to test it), it was nonetheless used in a much more reflexive way.

4

Critics and Limits

These three approaches have generated much research and they are now part of the classical toolkit of French economic sociologists. Since the main texts of Karpik, of the conventionalists, and of Callon and his colleagues are available in English, they can be read, discussed, and used by a wider audience all over the world. In spite of their usefulness, they have been facing three main kinds of criticisms. The first criticism deals with the implicit functionalism implied by these approaches. This functionalism clearly appears in the way the arguments of Karpik and of some conventionalists are formulated. In certain situations, actors face uncertainty (here is the problem); hence, institutions (devices, conventions) develop to help them face the situation (here is the solution). There is no doubt that, as many social entities, institutions have a function. Functionalism may be an analytical problem, if one thinks that because the function of something is identified, then one knows the why and the how (the cause) of this thing. In this case, as Durkheim (1990, 90) puts it, there is a risk of

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conflating the consequences (this institution is there, therefore it helps to solve a problem) and the causes (how this institution came into being there). Only if one can prove that the institution was developed to solve this problem, can the function of the institution be assimilated to its cause. Another problematic dimension of functionalism is that it often goes together with an implicit irenicism. This point has been made by Friedberg (1996) when he discussed the theory of Boltanski and Thévenot (2006). Friedberg argued that when actors take part in a dispute, they seldom engage in the process described by Boltanski and Thévenot. They do not confront their criteria of judgement, nor do they try to purify the situation from all the elements which are external to the polities they refer to. They would rather engage in power relationships, and they solve the dispute based on their resources and their tactics. In other words, conventions may not be as important as conventionalists say, since they do not define the solutions most of the time, power does. The arguments made by Amable and Palombarini (2005) formulated from a completely different perspective (heterodox neo-Marxist economics), make the same kind of point. Amable and Palombarini stress the confusion, in the economics of convention, of ethics and politics, on the one side, and of politics and normativity on the other side. They also stress the conviction conventionalists share that dynamics of institutions might be explained by the search of consensus that spontaneously develops in a community of moral individuals. Instead, Amable and Palombarini underscore the importance of conflict. The idea of performativity, as it was developed by Callon and his colleagues, has been criticized for the same reason. Mirowski and Nik-Khah (2007) explain that several conceptions of what a market is, are involved in the development of a market. It is not economic theory per se that performs the market; rather, the market is transformed by some actors, who happen to refer to a specific theory. Market is not performed by theory; it is shaped by those who use theories to make their point and win the fight against their competitors. Focusing on economic theory is

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focusing on a smoke screen, while the real mechanisms, which imply power and conflict, are somewhere else. Such critics can be partly internalized. For example, Boltanski and Thévenot identified cases where no agreement could be reached and where solving the dispute involved negotiation, conflict, and power relationships. The discussion is rather on what is incidental and what is necessary in the analysis. If 90% of the cases rely on mechanisms which are peripheral to the theoretical framework, then the framework might be judged as not being very useful. This criticism has been addressed to Boltanski and Thévenot: their theory is very sophisticated, but there might be a few situations it helps one understand. If institutions only appear as a way of dressing up conflicting interests and power relationships, then it should be said more explicitly. Another criticism addressed to these frameworks stresses that they ignore class relationships. In some cases, this is explicit and deliberate. The first paragraphs of Boltanski and Thévenot’s On Justification warns the reader that in the book, he will not find the usual concepts of social sciences publications: no groups, no social classes. The same is true for Karpik’s approach. Karpik’s book aims at explaining how consumers make their choices in a market. What he wants to analyze has been a central issue for social scientists for a long time. To this question, together with Bourdieu’s Distinction (Bourdieu 1984), the answer of sociologists is clear and straightforward: the choices of the consumers depend on their social class. These two hypotheses can be discussed and confronted. When they make a choice in a market, do social actors rely on institutions, or on their habitus? One, the social class hypothesis has been proven many times, while the idea that actors use institutions has not been tested very much. Much of the research dedicated to the analysis of market devices does not focus on their effects on consumers; rather they describe the device and sometimes analyze the many choices and give the long story that led to the emergence of this or that device. This focus on the upstream of the institution, rather than on its consequences, might

P. François

explain why almost no studies were conducted to test whether the influence of the device was strong enough to overrule the determination of social class. A final criticism can be recalled here, stressing the fact that all these approaches are first and foremost descriptive. Karpik and the conventionalists dedicated a lot of effort to develop typologies that help classify the devices or conventions. However, they do not explain where the power of these devices comes from. Identifying the source of an institution’s power would help bring them into a causal relationship. How is it that, if Robert Parker grades this wine 96/100 its price will rise; while if Pierre François gives this wine the same grade, nobody cares? Here the weakness of French institutionalism connects to the research agenda of new institutionalism developed in the US (Hwang and Powell 2005; Powell and Colyvas 2008). Because they focused mainly on macro or meso situations, often approached by statistical tools, new institutionalists lack a clear understanding of the way institutions and actions are linked to each other. In French institutionalism, this link is also missing. None of them, Karpik, conventionalists or Callon proposed an explicit theory of action that would explain the way devices, or conventions, connect to actions. Their understanding of this link remains implicit and merely behaviorist: in a situation of uncertainty, a device is there (stimulus) and the actor uses it (answer). Discussing both French and US institutionalism, François (2011) draws on Wittgenstein’s second philosophy to develop a framework that might explain how institutions and actions connect in a more explicit and dynamic way. He suggests considering that no social entity is by nature an institution. A rule, a category, or a model is an institution only if, and only as long as, an actor decides to use it as such. According to Wittgenstein, the power of the rule does not lie in the rule itself; it is conferred to the rule by those who use it as a rule. Of course, those who confer power to the rule they follow are sometimes compelled to do so. In this case, the power of the rule does not come from the rule, it comes from the entities (the police, the judge, the chief, powerful

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A French Institutionalism in Economic Sociology?

groups, or the elite) that enforce rule. More generally, however, if one wants to understand the power of a device, convention, or theory, then one needs to understand the reasons why someone uses this device as a rule. This is what makes the devices or conventions studied by French institutionalists so fascinating. One can barely identify any entities that force their users to rely on them as a rule. Placing the power of the institution outside the institution itself, while being willing to follow it, also means that an institution may not always be as powerful as it seems. Ollivier (2011) shows that the certification proposed by a professional union of interior designers is used as an institution only for the newcomers in the labor market. When they are in school, designers are convinced by the union that this certification will be an asset for their career. In their first years as professionals, they try to rely on it, but they realize that it does not make much difference: no customers pay any attention to it. Therefore, they abandon it. The certification does not disappear completely, since new entrants in the labor markets have been convinced to use it, before they realize, in turn, that it is useless. Following Wittgenstein’s conception of the rule also helps understand where an institution comes from, how it emerges, develops, and dies. The grades Robert Parker gave at the beginning of the 1980s did not change anything in the wine market. At that time, Robert Parker was just a lawyer in a suburb of Baltimore. Robert Parker’s grades became an institution only when actors collectively started using these grades as an a priori criteria to decide which wine was good. To explain the birth of an institution, one should not focus on the institution, but on those who use it. François and Frezal (2018), for example, explain how the conflation of hazard and heterogeneity in statistical reasoning became an institution first in mathematical finance, then in the insurance industry. In the early stage of probabilities, this confusion was sometimes accepted, but sometimes rejected. It became largely invisible with the axiomatization conducted by Kolmogorov in the 1930s. Since this axiomatization was largely used to

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systematize mathematical finance in 1950s, in its theoretical framework and later in the tools that rely on it, this confusion remains implicit, undiscussed, and permanent. This set of intuitions, drawn on Wittgenstein, identify as the core of the problem, what is taken for granted by French institutionalists: why is it that one actor will follow this institution? What transforms this device or convention into such a powerful tool? The frameworks developed in the 1990s and in the 2000s by French economic sociologists are now part of the classical toolkit of economic sociology. It helps clarify the importance of certain devices in specific situations, where relying on calculus is insufficient. It also helps distinguish between the many kinds of devices that might be mobilized by social actors. These analytical decompositions are certainly the most useful dimensions of these frameworks. Questions remain, nonetheless, that should not lead one to abandon these distinctions, but to articulate them with classical tools of social sciences such as social classes, or to focus on the underlying mechanisms that might explain their causal power.

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Karpik, L. (1999). French lawyers: A study in collective action, 1274–1994. Oxford: Oxford University Press. Karpik, L. (2000). Le Guide Rouge Michelin. Sociologie du Travail, 42(3), 369–391. Karpik, L. (2002). Que Faire des Singularités? Sociologie du Travail, 44(3), 279–284. Karpik, L. (2010). Valuing the unique: The economics of singularities. Princeton: Princeton University Press. Keynes, J. M. (1973a). The collected writings VII. The general theory of employment, interest and money. London: Macmillan. Keynes, J. M. (1973b). The collected writings VIII. A treatise on probability. London: Macmillan. Lamont, M., & Thévenot, L. (2000). Rethinking comparative cultural sociology. Repertoires of evaluation in France and the United States. Cambridge: Cambridge University Press. Marchal, E. (2015). Les Embarras des Recruteurs. Enquête sur le Marché du Travail. Paris: Presses de l’EHESS. Mariotti, F. (2005). Qui Gouverne l’entreprise en Réseau? Paris: Presses de Sciences po. McKenzie, D. (2006). An engine, not a camera. How financial models shape markets. Cambridge: MIT Press. McKenzie, D., & Millo, Y. (2003). Constructing a market: The historical sociology of a financial derivatives exchange. American Journal of Sociology, 109(1), 107–145. Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2), 340–363. Mirowski, P., & Nik-Khah, E. (2007). Markets made flesh: Performativity, and a problem in science studies, augmented with consideration of the FCC auctions. In F. Muniesa, D. McKenzie, & L. Siu (Eds.), Do economists make markets? (pp. 190–224). Princeton: Princeton University Press. Muniesa, F. (2000). Un Robot Walrasien. Cotation Électronique et Justesse de la Découverte des Prix. Politix, 52(4), 121–154. Ollivier, C. (2011). Naissance et Survie d’une Institution. La Qualification Professionnelle des Architectes d’intérieur. In P. François (Ed.), Vie et mort des institutions marchandes (pp. 195–223). Paris: Presses de Sciences po. Postel, N., & Sobel, R. (2001). L’impensé de l’hétérodoxie Économique Française. Les Temps Modernes, 615–6 (4), 321–346. Powell, W. W., & Colyvas, J. A. (2008). Microfoundations of institutional theory. In R. Greenwood, C. Oliver, R. Suddaby, & K. SahlinAnderson (Eds.), The sage handbook of organizational institutionalism (pp. 276–298). Thousand Oaks: Sage. Powell, W. W., & DiMaggio, P. J. (Ed.). (1991). The new institutionalism in organizational analysis. Chicago: The University of Chicago Press. Rao, H., Monin, P., & Durand, R. (2003). Institutional change in Toque Ville: Nouvelle Cuisine as an identity

77 movement in French gastronomy. American Journal of Sociology, 108(4), 795–843. Reverdy, T. (2014). La Construction Politique du Prix de l’énergie. Paris: Presses de Sciences po. Sako, M. (1992). Prices, quality and trust: Inter-firm relations in Britain and Japan. Cambridge: Cambridge University Press. Stanziani, A. (Ed.). (2003). La Qualité des Produits en France (XVIIIè–XXè siècles). Paris: Belin. Stiglitz, J. (1987). The causes and consequences of the dependence of quality on prices. Journal of Economic Literature, 25(1), 1–48. Storper, M., & Salais, R. (1997). Worlds of production. The action framework of the economy. Cambridge: Harvard University Press. Teil, G. (2001). La Production du Jugement Esthétique sur les Vins par la Critique Vinicole. Sociologie du Travail, 43(1), 67–89. Thévenot, L. (2006). L’action au Pluriel. Paris: La Découverte. Trompette, P. (2008). Le Marché des Défunts. Paris: Presses de sciences Po. Viallet-Thévenin, S. (2015). Du champion national au champion international. Revue Francaise de Science Politique, 65(5), 761–783. Weber, M. (2005). La Théorie de l’utilité Marginale et la “loi Fondamentale de la Psychophysique”. Revue Française de Sociologie, 46(4), 905–920. Williamson, O. E. (1993). Calculativeness, trust and economic organization. Journal of Law and Economics, 36(1), 453–486.

François, Pierre is a CNRS research professor in Sciences Po, Paris (Centre de sociologie des organisations). He is also the dean of the school of research of Sciences Po, Paris. Research topics: His main research topics concern the sociology of art (music and poetry) and of contemporary capitalism. He is working on a historical sociology of French firms and their managing directors from the beginning of the 19th century. Recent publications: Dubois, Sebastien, and Pierre François. 2021. Introducing Aesthetics Back in Status Analysis. The Case of French Contemporary Poetry. American Behavioral Scientist, 65/1. François, Pierre, and Sylvestre Frezal. 2018. Instituer l'incohérence. L'amalgame aléa et hétérogénéité dans le secteur assuranciel. Sociologie du travail 60/1. François, Pierre, and Claire Lemercier. 2016. Financialization French Style (1979–2009). Changes in Large Firms and Conversion of Elites. Revue française de sociologie 57/2: 269–320. François, Pierre. 2014. Ebbs and Flows of French Capitalism. In The Power of Corporate Networks. A Comparative and Historical Perspective, eds. Thomas David, and Gerharda Westerhuis, 149–68. London: Rouledge. François, Pierre. 2013. Career Paths and Hierarchies in the Pure Pole of the Literary Field: the Case of Contemporary Poetry. Poetics 41/3: 501‑23.

6

Transcending History’s Heavy Hand: The Future in Economic Action Jens Beckert and Timur Ergen

1

Introduction

The core theoretical developments in the new economic sociology to date concern meso- and macro-level aspects, such as the role played by culture, groups, institutions, and networks in economic life. With few notable exceptions (Etzioni 1988; Swedberg 1998; Beckert 2002; Whitford 2002), action theory, in particular, has not been at the center of recent sociological theorizing of the economy. In this vein, the central programmatic argument of Granovetter’s (1985) seminal founding manifesto can well be summarized as a plea to challenge conventional economic theory not regarding models of action and decisionmaking, but by emphasizing the influence of social structures on economic outcomes (Swedberg 1997, 162). The imagined-futures approach to economic sociology described in this chapter takes a decidedly different approach. Building on arguments about how actors form expectations, it demonstrates how micro-level theory development can form the basis of a productive research agenda in economic sociology and contribute to Authors in alphabetical order. For comments on earlier drafts we thank Alexandra Hees, Marcin Serafin, and Lisa Suckert. J. Beckert (*) · T. Ergen Max Planck Institute for the Study of Societies in Cologne, Cologne, Germany e-mail: [email protected]; [email protected]

the investigation of long-standing puzzles in the analysis of capitalist economies. As will become clear throughout our chapter, this actiontheoretical focus shall by no means deny the central explanatory importance of social structures in sociological analyses of the economy. Rather, we shall demonstrate how conceptual work on the micro-level may produce new insights into how and when social structures play a role in modern economies. Unlike economic sociology and political economy, expectations are a major explanatory factor in economics. Since the late nineteenth century, economic explanations have had at their core the idea that economic outcomes emerge from the aggregation of forward-looking decisions made by economic agents (Evans and Honkapohja 2015; Doganova 2018). In this sense, Andrew Abbott (2005, 406) characterized typical economic explanations as “precisely the reverse of the sociological ancestors’ plot, which looks back at the causes funneling into a final result. Economists focus not on the end of a period, but on its beginning; they study not the origins of an outcome, but the descendants of a decision.” Sociological approaches focusing on expectations in the economy pursue a similar explanatory strategy. They analyze how images of the future emerge and constitute social action. Compared with more established explanatory approaches in economic sociology, sociological analyses of expectations to date, represent an unconsolidated and only loosely structured research field. As we

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document in this chapter, the field is characterized, its youth notwithstanding by a number of shared classics, common lines of argument, and unifying research interests. We present the structure, potential contributions, and challenges of the field in four steps. Section 2 lays out the main argument and situates it in the relevant literature. Section 3 highlights selected empirical applications to the economy. Subsequently, we discuss core research questions of an economic sociology focusing on expectations in Sect. 4. Finally, Sect. 5 summarizes the argument and speculates about its future development.

2

Uncertainty and the Social Constitution of Expectations

Unlike traditional societies, modern capitalist societies are characterized by a perception of the future as contingent, malleable by actors, and entailing open time horizons. As pointedly described by Pierre Bourdieu, traditional peasant communities typically live “in the very rhythm of the world with which [they are] bound up” (Bourdieu 1979, 27). “Nothing,” Bourdieu (1979, 8) conjectured, “is more foreign to the pre-capitalist economy than representation of the future . . . as a field of possibles to be explored and mastered by calculation.” While possibly overdrawn in their stark juxtaposition (Tavory and Eliasoph 2013), change from strongly scripted to predominantly open relationships to the future in the course of capitalist development is now a widely shared historical diagnosis (see Beckert 2016, Chap. 2). Beckert (2016) has argued that this historical transition in temporal orientations should be reflected in action theory, and especially in theories meant to explain economic action in modern capitalist societies. As such, the imagined-futures approach to economic sociology is historically situated. The analytical emphasis on the future is in stark contrast to the temporal orientation stressed by conventional sociological explanations of economic action. As summarized by Abbott, quoted above, typical explanations in

economic sociology and political economy stress the malleability of social action by the past. What is more, explanations of social action highlighting actors’ orientation towards the future have often been portrayed as overly parsimonious and contextually simplistic. This was Emile Durkheim’s (1984) strategy when he developed his analytical program in opposition to that of Herbert Spencer. “The past predetermines the future,” he polemically summarized his approach to the role of social norms (Durkheim 1984, 302). Imaginedfutures approaches to economic sociology do not deny the influence of history’s heavy hand (Ikenberry 1994) on social outcomes. They rather try to develop a genuinely sociological approach to future-oriented action in capitalist economies and map the interplay between the effects of social structures, past experiences, and future orientations. This approach is best summarized in contrast to modern economic theory. While there exists a rich lineage of thinking psychologically, and to some extent sociologically, about the formation of expectations in economics (Keynes 1936; Shiller 2019), modern financial and macroeconomics, in particular, build on models of perfect foresight (e.g., Lucas and Sargent 1978). Expectations in this influential view are individual beliefs about the future that make the best possible use of all available information (Muth 1961). In this sense, rational expectations are determined by sets of information and are objectively correct. They emerge from the optimal way of processing known information. While commonly meant as simplifying assumptions to ease macroeconomic modelling, applications of rational expectations-theory often entail plainly absurd depictions of economic foresight (Elster 2005), such as ordinary actors deciding on their present consumption based on life-course optimization. By contrast, sociological approaches to the formation of expectations start not from information, but from uncertainty. They diverge in two important respects from economic notions of rational expectations: in their emphasis on expectations as cognitive devices and in their insistence that expectations emerge from social

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processes. Beckert (2016, see also Beckert and Bronk 2018) has developed the notion that a significant share of expectations in modern capitalist economies have a quasi-fictional quality. If future economic outcomes are fundamentally uncertain, but set expectations are necessary for economic decision-making and coordination, actors can typically be expected to rely on imagined futures as cognitive devices to enable economic action. Despite being known to be contingent projections in principle, imagined futures are often treated as if they were reliable forecasts of coming economic outcomes. Muchdiscussed examples of this process are macroeconomic forecasts and point projections. Even though they continuously fail as mere forecasts, they reliably work as bases for decision-making in business and government (Pilmis 2018; Reichmann 2018). This argument can be understood as a specification of the well-known Thomas-theorem (Thomas and Thomas 1928) in that beliefs about the future influence social action, irrespective of their objective correctness. The second deviation builds on a related observation. In many economic situations, the idea that the formation of expectations is a matter of individuals projecting independent, quasipredetermined futures is misleading. If the shape of the given future is itself influenced by the expectations actors hold when enacting it, forecasting activities gain a pragmatic character. Rather than a mere cognitive activity, neatly separated from and preceding individual action, the formation of expectations is an iterative social process (Emirbayer and Mische 1998). Expectations emerge from ongoing social processes in which actors articulate, negotiate, fight over, and provisionally adopt imaginaries of the future to guide social action. As intersubjective phenomena, expectations are typically embedded in narratives about the future (Mützel 2009; Garud et al. 2014). In its emphasis on the social, processual, and practical constitution of expectations, the imagined-futures approach is strongly influenced by pragmatist, and especially Deweyan, thought (Strauss 1993; Joas 2005; Dewey 2008). In its focus on social structures as structures of meaning and the social nature of

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interpretative processes, it takes important cues from phenomenological thought in sociology (Schütz 1932; Schütz and Luckmann 1975). A good example of the social constitution of expectations is provided by the literature on promises in technological development, which since the 1990s has highlighted the key role of shared expectations. In their early stages, emerging technological fields are home to future-oriented sense-making activities. Much of this dynamic consists of interpretative conflicts over the acceptance of the uncertain promises of the respective technologies. As has been shown empirically, actors continuously try to nurture shared expectations in order to route resources and developmental possibilities in their favor. Shared expectations can feed into self-fulfilling prophecies and technological path dependencies (van Lente 1993). The emphasis on the social constitution of expectations distinguishes sociological approaches, not just from models of rational expectations, but also from recent work in behavioral economics. While such approaches routinely acknowledge the presence of radical uncertainty, they focus on individual-cognitive coping mechanisms, rather than on social processes (Thaler 2000). Sociological analyses of the formation of expectations aim to complement rather than compete with cultural, institutional, relational, and structural theoretical programs in economic sociology. They are complementary in two ways. First, social structures often shape expectations. To give just two examples, social position and embeddedness in communities have repeatedly been shown to influence not just actors’ anticipatory capabilities, but also their aspirations and hopes (Bourdieu 1979; Mische 2009; Bandelj and Lanuza 2018). To the same effect, the institutional regimes of advanced capitalist societies have been shown not strictly to determine firm strategy, but to influence wider understandings of what business models count as feasible, profitable, and realistic (Herrmann 2008). In both cases, structures do not determine the concrete content and forms of expectations, but act in a way similar to Max Weber’s (1946) switchmen in that they pattern interpretative processes loosely.

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Second, orientations towards an open future, imagination, and the social construction of expectations can be conceptualized as agents of social change in thoroughly structured fields. In the medium- to long-term, firms and markets in capitalism are notoriously dynamic social formations. As developed by various literatures on innovation, pockets exist for the creative reconstruction of the action situation in capitalist societies––spaces for new imaginaries of the future that arguably are at the heart of this dynamic (Lester and Piore 2004; Stark 2009; Ergen 2018). The macro-sociological question of how to square the restlessness (Sewell 2008) of modern capitalist economies with their welldocumented institutional and social embeddedness may be answered in part by the alternating temporal orientations of actors, organizations, and institutions (Beckert 2013). Extending the micro-foundations of economic sociology and political economy with a sociological concept of expectations can help to specify how and when social structures influence economic action. One way of conceptualizing the relationship between expectations and cultural patterns, for example, is to think of expectations as mediators of the influence of culture on social action. If cultural patterns influence how actors interpret situations and formulate expectations, rather than provide straightforward scripts for behavior, culture’s influence is filtered through situational dynamics (Swidler 1986). Three empirical examples may illustrate the situational mediation of the influence of cultural patterns. Angeletti’s (2019) research shows how the use of economic models by French government planners did not have straightforward performative effects. Economic models framed how political actors thought about political feasibility and economic possibility but left considerable room for administrators to develop creative strategies for economic governance. Ergen (2019) shows how Ronald Reagan’s administration strategically used scenarios about national industrial decline to push tax reform through Congress. Contrary to the assumptions of scholarship on policy paradigms and the power of economic ideas (Hall 1989), the administration

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was then forced to abandon its neoliberal agenda and aid struggling sectors, in order to live up to its promises of supporting domestic industry. Finally, Suckert (2020) argues that imaginaries of the future identity of Great Britain invoked by the recent campaign for Brexit narratively combine contradictory national traditions and memories. Promises about Britain’s future economic identity creatively combined aspects from the country’s history and tradition. Along those lines, a common theme of future imaginary focused empirical research is that cognitive devices, ideas, cultural imprints, and theories do not wholly work through a cognitive taken-forgranted channel. They are put into action on the basis of contingent interpretations of the situation, improvisation, and projections of the future (Swidler 1986).

3

Expectations in Contemporary Capitalism

To illustrate the general sociological usefulness of analyses of expectations, this section briefly summarizes how they might help in thinking about core spheres of economic activity in modern capitalism. Drawing on Beckert (2016), we schematically discuss the role of imaginaries of the future in consumption, investment, and innovation and underline the argument with examples of empirical research.1 Our focus on consumption, innovation, and investment is first due to the richness of empirical research on the role of expectations in these realms. Second, we consider these fields to be particularly instructive examples of how the investigation of expectations may help to understand the dynamic nature of capitalist societies.

1 For reasons of space, we are highly selective in our presentation of spheres of economic activity. The spheres that would merit discussion, but which were left out, include the expectation-focused investigation of money, of labor and the production process, of the state and the political system, and of organizations.

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3.1

Consumption

Economic sociology has traditionally focused on the social constitution of consumption in its treatment of consumer behavior (Zukin and Smith Maguire 2004; Zelizer 2005). A large portion of this research has tried to understand the workings of specific products, categories, and markets, especially regarding the influence of morality and the problem of quality uncertainty (Karpik 2010; Schiller-Merkens and Balsiger 2019). Very few studies have attempted to answer the more fundamental question of how to explain the seemingly endless demand for consumer goods and services that is historically unique to modern capitalist societies. Anthropological, as well as historical literatures have long argued that premodern societies tended to minimize the effort necessary for quasi-stagnant consumption, rather than maximize their consumption possibilities (Campbell 1987). With few exceptions, answers to the puzzle of the dynamics of modern consumer societies are based on the idea that modern societies impute non-essential goods and services with symbolic value, with socially shared meaning capable of stimulating desires. Sociological classics such as Simmel (1957) and Veblen (1992), as well as Pierre Bourdieu (1984), strongly emphasized the positional value of consumer goods to explain the dynamics of modern consumer societies. Boltanski and Esquerre (2017) have recently proposed the notion of the enrichment of goods for their charging with symbolic qualities, in particular with historical references, regional associations, and sociocultural connotations. The sociological analysis of expectations contributes to this line of research. How can one explain the fact that actors are willing to incur costs, in terms of foregone leisure or savings, for the acquisition of such symbolic qualities? One answer, developed by Beckert (2016, Chap. 8), suggests that the acquisition and possession of goods promise to transcend the individual. Symbolically charged goods gain their attraction from a promise to connect individuals to society, specific social communities, regions, histories, or

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personalities. Significant parts of contemporary advertisement and marketing can be understood as attempts to convey such promises of transcendence for particular goods or brands, and thereby constitute a specific form of future orientation of consumers. Modern consumer societies are significantly constituted by systems that create desires through promises and the planting of expectations (Illouz 2009). A further, more mundane way in which the social analysis of expectations contributes to the understanding of the dynamics of consumption is found in the field of consumer confidence and macroeconomic expectations. Expectations about future macroeconomic developments and their effects on consumption have been at the core of macroeconomic debates from Keynes’s General Theory through to the rational expectationsrevolution of the 1970s and 1980s. Under conditions of genuine uncertainty, optimistic or pessimistic outlooks have less to do with available information and their proper assessment. Instead, they often take the form of general confidence, and of emotionally charged animal spirits (Keynes 1936, 161; DiMaggio 2002). Sociological research on the empirical distribution, emergence, and breakdown of consumer confidence represents a highly important research field. Sociologists have recently demonstrated that consumer confidence systematically varies by racial and ethnic background in the United States (Doherty Bea 2019), while economists are beginning to analyze narratives about the economy as independent variables in macroeconomic models (Shiller 2019).

3.2

Investment

The second component of aggregate demand, besides private consumption, investment, is similarly affected by the dynamics of expectations. Capital, as well as financial investment in modern economies is ultimately determined by expectations about future profit streams. Hence, investors principally need to reckon with a multitude of uncertain future developments, such as product development, future patterns of consumer

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demand, competitors’ investments, government policy, and broader social change, and this often over a period of a decade or more. Given the complexity of the task and genuine uncertainty over future developments, boundedly rational ways of decision-making have repeatedly been shown to be key to understanding investment decisions. Examples are investors’ reliance on formal models, legitimating narratives, rules of thumb, and herd behavior (Akerlof and Shiller 2009; Arjaliès et al. 2017). Three strands of recent research focusing on the social formation of expectations contribute to the explanation of investment decisions. While differing in their empirical subjects and methods of analysis, they all emphasize the role of stories about the future in structuring attention and sensemaking regarding future profit opportunities. A first strand of research focusses on the future-oriented sense-making activities of market actors. Individual industries as well as financial markets are today equipped with dense infrastructures that interpret market movements and endow them with shared meaning. Good examples of such infrastructures are specialized industry journals, roadmaps, surveys and indicators published by trade associations, and financial analysts at banks and other financial intermediaries. In this vein, Meyer et al. (2018) show how global semiconductor manufacturing has been shaped by collective efforts to roadmap technological development along the supply chain (see also Gawer 2000). In this line of research, Wansleben (2013) has shown how the Goldman Sachs-invented acronym BRICS (Brazil, Russia, India, China, and South Africa) helped create a new category of developing countries believed to be on the verge of rapid growth. The expectations shaped through this new category henceforth structured global development discourse and investment flows. Based on an extensive ethnography, Leins (2018) has demonstrated that financial analysts consciously use stories about possible futures to give meaning to unstable markets and hence boost investment. A second strand of literature investigates the narrative construction of investor sentiment. As mentioned above, in the context of private

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consumption, investment is often contingent on a vague notion of investor sentiment and confidence. As can be shown empirically, swings in predominant narratives can change investment flows massively without preceding changes in economic fundamentals. Along these lines and based on quantitative text analyses, Beckert and Arndt (2019) show that the willingness to lend to the Greek state during the recent Euro Crisis reacted strongly to shifts in the narrative about Greece’s situation in the trade press. Given their importance for macroeconomic stability, such expectational dynamics can become the object of state intervention. Braun (2015, 2016) traces the expansion of expectation-management by central banks as they increasingly run into problems of policy implementation. Findings documenting the narrative constitution of investor confidence are not limited to financial markets. Giraudeau (2012, 2018) presents historical insight into the function, use, and abuse of business plans in channeling investment. He shows that the use of quantitative techniques allowed for the diminishing of doubts about the sustainability and future of the emerging DuPont venture among investors. A third strand of research shows how stories about the future of products and sectors affect the flow of investment to competing ventures. Influencing such stories hence becomes part of the competitive process within and between firms and industries. Mützel (2009) shows how pharmaceutical firms competed for funding, niches, and prestige in the emerging market for breast cancer treatment with projected breakthroughannouncements in international trade journals. Ergen (2017) documents how competing actors in the energy sector fought over support for the nascent solar industry with competing narratives about the future of the technology. This case also highlights that expectations, even if commonly shared, do not necessarily have to have selffulfilling consequences. As observed repeatedly in the history of industrial production, shared beliefs in rapid industrial development can be self-undermining if they lead to hesitancy in investing in capital equipment (Rosenberg 1976).

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Transcending History’s Heavy Hand: The Future in Economic Action

Compared with studies on private consumption discussed in the previous section, research on investment highlights that the social analysis of expectations is conducive to investigations of power relations, conflicts, and relations of domination. As pointed out early by Kalecki (1943), expectations can be at the core of power dynamics in capitalism. The ability to withhold resources at will, on the basis of uncertainty about the future is among the major sources of social power, often called structural power (Hacker and Pierson 2002). Beckert (2016) has suggested the notion of the politics of expectations to grasp the power struggles around imagined futures.

3.3

Innovation

The field of innovation is among the most obvious candidates for an expectation-based economic sociology. It is in innovation processes that modern societies most routinely debate uncertain long-term economic, social, and technological change. Moreover, innovative activity has long been described as not accessible to models of rational action due to the problem of conceptualizing deviance, ventures into the uncertain, and entrepreneurial imagination (Schumpeter 1912; Nelson and Winter 1977). Not surprisingly, sociological analyses of expectations represent a comparatively wellestablished field in innovation studies and the history and sociology of technology development. Research into imagined futures in innovation studies can roughly be subdivided into three lines. First, innovations and associated sociotechnical imaginaries usually have deeper and longer-standing social origins. A broad literature on the social life of socio-technical imaginaries traces the history of specific technological visions, their shifting support and form, and their final fulfilment or abandonment. A good example of this line of research is McCurdy’s (2011) history of American spaceflight. It documents how imagined opportunities and dangers perceived from fictional literature and societal discourse interacted with political

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opportunity structures, and scientific and technological developments, resulting in the eventual establishment of a massive public-private institutional complex. Meikle (1995) has made a similar argument. He shows how projections of the use of plastics in consumer goods production came to symbolize the rise of consumer society and fueled hopes of an end to the resource limitations on economic growth after the Great Depression. Jasanoff and Kim (2013) show how expectations about nuclear development, and in particular the thinking about opportunities and risks, were shaped by national understandings of statesociety relationships, the law, and national development. A second line of empirical research investigates the micropolitics of the social formation of expectations in technological development. A path-breaking study in this field is van Lente’s (1993) history of the emergence of membrane technology. While almost an empty signifier at an early stage, interested actors tried to promote the umbrella term of membrane technology as a promising new field to safeguard resources and public support. In the process, conflicts and the emergence of competing factions over the field’s possible futures significantly shaped its development. Another often observed feature of the micropolitics of innovation processes is the problem of maintaining motivating imaginaries after major commercial failures. Socio-technical imaginaries can survive for decades and even centuries despite stagnant realization and major failures. Good examples of permanently failing but resilient technological promises are the hydrogen economy, solar energy, and nuclear fusion reactors. A study detailing how developmental communities try to manage expectations in the face of successive failures is Brown’s et al. (2006) study of promises of the medical potential of stem cells. Repeatedly since the 1950s, actors have tried to distance their development efforts discursively from earlier failed realizations to maintain public faith in their projects. A third line of research differs from most historical innovation studies in that it does not look primarily at how expectations are set, but at how

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the future is opened up and uncertainty generated. Contrary to the early writings of Joseph Schumpeter (1912) and much of recent economic theory on the subject (Alvarez 1991), which stress the individual entrepreneur, contemporary societies generate the majority of innovations in teams, organizations, networks, and institutions. Through in-depth case studies, Lester and Piore (2004) have developed the idea that the character of many of the most innovative institutions in contemporary societies is not centered on creating shared development goals, but on generating ambiguity and conversations between heterogeneous functions. Universities, corporate laboratories dedicated to basic research, and development teams are arguably designed to create, rather than diminish uncertainty (Stark 2009; Herrigel 2017). Put differently, such arguments point to the social constitution of an open future, rather than to attempts to foreclose it with the help of promises and narrative (Ergen 2018).

4

Questions and Perspectives of an Economic Sociology of Expectations

Building on these exemplary insights into empirical research, we now describe some of the core research questions, frontiers, and challenges of the analysis of expectations in economic sociology. Again, we are highly selective for reasons of space. We schematically discuss three major research questions that we think are especially well-suited to develop the sociological analysis of expectations theoretically, as well as bring it into discussion with other approaches in economic sociology.2

2 A major concern that is omitted from this chapter is the question of methodology, a discussion of which can be found in a standalone paper (Beckert and Suckert 2020, see also the brief discussion below in the conclusion).

4.1

Where Do Expectations Come from?

A core question of all sociological analyses of expectations deals with their origin and emergence. As mentioned above, it is regarding the emergence of expectations in particular that the imagined-futures approach promises to be highly complementary to established sociological explanatory programs. Expectations do not emerge out of thin air but from interpreted experience. If expectations are constituted intersubjectively, social structures should be key to understanding their emergence. Along these lines, major efforts are currently under way among contemporary historians to construct histories of the interplay between experience and expectations (Levy 2017; Jakob et al. 2018). Major sociological pathways towards answering questions of emergence are attempts to understand variation in expectations between historical periods and societies. Sociology has a rich tradition of analyzing changing understandings of time, and in particular changes of the temporal rhythms of social life in the course of modernization (Zerubavel 1985; Elias 1992). Bourdieu (1979) has developed ideas on the differences in future orientations between traditional and modern capitalist societies, and the related strains and conflicts of forced capitalist modernization through colonization. Observations of historical ebbs and flows of specific expectations, promises, and orientations towards the future are particularly abundant in historical political economy today. Literatures on policy paradigms and dominant understandings of economic governance point to the contingent character of ideas about effective economic management (Hall 1989; Boyer 2018). This line of research has unearthed a broad variety of political and structural variables conditioning beliefs in the efficacy of governance paradigms, such as state structures, coalitional patterns, electoral regimes, and national cultural traits (Gourevitch 1986; Hall 1989). At the same time, this literature has highlighted the central importance of unsettled times (Swidler 1986), such as bigger economic

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crises, for creative sense-making and cognitive reorientation (Blyth 2002). Recent historical and comparative research has tried to understand the sequential dynamics between economic structures, political shifts, and expectations (see also Ergen 2017). Chwieroth and Walter (2019) argue that capitalist societies have increasingly been caught up in Minskian feedback loops since the Great Depression of the 1930s. Increasing aggregate holdings of wealth, expectations of voters that governments protect that wealth in times of crisis, and related moral hazards of financial institutions may help explain the growing financialization of capitalist economies. A second major pathway towards understanding the emergence of expectations was also spearheaded by Bourdieu (1979). In multiple contexts he has argued that expectations are socially stratified. This may be due either to class-based differences in the alignment between objective probabilities and aspirations or due to varying degrees of self-fulfilling aspirations. Challenging Bourdieu’s structuralist explanations of expectations, Bandelj and Lanuza (2018) recently argued that embeddedness in communities may trump the effects of socioeconomic background on young adults’ economic aspirations. Such results resonate with the idea that social structures shape, but do not determine, expectations towards the future. Similar findings on the social structuration of the formation of expectations have been made for network structures (Prato and Stark 2013), racial background (Doherty Bea 2019), popular culture (McCurdy 2011), and broader cultural understandings (Jasanoff and Kim 2013; Suckert 2020).

4.2

How Do Expectations Spread and Gain Momentum?

A related problem concerns how expectations are diffused, gain the power to influence thought and action, and become resilient. Emphasizing the openness of the future in capitalist societies and the imaginative capabilities of actors certainly does not imply that expectations are malleable at

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will. It is also probably safe to say that only an infinitesimally small array of expectations is effective in contemporary societies, compared with the endless possibilities of imagining an open future. If expectations are contingent interpretations of an unknowable future, what makes some of them more persuasive than others? Shiller (2019) has recently suggested using epidemiological models of contagion to understand the diffusion of economic narratives. While the description of the shape and form of diffusion is certainly of prime interest to a sociology of expectations, and might, at some point, be an important means of testing competing theories, we believe the theoretical groundwork on the social mechanisms of diffusion and institutionalization is particularly promising. A first promising research field starts from the observation that beliefs about the future in modern societies are to a significant degree spread by mass communication media (Shiller 2000). For example, Beckert and Arndt (2019) show how news coverage of the Greek debt crisis drove interest rates on Greek government bonds. Studies of the internal logic, selection mechanisms, and sense-making effects of mass media are surprisingly rare in economic sociology and political economy. While characterized by significant barriers to entry, due to the specialized nature of media studies, the case-specific, comparative, and historical workings of mass media in the formation of expectations hold great promise for sociological studies (see Chap. 10). A second research field concerns the role of experts, intermediaries, and certified knowledge (Pollock and Williams 2010, 2016). As documented extensively in economic sociology, sociology of technology, and political economy, knowledge in modern economies is constructed in social systems of expertise, categories, and authority. Modern economies are densely populated by organizations, the purpose of which is the creation and dissemination of expectations. Promissory organizations (Pollock and Williams 2010), such as forecasting institutes, consultancies, public relations agencies, and think tanks, provide economic actors with coordinating narratives about future

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developments as well as with representations of the future role structure of markets. A good example of the organized production of authoritative expectations are the activities of credit rating agencies (Rona-Tas and Hiß 2011; Fourcade 2017). Rating agencies’ assessments of borrowers’ default risks have become a de facto standard on which actors throughout the global financial system base their decisions. Credit ratings standardize and legitimize expectations and help shift blame in case of disappointment. Instances of similar processes of the creation of shared expectations can be found throughout modern economies. A particularly interesting recent dynamic concerns the expansion of systems structuring the prediction of individuals’ behavior, such as the off-label use of credit ratings or the expansion of algorithmic systems in governance and government (Rona-Tas 2017, 2020). A third and related field concerns the role of social power in spreading expectations. Power is crucial for the diffusion of expectations because of two aspects. First, actors uttering predictions may be believed to be powerful enough to render the given prediction true, which can lead to selffulfilling prophecies. A good example of this process is ECB president Mario Draghi’s famous promise to do whatever it takes during the Euro Crisis, which ended speculative attacks on the currency without actual central bank interventions. Second, actors may possess the discursive resources to shift interpretations of how the future will unfold. Modern corporations, associations, and state agencies maintain elaborate professional repertoires to shape discourse. While equally endemic in other economic domains, the professional management of expectations has been singled out in research on central banks (Braun 2015; Wansleben 2018). In line with our claim that the analysis of social structures and expectations may be highly complementary, this area of research in addition shows that central banks’ ability to durably influence expectations in society requires specific financial market structures. Hence, market structures serve as the infrastructure for policy implementation. Braun (2018) captures the

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resulting entanglements between public and private actors in the notion of infrastructural power. Another good example of the power dimension in spreading expectations is Serafin’s (2019) study of taxi drivers’ resistance to market deregulation. While struggling to unite behind a common projection of the dangers of unhampered market entry initially, taxi drivers formed a movement behind charismatic figures, which was then able to counter the projections of the future of the taxi market brought forward by politicians and factions in favor of liberalization. While sociological studies of the emergence and diffusion of expectations have become fairly numerous in recent years, the fading away, breakdown, and abandonment of imaginaries of the future remain underexplored. Processes accounting for the death of expectations need not be mirror images of processes accounting for their emergence, and hence might require distinct explanations (Haffert and Ergen 2019). Two rare empirical studies focusing on the decline of expectations by Beckert (2020) and Ergen (2017) point to the fact that interruptions of validating experiences and stuttering signals of eventual fulfilment may undermine promises and the momentum of related imagined futures. Beckert (2020) traces the recent decline of the political power of neoliberal ideas back to the increasing elusiveness of promises of upward social mobility in the early twenty-first century.

4.3

The Moral Economy of Expectations

Most theoretical arguments on the social constitution of expectations in economic sociology treat them as predominantly cognitive phenomena, related to the problem of uncertainty. Yet, projections of the future are regularly saturated with normativity and values. A moral economy of expectations exists in modern capitalist societies. Larger technological projections usually present themselves as utopias or dystopias. New approaches to economic governance commonly include promises to overcome long-standing social ills, and business models regularly promise

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to cure dysfunctional structures and practices. The evaluative structures of expectations represent a vast and understudied research field. How do expectations become evaluatively charged? How do values, norms, and moral structures influence the emergence and spread of expectations and projective techniques? What does the prevalence of evaluatively charged imaginaries of the future in modern economies imply for theories of the rationalization and dis-embedding of contemporary capitalism? Knowledge about the relationship between expectations and social values is particularly important as it should help to situate the approach in relation to classical accounts of the normative embedding of the economy. A good example of the insights gained from bringing together the two approaches is Zaloom’s anthropological (2016, 2019) research on the ethical roots of household financial budgeting and planning. In a number of contexts, she shows how methods of family budgeting, and hence also families’ investment activities in financial markets, respond to projected models of an ethical life, for example regarding religious or intergenerational duties and responsible behavior. Closer investigation of the links between the cognitive and evaluative aspects of imagined futures may, in addition, help to develop the action-theoretical bases of the sociological analysis of expectations. As Miyazaki and Swedberg’s (2017) work on hope demonstrates, expectations charged with positive emotions and visions of a good life can exert strong motivational and mobilizing effects on actors and social groups. The motivating force of aspirations and shared hopes for economic emancipation has also been captured empirically in recent research on the illegal and informal economy. Dewey’s (2020) ethnography of the informal apparel industry underlying Buenos Aires’s La Salada market demonstrates that shared aspirations can form the basis of the ongoing reproduction of social order in markets (see also Chap. 11). Studying the normative dimensions of expectations is a promising starting point to understand the political facet of expectations. The way in which large scale projections are

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developed and the question of who shall participate in their creation are contested political issues. By documenting the rise and fall of the field of professional future studies, Andersson (2018) has shown how the formation of expectations was a core ideological battleground in Cold War society. Rival methods of forming expectations and developing scenarios were at their core shaped by normative conflicts over who may claim control over the future of the global order.

5

Conclusion

The analysis of expectations in economic sociology is a comparatively young and unconsolidated research field. Today it is driven mainly by theoretical explorations and empirical projects, which experiment with data sources that indicate actors’ expectations and their influence on social processes. While certainly not without potential drawbacks, the field’s current experimental character in terms of theory, method, and methodology produces a considerable dynamism. As outlined in this chapter, a number of loosely shared classics, research questions, and theoretical arguments structure the recent uptick of sociological interest in the future (Beckert and Suckert 2020). To conclude, we want to highlight three wider frontiers of the research field: its connection to social theory, the methodology of studying the future, and the quest for a macrosociology of the economy. The first frontier concerns the connection of the analysis of expectations to general economic sociology and social theory. As touched on above, knowledge of the connections between expectations and traditional sociological explanatory factors is largely of an exploratory and hypothetical nature. What is more, there is little systematic work on how sociological analyses of expectations may contribute to general social theory. While contributions to the former issue can be expected to result from scattered empirical research, the latter is a problem for systematic theoretical work. More general implications of a sociological understanding of expectations exist regarding understanding social order and social

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change in the economy, two constitutive issues for economic sociology and sociology writ large. Sociological work on the problem of social order has traditionally been strongly shaped by an emphasis on the past, which is true for both general social theory and economic sociology (Granovetter 1985; Beckert 2009; Joas and Knöbl 2009). An absence of social norms, relational structures, and cultural imprints brings to the fore problems of coordination, collective action, and social conflict that would make orderly economic life impossible. One way in which the analysis of economic expectations might help in understanding social order may be its emphasis on the intersubjective constitution of the action situation. As outlined above, the formation of expectations can be thought of as a mediating process, rendering social structures effective and shaping their effects on social action. As pointed out in rational-actor modelling (Axelrod 1984), as well as in pragmatist writings (Whitford 2002), shared expectations can be at the basis of durably cooperative relationships. The interpretation of situations as situations of joint gain, or of conflict and competition is crucially contingent on actors’ expectations about the future. Thus, the alignment and structuring of expectations can be thought of as essential for the ongoing reproduction of social order in the economy. A second way in which recognizing the role of expectations benefits theories of social order is that it provides an avenue for understanding social change. As outlined above in our description of research on innovation, realignments of expectations can be responsible for actors’ deviations from established paths of social organization. The analysis of economic expectations may have the potential to perform as a theoretical bridge between the understanding of the social integration of economic action, and the social constitution of economic dynamism characteristic of capitalist societies. The second frontier consists of methodological challenges. In line with phenomenological sociology, the analysis of expectations in economic sociology implies a view of the economy that understands it as a complex structure of meaning. How can structures of meaning and actors’

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interpretative efforts reliably be captured and reconstructed? Similar to attempts in network theory to conceptualize relational structures as constituted through stories (White 1992; Emirbayer and Goodwin 1994), imagined-futures approaches have often tried to capture sensemaking activities with the help of qualitative analyses of discourse, such as firms’ written communications, media reports, and documented speech and debate. As demonstrated by a number of recent studies, such interpretative methodologies can potentially also be combined with quantitative methods of analysis, for example on the basis of the large-scale hand- or machine-coding of textual material. A key challenge for the empirical analysis of expectations in the economy is that expectations need not be explicated to be observable in their effects on economic life. Core assumptions about the stability and orderly change of actors’ identities, relationships, and institutions arguably operate on a taken-for-granted level (Tavory and Eliasoph 2013). Expectations about the future may also be inscribed in material artifacts and tools, rather than made explicit. If structures of meaning exist in a variety of forms and layers, and are more or less accessible for scholarly reconstruction, there is a clear danger that studies may privilege more accessible manifestations of expectations. What is more, it remains a challenge for empirical research to establish causal links between clearly articulated expectations and their consequences for action and social structure (Jerolmack and Khan 2014). Differentiating empirically between the primacy of actors’ interests, cultural beliefs, and expectations beyond reasonable doubt is extremely difficult, often futile, and requires careful research design. Hence, analyses of expectations require a significant degree of methodological reflection and care (see Beckert and Suckert 2020, for an elaboration of the field’s methodological challenges). Third, the analysis of expectations promises a path towards macro sociological insights into capitalist economies. The development of realistic micro foundations for economic sociology should not be mistaken as being oriented towards a primarily micro-oriented research program. As

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Transcending History’s Heavy Hand: The Future in Economic Action

discussed above in the context of Pierre Bourdieu’s work, the potential contribution of a sociology of expectations to macrosociology should be obvious regarding the historical characterization of economic action in capitalist economies. Capitalist economies are characterized by a historically unique conception of an open and malleable future (Beckert 2013). While there are clear leads for how a sociology of expectations may contribute to modernization theory and historical macrosociology, the field still holds a wealth of possibilities for comparative and historical research. The implications of a sociological notion of the formation of expectations are less clear in contrast with macroeconomics and its widespread reliance on the assumption of rational expectations. A developed notion of the formation of expectations and its interplay with social structures should provide a productive starting point to revisit major macroeconomic problems and theorems from a sociological perspective. Long-standing problems of macroeconomics, such as swings in consumer confidence and investor sentiment, cyclical movements of the economy, breakdowns of economic activity, and structural change are promising fields for a macrosociology of economic activity. Equally promising are sociological inquiries into influential economic policy convictions derived from modern macroeconomics, such as the neutrality of money and the crowding out of private investment by government expenditure. At their core, answers to such questions require hypotheses about how expectations are formed and how they affect economic action. A sociologically rich notion of expectations should thus provide a starting point for a realistic macrosociology of the economy.

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Beckert, Jens is director of the Max Planck Institute for the Study of Societies in Cologne. In 2018 he was awarded the Gottfried Wilhelm Leibniz Prize for his work, reinvigorating the social sciences with an interdisciplinary perspective, especially at the intersection of sociology and economics. Research topics: Economic sociology, wealth and social inequality, organizations, sociological theory. Recent publications: Beckert, Jens. 2020. Markets from Meaning: Quality Uncertainty and the Intersubjective Construction of Value. Cambridge Journal of Economics 44/2: 285–301. Beckert, Jens. 2020. The Exhausted Futures of Neoliberalism: From Promissory Legitimacy to Social Anomy. Journal of Cultural Economy 13/3: 318–30. Beckert, Jens, and Richard Bronk, eds. 2018. Uncertain Futures. Imaginaries, Narratives, and Calculation in the Economy. Oxford: Oxford University Press. Ergen, Timur is a senior researcher at the Max Planck Institute for the Study of Societies in Cologne. He works at the intersection of economic and historical sociology with a special focus on state intervention in the economy. His research investigates cartel and merger policy, energy innovation, industrial and technology policy, and the history of the postindustrial society. Research topics: Deindustrialization, economic sociology, economic policy, historical sociology, innovation, pragmatism, renewable energy technologies. Recent publications: Ergen, Timur, and Sebastian Kohl. 2019. Varieties of Economization in Competition Policy: Institutional Change in German and American Antitrust, 1960–2000. Review of International Political Economy 26/2: 256–86. Haffert, Lukas, and Timur Ergen. 2019. The Symmetric Fallacy: The Dangers of Symmetric Reasoning in the Social Sciences. Cambridge, MA: Center for European Studies, Harvard University. Ergen, Timur. 2018. The Dilemma Between Aligned Expectations and Diversity in Innovation: Evidence from Early Energy Technology Policies. In Uncertain Futures: Imaginaries, Narratives, and Calculation in the Economy, eds. Jens Beckert and Richard Bronk, 298–318. Oxford: Oxford University Press.

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The Aesthetic Moment in Markets Jörg Rössel, Patrick Schenk, and Sebastian Weingartner

1

Introduction

New economic sociology has a long-standing interest in the cultural significance of goods, services, and exchange processes (Zelizer 1978, 2005). This chapter will concentrate on a particular kind of cultural attribution of meaning, analyzing goods and services that are seen as having a primarily aesthetic quality. Examples such as the fashion, film, music, art, or wine markets show that these are highly relevant areas. This becomes even clearer if we consider the role of aesthetic features in the purchasing of ordinary consumer goods. In these areas, design and external appearance play an ever-greater role in competition on the market. The importance of concepts such as the aestheticization of society or the aestheticization of everyday life highlights the increasing significance of aesthetic categories in everyday decisions about buying, using, and disposing of products. In contrast, in contemporary societies there tends to be less emphasis on instrumental criteria focused purely on the functionality of goods and services (Rössel 2007). This chapter aims to develop the hypothesis that goods and services which are considered in J. Rössel (*) · S. Weingartner University of Zurich, Zurich, Switzerland e-mail: [email protected]; [email protected] P. Schenk University of Lucerne, Lucerne, Switzerland e-mail: [email protected]

terms of aesthetic criteria are associated with a specific form of uncertainty. In the branch of economics known as information economics, it has been argued that uncertainty about the quality of goods is primarily caused by a lack of information about these goods. This is not the case for aesthetic goods. The difference is that aesthetic judgments are socially constituted assessments, so individual and collective aesthetic decisions must be seen, to an especially high degree, as only ever having temporary validity. A skirt that is at the cutting edge of fashion today may be hopelessly out of fashion tomorrow. Yet, aesthetic judgments are not fallible solely from a temporal perspective, but also in terms of differences between social groups. A musical genre may be highly prized in one particular group but will certainly be denigrated in others. This is why, in this chapter, we focus on analyzing the processes of aesthetic judgment. The first area of interest is the symbolic distinction between objects that are accorded a particular status (e.g., that of being a work of art) and objects that are denied this status. The second, however, is the graded evaluation of these objects as better or worse on a rating scale. These questions are relevant not only for cultural sociology, which explores various kinds of cultural values and cultural demarcations, but also for economics and economic sociology, where questions of the origin of values and prices are central (Beckert 2011). Economic values also do not arise solely on the basis of isolated, individual

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acts of judgment in exchanges, but in a social context, in which processes of aesthetic evaluation take place in different fields within society (Beckert and Rössel 2013). Our first step in the second section of this chapter will be to introduce the concept of the aestheticization of everyday life, which is fundamental for the growing importance of aesthetic criteria on markets. The second step will be to elucidate the key problem of uncertainty about the quality of goods with primarily aesthetic criteria, and the third step will be to analyze the process of evaluation for such goods and services. After developing the theoretical framework in these three steps, we will present a number of studies from our own research on the arts and the wine markets (Beckert and Rössel 2013; Beckert et al. 2018; Rössel et al. 2018; Schenk 2020), to illustrate these theoretical perspectives, as powerful tools for economic sociology in the twenty-first century. We summarize our results in seven concluding theses in the fourth section.

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Theoretical Analysis of Markets for Goods and Services with Primarily Aesthetic Features

2.1

The Directions of Aestheticization

The cultural process of aestheticization forms a backdrop for the increasing focus on the aesthetic features of goods and services (Featherstone 1987; Schulze 1992; Charters 2006). A key aspect of this aestheticization is that the emphasis is not on the strictly instrumental usefulness of an object, but on the enjoyment of its beauty, its symbolic and aesthetic qualities, and the associated experiences (Charters 2006, 246). Typically, this also means that the corresponding objects are associated with art, and their producers are treated as artists (Charters and Pettigrew 2005). What is meant by the process of aestheticization is that, from a historical perspective, a comprehensive aestheticization of everyday life can be observed, affecting an ever-greater number of objects and

actions, and giving great prominence to individual lifestyles (Featherstone 1987). In the Germanspeaking countries, the theory of aestheticization has been extensively elaborated by Gerhard Schulze. His diagnosis of contemporary society centers on the assertion that people in contemporary societies are especially guided by an experiential orientation (Erlebnisorientierung), which he regards as the consequence of a sustained period of prosperity, in contrast to the survival orientation in societies of scarcity (Schulze 1992, 41 ff., 1997, 84 ff.). One reason for this change is the massive upsurge in wealth and leisure (Schulze 1992, 54 ff., 1997, 85), which has drastically reduced the material limitations on everyday life for a large number of people. Another reason, however, is the change in cultural values, since the proliferation of options is partly caused by the weakening of previously valid, normative restrictions. Schulze, therefore, uses the term Entgrenzung (the removal or dissolution of boundaries or limits) to highlight the fact that various kinds of boundaries limiting people’s scope for action have opened up in recent decades as a result of modernization processes (Schulze 1997, 85 f.). The core of the concept of experiential orientation is defined by the contrast between outward and inward orientation (Schulze 1992, 38). People’s actions are increasingly less focused on functional goals in the outside world and are increasingly aimed at internal psychophysical processes which can be interpreted as pleasant, and therefore aesthetic experiences. Schulze is not solely concerned with the historical growth in consumer options and leisure in contrast to the realm of work, but with a deeper distinction. He sees the opposition between outward and inward orientation in consumer and leisure activities themselves. In the case of externally oriented consumption, the usefulness of a commodity can be defined independently of the subject, while in internally oriented consumption it can only be judged by the individual actor (Schulze 1992, 427, 1997, 84). This is associated with a high degree of subjectively felt uncertainty. While it is possible to develop clear quality criteria for outwardly oriented consumption, this is much

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more difficult for inwardly oriented consumption. Buying yourself a good pair of shoes is simple compared to the goal of finding a nice pair of shoes (Schulze 1992, 431). This is connected to the next feature, the fact that experience-oriented action brings a high risk of disappointment. A piece of music that produced a pleasant experience a few days ago can be felt to be dull and uninspiring today. The relationship between experiential means and ends is therefore extremely incalculable (Schulze 1997, 89 f.). The risk of disappointment, inherent in an experiential orientation, then brings us to the last aspect: the fact that experience-oriented individuals are in search of new, less disappointing impressions to provide variety (Schulze 1988, 85, 1992, 63 ff.). Schulze’s diagnosis of the times is based on the assumption that people’s experiential orientations are not completely individualized but are socially schematized. In his empirical study, three everyday aesthetic schemata of this kind emerge: the schemata of Hochkultur (high culture), of Trivialkultur (literally trivial culture, i.e., low-brow culture, entertainment for the masses) and of Spannung (tension, excitement) (Schulze 1992, 142 ff.). Just a few decades ago, Schulze argues, everyday aesthetics was marked by a one-dimensional opposition between Hochkultur on the one hand and Trivialkultur on the other; now, however, the development of the Spannung schema has led to a multidimensionality in the space of everyday aesthetics (Müller-Schneider 1994). What is meant by this is a form of everyday aesthetics focused on speed, physicality, and action. Typical examples of the Spannung schema are rock and pop music, trips to the cinema, action films, and very physical forms of dancing (Schulze 1992, 153 f.). Analyses of media have been especially useful for tracing these processes of aestheticization. It becomes evident here that processes of aestheticization can go in different directions, depending on their orientation towards everyday aesthetic schemata. For example, Janssen et al. (2011) are able to show that the coverage of arts and culture in the quality newspapers is becoming more inclusive of popular culture, which belongs to Schulze’s Spannung schema, and that the

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boundaries between high culture and popular culture are becoming somewhat less rigid. In more nuanced studies on the field of film, however, Baumann (2001, 2002) shows that the cinema film, traditionally classified as popular culture, is undergoing a change of meaning in media coverage. Over time, films have come to be seen less as pure entertainment products, and more as works of art. Thus, film is moving ever closer to high culture. This is apparent in terms from highculture discourses that align films with artworks, but also from the fact that critics and their positions are becoming much more crucial for the understanding of films (Shrum 1991; Baumann 2002). However, these processes of assimilation to high culture cannot be observed for all cultural products. For example, Verboord (2011) shows in an international comparative study that fictional writing is being judged less by high-culture standards, and is increasingly following an economic, market-oriented logic. These studies show, in line with Schulze’s reflections, that processes of aestheticization do not have to be linear and move in a particular direction, but that there are various cultural repertoires of aestheticization. In their analysis of the American gourmet foodscape, Johnston and Baumann (2007) observe a trend, leading away from the traditional culinary emphasis on French cuisine to a focus on criteria of authenticity and exoticism. In their view, however, this does not mean a democratization or a breaking down of hierarchies, but merely a change in the criteria for legitimate culture in aesthetic judgments about products. In contemporary societies, legitimate culture can be identified by the prioritizing of criteria of authenticity, encompassing artisanal instead of industrial production, contextualization in a local or regional setting, and an anti-commercial attitude, which distances itself from economic calculation. Further identifying features are an artistic/aesthetic attitude, and an emphasis on the individual person of the producer, and the historical and traditional connections of a product. In their analysis of the discourse of the American gourmet scene, Johnston und Baumann (2007) are able to empirically identify, in particular, the relevance

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of (1) geographical connections, (2) artisanal production methods, (3) the personality of the individual producer, and (4) the embedding of the production in history and tradition. This focus on criteria of authenticity is becoming increasingly important for ever-larger sectors of markets offering products and services with primarily aesthetic features (Carroll 2015).

2.2

Aestheticization and Uncertainty

Schulze’s reflections demonstrated very emphatically that the evaluation of goods, services, and experiences has very shaky foundations and entails a high level of uncertainty. Consumer judgments in the fields of wine and art can serve as empirical evidence of this. For the recipients and consumers of artistic goods and services, it is extremely difficult to assess their quality. In an enlightening experiment, Hawley-Dolan and Winner (2011) used paintings by professional artists on the one hand and by animals and children on the other hand as stimuli. These were presented to art and non-art students for evaluation. There were hardly any differences between the assessments of the two groups, with slightly less than two thirds of the artworks presented being attributed to the correct producers. While this value does differ significantly from a random evaluation (50% correct attributions), it clearly shows people’s considerable uncertainty when evaluating contemporary art. Therefore, Plattner (1996) also describes the buyers of contemporary artworks as confused consumers, who would generally be unable to undertake any economic transactions without getting orientation from the quality judgments of actors in the art field. This uncertainty in assessing the quality of products and services can also be discerned in the field of food and especially wine. Several studies have shown that people are not very good at evaluating food, based solely on its sensory characteristics. For instance, an experimental study with students of oenology from Bordeaux found that most of them were unable to distinguish white from red wine just by taste (Morrot

et al. 2001). Similarly, expert ratings of wine in blind tastings exhibit only low intercorrelations (Brochet 2001; Cicchetti 2007; Hodgson 2008). Quality assessments of wines by nonexperts show a negative correlation with price, meaning that wine consumers on average rate the quality of high-priced wines lower than that of inexpensive wines (Goldstein et al. 2008). Generally, these and many other experimental studies indicate that consumers, when relying only on sensory characteristics, are not able to distinguish between different levels of wine quality (D’Alessandro and Pecotich 2013), though wine experts do perform better in some respects (Gawel 1997; Solomon 1997; Goldstein et al. 2008). In short, products and services that are primarily acquired because of their aesthetic features are characterized by a high level of uncertainty about their quality. A central approach within economics which deals with such uncertainties about quality is information economics (Stiglitz 1987; Riley 2001). In one of the classic publications leading to the founding of this new branch of economics, Akerlof (1970) showed, in a model of the used car market, that in conditions of asymmetric distribution of information (where the consumers know less about the quality of the vehicles on offer than the sellers), buyers are only willing to pay an average price. This in turn means that sellers of above-average-quality goods withdraw from the market, which ultimately hampers the development of the market. To solve this problem, Akerlof raised the possibility of introducing institutions to signal a certain quality to the customers (Schneider 1997, 117 ff.). These include guarantees from the manufacturers, brand names, or chains which represent a certain level of performance. Shapiro (1983) was able to show that, in markets where customers have incomplete information about the actual quality of products, creating a good reputation is a worthwhile investment strategy for producers. In order to more precisely define the asymmetric distribution of information during the exchange of goods, three different types of properties can be distinguished (Schneider 1997,

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The Aesthetic Moment in Markets

84 ff.): Firstly, search properties, which can already be evaluated by the consumers before they purchase a product, (e.g., the color or weight). Secondly, experience properties, which can only be ascertained after the good has been purchased, by consumption or use, (e.g., the actual fit of a shoe, the taste of a new lemonade, or the durability of a Teflon-coated pan). Thirdly, so-called credence properties, which the consumer cannot verify with any certainty either before or after the purchase or only with great difficulty. Examples might be the local origin of foodstuffs, or the guarantee of a particular ecological method of cultivation for cereal crops. The theoretical criterion for distinguishing between these types of properties is obviously whether and when consumers can acquire information about them. In our view, however, the uncertainty attendant on aesthetic evaluations does not depend on asymmetric information distribution and therefore, cannot be subsumed under the concepts of information economics, as will now be demonstrated. Most features of an artwork can be ascertained when viewing it in the gallery, in the artist’s studio, or at an auction. From an economic perspective, most of the features of artworks must surely be regarded as search properties since customers can assess the objects and their characteristics before and during purchase. How is this contradiction to be understood? On the one hand, there are no information asymmetries, as understood by information economics; on the other hand, there are obvious uncertainties on the part of consumers about the aesthetic qualities of the products. Aesthetic evaluations of the beauty of an artwork or the taste of a high-quality wine are not individual judgments, but are, typically, socially constructed. If a random person declares that a particular object is a work of art, or that a fermented grape juice is an excellent wine, this judgment has no social consequences unless other people, who are considered to be competent judges, share and endorse these evaluations. Thus, aesthetic judgments are social properties of products, which are only created by a social consensus within certain groups or networks, and are therefore, temporary to a particularly great

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extent. Hence, these socially attributed features cannot be straightforwardly slotted into the category system, developed in information economics to describe the properties of goods, since uncertainty about aesthetic judgments is not based on a lack of information, but on their social construction. This also means, however, that quality judgments themselves are dependent on processes of social construction, which, as outlined above, can vary across time and space as well as between social groups.

2.3

How Is Aesthetic Quality Attributed?

In the following section we present two theoretical approaches to explain how quality judgments come about: Karpik’s model of the economics of singularities and Bourdieu’s model of the cultural consecration of objects. Karpik's economics of singularities is not a theory about markets in general, it is a theory about markets for singular products, and products with aesthetic qualities usually belong to this category. Singular products constitute a specific class of products, which has been ignored in economic theory, according to Karpik (Eloire 2010; Karpik 2011). Singular products are unique due to their structured multidimensionality. That is, each singular product is defined by a specific combination of attributes and their interrelations. For example, according to the economics of singularities, Tenuta San Guido was not judged (by the Wine Spectator) to be the best wine of 2018 because it contains elements of Cabernet Franc, some Tuscany, some 2015, and some red, but due to the specific combination of these attributes (or others). Their uniqueness makes singular products incommensurable. They do not easily lend themselves to comparisons (Heintz 2016). Moreover, in markets for singular products, quality competition prevails over price competition (Karpik 2010). Singular products are therefore not primarily compared by price. Yet without comparison, choice is not possible, so in theory no market can exist. How is this resolved? Karpik maintains that singular products can be commensurated by

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highlighting some attributes and neglecting others. According to Karpik, then, markets for singular products necessarily rely on judgments about the quality of such products. The judgment establishes a certain point of view, enabling actors to compare otherwise incommensurable products. However, in a market for singular products, each point of view is contestable. Indeed, a multiplicity of points of views is constitutive of this market (Karpik 2013). If this were not the case, de-singularization would become rampant, and it would not be a market for singular products anymore. The awareness of different points of view further implies that commensuration is always just temporary, and quality is always underdetermined. One might judge a singular product from a certain perspective, but in principle a different perspective would be equally legitimate. A situation of radical uncertainty arises. Were the 250 dollars for the bottle of Tenuta San Guido really justified, and if so, on what grounds? This makes markets for singular products opaque. To dissipate this opacity and to make judgments, consumers need help, which is provided by judgment devices. Judgment devices are cognitive artifacts (Aspers and Beckert 2011). They offer focused, formatted, and credible knowledge on the quality of singular products. Knowledge contains implicit and explicit evaluations, providing reasons for choosing a product (Karpik 2013). Credible judgment devices are a necessary condition for the existence of a functioning market for singular goods and services. Karpik differentiates five types of judgment devices. Cicerones represent critics and guidebooks offering evaluations of singular products (Eloire 2010). In the wine market, the expert Robert Parker, who publishes Parker’s: “The Wine Buyer’s Guide,” is a formidable example. Parker talks about the tradition of a wine region, the personality of the wine producer, and gives a detailed account of the flavors of a wine. Cicerones, hence, provide substantive knowledge without establishing a single order of worth. This is in stark contrast to rankings, which

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order singular products along an ordinal scale (Karpik 2011). Rankings do not provide substantive knowledge, only formal knowledge on the relative position of products within a single hierarchy. Parker Points are an example. Hence, the complexity of the quality of singular products is condensed into a one-dimensional scale, incommensurability is temporarily eliminated. Appellations are “names associated with the attributes and meanings that define singular products or families of singular products” (Karpik 2010, 45; Rodet 2012). In the wine market, this can be the name of the wine producer, the winery, a wine region, or a label, such as the appelations d’origine contrôlée in France. Confluences are techniques to channel consumers, entailing spatial arrangements of products in retail outlets or selling techniques (Jourdain 2010). In the wine market, consumers participate in wine tastings or tours of wine estates, complete with the customary visit to the on-site shop. Finally, there are personal networks, which encompass strong and weak ties, such as family members, friends, colleagues, or contacts (Felouzis and Perroton 2007; Lefèvre 2015). This type of judgment device “operate[s] by the circulation of the spoken word” (Karpik 2010, 45). Karpik’s typology makes a significant contribution to the sociology of valuation and evaluation by bringing together different types of judgment devices, most often treated separately, in a theoretically grounded framework (Healy 2011; Aspers 2018). Karpik understands his typology as a tool for empirical research, and deems it sufficiently complete to analyze and explain the functioning of markets for singularities (Karpik 2013). A major task for the analysis of a particular market, then, is to assess the relative importance of these devices for (e)valuation processes and for market outcomes, such as price and demand (Kraemer 2017). Yet, in line with the Weberian concept of ideal types, Karpik (2010) also characterizes empirically observable markets as regimes of economic coordination. The market for fine wine, for example, is built upon impersonal, substantial, and critical devices. Karpik speaks of an authenticity regime. These devices respect the originality and

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authenticity of the product and empower consumers to make autonomous judgments. Consequently, the market for fine wine is based on cicerones and appellations (Karpik 2013). Rankings and confluences are expected to play a subordinate role since they represent formal and commercial devices, which de-singularize products by ordering them on a one-dimensional scale and by channeling consumers to increase profits. Personal networks are also likely to play a lesser role, since they are primarily relevant in markets where no other credible judgment devices are available (Bessy and Chauvin 2013). While Karpik presents a specific model, focused on the uncertainty associated with singular products, Pierre Bourdieu views the attribution of aesthetic and other qualities to objects as a general social process, taking place in all social fields. Similarly, to Luhmann’s theory of functional differentiation, Bourdieu sees society as differentiated into various subsystems; he considers the social space as being differentiated into various spheres or social fields (Bourdieu and Wacquant 1996, 134; Kneer 2004). Unlike Luhmann, however, Bourdieu conceives of social fields as having only limited autonomy: firstly, he sees economic capital as dominant in modern societies, so even actors in non-economic fields must, in some cases, be guided by the prevailing economic logic (Bourdieu 1999, 341 f.). Secondly, the relative autonomy of the social fields is historically variable. The autonomy of a field can be deduced from the degree to which actors within that field take their cues from hierarchizations and criteria that are internal to the field, and not from those outside the field, (e.g., economic criteria) (Bourdieu 1999, 344). In one respect, however, the autonomy of social fields increases in a nearly linear manner: over time, fields accumulate their own history and an associated discourse. Actors are then required to exercise ever-greater reflexivity, if they are to position themselves appropriately in the field (Bourdieu 1999, 384 ff.). The defining feature of social fields is their objective structure, which is the result of the distribution of key resources, which Bourdieu calls forms of capital, and which structures the

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behavior of actors in a field (Bourdieu and Wacquant 1996, 124 ff.). Bourdieu is mainly concerned with the extent to which actors possess three types of resources: economic, social, and cultural capital (Bourdieu 1983; Fröhlich 1994, 34 ff.). Although Bourdieu expands the classic concept of capital, economic capital in the form of money and property rights remains dominant in his concept. He uses social capital to refer to people’s formal and informal networks of relationships, which can be relevant for the acquisition of other types of capital. Lastly, he differentiates between three forms of cultural capital: firstly, institutionalized cultural capital in the form of educational qualifications; secondly, objectified cultural capital in the form of objects (pictures, books, musical instruments, musical scores); and thirdly, embodied cultural capital. The latter refers to abilities, dispositions, and skills assimilated or absorbed by individuals, which enable them to appreciate works of art, for example. Bourdieu is referring mainly to works of classic high culture, for which he uses the term legitimate culture (Bourdieu 1982). Cultural capital, in particular, can take on different field-specific forms (Holt 1997). Possessing different forms of capital allows actors access to the field and opportunities to exert influence in it. So, for Bourdieu these fields are always, in part, power structures and fields of conflict. The actors strategically deploy their resources to improve their position in the field and thus, also define the boundaries of the field. Whatever definition of a true artist or a true writer is accepted at any given time (other terms could be substituted here: true scientist, true believer, the wine of the century, the ultimate smartphone) is the result of the preceding conflicts between the different actors in the relevant field (Bourdieu 1999, 355). The fields of cultural production that are central for the attribution of aesthetic features mostly display a bipolar structure: at one pole are the actors who are more strongly oriented towards commercial success and gaining economic capital, at the other pole are those who base their goals more on cultural criteria (Bourdieu 1999, 227 ff.). From Bourdieu’s perspective, an orientation towards commercial gain means that these actors

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do not fully submit to the cultural criteria within the field and are more guided by external criteria (Bourdieu 1999, 227 ff., 346). In contrast, the targeted reference group of the limited mode of production, oriented towards the internal criteria of the cultural field, is a highly educated audience, in extreme cases including only the producer’s colleagues. In comparison to commercial products, products originating from the limited mode of production often place high demands on its audience, since the content can only be understood in a reflexive relationship to the history of the field (Bourdieu 1999, 237). The objects, goods, and services discussed here are often avant-garde in character, making a conscious break with the existing conventions of perception and interpretation (Becker 1982) and a deliberate effort to disconcert the audience. The social fields of cultural production show a number of institutionalized roles that contribute to creating an object’s aura (Bourdieu 1999, 270 ff., 360 ff.).1 These range from the editor who discovers an author, or the gallery-owner who exhibits an artist to critics and decision-makers in museums and cultural policy. An important, often overlooked point is that the consecration of an artist or an artist’s work is also dependent on educational policy. Only when the reading of a writer’s novels, or the interpretation of a visual artist’s objects, or a composer’s works has been included in the school curriculum have they definitively arrived in the pantheon of the classics (Bourdieu 1999, 237). It is also via the educational institutions and the specific art-related public spheres that the corresponding demand for art is created, on the one hand in the form of art lovers, who populate the museums and galleries, and on the other hand in the form of collectors and art buyers, who actually demand artworks on the art market. If we follow Bourdieu’s theory of art reception, an adequate understanding of artworks (and therefore one that gives enjoyment) is only possible if a person has the corresponding 1 Here we are focusing on Bourdieu’s presentation of the artistic field. It would be possible, however, to produce comparable representations for any field of cultural production by exchanging the actors and institutions involved.

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knowledge about the codes and conventions relevant in production. For many people from the lower and middle social classes, works of contemporary art are a source of confusion and misunderstanding, because they generally use their everyday knowledge to decode these artworks (Bourdieu 1970). However, this everyday cultural capital only allows decoding of the surface meaning of artworks. This typically means that people from the lower and middle social classes mainly perceive artworks as beautiful if they represent things that can be regarded as beautiful themselves, such as an attractive woman or a sunset (Bourdieu et al. 1981; Bourdieu 1982). The formal and stylistic aspects of an artwork, which derive from its producer’s position in the history of the artistic field and which are necessary for a deeper understanding and therefore enjoyment of the artwork, remain hidden from these viewers (Bourdieu 1970). Clearly the basis for an adequate appreciation of art, which also enables the viewer to enjoy it, is to have sufficient aesthetic competence or cultural capital, allowing for a more fundamental decoding of an artwork. Besides repeated engagement with artworks, the most important sources for the cultural capital needed for this are, on the one hand, the education system, and on the other hand, as a prerequisite for acquiring cultural capital in the education system, the cultural climate in a person’s household of origin. Although Bourdieu’s theory was primarily developed for the reception of art, it is also transferable to other fields. This applies both to the process of the aesthetic consecration of objects on the producer side, and to the consumption of goods and services, which is dependent on possessing a certain cultural capital. Pape (2012), for example, has been able to demonstrate this comprehensively for the German wine market. It is clear, for instance, that the position of actors in social space and their family socialization have a significant influence on taste dispositions (dry versus sweet wine), on evaluation criteria (importance of artisanal production methods), and on the main purchasing channels chosen by consumers. In summary, this discussion of field theory shows that the quality of an

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aesthetic product is not determined by existing objective features but is constructed in the fieldspecific discourse. A substantial part of this is conducted in the general mass media, regardless of whether the topic is art in a narrower sense or other products with primarily aesthetic features. These goods and services with their respective qualities attract a response in virtually all mass media, but in some cases, there are also fieldspecific media such as specialist journals, which constitute the relevant field-specific public sphere.

3

Empirical Examples

In this section we report results of empirical studies, that applied and tested the theoretical concepts, we developed and discussed in the previous sections. In Sect. 3.1 we study the aestheticization thesis on the empirical basis of wine reporting in two major German weeklies. In this section, we focus especially on Johnston and Baumann’s (2007) idea that aesthetic goods and services are increasingly evaluated by criteria of authenticity. In Sect. 3.2 we report on a study, that analyzes Karpik’s model of judgement devices in its impact on consumers’ willingness to buy and pay for fine wines. In Sect. 3.3. we switch to Bourdieu’s field theory and present research results, that show the relevance of field-specific processes of aesthetic consecration on price formation on the art market. Finally, in Sect. 3.4. we take both the producer and the consumer side of the wine market into account and empirically establish that a homology in aesthetic evaluation criteria between these two sides of the market exists, thus supporting Bourdieu’s field model. Overall, these four studies illustrate the empirical usefulness of the theoretical approaches presented in Sect. 2 for economic sociology.

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3.1

How Does the Aesthetic Discourse in the Wine Field Develop?

What turns a bottle of fermented grape juice into a cult wine? As discussed in the course of this chapter, we are working on the theoretical assumption that the evaluation of aesthetic products is not the result of exchange processes on the market, but of the interactions of actors in the relevant social world, in this case the wine field. Different actors, however, have unequal levels of influence. Their endowment with diverse forms and different volumes of capital allows the actors access to the field and diverging chances of exerting influence in it. The accepted definition of an icon wine, or of a high-status winemaker, is the result of preceding conflicts and discourses between the different actors in the relevant field. In our view, the public discourses and mass media play a special part in this process. In order to investigate the role of the mass media in the process of aestheticization, using the example of wine, we conducted an empirical study of wine coverage in two German weekly magazines, Der Spiegel and Die ZEIT, two particularly influential actors of quality evaluation and cultural consecration from the German fieldspecific public sphere (Rössel et al. 2018). All articles on the topic of wine for the period from 1947 to 2008 were included. The relatively long period covered by the study allowed us to consider several theses about the historical transformation of cultural evaluation processes from the literature on cultural sociology. Firstly, the abovediscussed theory of aestheticization, which postulates that evaluation processes are shaped increasingly by aesthetic standards, while instrumental and economic aspects, in a narrower sense are attracting less attention. Secondly, there is the claim that in the context of the globalization process, the cultural discourse in the individual countries is becoming more global in scope. Thirdly, there is the assumption that the traditional separation between high culture and popular culture is eroding, and is being replaced by new symbolic hierarchies, like authenticity. We

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assume that the authenticity of aesthetic objects can be discerned from the use of criteria emphasizing artisanal production, the natural preconditions for this, regional and traditional integration, and the personalities of the individual producers. Our empirical study can largely confirm these theses: wine is increasingly viewed as an aesthetic object, while economic and instrumental references have almost completely vanished from the discussion. The globalization theory can also be confirmed: references to German wine are decreasing, while wine from the New World in particular is attracting more attention. Yet, contrary to all arguments about the end of France’s dominance in the culinary world, the esteem which French wines are given has not diminished over time. Lastly, we can demonstrate that in the period of time under consideration, authenticity came to play an ever more important role in the discourse on wine. This shows empirically, that in the contemporary field of wine, a fermented grape juice is particularly likely to become a cult wine, without any change in its chemical composition, if, regardless of its provenance from a particular country, it is presented in the field-specific discourse as an aesthetic product, characterized by artisanal manufacture, special natural conditions of production, a specific winemaking tradition, and a winemaker who is comparable to an artist (Rössel et al. 2018). These findings very clearly show that developments on the market could be influenced not only by the growing aestheticization of products, but also by the specific direction of this aestheticization process.

3.2

The Use of Judgment Devices to Overcome Quality Uncertainty

Based on survey data on consumers in four German cities (Pape 2012), we studied the role of the different judgment devices, which, according to Karpik, reduce the quality uncertainty connected to singular products (Schenk 2020). We found that the use of different types of judgment devices is consistently and substantially correlated with

the demand for fine wine. Karpik’s theory thus makes a valuable contribution to the explanation of prices and demand (Schenk 2012; Kraemer 2017). However, the statistical findings for Karpik’s characterization of the fine wine market as an authenticity regime are mixed (Healy 2011). In line with the theoretical expectations, cicerones are substantially related to the demand for fine wine. Personal networks play a subordinate role. In contrast to the theoretical arguments, confluences are also strongly correlated with the demand for fine wine, while appellations are unrelated to the purchase of the most expensive wines. Rankings are relevant for lower-priced wines, but also for the wines at the very top of the price distribution. Thus, judgment devices are extremely important for explaining market behavior for singular products, however, we do not find clear evidence to support Karpik’s notions of ideal-typical markets, where certain combinations of judgment devices prevail. Historical and institutional characteristics of the German wine market provide a tentative explanation for some of these unexpected findings (Zhao 2008; Carter 2017). Although the market is increasingly characterized by a demand for foreign wines, the demand for regional wines is still strong, especially in wine-producing regions (Pape 2012). This might explain the pervasive role of confluences (wine seminars and wine tours) as a judgment device. Furthermore, the German wine market is characterized by the coexistence of two ranking devices, issued by two separate and competing institutions for quality assessments: the official German wine classification and a private association of wine producers called Verband Deutscher Prädikatsweingüter (VDP). According to previous studies, the former is more oriented towards the mass market, employing a standardized method of wine testing based on taste and chemical composition, while the latter is restricted to fine wine, putting forward a more holistic notion of quality akin to the French concept of terroir (Rössel and Beckert 2013; Frick and Simmons 2013). The use of these ranking devices might yield different effects at different points of the price distribution, and not only in the lowest price segments, as the

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theory suggests. The impact of rankings on the demand for fine wine reflects the particular landscape of ranking devices in the German wine field. In sum, this implies that the economics of singularities takes too little of the historical and institutional context into account when explaining the relative importance of judgment devices in the demand for singular products (Zhao 2008; Healy 2011; Carter 2017). The results show, furthermore, that the demand for fine wine is not directly related to social distinction, once the use of judgment devices is taken into account. In line with Karpik’s depiction, this indicates that consumers of singular products are highly reflexive and autonomous, making product choices based on the knowledge provided by judgment devices (Howland 2013). However, the engagement with judgment devices is, in turn, consistently and substantially correlated with the social and normative function of wine consumption. This suggests that social actors do not seek to acquire knowledge on the quality of singular products solely to counter radical uncertainty, as Karpik argues (Aspers and Beckert 2011). The users of judgment devices also link external rewards and symbolic group boundaries to the practice of fine wine consumption (Warde 2014). These social functions might help to explain why consumers become knowledgeable evaluators of singular products, and how this relates to identity formation (Lamont 2012). The neglect of processes of distinction and their class foundations is a serious blind spot in the economics of singularities (Kraemer 2017), which is, however, addressed in Bourdieu’s theory.

3.3

What Part Do Aesthetic Criteria Play in Price Formation on the Art Market?

We conducted a study on the art market in Germany (Beckert and Rössel 2013), starting from the assumption developed above, that the problem of uncertainty is a dominant structural property of the market for contemporary art. A stable market can only develop if this uncertainty

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is reduced. The formation of aesthetic evaluations and thus the reduction of uncertainty does not take place on the art market, but rather in the art field, as the field theory of Bourdieu predicts. The pricing of contemporary works of art therefore depends on the reputation of the artist and the artworks, which is established by actors participating in the artistic field of production, especially the field-specific arts media. We analyzed this idea using two databases, containing various indicators for the reputation of the artists in the sample and prices for their work, one focusing on auction prices and one on gallery prices. The auction database contains data on 23 internationally renowned artists from German-speaking countries, following their activities in the art world from the start of their careers until the year 2000. The gallery database comprises information on 30 artists represented by galleries in Leipzig and Berlin catering to a national and international audience. We were able to use both of these databases to systematically test and ultimately substantiate our idea that the aesthetic reputation, established in the art field is crucial for the formation of prices on the art market. Using two different databases, however, also enabled us to test for differences in the relationship between artistic reputation and price formation on the primary (gallery) and secondary (auction) art market. Based on the data we collected from galleries, we were able to show that an artist’s accumulated reputation over the course of his or her career is of central importance. This result is explained by the specific scripts that gallery owners follow in their pricing strategies (Velthuis 2005). Auction price data, on the other hand, revealed that among the more specific reputation indicators, the most important is the recognition that comes through awards and media coverage of the artist. This result is very convincing from the point of view of our theoretical framework developed above, focusing on the public discourse about aesthetic qualities. For potential art purchasers, media attention given to an artist is a very accessible signal of artistic quality, which reduces the uncertainty associated with purchasing a contemporary work of art. The representation of an artist’s works and career in

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the media lends legitimacy to individual works of art. This gives prospective buyers reassurance about the probable quality of past and future works by the same artist. This public awareness does not arise independently of the artistic field, but rather originates from assessments and activities inside the art world that create and promote an artist’s reputation and image.

3.4

What Influence Do Aesthetic Criteria Have on Behavior in the Wine Market: Price Formation and Consumption?

Based on the assumption that the assessment of wine quality is not simply a question of information about objective characteristics, but the result of a process of social and cultural consecration, we studied the formation of prices on the German wine market (Beckert et al. 2018). In our empirical study, we analyzed data for 110 wineries and 1071 wines, as well as data on wine consumers in four German cities. The symbolic positions of the wineries were ascertained from a content analysis of their homepages. The information on consumers was obtained from a population survey (see Sect. 3.2). Our empirical analysis of the production side showed that the symbolic positions of wineries have a strong explanatory impact on the price differences between them. This is a surprisingly clear result since we captured only a narrow slice of the vineyards’ symbolic positions by analyzing only their webpage. Future research based on richer data could uncover even stronger effects. Winemakers with symbolic positions, typical of the autonomous pole in fields of cultural production obtain significantly higher prices on the wine market compared to other wineries. Producers with these symbolic positions make use of symbolic capital, converting it into higher market prices. Symbolic capital accrues especially to wine producers who conceal their economic aims and produce wines with aesthetic characteristics, which are depicted as difficult to drink because the consumer must first learn to appreciate them and must therefore work on

developing taste. This symbolic capital can be transformed into economic capital in the form of substantially higher prices on the market. However, this indirect strategy of first gaining symbolic capital, which is afterwards transformed into economic profits, is of course only one of two alternative economic strategies for wineries. The other strategy is a heteronomous orientation towards direct economic gains and a strict focus on the pre-existing demand in the market. Thus, the analysis has shown that Bourdieu’s model of the chiastic structure of fields has considerable power in explaining price differentiation between wineries. Regarding the consumer side, we found that wine quality is interpreted differently according to a person’s habitus. The perception of symbolic capital is shaped by the class positions of consumers. In the case of upper- and middleclass consumers with high economic and cultural capital, symbolic positions from the autonomous pole of cultural production fields enjoy a high level of legitimacy. Furthermore, our empirical analysis of the consumption side of the market has clearly indicated that middle- and upper-class consumers with a higher income, a higher level of education, and a strong familiarity with and knowledge of the wine field, due to their socialization are not only more oriented towards the autonomous pole of the field in terms of sources of information, quality criteria, taste, and distribution channels, but are also prepared to pay higher prices for a bottle of wine. Finally, they have a greater disposition to view wine consumption as a practice allowing for social distinction. This strongly substantiates Bourdieu’s idea of a homology between the hierarchic structure of fields of cultural production and the class hierarchy of the social space.

4

Summary

We would like to conclude this chapter by summarizing a few theses that we see as central for the future analysis of markets for products and services with primarily aesthetic features.

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The Aesthetic Moment in Markets

1. The relevance of markets for primarily aesthetic products and services is increasing. This is not only the result of a shift in structures of consumption towards classic goods and services defined by aesthetic features (Hörstermann 2016), but also of intensifying competition, based on aesthetic design, in markets for classic consumer goods (Reckwitz 2012, 2017). The background for these market developments is a fundamental aestheticization of everyday life in prosperous, post-materialist societies. The analysis of aesthetic features of products and services is therefore steadily gaining importance for economic sociology. 2. In an analysis of reporting on the wine market in Germany over more than half a century (1947–2008), we were able to convincingly trace the growing aestheticization of this product (Rössel et al. 2018). Of course, wine is a commodity that has always been mainly viewed in aesthetic terms. However, our analysis was able to show that, at the beginning of the twenty-first century, even the remaining economic and instrumental aspects had been almost completely supplanted by aesthetic aspects. We were also able to show that more attention is now being paid to authenticity criteria such as artisanal production, regional origin, and the personality of the winemaker. One route taken by aestheticization is clearly leading towards authentic products. This is an increasingly important branch of economic sociology (Carroll 2015). 3. Aesthetic evaluations of goods are, by their very nature, associated with radical uncertainty, since these assessments can always be fallible, be it over time or space, or across social groups (Rössel 2007). Karpik defined this uncertainty with the concept of the singular product, which is distinguished by its unique combination of features. In contrast to the assumption made by information economics (as a branch of economics), this uncertainty is not based on a kind of information asymmetry between buyers and sellers, but merely on the fundamental fallibility of aesthetic

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judgments, which is based on their socially constructed nature. 4. As Akerlof (1970) showed, markets with radical uncertainty about the quality of the goods and services offered, collapse. In our chapter, we have discussed two theoretical proposals explaining mechanisms that reduce uncertainty for these markets: on the one hand Karpik’s theory of singular products, on the other hand Bourdieu’s field theory. Thus, these two theoretical approaches offer useful tools for the analysis of uncertainty on economic markets. 5. Karpik assumes that in markets for singular products, which include the aesthetic products discussed here, the judgment devices (cicerones, rankings, appellations, confluences, personal networks) allow quality assessments to be made by consumers. He assumes that in certain markets very specific configurations of such judgment devices determine the reduction of uncertainty in a given market. A study of the wine market (Schenk 2020) was able to demonstrate that judgment devices really are of substantial importance for demand and pricing in this market. However, the study did not find evidence that this market is defined by an ideal-typical constellation of judgment devices as postulated by Karpik. This suggests that market processes need to be examined in closer connection to the historical, social, and geographical background in which they are embedded, which may be able to explain the specific role of particular judgment devices. Furthermore, Karpik’s economics of singularities neglects the role of distinction processes to explain the use of judgment devices. In sum, the strengths of Karpik’s theory lie in the nuanced and differentiated analysis of the roles of particular judgment devices, but the theory neglects the wider social embeddedness of markets, which are more comprehensively addressed in Bourdieu’s theory of social fields. 6. Bourdieu explains the emergence of aesthetic, but also other evaluations as the result of a process of consecration that takes place in

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social fields. This is associated with a powerful social theory for economic sociology. On the one hand, these fields are understood as structured fields of power and conflict; on the other hand, the hierarchy of the actors in these fields is matched by a homologous social structure of consumers. Bourdieu’s field theory, therefore, makes it possible to explain not only the genesis of symbolic attributions on the producer side, but also the consumption and reception of these attributions on the part of consumers. 7. A study of price formation in the art market (Beckert and Rössel 2013) was able to show that this is fundamentally dependent on the aesthetic attributions in the field of art. The commercial pricing processes should be understood as embedded, so to speak, in noncommercial field contexts. It became clear that the public discourse in the field and in the mass media play a particularly important role in contemporary pricing processes. Comparable results emerged from a study on the wine field (Beckert et al. 2018). The most noteworthy finding here was that the structure of the fields leads to different pricing strategies among wine producers. On the one hand there are suppliers who operate at the autonomous pole of the field, following a strategy of symbolically distinctive products with high prices; on the other hand there are producers operating at the heteronomous pole, who offer standardized quality and follow a strategy of low prices and high market volume. This study was also able to show a homology with the social structure of wine consumption: it is groups endowed with cultural and economic capital who are among the most important consumers of distinctive and expensive wines. In this chapter we have concentrated on the analysis of the fields of art and wine. It is obvious, however, that this approach can be transferred to numerous other products and markets which are strongly characterized by aesthetic features, from music to cosmetic products and clothing. In addition, however, other consumer goods with more instrumental functions, from cars and

J. Rössel et al.

smartphones to interiors, are increasingly being viewed and evaluated in aesthetic terms, even in the public discourse. They are increasingly more perceived as aesthetic objects, not only as goods fulfilling an instrumental function. Therefore, we believe that it would be worthwhile to transfer the theoretical instruments proposed here to markets such as these.

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109 Hawley-Dolan, A., & Winner, E. (2011). Seeing the mind behind the art: People can distinguish abstract expressionist paintings from highly similar paintings by children, chimps, monkeys and elephants. Psychological Science, 22, 435–441. Healy, K. (2011). Judgement and distinction: Review symposium. Lucien Karpik: Valuing the unique. The economics of singularities. Socio-Economic Review, 9, 787–800. Heintz, B. (2016). Wir leben im Zeitalter der Vergleichung. Perspektiven einer Soziologie des Vergleichs. Zeitschrift für Soziologie, 45(5), 305–323. Hodgson, R. T. (2008). An examination of judge reliability at a major U. S. wine competition. Journal of Wine Economics, 3, 105–113. Holt, D. B. (1997). Distinction in America? Recovering Bourdieu’s theory of tastes from its critics. Poetics, 25, 93–120. Hörstermann, K. (2016). Der Wandel der Konsumstruktur in Deutschland. Kölner Zeitschrift für Soziologie und Sozialpsychologie, 68, 713–730. Howland, P. J. (2013). Distinction by proxy: The democratization of fine wine. Journal of Sociology, 49(2–3), 325–340. Janssen, S., Verboord, M., & Kuipers, G. (2011). Comparing cultural classification. In J. Rössel & G. Otte (Eds.), Lebensstilforschung (Sonderheft 51, Kölner Zeitschrift für Soziologie und Sozialpsychologie) (pp. 139–168). Wiesbaden: Springer. Johnston, J., & Baumann, S. (2007). Democracy versus distinction: A study of omnivorousness in gourmet food writing. American Journal of Sociology, 113, 165–204. Jourdain, A. (2010). La construction sociale de la singularité. Une stratégie entrepreneuriale des artisans d’art. Revue Française de Socio-Économie, 6(2), 13–30. Karpik, L. (2010). Valuing the unique: The economics of singularities. Princeton: Princeton University Press. Karpik, L. (2011). What is the price of a scientific paper? In J. Beckert & P. Aspers (Eds.), The worth of goods: Valuation and pricing in the economy (pp. 63–85). Oxford: Oxford University Press. Karpik, L. (2013). Éléments de l’économie des singularités. In P. Steiner & F. Vatin (Eds.), Traité de sociologie économique (pp. 163–206). Paris: PUF. Kneer, G. (2004). Differenzierung bei Luhmann und Bourdieu. Ein Theorievergleich. In A. Nassehi & G. Nollmann (Eds.), Bourdieu und Luhmann. Frankfurt am Main: Suhrkamp. Kraemer, K. (2017). Lucien Karpik: Mehr Wert. Die Ökonomie des Einzigartigen. In K. Kraemer & F. Brugger (Eds.), Schlüsselwerke der Wirtschaftssoziologie (pp. 507–514). Wiesbaden: Springer Fachmedien Wiesbaden. Lamont, M. (2012). Toward a comparative sociology of valuation and evaluation. Annual Review of Sociology, 38(1), 201–221.

110 Lefèvre, N. (2015). Le marché du travail cycliste comme économie des singularités. Sociologie du travail, 57(4), 446–469. Morrot, G., Brochet, F., & Dubourdieu, D. (2001). The color of odors. Brain and Language, 79, 309–320. Müller-Schneider, T. (1994). Von Schichten zu Erlebnismilieus. Der Wandel der Milieustruktur in der Bundesrepublik Deutschland. Wiesbaden: DUV. Pape, S. (2012). Weinkonsum: Eine Studie zu sozialstrukturellen Determinanten und Lebensstilen im Feld des Weines. Wiesbaden: Springer Fachmedien Wiesbaden. Plattner, S. (1996). High art down home. An economic ethnography of a local art market. Chicago: The University of Chicago Press. Reckwitz, A. (2012). Die Erfindung der Kreativität. Zum Prozess gesellschaftlicher Ästhetisierung. Berlin: Suhrkamp. Reckwitz, A. (2017). Die Gesellschaft der Singularitäten. Zum Strukturwandel der Moderne. Berlin: Suhrkamp. Riley, J. G. (2001). Silver signals: Twenty-five years of screening and signaling. Journal of Economic Literature, 39, 432–478. Rodet, D. (2012). Des dispositifs de jugement pour et par les consommateurs? Les systèmes participatifs de garantie du commerce equitable, de l’agriculture biologique et des Amap. Revue Française de SocioÉconomie, 10(2), 199–217. Rössel, J. (2007). Ästhetisierung, Unsicherheit und die Entwicklung von Märkten. In J. Beckert, R. DiazBone, & H. Ganßmann (Eds.), Märkte als soziale Strukturen (pp. 167–181). Frankfurt am Main: Campus Verlag. Rössel, J, & Beckert, J. (2012). Quality classifications in competition: Price formation in the German wine market (MPIfG Discussion Paper 12/3). Cologne: Max Planck Institute for the Study of Societies. Rössel, J., & Beckert, J. (2013). Quality classifications in competition: Price formation in the German wine market. In J. Beckert & C. Musselin (Eds.), Constructing quality. The classification of goods in markets. Oxford: Oxford University Press. Rössel, J., Schenk, P., & Eppler, D. (2018). The emergence of authentic products: The transformation of wine journalism in Germany, 1947–2008. Journal of Consumer Culture, 18(3), 453–473. Schenk, P. (2012). Review of Lucien Karpik (2010): Valuing the unique. The economics of singularities. Princeton: Princeton University Press. Kölner Zeitschrift für Soziologie und Sozialpsychologie, 64 (2), 415–417. Schenk, P. (2020). Can judgement devices explain the demand for fine wine? Manuscript. University of Lucerne. Schneider, C. (1997). Präferenzbildung bei Qualitätsunsicherheit: Das Beispiel Wein. Berlin: Duncker & Humblot. Schulze, G. (1988). Alltagsästhetik und Lebenssituation. Eine Analyse kultureller Segmentierungen in der Bundesrepublik Deutschland. In H.-G. Soeffner (Ed.),

J. Rössel et al. Kultur und Alltag (Soziale Welt, Sonderband 6) (pp. 71–92). Göttingen: Schwartz. Schulze, G. (1992). Die Erlebnisgesellschaft. Kultursoziologie der Gegenwart. Frankfurt am Main: Campus. Schulze, G. (1997). Steigerungslogik und Erlebnisgesellschaft. Politische Bildung, 30, 77–94. Shapiro, C. (1983). Premiums for high quality products as returns to reputation. Quarterly Journal of Economics, 98, 659–679. Shrum, W. (1991). Critics and publics: Cultural mediation in highbrow and popular performing arts. American Journal of Sociology, 97, 347–375. Solomon, G. E. A. (1997). Conceptual change and wine expertise. Journal of the Learning Sciences, 6, 41–60. Stiglitz, J. E. (1987). The causes and consequences of the dependence of quality on Price. Journal of Economic Literature, 25, 1–48. Velthuis, O. (2005). Talking prices. Symbolic meanings of prices on the market for contemporary art. Princeton: Princeton University Press. Verboord, M. (2011). Market logic and cultural consecration in French, German and American bestseller lists, 1970–2007. Poetics, 39, 290–315. Warde, A. (2014). After taste: Culture, consumption and theories of practice. Journal of Consumer Culture, 14 (3), 279–303. Zelizer, V. (1978). Human values and the market: The case of life insurance and death in 19th century America. American Journal of Sociology, 84(3), 591–610. Zelizer, V. (2005). Circuits within capitalism. In V. Nee & R. Swedberg (Eds.), The economic sociology of capitalism (pp. 289–322). Princeton: Princeton University Press. Zhao, W. (2008). Social categories, classification systems, and determinants of wine Price in the California and French wine industries. Sociological Perspectives, 51 (1), 163–199.

Rössel, Jörg is professor of sociology, University of Zurich, Switzerland. Research topics: Economic sociology, sociological theory, consumption, culture, migration, transnationalism. Recent publications: Aidenberger, Amelie, Heiko Rauhut, and Jörg Rössel. 2020. Is Participation in High-Status Culture a Signal of Trustworthiness? PlosOne 15/5: 1–23. Schroedter, Julia, Jörg Rössel, and Emmanuela Chiapparini. 2020. Love Across Borders. On Population Structures, Meeting Places and Preferences in a Globalizing World. Journal of Comparative Family Studies 51/1: 18–58. Weingartner, Sebastian, and Jörg Rössel. 2019. Changing Dimensions of Cultural Consumption? Poetics 74: 101345. Schenk, Patrick, Jörg Rössel, and Manuel Scholz. 2018. Motivations and Constraints of Meat Avoidance. Sustainability 10: 3858. Rössel, Jörg, Patrick Schenk, and Dorothea Eppler. 2018. The Emergence of Authentic Products. The Transformation of Wine Journalism in Germany, 1947–2008. Journal of Consumer Culture 18/3: 453–73. Rössel, Jörg, and Patrick Schenk.

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2018. How Political is Political Consumption? The Case of Activism for the Global South and Fair Trade. Social Problems 65/2: 266–84. Schenk, Patrick is a postdoctoral researcher in sociology, University of Lucerne, Switzerland. Research topics: Economic sociology, sociology of morality, markets, consumption, culture, technology. Recent publications: Schenk, Patrick. 2019. A Matter of Principle: Comparing Norm-Based Explanations for Fair Trade Consumption. Journal of Consumer Policy 42/3: 397–423. Schenk, Patrick, Jörg Rössel, and Manuel Scholz. 2018. Motivations and Constraints of Meat Avoidance. Sustainability 10: 3858. Rössel, Jörg, Patrick Schenk, and Dorothea Eppler. 2018. The Emergence of Authentic Products. The Transformation of Wine Journalism in Germany, 1947–2008. Journal of Consumer Culture 18/3: 453–73. Rössel, Jörg, and Patrick Schenk. 2018. How Political is Political Consumption? The Case of Activism for the Global South and Fair Trade. Social Problems 65/2: 266–84. Rössel, Jörg, and Patrick Schenk. 2018. Researching the Transformation of Wine Discourse from 1974–2008 using Quantitative Content Analysis. SAGE Research Methods Cases.

111 Weingartner, Sebastian is a postdoctoral researcher in Sociology, University of Zurich, Switzerland. Research topics: Consumption, culture, digitization, lifestyles, social inequality, sociological theory. Recent publications: Weingartner, Sebastian. 2019. Führen mehrere Wege in die Oper? Die soziale Strukturierung von Entscheidungsprozessen für den Kulturkonsum. Kölner Zeitschrift für Soziologie und Sozialpsychologie 75/1: 53–79. Weingartner, Sebastian, and Jörg Rössel. 2019. Changing Dimensions of Cultural Consumption? Social Space and Space of Lifestyles in Switzerland from 1976 to 2013, Poetics 74: 101345. Rössel, Jörg, and Sebastian Weingartner. 2019. Rational Choice-Theorie in der Kultursoziologie. In Handbuch Kultursoziologie, Band 2: Theorien–Methoden–Felder, eds Stephan Moebius, Frithjof Nungesser, and Katharina Scherke, 131–48. Wiesbaden: Springer VS. Rössel, Jörg, Patrick Schenk, and Sebastian Weingartner. 2017. Cultural Consumption. Emerging Trends in the Social and Behavioral Sciences. Wiley Online Library. Rössel, Jörg, and Sebastian Weingartner. 2016. Opportunities for Cultural Consumption. How is Cultural Participation in Switzerland Shaped by Regional Cultural Infrastructure? Rationality & Society 28/4: 363–85.

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Economization: How Neo-Liberalism Took Over Society Uwe Schimank and Ute Volkmann

Western modernity is a functionally differentiated capitalist society (Schimank 2015a). It consists of a plurality of a dozen spheres of action, each of which is governed by its own guiding value–– with the capitalist economy as the society-wide dominating sphere. Each of these value spheres (Weber 1958; Wertsphären) constitutes a social world in its own right, where very different concerns are at stake: a concern for truth in science, for justice in law, for newsworthiness in journalism, or for love in intimate relations, to name just a few. Protagonists of any of these spheres insist on their particular sphere’s basic autonomy and defend it against interferences from other spheres. Moreover, in our everyday affairs we are well aware of the distinctiveness of these spheres, and under normal circumstances, move without difficulty from one sphere to the other, as we shift roles from being a teacher at work, a husband at home, a consumer in-between on our way home, and an art lover at the opera house in the evening. This functional differentiation of society translates into a polytheism (Weber 1958, 126 f.) of one’s personal conduct of life, with every member of modern society being a plural actor (Lahire 2011), who is guided by different nomoi (Bourdieu 1999, 223 ff.). Each one disposes of a different repertoire of practices U. Schimank (*) · U. Volkmann University of Bremen, SOCIUM––Research Center Inequality and Social Policy, Bremen, Germany e-mail: [email protected]; [email protected]

to satisfy this nomos in each value sphere; for the great majority nowadays, this polytheism is essential for a good life in a good society. Against the background of this selfunderstanding of Western modernity embodied in many institutional structures and cultural framings, the so-called neoliberal transformation of Western societies has, since the second half of the 1970s, been a deep disturbance of taken-forgranted assumptions about how these societies actually work, and how we want them to work.1 One of the centerpieces of this transformation is an economization of non-economic societal spheres. Sometimes suddenly, organizations and professions in the various societal spheres have been confronted with money issues either as demands for cost reduction or as requests for profit-making. Non-profit organizations financed by the state such as schools, hospitals, museums, or legal courts have had to face budget cuts or stagnating budgets despite increasing workload. For-profit organizations such as newspapers, private TV stations, or commercial hospitals have been ordered, by their owners or shareholders, to bring about a higher return on investments. In this way, economic considerations have become 1

One can argue about whether neoliberalism may not be the best term for what has happened, but it is widely used now. For an overview of what it means, as an alternative set of ideas about a good society, see only Mudge (2008). Evans and Sewell (2013) give a brief but concise synopsis of how neoliberalism changed contemporary Western societies.

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_8

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much stronger or even predominant in formerly non-economic societal spheres, to the disadvantage of the sphere’s own guiding values. These dynamics of economization have not ended. On the contrary, tensions between sphere-specific values and economizing pressures of cost reduction or profit-making have risen to date in many countries and most non-economic societal spheres.2 In the following interpretation of the manifestations, origins, and consequences of current economization dynamics, sociological theories of functional differentiation are used. In the first section, it is shown why this theoretical perspective is especially suited to capture what economization means as an inherent feature of modernity. Building on this, in the second section, an understanding is outlined of today’s experiences of economization as a regime of competition with society-wide, massive effects. In the third section, attention is drawn to the point that an on-going intensification of economizing pressures leads to a creeping erosion of functional differentiation, which seems to have already started in some countries and societal spheres. We cannot do justice here to national variants of societal spheres, nor can we consider specificities, for instance, of health care compared to the science system. However, it is exactly the national diversity, and sphere-specific diversity, documented now in thousands of case studies, which calls for an analytical framework that emphasizes the underlying commonalities.3

2 Accordingly, this is still a hot topic of public debates as well as a subject of many empirical studies. Besides economization and neoliberalism, some other familiar keywords are liberalization, deregulation, privatization, managerialism, new public management, entrepreneurialism, or marketization. These terms do not all have the same meaning, but there are considerable overlaps. 3 The following argument is based on the more extensive elaboration in Schimank and Volkmann (2017).

U. Schimank and U. Volkmann

1

Economized Modernity: A Functionally Differentiated Capitalist Society

One could ask why theories of functional differentiation, of all sociological perspectives on modern society, are the master key to understanding society-wide economization dynamics. The core proposition of differentiation theories about Western modernity is the distinctiveness and autonomy of each societal sphere.4 For instance, science is all about truth, and in the health care system everything is done to cure the ill, no matter what it costs. However, economization brutally shows: Money makes the world go round! In other words, economization dynamics contest, and in the end, could abolish functional differentiation. Economization is an unfriendly take-over of non-economic societal spheres by economic concerns. Precisely because economization is a bad surprise to differentiation theories they are very good sensitizing perspectives to what economization means to modern society. Recent economization dynamics have shown us more clearly than was known before, that functional differentiation is not a societal order which, once established, stabilizes itself to high solidity but rather, remains unstable on many fronts. The autonomy of the various societal spheres, hard-won against the resistance of the churches, which fought for the maintenance of medieval society-wide religious hegemony, in later times has been repeatedly endangered either by political assaults, most far-reaching in German National Socialism, and in Russian statedominated socialism, or by economizing pressures. To understand more clearly what these pressures mean for functional differentiation, one must conceive it as a culturally framed institutionalized service provision. This view combines two traditions of understanding functional differentiation. One tradition, which was 4 See Schimank (1996) for a reconstruction of differentiation theories since the sociological classics, and Schimank (2015b) for a brief overview that includes newer contributions.

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already alluded to, sees modern society as functionally differentiated into a dozen value spheres (politics, armed forces, law, religion, art, science, journalism, education, healthcare, sports, intimate relations, and the economy) each of which is a sub-universe of meaning, constituted by the supremacy of its own guiding value which serves as a self-referential evaluative orientation of action. The guiding value formulates the summum bonum of all activities within the sphere, but this summum bonum is not legitimized by any higherorder end. It is taken rather, as an end in itself. Therefore, those who act under the spell of a particular sphere’s “illusio” (Bourdieu 1999, 227 ff.)—such as scientists in the scientific sphere or judges in the legal sphere—insist, above everything else, on their sphere’s autonomy from all interferences driven by other societal concerns. With its crucial insight into the necessity of autonomy of each sphere, this Weberian, Luhmannian, as well as Bourdieusian view of functional differentiation, can become a one-sided, ideological legitimation of each sphere’s protagonists, supporting their “legitimate indifference” (Tyrell 1978, 173 f., emphasis omitted) regarding all other concerns. In order to avoid this bias, this view has to be complemented by the other, structural-functionalist tradition of differentiation theory, pioneered by Talcott Parsons. It has Seth Abrutyn (2016) as a recent, new advocate who avoids many fatal flaws of Parsonianism. In this view, the analytical point of reference is the collectively arranged conduct of life of human beings within society. Certain kinds of needs arise in this collective arrangement, ranging from food and shelter to socialization and education, from conflict resolution and defense against violence to the confirmation of identity and experiences of transcendence. A functionally differentiated societal order responds to recurrent and widespread needs, initially and a-historically called “functional pre-requisites” of society (Levy 1951), by the establishment of specialized service productions, with each societal sphere focused on one kind of service.5 This 5 This very brief exposition inevitably sounds like a functionalist deduction, which is not far from a functionalist

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second tradition of differentiation theory emphasizes the division of labor inherent to functional differentiation. Indeed, the autonomy of any specialized sphere of action rests upon the existence of other spheres taking care of all the other concerns of human beings’ conduct of life. If all spheres do their work, each sphere can concentrate on perfecting its own service provision—with its autonomy as a prerequisite. In this way, functional differentiation amounts to a plural simultaneous striving for perfection of spherespecific service provisions. Of course, manifold tensions and conflicts arise out of this arrangement. Still, despite such tradeoffs, the side-by-side autonomous service provisions of specialized societal spheres has produced a level of quality and quantity unknown before (see also Chap. 18). Therefore, a wellworking societal order of functional differentiation can be assessed as an achievement, compared to other forms of differentiation as well as to deficient forms of functional differentiation such as “blunted differentiation,” (Colomy 1990, 470) which get stuck half way or are cut back again from an already reached state of full-blown differentiation. “Blunted differentiation” is exactly what economizing pressure amounts to. Those affected by it are, first of all, the service providers, organizations and their employees, in the various non-economic societal spheres such as hospitals, schools, universities, TV stations, or public administrations. Secondly, the users of these services suffer from economization in the end, as individual human beings in their conduct of life. To explicate dynamics of economization of these service provisions the understanding of functional differentiation, outlined above, must be combined with theories of capitalism for a concept of modernity as a functionally differentiated capitalist society. In contrast to prevalent notions on both sides that functional differentiation and capitalism are contradictory perspectives on modern society, its capitalist fallacy. What, for lack of space, cannot be reconstructed here is the gradual and stumbling evolutionary emergence of some fit between the services produced and the underlying needs (see Abrutyn 2016 for more details).

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character derives precisely from its functional differentiation. On the one hand, functional differentiation brings about capitalism. On the other, though, capitalism shapes functional differentiation in a fateful way, which is where economization comes into the picture. At first sight, the capitalist economy is just one societal sphere among others. The guiding value by which its protagonists—entrepreneurs, managers, and firms—are directed is profitmaking. Just as scientists are obsessed by their pursuit of truth, capitalists are fixated on the pursuit of profit. However, as the offspring of functional differentiation, the capitalist economy has imprinted its imperatives on modern society. What economic service providers need to pursue their sphere’s guiding value has a society-wide top priority that cannot be ignored for long by protagonists of other spheres. This is the decisive difference compared with service providers from all other spheres. The society-wide dominance of economic concerns originates from the elevated position that the economy holds in the overall fabric of interdependencies between societal spheres. It is the economy, and only the economy, which provides all spheres of modern society with money as a generalized resource for the acquisition of everything that is needed in the various service productions, particularly paying for the labor force. A closer look at the money flows within modern society reveals that: • Only economic service providers recover their production costs by selling their services at a price which covers these costs, in contrast to service providers of all other societal spheres, such as hospitals, universities or public administration. They cover only parts, mostly smaller parts, of their costs from user fees. • Furthermore, prices for economic goods and services not only cover the firms’ own production costs, including salaries of employees, as well as profits to owners and shareholders, but also taxes paid to the state. Besides business taxes, there are income taxes as part of the salaries paid by the firms, and taxes on consumption, paid from the salaries. It is from

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these basic revenues of the tax state (Hickel 1976) that most of the service provision costs of the non-economic societal spheres are paid. • Many service providers in non-economic societal spheres are vitally dependent upon being financed by the state, which often covers the largest part of their costs, including the salaries of their employees. This financing takes the forms of institutional funding, generally regular subsidies, transfer payments, or project financing.6 Thus, regarding money, many service providers of non-economic societal spheres as well as each individual human being are on a permanent drip feed coming from the economy. This dependence has the effect, that simply by earning and passing on greater or lesser amounts of money, economic activities have the cumulative external effect of imposing greater or lesser degrees of pressure, on all other societal spheres as well as on individuals, to economize. In every other sphere of society, it is necessary to be very careful with any activity which might endanger a firm’s money-making and the economic growth that results from it. Otherwise, tax revenues of the state, which finance large sectors of the other societal spheres, will drop as will employee wages. Consequently, intensive cost pressure will be placed upon the budgets of hospitals, schools, research institutions, and social services as well as upon the budgets of households. Conversely, the worse the situation is for economic actors, the more important it is that they be allowed to earn money wherever they can, so that in the sense of “collateral benefits” the situation can also improve for service providers in other spheres and for individuals. Thus, cost pressure is often accompanied by a pressure for commodification so that, for instance, postal services are privatized to offer investors new opportunities for making profits. In this way, every actor in all spheres of modern society is constantly dependent upon the pulse 6

Or of compulsory insurances established by the state, such as the German unemployment or health care insurance.

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of economic activity. Everyone knows that when the economy weakens, all other societal needs served by the non-economic societal spheres are more and more qualified, and the autonomy of these spheres becomes endangered. In good times, concerns about money are just one of various other-referential concerns, which actors in all societal spheres are subjected to, while pursuing their sphere’s guiding value. For instance, scientists obey legal restrictions of their work, or take political demands for more relevancy into account. However, in the scientists’ view these are strictly secondary orientations of their activities, which are primarily framed by their sphere’s illusio. In the same way, economic considerations are always relevant, reminding scientists that they do not live in a land of milk and honey. When times become difficult though, economic concerns quickly challenge the primacy of the respective sphere’s guiding value by demanding primacy for themselves. Under these circumstances the other-referential concerns about a lack of money rise to the top of the agenda everywhere, and the spheres’ guiding values are at risk of being subordinated to money concerns. It is an empirical question to calculate the degree of economizing pressure over time in different countries and in different societal spheres, and to discover, on the one hand, how often, and for how long, this pressure increases above a critical threshold value, and, on the other hand, how frequent and long were the times when the economizing pressure became practically imperceptible. If this economizing pressure finds no limits to its growth, it might become a selfdestructive force of modern society. However, in modern Western societies a rescue mechanism was found in the last third of the nineteenth century under the pressure of growing social unrest. It consisted of the establishment of social policy and its gradual expansion to the welfare state or some functional equivalent, as a countermechanism to capitalist dynamics (Heimann 1980). The safeguard of this counter-mechanism has been the successful fight for political democracy, so that the majority of the population can demand that their life chances are improved (Iversen and Soskice 2019). Thus, a democratic

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welfare state, which consists of the services of many of the non-economic societal spheres such as education or health care, is related to the capitalist economy in a constellation of functional antagonism: two societal forces opposed to each other in an arrangement of checks and balances so that each force sets limits to the destructive potential of the other. This functional antagonism is asymmetric in favor of capitalist imperatives, as every economic crisis demonstrates; and yet to date, the protagonists of capitalism have never been strong enough for a permanent and complete prevention or elimination of all kinds of social welfare. To sum up this analytical framework, the capitalist economy is a mighty driving force against functional differentiation, and the non-economic societal spheres are the victims, but they are also forces of resistance. There is no pre-determined outcome of this struggle, although it is true that the cards are stacked against the requirements of health care, education, science, and other non-economic societal spheres.

2

Economizing since the Mid-1970s: The Logic of Compare and Replace!

From this strongly simplified theoretical blueprint of Western modernity, it is clear that economization is a structurally built-in feature. The wave of economization, which started around the mid-1970s and is by no means over today, has been more than the same old story again. In this section, this will be outlined in four steps. In a first step, attention is directed to the transformation of “organized modernity” to a society “managed by the markets.” This societal transformation affects non-profit organizations of service production in the non-economic societal spheres differently than it affects for-profit organizations, as will be shown in the following two steps. Finally, a fourth step recapitulates the common underlying logic of the changes for nonprofit as well as for-profit organizations.

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2.1

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From “Organized Modernity” to a Society “Managed by the Markets”

To begin with, economization came back as a bad surprise. No one had expected it to return any more, at least not to highly developed Western countries. Most of them had had more than 20 years of unparalleled strong, steady economic growth since the early 1950s. In addition, the implementation of a national economic planning, guided by Keynesian doctrine gave assurance that states would be able to counteract all kinds of economic turbulences, and hence prevent the strong economic crises which had plagued earlier capitalism. It seemed that the beast, indeed, had been ultimately tamed. However, this turned out to be a short dream of everlasting prosperity, as Burkart Lutz (1984) called it, just after most dreamers had abruptly woken up. During that exceptional golden age (Hobsbawm 1994, 324 ff.) Parsons (1971) celebrated the final victory of functional differentiation. He praised this, seemingly, firmly established structure of modern society for its potential of an ever-expanding and ever-improving service provision by all societal spheres. This allowed for a corresponding extension of inclusion of all members of society into the beneficiaries of the welfare state. Everybody should benefit more and more from all societal spheres; that seemed to be the motto from then on. This high time of functional differentiation, in which economic constraints of non-economic societal spheres appeared to no longer exist, was already over when Luhmann (2013), 10 years after Parsons, advised policy makers to shift from an expansionist to a restrictive mode of policy making. Luhmann radicalized Parsons’ observation that service providers of all societal spheres, in their fixation on the respective guiding values, cannot but strive for unlimited growth, including continual improvements, of their services, an aspiration which fits to and stimulates further the rising expectations of the users of these services. In Luhmann’s view, this escalation had to be stopped. Ironically, he saw economization not as the problem which again

had begun to torment functional differentiation, but as the solution to the problem of irresponsible autonomy, built into functional differentiation. He felt that less money (Luhmann 1983, 39), as a result of lower tax revenues from a weak economy, cures the hypertrophic growth dynamics of service provisions, be it public health care, public schools, public broadcasts, or public museums. This was an entirely new view on the functional antagonism. If one adopts Luhmann’s perspective, the focus is no longer on the welfare state which corrects destructive economic dynamics. On the contrary, the capitalist economy represents society-wide reason against unreasonable aspirations, created by the various sphere-specific service providers of the welfare state. They are unreasonable because sooner or later they will overstrain even a strong economy. What Luhmann did not take into consideration, though, was the possibility that this economizing pressure might become so strong that it would not stop at a point where the service provisions of non-economic societal spheres were able to maintain a sustainable level. He failed to realize that the pressure might increase beyond that point, in the direction of nothing less than an unfriendly economic takeover of the command over these service provisions. Since then, many observers have realized the potential danger of economization to functional differentiation. That was the second bad surprise: economization had returned with a much stronger grip than ever before, on all kinds of service providers. It is true that the sheer quantitative intensity of economizing pressure had also been very high, perhaps even higher, in earlier periods of strong economic crises, to mention only the worldwide crisis of the late 1920s from which many countries needed more than 20 years including World War II to recover. Nevertheless, nowadays there is a distinctively new quality of how economizing pressure is exerted on non-economic societal spheres. In his study of the US economy, Gerald Davis (2009) concludes that from the late nineteenth century until the mid-1970s, periods of economization took place in an organizational society, whereas now it occurs in a society

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managed by the markets. More precisely, the economization which started in the mid-1970s has quickly eroded organized modernity (Wagner 1993), where capitalist market forces were disciplined by large organizations, especially huge corporations in the economy. This was a society of “markets and hierarchies” (Williamson 1975), with an emphasis on the and. Markets were perceived to need hierarchies, or organizations to function properly. In contrast, neoliberal modernity, which conquered organized modernity, designed markets which no longer seemed to need hierarchies as a functional complementarity, at least not in a short-term perspective. The inventors and propagandists of this new fabric, not only of the economy but also of society at large, were indeed capitalists with a short-term business ethos of take the money and run. Davis’ reasoning can be extended to non-economic societal spheres and their organizations, as will be shown in the next two sections.

2.2

Non-profit Organizations: Cost Reduction Through New Public Management

Economizing pressure in non-economic societal spheres is directed at the reduction of costs. This kind of pressure arises firstly, whenever service providers such as schools, hospitals, museums, or the army considerably or repeatedly overdraw their budgets. Secondly, the pressure arises, when the state, as financial backer, dictates budget cutbacks on these service providers, or thirdly, when they are denied budget increases, although more money is needed to satisfy a quantitatively or qualitatively growing demand for their services. Service providers have been confronted with all three situations with increasing frequency and severity since the mid-1970s. At the beginning, service providers were requested, in a friendly tone, to keep an eye on costs. However, no compromises regarding the particular sphere’s summum bonum were called for. If the director of a state-financed museum, for example, insisted on a very expensive exhibition

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of avant-garde paintings by pointing out its merits, as judged by the art world, this was accepted. So, if superior criteria of the respective value sphere were emphasized, cost considerations were overruled. What was expected from the service providers of the non-economic societal sub-systems was only that, if they had the alternative between two measures of equal effectiveness, for instance two drugs given to a patient by a medical doctor, they should choose the less expensive one. In addition, they were expected to reflect on whether there were luxury measures they could do without. Very soon, however, this proved to be insufficient in many cases. Accordingly, economizing pressures rose and became strict limitations of financial losses. At first, they were tolerated to some extent. In the end, a zero tolerance for any losses was established. Along this trajectory, cost reduction became the guiding principle of performance, up to the point where the economizing pressure was experienced as increasingly more painful by the service providers. When hospital doctors cannot give seriously ill patients what is necessary from a medical point of view because costs are too high, or public theatres are closed down because their paying audience is too small and their budget subsidies from the state are cut back, the respective sphere’s performance suffers substantially; and service providers get a strong feeling that they are in danger of betraying their ethos tied to the respective value sphere for the sake of money-saving. In earlier periods of economizing, typical reactions were many different cost-saving measures, which were dictated, at times in quite a brutal, hierarchical manner according to the logic of bureaucratic organizations. The most important hierarchically imposed ways of cost reduction were reductions of service quantity or quality, both were usually accompanied by a reduction of personnel or a prohibition of the recruitment of more personnel. In addition, service providers often tried to increase their incomes by increasing user fees, museum entrance fees, for instance, or by increased donations from private sponsors. These traditional instruments of cost reduction have not

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been done away with in the present era of economizing, but now, have become part of a much richer tool-kit which is conceived according to a totally different logic called “new public management,” (NPM) (OECD 1995; Pollitt and Bouckaert 2000). Its basic principles show how organizational hierarchies are substituted by markets, or, more precisely: how organizational hierarchies make use of markets and market-like arrangements. Thus, hierarchy still governs, but now in an indirect manner. The visible hand (Chandler 1977) of organizational management and state authorities camouflages itself as the famous impartial invisible hand to which cost reductions and their consequences must now be attributed. This is motivated by the calculation that competitive pressure is more effective in bringing about good performance than hierarchical pressure, or than the internalized professional ethos of service providers. Essentially, NPM increases the external competitive pressure on providers of a specific service, as well as within service providing organizations, and builds up the competitive strength of service providers. To the latter end, NPM places an emphasis on deregulation, because an overly detailed regulation leaves actors no room to maneuver within competitive strategies. Instead of giving regulations, state authorities turn to negotiated mission contracts which formulate general performance goals, while giving service providers space for their own strategies to reach these goals. In addition, NPM strengthens hierarchical leadership within organizations, because strong leaders are seen as a prerequisite of a competitive corporate actor. The competitive pressure itself is sometimes affected by proper markets, when study fees, for example, are introduced in the university system, and become a significant part of a university’s basic funds. This causes universities to compete for students. However, when part of the basic funds is allocated to universities according to a formula which measures relative performance, using a fixed set of indicators such as the amount of third-party funding, the number of students finishing their studies in due time, and the number of publications in peer-reviewed

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journals, this is a quasi-market where performance measurement determines income (Le Grand and Bartlett 1993). Quasi-markets, which are a predominant instrument of NPM, require the establishment of an audit society (Power 1997) in which a systematic collection of service providers’ performance data takes place and this data is not only given to state authorities for their decisions on the allocation of funds but also to users, in order to assist in directing their choice of providers. Compared to proper markets, the operation of quasi-markets is based on extremely simplified user preferences. In proper markets, there is a plurality of users, who often have idiosyncratic preference orders. One user wants the service as cheap as possible, but quality is not as important, while a second one wants the highest quality and is willing to pay almost any price for that. A third user insists on specific conditions, such as the ecological harmlessness or a fair pay for the employees, while a fourth user is particularly interested in a quick delivery of the service. In principle, there can be as many combinations and rank-orderings of preferences as there are users, and this complexity is represented in the prices they are willing to pay for the offered services. On a quasi-market, in contrast, actors, who are not even users, decide on a one size fits all performance formula. On the one hand, this radical reduction of complexity seems to be inevitable because the hierarchical authority which installs the quasi-market cannot have an adequate overview of the real variety of user preferences. It can only be hoped that at least some preferences, which are important to most users of the respective services are more or less met. On the other hand, sometimes the hierarchical authority deliberately neglects most user preferences, because it is of the opinion that it knows what is best for the users. Either way the risk is that quasi-market failures occur quickly. In a worst-case scenario, the dangers of markets such as ruinous competition, are combined with the evils of hierarchy such as narrowmindedness. NPM is propagated and perceived to be the intelligent way to reduce costs without reducing essential elements of service quality or service

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quantity. On the contrary, proponents even claim that NPM enhances quality, for instance, the responsiveness of service providers to the needs of their users. Compared to earlier periods of economization, NPM amounts to an economizing pressure which is no longer predominantly implemented on the shop floor of service provision directly by hierarchical command, but indirectly by the hierarchical establishment of markets or quasi-markets for service providers.

2.3

For-Profit Organizations: Profit-Making by Commodification

Economizing pressure can go further than cost reduction. In for-profit organizations such as private newspapers, or radio and TV stations higher profits have been demanded by owners and shareholders; and a number of nonprofit organizations have been turned into for-profit organizations via privatization, and the respective service being turned into a commodity. The user no longer pays nothing or a small fee, which financed only a small part of the service costs. Now, the user must pay a price which is higher than total costs, so that a profit remains.7 One of the non-economic spheres, journalism, has been run from the beginning as a branch of the capitalist economy. Newspapers have always been for-profit firms. When radio and later television appeared on the scene, they were run by the state at the beginning; but very soon in many countries private stations were established and often became the dominant service providers. In Germany in the mid-1980s, government made a law which allowed private radio and TV stations to be established. Since then, private suppliers of journalism have dominated radio and television as well. Public broadcasting has had to adapt. Other societal spheres such as the arts have been split for a long time into nonprofit and for-profit sectors, with economizing meaning 7

In some cases, the state still subsidizes service provision, to a certain extent, in order to compensate for the users who are unable to pay.

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cost reduction in the former, and increased profit-making in the latter. There are public museums or opera houses, on the one hand, and commercial providers such as cinemas, private musical theatres, publishing houses for literature, or record companies for both classical as well as pop music, on the other. With the nonprofit sector being forced to make massive cuts in services, the share of for-profit service providers has grown. In still other societal spheres, which for a long time had been dominated by nonprofit service providers, a conspicuous drift towards privatization occurred, with profit-making as a consequence. In many West-European countries, the clearest cases of this are the health care systems and public infrastructures. In the former, commercial hospital chains owned by investment funds have become ever stronger, taking over hospitals from local governments, from churches, or from charities. Often a symbolic price was paid, because former owners were happy to get rid of these organizations which were chronically in deficit. Important infrastructures have been privatized as well: railways, airlines, postal services, telecommunication, public housing, and a number of municipal utilities. Differently from cost reduction, commodification does not lead to a reduction of services. On the contrary, it requires an unleashing of service provision as a prerequisite for profit-making: • sometimes in terms of exclusive quality as with private schools, which can hire the best teachers and pay them quite well. Consequently, these services are rather expensive, so only a small minority of users is able and willing to pay for them; • sometimes in terms of quantity, which is based on an extended inclusion of users, as in private radio and TV stations; • and sometimes in both dimensions, as in the case of commercially successful blockbuster art exhibitions, which attract a large number of visitors and still are taken serious by art critics and the art world in general. Thus, there can be win-win situations where high profits tolerate high performance according

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to the sphere’s own criteria. Furthermore, to earn high profits it is often necessary that considerable respect must be paid to the sphere-specific guiding value. However, the greatest risk of a commodified provision of non-economic services is, that whenever other opportunities to make profit look more promising, the money invested, for instance in a commercial hospital chain, will be shifted as soon as possible in that new direction, for example to a new internet service. In other words, investors have no loyalty to the non-economic values governing the respective service provisions. They do not care if a local, regional, or even national health care system has problems because they suddenly abandon hospital business to re-invest their money more profitably elsewhere.8 Although these dynamics of commodification via privatization have differed in speed, scope, and specific directions in all Western countries, the general picture is roughly the same: profitmaking has become an imperative on a substantial number of service providers in former non-economic societal spheres. In these cases, being increasingly managed by the markets refers not to quasi-markets established by state authorities, but to proper markets.

2.4

The Underlying Logic: “Divide et Impera” Through Shopping Around

The common underlying logic of cost reduction through NPM as well as profit-making through commodification is shopping around, more precisely the threat of shopping around.9 Shopping around consists of a permanent search for potential better alternatives to the alternative at hand. 8 In such moments of trouble, state authorities can have an unexpected comeback as trouble-shooters called for by the public. Unfortunately, they are quite often unprepared and helpless in this role. 9 This colloquial phrase is adopted from Parsons (1970, 438 f.). He used it in the 1950s to describe patients who show no loyalty to their medical doctors but permanently look out for potential, better alternatives––a normatively disapproved behaviour at that time.

This is not necessarily motivated by massive dissatisfaction, but is an instance of Thomas Schelling’s (1984, 15 ff.) “‘something better’ approach.” Even if one is quite satisfied, as long as there is a possibility of finding an even better alternative, one should invest time and energy into finding it. It is perhaps no coincidence that Schelling reacted, with this proposal at that time, when the transformation of organized modernity had just started, to Herbert Simon’s (1976, 80 ff.) famous earlier maxim of satisficing which expressed the typical way of thinking in organized modernity: As long as things work fairly well, there is no reason to search for something better. Schelling’s precept, in contrast, promises the actor that more can be achieved; neoliberal thinking demands that this ‘more’ be realized with no regard for established practices, arrangements, or social relations. Two steps of shopping around can be distinguished. The first one is to decide whether to outsource some sub-task of the service provision or not. In this step an internal unit of the organization competes with external alternatives (Sjurts 2006). If outsourcing is chosen, the second step of shopping around starts: external alternatives compete against each other. However, the first step is kept in mind: external alternatives also compete with a potential re-internalization of the respective sub-task of service provision. Behind the explicit motivation for shopping around, which is the possibility of finding a better alternative, there is a much more important latent effect of “divide et impera” (Simmel 2009, 115 ff.). All competitors are kept in permanent suspension: the one who is chosen at the moment cannot be sure that this will remain so; the winner now, may be the loser next time. The one logical outcome of shopping around is what Davis describes as a hollow organization, which has outsourced most components of the service provision workflow because the internal units were outcompeted by external alternatives. However, the other logical extreme is also possible: all internal units succeed in the competition with outside suppliers. Superficially, this outcome looks as if nothing has happened; top management made an empty threat. However, the threat

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is by no means empty, because it lingers on. Instead of existing in a safe world where there are clear rules of mutual commitment, organizational units now find themselves on a permanently contested market. The terms of trade between management and the members of the organization have dramatically changed. All organizational members know that from then on, they cannot rely on management any longer; they can only try to stay ahead of all potential competitors.10 In this way a dual organizational work force has been created. There is a shrinking core work force and a growing periphery of marginal workers, who have a precarious employment status. The marginal workers’ existence demonstrates to those still at the core, that their days may be numbered. The most visible cases are those where shopping around has not remained a threat. More numerous, though, are instances where shopping around has worked effectively as a threat to bring about compliance with increased work pressure, including involuntary part-time contracts with full-time work to do, lower wages, less job security, and fewer employee rights. If the threat suffices, the same effect is reached with lower transaction costs to the organization. All in all, stable membership roles in formal organizations, one of the cornerstones of organized modernity (Luhmann 1964), are losing ground. Fewer employees not only in firms but also in non-economic organizations can count on having a secure job (Le Gales and Scott 2009, 18 ff.).11

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3

To the degree that shopping around has affected individual employees in the way described, consequences for the autonomy of the non-economic value-spheres and their service provisions are obvious. Individuals in precarious work situations are, for good personal reasons, less inclined to take a stand for the guiding value of their societal sphere, against economizing pressures. On the contrary, under such circumstances scientists, for example, succumb to inappropriate research designs or falsify results to have something to present according to performance criteria; medical doctors implement suboptimal therapies or refrain from providing assistance to patients in need; school teachers accept class sizes which are unsuitable from a pedagogical point of view; directors of art museums present exhibitions of second-rate paintings if only increasing visitor numbers can be reached; and newspaper journalists serve their readers’ craving for sensations to sell more newspapers and achieve higher advertising rates. A general disenchantment about one’s work and its societal appreciation combines with fears of risking one’s job or contract due to protesting against the impositions to compromise standards and principles of health, truth, or education, in order to save or to make money. A critical mass of employees who are not vulnerable to threats of shopping around is needed as a stronghold of the autonomy of the non-economic societal spheres against economization.12 The more shopping around proliferates, the fewer firm defenders of the non-economic value-spheres of modernity remain. This nexus between functional 12

10

To be sure, in many respects organized modernity was definitely no paradise for hierarchically subordinated organizational members; but when management was dissatisfied with an organizational unit its redesign, instead of outsourcing, was the usual reaction. 11 A similar diagnosis is made by Robert Castel (2003) in his account of the rise and fall of what he calls the wage labour society.

Societal Costs: Erosion of Functional Differentiation

Of course, some opportunities of resistance against economizing remain in most cases. See, for example, Anderson’s (2008) observations of micro-resistance at universities and Volkmann (2019) for a systematic theoretical exploration. However, often this resistance remains an act of individuals taking a stand against outrageous working conditions which serves their personal identity maintenance but is unable to defend standards of good service provision.

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differentiation, on the one hand, and formal organizations, on the other, is not at all seen by Luhmann. The increased vulnerability of the core personnel of service providers of non-economic societal spheres results in losses of efficiency and effectiveness of services documented in countless studies.13 There are three kinds of efficiency losses: • First, shopping around requires a massive organizational expense of measuring and comparing performance. A growing amount of the working time of hospital doctors and nurses is needed for reporting duties; and the best researchers at universities are requested to invest increasingly more time in evaluating project proposals and the overall performance of their colleagues, to the detriment of their own superior research work. More new professions such as quality managers and organizations such as evaluation or accreditation agencies have been established to implement this omnipresent auditing, with nobody asking whether all these efforts are really justified by their gains. One can imagine that instead of the desired increases of efficiency and effectiveness of service provision, efficiency has often decreased. • Second, at some point, a striving for a higher efficiency of service provision eats away “organizational slack” (Cyert and March 1963, 41 ff.) which is important when bottleneck situations occur. For example, personnel reductions in a hospital can go so far, that in case of an influenza epidemic hospital administrators suddenly realize that many patients cannot be served adequately. In this way, gains in efficiency may result in intolerable losses of effectiveness. • Third, one can ask under what conditions a winner takes all competition, which is brought about by increasing economizing pressure, is efficient at all. For example, if the success rate at a funding agency for university research is 13 A good overview of these effects with numerous examples is given by Binswanger (2012).

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10%, so that nine out of ten proposals get no funding, nine research teams performed a lot of futile work. Even if some level of competition may be helpful to motivate high performance, when the chances to be among the winners are too small, frustration and fatalism, or deviant behavior, proliferate. These are unsuitable conditions for high effectiveness of service provision. In addition to efficiency losses economizing pressure produces three kinds of losses of effectiveness: • First, the range of services can be reduced in several dimensions. For instance, if a city government closes two of five public libraries or reduces the operating hours, the quantity of supply of these services decreases. This goes along with social selectivities. Some groups of service users are more affected than others. Families from lower classes cannot afford to buy all the books that would help their children get a good education. In terms of time, service reductions manifest themselves in longer lines and less time for each case. • Second, the quality of services can deteriorate. Some drastic examples can be found in health care. As a consequence of being forced to cut costs, hospitals may recruit poorly trained personnel which results in more medical complications and even casualties. If tasks that were previously done by medical doctors are delegated to nurses who are not trained for these tasks, there is again a higher risk for the patients. A special but very important kind of quality reduction is the declining innovativeness of service provision. For instance, junior researchers in temporary positions, with unclear job perspectives are taught a habitus of subaltern conformity, which kills their potential for creative scientific ideas (Münch 2016, 418). • Thirdly, losses of effectiveness of service provision may occur regarding its responsiveness to user needs. Proponents of economizing promised the exact opposite. They state that whoever has to calculate costs or profits is well

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advised to take user needs into account. However, this reasoning presupposes that users are able to assess the quality of service provision. Do patients, for example, know which kind of medical treatment helps them best? They more likely are “under-informed consumers” (Dill and Soo 2004, 70 ff.) who can be manipulated by fine words. Even if they are well-informed, in quasi-markets others, usually state authorities, have decided on a very few user preferences that are cared for, just as in socialist planned economies. If these losses of efficiency and effectiveness of service provision of the non-economic societal spheres increase, the critical point is eventually reached where they amount to an erosion of sphere-specific autonomy. This autonomy is commensurate to the degree that service providers can determine the quantity and quality of their services. What are the criteria of service quality, and which amount of services for which kinds of users is needed? Efficiency losses manifest themselves immediately in reductions in the quantity of services, indirectly also in quality reductions. Enforced reductions of effectiveness result in quality reductions.

4

Perspectives

Empirical evidence, when taken all together, points to an on-going erosion of functional differentiation regarding all non-economic societal spheres. This raises the question: what can be done against it? Unfortunately, it gets even worse. The capability of democratic self-design of functionally differentiated Western societies, in particular, a political defense of the non-economic societal spheres against economization, depends critically upon the interplay of two societal spheres: politics and journalism. However, there may be a danger of an acceleration of the dynamics of economization by a fatal combination of economized politics and economized journalism.

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Within the political system, the most important economizing pressure moves towards an overall cost reduction of government; and this pressure comes from the financial market, where governments have to maintain or regain their credit standing to be able to issue new government bonds for the additional money they need beyond their tax income. This amounts to the imperative of becoming a “consolidation state” (Streeck 2015) that disciplines itself rigorously regarding expenditures according to the creditors’ expectations. The other side of the coin is that less money remains for the democratic shaping of society, especially in welfare issues. However, increasing, and not only temporary, financial restrictions of government action are highly critical because, as mentioned, the democratic welfare state is the indispensable functional antagonism to capitalism, “saving capitalism from itself” (Klundt 2005). In other words, if democracy no longer functions as a result of a massive, permanent, financial squeeze, society will be completely driven by capitalism run wild, which means a further escalation of the erosion of functional differentiation. The second economization dynamic which reinforces this de-democratization of politics occurs in the sphere of journalism (Schimank and Volkmann 2015). As was already mentioned, in this societal subsystem economizing pressures move towards profit-making, especially by the private radio and TV stations. Since they earn most of their money from advertisements, and the price they can demand for advertisements depends on their audience ratings, what they must achieve is an increase in their audience. This, in turn, cannot be done by the attraction of additional persons, because almost everybody is already included in the daily reception of radio and TV programs; the only thing that is possible is to entice listeners and viewers to do that for more minutes and hours per day. If someone who spent 2 h a day listening to the radio and watching television can be captivated to tune in for 4 h, thus contributing to larger audiences of particular programs, the radio or TV station makes more money with these programs. How can people be motivated to devote more time to radio and TV

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programs? It will not be by the informational content of the news: “When news departments that derive most––or all––of their income from advertising seek to maximize audience, they must create content that attracts more than those who consume news primarily for information.” (McManus 1994, 184) The main answer news providers have found to this critical question is that they attract more people by entertaining their audience. What an entertaining mode of presentation of all kinds of journalistic news can achieve, regarding sports news, is captured in the motto: “Attract the non-fan!” (Altheide and Snow 1979, 220) In other words, people who are not really interested, still remain in the audience because they are entertained. This imperative of entertainment increasingly shapes radio and television news as a consequence of the profit-making pressures they are subjected to. At least when a certain level of entertainment is reached, the higher the entertainment value of news is, the lower its information value is. The consequence of this is, that members of society, whose most important source of knowledge about societal affairs is journalism, will become increasingly less informed, as the economizing pressure on journalism increases and the reaction to this is more entertainment to the detriment of the information. Society turns into what may be called an entertainment society (Ralfs 1995) because the “non-fans”, those who are not really interested in the reported news, dominate the audience, as Neil Postman (1985) already perceived some time ago, in his wellknown diagnosis that we are amusing ourselves to death. It is no good news for democracy, if there is no longer a well-informed citizen (Schütz 1946) who is knowledgeable, competent, strategically realistic, non-extreme, and a force of resistance against capitalism run wild. We now live in times of post-democracy (Crouch 2004) not only because the decision space of politicians has shrunk dramatically as a result of the “consolidation state” but also because wellentertained citizens are going to lose their standards for a proper assessment of public affairs. Both developments, which go in the same direction also have the same origin: an

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ongoing economizing of the non-economic since the mid-1970s. This, then, might be the final speculative answer to the question posed at the beginning: The new quality of contemporary economization may be that it oversteps the point of no return, beyond which the achievements of functional differentiation are seriously endangered, including the meta-achievement of the democratic welfare state as the ultimate counter-principle to economization. Admittedly, at the moment, only some manifestations of economization come near to the point of no return. Most do not show such an advanced state. This may be due to the fact that it takes some time to reach that state, or it may be that the promoters of economization, after reviewing the effects, show some understanding in the dysfunctionalities of an economization that goes too far. It could also be the case that the resistance against economization is still strong enough to slow it down or put limits to it at some point. However, there should be an awareness of what might happen if economization pressures increase further. The sociological analysis presented here, by sketching possible future crisis scenarios, deliberately uses the tone of a warning (Clausen and Dombrowsky 1984). Someone who articulates a warning does not want it to become true; rather, he or she wants it to become a “self-altering prophecy” (Henshel 1978) by communicating it to those who can do something about it.

References Abrutyn, S. (2016). Institutional spheres: The macrostructure and culture of social life. In S. Abrutyn (Ed.), Handbook of contemporary sociological theory (pp. 207–228). Cham: Springer International. Altheide, D. L., & Snow, R. P. (1979). Media logic. Beverly Hills: Sage. Anderson, G. (2008). Mapping academic resistance in the managerial university. Organization, 15(2), 251–270. Binswanger, M. (2012). Sinnlose Wettbewerbe: Warum wir immer mehr Unsinn produzieren. Freiburg: Herder. Bourdieu, P. (1999). Rules of art: Genesis and structure of the literary field. Stanford, CA: Stanford University Press.

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Castel, R. (2003). From manual workers to wage laborers: Transformation of the social question. New Brunswick, NJ: Transaction Publishers. Chandler, A. (1977). The visible hand: The managerial revolution in American business. Cambridge, MA: Belknap Press. Clausen, L., & Dombrowsky, W. (1984). Warnpraxis und Warnlogik. Zeitschrift für Soziologie, 13, 293–307. Colomy, P. (1990). Divisions and Progress in differentiation theory. In J. C. Alexander & P. Colomy (Eds.), Differentiation theory and social change: Comparative and historical perspectives (pp. 465–495). New York: Columbia University Press. Crouch, C. (2004). Post democracy. Oxford: Polity Press. Cyert, R. M., & March, J. G. (1963). A behavioral theory of the firm. Englewood Cliffs, NJ: Prentice-Hall. Davis, G. (2009). Managed by the markets: How finance re-shaped America. Oxford: Oxford University Press. Dill, D. D., & Soo, M. (2004). Transparency and quality in higher education markets. In P. Teixeira et al. (Eds.), Markets in higher education––Rhetoric or reality? (pp. 61–85). Dordrecht: Kluwer. Evans, P., & Sewell, W. H. (2013). Neoliberalism: Policy regimes, international regimes, and social effects. In P. Hall & M. Lamont (Eds.), Social resilience in the neoliberal era (pp. 35–68). Cambridge: Cambridge University Press. Heimann, E. (1980 [1929]). Soziale Theorie des Kapitalismus: Theorie der Sozialpolitik. Frankfurt/ M.: Suhrkamp. Henshel, R. L. (1978). Self-altering predictions. In J. Fowles (Ed.), Handbook of future research (pp. 99–125). Westport: Greenwood. Hickel, R. (Ed.). (1976). Die Finanzkrise des Steuerstaats. Suhrkamp: Frankfurt/M. Hobsbawm, E. (1994). The age of extremes: A history of the world, 1914–91. New York: Vintage Books. Iversen, T., & Soskice, D. (2019). Democracy and prosperity. Reinventing capitalism through a turbulent century. Princeton: Princeton University Press. Klundt, M. (2005). Saving capitalism from itself? Entstehung und Entwicklung sozialdemokratischer Wohlfahrtsstaatlichkeit. In Europäische Wohlfahrtsstaatlichkeit: Soziokulturelle Grundlagen und religiöse Wurzeln, ed. Karl Gabriel, Jahrbuch für Christliche Sozialwissenschaften, 46, 129–146. Lahire, B. (2011). The plural actor. Cambridge: Polity Press. Le Gales, P., & Scott, A. (2009). Die Wiederherstellung des Marktsubjekts. Berliner Journal für Soziologie, 19, 6–28. Le Grand, J., & Bartlett, W. J. (Eds.). (1993). Quasimarkets and social policy. Basingstoke: Macmillan. Levy, M. J. (1951). The structure of society. Princeton, NJ: Princeton University Press. Luhmann, N. (1964). Funktionen und Folgen formaler Organisation. Berlin: Duncker & Humblot. Luhmann, N. (1983). Anspruchsinflation im Krankheitssystem: Eine Stellungnahme aus

127 gesellschaftstheoretischer Sicht. In P. Herder-Dorneich & A. Schuller (Eds.), Die Anspruchsspirale: Schicksal oder Systemdefekt? (pp. 28–49). Stuttgart: Kohlhammer. Luhmann, N. (2013 [1981]). Political theory in the welfare state. Berlin: De Gruyter. Lutz, B. (1984). Der kurze Traum immerwährender Prosperität: Eine Neuinterpretation der industriellkapitalistischen Entwicklung im Europa des 20. Jahrhunderts. Frankfurt/M: Campus. McManus, J. H. (1994). Market-driven journalism: Let the citizen be-ware? Thousand Oaks: Sage. Mudge, S. L. (2008). What is neo-liberalism? Socio-Economic Revue, 6(4), 703–731. Münch, R. (2016). Kapital und Arbeit im akademischen Shareholder-Kapitalismus. Soziologie, 45(4), 412–440. OECD. (1995). Governance in transition: Public management reforms in OECD countries. Paris: OECD. Parsons, T. (1970 [1951]). The social system. London: Routledge. Parsons, T. (1971). System of modern societies. Englewood Cliffs: Prentice Hall. Pollitt, C., & Bouckaert, G. (2000). Public management reform: A comparative analysis. Oxford: Oxford University Press. Postman, N. (1985). Amusing ourselves to death: Public discourse in the age of show business. Harmondsworth: Penguin. Power, M. (1997). Audit society: Rituals of verification. Oxford: Oxford University Press. Ralfs, R. (1995). Die Unterhaltungsgesellschaft: Die Bedeutung der Unterhaltung in der gesellschaftlichen Kommunikation. Magisterarbeit: Universität Düsseldorf, Sozialwissenschaftliches Institut. Schelling, T. C. (1984). Economic reasoning and the ethics of policy. In T. C. Schelling (Ed.), Choice and consequence: Perspective of an errant economist (pp. 1–26). Cambridge, MA: Harvard University Press. Schimank, U. (1996). Theorien gesellschaftlicher Differenzierung. Opladen: Leske + Budrich. Schimank, U. (2015a). Modernity as a functionally differentiated capitalist society: A general theoretical model. European Journal of Social Theory, 18, 413–430. Schimank, U. (2015b [2002]). Differentiation, social. In J. D. Wright (Ed.), International encyclopedia of the social and behavioral sciences (Vol. 6, pp. 391–394). Oxford: Pergamon. Schimank, U., & Volkmann, U. (2015). Ökonomisierter Journalismus: Erodiert funktionale Differenzierung zur ‘Unterhaltungsgesellschaft’? In K.-D. Altmeppen et al. (Eds.), Soziale Ordnung durch Kommunikation? (pp. 119–135). Baden-Baden: Nomos. Schimank, U., & Volkmann, U. (2017). Das Regime der Konkurrenz: Gesellschaftliche Ökonomisierungsdynamiken Heute. Weinheim: Beltz Juventa. Schütz, A. (1946). The well-informed citizen. Social Research, 71, 463–478.

128 Simmel, G. (2009 [1908]). Sociology: Inquiries into the construction of social forms. Michigan: Brill. Simon, H. A. (1976 [1946]). Administrative behavior: A study of decision-making processes in administrative organization. New York: Free Press. Sjurts, I. (2006). Outsourcing und insourcing. In Handelsblatt Wirtschaftslexikon (Band VIII, pp. 4229–4233). Stuttgart: Schäffer-Poeschel. Streeck, W. (2015). The rise of the European consolidation state. Köln: MPIfG Discussion Paper 15/1. Tyrell, H. (1978). Anfragen an die Theorie der gesellschaftlichen Differenzierung. Zeitschrift für Soziologie, 7(2), 175–193. Volkmann, U. (2019). Gesellschaftliche Ökonomisierung und die Gegenkräfte: Ein differenzierungstheoretischer Bezugsrahmen. In R. Graf (Ed.), Ökonomisierung: Debatten und Praktiken in der Zeitgeschichte (pp. 29–54). Göttingen: Wallstein. Wagner, P. (1993). A sociology of modernity: Liberty and discipline. London: Routledge. Weber, M. (1958 [1919]). Science as a vocation. Daedalus, 87(1), 111–134. Williamson, O. E. (1975). Markets and hierarchies. New York: Free Press.

Schimank, Uwe is professor of sociological theory, University of Bremen, SOCIUM––Research Center Inequality and Social Policy, Mary-Somerville Str. 9, 28359 Bremen, Germany. Research topics: Social theory, theories of modern society, organizational and economic sociology, science, and higher education studies. Recent publications: Leibfried, Stephan, Kerstin Martens, and Uwe Schimank. 2019. Entangled Inequalities, a Disbalanced Welfare State, and Populist Challenges for Democracy. In Globalizing Welfare––An Evolving Asian-European Dialogue, eds. Stein Kuhnle, Per Selle, and Sven E.O. Hart, 315–32. Cheltenham: Edward Elgar. Schimank, Uwe.

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2015. Modernity as a Functionally Differentiated Capitalist Society. A General Theoretical Model. European Journal of Social Theory 18: 413–30. Schimank, Uwe. 2015. Grundriss einer integrativen Theorie der modernen Gesellschaft. Zeitschrift für Theoretische Soziologie 4: 236–68. Schimank, Uwe. 2015. New Public Management as De-Professionalization: Conceptual Reflections with Some Applications to School Teachers. In Restructuring Welfare Governance: Marketization, Managerialism and Welfare State Professionalism, eds. Tanja Klenk, and Emmanuele Pavolini, 183–99. Cheltenham: Edward Elgar. Volkmann, Ute is teaching and research assistant, University of Bremen, SOCIUM––Research Center Inequality and Social Policy, Mary-Somerville Str. 9, 28359 Bremen, Germany. Research topics: Sociological theory, diagnoses of our time, media, and economic sociology. Recent publications: Schimank, Uwe, and Ute Volkmann. 2017. Das Regime der Konkurrenz: Gesellschaftliche Ökonomisierungsdynamiken Heute. Weinheim/Basel: Beltz Juventa. Schimank, Uwe, and Ute Volkmann. 2019. Gesellschaftstheorie und Gegenwartsdiagnosen: Verhältnisbestimmungen und Themenpanorama. In Gegenwartsdiagnosen: Kulturelle Formen gesellschaftlicher Selbstproblematisierung in der Moderne, ed. Thomas Alkemeyer, Nikolaus Buschmann, and Thomas Etzemüller, 235–55. Bielefeld: transcript. Volkmann, Ute. 2017. Gegenwartsdiagnose: Öffentlich und/oder Soziologie? In Öffentliche Soziologie. Wissenschaft im Dialog mit der Gesellschaft, eds. Brigitte Aulenbacher, Michael Burawoy, Klaus Dörre, and Johanna Sittel, 119–30. Frankfurt/ M: Campus. Volkmann, Ute. 2019. Gesellschaftliche Ökonomisierung und die Gegenkräfte: Ein differenzierungstheoretischer Bezugsrahmen. In Ökonomisierung: Debatten und Praktiken in der Zeitgeschichte, ed. Rüdiger Graf, 29–54. Göttingen: Wallstein.

Part II Empirical Studies and Research Topics

9

Trust and Reputation in Historical Markets and Contemporary Online Markets Andreas Diekmann and Wojtek Przepiorka

1

Introduction

Assume you intend to buy a second-hand laptop from a seller on eBay. It has crossed your mind that the laptop may have hidden defects or, even worse, that the seller may take your money without delivering the laptop. Would you be more likely to send your money to the seller in advance, if the laptop was much cheaper than other offers, if the offer was from a registered computer-shop, or if the seller had a large number of positive customer ratings? Would you prefer to pay extra for your transaction to be handled by an escrow service, which releases your payment to the seller once you confirm receipt of the laptop? Problems of trust have hampered mutually beneficial exchanges not only since the advent of the internet. Heinrich Popitz (1980) formulated the trust problem in his work on the normative construction of society as follows:

This chapter is an extended version of Diekmann and Przepiorka (2016, 2019a). Section 5 also includes material from Diekmann and Przepiorka (2019b). A. Diekmann (*) ETH Zurich, Zürich, Switzerland University of Leipzig, Leipzig, Germany e-mail: [email protected] W. Przepiorka Department of Sociology / ICS, Utrecht University, Utrecht, Netherlands e-mail: [email protected]

The condition for this reliance on the future behavior of others is trust. Where trust is lacking, only limited and rudimentary forms of sociality are possible. In the extreme case of total distrust, the interactions of the partners must be restricted to a strictly controllable simultaneity of the corresponding actions. The black-market situation provides an example. I must hold my goods firmly in my right hand until I have grasped the goods of the other person with my left hand. We both pull at the same time and release the goods at the same time (Popitz 1980, 78).

If an exchange between A and B is sequential, where A moves first, (e.g., sends money) and B moves second, (e.g., delivers merchandise), it becomes possible for B to fail to reciprocate A’s advance. In what follows, we call the first moving party to the exchange (A), the truster, and we call the second moving party (B), the trustee. A trust problem exists in as far as it is uncertain whether the trustee will return the advance the truster made in expectation of a benefit (Coleman 1990, Chap. 5). A trust problem does not only arise if it is uncertain whether the trustee will deliver at all, but also if the agreed quality and/or quantity of the exchanged good or service is not directly observable. The trustee could deliver goods of an inferior quality, whereas the truster might only recognize the quality after the conclusion of the transaction. If the trustee knows the quality of his goods, but the truster does not, until the exchange is completed, the exchange situation is one of asymmetric information. The degree of the

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information asymmetry can vary depending on the good. In the case of inspection goods, unpacked food, for example, it is relatively easy for the truster to determine the quality before the exchange. In the case of experience goods, the quality only becomes apparent in the course of use, often after a longer period of time. Secondhand cars, dental crowns or beauty creams are examples of experience goods.1 We define the trust problem as the uncertainty regarding the trustworthiness and/or competence of the trustee that the truster faces. We define trustworthiness as the trustee’s intention to meet the truster’s advance. We distinguish it from competence, which is the trustee’s ability (in terms of skill and knowledge) to meet the truster’s advance. Finally, we define trust as the truster’s belief regarding the trustee’s trustworthiness and/or competence based on which the truster decides whether or not to make the advance. That is, by trusting, the truster acts upon the expectation that the trustee will abide by the agreement, for example, that a good will be delivered with a certain quality and in a certain quantity, even though it is possible for the trustee to deviate from the agreement. In what follows, we review the many ways trust problems, inherent in economic exchanges, have been tackled and studied in historical and contemporary markets, as well as in offline and online markets. We thereby focus on solutions provided by opportunities for reputation formation and draw on evidence from various disciplines of the social and behavioral sciences. Our chapter contributes to a better understanding of the advantages and disadvantages of reputation formation as a mechanism for promoting cooperation in markets. It also points out some promising directions for future research.

An instructive field study on dentists was conducted by Gottschalk et al. (2019). Twenty-eight per cent of 180 dentists in the canton of Zurich, Switzerland, suggested one to six unnecessary fillings (with an average cost of 250 Swiss Francs—about 250 US$—per filling) to healthy study participants.

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2

The Trust Problem and Its Solutions

The trust problem arising in social and economic exchange is often described with the trust game known from game theory (Dasgupta 1988; Kreps 1990). In the trust game, if the truster does not trust the trustee, the exchange is refused and neither of the actors gains anything, (i.e., the payoff for both actors is zero). However, if the truster agrees to the exchange, thereby placing his trust in the trustee, the trustee then has two possibilities. The trustee can fulfil the agreement and both the truster and the trustee earn the gains from trade (R). However, the trustee can also abuse the truster’s trust. The trustee then gains an exploitation profit (T) and the truster suffers a loss (S). In the latter case, the truster’s position is even worse than it would have been without the exchange. In the trust game, the trustee’s temptation to exploit the truster (T ) is larger than the gains from trade (R), the gains from trade are larger than no earnings at all, and for the truster, not earning anything is preferable to suffering a loss (S) from being exploited by the trustee (i.e. T > R > 0 > S). In a one-time-only trust game, a self-regarding trustee, who only maximizes his or her own benefit, will always abuse trust. As the truster can anticipate this move he or she will refuse to place their trust. In the Nash equilibrium2 of the trust game, both actors come away empty handed, although both could have benefitted from the trust-based exchange. The social dilemma (Kollock 1999) inherent to social and economic exchanges (formally described as a trust game) can, in principle, be solved in three ways: first, by means of repeated exchanges; second, by institutional regulation of the exchanges; and third, by reputational incentives. Combinations of these solutions also exist. For example, institutions can intentionally

1

2

A Nash equilibrium is a combination of strategies, such that no actor has an incentive to deviate (to switch to an alternative strategy) as long as all other actors stick to their strategies. In other words, a unilateral change of strategy does not pay off in a Nash equilibrium.

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Trust and Reputation in Historical Markets and Contemporary Online Markets

or as a side product create opportunities for longterm exchange relations or reputation building (see also Chap. 12). It is known from game theory (Fudenberg and Maskin 1986), simulation experiments (Axelrod 1984), and behavioral experiments (Rapoport and Chammah 1965; Dal Bó 2005) that in repeated social dilemma situations, as well as in repeated trust games, cooperation can arise under certain conditions, even among self-regarding actors. A central condition is the shadow of the future (Axelrod 1984), a figurative expression for the subjective probability that, in a series of exchanges, a further interaction will take place between the same actors. If this probability exceeds a critical level, cooperation can evolve. In other words, long-term exchange relations are more cooperative.3 The importance of repeated exchange relations was already observed by the anthropologist Bronisław Malinowski. In Crime and Custom in Savage Society, the classic study on the Trobriand peoples, Malinowski (1926, 22) describes how “the inland village supplies the fishermen with vegetables: the coastal community repays with fish.” As Malinowski (1926, 25) further explains, exchange dyads emerge in this process, “every man has his permanent partner in the exchange.” The same actors deal repeatedly with one another and can thus develop a lasting exchange relation. Long-term exchange relations can also provide a solution for the trust problem arising from asymmetric information. Siamwalla (1978) analyses rice and rubber markets in Thailand. The quality of rice is immediately recognizable by the expert. However, in the case of raw rubber, the production process plays a decisive part. The quality of raw rubber can only be ascertained after several months of use. Hence, rice can be characterized as an inspection good and rubber as an experience good. The different degrees of information asymmetry lead to different market relationships. In the rice market a producer deals with changing 3 In terms of game theory, cooperative equilibrium strategies exist in a repeated game, if the probability of meeting one’s interaction partner again is sufficiently high (see, for example, Osborne 2009, Chap. 15).

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customers, whereas “rubber-growers generally prefer to trade continuously with one buyer” (Siamwalla 1978, 43; see also Geertz 1979, who observes a similar mechanism in Moroccan bazaar economy). In a behavioral experiment simulating the situation on the rice and rubber markets described by Siamwalla (1978), Kollock (1994) shows that different market relationships arise, depending on the degree of information asymmetry. In his experiment, Kollock varies the degree of uncertainty about the quality of the goods. In the control condition buyers and sellers are informed about the quality. In the experimental condition the seller alone is informed, and the buyer learns the quality of the goods only after purchasing them. Four subjects in the role of buyers and four subjects in the role of sellers deal with each other over 20 rounds. The sellers can offer goods at the quality and price of their own choosing. In the experimental condition the sellers can advertise the quality of their goods but are not required to be honest. The results show that in the experimental condition (as compared to the control condition): (1) buyers more frequently deal with the same seller, (2) buyers’ assessment of sellers’ trustworthiness varies more strongly, (3) sellers make a greater effort to acquire a good reputation, and (4) the quality of the goods traded is lower, on the average (Kollock 1994). There are institutional solutions to the trust problem we have outlined above. Solutions include contract law, which regulates economic exchanges in contemporary societies. It is, of course, widely recognized that taking legal action involves costs and uncertainties. So, problems arising between trading partners, who are repeatedly engaged in business transactions are usually settled outside of court (Macaulay 1963). It may be useful, therefore, to distinguish between two types of institutional regulations of markets: (1) exogenous institutions equipped with formal sanctioning powers, such as state authorities, and (2) endogenous, self-organized institutions (Ostrom 1990; Greif 2006). Self-organized solutions to the trust problem can be promoted by means of commitments, such as the payment of a deposit. One example is the rent deposit,

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which the landlord receives from the tenant and which the tenant receives back from the landlord at the end of the tenancy, provided the property is left in good condition. The interplay between exogenous and endogenous institutions for the regulation of markets in modern societies is also exemplified by the mortgaging process involved in the purchase of property. The property is mortgaged to the bank, but after the entry in the land register, conflicts are settled by the legal institutions provided by the state. In the case of property acquisition, the mortgage interest issued by the bank would be substantially higher if exogenous, trust-building institutions did not exist. While the expectation of repeated exchanges creates a shadow of the future, reputation refers to the shadow of the past. Reputation carries information about the perceived and rated activities of a person or organization (trustee) with third parties. If the transaction history of a trustee is known, cooperative exchanges can occur between self-regarding and rational actors in an analogy to repeated exchange relations, provided that the trustee is interested in maintaining a good reputation. It has been shown by means of game theoretic models that reputational incentives can create the basis for cooperative behavior, even if it is unlikely that the same trading partners will meet again in the future. Under certain conditions, cooperative strategies of trusters and trustees can arise in a Nash equilibrium (Kreps 1990; Milgrom et al. 1990). Social capital, social networks and, generally, the social embeddedness of market participants, are fundamental concepts in the social sciences in general, as well as in economic sociology in particular (Coleman 1990; Granovetter 1992; Nee 2005; Diekmann 2007; Beckert 2009; Przepiorka 2014). In light of these concepts, reputation can be described as a form of social embeddedness, and its causes and consequences can be more precisely grasped with the help of game theory and behavioral experiments. Buskens and Raub (2013) deal with various forms of social embeddedness and how it can promote cooperation through the two mechanisms of learning and control. In learning, actors consider information

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about the past. A trustor’s decision to trust is based on information about past experiences with the trustee. In control, actors consider their influence on a future course of action. A trustor’s decision to trust is based on their power to inflict negative sanctions on the trustee in case their trust is abused. In dyadic embeddedness learning and control apply to the situation in which the same two interaction partners meet repeatedly; trust and cooperation are maintained via direct reciprocity (Gouldner 1960; Trivers 1971; Axelrod 1984). In network embeddedness, learning and control apply indirectly, while trust and cooperation are maintained via indirect reciprocity (Nowak and Sigmund 2005; Milinski 2016). In network embeddedness, learning is based on the information transferred by third parties about a certain trustee, and control is based on the truster’s possibility to induce third parties to inflict negative sanctions on a trustee (also see Buskens and Raub 2002). Long-term exchange relations, self-organized institutional rules and reputational incentives are three forms of organizational assurances which can promote the evolution of cooperation without state intervention and can thus be characterized as promoting order without law (Ellickson 1991). Unsurprisingly, examples of the functioning of these mechanisms can also be found in prehistoric and historical societies, in which state authority is weak or entirely absent (North 1977).

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Reputation and Markets in Historical and Contemporary Societies

In the evolution of mankind, reputation has always played an important part in maintaining the cohesion of societies. In Dunbar’s (2003) prehistoric communities, reputation was communicated through language, (i.e., spoken information about third parties or gossip), in very much the same way as in contemporary informal groups. Language makes it possible to pass on information on the deeds and misdeeds of others. In this way, individuals’ reputations can be built or possibly even destroyed in large

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groups; Dunbar speaks of around 150 members of prehistoric communities (see also Milinski 2016). In laboratory experiments, the spread of information about group members’ reputation through gossip has been shown to promote cooperative exchanges (Sommerfeld et al. 2007; Feinberg et al. 2014), and does so in a more efficient way than other forms of peer-sanctioning (Guala 2012; Grimalda et al. 2016; Wu et al. 2016). Economic historians have described institutionalized forms of communicating information about reputation in social and economic exchanges from antiquity to modern times. Temin (2013) deals with the grain market in ancient Rome. A “peer-monitoring system” (Temin 2013, 106) and the documentation of the quantities and prices of business deals reduced merchants’ risks of being deceived by their agents in long-distance trade. The annona, a kind of authority responsible for the supply of grain, could punish fraudulent agents and exclude them from trade. Apart from the institutional regulations, agents were interested in maintaining their reputations. The unloading of the ships in the harbor of Ostia and the further transportation of the grain to Rome was the task of specialized guilds, which paid careful attention to the reputation of their members. A mixed form of various institutional regulations involving enforceable contracts, as well as reputation resulting from recommendations or the membership in guilds, reduced the risk of agents deceiving their customers. In the late medieval Hanseatic city of Lübeck, Burkhardt (2010) finds a change in the structure of long-term relations among the Bergen travelers, (merchants who traded with the Norwegian city of Bergen). Burkhardt’s analysis of commercial networks reveals the dominance of family relations in the fourteenth century. However, by the second half of the fifteenth century, these family networks were disappearing. According to Burkhardt the reason was that institutions, such as clubs, guilds and brotherhoods had emerged, which provided alternative solutions to the trust problem by enabling merchants to build a good reputation.

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Greif (1989) and Milgrom et al. (1990) analyzed various forms of self-organized institutions which promoted economic exchange based on reputational incentives. The economic historian, Avner Greif, examined the reputation system created by Maghrebian merchants in the eleventh century. Paul Milgrom, Douglas North and Barry Weingast analyzed the Lex Mercatoria, which regulated trade at the Champagne fairs in the twelfth and thirteenth centuries. These case studies make the importance of reputation for economic exchange apparent and are highly instructive for game theoretic argumentation. Therefore, we will take a closer look at these two studies. Jewish merchants had settled in North Africa in the eleventh century, predominantly in Tunisia. These Maghrebian traders were active in longdistance trade, which was, however, burdened by great uncertainty. The sea voyage from Egypt to Sicily lasted from thirteen to fifty days and the price of goods fluctuated greatly. The merchants had agents at the destination of the goods, who looked after their sale. The agents had information that the merchants did not have. This was a situation involving both asymmetric information and exchanges with potentially large returns. Agents could fraudulently inform the merchant of a lower selling price than the one that was actually realized in the sale of the goods, and pocket the difference. However, the agent had an incentive to act honestly in order to continue working for the merchant in the future. If the agent acted dishonestly, the merchant would no longer employ him. This mechanism only functioned, however, if the dishonest activities of the agent came to the merchant’s knowledge. In fact, the Maghrebian merchants formed a coalition, the members of which observed the following rules: first, they informed each other about dishonest agents. Second, an agent who cheated, not only lost his position with the merchant, but was never again offered employment by any other member of the coalition. The fact that agents and merchants did not belong to different social classes and often switched roles, also played a part. A merchant could act as an agent for another merchant. As a consequence, and because of the third

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rule, attempted fraud could not only cost him his wage as an agent but also the profits from his activities as a merchant. Third, a fraudulent agent who operated as a merchant could be cheated by the other merchants of the coalition with impunity. An agent thus had a great interest in acting honestly, as he would otherwise lose both his future wage as an agent as well as his profits as a merchant. Thus, the double incentive ensured honest actions to the benefit of all parties. Maghrebian Mediterranean trade only came to an end with the expansion of trade from the Italian city states and the conquests of the Bedouins in North Africa at the end of the eleventh century (Greif 1989). Traders in the Champagne fairs (Milgrom et al. 1990) also faced trust problems, as the traded goods were often delivered after payment, and both the quality and the quantity could be subject to dispute. The Champagne fairs were of preeminent importance for trade in Europe of the twelfth and thirteenth centuries. In contrast to the reputation system maintained by the Maghrebian merchants, the information about traders’ reputations in these fairs was communicated by specialized actors who kept a record of disputed transactions while, at the same time, administering justice. Merchants or local officials worked as private judges, who received information about disputed transactions and provided information on particular traders upon request and in return for a fee. These private judges could also pass judgment and impose penalties in case of a dispute. However, they were unable to impose penalties outside of the fairs. Why, then, should a trader accept the judge’s verdict and pay a penalty after returning to his hometown? A good reason was the maintenance of his reputation and the prospect of good business. Traders with a bad reputation were excluded from trade or could only participate under worse conditions than traders with a good reputation. The Lex Mercatoria, which developed out of the merchant law of the Champagne fairs and other trade centers of medieval Europe, was private law. Violations of the rules could not be punished under the sanctioning powers of state officials. Consequently, all market participants

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had a personal interest in observing the rules. The interplay of various individual incentives has been analyzed by Milgrom et al. (1990) in an abstract model comprising the main features of the Lex Mercatoria. Their analysis reveals that a self-organized reputation system must fulfil four conditions to promote cooperation and an efficiently functioning market: (1) Norm violators must be punished. (2) Traders must be informed about the behavior of others in earlier transactions. (3) Traders must provide information on the behavior of their trading partners after a transaction. (4) Traders must comply with the judges’ verdicts. Milgrom et al. (1990) apply game theory to examine the incentive problem regarding the maintenance of a reputation system that would promote cooperative market transactions between traders. It turns out that observing the rules of the Lex Mercatoria is, under certain conditions, an equilibrium strategy. These conditions include the information costs and the profit from a single act of fraud. If these two factors do not exceed a certain level, the market participants will have a personal interest in playing by the rules. These case studies clearly show that the reputation mechanism can promote cooperative market transactions. Moreover, they show that self-organized reputation systems can be maintained without state intervention, as long as it is in all the actors’ own interest to observe certain rules. As with the Roman professional guilds (Temin 2013) or the Lübeck Bergen Travelers (Burkhardt 2010) reputation can be acquired through membership in a recognized social group or organization. The membership in a religious community can also confer reputation, particularly when admission to the religious community is accompanied by strict rules and tests, and when potential business partners know that the members of the community adhere to honest business conduct. The Amish people in North America can easily receive credit because the banks know that the credit agreements are virtually always kept. A banker with fifteen years of experience with the evangelical community said, “I never lost a dime lending to the Amish” (Kraybill

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2001, 257; Diekmann 2007, 49). In his study on The Protestant Sects and the Spirit of Capitalism, Max Weber (2002) reports on various observations which clearly show that membership in a religious group not only fulfils religious needs but also may have the important side effect of attributing business reputation (Voss 1998). On a train journey, Weber meets a travelling salesman who assures him, “‘Sir, for my part everybody may believe or not believe as he pleases; but if I saw a farmer or a businessman not belonging to any church at all, I wouldn’t trust him with fifty cents’” (Weber 2002, 128). Weber’s observations at the baptism of a new member of a Baptist community are also highly informative: ‘. . . once [he is] baptized he will get the patronage of the whole region and he will outcompete everybody.’ Further questions of ‘why’ and ‘by what means’ led to the following conclusion: Admission to the local Baptist congregation follows only upon the most careful ‘probation’ and after closest inquiries into conduct going back to early childhood (Disorderly conduct? Frequenting taverns? Dance? Theatre? Card Playing? Untimely meeting of liability? Other Frivolities?) The congregation still adhered strictly to the religious tradition. Admission to the congregation is recognized as an absolute guarantee of the moral qualities of a gentleman, especially of those qualities required in business matters. Baptism secures to the individual the deposits of the whole region and unlimited credit without any competition. He is a ‘made man.’ (Weber 2002, 129 f.)

Three characteristics make a person’s reputation credible and effective in this case. First, admission to the community only takes place after careful examination and with the agreement of the members of the community. Second, membership cannot be faked so the reputation cannot be falsely acquired. Third, the membership and hence the attestation of the ethical quality of all the business partners is known (see also Diekmann et al. 2009). In secular societies we hardly ever rely on membership in a religious community when giving credit or choosing business partners. Specialized reputation firms such as credit bureaus, aka credit reference agencies (CRAs), collect and provide information on the credit

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history and business conduct of a customer or business partner (Djankov et al. 2007). Anyone who applies for a loan, buys a new mobile phone or car will come across a contract clause which permits the bank, mobile provider or car dealer, respectively, to do a credit check by obtaining information from a CRA. CRAs, such as Experian, operate globally and collect individual consumer information from different sources, (e.g., credit payment histories, public records on bankruptcies and court judgements). Based on this information, CRAs calculate individual credit scores, which are increasingly used by borrowers to assess lenders’ creditworthiness (Einav et al. 2013). The similarity to the Lex Mercatoria’s system of notaries, which kept a register of all known transactions, is apparent. The notaries’ registers contained reports on the trustworthiness of merchants the same way as today’s credit bureaus do. The same principles are applied; only the means of communication have changed. Technological progress has drastically reduced the cost of acquiring and sharing information and has increased the speed at which information can be accessed.

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Reputation in Online Markets

In online trade, trust problems arise due to the anonymity of market participants, who often interact with each other over large geographic distances and across national borders (also see Przepiorka 2013). Most of their transactions are one-time-only, that is, only a small proportion of business deals conducted on platforms, such as eBay, comprise repeated encounters between the same traders (e.g., Diekmann et al. 2014). According to the Nash equilibrium, predictions of the standard trust game, one-time-only exchanges between online traders should not take place; online markets should not exist (Güth and Ockenfels 2003). However, online markets are a growth sector. To a large extent, the popularity and success of online markets can be attributed to the implementation of decentralized reputation systems, made possible by the development of internet

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technology (Kollock 1999; Resnick et al. 2000). A person who buys something on eBay, for instance, is asked to rate the seller after the transaction. These ratings (positive and negative) make up the interaction history of a seller, which can be accessed online anywhere in the world, at no cost, and within seconds. Since it is time consuming and cognitively demanding to read and interpret the entire interaction history of a seller, a reputation index is calculated, which informs potential buyers of the number and the percentage of a seller’s positive ratings. The cost of acquiring this information, a central factor in the reputation model of the Lex Mercatoria (Milgrom et al. 1990), is virtually zero. Moreover, in contrast to the Lex Mercatoria, as well as modern credit bureaus, online rating systems are decentralized, whereby the costs of providing information are also reduced (Dellarocas 2003). In anonymous online markets with a reputation system, buyers will trust and pay sellers with a good reputation more; in the case of sellers with a poor reputation buyers will demand a discount, (i.e., they will bid lower amounts in auctions) to compensate for the risk they take when dealing with unknown sellers. Using econometric methods, Diekmann et al. (2014) have estimated the price increase in the case of positive ratings and the price reduction in the case of negative ratings based on more than 13,000 auctions of mobile phones and 180,000 auctions of DVDs. A significant effect on the selling price is revealed, whereby positive ratings have a smaller effect on price increases than negative ratings have on price reductions. This outcome is consistent with a large number of empirical studies (e.g. Kollock 1999; Dellarocas 2003; Resnick et al. 2006; Diekmann et al. 2009) and shows that sellers have a financial incentive to invest in a good reputation. They are, in particular, interested in avoiding negative ratings because negative ratings are most detrimental to business. Since this can be achieved primarily by means of honest transactions, fraudulent sellers have a reduced incentive to participate in online trade in the first place.

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Today’s online market platforms offer great opportunities to study the way reputation systems function unobtrusively on a large scale. However, process data obtained from online markets only reflects traders’ behavior and, as such, does not reveal much about these traders’ motives or beliefs. The way reputation systems function is also studied in laboratory experiments (e.g., Bohnet et al. 2005; Kuwabara 2015; Abraham et al. 2016). Bolton et al. (2004) compare three market structures: a market with one-off transactions and changing partners (stranger market); a market with repeated transactions with the same partner (partner market); and a stranger market in which transaction partners are informed about each other’s decisions in previous transactions (rating market). Trust and cooperation were higher in the rating market than in the stranger market, but the highest level of cooperation was achieved in the partner market. A reason for the difference between the partner market and the rating market was that subjects are distrustful when they interact with a partner who does not yet have an interaction history. This result also shows that for market entrants, establishing a good reputation may pose a problem. However, building a good online reputation must be costly in order to deter fraudulent traders from entering the market or re-entering under a new pseudonym after a fraudulent transaction (Friedman and Resnick 2001). Market entrants with honest intentions must thus accept lower prices to build their reputation; once they have built a good reputation, they will be compensated for their initial investment by the higher prices they can charge for their goods (Shapiro 1983). Buyers can protect themselves against fraud by taking into account sellers’ reputations when choosing the sellers they want to buy from. Sellers, however, do not generally have the option to choose buyers. How, then, can sellers protect themselves against buyers with poor payment morale? The solution is simple. Sellers determine the mode of payment, so that they are able to make the second move and deliver the goods only after having received a buyer’s payment. Payment modalities can be ordered by the degree to which they favor the seller. The rank order with

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decreasing seller power is (1) payment in advance, (2) cash upon mail delivery, (3) cash on pick up, (4) cash upon delivery (in person), and (5) mail delivery on account. In a study by Diekmann et al. (2009) on mobile phone auctions in the Swiss online market Ricardo.ch, 25% of the transactions were carried out by cash in advance and 70% by cash upon delivery. It also turned out that the reputation of the seller correlated with seller’s power. The better a seller’s reputation the more likely the seller was to determine a payment mode in his or her favor. This effect is also shown in secondary online markets for game cards. Kollock (1999) reports an example of a market in which the norm developed that the exchange partner with a worse reputation had to initiate the exchange by sending his or her card to the exchange partner first. The workings of decentralized reputation systems depend crucially on traders rating each other after finished transactions. Although the submission of a rating by a buyer after receipt of the merchandise requires very little effort, it is by no means a matter of course that ratings are made to a large extent. The sum of all ratings constitutes the collective good reputation that is subject to a free rider problem (Bolton et al. 2004). If traders spared themselves the trouble and provided no feedback, the rating system would deteriorate and with it the entire market. However, a little bit of reciprocity and altruism beyond the selfinterest of the homo oeconomicus can get an anonymous online market with a reputation system up and running (Bolton et al. 2013; Diekmann et al. 2014). Reciprocity is one reason for giving positive feedback to a seller with whom one is highly satisfied because of the high quality of the goods or the rapid processing of the transaction. Many buyers are also inclined to punish a seller who delivers poor quality goods, with a negative rating (Resnick et al. 2000). In the case of two-sided rating systems, there are also strategic motives for leaving feedback (Dellarocas et al. 2004). If the seller and the buyer can rate each other, one gladly gives a positive rating in order to receive the same from the other. At the same time, traders will be more cautious with negative ratings as the trading partner has the possibility

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of retaliating. Hence, a side effect of the two-sided rating system is the inflation of positive ratings. In other words, although the reciprocal rating system of eBay may have helped to overcome the free rider problem in feedback provision, it boosted the amount of positive ratings possibly leading to biased evaluations (Dellarocas and Wood 2008). However, it was possible to overcome this problem by means of a change in the rating system. In 2007 eBay essentially shifted to a one-sided system of buyer ratings, but even after the system change, the proportion of rated transactions remained very high (Bolton et al. 2013). In a similar vein, RentACoder.com, an online platform where people can offer their programming jobs to programmers (Snijders and Weesie 2009), revised its rating system in May 2005. The platform used an open, double-sided rating system before this date, but changed it to a doublesided blind system thereafter. Surprisingly, feedback decreased only slightly, while there was a tremendous decline in strategic rating (Bolton et al. 2013). In general, data from internet markets offer social science researchers rich opportunities to study the impact of institutional rules on human behavior. The results of these studies support the hypothesis that a majority of buyers is not only motivated by strategic considerations but also by other motives. For example, strong reciprocity (Gintis 2000)––the tendency to respond to positive actions positively and to negative actions negatively, even when these responses involve a cost––seems to be common enough in online trades to guarantee a sufficient proportion of ratings.4

4 Based on a theory driven analysis of hundreds of thousands of rating events obtained from eBay, Diekmann et al. (2014) show that strong reciprocity, but also altruism (Becker 1976) and strategic motives (Dellarocas et al. 2004), are important drivers of online traders leaving feedback after finished transactions. Other motives such as warm glow altruism (Andreoni 1990) or indirect reciprocity (Nowak and Sigmund 2005) may also play a role in traders leaving feedback but turned out to be difficult to identify with observational data (Diekmann et al. 2014).

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In their analysis of the Lex Mercatoria, Milgrom et al. (1990) do not assume the existence of any altruism or norms of honorable traders. The rise of the honorable merchant could be a consequence of, but is not a necessary precondition for, the proper functioning of a market with a reputation system. In the analysis by Milgrom et al. (1990), the assumption of self-interest suffices, since all actors have an incentive to play by the rules. However, this is not the case with online markets. There are no material incentives to provide ratings. If all online traders corresponded to the image of the homo oeconomicus, online markets would not emerge. Online markets can only function if a certain proportion of traders employ reciprocal behavior. Only if a certain proportion of traders are motivated by strong reciprocity, and possibly other types of other-regarding preferences, can reputation systems function without additional incentives. Thus far, we have been primarily concerned with three elements which promote cooperation among anonymous traders in online markets: (1) the reputation system, (2) the payment mode and (3) the notion of reciprocity. As a fourth element, institutional rules must be added to this list. Many online markets offer an escrow service, particularly when larger sums of money are involved. While the power of the seller is strengthened by payment in advance, the availability of an escrow service shifts power back to the buyer. Finally, and as a fifth element, we should call to mind that all transactions are subject to contract law. It is possible to take a fraudulent trading partner to court, although this takes time, money and effort. It is, however, remarkable that the four elements of self-organized cooperation alone are sufficient to enable economic transactions. This is demonstrated by the fact that numerous cryptomarkets, markets for illegal goods, function on the dark web (Bradbury 2014). The dark web is only accessible by means of encryption software that obliterates all traces of the actors. In cryptomarkets, such as Silk Road, AlphaBay or Evolution, trade with hacked user accounts, forged passports, illegal drugs, weapons, among

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others is carried out in total anonymity (Christin 2012; Bartlett 2014; Barratt and Aldridge 2016). As with eBay, finished transactions are rated by the customers and to this extent provide information on honest dealers.5 Although none of the traders in cryptomarkets for illegal goods could ever take legal action to uphold their rights before a state court, trade in cryptomarkets flourishes nonetheless (Soska and Christin 2015). Recent findings corroborate that a good seller reputation is at least as important for business success in cryptomarkets, as it is in surface web markets such as eBay. Using data of illegal drug transactions in the cryptomarket Silk Road 1.0 (Christin 2012), Przepiorka et al. (2017) analyzed the effect of buyer ratings on sellers’ business success. They found that sellers with a better rating history charged higher prices and sold their merchandise faster than sellers with a bad or no rating history (see also Hardy and Norgaard 2016). Anonymous traders in cryptomarkets do not, however, rely solely on ratings. There is also an escrow service, which protects buyers by releasing the payment to the seller only upon confirmation of receipt of the merchandise by the buyer. The combination of reputational incentives and institutional precautions literally promotes order without law (Ellickson 1991). Reputation contributes decisively to the relatively smooth processing of millions of transactions in online markets, even in markets for illegal goods in the dark web. Without a reputation system, online markets in which anonymous actors do business over large geographic distances would fail on account of the problem of asymmetric information (Akerlof 1970). Unsurprisingly, reputation systems have spread rapidly on the internet, in particular, in online markets, but also in the form of review platforms of services, hotels, car sharing agencies, hospitals, and universities, among others.

5

The dark web also helps civil rights activists and journalists living in dictatorial regimes to communicate freely.

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Trust and Reputation in Historical Markets and Contemporary Online Markets

The Downside of Reputation Systems

Reputation systems can promote cooperation in illegal activities as much as in legal online markets. In the same way as mafia structures are strengthened by strict cooperation norms, (e.g., the obligation to secrecy, the omertà), reputation systems also help markets for illegal goods achieve a high degree of successful transactions (Hardy and Norgaard 2016; Przepiorka et al. 2017). Reputation is always based on perception, but perception can be deceptive. This is true for gossip and tittle-tattle, and equally so for online reputation indices. In particular, a good reputation can also be faked to a certain extent. This used to be called swindling, but is nowadays termed reputation management. For example, companies or authors of books sold by Amazon may pay for services praising their products (Flood 2012; Arthur 2013). There is also the possibility of hiring reviewers to give negative ratings to competing products. Examples of such services can be found on the online platform Fiverr.com. Recently, Amazon sued fake reviewers who were active on this platform (Kirchner and Beyer 2016). By now, specially programmed algorithms or bots are able to generate like clicks on social media such as Facebook or YouTube (Clark 2015). In certain domains it may be even simpler to fabricate favorable evaluations. Who knows whether hotel ratings really come from guests or whether they have been commissioned by the hotel owners? Rating agencies, which decide on the quality of securities, are paid by the issuers, with the result that questionable collateralized debt obligations are awarded a Triple A, the highest possible rating. Finance experts put at least part of the blame for the 2008 financial crisis on these agencies. Not only is a fraudulently acquired reputation a problem, but also the destruction of honestly acquired reputation. This can take the shape of mobbing among schoolchildren or the destruction of the reputation of a competing product on the market through negative, fake reviews. Thus, in general, for

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reputation systems, the reliability of the information and the rating procedures are core issues. In online markets the construction of a bogus reputation involves costs, as fees are charged for every transaction. A trader can pursue a policy of building up a reputation with a number of small business transactions (whitewashing) and then act fraudulently in a big transaction. The strategy can pay off if the profit from the fraud exceeds the cost of building up the reputation. Counter measures are, however, available. In the case of large transactions, customers are well advised to make use of the escrow service. Moreover, a seller makes him- or herself seem suspicious if, to exaggerate a bit, he or she makes a hundred deals with the sale of chewing gum and then offers a Ferrari for sale with payment in advance. It is important that potential customers are not only informed about the evaluations of past transactions but also about the size of the deals. Apart from the question of fraudulent reputation building, there is a further problem in connection with decentralized reputation systems. In the case of experience goods, deficiencies might only be recognized by consumers after some time, if at all. If, for example, a toy bought in an online auction, releases toxic chemicals which the buyer cannot notice, this serious deficiency will not of course be reflected in the buyer’s rating of the seller. Deficiencies which can only be established by means of special tests and material analysis require expert evaluation by institutions such as food inspection or consumer safety agencies. In these cases, decentralized ratings alone are, therefore, by no means sufficient and must be supplemented by the evaluations of experts. In spite of all the reservations and problems they give rise to, decentralized rating systems are evidently successful. They have spread rapidly in online markets, not only on the internet. The concept of a reputation society is perhaps rather exaggerated, but it makes clear that more and more corners of our society are being pervaded by quantifying reputation systems. Reputation is also being increasingly quantified in the field of science. A large number of digital archives exist alongside the Web of Science. Google Scholar, RePEc, Research Gate, and Academia.edu all

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publish indices and attribute reputations. Recruitment committees, for example, often use these performance scores to select candidates for an academic position. Hence, citations, the impact factor of journals, the h-index and other indices increasingly determine the careers of researchers, who adapt their behavior to the requirements of these indices. Reputation can create social order and promote cooperative behavior, but it can also have unintended, negative consequences. For example, public quality rankings of physicians, introduced to improve treatment quality, may induce these physicians to avoid sick patients, because sick patients are more likely to negatively affect their scores (Werner and Asch 2005). Insurance companies, employers, banks and many other companies will increasingly use data about the reputation of citizens for their decisions, but also may abuse it. Coleman’s (1982) criticism of the asymmetrical society is gaining new relevance with regard to the power of large corporations that have data of millions of people at their disposal. Credit agencies thus condense information into credit scores that not only take into account the payment history of consumers, but also sociodemographic information and the payment behavior of neighbors. As a result, an honest consumer, who has always behaved in accordance with the contract, receives a point deduction because his neighbors have low scores. When a bank grants a loan, this person is then confronted with less favorable credit conditions. This also has distribution policy effects, because people in poorer residential areas pay higher mortgage interest rates than people in wealthy neighborhoods. Regulation is necessary for such markets; above all, transparency must also be created through the disclosure of scoring algorithms. As the above example illustrates, scoring systems can lead to massive collateral damage; O’Neill (2016) calls them Weapons of Math Destruction. In nightmarish dimensions, monitoring and reputation systems of citizen scores are currently being tested in China and may be introduced to a large extent in the coming years. The life chances of millions of people will then depend on questionable assessments of their good conduct and

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their conformist behavior in political affairs. There is no doubt that people will respond. Public opportunism and retreat into the private sphere will increase; intrinsic motivation might be crowded out, and people will likely game the system when trying to boost their scores (for critical essays on the digital revolution see Helbing 2015). There is also the danger of massive misdirection and undesirable side effects from reputation systems outside markets, especially if reputation systems are non-transparent or misused by companies or governments for their own purposes. Whether and to what degree reputation systems promote the welfare of society depends on the purpose of the scores and their consequences for market participants and citizens. It also depends on the quality of the information measured with the individual indicators. More systematic research into the working of reputation systems, into their interaction with individuals’ preferences and constraints, as well as into the consequences of reputation systems for society at large is necessary. The analysis of reputation systems in past and present societies does show that in markets for goods and services, whether online or offline, reputation can help solve problems of asymmetric information and in this way promote cooperative and mutually beneficial trade.

References Abraham, M., Grimm, V., Neeß, C., & Seebauer, M. (2016). Reputation formation in economic transactions. Journal of Economic Behavior & Organization, 121, 1–14. Akerlof, G. A. (1970). The market for ‘lemons’: Quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488–500. Andreoni, J. (1990). Impure altruism and donations to public goods: A theory of warm-glow giving. Economic Journal, 100(401), 464–477. Axelrod, R. (1984). The evolution of cooperation. New York: Basic Books. Barratt, M. J., & Aldridge, J. (2016). Everything you always wanted to know about drug cryptomarkets* (*but were afraid to ask). International Journal of Drug Policy, 35, 1–6.

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A. Diekmann and W. Przepiorka Milinski, M. (2016). Reputation, a universal currency for human social interactions. Philosophical Transactions of the Royal Society B, 371, 20150100. Nee, V. (2005). The new institutionalisms in economics and sociology. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (pp. 49–74). Princeton, NJ: Princeton University Press. North, D. C. (1977). Markets and other allocation systems in history. The challenge of Karl Polanyi. Journal of European Economic History, 6, 703–716. Nowak, M. A., & Sigmund, K. (2005). Evolution of indirect reciprocity. Nature, 437(7063), 1291–1298. O’Neill, C. (2016). Weapons of math destruction: How big data increases inequality and threatens democracy. London: Penguin Books. Osborne, M. J. (2009). An introduction to game theory (International ed.). Oxford: Oxford University Press. Ostrom, E. (1990). Governing the commons: The evolution of institutions for collective action. Cambridge, UK: Cambridge University Press. Popitz, H. (1980). Die normative Konstruktion von Gesellschaft. Tübingen: Mohr Siebeck. Przepiorka, W. (2013). Buyers pay for and sellers invest in a good reputation: More evidence from eBay. Journal of Socio-Economics, 42(C), 31–42. Przepiorka, W. (2014). Reputation in offline and online markets: Solutions to trust problems in social and economic exchange. Economic Sociology, the European Electronic Newsletter, 16(1), 4–10. Przepiorka, W., Norbutas, L., & Corten, R. (2017). Order without law: Reputation promotes cooperation in a cryptomarket for illegal drugs. European Sociological Review, 33(6), 752–764. Rapoport, A., & Chammah, A. M. (1965). Prisoner’s dilemma: A study of conflict and cooperation. Ann Arbor: University of Michigan Press. Resnick, P., Zeckhauser, R., Friedman, E., & Kuwabara, K. (2000). Reputation systems. Communications of the ACM, 43(12), 45–48. Resnick, P., Zeckhauser, R., Swanson, J., & Lockwood, K. (2006). The value of reputation on Ebay: A controlled experiment. Experimental Economics, 9, 79–101. Shapiro, C. (1983). Premiums for high quality products as return to reputation. Quarterly Journal of Economics, 98(4), 659–680. Siamwalla, A. (1978). Farmers and middlemen: Aspects of agricultural marketing in Thailand. Economic Bulletin for Asia and the Pacific, 29(1), 38–50. Snijders, C., & Weesie, J. (2009). Online programming markets. In K. S. Cook, C. Snijders, V. Buskens, & C. Cheshire (Eds.), eTtrust: Forming relationships in the online world (pp. 166–185). New York: Russell Sage Foundation. Sommerfeld, R. D., Krambeck, H.-J., Semmann, D., & Milinski, M. (2007). Gossip as an alternative for direct observation in games of indirect reciprocity. Proceedings of the National Academy of Sciences of the USA, 104(44), 17435–17440.

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Internet Resources Arthur, C. (2013). How low-paid workers at ‘Click Farms’ create appearance of online popularity. Retrieved August 2, 2013, from https://www.theguardian.com/ technology/2013/aug/02/click-farms-appearanceonline-popularity Clark, D. B. (2015). The bot bubble: How click farms have inflated social media currency. Retrieved April 21, 2015, from https://newrepublic.com/article/ 121551/bot-bubble-click-farms-have-inflated-socialmedia-currency Diekmann, A., & Przepiorka, W. (2019b). Die Expansion digitaler Märkte und die dunklen Seiten von Reputationssystemen. In Nicole Burzan (Ed.), Komplexe Dynamiken globaler und lokaler Entwicklungen. Verhandlungen des 39. Kongresses der Deutschen Gesellschaft für Soziologie in Göttingen 2018. Retrieved from http://publikationen.soziologie. de/index.php/kongressband_2018/issue/view/33 Flood, A. (2012). Sock puppetry and fake reviews: Publish and be damned. Retrieved September 4, 2012, from https://www.theguardian.com/books/2012/sep/04/ sock-puppetry-publish-be-damned Gottschalk, F. C. H., Mimra, W., & Waibel, C. (2019). Health services as credence goods: A field experiment.

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Diekmann, Andreas is professor emeritus of sociology at ETH Zurich, Switzerland, and senior professor at the University of Leipzig, Germany. Research topics: Theory of social cooperation and experimental game theory, environmental and population sociology, methods of empirical social research. Recent publications: Przepiorka, Wojtek, and Andreas Diekmann. 2020. Binding Contracts, Non-Binding Promises and Social Feedback in the Intertemporal Common-Pool Resource Game. Games 11: 5. Bruderer Enzler, Heidi, and Andreas Diekmann. 2019. All Talk and No Action? Environmental Impact and Pro-Environmental Behavior: Correlations to Income and Environmental Concern. Energy Research and Social Science 51: 12–19. Diekmann, Andreas, and Wojtek Przepiorka. 2016. “Take One for the Team”! Individual Heterogeneity and the Emergence of Latent Norms in a Volunteer’s Dilemma. Social Forces 94/3: 1309–33. Berger, Joel, and Andreas Diekmann. 2015. The Logic of Relative Frustration: Boudon's Competition Model and Experimental Evidence. European Sociological Review 31/6: 725–37. Diekmann, Andreas, and Wojtek Przepiorka. 2015. Punitive Preferences, Monetary Incentives and Tacit Coordination in the Punishment of Defectors Promote Cooperation in Humans. Scientific Reports 5: 1–10. Przepiorka, Wojtek is assistant professor at the department of sociology/ICS, Utrecht University, Netherlands. Research topics: Analytical sociology, economic sociology, game theory, organizational behavior, computation social sciences, experimental methods, meta-analysis, replication. Recent publications: Gambetta, Diego, and Wojtek Przepiorka. 2019. Sharing Compromising Information as a Cooperative Strategy. Sociological Science 6: 352–79. Horne, Christine, and Wojtek Przepiorka. 2019. Technology Use and Norm Change in Online Privacy: Experimental Evidence from Vignette Studies. Information, Communication & Society. Przepiorka, Wojtek, and Andreas Diekmann. 2018. Heterogeneous Groups Overcome the Diffusion of Responsibility Problem in Social Norm Enforcement. PLOS ONE 13/11: 1–18. Przepiorka, Wojtek, and Christine Horne. 2019. How Can Consumer Trust in Energy Utilities Be Increased? The Effectiveness of Prosocial, Pro-Environmental, and Service-Oriented Investments as Signals of Trustworthiness. Organization & Environment 33/2: 262–84. Przepiorka, Wojtek, Charlotte Rutten, Vincent Buskens, and Aron Szekely. 2019. How Dominance Hierarchies Emerge from Conflict: A Game Theoretic Model and Experimental Evidence. Social Science Research 86: 102393.

How to Buy, Sell, and Trade Attention: A Sociology of (Digital) Attention Markets

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Philipp Bachmann and Gabriele Siegert

1

The Emergence of Attention Markets

By the end of the nineteenth century, more and more people in the industrialized world were benefitting from economic growth. With an increase in wages and wealth, a new social class emerged: the bourgeoisie. Its members could spend money on products and services beyond the satisfaction of their primary needs. What needs came up? New needs would have to be awakened first. In cities, shop owners and companies began attempting to win consumer favor, which, if nothing else, resulted in complaints about the emergence of advertisements. In his unfinished Arcades Project, which literarily captured the developments of capitalism and emerging shopping arcades in Paris, Walter Benjamin lamented the many advertising messages. “Locust swarms of print, which already eclipse the sun of what city dwellers take for intellect, will grow thicker with each succeeding year” (Benjamin 2002, 456). Here, Benjamin recognizes targeted disturbance as a P. Bachmann (*) Institute of Communication and Marketing (IKM), Lucerne University of Applied Sciences and Arts, Lucerne, Switzerland e-mail: [email protected] G. Siegert Department of communication and media research (IKMZ), University of Zurich, Zurich, Switzerland e-mail: [email protected]

basic principle of attention markets. In addition to advertising, politics and the press began to attract attention using pictures, slogans, headlines, and provocations. The more people became accustomed to them, the shriller and louder these efforts became. Between 1927 and 1940, while Benjamin was working on the Arcades Project, many attempts to attract attention were still intuitive. It was Edward L. Bernays (1928) who first claimed that attention could be manufactured, thus, the opinions of the masses could be influenced and controlled by an intellectual and economic elite. At the time, he referred to this as propaganda, a term that would only later fall into disrepute. Bernays connected Sigmund Freud’s theory of unguarded driving forces with empirical research methods of the social sciences in development at that time, particularly those of market research (Bernays 1928, see also Bernays 1971). Today’s fields of advertising and public relations have grown apart from one another; in industrialized nations, the demand for press products skyrocketed, as did spending on propaganda, advertising, and public relations (Reinhardt 1993, 35 ff.). In short, a large media industry emerged with its own attention markets (Siegert and Brecheis 2017, 74). The objective of this chapter is to examine attention markets from a sociological point of view. From the perspective of economic sociology (see Swedberg 1987; Smelser and Swedberg 1994; Steiner 1995, 176) this is appropriate

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_10

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because attention is a social phenomenon that, in modern society, is traded in markets on an industrial scale. For Franck (1998), attention is even more important than money and power—the typical subjects of sociology. He writes, “Attention by other people is the most irresistible of drugs. To receive it, outshines receiving any other kind of income. This is why glory surpasses power and why wealth is overshadowed by prominence” (Franck 1999, see also Franck 1998, 10). Similarly, Davenport and Beck highly value the social and economic relevance of attention. “Those who do not have it want it. Even those who have it want more. You can trade it, you can purchase it. People work to preserve and extend what they have already . . . and attention can be converted into other currencies” (2001, 3). What distinguishes a sociological analysis of attention markets? Sociological theory, our starting point, claims to provide consistent answers to four basic questions. (1) What is social action? (2) How does social order come about? (3) What causes social change? (4) How is the present to be interpreted? We apply these basic questions to attention markets. This chapter’s research questions are as follows: (a) To what extent is the generation of attention a social action? (b) How do markets emerge in which something as fleeting as attention is traded? (c) What causes change in attention markets? and (d) How are attention markets currently changing through digital transformation? To answer the four questions, we first conceptualize attention as an economic good and a social relation. Based on Simmel’s Sociology of Money, we demonstrate that attention, unlike many other goods and services, cannot be easily expressed in monetary terms. Since attention takes place in the minds of other people, the amount and quality of attention are difficult to measure, as Franck also shows in his Economics of Attention. It is shown that, in practice, attention buyers and dealers use stopgap measures; they do not trade actual attention, but media reach, as a substitute, because its amount and quality are easier to measure. Media are institutions that bundle attention, which is why, in research and practice, attention markets appear in the form of media markets. However,

P. Bachmann and G. Siegert

discussing attention markets rather than media markets reveals the important role played by creativity in attracting attention. Recipients are flexible beings who, as Friestad and Wright’s (1994) model of persuasion knowledge demonstrates, have the power to ensure that unwanted attempts to influence them come to nothing. Therefore, public relations and advertising must use a great deal of creativity to attract recipients, to influence them in a strategic manner. Yet our chapter concludes that digitalization led to “hypercompetitive markets” (Hollifield 2006) with countless communicators and a plethora of content competing for our attention. Moreover, the interplay of big data, data mining, and artificial intelligence raises the question of whether the gloomy diagnoses of externally controlled recipients, like those formulated by the Frankfurt School, (e.g., Adorno 1963; Marcuse 2002), are justified. Based on our framework, we reach the conclusion that despite sophisticated technologies and persuasion techniques, one should not forget that humans are more than mere targets; they can see through sophisticated manipulation strategies after a while.

2

Defining Attention and Attention Markets

2.1

Attention as an Economic Commodity

In the most general sense, markets are social structures that allow buyers and sellers to exchange goods, services, or information. Money, as the key facilitator of exchange in complex market structure, is so integral that we cannot imagine modern markets without money and currencies. Is attention really an economic commodity? To what extent is it possible for attention to be traded in a market? In his Sociology of Money, published in 1900, Georg Simmel conceptualized money as a “generalized medium of interaction”. Money, according to Simmel, is the purest symbol of modern society. “Only money, in terms of its pure concept, has attained this final stage; it is

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How to Buy, Sell, and Trade Attention: A Sociology of (Digital) Attention Markets

nothing but the pure form of exchangeability” (Simmel 2004, 128). As a generalized medium of interaction, money is constitutive for attention markets. The role of money in modern societies cannot be overestimated, as Harari emphasizes, “Money is the most universal and most efficient system of mutual trust ever devised” (2014, 201). Following the perspective of a generalized media of interaction, Davenport and Beck conceptualize attention as a currency itself. Attention is today’s “real currency of businesses and individuals” (2001, 3). It is true that attention, like money, can be considered a measure of what gives value to goods, but, unlike money, attention has a low direct exchangeability. While money is temporally and socially indifferent and, thus far, can be stored, attention is difficult to store, whether by the owner or the buyer (Ghosh 1997; Dahinden 2001; Siegert 2001b, 115). Even Davenport and Beck acknowledge, “attention is focused on a particular item of information” (2001, 20). Therefore, the conceptualization of attention as a currency can be rejected for now; in contrast to money, attention lacks exchangeability (Beck 2001). As Goldhaber stated, “Money flows to attention, and attention flows much less well to money” (1997, 7). Thus, the question remains open, as to whether attention is a good that buyers and sellers can exchange for money or not. Franck points out that, for a long time, science has been and still is struggling with the economics of attention, because attention is an immaterial thing that occurs within people and thus cannot be measured or weighed. If its quantity and quality cannot be measured, it cannot be easily converted into money (1998, 22 f.). To open a sociological analysis, we argue that attention is not only an intangible thing that occurs within people but also one that occurs between people. In other words, all social action is based on the generation of attention, which is thus a social phenomenon. According to Campo, it was Alfred Schutz in the late 1920s who revealed that attention is the “basso continuo” (figured bass) of all social actions (2015, 118).

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At about the same time, Walter Benjamin pointed out in his Arcades Project (1927–40) that a specific disturbance is necessary to capture someone else’s attention, especially in the public domain. It is a targeted disturbance that aims to trigger the mental engagement of another, unknown person. Combining ideas from Schutz and Benjamin, we can argue that under market conditions, the generation of attention is no longer the basso continuo of social action, but becomes the first violin. Moreover, the “technical reproducibility” (Benjamin 1969), and now also the digital reproducibility of media content leads to many disturbances, which far exceed people’s mental capacities. This results in a fundamental economic problem, which remains unchanged since Benjamin’s time. The fields of economics and politics, as well as culture and religion, each have a respective interest in the fact that spatially, temporally or socially distant people direct their mental engagement to particular stimuli of information. In other words, in modern attention markets, everyone refuses to play second fiddle. Economist and cognitive psychologist, Herbert A. Simon, defines attention in a similar way as Benjamin. He speaks of stimuli instead of disturbances, “Attention, then, refers to the set of elements that enter into consciousness at any given time” (Simon 1997, 102). He came to the same conclusion, regarding modern society. In an information-rich world, the wealth of information means a dearth of something else: a scarcity of whatever it is that information consumes. What information consumes is rather obvious; it consumes the attention of its recipients. Hence, a wealth of information creates poverty of attention (Simon 1971, 40 f.).

What communication scholars call information overload (Blumler 1980) is simply a classic shortage to economists; the demand for attention is greater than the supply (Goldhaber 1997; Falkinger 2007). We can conclude that attention is not a currency because it is not a generalized medium of interaction. Instead, attention seems to be a non-generalizable commodity; it is bound to a particular item of information and is thus difficult to exchange. The first research question, to what

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extent is the generation of attention a social action, can be answered as follows: all social action is based on the generation of attention. However, in immediate social contexts, attention is generally not an independent social action; on the contrary, attention is the figured bass of interactions. However, under market conditions, attention is not a side aspect anymore, but rather a scarce commodity. In modern society, the generation of attention through communication media, over great distances of time and space is the basic resource for achieving society’s economic, political, cultural, and religious goals, among others.

2.2

The Constitution of Attention Markets

Due to the imbalance between the technical reproducibility of media content on the one hand, and people’s limited processing capacity on the other, attention, particularly that of wealthy or otherwise influential people, has become a scarce commodity. High prices are usually paid for scarce commodities, which is an economic incentive to mass production and trading. The development of attention markets encounters a fundamental problem: attention is something fleeting, hidden, something that takes place inside another person’s mind. In social proximity, people with empathy and patience can develop a precise idea of what is happening in the mind of another person, although some sociologists and philosophers, like Niklas Luhmann, would dispute this. Human consciousness functions as a closed system that is neither externally visible nor alterable (Luhmann 1995). Regardless of one’s position, something else is crucial to the present analysis; the greater the distances in time and space between humans, the more the problem of other minds inevitably arises. Over great distances of time and space, the amount and quality of attention generated cannot, or at best very superficially, be recognized and measured. As Goldhaber (1997) explained in a speech: If money could reliably buy attention, all I would have to do is pay you the required amount and you would keep listening carefully through all that, not

falling asleep en masse, nor allowing your minds to wander. In truth, even if you had been paid a huge sum, this would be most difficult, and if you did it, it would be a testament more to your own deep sense of principle than to a general condition in which another roomful of similar people could be expected to do equally well (Goldhaber 1997, 7).

Consequently, the amount and quality of attention cannot be expressed in monetary terms either, there is a conversion dilemma between money and attention. The price uncertainty that ensues is highly unsatisfactory for market players (see Siegert 2001a, b). Thus, market players who buy and sell must utilize tricks or tools. Instead of trading hard-to-measure attention, they convert it into media reach, which is a quantifiable measure. Advertising has established the thousand-contact price (CPT), which reveals the amount of money that must be spent on an advertising campaign to reach 1000 people of a target group, visually or audibly. Similarly to standardized container dimensions, which ensure the efficient trade of goods, CPT is a standard measure that regulates the conversion of money and attention between principals and attention merchants. It is generally clear to those involved that merely disseminating particular pieces of information does not guarantee mental commitment. To say, write or picture something in the public domain does not mean that the target audience hears, reads or sees it. However, because media reach can usually be measured easily and in a standardized manner, and thus expressed in monetary units, these temporary measures, stopgap measures, have dominated the market for a long time (see Sommer and Marty 2015). From a sociological perspective, the second research question, how do markets emerge in which something as fleeting as attention is traded, can be answered as follows: Attention markets arise because market players spend their money where they believe it will be the most useful, where they expect the highest return on their investment. The objective of market players in attention markets is what Turow calls “achieving a good share of mind” among the target groups (2009, 201); people should develop positive opinions toward products, services, politicians,

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How to Buy, Sell, and Trade Attention: A Sociology of (Digital) Attention Markets

companies, and so forth, and act accordingly, especially when purchasing and voting. However, a good share of mind as well as cause-and-effect relationships in advertising are difficult to measure. Since it is barely possible to determine the good share of mind and thus express attention in monetary terms, media reach (thousand-contact price) is traded as a proxy. Here, McQuail states, “The fact of attention often matters more than the quality of attention (which can rarely be adequately measured)” (2010, 72). Attention markets and media markets represent an amalgam, the components of which cannot be separated.

2.3

Social Change: Attention, Media, and Persuasion Markets

The conversion dilemma between attention and money represents one reason an economics of the media has established itself rather than an economy of attention (Franck 1998). This media economy does not focus on hard-to-reach public attention, but on directly observable public communication, or more precisely, on the economic and social limitations of public communication (see Picard 2003, 301; Meier et al. 2010, 242). A focus on public communication, or the production and trade of media reach, may lead to the assumption that the targets are merely passive recipients of stimuli; principals and merchants need only slip a particular item of information to relevant target groups, and this information would then achieve the desired effect in the recipient’s consciousness. Even in the social sciences, this idea of passive, externally controlled recipients has long been prevalent, especially from members of the Frankfurt School. In the tradition of Walter Benjamin, for example, Theodor W. Adorno claimed that consumerism in capitalism means the best manipulated audience blinds itself to evil of its own free will if one surrenders to his will, the best prepared audience blinds the bad (1963, 57). Herbert Marcuse also saw the recipient as a “one-dimensional man” asserting “[t]he mere absence of all advertising and of all indoctrinating media of information and entertainment would plunge the individual into a

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traumatic void where he would have the chance to wonder and to think” (2002, 250). This idea lives on through Zygmunt Bauman, who, according to Rattansi, is “best understood as a latter-day representative of the German Critical Theory” (2017, 4). “The phenomenon of brainwashing is eminently present nowadays in both propaganda and commercial advertising––though hiding under the politically correct names of ‘advertising,’ ‘broadcasting,’ ‘public relations,’ downright to ‘information service’” (Bauman and Donskis 2016, 37). Other social theorists highlight that humans are not just targets, but reflective beings, (e.g. Giddens 1984). With reference to attention markets, Friestad and Wright’s model of persuasion knowledge is instructive. Its basic assumption is that humans have a broad repertoire of knowledge and techniques to sabotage unwanted attempts to influence them. Recipients do not accept clumsy, obvious attempts to influence them. With time, they can also see through sophisticated manipulation strategies. “All people are ‘moving targets’ whose knowledge about persuasion keeps changing. In the ‘game’ of persuasion, the persuasion knowledge of the players changes developmentally and historically” (Friestad and Wright 1994, 22). Like the arms race between developers of malicious software and developers of anti-virus software, there is a kind of arms race between generators, dealers, and recipients of attention, constituted in efforts to escape and expose the attention stimuli and accompanying attempts at persuasion. To keep pace with this arms race, the highest level of creativity is demanded of attention generators and dealers. The stimuli required to generate media attention should not be recognized by the targets as a disturbance. Not surprisingly, according to von Rimscha, “Creativity is a core value in all areas of media production” (2017, 109). As Goldhaber exemplified in his speech: Someone who wants your attention just can’t rely on paying you money to get it, but has to do more, has to be interesting, that is must offer you illusory attention, in just about the same amounts as they

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would if you had instead been paying money to listen to them (Goldhaber 1997, 7).

Regarding attention markets, two professions have emerged to generate attention. These two have developed different strategies with a common interest in purposefully and systematically attracting attention: advertising and public relations. Much has already been written about their similarities and differences (e.g. Siegert and Brecheis 2017, 30 ff.). Advertisers try to place messages in the right environments to attract attention to the interests of their clients. A high level of creativity is required to ensure these messages are not ignored, which can be demonstrated, although not exclusively, in humorous campaigns, or by advertising in unusual places. Another complementary strategy is to place attention stimuli where targets do not perceive persuasive messages to be a disturbance. Generating attention here works particularly well. Traditionally, public relations professionals try to accommodate their messages in editorial reporting through a deliberate awareness of the selection, presentation and logic of interpretation of the editorial media (see, e.g. Bernays 1947; Baerns 1987; Bentele and Nothhaft 2008). So, we have a first answer to our third question. Human targets of attention strategies are not passive recipients of media stimuli, but reflexive beings who constantly adapt their knowledge and abilities to avoid or sabotage unwanted attempts to capture their attention or to persuade them. Generators of and dealers in attention must be creative to attract attention in a systematic, constant, and demonstrable way. The need to innovate results in highly variable structures of attention markets.

2.4

An Economic-Sociological Framework of Attention Markets

Economic and sociological thought on attention and attention markets can now be combined coherently to answer the questions regarding attention as a social act, the constitution of

attention markets, and the changes in attention markets. Generating attention is a component of any social interaction, in which one captures the mental focus of another by means of a disturbance. Thus, attention is a relational construct; without providing information on why or how an actor generates attention, one cannot speak of attention (see Siegert and Brecheis 2017, 8 ff.). In modern societies, attention is conveyed over great distances of time and space by means of mass media and communication technologies. Because media content is technically easy to reproduce, there is a plethora of strategic attempts to attract the attention of relevant audiences. Not every intended information transfer reaches its destination. The limited processing capacity of human consciousness creates an economic scarcity. This is especially true since these goals are agile; target groups do not consist of passive recipients of stimuli, but are rather, reflexive beings with a broad repertoire of knowledge and techniques to avoid undesired disturbances. Certain professions, which cultivate this scarcity, have emerged over the last decades and have defined public relations and advertising as a professional generation of attention. The professional generation of attention is a specific form among human activities. It is essentially characterized by strategic planning, delivery and evaluation of information dissemination to other people and target groups by professionals. This information is a type of persuasive communication that, in the interests of one’s own organization or of the client, raises awareness among target groups to influence and trigger actions, especially purchase and choice. To meet the moving goals, professional generators of attention embed the persuasive messages in a communication environment, so that the targets do not perceive these messages as disturbances. Advertisers place messages in an advertising-friendly environment, such as editorial media, which recipients consume voluntarily and purposefully. Public relations experts apply the selection, presentation, and logic of interpretation of journalistic media to their messages, the subject of journalistic reporting.

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3

How to Buy, Sell, and Trade Attention: A Sociology of (Digital) Attention Markets

Attention Markets in the Digital Age

We can use our sociological framework to answer the fourth and final question of how digital transformation is changing attention markets. Numerous bestselling, critical nonfiction books deal with the consequences of the digital transformation these days. Although authors concern themselves with a variety of digital technologies, their work has one thing in common; they perceive digital transformation as a disruption in the history of humanity. For example, Brynjolfsson and McAfee (2014) speak of the Second Machine Age. Additionally, bestselling books on digitization have an ominous undertone. Ford (2016), for example, warns of mass unemployment; Pariser (2011) of intellectual isolation; O’Neil (2016) of inequality and the deconstruction of democracy; Harari (2018) of digital dictatorship; Zuboff (2019) of total surveillance; and Bostrom (2014) even predicts the end of the world as a result of an emergent digital superintelligence. These evocations of anxiety are reminiscent, in some respects, of the gloomy diagnoses and predictions of critical theory on the culture industry, within which the public is seen as blind, uncritical, cultural consumers. Felix Stalder’s perspective (2018) on the peculiarities of digital culture is much more illuminating for our purposes. In his book, The Digital Condition, Stalder shows how social action is increasingly shaped by digital technologies; how the internet exists despite massive information overload; and how the interplay of technical and social feedback mechanisms causes constant social change (see Stalder 2018). We combine our economic-sociological framework of attention markets with Stalder’s analysis of digital transformation. According to Stalder (2018), social action is embedded in ever-more-complex communication technologies in the digital environment. As a result, people are increasingly confronted with a new digital culture. According to Stalder, digital transformation is ultimately accompanied by the erosion of established institutions, certainties and

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ideas (see Stalder 2018, 3 ff.). We have argued that, under market conditions, the generation of attention is no longer merely a part of social action, but rather, becomes a commodity. Targeted disturbances, in the form of advertising, for example, are a solution and a problem for attention merchants; disturbances must not be perceived as such, by target groups. Why is this important? It seems that successful platforms, such as Facebook and YouTube solve this fundamental dilemma of attention markets by leveraging users’ social action. Platforms use algorithms to evaluate which communicators their users follow, and which content they like and share voluntarily. Unlike traditional institutions, these platforms do not attempt to address the information overload as a hierarchy. Instead, their algorithms convert one aspect of the users’ social action into the platforms’ main product. Rather than acting as a gatekeeper, the platform determines which target group receives which content via an interaction of user behavior and algorithms. In this interaction, attention is increasingly directed to communicators and content, which are not perceived as a targeted disturbance. Instead, the recipients demand the content voluntarily. In this context, Shaw (2012) refers to decentralized gatekeeping (see also Wallace 2018). This leads us to answer how social order arises on the internet. Considering that the wealth of information and the poverty of attention are two sides of the same coin, Simon saw “a need to allocate that attention efficiently among the overabundance of information sources that might consume it” (1971, 40 f.). This allocation problem is further exacerbated by the digital transformation (Davenport and Beck 2001; Chan-Olmsted and Wolter 2018). Stalder (2018) states that no classical institution, no library, no archive, no editorial office is capable of even approximately channeling and organizing the information overload. In the digital environment, successful companies are those which have algorithms that make it possible to automate cultural activity, which previously was an exclusive domain of humans (see Stalder 2018, 104 ff.). Instead of channeling and organizing the information

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themselves, which leads to costs, they simply provide platforms for others to do this. Therefore, Srnicek conceives platforms as a new type of firm, because they allocate attention efficiently by monopolizing, extracting, analyzing, and using large amounts of user data. User groups are not only consumers but also “advertisers, service providers, producers, suppliers, and even physical objects” (Srnicek 2017, 43). Hence, the overabundance of information is no longer a costfactor for platforms, but the source of their wealth instead. When considering social order, we have noticed that attention markets arise because market players spend their money where they find it most useful, where they expect the highest return on investment. Platform operators offer their paying clientele much more than media reach. McQuail’s statement, the “fact of attention, often matters more than the quality of attention (which can be adequately measured)” (2010, 72) may be considered obsolete in the digital environment. Chan-Olmsted and Wolter reveal that media experts stress the importance of attention quality, simple counting is not enough nowadays (2018, 17). Srnicek indicates that the more users interact with a site or app, the more information is collected about them via cookies and other means (2017, 57). Not only can digital platforms measure the quality of attention, they can even better predict attentional behavior. For example, Zuboff (2019) refers to Facebook’s loyalty prediction service that predicts which customers are at risk, explaining, “The idea is that predictions can trigger advertisers to intervene promptly, targeting aggressive messages to stabilize loyalty and thus achieve guaranteed outcomes by altering the course of the future” (Zuboff 2019, 279). The decisions as to where to invest money are not only automated in the digital environment but are increasingly affected by artificial intelligence. This brings us to the question of social change. Stalder (2018) portends that the algorithms of successful platforms are not static but dynamic. Powerful algorithms are able to incorporate realtime feedback to improve their performance (Stalder 2018, 109). This also affects the classical attention professions of advertising and public relations. Professional attention generation is no

P. Bachmann and G. Siegert

longer just a specific form of human action, which is essentially characterized by someone’s strategic planning, delivery, and evaluation of information transfer to relevant target groups. Persuasive information transfer is increasingly automated. In this context, Bachmann (2019) argues that future public relations and advertising providers who use big data, data mining, and artificial intelligence to manage data flow most effectively will be successful in targeting actions, especially purchase. Finally, we attempt to answer the fourth question. The effect of digital transformation on attention markets is undisputed. However, the innumerable bestsellers’ inherent penchant for doom and gloom presumably reveals less about digital transformation than it does about the fact that apocalyptic predictions themselves can generate a lot of attention, even in the digital age. Yet despite ever-more-sophisticated technologies and persuasion techniques, one should not forget that humans are more than mere targets. They are reflexive beings who, over time, learn to thwart unwanted attempts to persuade and capture their attention, even though these attempts are very sophisticated. If one takes the idea of humans as reflexive beings seriously, it will raise skepticism about the gloomy diagnoses and predictions of externally controlled recipients. Not every information transfer will reach its intended destination in the future.

4

A Concluding Remark

In this sociological analysis of attention markets, we refer to Simmel’s Sociology of Money for the preliminary insight that attention is not a currency; unlike money, attention does not meet certain requirements for exchangeability. Attention is neither temporally, nor socially indifferent and thus far cannot be stored. In light of digital transformation, perhaps this statement must be questioned. In his summary of Franck’s Economy of Attention, van Krieken argues that attention “becomes a currency when it becomes, like money, abstract, comparable, a system of equivalence, quantifiable, and measurable in the form of

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How to Buy, Sell, and Trade Attention: A Sociology of (Digital) Attention Markets

circulation forges, audience rating, sales figures, hits, likes, views, downloads, followers, and so on” (2019, 5; see also Franck 2005, 103). Our analysis has shown that not only can attention be measured more accurately in the digital age than ever before; it can even be predicted with higher accuracy. Smart devices open up possibilities of measurements based on the number of followers, clicks, shares, likes, and so on, as well as completely new possibilities of automated monitoring. According to Zuboff, Amazon has filed a patent for a voice-sniffer algorithm that can be “integrated into any device and responds to hot words such as ‘bought,’ ‘dislike,’ or ‘love’ with product and service offers” (2019, 269). Although attention has not yet been given to the properties of money in the digital age, the question remains as to whether attention has already become close to currency, as it can be measured so accurately and in a timely and individualized manner.

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Benjamin, W. (2002 [1982]). The Arcades project. Transl. into English by Howard Eiland and Kevin McLaughlin. New York: Belknap Press. [Walter Benjamin 1982 Das Passagen-Werk. Frankfurt am Main: Suhrkamp.] Bentele, G., & Nothhaft, H. (2008). The intereffication model: Theoretical discussions and empirical Research. In A. Zerfass, B. van Ruler, & K. Sriramesh (Eds.), Public relations research. European and international perspectives and innovations (pp. 33–47). Wiesbaden: VS Verlag für Sozialwissenschaften. Bernays, E. L. (1928). Propaganda. New York: Horace Liveright. Bernays, E. L. (1947). The engineering of consent. The Annals of the American Academy of Political and Social Science, 250, 113–120. Bernays, E. L. (1971). The emergence of the public relations counsel: Principles and recollections. The Business History Review, 45, 296–316. Blumler, J. (1980). Information overload: Is there a problem? In E. Witte (Ed.), Human aspects of telecommunication (pp. 229–263). New York: Springer. Bostrom, N. (2014). Superintelligence. Paths, dangers, strategies. Oxford: Oxford University Press. Brynjolfsson, E., & McAfee, A. (2014). The second machine age: Work, progress, and prosperity in a time of brilliant technologies. New York: Norton. Campo, E. (2015). Relevance as social matrix of attention in Alfred Schutz. Società Mutamento Politica, 6(12), 117–148. Chan-Olmsted, S. M., & Wolter, L.-C. (2018). Perceptions and practices of media engagement: A global perspective. International Journal of Media Management, 20(1), 1–24. Dahinden, U. (2001). Informationsflut und Aufmerksamkeitsmangel: Überlegungen zu einer Sozialökonomie der Aufmerksamkeit. In K. Beck & W. Schweiger (Eds.), Attention please. Online-Kommunikation und Aufmerksamkeit (pp. 39–55). München: Reinhard Fischer. Davenport, T. H., & Beck, J. C. (2001). The attention economy: Understanding the new currency of business. Brighton, MA: Harvard Business School Press. Falkinger, J. (2007). Attention economies. Journal of Economic Theory, 133(1), 266–294. Ford, M. (2016). The rise of the robots: Technology and the threat of mass unemployment. New York: Basic Books. Franck, G. (1998). Ökonomie der Aufmerksamkeit: Ein Entwurf. München: Carl Hanser. Franck, G. (2005). Mental capitalism. In M. Shamiyeh & DOM Research Laboratory (Eds.), What people want: Populism in architecture and design (pp. 98–115). Basel: Birkhäuser. Friestad, M., & Wright, P. (1994). The persuasion knowledge model: How people cope with persuasion attempts. Journal of Consumer Research, 21(1), 1–31.

156 Giddens, A. (1984). The constitution of society. Outline of the theory of structuration. Cambridge: Polity Press. Harari, Y. N. (2014). Homo Sapiens: A brief history of humankind. New York: Harper Collins. Harari, Y. N. (2018). 21 lessons for the 21st century. London: Jonathan Cape. Hollifield, C. A. (2006). News media performance in hypercompetitive markets: An extended model of effects. The International Journal on Media Management, 8(2), 60–69. Luhmann, N. (1995 [1984]). Social systems (J. Bednarz, Jr. with D. Baecker, Trans.). Stanford: Stanford University Press. [Niklas Luhmann 1984 Soziale Systeme: Grundriß einer allgemeinen Theorie. Frankfurt am Main: Suhrkamp.] Marcuse, H. (2002 [1964]). One-dimensional man. Studies in the ideology of advanced industrial society. With an introduction by Douglas Kellner. London: Routledge. McQuail, D. (2010). McQuail’s mass communication theory (6th Revised ed.). London: Sage. Meier, W. A., Trappel, J., & Siegert, G. (2010). Medienökonomie. In H. Bonfadelli, O. Jarren, & G. Siegert (Eds.), Einführung in die Publizistikwissenschaft (pp. 239–270). Bern: Haupt. O’Neil, C. (2016). Weapons of math destruction: How big data increases inequality and threatens democracy. New York: Crown. Pariser, E. (2011). The filter bubble: What the internet is hiding from you. New York: Penguin Press. Picard, R. G. (2003). Media economics. In R. Towse (Ed.), The handbook of cultural economics (pp. 301–305). Cheltenham: Edward Elg. Rattansi, A. (2017). Bauman and contemporary sociology: A critical analysis. Manchester: Manchester University Press. Reinhardt, D. (1993). Von der Reklame zum Marketing: Geschichte der Wirtschaftswerbung in Deutschland. Berlin: Akademie Verlag. Shaw, A. (2012). Centralized and decentralized gatekeeping in an open collective. Politics and Society, 40(3), 349–388. Siegert, G. (2001a). Ökonomisierung der Medien aus Systemtheoretischer Perspektive. Medien & Kommunikationswissenschaft, 49, 167–176. Siegert, G. (2001b). Der Januskopf der Aufmerksamkeit. Überlegungen zur medienökonomischen Verortung von Aufmerksamkeit zwischen knappen Gut und universeller Währung. In K. Beck & W. Schweiger (Eds.), Attention please. Online-Kommunikation und Aufmerksamkeit (pp. 109–120). München: Reinhard Fischer. Siegert, G., & Brecheis, D. (2017). Werbung in der Medienund Informationsgesellschaft: Eine Kommunikationswissenschaftliche Einführung (3. Auflage). Wiesbaden: Springer VS. Simmel, G. (2004 [1900]). The philosophy of money. Edited by David Frisby. Transl. into English by Tom Bottomore and David Frisby from a first draft by Kaethe Mengelberg (3rd Enlarged ed.). London:

P. Bachmann and G. Siegert Routledge. [Georg Simmel 1900 Philosophie des Geldes. Leipzig: Duncker & Humblot.] Simon, H. A. (1971). Designing organizations for an information-rich world. In M. Greenberger (Ed.), Computers, communication, and the public interest (pp. 37–52). Baltimore, MD: John Hopkins University Press. Simon, H. A. (1997). Administrative behavior. A study of decision-making processes in administrative organizations (4th ed.). New York: Free Press. Smelser, N. J., & Swedberg, R. (1994). Introducing economic sociology. In N. J. Smelser & R. Swedberg (Eds.), The handbook of economic sociology (pp. 3–25). Princeton, NJ: Princeton University Press. Sommer, C., & Marty, L. (2015). The role of media brands in media planning. Journal of Media Business Studies, 12, 185–203. Srnicek, N. (2017). Platform capitalism. Cambridge: Polity Press. Stalder, F. (2018). The digital condition (V. A. Pakis, Trans.). Cambridge: Polity Press.[Felix Stalder 2016 Kultur der Digitalität. Frankfurt am Main: Suhrkamp.] Steiner, P. (1995). Economic sociology: A historical perspective. The European Journal of the History of Economic Thought, 2, 175–195. Swedberg, R. (1987). The sociology of markets. Current Sociology, 35, 105–119. Turow, J. (2009). Media today: An introduction to mass communication (3rd ed.). New York: Routledge. Van Krieken, R. (2019). Georg Franck’s ‘the economy of attention’: Mental capitalism and the struggle for attention. Journal of Sociology, 55(1), 3–7. Von Rimscha, B. M. (2017). The economic value of creativity. How much, for whom, and what for. In K.-D. Altmeppen, C. A. Hollifield, & J. van Loon (Eds.), Value-oriented media management. Decision making between profit and responsibility (pp. 109–118). Wiesbaden: Springer. Wallace, J. (2018). Modelling contemporary gatekeeping. Digital Journalism, 6, 274–293. Zuboff, S. (2019). The age of surveillance capitalism. The fight for the future at the new frontier of power. London: Profile Books.

Internet References Franck, G. (1999). The economy of attention. Telepolis 7. Retrieved December 07, 1999, from https://www. heise.de/tp/features/The-Economy-of-Attention3444929.html Ghosh, R. A. (1997). Economics is dead, long live economics! A Commentary on Michael Goldhaber’s ‘The attention economy’. First Monday, 5, 1–10. Retrieved May 05, 1997, from https://journals.uic.edu/ojs/index. php/fm/article/view/529

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Goldhaber, M. H. (1997). The attention economy and the net. First Monday, 4, 1–10. Retrieved April 07, 1997, from https://firstmonday.org/article/view/519/440

Bachmann, Philipp is lecturer at the Institute of Communication and Marketing (IKM) at the Lucerne University of Applied Sciences and Arts, Switzerland. His research interests focus on strategic communication, corporate social responsibility, media management, and new technologies. He studied political science, sociology as well as media and communication sciences at the Universities of Göttingen, Stockholm and Leipzig and achieved the magister degree in 2011. From 2011 to 2016, he worked as a research and teaching assistant at the University of Fribourg in Switzerland and obtained his doctorate in 2016. He was senior research and teaching associate at the Institute of Mass Communication and Media Research (IKMZ), University of Zurich, from 2016 to 2019.

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Siegert, Gabriele is a full professor of communication studies and media economics at the Department of Communication and Media Research (IKMZ), University of Zurich, Switzerland. Her research interests deal with media economics, media management and advertising. Recent publications: Siegert, Gabriele, and Dieter Brecheis. 2017. Werbung in der Medien- und Informationsgesellschaft: Eine kommunikationswissenschaftliche Einführung. 3. Auflage. Wiesbaden: Springer VS. Siegert, Gabriele et al. 2017. Commercial Communication in the Digital Age. Berlin: De Gruyter. Siegert, Gabriele et al. 2016. Handbuch Werbeforschung. Wiesbaden: VS Verlag für Sozialwissenschaften. Siegert, Gabriele et al. 2015. Handbook of Media Branding. Basel: Springer International Publishing. Gabriele Siegert has served as president of the Swiss Association of Communication and Media Research, as member of the Swiss Federal Media Commission and as member of editorial and advisory boards. Since 2016, she has served as Deputy President and Vice President Education and Student Affairs at the University of Zurich.

Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces

11

Helge Mooshammer

Since the turn of the millennium, an expanding range of formal-informal linkages, such as taxation of the informal sector and the creation of informal jobs by state institutions, has markedly impacted both the perception and operation of informal markets. Often triggered by political upheaval, economic destabilization, migratory movements and new labor situations, informal markets shape a form of alternative economic governance wherever and whenever institutional protocols have come to a deadlock. With the informal sector estimated to account for more than half of all economic activity worldwide,1 a more decisive engagement with economic informality by the world’s governing bodies is increasingly being seen as critical to achieving a more sustainable form of global development. However, current policy approaches are still torn between framing informality as the root problem, being a “drag on growth”, as a Latin Americafocused World Bank report put it (Perry et al. 2007, 1), and attempting to recognize people involved in the informal economy as valid

1 An ILO report put the number even higher, stating that according to its calculations 2 billion workers, or 61 percent of the worlds employed population, were in informal employment (ILO 2018, 13).

H. Mooshammer (*) Goldsmiths, University of London, London, UK

economic actors and tap into their entrepreneurial capacities. In this chapter, I will examine how these differences are indicative of the current tensions around the development of novel forms of formal-informal linkages, especially around new forms of economic governance, which go beyond state-oriented notions of how to generate political order and economic growth. My key aim is to sketch a nuanced picture of the motivations, practices, and effects of these divergent approaches to economic informality. Drawing on findings of long-term research into the political pressure on informal markets carried out in collaboration with a global network of sociologists, anthropologists, architects, and activists over more than 15 years (Mörtenböck and Mooshammer 2012, 2015, 2016, 2019; Mörtenböck et al. 2015), I will seek to exemplify how the spectrum of policy engagement with informal trade is applied to different physical marketplaces. Specifically, I will reference case studies from around the world to illustrate distinct strategies of engagement with informal markets, ranging from forced closure or relocation of marketplaces, to infrastructural improvement of market facilities, or appropriation of entrepreneurial undertakings. In doing so, I aim to articulate a basic typology of spatio-economic policies that are shaping the role of informal markets in contemporary urban development.

TU Wien, Vienna, Austria e-mail: [email protected] # Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_11

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1

H. Mooshammer

Contested Sites of Exchange

Markets are one of society’s most prevalent and diverse sites of exchange. They are the meeting point for a fluctuating circle of individuals where economic, cultural and social concerns intersect. What holds a market together is its claim to constitute a locus of multiple forms of agreement. In Greek antiquity, the agora, a centrally located city square, was regarded as a site for political, religious, and juridical assembly, as well as a marketplace and a place for consultations involving the community of citizens (polis). It was the place in which the public gathered, and the character of the public sphere was negotiated on many levels. The development of the modern state has seen a separation of the spaces, in which politics are conducted, from the spaces in which markets operate and capital flows are regulated. This has, in turn, blurred the entanglement of different forums of civil assembly and of economic resource allocation. In the current phase of neoliberalism, this spatial separation is contributing to an ongoing concealment of the interrelationships between political and economic forces. At the same time, the state and private capital are increasingly operating outside their respective, established repertoires of action in order to lay claim to market spaces and steer them, in speculative terms. In this context, different evaluations are made of the legitimacy and quality of the operations of individual markets, depending on prevailing political, ideological, and cultural circumstances. Today, places of public trade operate alternately as sites of social opening and reinvention, as forums of reconciliation and integration, as economic security nets for immigrant workers, and as sites of ethnic stigmatization and the enslavement of marginalized population sectors. In accordance with whatever strategic interests are pursued, these attributions are used as a basis for facilitating some business activities while endeavoring to repress others that are classified as illegal, dirty, or backward. The alleged informality of these non-conforming markets is linked to a lack of modernity, legality, profitability, or

public order. Outmoded infrastructure, tax evasion, violations of trade regulations, product counterfeiting, non-transparent business relationships, health risks, unregulated employment agreements, trespass and traffic obstruction are only some of the many shortcomings which are attributed to informal markets. Seen against the backdrop of the globalization of world trade, the increase of the urban population and unprecedented levels of international migration, another picture has emerged since the 1990s, in which the dual logic of the worldwide spread of informal markets can be discerned. Reorganizing politically imposed conditions, informality is a response to, and yet dependent on formal societal structures. However, informality also exists independently, producing its own social, economic, and cultural spheres. Within this tension, the definition and ascription of informality has increasingly become a strategic element in a global struggle for economic access to the processes operating at the lower end of the economic pyramid, in particular (Roy 2010). When the anthropologist, Keith Hart, first coined the term “informal economy” in his article on Informal Income Opportunities and Urban Employment in Ghana, in 1973, he was motivated in part by dissatisfaction with the ignorance of hegemonic economic discourses and the conceptual failure of western categories to grasp a significant share of the world’s economic goings-on (Hart 1973). Since then, among the many things that have changed in global economic politics is a surging interest in informality, its varying conditions, ramifications, and potentials. Hence, one of the most urgent tasks for research in sociology, as well as in architecture, urban anthropology, and globalization studies is to address what is at stake in the politics of informality, in the age of global markets. How can we identify, analyze, and engage with the competing interests that are directing today’s political framing and application of the concept of informality in different parts of the world? From such a practice-oriented perspective, it becomes possible to assess how, during the course of the last decades, the concept of informality has developed from a simply structured

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Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces

economic situation into a figure that encompasses all the complexities emerging from the globalization process. The operative dimension of informality, which is central to these investigations, thus points not only to an abstract, one-dimensional plan of action, but also to a field of forces, spread across the world, in which different milieus of actors, interests, and aspirations unfold at different sites, on varying scales. This field is a vehicle of the global economy, as well as a site of everyday struggles and step-by-step development of alternative interconnections. Crucial for any research into the contemporary fate of informal marketplaces is the recognition that there is no clear-cut binary of formal and informal economic conduct. Both terms reflect particular roles assigned within a continuous economic fabric. Although often characterized by uneven power relations (Simone 2010), the distinction between formal and informal is not necessarily synonymous with the disparity between the wealthy and the poor. There is informality from above, just as there is informality from below (Ribeiro 2006); there is elite informality, just as there is subaltern informality (Roy 2005). There are also degrees of planning, order, deliberations, and protocols in informal markets, just as there are in formal markets. Indeed, recent changes in global economic operations, particularly in the wake of the 2007/08 financial crisis, as well as ongoing technological and operational advances, have brought about an increased informalization of all areas of commerce, trade and work. My argument is that in order to gain a better understanding of the patterns of economic informality and empower public debates about policy approaches, it is necessary to acknowledge that the idea of an informal economy is already entailed in the institutional effort to organize society along formal lines.2 This attempt to engage with the ambiguities surrounding the spread of informality is substantially informed by recent discourses in architectural, urban, economic, and geographical studies

2

See, for instance, Hart (2012).

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that investigate the developmental impact of hybrid governance arrangements (Sassen 2014), the distinctive needs of entrepreneurial vs. survivalist informal actors (Linehan 2007; see also Stamm in this handbook), and the changing forms of integrating informal vendors into economic growth and civic participation (Lund and Skinner 2004). While being grounded in site-specific analyses of the governance effects of formal-informal linkages (bricolage, synergy, composition, hybrid governance, among others), the broad direction of this approach draws on emergent theoretical work around the nexus between formal and informal economic practices, including New Institutional Economics, network analysis, global commodity/ value chains, legal pluralism, subaltern politics, and post-Foucauldian conceptions of power beyond the state (Feige 1990; Nadvi 2004; Spivak 2004; Latour 2005; Ong 2006; Wojkowska 2006; Easterling 2014). By embracing such a trans-disciplinary perspective, I seek to move beyond essentialist debates and reach a more nuanced understanding of the dynamic interactions of spatio-economic integration, transnational capital flows, institutional processes, and bottom-up restructuring (see also Opper in this handbook). Finally, while focusing on contemporary aspects and phenomena of global economic realignment, addressing key notions, such as co-production, bottom/base of the pyramid, multi-stakeholder networks, to name a few, I feel it is imperative to also situate the transformation of informal marketplaces within historical trajectories of strategic urban transformation, colonial exploitation, and political resistance. The hitherto dominant interpretation of manifestations of economic informality and associated proposals, as to how structural deficits of the informal sector can be overcome, have so far prioritized demands on academic research to estimate the size of the informal economy.3

3

This has notably helped to lay the foundation for policies formulated by agencies trying to improve the conditions of informal workers such as the ILO (International Labor Organization) and NGOs such as WIEGO (Women in Informal Employment: Globalizing and Organizing),

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Placing an emphasis on the relations of economic informality with other domains as well as current practices of (in)formalization (McFarlane 2012), I propose shifting the focus of such estimations from measuring the size of the informal sector to developing an analytical matrix, which captures the dynamics of strategic interventions in the informal economy. In this chapter, I am interested in how the term integration often masks a range of extra-market processes, ideologically biased goals, and purpose-driven interventions, which are central to the ongoing creation of a global market and economic standardization (Humphrey and Skvirskaja 2012). Architecture is politics in physical form. It provides a material foil, the life cycles of which, can be examined and contextualized. Tracing and interpreting the temporal and spatial trajectories of ongoing transformations of informal marketplaces can create entry points for capturing and narrating the different degrees of integration involved, and the policies pursued in the incorporation of informality into mainstream economic activity. Pursuing a comparative reading of spatial transformations of informal markets can pave the way to identify different degrees and forms of integration, as well as corresponding social and economic policies. Articulating patterns of spatial intervention can make their correlation with a network of state and non-state actors, communities of interests, economic powers, conflicts, and deals, tangible on a local, regional, and global level.

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Spatial Interventions in Informal Markets as Economic Policy Indicators

In accordance with this approach, l will touch on various cases of informal markets in order to explore the scope, intersections and tensions of ongoing processes of incorporating informality. When looking at these and many other related sites, it becomes possible not only to identify a which grew out of a research network at the Harvard Kennedy School.

diverse range of policy strategies involved in the incorporation of the informal economy, but also to identify decisive modes of spatial planning intervention employed in their implementation. For the purpose of clarity, I suggest grouping these partly overlapping, partly competing strategies into four distinct types (Fig. 11.1), which can be described as follows: A. Forced closure of informal markets (shutdown of trade, eviction of vendors) B. Relocation of informal markets (relocation of informal trade to peri-urban environments) C. On-site infrastructural improvement (water, sanitary facilities, service, transport, maintenance) D. Appropriation of the entrepreneurial energy of informal markets (privatization, commodification) What I am interested in here is to lay out an analytical matrix to assess policy interventions in informal marketplaces, by way of identifying and articulating interrelations between spatial transformation processes and economic policy frameworks. In what ways do different types of spatial intervention correlate with varying degrees of economic incorporation, while also being shaped by regional tendencies, and other demographic, social, and cultural dynamics? Building on existing models of investigating governance implications of formal-informal linkages through typologies of governance transformation, e.g., replacement, undermining, support, competition (Helmke and Levitsky 2004), or complementary, accommodating, substitutive, competing (Grzymala-Busse 2010), I aim to extend this conceptual framework by adding the four distinctive spatial dimensions outlined above: closure, relocation, improvement, and appropriation. What is at stake in these endeavors is making spatial interventions in informal marketplaces legible, as catalysts of hybrid economic governance. By exemplifying, rather than representing the diversity of informal marketplaces currently being transformed into hubs of formal economic activity, I will now discuss each type of spatial transformation alongside a specific case study in

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Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces

closure

(shutdown of trade, eviction of vendors

relocation

(of trade to peri-urban environments)

improvement

(water, sanitary facilities, service, transport, maintenance)

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appropriation

of entrepreneurial energy (privatization, commodification)

Fig. 11.1 Spatial interventions in informal markets. Source: Author

order to trace particular patterns of economic incorporation, which can be distinguished from other types of intervention.

3

Forced Closure: Moscow’s Cherkizovsky Market

The first case study is an example of the forced closure of informal markets. What is notable with this type of intervention is how disputes regarding the spatial conditions (overcrowding, lack of sanitation, and fire hazards) of informal markets affected by this mode of radical transformation have been strategically linked with ideological attitudes (anti-immigrant, nationalistic, and pro-liberal markets to name a few). There is a recognizable pattern to the political rhetoric accompanying the enforced clamp-down on otherwise successful markets, which positions them as extra-legal goings-on that need to be reined in. At its peak, the Cherkizovsky Market in the northeast of Moscow was one of the most important nodes of informal trade across much of Eastern Europe and Eurasia. The market’s layered history provides extensive material for multiple interwoven readings. It was also one of the most elaborate and expansive examples of a container market, a spatial typology typical of the kind of anarchic urbanism that spread rapidly after the collapse of the Eastern Block, the key assets of which were speed and unhindered appropriation. While unitization had played an important role in the Soviet Union’s policy of mass production, its container standards were incompatible with

systems prevalent in the former West. With the dissolution of the Soviet Union and the integration of its trade into a global market, countless old shipping containers became redundant and were recycled as low expense infrastructure for storage space, logistics services, public amenities, shops and market stalls, be it as a temporary setup or as an ad-hoc solution to deliver public services in new residential areas. Against this backdrop, the sprawl of vast container markets, after 1989 in this changing region was certainly not an anomalous phenomenon. The modular design, strength and adaptability of shipping containers made them well suited to use as low-cost, multi-story structures that could accommodate a wide range of businesses, from service providers to wholesale and retail traders of all kinds. They also allowed for the easy, flexible expansion of market areas. As long as vacant land was available, more rows of stacked containers could be added, combining sale units on the ground and storage units on top. Some of these informal marketplaces, such as the SeventhKilometer Market on the outskirts of Odessa or the Dordoi Bazaar in Bishkek, Kyrgyzstan have reached the size of several dozen hectares of land, with thousands of vendors vying to sell low-priced goods. While these markets are still operating, others, such as Moscow’s Cherkizovsky Market had to give into pressures from landowners, politicians, lobby groups, and investors and were dismantled to make way for more profitable operations. Built of row after row of stacked containers, with alleys covered with vaulted Perspex, the

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Cherkizovsky Market, by the time it was finally dismantled in 2009, had grown into fifteen specialized trading areas. At that stage, the market occupied an area three times the size of the Kremlin and had completely engulfed the old Izmailovo Stadium at its center. The market’s owners were among Russia’s new billionaires, while at the lower end of the new marketeconomy scale, it provided a habitat for thousands of migrants from Tajikistan, Uzbekistan, China, and Southeast Asia, who worked as stall-minders, carriers and tea-sellers 7 days a week. They slept in the metal storage containers on top of stored goods or in the cellars of the stadium. In this state of modern slavery, they were not only at the mercy of exploitative employers but also of arbitrary police behavior and gangs of young thugs roaming the streets of Moscow. As a result, many of them never dared to venture more than a few 100 m from the market, which had morphed into a city within the city. Both ends of its 20-year existence were marked, on the one hand, by a process of stepby-step adaptation of spatial possibilities on the ground, and on the other, by intervening directives coming from the top of the national government. Initially, Cherkizovsky Market was a product of the politics of individual initiatives promoted by Perestroika. Under its banner, members of the Russian State University of Physical Education (RGUFK) began to use its grounds and buildings commercially. In June 1989, Sergei Korniyenko and a collective of enthusiasts leased the stadium buildings. Under the terms of the contract, the spectator stands and the sports fields were to be made available for events such as the Spartakiade 2000. The remaining spaces, such as those beneath the stands, could be used for commercial purposes. Originally, the stadium was conceived as an arena for mass performances, demonstrating the superiority of the political order of the Soviet Union. With the rapid expansion of the market, the idea of parade grounds for revolutionary tanks and patriotic armies gave way to thousands of carriers and tea-sellers swarming along the endless labyrinth of its mile-long halls to keep this trading organism alive. As a place of trade in the

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basic necessities of life, the Cherkizovsky Market became a repeatedly contested site of cultural belonging where attempts to reconstruct a Russian national identity encountered the complex realities of a globalized migration-economy. The progressive commercialization, of even the tiniest niches, generated a large number of unforeseen spaces for micro-cultural negotiations, such as the space used by 3000 Mountain Jews from the Caucasus, for whom a 200-square-feet room, laid out with carpets and located between the shoe storerooms and the sportsmen’s and women’s toilets in the caverns of the stadium stands, served as a synagogue. Like the majority of the hundreds of thousands of people whose lives were inextricably tied to the market, they, too, were both marginalized and transformed into targets of a global tug-o-war over cultural identity. To some, they are blacks, to some they are not orthodox enough, while some doubt whether they are Jews at all. In August 2006, a bombing at the market, carried out by the Russian radical nationalist group Spas, killed thirteen people and left 53 badly wounded. One month later, the vicespeaker of Moscow City Council announced that the market would be closed at the end of 2006. While the owners’ good contacts with the government and the mayor led to repeated delays in implementing these plans, a ruling to restrict the share of foreign workers at markets to 40 per cent, which came into effect in April 2007, had a significant impact on Cherkizovksy Market, as it did on many other Eurasian trading places. From Moscow to Vladivostock, there were reports of markets collapsing completely. On June 29, 2009, the market was finally shut down by Russia’s consumer watchdog, Rospotrebnadzor. Among the reasons cited were 464 alleged violations of fire safety regulations and the results of earlier raids that had unearthed 6000 containers of counterfeit goods. According to a number of international media reports, growing alienation between former close allies Moscow Mayor Yuri Luzhkov and the oligarch Telman Ismailov, whose AST Group operated many markets, caused by the latter’s very public economic flirtation with Turkey, may have contributed to the market’s sudden

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Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces

closure. This lockdown took many of the 100,000 migrant workers by surprise, and they suddenly found themselves locked out with no access to their trading stock. Stallholders and suitcase traders protested for days outside the locked market gates. A group of Vietnamese market workers trying to block a nearby highway were arrested and given deportation orders. Immediate crisis talks between Chinese officials and the Russian government about the implications of the closure for the 60,000 strong Chinese community involved in the market led to arrangements for traders to withdraw their stock from the market at regulated times. Russia and China expressed their mutual interest in establishing a standardized, transparent, and convenient trade environment. Work to dismantle the market began in September 2009, and on October 20, 2009, Moscow Mayor Yuri Luzhkov signed a decree on a revised listing of Moscow’s markets that no longer included the Cherkizovsky Market. On that day, the Cherkizovsky Market officially ceased to exist. While the official rhetoric accompanying the closure of the market promoted a return of the site to its proper use as a space where people could devote themselves to physical culture, the emerging leitmotif in the RGUFK’s concept for the site emulates the global pattern of turning stadium grounds into high-value real estate. The numerous development proposals that have been put forward for this substantial tract of land have included ambitious plans for using the stadium as a venue for the 2018 FIFA World Cup. Echoing the spatial logic of the market in which rows of containers hugged the oval shape of the stadium like the rings of an onion, the design proposed for the World Cup included an iconic center piece formed by the sweeping curve of a new outer building block running parallel to the stands, supporting a new roof and rising up spectacularly to its northern tip. By 2019, 10 years after the dismantling of the market and the removal of thousands of stacked shipping containers, none of those grand schemes had materialized and the area surrounding the old Soviet stadium remained a barren wasteland, crisscrossed only by a few short-cuts to the neighboring blocks of flats.

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Meanwhile, many Asian traders moved to the 8000-stall Sadovod Market, situated further out, next to Moscow’s ring road and established more permanently around the announced closure of the Cherkizovky Market in 2008. Sadovod Market is now considered to be Russia’s largest market, operating in a very similar manner to Cherkizovsky Market in terms of both its economic and spatial organization.

4

Market Relocation: Bangkok’s Talad Rot Fai

While efforts to shut down informal markets focus on redirecting the nominal volume of informal economic operations, relocation programs seek to utilize informal traders as helpful facilitators of this trade flow, albeit under highly altered and much more controlled circumstances. Such policies of peripheral incorporation typically involve a convergence of legal and policy instruments with particular spatial typologies (design, functional layout, financing, building contracts, operational management). Relocation measures often target interstitial markets, taking advantage of niche opportunities, which might be spatial, (e.g., underutilized strips of land situated between larger developments) but might also be temporal, (e.g., night or dawn markets occupying land outside main business hours). Informal markets are masters of adaptability. Insofar as informality can be defined at all, a formative and characteristic dimension of informal markets is their ability to escape regulation, as well as the grip of authorities. This is primarily due to the creative ways in which informal markets take hold of situations outside the standard course of things. As a place of direct exchange, markets rely on the provision of a physical meeting ground where buyers and vendors can come together. Given the economic precariousness at the heart of informal economies, which impedes investment in anything long-term, informal markets are thus dependent on the appropriation of available spaces. Forced to seek out gaps in the urban fabric, informal markets take on a plethora of different forms.

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While many occupy spatial margins or the interstices between different land uses and zones of authority, informal markets also avail themselves of communal gathering spaces during times when such spaces are not subject to formal uses or control. The interstices in which informal markets emerge and become concentrated are above all, the spatial effects of in-between opportunities. Yet, while space is one of the core components in the making of cities, one of the most essential resources keeping cities afloat, and their most transformative capital is their people. The fluctuating conglomerations of people, characteristic of today’s exploding metropolises, catalyze a multitude of interstitial market formations. Building nodes of provisional networks, interstitial markets turn into infrastructures themselves, providing crucial support at the bottom strata of globalization. In their spatial proliferation, they index the manifold links between informality, the needs of transient populations, and the excesses of urban economic transformation. It is testimony to the markets’ enduring capacity to generate hubs of commonality that people not only flock to them to satisfy basic needs but also choose to spend their leisure time there. The city of Bangkok with its rich array of markets is a case in point: informal trade is so engrained in Bangkok’s urban fabric that virtually every neighborhood features a line of vendors selling street food, cheap textiles, or household goods, rendering street market consumption one of the most mundane routines of Thai everyday life. On the other hand, Bangkok also boasts one of the largest weekend markets in the world. The Chatuchak Market, or JJ for short, is reputed to attract 200,000 visitors every Saturday and Sunday. As a shopping and leisure destination it competes with Bangkok’s high concentration of spectacular super-brand malls such as the Central World Mall and the Siam Paragon Mall. The origins of the JJ date back to 1948, when the then Prime Minister, Plaek Phibunsongkhram, promoted a policy of one flea market per town. In Bangkok, the first flea market was initially held on the open field of Sanam Luang, right next to the Grand Palace. It was relocated several times in

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its early years but always remained in the heart of Bangkok’s political district. In 1982, to make space for Bangkok’s bicentennial celebrations, it was moved to its current site, a fenced-in, 35-acre lot on the grounds of the State Railway of Thailand’s former golf course near Chatuchak Park. In the historical context, this flea market program may seem paradoxical, given that in the twentieth century most emerging economies sought to ban street trade as incompatible with the aesthetics of a modern Western-style state. However, while the de-facto dictatorship of Phibunsongkhram is credited with the modernization of Thailand, his policies were also driven by an explicitly nationalist agenda. Establishing one flea market per town was meant to encourage people to purchase primarily Thai products and to cut imports, specifically from China, thus securing Thailand’s independence from neighboring powers. Today, the JJ, together with many of Bangkok’s other street markets, is often regarded as out of sync with Thailand’s progression towards a globally integrated, advanced consumer economy. The aspiring youngsters populating the city’s high-end malls are perceived to be much more in line with Thailand’s avowed mission to become the region’s model capitalist state, than the uncontrollable mayhem of a congested market where operations result in rubbish-filled streets and an undesirable listing in the USTR’s yearly Special 301 reports.4 Yet, in the shadow of the JJ a new kind of market typology has emerged, which might well prove capable of meeting the challenges presented by a monopolized market of global corporate chains; a market culture fostered by a new generation of young entrepreneurial creatives that fuses issues

4 In conjunction with separately published annual results of a so-called Out Out-of-Cycle Review of Notorious Markets, yearly Special 301 reports are released by the Office of the United States Trade Representative (USTR) under Sect. 301 of the Trade Act of 1974 and list physical marketplaces around the world that are deemed notorious for violating the intellectual property rights of US companies and individuals. For the 2019 issues see https://ustr.gov/sites/default/files/2019_Special_301_ Report.pdf.

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Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces

of identity and occupation in a self-styled atmosphere of productivity and enjoyment. Initially located approximately 500 m from the JJ, the celebrated hipster mecca of Talad Rot Fai has brought Bangkok to the forefront of a global phenomenon of bottom-up creative cities, that is usually associated with highly contested gentrification processes in the centers of old power such as New York, London or Berlin. The market’s name, Talad Rot Fai (Train Market), refers to the original site of the market, a former rail yard featuring a paved rectangular open space backed by disused railway carriages and flanked by two rows of cargo depots. The market was the brainchild of two antique dealers, who in July 2010, seeking to expand their business, leased a nineacre site from the State Railway of Thailand (SRT) for a period of 3 years. Unable to fill the vast warehouses with their own merchandise, they started offering spaces to fellow traders. The terrain was subsequently divided up into retro boutiques and arts, crafts and furniture stores interspersed with the odd display of vintage cars and car accessories. A significant proportion of the buildings were left undeveloped, which added to the site’s sense of discovery. At the heart of the original Talad Rot Fai, occupying the former head offices of the railway yard, sat Rod’s, a restaurant/bar/music venue run by one of the market’s founders that blended smoothly into his antique shop in the warehouse section. This combination of entertainment and trade at Rod’s set the tone for turning the Train Market into one of Bangkok’s favorite places to hang out. Promising a good time is central to Talad Rot Fai’s continuing appeal at its new venue, where Rod’s still operates, and the main reason why an avant-garde scene of young fashionistas gathers at the market. The magic of Talad Rot Fai lies in its spatial logic of long rows of brightly colored gazebo-type stalls, selling customized fashion items such as T-shirts, shoes, glasses, jewelry, and other accessories, which stretch between food stalls and pop-up bars at either end. Here, the emphasis is not on hunting for the best deal but rather on doing the walk along the stalls from one bar to another, which becomes a ritual of cultural communality.

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Consuming and buying at the market paves the way for spending time with friends and experiencing a sense of cultural belonging. Aesthetics play a key role in establishing this sense of counterculture. In the case of Talad Rot Fai, it is vintage chic with a specific focus on Americana that provides the basis for reciprocal recognition. With most of the goods on offer being customized or simply scarcely sourced, the market’s flavor of uniqueness does not rely on original craft production. What matters is that Talad Rot Fai, as a kind of Gesamtkunstwerk (an artistic synthesis addressing all senses) provokes a captivating feeling of community that is shared by both sellers and buyers. The conviction that both groups contribute to the making of the place is essential for this new type of social economy to prevail. As the roles of traders and customers become blurred, business activities and enjoyment become interchangeable. This supposed dissolution of value hierarchies and the backgrounding of profit interests allows the market to be embraced as a connective cultural framework. Nowadays, while the vast JJ flea market sells predominately cheap goods or mass-produced knick-knacks aimed at tourists, much of which is sourced from China, the Talad Rot Fai engages with the global market in a very different way. At this market, globalization refers less to the global circulation of goods than to embracing a global cultural vocabulary of teenage lifestyles. American retro provides the basis for appropriating a globally as well as locally oriented identity of creative expression and a self-made environment, both socially and economically. Responding to a global taste for individual style, customized fashion replaces indistinguishable Chinese mass production. In a perhaps unintended way, the young entrepreneurs at Talad Rot Fai can be seen as perpetuating Phibunsongkhram’s 1948 policy of economic independence through a flea market culture, albeit in a very different fashion; one based not on references to a national folklore but on a fusion of global styles and iconographies. When the 3-year lease for the former rail yard expired in June 2013, the market was shut down and the grounds immediately dug up for work on

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the new SRT Red Line. In anticipation of this development, the proprietors had already established a sister site in Srinakarin near the Suvarnabhumi Airport in the east of the city, to which the entire market has now been moved. However, while the original market’s attraction was based, to no small extent, on the ambience of its old, abandoned and worn out buildings, this second, bigger version of Talad Rot Fai is an entirely new structure located on a brownfield site on the outskirts of the city. Comprised of standardized light-weight metal structures, it has been decorated with retro-style mock-ups, including a replica pagoda and a gateway flanked by two kitsch brass warrior statues, making it resemble more a village-themed shopping outlet than an underground market. It is still called the Train Market even though its new site no longer has anything to do with trains. Instead, its new neighbor is the massive 500-yard-long Seacon Square shopping mall and entertainment center. Yet, this fake reincarnation of the original aesthetics at the new Talad Rot Fai site is less an expression of a counterfeit culture, but is indicative of a widely shared attitude toward economic development, which seeks to capture and maintain the original entrepreneurial energy of informal activities, albeit in a much more controlled and regulated environment. This hegemonic framework is further echoed by the way in which this change of urban context, from the hustle-and-bustle of a central transport hub to a mono-functional shopping area at the periphery, has become a staple of many market relocation programs, whether voluntary or involuntary, around the world.

5

Old Site, New Market: Encants Vells, Barcelona

The third type of intervention, improvement of informal markets through onsite infrastructural investment, takes the active involvement of public authorities, in efforts to take certain levels of economic integration a significant step further. Such urban development policies propose a win-win situation in which increased efficiency, hygiene, and order will result in safer and more

attractive neighborhoods benefitting both vendors and visitors, as well as the city and its economy as a whole. Of particular interest in this context is to understand which actors commission, design, and manage such spatial interventions, for which the high-profile redesign of Barcelona’s ancient Encants Vells flea market has become a flagship example. The urban typology of public markets is regaining interest amongst politicians and investors alike. The economic changes of recent years have not only contributed to a worldwide spread of informal markets, but also brought with them a surprising reappraisal of historical marketplaces. In modernist, traffic-oriented urban planning, prevalent for much of the past century, public marketplaces have often been attributed only marginal economic relevance. While some cases were deemed worthy of protection as cultural heritage, harboring potential as a tourist attraction, more often than not, they were regarded as an outmoded form of urban provision and a burden on municipal budgets. The resurgent interest in markets as engines of urban regeneration has intensified significantly since the fall-out of the global financial crisis of 2007–08. This trend has partly been fueled by the festivalization of public space but is also linked to the demand to foster new hybrid economic environments which generate growth while shifting risks from authorities to resident populations. The informal sector plays a major role in this quest for risk mitigation. Flea markets, in particular, are a long-standing example of such formal/informal arrangements. While the market managers present a respectable facade consistent with most formal requirements by the authorities, businesses of the individual stall holders are, in essence, informal enterprises, whether they focus on singlehandedly operated imports or the selling of home baked cupcakes. One of the most dazzling examples of such a contemporary appropriation of the cultural values of markets is the centuries-old Encants Vells in Barcelona, a former open-air market, which was relocated to a new and twice as large market hall, in the fall of 2013. Encants Vells is considered to be one of the oldest markets in Europe. Its origins

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Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces

can be traced back to the thirteenth century, when it took place in various churchyards of the medieval city. Back then, a key function of the market was to auction off estates of recently deceased citizens in order to generate cash flows for the bereaved and help to pay off any remaining debts. Even today, on Mondays, Wednesdays, and Fridays, excess goods from warehouse liquidations, bankruptcies or other one-off sources are sub-mastered, (i.e., auctioned off) among the registered dealers, who later sell these goods at the flea market held in the very same space. In the first half of the nineteenth century, these auctions merged with the Fira de Bellcaire, which had developed outside the city walls during the Napoleonic occupation years. In 1928, after several relocations in connection with the world exhibitions of 1888 and 1929, the then combined auction and flea market moved to a site on the edge of Plaça de les Glòries Catalanes, two miles east of the city center, which remained its permanent home for the next 85 years. Subsequent alterations of surrounding road levels caused the market to sit in a sunken pit. On both sides of Carrer del Dos de Maig, which formed the central artery of Encants Vells, steps led down to a row of sheet-metal stalls, offering mainly household and hardware goods. In the open space to the west, the famous auctions and subsequent flea markets were held. With its dense array of curious assortments of goods, the horizon accentuated by rows of palm trees and a huge neon sign rising against the sky, it was this open-air part of the market that shaped the popular image of Encants Vells. In contrast, the plot to the east of Carrer del Dos de Maig was occupied by rows of fixed walk-in market booths, which clustered around smaller irregular-shaped open spaces and which were primarily catering to buyers of furniture, sanitary appliances, bedding, and other home accessories. To the north, bordering the Camp de l’Arpa del Clot residential areas, most of the stalls belonged to textile and cloth traders, who often leased warehouses in the adjoining former factory buildings to support their swift trade. Over the last decades, this plentiful supply of cheap new goods, especially textiles and household goods, had helped make

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the market a popular meeting place for the growing migrant population of Barcelona. Along the pedestrian links to the nearby metro station, which crossed the vast roundabout of Plaça de les Glòries Catalanes, a few hawkers usually lingered, selling socks from cardboard boxes or pieces of second-hand clothing strung across the torn fences that encircled this otherwise deserted island, which was engulfed by thundering traffic. Although these hawkers were small in numbers and only occupied the fringes of the market, their high visibility to passers-by was often channeled into political and media pressure for a redesign of the entire area (see also Morén-Alegret et al. 2016, 107). In a city as colorful as Barcelona, Plaça de les Glòries Catalanes embodies a particularly striking piece of failed urban planning. As the crossing point of the broad streets of Meridiana, Diagonal and Gran Via de Les Corts Catalanes, Ildefons Cerdà’s master plan of 1859 envisaged the Plaça de les Glòries Catalanes as a new center of urban expansion toward the northeast. However, the route of the existing railway line to France interfered with the planned intersection of major axes and diagonals so unfavorably that within the basic orthogonal grid, an area of nine-hectares remained undefined and over the course of many years served all sorts of unglamorous uses, from freight sheds to Second World War shelters to the market of Encants Vells. While the location of the market within the no-man’s-land of Les Glòries secured the survival of the market for a long time, the unresolvedness of its urban setting increasingly added to the pressure on its particular mode of doing things, as the surrounding areas got spruced up one after the other. Following the urban renewal schemes initiated in the run-up to the 1992 Summer Olympics, the subsequent extension of the Avinguda Diagonal to the sea provided the starting signal for a whole wave of high-profile monumental architecture now dotting the area. Iconic structures such as the Forum building by Herzog & de Meuron or the Torre Agbar by Jean Nouvel are meant to usher in a profound transformation of the working class neighborhood of Poblenou (New Village) into a

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new innovation district marketed by the brand name 22 @. The Plaça de les Glòries Catalanes was chosen by the city administration as the focus of social and economic dynamization of the entire area, which should inspire new urban practices for the future. Started in 2003, the process to transplant Encants Vells to a new site on the other side of Plaça de les Glòries Catalanes initially faced substantial resistance from major sections of the market vendors. However, a compromise plan adopted in 2007, which included the prospect of significant organizational and spatial improvements, ultimately helped win a majority for handing over the original site and allowing the development of a grand new Central Park. According to the plans of the competitionwinning team of Agence Ter and Ana Coello Llobet, the emblematic elevated motorway has been replaced by an urban canopy that is supposed to improve the urban microclimate and create a new hybrid eco-system. While the park was opened to the public in 2019, completion of the entire remodeling of Plaça de les Glòries Catalanes is envisaged for 2021. The new market hall of Encants Barcelona/La Fira de Bellcaire on the southwestern corner of the square itself was already inaugurated in September 2013 and formed an important step in the radical transformation of Les Glòries. The design, which has also received much attention in professional circles, frames the market activities as an all-senses spectacle. Market visitors are led along ramps, which are lined with stalls and double back on themselves like a Möbius strip. On the lower ramps, rows of tables are set up in front of roller shutter cabinets that provide some storage space. This is where most of the textile, shoe and housewares sellers have moved to. On the upper and more rearward ramps, rows of walk-in booths sit next to each other, representing proper shops that are mostly occupied by antique and furniture dealers. On the lowest level, right in the center of the new market hall, one finds the 80,000 square feet open area dedicated to the auction routines in the morning and taken over by the actual flea market during the day. From the upper ramps, visitors can look down into this

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arena of action. One side of the triangular plot has been kept completely open, providing an uninterrupted view of the Torre Agbar to the east. The undisputed highlight of the whole design, however, is the facetted canopy roof, held up by thin steel columns at an airy height of 16 yards. Its underside is entirely covered with highly reflective gold-tinted metal panels—as praised in numerous marketing material—making the whole kaleidoscope of market activity visible at a glance. With 375,000 square feet, the new market offers space for more than twice as many retailers and, according to the Municipal Market Office (IMMB), attracts up to 100,000 visitors per week. The new market hall occupies a front row position in this line-up of spectacular architecture, which in addition to the Torre Agbar includes the Catalan National Theatre, the Music Auditorium and the Design Museum. Joining this parade of long-established building typologies of civic pride demonstrates how popular marketplaces have markedly moved up a notch within the hierarchy and repertoire of urban planning oriented toward stimulating economic growth through cultural assets. In this sense, the shift of Encants Vells from outside to inside also marks the shift from informal exploitation to formalized investment. Thus, the newly constructed market hall not only provides a roof over head for dealers who were previously unprotected against arbitrary weather. It also opens up more direct access to the innovation potential of markets as incubators of new business ideas. The geometric layout of the new building, with its sharply delineated zones and different types of booth models (78 business boxes, 156 fixed sales desks, 39 auction spaces, 2 bars, 1 restaurant, and 6 food stalls), also serves the municipal market administration as a kind of spatial control board to steer the socio-economic orientation of the market. While the old open-air market, for instance, had only two food stalls catering to both traders and buyers alike, the new curated mix of businesses also boosts an exquisite seafood kiosk and a hip sandwich shop, the latter proudly announcing that they only use buns from the city’s most famous bakery, when assembling their signature hot dog. It is

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Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces

said that almost all original dealers have moved from the old to the new location, but there is an unmissable change in the market’s character. It is not just the spatial setting that has changed but the purpose of the market itself.

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Arizona Market: Top-Down Appropriation of Survival Economies

The fourth type of intervention exemplifying the wide and often contradictory spectrum of interrelated spatial and economic integration, which I want to address in this chapter, refers to often highly elaborated measures seeking to appropriate the entrepreneurial energy of informal markets. One of the most charged examples of this strategy is the case of the so-called, Arizona Market that had sprung up in post-war Bosnia and Herzegovina, involving a repeatedly violent wholesale privatization of the original informal markets and their transformation into corporately managed shopping malls. Located not far from the north Bosnian town of Brčko, the Arizona Market was once one of southeastern Europe’s busiest marketplaces, comprising 2500 stalls on an area covering forty hectares, receiving three million visitors a year, and employing directly or indirectly an estimated 100,000 people. Apart from these statistics, what distinguished the market depended on participants’ perspectives and interests, and these differed considerably. For some, it was a model of a multi-ethnic community, for others it was the largest open-air shopping mall in the Balkans, while still others experienced it as a hell on earth. The differences in perspective depend upon which of the numerous stages and transformations of the Arizona Market that one is referring to. The strip of land occupied by the present Arizona Market is a part of the war zone that was fiercely fought over by Serbian, Croatian, and Bosnian Muslim units because of the strategic position that it assumed after Bosnia-Herzegovina left the federal state of Yugoslavia in 1991. The Dayton Peace Accords

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of November 1995 granted special status to this disputed territory around the town of Brčko. Its future was to be decided in an international arbitration process. It was placed under the auspices of a special supervisor from the Office of the High Representative (OHR) of the international community of states for Bosnia and Herzegovina. Soon afterwards the local checkpoint at the Arizona Corridor (the code name given to the north-south link between Bosnia and Croatia by IFOR/SFOR troops) evolved into an informal meeting place where cigarettes and agricultural products were traded, and coffee was served on the roadside. It is said that in 1996 the local commander decided to encourage initial encounters between members of the different ethnic communities by establishing a free-trade zone, with the aim of consolidating peace. SFOR soldiers levelled several hectares of farmland, cleared the area of mines, and supplied building materials. In next to no time, the largest informal market for goods in southern Europe arose on the side of the road opposite the checkpoint: with wooden huts, improvised stalls, smuggled goods, and pirate copies of brand-name goods. Textiles, food, electronic products, building materials, cosmetics, car accessories, and CDs could all be purchased at favorable prices there, with the cheapest goods available directly from the lorries that had brought them. Decisive to the continued development of the Arizona Market was the fact that, unlike most other informal markets, its development was supported by locally stationed armed forces. In the years that followed, the convergence of economic activities at the site and the selforganization of this gray trade area were extolled as a model for promoting the sustained development of communications and community structures between former wartime enemies (Jašarević 2007, 287). The simple market facilities and mobile sales units were soon supplemented by the first houses, presaging the emergence of a self-organized urbanization process on the site. However, as time went on, the bars and motels operating in these huts and houses started to accommodate a form of trade that made it increasingly difficult to sell the

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success story of peace based on the market economy, at an international level. At the Arizona Market, the real money was made through prostitution and human trafficking of women and girls, who were being brought in from Eastern Europe. According to reports, they were rounded up on the streets and resold like cattle from one bar owner to the next (Haynes 2010). On October 26, 2000, the international community (OHR, OSCE, UNMIBH, and SFOR) announced a package of measures designed to purge the Arizona Market of such illegal activities. These measures focused on regulation, licensing, and taxation as well as on the planned relocation of the market by June 2001 to a new site that would offer all the necessary facilities and safety features. In February 2001, the supervisor ordered the closure of the existing market. In December of that year, ItalProject, an ItalianBosnian-Serbian consortium, won a tender to establish and operate a new market. The consortium signed a 20-year lease agreement with the district administration that granted it the right to retain 100 per cent of rental income from the market for a period of 17 years, in return for developing the infrastructure of the site. The project envisaged investing 120 million euro under the supervision of the Eufor (EU) to develop a modern trade infrastructure on an area initially comprising 650,000 square feet. In a later phase of development, a complexly structured economic and trade base for the entire southern European area was to be established that would include multiplex cinemas, hotels, casinos, and a conference center. Italproject offered existing traders the opportunity to rent or buy stalls in module-like rooms. Resistance by landowners and traders to this total takeover was met with compulsory dispossessions. This response was justified with the argument that it was in the public interest to ensure that the district administration of Brčko complied with the agreements made with Italproject. Demonstrations and road blockades staged to oppose the demolition of the old site were cleared by the police. As most of the landowners affected were Croatians who sought the support of nationalist groups to assert their

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cause, the maxim of achieving reconciliation by taking economic measures came dangerously close to fomenting an ethnic conflict as a result of what was seen as an arbitrary allocation of economic options. The most striking thing about this strategy to regain control over the Arizona Market, which ultimately culminated in the ceremonial opening of a new shopping center in the presence of the Principal Deputy High Representative, the US Ambassador, Donald S. Hays, on November 11, 2004, was the way the international community, which exercised political territorial control, and an international investor co-operated in privatizing the public domain of the market. The transformation of the informal market into a shopping center signaled a critical turning point, revealing the limits of converting between formal and informal systems. The spontaneous evolution of a public-urban space in the shape of an informal market surrounded by transporters and huts was replaced by parking spaces with ticket barriers at their entrances. The coming together of diverse cultures was now regulated by fixed opening hours and private security guards. In only 10 years, the Arizona Market was transformed from a space of bare survival into a center of ubiquitous consumption. What had once been a mere border guard outpost became a postmetropolitan territory. Hopes that the Arizona Market might become a model for a selforganized town were dashed when a market arose which had its existence and development far more extensively tied to the presence of the international defense force than initially suggested by the generous gesture to bulldoze a few fields. The UNHCHR attributed the mounting crisis surrounding Arizona Market at the turn of millennium––evidenced most starkly in the huge increase in prostitution and trafficking in women––among other things to the presence of over 30,000 peacekeepers in BiH (Rees 1999). Bosnia was not so much a transit country as a destination for women who were victims of trafficking. The SFOR troops were not only customers but allegedly also took a share of the profits accrued from smuggling and corruption. The solution, based on the model of urban

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Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces

renewal developed in the USA in the 1960s. (In this model a district was declared a problem area and thus large-scale expropriation in the name of the public interest was permitted.) It was fostered by the transformation of the legal system in the Brčko district with the help of legal advisers financed by USAID (US Agency for International Development). Another decade down the road, after the celebrated opening of its redevelopment, the Arizona Market seems to have become stuck in a similar state of limbo as the whole of Bosnia Herzegovina. Having been on the frontline of conflicts over global spheres of influence, the deadlock of the post-Dayton territorial divisions has left much of the country side-lined and repeatedly falling behind the development of its neighbors. Virtually none of the plans announced for the creation of a trans-regional trade and commerce hub have materialized. The site of the original Arizona Market (Arizona 1), where hundreds of wooden huts once formed a tarpaulin and metal-roofed bazaar, still resembles nothing more than a few levelled-off fallow fields. A few warehouses have been added at the rear of the so-called Arizona 2, a hybrid piece of prototypical turbo architecture that fueled speculation about a consolidated and urbanized nucleus of trade in a region marred by conflict and deregulation, and that is now squeezed between the old and the new site of the market. The Trade City of China building occupying the north-eastern section of the Arizona Market’s central roundabout, which was supposed to play a major role in establishing Brčko as a key hub in the distribution of imports from China to wholesalers and retailers, stands uncompleted, its concrete lions looking on as the steel frame slowly rusts away. What the diverse outcomes of these cases highlight is the continuous need for open debates around the form and direction of how economic informality should intersect with local environments, national policies, and supranational actors, especially for discussions about how this process is to be managed and controlled, and by whom. These discussions will have to consider key shifts in global economic conduct and their impact on the current transformation of

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informal marketplaces. How, on the one hand, do expansive capital interests increasingly target economies of poverty as frontiers of investment and accumulation (Roy 2010; Hart 2012)? How, on the other, does the spreading of novel entrepreneurial cultures (P2P marketplaces, social entrepreneurship, gig economy, new intimate economy, among others) animate a changing climate of development policies both in contemporary urban economies in the Global North, as well as in top-tier emerging economies in the Global South (Mörtenböck et al. 2015). Only by embracing such broad perspectives can we truly advance our understanding of how informal and formal economic practices come to blend into new kinds of hybrid economic governance (Strazzari and Kamphuis 2012; Sassen 2014).

7

Conclusion

Informal markets have become a vital part of cities around the world. From the new mega-cities of the Global South to the old centers of political and economic power, they form complex sites of negotiation between multiple political demands, social actors, and environmental constraints. Spurred by deregulation and accelerating global flows, they are, in many instances, tolerated as shock-absorbers of widening social divisions. Yet, whenever these markets show signs of establishing realms of their own, more often than not, official rhetoric has painted them as a threat to social and economic order, a response by government-directed demolition or relocation often follows. However, since the 2007–08 global financial crisis which has intensified the quest for alternative approaches toward triggering innovation and economic growth, we are also seeing increased interest across the political spectrum in accessing the potential of the informal economy by integrating its entrepreneurial energies, assets, and networks into wider economic circuits. Attesting to this growing interest, the development of many informal markets, including those discussed above, has been characterized by a variety of attempts at integration. Besides

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juridical measures (trade licenses, rights of use, among others), financial measures (access to credit, poverty alleviation, for example), and organizational measures (access to piped water, electricity supply, and agreements with informal workers’ unions, among others) such attempts often revolve around spatial organization. The range of spatial interventions has thus extended from the forced removal and relocation of informal markets to urban fringes or the dispersal of market activities into other neighborhoods. Intervention ranges in measures of active support, which in turn can cover a broad spectrum from the simple demarcation of dedicated areas, which do not interfere with formal business, to the allocation of new trading spaces in newly erected permanent market halls, where improved facilities are provided on a fee-for-service basis (Mörtenböck et al. 2015). It is worth noting here that street vendors, even though they are the ones most affected by the regulation and management of informal trade, are rarely considered in decision-making processes (Bhowmik 2005). Many integration projects are still governed by an authoritative, paternalistic concept of realigning the workings of informal economic activities and making them fully compliant with the requirements of the formal economy (Roever 2006; Chen 2007). These dynamics need to be viewed against the background of globalization which, in conjunction with the recent economic crisis and emerging forms of self-organized, peer-to-peer economies, has substantially altered the relationship between the formal and informal sector, both conceptually and practically (Mörtenböck and Mooshammer 2019). This change has been reflected in a revised understanding of the informal economy as an alternative, multi-faceted mode of economic governance outside state regulation (Meagher 2013). It is also reflected in the recent rise of selfemployment and increasing state support for start-ups, micro-businesses, social entrepreneurship, and peer-to-peer industries in countries of the Global North (2012 JOBS Act in the USA) as well as the Global South (micro-lending, crowdfunding).

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What these developments point to is that the growing interaction between the formal and informal spheres has a transformative effect on both, leading to a formalization of the informal sector and an informalization of the formal economy. The ongoing spatial transformation of informal markets is not only indicative of these macroeconomic changes. Due to their proliferation, informal markets also play an instrumental role in the generation of new economic climates, in some cases, signifying generative activity through alternative knowledge and use of city services; land and livelihood strategies (Evers and Seale 2015), and, in others, an expansion of the market economy’s reach into new territories, particularly within the framework of markets run by the poor in developing countries (Roy 2010). Regarding this, informal markets are important sites of negotiation where new forms of interaction (shaped by technological and organizational changes) are explored between state and non-state actors pursuing different political and economic interests (Guha-Khasanobis et al. 2006; Altman 2008).

References Altman, M. (2008). Formal-informal economy linkages, employment growth and development initiative. Pretoria: Human Sciences Research Council. Bhowmik, S. K. (2005). Street vendors in Asia. Economic and Political Weekly, 40(22), 2256–2264. Chen, M. A. (2007). Rethinking the informal economy: Linkages with the formal economy and the formal regulatory environment. DESA working paper no. 46. Easterling, K. (2014). Extrastatecraft: The power of infrastructure space. Cambridge, MA: MIT Press. Evers, C., & Seale, K. (Eds.). (2015). Informal urban street markets. London: Routledge. Feige, E. (1990). Defining and estimating underground and informal economies: The new institutional economics approach. World Development, 18(7), 989–1002. Grzymala-Busse, A. (2010). The best laid plans: The impact of informal rules on formal institutions in transitional regimes. Studies in Comparative International Development, 45(3), 311–333. Guha-Khasanobis, B., et al. (Eds.). (2006). Linking the formal and informal economy: Concepts and policies. Oxford: Oxford University Press.

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Hart, K. (1973). Informal income opportunities and urban employment in Ghana. The Journal of Modern African Studies, 11(1), 61–89. Haynes, D. F. (2010). Lessons from Bosnia’s Arizona market: harm to women in a neoliberalized postconflict reconstruction process. University of Pennsylvania Law Review, 158, 1779–1829. Helmke, G., & Levitsky, S. (2004). Informal institutions and comparative politics: A research agenda. Perspectives on Politics, 2(04), 725–740. Humphrey, C., & Skvirskaja, V. (Eds.). (2012). Post-Cosmopolitan cities. New York: Berghahn Books. ILO (International Labour Organization). (2018). Women and men in the informal economy: A statistical picture (3rd ed.). Geneva: ILO. Jašarević, L. (2007). Everyday work: Subsistence economy, social belonging and moralities of exchange at a Bosnian (Black) Market. In X. Bougarel et al. (Eds.), The New Bosnian Mosaic. London: Ashgate. Latour, B. (2005). Reassembling the social: An introduction to actor-network-theory. Oxford: Oxford University Press. Linehan, D. (2007). Re-ordering the urban Archipelago: Kenya vision 2030, street trade and the battle for Nairobi City Centre. Aurora Geography Journal, 1, 21–37. Lund, F., & Skinner, C. (2004). Integrating the informal economy in urban planning and governance. International Development Planning Review, 26(4), 413–465. McFarlane, C. (2012). Rethinking informality: Politics, crisis, and the city. Planning Theory & Practice, 13 (1), 89–108. Meagher, K. (2013). Unlocking the informal economy. A literature review on linkages between formal and informal economies in developing countries. WIEGO working paper no. 27. Morén-Alegret, R., et al. (2016). Inter-group perceptions and representations in two Barcelona neighborhoods: Poble sec and Sagrada Família compared. In F. Pastore & I. Ponzo (Eds.), Inter-group relations and migrant integration in European cities: Changing neighborhoods, IMISCOE research series. Heidelberg: Springer. Mörtenböck, P., & Mooshammer, H. (2012). Informal market worlds: Instruments of change. Scapegoat Journal Architecture, Landscape, Political Economy, 04, 203–220. Mörtenböck, P., & Mooshammer, H. (Eds.). (2015). Informal market worlds: The architecture of economic pressure––ATLAS. Rotterdam: nai010 Publishers. Mörtenböck, P., et al. (Eds.). (2015). Informal market worlds: The architecture of economic pressure–– READER. Rotterdam: nai010 Publishers. Mörtenböck, P., & Mooshammer, H. (2016). From urban talent to commodity city: Marketplaces in the informal economy. In J. Darling & H. F. Wilson (Eds.), Encountering the city: Urban encounters from Accra to New York. London: Routledge.

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Mörtenböck, P., & Mooshammer, H. (2019). The art of crafting formal-informal linkages. In E. Dürr & J. Müller (Eds.), The popular economy in Urban Latin America: Informality, materiality, and gender in commerce. Lanham, MD: Lexington Books. Nadvi, K. (2004). Globalisation and poverty: How can global value chain research inform the policy debate? IDS Bulletin, 35(1), 20–30. Ong, A. (2006). Neoliberalism as exception. Durham: Duke University Press. Perry, G. E., et al. (Eds.). (2007). Informality: Exit and exclusion. Latin American and Caribbean studies. Washington, DC: World Bank. Rees, M. (1999). Markets, migration and forced prostitution. Relief and Rehabilitation Network Newsletter, 14, 2–3. Ribeiro, G. L. (2006). Economic globalization from below. Etnográfica, 10(2), 233–249. Roever, S. (2006). Street trade in Latin America: Demographic trends, legal issues, and vending organizations in six cities. WIEGO urban policies programe, 6 October 2006. Roy, A. (2005). Urban informality: Toward an epistemology of planning. Journal of the American Planning Association, 71(2), 147–158. Roy, A. (2010). Poverty Capital: Microfinance and the Making of Development. London: Routledge. Sassen, S. (2014). Expulsions: Brutality and complexity in the global economy. Cambridge, MA: Harvard University Press. Simone, A. M. (2010). City life from Jakarta to Dakar: Movements at the crossroads. London and New York: Routledge. Spivak, G. C. (2004). Righting wrongs. The South Atlantic Quarterly, 103(2–3), 523–581. Strazzari, F., & Kamphuis, B. (2012). Hybrid economies and statebuilding: On the resilience of the extralegal. Global Governance: A Review of Multilateralism and International Organizations, 18(1), 57–72. Wojkowska, E. (2006). Doing justice: How informal justice systems can contribute. Oslo: United Nations Development Programme.

Internet References USTR (Office of the United States Trade Representative). (2019). Special 301 report. April 2019. https://ustr. gov/sites/default/files/2019_Special_301_Report.pdf [2020.01.01]. Hart, K. (2012). The informalization of the world economy. Keynote lecture for the 24th conference of the societa’ Italiana di Economia Pubblica, Pavia, 24–25 September 2012. http://thememorybank.co.uk/ 2012/10/17/the-informalization-of-the-world-econ omy/ [2020.01.02].

176 Helge Mooshammer is an architect and cultural theorist based at Goldsmiths, University of London, and TU Wien. He has led a range of international research projects around questions of post-capitalist economies and urban informality. He is one of the founding directors of the Centre for Global Architecture, an interdisciplinary initiative established to study the planetary changes affecting spatial production today. Research topics: Informal markets, social transformation, urban speculation, architecture of finance, informalization of urban economies. Recent publications: Mörtenböck,

H. Mooshammer Peter and Helge Mooshammer, eds. 2021. Platform Urbanism. Rotterdam: nai010 Publishers. Mörtenböck, Peter and Helge Mooshammer, eds. 2020. Data Publics: Public Plurality in an Era of Data Determinacy. London: Routledge. Mörtenböck, Peter and Helge Mooshammer, 2016. Visual Cultures as Opportunity. Berlin: Sternberg Press. Mörtenböck, Peter, Helge Mooshammer, Teddy Cruz, and Fonna Forman, eds. 2005. Informal Market Worlds: The Architecture of Economic Pressure, ATLAS & READER. Rotterdam: nai010 Publishers.

Economic Change from an Institutional Perspective

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Sonja Opper

In theory, the causal relation between institutions and economic change is straightforward (North and Thomas 1973; North and Weingast 1989; North 1990). Institutions, which are the humanly devised incentives and constraints organizing social and economic life (North 1990), shape individual behavior and thereby influence the direction of economic change. Whether economies grow, stagnate, or decline is to a considerable extent explained by the institutional structure organizing and guiding economic action. The logic is simple and compelling. Institutions that encourage and reward productive entrepreneurship lead to growth and economic development, whereas, institutions that reward unproductive activities, such as rent-seeking and corruption, will undermine rather than increase economic growth (Baumol 1990). In the heyday of new institutionalism, when Ronald Coase (in 1991) and Douglass North (in 1993) in short sequence, received the Nobel Prize in Economics, getting the institutions right became the new mantra in development and economic policy. With neoclassical growth theory struggling to explain persistent poverty and inequality despite massive investments in aid, technology, and human capital, new institutionalism offered a new perspective. Human behavior S. Opper (*) Department of Management and Technology, Bocconi University, Milan, Italy e-mail: [email protected]

suddenly seemed malleable by reshaping the institutional structure. Coincidentally, the collapse of the Soviet Union and the transition of Central and Eastern Europe, China, and Vietnam offered the muchneeded opportunity to put institution building to a large-scale practical test. In 1996, the World Bank’s annual World Development Report, published under the roadmap title, From Plan to Market, mirrors the initial enthusiasm of the early and mid-1990s. Yet twenty years later, its 2017 report, Governance and the Law, ponders why “policies that should be effective in generating positive development outcomes are often not adopted, are poorly implemented, or end up backfiring over time”, and calls for rethinking “the process by which state and non-state actors interact to design and implement policies” (World Bank 2017, 2). I have three goals in this chapter. First, I will briefly summarize some of the unforeseen challenges to institution building for economic growth. Second, on a more positive note, I will highlight unexpected development outcomes: the emergence of bottom-up institutional changes, and the development and viability of secondbest institutions. Both developments rely on private actors rather than state actors. Third, I will highlight recent work exploring how social context, networks, and local culture influence these institutional transitions.

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_12

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Limits of Institution Building

In preparing large-scale reforms across former planned economies, academic and political discourse largely agreed on the role of the state as the central arbiter of change. The standard prescription, according to the Washington Consensus, combined market liberalization, privatization, and stabilization policies (World Bank 1996). If consistently implemented and predictably maintained, this reform triad should reduce transaction costs to create the much-needed individual incentives for private investments. Ultimately, it would turn former planned economies into thriving market economies. There was less agreement on reform sequencing and timing. One option was to implement as many market institutions as possible in a short timespan (i.e., shock therapy, as exemplified by Poland’s reform program; see Sachs and Woo 1994). The other option was to initiate gradual reforms, enabling economic and political actors to test and explore appropriate institutions (i.e., gradualism, often associated with China’s evolutionary reform policies; see Murrell 1995). As usual, getting the institutions right proved to be more complex and costly than anticipated. Most reforms were located somewhere on the continuum between shock therapy and gradualism. It is true that new laws and regulations can be modeled after international best practices, hence the illusion that fast results are possible. However, being able to identify the key incentives and constraints that have fostered growth and economic change in well-developed market economies (e.g., Keefer and Knack 1997; Hall and Jones 1999; Rodrik et al. 2004) is not the same as understanding how to establish effective private property rights protection and governance mechanisms. Negative short-term effects followed initial liberalization policies, including sharp drops in production, high unemployment rates, and hyperinflation. These areas of friction were not only attributable to unavoidable adjustment processes of the real and monetary sector. Country specifics such as geography (e.g., coastal access or proximity to high-growth countries),

differences in historical, legal, and structural starting conditions, and domestic stakeholder conflicts deepened some of the implementation problems (World Bank 1996). More importantly, the emergence and proactive creation of market institutions was simply not well understood. Much of the early work of studying the evolution of modern economic institutions had focused on the limitation of sovereign power, the introduction of formal laws, and third party enforcement, as central prerequisites of the development of modern economies (North and Thomas 1973; North and Weingast 1989; North 1990). Systematic research into the emergence of institutions and institutional change intensified only around the turn of the century, when the initial enthusiasm for institution building ebbed (Greif and Laitin 2004; North 2005; Greif 2006).1 Historic pathways toward developing anonymous markets, economies of scale, and longdistance trade bear little resemblance to the realities of institutional change of the late twentieth and early twenty-first centuries. Historically, formal institutions have developed organically, building on emergent business practices, local norms, and culture. In this process, formal laws typically emerged in response to shifting local demands. Acemoglu et al. (2005) describe how the growth of Atlantic trade, after 1500, empowered merchant groups across Europe to demand better property rights. Similarly, England’s Glorious Revolution in 1688, typically interpreted as the beginning of codified property protection and the restraint of state power (North and Weingast 1989) followed, rather than preceded, increasing de facto security of property and fiscal income from 1600 on (Clark 1996). Institutions were formalized once there was sufficient public support to turn standard practice into a formal legal code, protected and enforced by the sovereign. Of course, this does not imply that “the beliefs and institutions that evolve through time will produce economic growth” (North 1994, 1

For a recent review of studies documenting economic and institutional change through history, see Hillmann (2013).

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Economic Change from an Institutional Perspective

363). Many countries developed inefficient institutions. Notwithstanding, history supports Axelrod’s (1986) notion that laws are typically preceded by respective behavioral norms. Today’s transition and reform countries face an entirely different task. They seek to blend efficiency-enhancing formal institutions with established, often contradictory, local norms, customs, and traditions. The risk of institutional mismatches is high. New labor laws may not fit the existing social security system; new banking regulations conflict with traditional procedures of money lending; and property reforms assume the existence of established markets for land and real estate as well as related legal services. The situation resembles institutional transfers of the eighteenth and nineteenth centuries, when colonizers transplanted laws and regulations into alien institutional systems. Berkowitz et al. (2003) show that legal transplants do not carry the risk of short-term friction only at the implementation stage. The nature of the transplant process also has long-term ramifications. Countries that were either familiar with basic principles of the imported law or in a position to adjust foreign legal codes to be in line with local norms and common practice developed more effective legal institutions and higher standards of legality than countries that simply imported foreign laws. In 1996, the World Bank’s annual report presented a striking analysis. It compared twenty-eight transition economies across Europe and Asia in terms of their progress in economic liberalization, privatization, and institutional and social policy reforms (including reforms of laws and legal institutions). The countries that registered the greatest progress showed only modest growth rates. In contrast, China and Vietnam, the least ambitious countries in terms of institutional reforms, recorded the highest GDP growth rates during the late 1980s and mid-1990s. It is easy to disregard the data by pointing to the dramatically lower development level in East Asia at the outset of reforms. Yet China and Vietnam also outperformed most transition economies in terms of monetary stability, and scored high in terms of increasing life expectancy, (with an increase of 2.1 years in China

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between 1978 and 1995) and a reduction in infant mortality by 11.1% (World Bank 1996). This is not evidence that slow, moderate reforms are more effective. It is, however, a useful reminder to move beyond exploring state action and to incorporate complementary elements into analyses of institutional change and economic development.

2

Lessons from Unlikely Winners

A closer look at reforms in these unexpectedly successful reform countries is informative. This section will focus on two elements that have facilitated reforms in a way that textbook knowledge could not have predicted: bottom-up institutional reforms, as opposed to state-orchestrated top-down reforms, and the temporary utility of second-best institutions.

2.1

Institutional Change from Below

It seemed obvious, that institutional change must be orchestrated in a top-down manner, with politicians and state representatives passing laws and regulations. However, the dynamic development of institutions in many emerging economies demonstrates that grassroots activities can play an important role in shaping and redefining institutions from within the system. Successful local experiments, originally initiated to serve community needs, attracted imitators that helped spread novel institutions and organizational forms to neighboring communities and those further afield. Many of these developments started out as illegal or semi legal local practices. Legalization followed, once institutional innovations diffused and gained sufficient public support to push governments to acknowledge their legitimacy. This often involved extending and revising reigning political ideologies and reform goals. In effect, these developments replicated the emergence of political and economic institutions in the West. The vital contributions made by grassroots innovations tend to be underestimated. Early

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processes of institutional emergence are typically overlooked in official records. They only become visible once formal policy statements legitimate their existence. These bottom-up activities are by no means marginal. The Hungarian historian, Istvan Rév (1987, 342) claimed that, “from a closer look, all the important and long-lasting economic and social reforms in all the Central European countries appear as nothing but the legalization of already existing illegal and semi legal practices. What seems to be the work of the professional reformers . . . is in fact the consequence of continuous atomized resistance.” China’s reforms offer numerous examples of how institutional entrepreneurship at the grassroots level influenced national-level policy reforms. The abandonment of the people’s commune system is a good example. Though often heralded as an ingenious political decision to start liberalization policies in the countryside, agricultural land reforms emerged from a bottom-up social movement (Kelliher 1992; Zhou 1996). Early efforts to silently reprivatize collective production date back to the early 1950s (Zhou 1996) and gained momentum during the Cultural Revolution (1966–76), when private actors, with either active local state support or silent acquiescence, brought increasing shares of land under household production (Kelliher 1992; Zhou 1996; Dikötter 2016). Well into the second half of the Cultural Revolution, these local episodes of collective action were still short-lived and repeatedly suppressed as capitalist reactionary behavior. However, after Lin Biao’s death in 1971, a weakened party-state could no longer control rural resistance. The Cultural Revolution created millions of enemies, ready to take their fate into their own hands. Disillusioned local party representatives and government officials were also ready to replace ideological vision with pragmatism and production goals. Local officials took the lead in redistributing land from collective to private production. Some of these transfers were conducted openly, while others maintained the fiction of collective production by turning over certain production shares to local officials. While poor localities were the first to experiment with various land reforms, the rapid productivity

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increase following a shift to private production quickly encouraged richer communities to follow suit (Dikötter 2016). Bai and Kung’s (2014) quantitative analysis confirms Dikötter’s account that a nationwide variation in decollectivization efforts was largely explained by the localities’ dependence on state support and their experience of poverty during the Great Leap Forward. Localities that had suffered more during the Great Leap Forward were faster to return to family farming and eager to abandon the institutional rules of collectivism. When the central government finally endorsed these spontaneous land relocations in 1982–83 and officially dissolved China’s people’s communes, de facto decollectivization was moving forward and, in some provinces, had even been completed (Kelliher 1992; Dikötter 2016). The social-movement-like spread of land relocation had consequences reaching far beyond the agricultural sector. With productivity unleashed, surplus labor was freed from agricultural tasks and sought more productive non-agricultural employment. By marketing their produce in free markets, peasants were able to accumulate modest savings, which they invested in sideline production. Initially, these manufacturing activities served local agricultural needs and household consumption. However, with consumer goods in short supply, rural entrepreneurs started to cater to urban demand in nearby metropolitan regions. Businesses quickly outgrew the officially approved size of seven salaried workers. Thriving underground factories developed long before the state acknowledged private forms of industrial production. Private enterprise once again pushed the boundaries of what was politically and ideologically desirable. Nee and Opper (2012) offer a detailed account of the development of China’s emergent private firm economy. Although standard institutions such as the effective protection of private property rights were not in place, while the state continued to prioritize state-owned and statecontrolled public firms throughout the first decades of economic reforms, more than five million private firms had registered by the time the government finally enacted its first Private

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Property Rights Law in 2007 (China Statistical Bureau 2008). The bottom-up movement of institutional and organizational change followed a simple pattern (Nee and Opper 2012; see specifically Chaps. 2 and 4). First, the gradual liberalization opened up profitmaking opportunities outside the socialist production system, which were large enough to attract entrepreneurial talent and start-up investments. Once successful, imitators followed and mimicked pioneering entrepreneurs, building local clusters of sellers and buyers organized around specific industries and supply chains. As clusters developed and cooperation intensified, commonly accepted business norms emerged that substituted the lack of formal institutions and property rights protection, thereby drawing in even more followers. Once a critical movement was reached, local and national policymakers had little choice but to adjust national rules and regulations. China is not unique. The rise of a new entrepreneurial class followed a similar pattern in Vietnam. As soon as markets were liberalized, entrepreneurs started their own businesses while formal protection of private property rights was either absent or ineffective (McMillan and Woodruff 1999). Neither of these examples suggests that bottom-up institutional reforms happen whenever there is room for efficiency gains. If this were the case, poverty would be less persistent. The central point is that even large-scale institutional changes, such as the return to family farming or the shift to private manufacturing, do not require top-down initiatives. It is often through searching for better solutions at grassroots level, through local experimentation, and through competition between alternative solutions that viable institutional arrangements are identified. An important question for future research is when to expect powerful reforms from the general population rather than the state. In other words, when do private actors cooperate to carry out institutional innovations, despite collective action problems (Olson 1965)? Three factors deserve attention (Nee and Opper 2012, 28 ff.; see also DellaPosta et al. 2017). First, expected individual utility gains must be substantial in order to accept

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the risk of experimenting with novel, partly illegal, but certainly illegitimate institutional arrangements. Second, with a growing number of innovators, positive network externalities from cooperation norms lower the institutional switching costs for imitators, drawing in more risk-averse followers. Third, the state’s interest in maintaining and defending the institutional status quo must be sufficiently weak, so that the innovators’ probability of being penalized for semi legal or illegal activities is sufficiently small. Both China’s land reforms and the rise of a private firm economy fit this account. While the first condition was in place all along, the second and the third were largely absent or only temporarily present during the pre-reform period. It was only at the end of the Cultural Revolution that the personal risk of participating in private land redistribution declined and local governments were no longer interested in defending and maintaining the old institutional order (Dikötter 2016). The economic decline of people’s communes during the Great Leap Forward and the Cultural Revolution had made it clear that the collective production system impeded the muchneeded increase in agricultural production. Local governments took an acquiescent, if not actively supportive, role in fostering local economic growth. The collective production system of people’s communes had finally become selfundermining (Greif 2006). Once labor migrated from agricultural to non-agricultural production, the same development of a private firm economy gained momentum (for details, see Nee and Opper 2012). First, the draw of changing careers was high, as agricultural household income remained low and alternative employment channels were unavailable, or restricted due to the country’s strict policies regulating rural to urban migration. Starting a small-scale business—whether legally protected or not—offered an attractive route to increase household income. Second, the proximity of like-minded actors made production outside the planned economy possible. Third, sanctions of capitalist activities were moderate, as local government developed an active interest in new business activities, to generate fiscal income and

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local employment channels. Government officials also found new rent-seeking opportunities. By offering entrepreneurs protection and access to politically controlled resources such as licenses, land lease rights, capital, and scarce raw materials, local bureaucrats became part of the entrepreneurial success story (see Krug and Hendrischke 2008 on coordination between local firms and government). It is consistent with this account that China’s private firm economy first emerged in rural areas and in relatively poor communities.

2.2

A Case for Second-Best Solutions

A central feature of gradual reforms is the temporary co-existence of old and new institutions. One institutional structure does not replace another, but new institutional elements are incorporated while established institutions are still in place. Such hybrid institutional environments pose specific challenges. A closer look at China’s economy is instructive (see Naughton 2007): the government allowed entrepreneurs to register private, rural firms as early as 1987; yet formal private property protection was not in place until 2007. Product markets were liberalized, but capital, land, and urban labor markets remained under tight state control. Labor contracts were introduced as early as 1986, but a corresponding Labor Contract Law covering rural and urban residents was not introduced until 2008. Stateowned banks were turned into commercial banks as early as 1986, but the state held majority shares to maintain direct control over large parts of the credit market. The state’s trade monopoly was abandoned, but contract and competition laws were not in place until 1999 and 2008, respectively. Stock markets were introduced in the early 1990s, but remained a vehicle for incorporating state-owned firms, with the majority of shares held by the state. A small and medium enterprise board was not in place until 2004. What looked like probable failure turned out to be an economic success. Why? The answer lies in the emergence of second-best institutional

arrangements (Rodrik 2008), responding to an environment, blending institutions of the old and new systems. A good example is China’s postreform, rural industrialization, which relied heavily on the formation of so-called townshipvillage enterprises (TVEs). Formally, these were collective firms. Some portion of these were actually owned and managed by local townships or villages (Walder 1995; Peng 2001). Another substantial share of these firms were de facto private firms, called red-hat firms, which sought to secure formal protection from political discrimination by being officially registered and viewed as publicly owned. One strategy for private firms was to affiliate with a collective firm and to use its formal registration, stationery, and address to signal a collective identity, while internally operating as a private firm (Kelliher 1992; Zhou 1996, Chap. 5). Following standard predictions of property rights theory (Demsetz 1967), TVEs should have failed, given their non-exclusive property rights (Walder 1995; Peng 2001). Whether firms were run as true collective firms or as red-hat firms, local officials could interfere in management decisions, prioritize non-economic goals, and extract rents for either public use or personal gain. With no personal investments by managers or local officials, overconsumption, underinvestment, and managerial slack should have followed. Yet the TVEs of the 1980s and 1990s grew rapidly and became the main provider of non-state employment in rural China. Between 1978 and 2005 total employment increased from 28.3 million to 142.8 million employees in rural China (China Statistical Bureau 2006). How could TVEs become a major driver of economic change and development? A number of factors matter. First, TVEs were producing for private markets and operated outside the state’s planning system. This allowed local firms to flexibly produce and market consumer goods in response to shifting demand. TVEs also benefited from an abundant pool of cheap and unskilled labor, a resource freed by China’s return to household farming. While state-owned enterprises were still burdened by lifelong employment guarantees and social costs, TVEs could rely on local

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contract labor recruited outside the country’s labor allocation system. In short, TVEs were able to capitalize on the country’s partly reformed economic system. The flexibility to participate in market exchange, however, would not have been sufficient to be economically successful. Walder (1995) points out that the crucial institutional innovation was the hardening of budget constraints of China’s local governments. With fiscal decentralization in place, local governments no longer received negotiable budget appropriations from superior government levels and thus, relied on local fiscal revenues. Unlike officials in Hungarian collectives or cadres of the commune and brigade enterprises of the Maoist era, local officials became keenly interested in investing in profitable firms and running viable industrial enterprises. Of course, local officials still used TVEs for rent-seeking activities and personal gain. TVEs also still benefited from softer budget constraints than private enterprises. Cross-subsidization between communityoperated TVEs granted some financial flexibility, allowing communities to bail out, at least short term, weaker enterprises experiencing liquidity constraints. The crucial point is that there was a financial limit to managerial slack and mismanagement (Peng 2001). In the medium and long run, local officials could not afford to operate TVEs under soft budget constraints, which, according to Kornai (1992), was the ultimate cause of the failure of the Hungarian experiment with collective firms. In this way, TVEs were often able to outperform the privileged stateowned enterprises (Peng 2001). The decline of TVEs only began once private firms formally competed on a level playing field, as signaled by the 2004 Constitutional Amendment and the 2007 enactment of the country’s first Property Rights Law. Interest in collective forms of production declined, especially in light of the higher productivity of private forms of production (Jin and Qian 1998). Was the TVE a necessary detour? TVEs were clearly a second-best institution. Would the immediate shift to private production have been more cost-efficient? One could think so. The

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privatization and reorganization of TVEs was certainly costly. Yet as Xu et al. (2014) convincingly argue, TVEs served as a critical transitional organizational form in the shift from public forms of production to private production. As public firms were already established during the pre-reform period, TVEs enjoyed sufficient identity overlap with the old system of state-owned enterprise production to be perceived as legitimate. Legitimized as part of the establishment, TVEs participated in increasingly liberalized markets, pursued profits, and used contract labor. Though TVEs were often private firms in disguise, or operated as if they were private, the displayed public nature conferred sufficient legitimacy to experiment with new business practices, in an increasingly market-oriented environment. By providing on-site rural employment for more than 100 million underemployed farmworkers, TVEs helped reduce rural poverty and ruralurban migration, and they helped develop and urbanize China’s countryside. Employees received basic training, learned manufacturing skills, and were often able to save enough to start their own small-scale businesses. In brief, TVEs were able to provide venues for employment and large-scale income generation during a time when private investors and privately run enterprises still lacked formal approval from state and private audiences. It is highly unlikely that private investors, lacking status and legitimacy could have operated at a comparable scale in the early years of China’s gradual transition. Xu et al. also reason that the gradual transition toward private production would not have been successful without the TVE as a transitional organization helping to bridge the contradictory ideologies of the old socialist and new market systems (2014, 519). Their empirical evidence from a multi-population study of state-owned collective and private firms operating between 1998 and 2006 supports their claim. As the density of collective firms increases, communities experience decreasing exit rates of private firms. Further evidence also suggests that private firms will eventually replace TVEs as a transitional form. The higher the community density of private firms, the higher the exit rate of TVEs.

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Second-best solutions, such as the rise of the TVE as a transitional form of production are unlikely to fit different institutional environments and cultural contexts. Without the country’s new fiscal revenue system, TVEs would have faced a similar fate to collective firms in pre-reform Hungary and China. What the example demonstrates, however, is that best-practice institutions are not required to induce economic change. Moreover, second-best institutions may offer appropriate, feasible, and often transitional alternatives that foster further institutional changes. A question for governments and practitioners is how to identify and incentivize the development of second-best solutions (see also Rodrik 2008). China’s example highlights the role of community competition and decentralized authority in fostering institutional reforms and experiments. It is also likely that the government’s evolutionary approach, stretching reforms over multiple decades, has inadvertently given private actors and lowerlevel government officials more leeway to participate in crafting the new business environment than initially intended.

3

Social Context Matters

Though the above examples of bottom-up institutional innovation and emergence of second-best institutions are encouraging, both are context dependent. Many economies have never witnessed comparable forms of dynamic institutional change leading to robust economic growth. As with best-practice institutions, the rise of alternative forms of governance is context specific. Therefore, it is useful to explore which conditions have enabled or even accelerated the type of transformations just described. I will not attempt a comprehensive account of potential contingencies. I will intentionally leave aside the oftendiscussed role of political systems, forms of state governance, and military power. These pose obvious constraints on private actor activities. Instead, I will focus on social contingencies, which only recently entered the analysis of institutional change. In fact, as Beckert (2010b,

615) notes, “it is striking that institutional change is much less understood . . . as stemming from the force of other social structures, (i.e., social networks or cognitive frames) and their impact on the power of actors interested in the preservation of existing institutional rules or their change.” Here the focus will be on the structure of social networks and local culture as important factors in shaping cognitive frames and belief systems. Social networks and local culture are somewhat mutually interdependent, but following standard practice in the related literature, I will offer brief individual accounts.

3.1

Social Networks

Social networks matter for economic growth and development. In closed networks, in which most contacts are mutually connected with one another, bad business behavior is likely to be noticed and sanctioned by others, so that the risk of trusting others declines and in-group cooperation appears less risky (Coleman 1988, 1990). Open networks, in contrast, include bridge ties that connect across social clusters. They lack high in-group trust but have the advantage of providing quick access to new information and ideas, resources, and business opportunities. While both network styles have advantages, individuals embedded in open networks tend to perform better and are more creative and innovative (Burt 2005; see Burt et al. 2013). This is a general observation applicable across advanced and transition economies in the West and East (for an overview, see Burt 2019). The relative importance of social networks, especially those involving state actors, may be even higher in dynamic environments undergoing institutional change, since social networks can secure access to governmentcontrolled resources and substitute for various safeguard mechanisms, typically provided by formal institutions (Peng and Luo 2000; Nee and Opper 2012, Chap. 9). However, social networks provide not only resource and information access but also the social fabric to organize institutional innovation (Peng 2004; Nee and Opper 2012). Without

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social support from like-minded actors, institutional entrepreneurs would not be able to break away from commonly accepted forms of business conduct to organize economic activities, bypassing mainstream institutional arrangements. It would also be impossible to encourage and gather a sufficiently large number of followers to press for regulatory adjustments accommodating institutional changes at the grassroots level. The stylized images of economic advantage associated with different network styles suggest that extreme forms of closure and openness are unlikely to provide grounds for robust institutional innovation. Overly closed networks, with few contacts outside of the social group, may be well-positioned for building trust and cooperation, yet distrust in those not belonging to the same group is likely to impede the discovery of different forms of doing business. The inward orientation of closed networks also reduces the chances of developing economies of scale and long-distance exchange. At the other end of the continuum, extremely open networks with sparse and infrequent mutual contacts lack the safe environment that allows for institutional experiments that specifically push the boundaries of the established order. Though individuals embedded in open social structures may have access to a host of new ideas, resources, and information, breaking away from what is formally codified as legitimate action becomes too risky, without the support of trusted and like-minded actors. Closer inspection of the type of social networks underlying China’s transformative change from below is consistent with these assertions. Business networks that have helped pioneering start-up entrepreneurs build viable business operations tend to include a high proportion of contacts known for many years and trusted for their integrity. Yet these networks are neither closed nor static. Building on a wealth of interviews conducted with private and state actors in the Lower Yangzi region, Krug and Hendrischke (2008, 99) note that entrepreneurial networks “accept and screen members for their ability to contribute to existing and future assets.” Similarly, Nee and Opper (2012) find that entrepreneurs select and renew network contacts

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in line with their expanding needs for resources, specialized skills, and bureaucratic and political support. Both qualitative studies mention network openness and a noticeable network churn as observable network qualities but have no quantitative evidence. Burt and Burzynska (2017) analytically corroborate these narratives. The average entrepreneurial network is neither extremely open nor extremely closed. Further and very much against common stereotypes of doing business in China, entrepreneurs do not lean heavily on family members and their closest kin. Most network contacts are former and current professional ties, as well as old friends and acquaintances. This does not imply that the closest ties, immediate and extended family or friends, are not relevant. They play a crucial, yet temporary role at the founding stage of the firm. Burt and Opper (2017) refer to these networks of multiple ties of family and close friends as cocoons. Once the firm is up and running, further business development requires a growing number of technical and managerial skills, which calls for broader and more open business networks. Using the same network data from 2012 together with information on firm survival five years later, Zhao and Burt (2018) support the argument that closed family networks have only temporary utility. They find that entrepreneurs who successfully developed their networks from a cocoon to an open network structure had the highest likelihood of survival five years after the initial data collection. Those who continued to rely on their initial cocoon tended to perform worse. Besides the importance of the network structure around the individual entrepreneur for business development, the diffusion of institutional and organizational innovations also hinges on the larger population network of villages, townships, and larger administrative units. Peng (2004) presented one of the first aggregate-level analyses, demonstrating the role of population networks in explaining the spread of institutional innovation. Equipped with data from 366 villages, Peng (2004) uncovered a significant association between the strength of kinship networks, and the diffusion and success of new private firms as an accepted organizational form. Kinship networks,

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measured as the relative importance of the strongest kin in each village, were positively correlated with the number of village firms and the business success of these companies (as measured by the total workforce employed in private firms). There was no direct evidence of the exact mechanism linking kinship networks to firm success, but trust and kin solidarity are likely supporting factors in an environment that lacks legal safeguard mechanisms and formal political protection. It is useful to note, that the focus on kinship is not to be mistaken for a measure of network structure or closure. In this study design, kinship is more likely a correlate of homophyly and structural similarity, qualities that tend to produce trust and a spirit of cohesion. In a more recent study, Dai and colleagues (2019) presented related findings. They employed birth-county-based community networks and found a significant link between population density and the local diffusion of private firms. Similar to Peng’s earlier study, the results support the idea that local social interactions, homogeneity, and enforceable trust foster the diffusion of innovative organizational forms and corresponding institutions.

3.2

Culture

Because culture is not easily malleable, it has traditionally not been considered in the analysis of institutional change and human behavior. Sociologists share a long-held resistance to explaining differences in behavior in cultural terms (see Patterson 2001 for a discussion). Economists tend to see culture as a filter through which the outcome of formal institutional change is modified and, in extreme cases, rendered ineffective (North 1994). In Williamson’s (2000) institutional framework, culture is part of a system’s social embeddedness, which constrains and shapes institutions by defining the opportunity space of what is regarded as socially accepted or unacceptable. Along these lines, Greif (1994, 914) highlights how cultural beliefs can explain the forestalling of successful intersociety adoption of institutions, and the persistence of inefficient institutions. In a related argument, Meyer

and Rowan’s (1977) earlier work on organizational forms discusses the impact of rationalized myths and taken-for-granted scripts on the desirability of distinct institutional and organizational forms. The limiting role of culture is also reflected in North’s (2005) later work, which shifted attention to the importance of belief systems and cognition in explaining institutional development pathways. If anything, the policy recommendation for practitioners is to be mindful of national and local culture when designing and implementing institutional reforms. Yet culture is more than a filter, constraining and limiting efforts of exogenous change, whether initiated internally or as part of intersociety institutional transfers. Swidler’s (1986) cultural toolkit approach offers a useful starting point. Following Swidler’s definition (1986, 273), culture is a set of “symbols, rituals, and world-views, which people may use in varying configurations to solve different kinds of problems.” Reference to varying configurations of cultural elements is crucial, as it allows one to see “culture’s causal significance not in defining ends of action, but in providing cultural components that are used to construct strategies of action” (Swidler 1986, 273). In a similar fashion, Rao and Giorgi (2006, 273) define cultural logics as “the socially constructed, historical pattern of material practices, assumptions, values, beliefs, and rules by which individuals produce and reproduce their material subsistence, organize time and space, and provide meaning to the social reality.” In both accounts, culture is not limited to a filtering function, which selects distinct institutional development trajectories. Culture provides a reservoir of practices, strategies, and organizing principles that can be readily deployed to create and develop new forms of cooperation. Beckert’s (2010a) interpretation of culture as a form of attraction mirrors the potentially positive role culture can play in advancing institutional change. The argument is simple: if institutional innovation is consistent with local culture or if innovation is mindful of “what people are ‘good at’” (Swidler 2008, 615), institutional innovators are likely to find strong local support, helping advance change dynamics. If, to the contrary,

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institutional innovations are inconsistent with local beliefs and cultural logics, institutional reforms are likely to be stalled or rendered ineffective. However, this is not an automatic process. Institutional entrepreneurs actively relate to cultural components to generate a common social understanding of the legitimacy of local innovation. It is easy to see why the negative view of culture as a filter, rather than as an attraction, prevails in economic institutionalism. Economists tend to emphasize the state as the central arbiter of institutional change, and top-down reforms, often guided by international best practice, have an inherent risk of colliding with local cultural logics. Bottom-up innovators, in contrast, naturally deploy local knowledge and available cultural components as they experiment with preexisting beliefs and practices to renew existing institutional structures. The bottom-up developments described in this chapter illustrate the close association between local cultural logics and successful institutional change. In their effort to break away from socialist production, institutional entrepreneurs intuitively returned to preexisting forms of doing business that facilitate broader social acceptance and help turn local innovation into a socialmovement-like dynamic. In doing so, innovators did not stop at replacing collective forms of farming and production with simple forms of smallscale family businesses, as commonly found before 1949. Instead, they developed family firms into modern capitalist organizations registered as joint-stock or limited liability companies, some even listed shares on the country’s new stock exchanges (see Nee and Opper 2012, Chap. 5). The crucial advantage of the initial return to common forms of family production, both in farming and manufacturing was the perceived familiarity with longestablished, traditional modes of production. Opper and Andersson (2019) corroborate these observations. Building on provincial level data documenting early forms of entrepreneurial activities observed during the Ming (1368–1644) and Qing Dynasties (1644–1911), the authors show that the spatial distribution of

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the new private firm economy replicates historical patterns of entrepreneurship. Their study also suggests that the deployment of cultural frames does not depend on hands-on experience of preexisting practices in the recent past. It is sufficient for agents of change and their respective audience to draw on a shared cultural heritage of preexisting beliefs and practices to culturally legitimize code-breaking forms of institutional and organizational innovation.

4

Conclusion

The variable success of institutional transitions and reforms over the last twenty years has dramatically changed how we think about institutional reforms and economic change. Simple prescriptions handed out in the early 1990s have lost some of their appeal. At the same time, the large-scale transitions in Central and Eastern Europe and East Asia have broadened perspectives to encompass various alternative strategies. I draw three lessons: first, the challenges of formal institutional change will remain pronounced, as long as we have no better understanding of the idiosyncratic development pathways of developed economies and how their institutions evolved. Second, bottom-up reforms initiated at the grassroots level can offer productive complements to top-down reforms. Third, second-best institutions have a place in reform strategies, especially if they induce further institutional change, as private and state actors search for more efficient solutions. None of these processes is sufficiently captured without understanding the social context. Whether or not societies will develop bottom-up institutional changes or hybrid forms of doing business depends to a considerable extent on the social structure and culture around private and state actors. Why have we seen so many positive developments in East Asia and Central Europe, while innovative and productive institutional solutions remain scarce in Sub-Saharan Africa (Fafchamps 2004)? There are no simple answers to this crucial question. Currently, we do not

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know enough about the interplay between institutional change, social structure, and culture in the emergence and transition of economic systems. We simply have very limited empirical work to draw on. This is not primarily because combined research designs pose unresolvable challenges. What is more pertinent is the traditional disciplinary divides across the social sciences, as well as distinctions within the disciplines interpreting markets as either institutions or networks (Williamson 1985; White 2002; for a review, see Beckert 2010b). Future research will need to examine the intersection between networks and institutions more closely. Field experiments studying the diffusion of new informal practices are likely to be productive, but comparative designs are also needed to distinguish between idiosyncratic phenomena and general mechanisms. Acknowledgements I am grateful to Riksbankens Jubileumsfond for my sabbatical grant, and to the Center for East Asian Studies at the University of Chicago for hosting me as an Associate. Comments by Ronald S. Burt are gratefully acknowledged.

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S. Opper Burt, R. S. (2005). Brokerage and closure. Oxford: Oxford University Press. Burt, R. S. (2019). Network disadvantaged entrepreneurs: Density, hierarchy, and success in China and the West. Entrepreneurship Theory and Practice, 43(1), 19–52. Burt, R. S., & Burzynska, K. (2017). Chinese entrepreneurs, social networks, and guanxi. Management and Organization Review, 13(2), 221–260. Burt, R. S., Kilduff, M., & Tasselli, S. (2013). Social network analysis: Foundations and frontiers on advantage. Annual Review of Psychology, 64(1), 527–547. Burt, R. S., & Opper, S. (2017). Early network events in the later success of Chinese entrepreneurs. Management and Organization Review, 12(3), 497–537. China Statistical Bureau. (2006). China state statistical yearbook 2006. Beijing: Statistics Press. China Statistical Bureau. (2008). China state statistical yearbook 2008. Beijing: Statistics Press. Clark, G. (1996). The political foundations of modern economic growth: England, 1540–1800. Journal of Interdisciplinary History, 26, 563–588. Coleman, J. S. (1988). Social capital in the creation of human capital. American Journal of Sociology, 94, 95–120. Coleman, J. S. (1990). Foundation of Social Theory. Cambridge, MA: Harvard University Press. Dai, R., et al. (2019). The community origins of private enterprise in China. The institute of economic development working paper series no. dp–320. Boston University. DellaPosta, D., Nee, V., & Opper, S. (2017). Endogenous dynamics of institutional change. Rationality and Society, 29(1), 5–48. Demsetz, H. (1967). Toward a theory of property rights. The American Economic Review, 57(2), 347–359. Dikötter, F. (2016). The silent revolution: Decollectivization from below during the cultural revolution. The China Quarterly, 227, 796–811. Fafchamps, M. (2004). Market institutions and sub-Saharan Africa: Theory and evidence. Cambridge, MA: MIT Press. Greif, A. (1994). Cultural beliefs and the organization of society: A historical and theoretical reflection on collectivist and individualist societies. Journal of Political Economy, 102(5), 912–950. Greif, A. (2006). Institutions and the path to the modern economy: Lessons from medieval trade. Cambridge: Cambridge University Press. Greif, A., & Laitin, D. D. (2004). A theory of endogenous institutional change. American Political Science Review, 98(4), 633–652. Hall, R. E., & Jones, C. I. (1999). Why do some countries produce so much more output per worker than others? Quarterly Journal of Economics, 114(1), 83–116. Hillmann, H. (2013). Economic institutions and the state: Insights from economic history. Annual Review of Sociology, 39, 251–273.

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Economic Change from an Institutional Perspective

Jin, H., & Qian, Y. (1998). Public versus private ownership of firms: Evidence from rural China. Quarterly Journal of Economics, 113(3), 773–808. Keefer, P., & Knack, S. (1997). Why don’t poor countries catch up? A cross-national test of an institutional explanation. Economic Inquiry, 35, 590–601. Kelliher, D. (1992). Peasant power in China: The era of rural reform in China, 1979–89. New Haven: Yale University Press. Kornai, J. (1992). The socialist system: The political economy of communism. Princeton, NJ: Princeton University Press. Krug, B., & Hendrischke, H. (2008). Framing China: Transformation and institutional change through coevolution. Management and Organization Review, 4(1), 81–108. McMillan, J., & Woodruff, C. (1999). Interfirm relationships and informal credit in Vietnam. Quarterly Journal of Economics, 114(4), 1285–1320. Meyer, J. W., & Rowan, B. (1977). Institutionalized organizations: Formal structure as myth and ceremony. American Journal of Sociology, 83(2), 340–363. Murrell, P. (1995). The transition according to Cambridge, Mass. Journal of Economic Literature, 33, 164–178. Naughton, B. (2007). The Chinese economy. Transitions and growth. Cambridge, MA: MIT Press. Nee, V., & Opper, S. (2012). Capitalism from below. In Markets and institutional change in China. Cambridge, MA: Harvard University Press. North, D. C. (1990). Institutions, institutional change, and economic performance. Cambridge: Cambridge University Press. North, D. C. (1994). Economic performance through time. The American Economic Review, 84(3), 359–368. North, D. C. (2005). Understanding the process of economic change. Princeton: Princeton University Press. North, D. C., & Thomas, R. (1973). The rise of the western world: A new economic history. Cambridge: Cambridge University Press. North, D. C., & Weingast, B. R. (1989). Constitutions and commitment: The evolution of institutions governing public choice in 17th century England. Journal of Economic History, 49(4), 803–832. Olson, M. (1965). The logic of collective action: Public goods and the theory of groups. Cambridge, MA: Harvard University Press. Opper, S., & Andersson, F. N. G. (2019). Are entrepreneurial cultures stable over time? Historical evidence from China. Asia Pacific Journal of Management, 36 (4), 1165–1192. Patterson, O. (2001). Taking culture seriously: A framework and an Afro-American illustration. In L. E. Harrison & S. P. Huntington (Eds.), Culture matters: How values shape human progress (pp. 202–218). New York: Basic Books. Peng, Y. (2001). Chinese villages and townships as industrial corporations: Ownership, governance, and market

189 discipline. American Journal of Sociology, 106(5), 1338–1370. Peng, Y. (2004). Kinship networks and entrepreneurs in China’s transitional economy. American Journal of Sociology, 109(5), 1045–1074. Peng, M. W., & Luo, Y. (2000). Managerial ties and firm performance in a transition economy: The nature of a micro-macro link. Academy of Management Journal, 43(3), 486–501. Rao, H., & Giorgi, S. (2006). Code breaking: How entrepreneurs exploit cultural logics to generate institutional change. Research in Organizational Behavior, 27, 269–304. Rév, I. (1987). The advantages of being atomized: How Hungarian peasants coped with collectivization. Dissent, 34(3), 341–345. Rodrik, D. (2008). Second-best institutions. American Economic Review, 98(2), 100–104. Rodrik, D., Subramanian, A., & Trebbi, F. (2004). Institutions rule: The primacy of institutions over geography and integration in economic development. Journal of Economic Growth, 9(2), 131–165. Sachs, J., & Woo, W. T. (1994). Structural factors in the economic reforms of China, Eastern Europe and the Former Soviet Union. Economic Policy, 9(18), 101–145. Swidler, A. (1986). Culture in action: Symbols and strategies. American Sociological Review, 51(2), 273–286. Swidler, A. (2008). Comment on Stephen Vaisey’s Socrates, Skinner, and Aristotle: Three ways of thinking about culture in action. Sociological Forum, 23(3), 614–618. Walder, A. G. (1995). Local governments as industrial firms: An organizational analysis of China’s transitional economy. American Journal of Sociology, 101 (2), 263–301. White, H. C. (2002). Markets from networks: Socioeconomic models of production. Princeton, NJ: Princeton University Press. Williamson, O. E. (1985). The economic institutions of capitalism. New York: Free Press. Williamson, O. E. (2000). The new institutional economics: Taking stock, looking ahead. Journal of Economic Literature, 38(3), 585–613. World Bank. (1996). From plan to market. Washington, DC: World Bank Publishing. World Bank. (2017). Governance and the law. Washington, DC: World Bank Publishing. Xu, D., Jane, W. L., & Qian, G. (2014). Organizational forms and multi-population dynamics: Economic transition in China. Administrative Science Quarterly, 59 (3), 517–547. Zhao, C., & Burt, R. S. (2018). A note on business survival and social network. Management and Organization Review, 14(2), 377–394. Zhou, K. (1996). How the farmers changed China: Power of the people. Boulder, CO: Westview Press.

190 Sonja Opper is professor at the Department of Management and Technology, Bocconi University, Italy. From 2005 to 2020 she was the Gad Rausing professor of economics and business in China at Lund University, Sweden. Research topics: Institutional change, organizational change and behavior, social networks. Recent publications: Burt, Ronald S., and Sonja Opper. 2020. Political

S. Opper Connection and Disconnection: Still a Success Factor for Chinese Entrepreneurs. Entrepreneurship Theory and Practice 44/6: 1199–1228. Opper, Sonja, Victor Nee, and Håkan J. Holm. 2017. Risk Aversion and Guanxi Activities: A Behavioral Analysis of CEOs in China. Academy of Management Journal 60/4: 1504–30.

Financial Services Governance in the European Union (EU)

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Lucia Quaglia

1

Introduction

The global financial crisis that began in the United States (US) in late 2007 and subsequently spread worldwide brought the political salience of financial governance into the spotlight. The crisis underscored the need for fit for purpose financial regulation and supervision. It also highlighted how financial instability can spread quickly across national borders due to the globalization of finance. The regulation of financial services has become increasingly complex, because of the large number of cross-border financial institutions that often exploit regulatory gaps, to engage in risky activities. Moreover, there is a variety of international, regional, transnational, and national bodies involved in rule-making and monitoring (Helleiner 2014). The multi-level governance of financial services is characterized by two main interrelated regulatory issues: the interaction between rule-making processes in multiple arenas, and the coexistence of the rulemaking outputs of various arenas. The multi-level governance of financial services is complicated further in regional jurisdictions, such as the European Union (EU), where an extra, supranational level of regulation exists, alongside that taking place in national, international, and transnational arenas. Amongst L. Quaglia (*) University of Bologna, Bologna, Italy e-mail: [email protected]

regional regulatory regimes, the EU is by far the most advanced, because its legislation is legally binding in the member states and it provides the framework for national financial services regulation, to a large extent. Moreover, the European Commission is in charge of monitoring the implementation of EU rules in the member states; the European Court of Justice has jurisdiction over compliance with those rules. The EU was severely affected by the crisis, prompting an intense regulatory debate on the revision of existing rules and the adoption of new regulatory measures in the EU (Moloney 2012; Quaglia 2012, 2014; Kudrna 2016). This chapter examines financial services governance in the EU before, and primarily, after the crisis. This is an important and timely research topic for three main reasons. First, the EU is one of the largest jurisdictions worldwide. It is increasingly active in shaping global financial rules in international fora (Posner 2009; Mügge 2014; Quaglia 2014) and is also active in exporting its rules to other countries, notably through the mechanism of equivalence (Quaglia 2015). Second, EU rules provide the framework for national regulation in the member states, to a large extent. Third, in the aftermath of the global financial crisis, the EU undertook significant regulatory reforms concerning a variety of financial services. The chapter begins with a review of the main theoretical approaches that have been used to account for the evolution of financial services governance in the EU. It then provides an

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overview of financial services regulation in the EU prior to the global financial crisis, followed by an outline of the regulatory changes enacted in the EU after the crisis. The fourth section discusses the Banking Union, which was one of the EU’s main responses to the sovereign debt crisis in the euro area, which followed the international financial crisis. The fifth section discusses the Capital Markets Union and Brexit.

2

Theoretical Approaches to Financial Services Governance in the EU

Public policy and the political economy literature on financial services regulation in the EU have developed different approaches on the subject. Story and Walter (1997) stressed the intergovernmental character of the negotiations on financial market regulation in the EU, in the 1980s and 1990s (see also Busch 2008). Indeed, their work regarded financial market integration as the battle of the systems, whereby the member states were keen to set EU rules that were in line with their domestic regulatory approach, while at the same time not creating comparative disadvantages or adjustment costs to national industry and the national public authorities. Several works that examined post-crisis regulation in the EU also took an intergovernmental approach (Fioretos 2010; Quaglia 2011; Howarth and Quaglia 2013; Schimmelfennig 2015). Their argument is that the configuration of national financial systems shaped member states’ preferences concerning the reform of financial regulation in the EU, including the establishment of the Banking Union (Howarth and Quaglia 2016; Donnelly 2018a, b; Schild 2018). Although with notable exceptions, the new rules were generally resisted by the UK, Ireland, Luxembourg, the Nordic countries, but were strongly supported by France, Germany, Italy, and Spain. A second explanation has viewed the European Commission as the core supranational actor, which was driving financial market integration prior to the crisis (Posner 2005; Jabko 2006).

These accounts have emphasized the role of the Commission in the making of financial regulation, even though this policy area was, and still is closely guarded by the member states. After the crisis, the Commission was very much on its back foot, especially during the unfolding of the sovereign debt crisis in the euro area (Hodson 2013). However, it played an important role in proposing the Banking Union (Epstein and Rhodes 2016), together with the European Central Bank (De Rynck 2015; Chang 2018), and later on, in launching the project of the Capital Markets Union (Quaglia and Howarth 2018). These projects were then negotiated by the member states. A third business-led explanation focused on the role of the private sector in promoting European financial market integration (Bieling 2003; Macartney 2009; Mügge 2010). These works emphasized either the structural power of transnational capital or the lobbying activities of financial institutions, which captured the public authorities in various ways. First, there was the economic capture, given the size and importance of the financial sector in certain countries and the economic resources available to industry for lobbying. Second, there was the intellectual capture, based on the high level of expertise and technical knowledge at the disposal of the private sector, and often tapped into by the regulators themselves (Baker 2010; Bell and Hindmoor 2015a, b, 2016). In the aftermath of the international financial crisis, the financial industry was less influential than it had been in the past, and mostly had to fight a rearguard battle in order to limit the extent of post-crisis reforms, which were costly for industry (Woll 2013; James 2016). Finally, some authors have taken an ideational approach. To begin with, some works have pointed out that in the 1980s and 1990s a dominating paradigm for financial services regulation emerged internationally and in the main jurisdictions, including Europe. In the EU, regulatory liberalism came to dominate EU financial regulation from the mid-1990s onwards, until the outbreak of the global financial crisis (Mügge 2012). Quaglia (2010) pointed out two main

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Financial Services Governance in the European Union (EU)

competing coalitions of interests and ideas, which were struggling to shape financial regulation in the EU in the 2000s: the market-making coalition and the market-shaping coalition. The marketmaking coalition, led by the UK, also included Ireland and the Nordic countries. The marketshaping coalition, led by France, included Italy, other Mediterranean countries and, in several instances, Germany. After the crisis, the main line of division tended to fall between the market-shaping coalition on the one side, and the market-making coalition, which also included the financial industry, on the other (Quaglia 2012). The main argument used by the coalition, which was eager to tone down the EU’s regulatory response, was that the proposed rules were over-prescriptive, intrusive, and potentially protectionist. The rules were actively sponsored by France, Germany, Italy, Spain, and other members of the market-shaping coalition, because they were seen as necessary to safeguard financial stability and protect investors. Some of these rules, such as those concerning hedge fund managers, credit rating agencies, and over the counter derivatives, also embodied the deeply ingrained Continental dislike of casino capitalism, which was seen as serving the fortunes of the City of London. To sum up, the main theoretical approaches to financial services governance in the EU highlight various sets of powerful actors in financial services governance. According to the intergovernmental approach, the key players are states, to be precise, the national governments of the main member states. According to the supranational approach, the key shapers of financial services governance are EU technocracies, due to the fact that financial regulation is very technical. For the business-led approach, the most powerful actors are financial markets, to be precise, large transnational forces in the financial industry. Finally, for the ideational approach, the most powerful actors are those who manage to articulate the most persuasive, however, not necessarily the best ideas, whether national governments, bureaucrats, or private financial actors.

3

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The Pre-Crisis Framework for Financial Regulation in the EU

In approaching the final stage of the Economic and Monetary Union (EMU) in 1999, and in the first decade after the introduction of the euro, the pace of financial market integration quickened; and financial services governance underwent significant changes in the EU (Grossman and Leblond 2011). The Financial Services Action Plan proposed by the Commission in 1999, and subsequently endorsed by the member states, envisaged the completion of the single financial market through a set of legislative measures that, in many cases, aimed at maximum harmonization. These measures mainly focused on securities markets and insurance, and found their way into several EU directives. Following this, attention shifted to post-trading, in particular, payment services, and the clearing and settlement of securities. In the same period, new accounting rules were issued by the EU, basically adopting the international standards issued by the International Accounting Standards Board (Posner 2010; Leblond 2011). Certain financial entities, such as hedge funds and rating agencies, as well as certain financial products, in particular, derivatives, were not regulated in the EU prior to the global financial crisis. In the early 2000s, some member states, most clearly Germany, as well as parts of the European Parliament, had encouraged discussions concerning the regulation of hedge funds at the EU level. However, the Commission, and especially, the Irish Commissioner for the Internal Market, Charles McCreevy, had ruled it out, and the UK, which hosted 4/5 of hedge funds managers in Europe, had opposed it (Fioretos 2010; Quaglia 2011). Neither France nor Germany successfully raised the issue of regulating rating agencies in the EU. In order to facilitate the completion of the single market in financial services, the framework for financial regulation and supervision in the EU was reformed in the early 2000s, when the Lamfalussy reforms were enacted in banking,

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securities markets, and insurance (Mügge 2010; Quaglia 2010). Basically, the main innovation introduced by the Lamfalussy reforms was the fact that the implementing measures of level 1 financial services legislation (which was co-decided by the Council of Ministers and the European Parliament) were to be adopted by the Commission. This was done through the comitology process, which involved committees of member states representatives (the so-called level 2 committees). Committees of national regulators were established to advise the Commission on the adoption of legislative measures (the so-called level 3 committees). They also had implementation tasks and could adopt non-legally binding standards and guidelines (Coen and Thatcher 2008; Quaglia 2008). These committees were the Committee of European Banking Supervisors; the Committee of European Securities Regulators; and the Committee of Insurance and Occupational Pension Supervisors. In the making of EU financial services regulation prior to the crisis, the UK (Posner and Véron 2010) and the most competitive part of the financial industry (Mügge 2010; Macartney 2010) were highly influential for a variety of reasons. To begin with, the UK and the US hosted the main global financial centers, and each had a large financial industry. The financial sector in the UK was particularly large when compared to the rest of the economy. Their policy-makers, therefore, had widely recognized financial expertise, and were regarded as providing state-of-theart regulations. Moreover, British policy-makers invested a considerable amount of technical and human resources in order to shape the regulatory debate in the EU. In addition, the UK and the US hosted large banks that had the resources to lobby policy-makers domestically and internationally (Baker 2010).

4

The Post-Crisis Framework for Financial Regulation in the EU

After the global financial crisis, a host of new regulatory measures were adopted by the EU in

the banking sector as well as in securities markets. The EU framework for financial supervision was also reformed.

4.1

Banking Regulation in the EU

Capital requirements for banks have traditionally been regarded as one of the main instruments to ensure the stability of the banking sector, and hence, financial stability tout court. In 1988, the Basel Committee on Banking Supervision (BCBS) issued the Basel I Accord on International Convergence of Capital Measurement and Capital Standards, which was updated by the Basel II Accord in 2004. Over time, these soft international rules have been incorporated into legally binding national legislation in more than one hundred countries. In the EU this has been done through the capital requirements directives (CRD). In the wake of the crisis, the Basel III Accord was agreed on by the BCBS in December 2010. The new rules provided a more restrictive definition of what counted as capital. They also increased the risk weight of several assets in the banking book and introduced capital buffers. These rules set up a leverage ratio, as well as outlined international rules on liquidity management. All in all, the new rules increased the proportion of capital that had to be of proven lossabsorbing capacity, (i.e., core tier one equity capital), and were to be phased in gradually from January 2013 to 2019. Once the Basel III Accord was signed, the process of incorporating it into EU legislation began in earnest. In July 2011, the EU Commission adopted the CRD IV legislative package, designed to replace the CRD III with a directive that governed the access to deposit-taking activities and a regulation that established prudential requirements for credit institutions. After its approval, the directive was to be transposed by the member states in a way, that was suitable to their own national environment. It contained rules concerning the taking up and pursuit of the banking business; the conditions for the freedom of establishment, and the freedom to provide services; the supervisory review process; and the definition of competent

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Financial Services Governance in the European Union (EU)

authorities. The directive also incorporated two elements of the Basel III Accord, namely, the introduction of two capital buffers on top of minimum capital requirements. The EU regulation contained prudential requirements for credit institutions and investment firms. It covered the definition of capital, increasing the amount of own funds that banks needed to hold, as well as the quality of those funds; it introduced the liquidity coverage ratio and a leverage ratio, subject to supervisory review. The use of a regulation, which, once approved, would be directly applicable without the need for national transposition, was designed to ensure the creation of a single rule book in the EU. While negotiating the new capital requirements, British policy-makers favored strict rules on capital and liquidity (James 2016). In contrast, French and German policy-makers supported softer rules. These member states, the European Parliament, and the European Commission called for taking European specificities into account when incorporating the Basel III rules into the CRD IV, thus reopening some of the issues that had caused friction within the BCBS. Indeed, the negotiations of this legislation were slowed down by different national preferences across the member states, which, in turn, were due to the expected effects of the new rules on their banking systems (Howarth and Quaglia 2013). The CRD IV was criticized for modifying the Basel III standards in ways that met EU member state demands. The CRD was designed to make banks more resilient to financial stress. However, the financial crisis also demonstrated that new rules on bank recovery and resolution were needed, due to the fact that during the crisis, several banks had to be bailed out with public funds. In June 2012, the Commission adopted a legislative proposal for bank recovery and resolution (BRRD), designed to avoid government bailout of large banks in the future. The scope of the proposal’s application was the same as the CRD discussed above, hence it applied to all credit institutions, as well as certain investment firms. The proposal distinguished between powers of prevention, early intervention, and resolution that regulators were

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given. In the case of prevention, banks were required to draw up recovery plans, and resolution authorities were required to prepare resolution plans, both at a group level and for individual institutions within the group. Authorities could require a bank to change its legal or operational structures to ensure that it could be resolved with the available tools. Financial groups could enter into intra-group support agreements in the form of loans, or the provision of guarantees. The framework envisaged early supervisory intervention, whereby the authorities could require banks to implement measures, which were set out in the recovery plan, and would have the power to appoint a special manager at a bank for a certain period. The harmonized resolution tools and powers outlined in the directive were designed to ensure that national authorities, in all member states, had a common toolkit and roadmap to manage the failure of banks. Amongst the tools considered, there was the bail-in tool, whereby banks would be recapitalized, where shareholders would be wiped out or diluted, and creditors would have their claims reduced or converted to shares. Resolution colleges were to be established under the leadership of the group resolution authority, with the participation of the European Banking Authority (EBA), discussed below. The EBA was to facilitate joint actions and act as a binding mediator if necessary. The legislation envisaged the creation of resolution funding, which would raise contributions from banks. These contributions would be proportionate to their liabilities and risk profiles, but they would not be used to bail out a bank. There was a link between this piece of legislation and the directive on the deposit guarantee scheme, which provided funding for the protection of retail depositors. Member states were allowed to merge these two funds, provided that the scheme remained in a position to repay depositors in case of failure. The Commission noted that ideally, a single pan-European fund should be established with a pan-European resolution authority to manage its disbursal, but the absence of a single European banking supervisor and insolvency regime would make this unworkable at that

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stage (Nielsen and Smeets 2017; Quaglia and Spendzharova 2017). The third area of post-crisis banking reform had to do with bank structure. In early 2012, the European Commission appointed a High-level Expert Group headed by the former governor of the central bank of Finland, Erkki Liikanen, to examine structural reforms that would directly affect the structure of individual banks, and the market as a whole. In January 2014, the European Commission presented a draft regulation on Structural Measures to Improve the Resilience of EU Credit Institutions. The proposal contained a ban on proprietary trading of financial instruments and commodities. Exemptions were provided for financial instruments issued by sovereigns, multilateral development banks, and certain international organizations. On the one hand, the proposal significantly eased the recommendations of the 2012 Liikanen Report on bank structures, so that banks were not automatically required to split their lending operations from risky trading activities. Reportedly, this softening of the proposal was ascribed to the lobbying efforts of banks, elected officials, and regulators in France and Germany (Hardie and Macartney 2016; Spendzharova 2016; Howarth and James 2019). On the other hand, the new rules, if adopted, would have forced a significant restructuring of big banks, such as Deutsche Bank and BNP Paribas. The proposed legislation was to apply only to Europe’s thirty largest banks, albeit holding over 65% of total EU banking assets. The Commission’s proposal gave countries like France and Germany leeway to avoid splitting up their big universal banks into separate deposit-taking investment banking operations, which would be riskier. In fact, in several EU member states, there was political unease over breaking up big banks and giving a competitive advantage to large non-EU rivals. There was also strong opposition from the financial industry. The European Parliament, which had the power of co-decision with the Council of Ministers on this piece of legislation, was also opposed, but was internally divided. Eventually, after more than 2 years of stalemate, in November 2017,

L. Quaglia

the Commission withdrew the proposal, noting the lack of progress and foreseeable agreement on the issue. Moreover, the Commission argued that the main objectives of the proposed regulation had already been addressed by other regulatory measures in the banking sector.

4.2

Securities Markets Regulation in the EU

Prior to the crisis, credit rating agencies (CRAs) were regulated internationally by a voluntary Code of Conduct issued by International Organization of Securities Commissions (IOSCO) in 2004, and revised in the wake of the crisis in 2008. The EU had considered, but then ruled out specific EU rules on CRAs prior to the international financial crisis. After the crisis, the Regulation on CRAs was agreed on by the EU in less than a year. According to the new rules, all CRAs, which had ratings that were used in the EU, needed to apply for registration in the EU. They also had to comply with rules designed to prevent any conflict of interest in the rating process and to ensure the quality of the rating methodology, as well as the quality of the ratings. CRAs, operating in non-EU jurisdictions, could issue ratings to be used in the EU, provided that their countries of origin had a regulatory framework which was recognized as equivalent to the one put in place by the EU, or were endorsed by an EU-registered CRA. In 2011, the Regulation on CRAs was amended. Since ratings issued by a CRA could be used by financial institutions throughout the EU, the Commission proposed a more centralized system for the supervision of CRAs. The newly created European Securities and Markets Authority (ESMA, discussed below) was entrusted with exclusive supervisory powers over the CRAs, registered in the EU, including European subsidiaries of US-headquartered CRAs, such as Fitch, Moody, and Standard & Poor. The ESMA was given powers to request information, to launch investigations, and to perform on-site inspections. The attempt to regulate hedge funds in the EU was given new momentum by the financial crisis.

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Financial Services Governance in the European Union (EU)

In June 2009, the European Commission presented a proposal for the draft directive on Alternative Investment Fund Managers (AIFMs), which included managers of hedge funds, private equities funds, and real estate funds, covering quite a broad range of financial entities. The main sponsors of the directive were France, Germany, and Italy, whereas the UK, some Northern countries and AIFMs reluctantly agreed to it, and then only after some of its most controversial provisions were watered down (see Buckley and Howarth 2010; Quaglia 2011; Woll 2013). After intense lobbying from industry in the US and the UK, the draft directive was partly revised and an agreement between the Council of Ministers and the European Parliament was eventually reached in late October 2010. The directive was due to enter into force in 2013. It introduced a legally binding authorization and supervisory regime for all AIFMs in the EU, irrespective of the legal domicile of the alternative investment funds being managed. So, AIFMs needed authorization from the competent authority of the home member state and were required to report important data systemically to supervisors. The directive set up a European passport for AIFMs. An AIFM which had been authorized in its home member state would be entitled to sell its funds to professional investors in other member states, and national authorities would not be permitted to impose additional requirements. Prior to the global financial crisis, derivatives were unregulated in the EU. In September 2010, the Commission proposed the European Market Infrastructure Regulation (EMIR). This proposed legislation aimed to ensure the transparency of over-the-counter (OTC) derivatives transactions, and to reduce the risks associated with these products by shifting the clearing of OTC derivatives to central counterparties (CCPs), whenever possible. These CCPs would reduce counterparty risks because they act as intermediaries between sellers and buyers of derivative products. They would ensure the solvency of their participants by requesting deposits and margin calls. The proposed regulation involved the creation of harmonized rules for CCPs and EU supervision of trade repositories.

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The reporting of all transactions would be mandatory and would provide supervisory authorities with the full picture of these markets. EMIR was considered a critical piece of legislation by the Commission as well as the member states, in order to meet their G20 commitments at the September 2009 Pittsburgh summit. It was initially conceived by the Commission as a directive, but it was quickly changed and became a regulation. This distinction is important because, as explained above, regulations are enacted into law with immediate effect in EU member states, with no discretion over their interpretation. The EMIR was driven by the Commission with support from Germany and France. The British government was generally in favor, but opposed certain elements of the proposed legislation (see Buckley et al. 2012). The final Level 1 text of the regulation was agreed on by the Council of Ministers and the European Parliament in March 2012. Afterward, the ESMA drafted the Level 2 rules that supported the Level 1 regulation. This piece of legislation was complemented by the revision of the Markets in Financial Instruments Directive (MiFID II) which was designed to offer greater protection to investors and to bring more transparency into the trading securities and, especially, into derivatives.

4.3

Financial Supervision in the EU

The global financial crisis revealed the weaknesses of existing macro-prudential oversight in the EU and the inadequacy of nationally-based supervisory models in overseeing integrated financial markets with cross-border operators. It exposed shortcomings in the consistent application of European Community law as well as insufficient cooperation between supervisors in exchanging information during a crisis. In 2009, a group of high-level practitioners and financial experts, chaired by the former governor of the Banque de France, produced a report on the issue, which was named after the chair of the group (de Larosière Group). Building on the de Larosiere’s report, in September 2009, the Commission put forth a

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L. Quaglia

series of legislative proposals for the reform of the micro- and macro-prudential framework for financial supervision in the EU. The Commission proposals were eventually agreed upon by the Council of Ministers and the European Parliament in the autumn of 2010. The main institutional innovations were the establishment of the European Systemic Risk Board, its chair to be elected by and from the members of the General Council of the European Central Bank (ECB). This board would be in charge of monitoring macroprudential risk. There was also the transformation of level three Lamfalussy committees of national regulators into independent authorities with legal personality. It would also handle an increased budget and have enhanced powers. Three newly created bodies, namely the European Banking Authority; the European Insurance and Occupational Pension Authority; and the European Securities Markets Authority. They were charged with the tasks of issuing binding technical standards and promoting stronger cooperation between national supervisors (Hennessy 2014).

5

The Banking Union

The Banking Union was one of the main EU’s responses to the sovereign debt crisis in the euro area. This crisis began in 2010, following the international financial crisis. In June 2012, the President of the European Council, the President of the Eurogroup, the President of the Commission, and the President of the ECB presented an interim report titled, Towards a Genuine Economic and Monetary Union. The Van Rompuy report, which was also known as the Four Presidents Report, proposed what later became known as the Banking Union. The project of the Banking Union was subsequently endorsed by the European Council and the euro area summit in June 2012. The first component of the Banking Union to be set up was the Single Supervisory Mechanism (SSM) (Glöckler et al. 2016). The final agreement on the SSM, which was reached by the European

Council in December 2012, foresaw that the ECB would be ‘responsible for the overall effective functioning of the SSM’ and would have ‘direct oversight of euro area banks’. This supervision, however, would be differentiated and the ECB would carry it out in ‘close cooperation with national supervisory authorities.’ The regulation establishing the SSM also permitted the ECB to step in, if necessary, and supervise any of the 6000 banks in the euro area. The SSM applied only to the euro area member states and to the non-euro area member states that decided to join the Banking Union. The SSM eventually agreed on involving a compromise on the distribution of supervisory power between the ECB and the national competent authorities. Direct ECB supervision, through joint supervisory teams, was to cover only those banks with assets exceeding €30 billion or those having assets representing at least 20 per cent of their home country’s annual GDP. The thousands of smaller, less significant banks headquartered in the euro area would continue to be under the direct supervision of the competent national authorities, but according to harmonized rules and practices. This compromise of two-level supervision reflected, above all, the demands of the German government, which opposed transferring supervisory responsibilities of the country’s regional public savings banks (Sparkassen) and co-operatives to the ECB (Howarth and Quaglia 2016). In July 2013, the Commission proposed the establishment of the Single Resolution Mechanism (SRM), designed to complement the SSM. Most of the intergovernmental negotiations concerned the decision-making process in the SSM and the establishment of the Single Resolution Fund (SRF) financed by bank levies, which were raised at the national level. The Commission, supported by French, Spanish and Italian policy-makers, wanted to be given the final power to decide whether to place a bank into resolution and determine the application of resolution tools. However, German policy-makers argued that the Single Resolution Board (SRB) should be given this power, and insisted on

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Financial Services Governance in the European Union (EU)

setting up the SRF through an intergovernmental agreement among the participating member states (Howarth and Quaglia 2016). In March 2014, an intergovernmental agreement was reached on the establishment of the SRM. As advocated by German policy-makers, the SRB would be responsible for the planning and the resolution of cross-border banks, as well as those directly supervised by the ECB. National resolution authorities would be responsible for all other banks, except banks which required access to the SRF. Moreover, the SRF, financed by bank levies raised at the national level, would initially consist of national compartments that would be gradually merged over 8 years. The SRF embodies all the controversial characteristics of the Banking Union, given its partly intergovernmental, partly supranational character. The Regulation on the Single Resolution Mechanism (SRM) was adopted in conjunction with the Bank Recovery and Resolution Directive (BRRD), which harmonized resolution instruments and powers in the EU. The BRRD and the SRM Regulation introduced a new instrument in bank resolution, the bail-in, which substantially reduced the need for public funding to bail out banks (Nielsen and Smeets 2017). Thus, the SRM would be fiscally neutral. The instrument of the bail-in was to enable banks to withstand financial stress by imposing losses on creditors (bail-in), without resorting to statefunded recapitalization (bail-out). The missing component of the Banking Union was, what later became to be known as the European Deposit Insurance Scheme (EDIS) (Donnelly 2018a, b; Howarth and Quaglia 2018). In June 2012, the interim Van Rompuy Report (a.k.a. Four Presidents’ Report) report mentioned the need to set up an EDIS. The Commission had prepared a draft proposing a new agency, the European Deposit Insurance and Resolution Authority (EDIRA), which would control a new European Deposit Guarantee and Resolution Fund. Due to German opposition, the proposal for the EDIRA was removed and the final Commission document A Roadmap Towards Banking Union was released. Thus, the final

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Van Rompuy Report issued in December 2012 only made reference to the Agreement on the Harmonization of National Resolution and Deposit Guarantee Frameworks. German policy-makers criticized the EDIS as an unacceptable step towards debt mutualization. In contrast, policy-makers in France and in the euro area periphery regarded the EDIS as the final pillar of the Banking Union, being necessary to severe the doom loop between banks and sovereigns. The ECB regarded the EDIS as an important component of the Banking Union, but one that could be implemented at a later date (Howarth and Quaglia 2016). The issue came back to the policy agenda in June 2015, when supranational actors, including ECB president Mario Draghi and Commission President Jean-Claude Juncker, endorsed the creation of the EDIS in the Five Presidents’ Report on the future of the euro. In the autumn of 2015, the Commission proposed the EDIS for bank deposits in the euro area as the third pillar of the Banking Union. The Commission’s proposal would, as a first step, involve the establishment of “a mandatory reinsurance scheme that would contribute under certain conditions when national deposit guarantee schemes are called upon.” It would, in effect, act as a backstop to national deposit guarantee schemes. This initiative took place despite explicit German opposition. As in the case of the creation of the SRF, the intergovernmental discussion on the creation of the EDIS pitted countries’ interests against each other. On one hand were the interests of the countries expected to make net contributions to common rescue funds, either coming from taxpayers or from banks. On the other hand were the interests of the countries that expected to be the principal recipients (Donnelly 2018a, b). Negotiations are ongoing at the time of writing. Finally, the credibility of the SRM/SRF and the EDIS was linked to the possibility of accessing a common fiscal backstop. Given the fact that the use of the ESM was subject to unanimity, German policy-makers enjoyed a veto on any decision to engage in direct bank recapitalization. Under the rules established for the direct

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recapitalization of banks, euro area member states agreed that a bank’s creditors should absorb appropriate losses before ESM funds could be accessed. These appropriate losses were defined by the BRRD’s rules on the bail-in. Moreover, ESM rules required a bank’s home government to initially contribute at least twenty per cent of the recapitalization and then ten per cent from 2017 onward. German policy-makers, joined by Austrian, Dutch and Finnish policy makers insisted that ESM funds could not be used to cover legacy problems. Hence, the fiscal backstop did not materialize when the Banking Union was set up (Howarth and Quaglia 2016). Subsequently, in late 2018 the member states in the Council of Ministers reached a general agreement on the use of the ESM as a backstop to the SRF, further details are to be negotiated in due course. Overall, the Banking Union was set up in a timely fashion between 2012 and 2014. However, it was incomplete and asymmetric in three main aspects. First, member states governments retained their vetoes on the mutualization of national funds and continued to have an important say on the use of resolution funds in the SRM. A rather complex compromise was reached concerning the resolution process in the SRB. Second, the EDIS was not set up. Third, no common fiscal backstop was established, albeit progress is underway at the time of writing. Most of the intergovernmental negotiations on the core components of the Banking Union basically boiled down to distributional conflicts in two dimensions: the centralization of decisionmaking, and the allocation of costs via risksharing in the Banking Union. The discussions pitted expected net contributors against those expected to be the principal recipients. Thus, compromises between the two coalitions were sought during the negotiations. The institutional design eventually set up for the Banking Union was closer to the preferences of the German led-coalition, as far as risk-sharing was concerned. However, German policy-makers had to make concessions concerning the transfer of decision-making to the EU/euro area level (Schild 2018).

L. Quaglia

6

The Capital Markets Union and Brexit

The idea of the Capital Markets Union was first mentioned in October 2014, in the Political Guidelines of the then newly appointed President of the European Commission, Jean-Claude Juncker. According to the Commission, the Capital Markets Union would “improve [the] financing of the economy . . . cut the cost of raising capital, notably for SMEs, and help reduce [the] very high dependence on bank funding. This would also increase the attractiveness of Europe as a place to invest” (European Commission 2014, 8). In February 2015, the Commission published the Green Paper, Building a Capital Markets Union, on which responses from interested parties were invited. At that stage, the Capital Markets Union was a mixed bag, it was a long shopping list of things to do in order to complete the single financial market and boost the EU’s capital markets (Moloney 2016). In September 2015, the Commission put forth an Action Plan for the Capital Markets Union, together with a package of two legislative proposals to promote securitization. Furthermore, the Commission began preparing a proposal for the revision of the Prospectus Directive and the Solvency II Directive. Finally, it opened a consultation on venture capital and social entrepreneurship funds, a consultation on covered bonds in the EU, as well as a call for evidence on the EU regulatory framework for financial services. The member states reached an agreement on the securitization proposal in a matter of weeks, but the European Parliament refused to fast-track the proposals, mainly because left-leaning parliamentarians called for a thorough review in order not to revive pre-crisis excesses (Quaglia et al. 2016). The European Commission was the main policy entrepreneur in the Capital Markets Union (Quaglia and Howarth 2018), which was enthusiastically supported by the UK. Those member states with the most well-developed and diversified financial sectors, including Ireland, the Netherlands, Sweden, and Luxembourg

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Financial Services Governance in the European Union (EU)

joined the UK. These member states unequivocally supported the market liberalization agenda in the Capital Markets Union. The main continental countries, notably France and Germany, expressed their reservations concerning the Capital Markets Union and so did some of their home country players, (e.g., domestic banks and investment firms). Instead, the most competitive parts of the financial industry, the main transnational players, such as large banks engaged in securitization, insurance companies, and the international financial centers in the EU, first and foremost the City of London, supported the proposal for the Capital Markets Union. The new measures designed to promote securitization would benefit the large banks based in the UK, but also those in France, Germany, the Benelux countries, Italy, and Spain. Small banks would also benefit from the new proposed legislation on securitization, but the large banks would benefit the most, as they are the most engaged in shadow banking (Quaglia et al. 2016). Of all EU member states, the UK had the most to benefit from the financial liberalization and diversification promised in/by the project on the Capital Markets Union, given the diversity of its financial sector, and in particular, the high concentration of wholesale market activity, private equity, and hedge funds. Given the implications of the Banking Union for the single financial market, the Capital Markets Union was deliberately framed as an initiative to complement the Banking Union, and ultimately, to complete EMU, even though the Capital Markets Union involved all twenty-eight member states. Some commentators interpreted the Capital Markets Union, in part, as an attempt to repair the strained relations between the UK and the euro area. It did this by giving “a political signal to strengthen the Single Market as a project of all 28 Member States” (Ringe 2015, 4), not only of the euro area countries, but also in an area where the UK had a clear competitive advantage. Thus, the Capital Markets Union was designed to attract especially the UK, as well as those member states that had not joined the Banking Union and/or EMU, but first and foremost the UK.

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From 2017 onwards, the Capital Markets Union has lost momentum because of Brexit. In fact, the UK which has by far, the largest financial sector in the EU, and the second largest in the world, decided to leave the EU. Furthermore, London was the only real international financial center in the EU at that time. Some argue that the Capital Markets Union does not make much sense without the UK. Others argue that Brexit makes the Capital Markets Union all the more necessary. At any rate, in the short and medium term, the main challenge concerning financial services governance in the EU is Brexit, specifically, the implications that the UK’s departure from the EU will have for market integration, (i.e., the cross-border financial flows) between the UK and the EU27, as well as the supervision of financial entities that operate across the English Channel. Following the general elections in December 2019, the UK is set to leave the EU by the end of January 2020. After that, there will be an eleven-month transition period, during which the UK will continue to be subject to EU rules and remain a member of the single market and customs union. In the meantime, the UK and the EU will negotiate their future trading relationship.

7

Conclusion

This chapter has examined financial services governance in the EU, focusing mainly on the reforms enacted following the international financial crisis and the sovereign debt crisis in the euro area. The analysis has not only pointed out the intergovernmental dynamics of many negotiations concerning financial regulation in the EU, but also the role of supranational institutions, in particular in agenda setting. The financial industry has also been influential in shaping the EU’s financial rules, albeit less so in the wake of the crisis. The regulatory changes enacted as a response to the two consecutive crises were mostly incremental and affected certain financial services more than others. However, taken together, this multitude of incremental changes amounted to a considerable reform of financial services governance post-crisis.

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L. Quaglia Euro area. Journal of European Public Policy, 24(8), 1135–1153. Grossman, E., & Leblond, P. (2011). European financial integration: Finally the great leap forward? Journal of Common Market Studies, 49(2), 413–435. Hardie, I., & Macartney, H. (2016). EU ring-fencing and the defence of too-big-to-fail banks. West European Politics, 39(3), 503–525. Helleiner, E. (2014). The status quo crisis: Global financial governance after the 2008 Meltdown. Oxford: Oxford University Press. Hennessy, A. (2014). Redesigning financial supervision in the European Union, 2009–13. Journal of European Public Policy, 21(2), 151–168. Hodson, D. (2013). The little engine that wouldn’t: Supranational entrepreneurship and the Barroso commission. Journal of European Integration, 35(3), 301–314. Howarth, D., & Quaglia, L. (2013). Banking on stability: The political economy of new capital requirements in the European Union. Journal of European Integration, 35(3), 333–346. Howarth, D., & Quaglia, L. (2016). The political economy of banking union. Oxford: Oxford University Press. Howarth, D., & Quaglia, L. (2018). The difficult construction of a European deposit insurance scheme: A step too far in Banking Union? Journal of Economic Policy Reform, 21(3), 190–209. Howarth, D., & James, S. (2019). The politics of bank structural reform: Business power and agenda setting in the UK, France and Germany. Business and Politics, 1–27. Jabko, N. (2006). Playing the market: A political strategy for Uniting Europe, 1985–2005. Ithaca: Cornell University Press. James, S. (2016). The domestic politics of financial regulation: Informal ratification games and the EU capital requirement negotiations. New Political Economy, 21 (2), 187–203. Kudrna, Z. (2016). Financial market regulation: Crisisinduced supranationalization. Journal of European Integration, 38(3), 251–264. Leblond, P. (2011). EU, US and international accounting standards: A delicate balancing act in governing global finance. Journal of European Public Policy, 18(3), 443–461. Macartney, H. (2009). Variegate neo-liberalism: Transnationally oriented fractions of capital in EU financial market integration. Review of International Studies, 35(2), 451–480. Macartney, H. (2010). Variegated neoliberalism: EU varieties of capitalism and international political economy. London: Routledge. Moloney, N. (2012). The legacy effects of the financial crisis on regulatory design in the EU. In E. Ferran, J. Hill, N. Moloney, & J. C. Coffee (Eds.), The regulatory aftermath of the global financial crisis. International corporate law and financial market regulation (pp. 111–202). Cambridge: Cambridge University Press.

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Moloney, N. (2016). Capital markets union: Ever closer union for the EU financial system? European Law Review, 41(3), 307–337. Mügge, D. (2010). Widen the market, narrow the competition: Banker interests and the making of a European capital market. Colchester: ECPR. Mügge, D. (2012). From pragmatism to dogmatism: EU governance, policy paradigms, and financial meltdown. New Political Economy, 16(2), 185–206. Mügge, D. (Ed.). (2014). Europe and the governance of global finance. Oxford: Oxford University Press. Nielsen, B., & Smeets, S. (2017). The role of the EU institutions in establishing the Banking Union. Collaborative leadership in the EMU reform process. Journal of European Public Policy, 25(9), 1233–1256. Posner, E. (2005). Sources of institutional change: The supranational origins of Europe’s New Stock Markets. World Politics, 58(1), 1–40. Posner, E. (2009). Making rules for global finance: Transatlantic regulatory cooperation at the turn of the millennium. International Organization, 63, 665–699. Posner, E. (2010). Sequence as explanation: The international politics of accounting standards. Review of International Political Economy, 17(4), 639–664. Posner, E., & Véron, N. (2010). The EU and financial regulation: Power without purpose? Journal of European Public Policy, 17(3), 400–415. Quaglia, L. (2008). Committee governance in the financial sector in the European Union. Journal of European Integration, 30(3), 565–580. Quaglia, L. (2010). Governing financial services in the European Union. London: Routledge. Quaglia, L. (2011). The “old” and “new” political economy of hedge funds regulation in the European Union. West European Politics, 34(4), 665–682. Quaglia, L. (2012). The “old” and “new” politics of financial services regulation in the European Union. New Political Economy, 17(4), 515–535. Quaglia, L. (2014). The European Union and global financial regulation. Oxford: Oxford University Press. Quaglia, L. (2015). The politics of “third country equivalence” in post-crisis financial services regulation in the European Union. West European Politics, 38(1), 167–184. Quaglia, L., Howarth, D., & Liebe, M. (2016). The political economy of European Capital Markets Union. Journal of Common Market Studies Annual Review, 54(s1), 185–203.

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Quaglia, L., & Spendzharova, A. (2017). The conundrum of solving “too big to fail” in the European Union: Supranationalization at different speeds. Journal of Common Market Studies, 55(5), 1110–1126. Quaglia, L., & Howarth, D. (2018). Policy narratives on capital markets union. Journal of European Public Policy, 25(7), 990–1009. Ringe, W.-G. (2015). Capital Markets Union for Europe: A political message to the UK. Law and Financial Markets Review, 9(1), 5–7. Schild, J. (2018). Germany and France at cross purposes: The case of Banking Union. Journal of Economic Policy Reform, 21(2), 102–117. Schimmelfennig, F. (2015). Liberal intergovernmentalism and the Euro area crisis. Journal of European Public Policy, 22(2), 177–195. Spendzharova, A. (2016). Regulatory cascading: Limitations of policy design in European banking structural reforms. Policy and Society, 35(3), 227–237. Story, J., & Walter, I. (1997). Political economy of financial integration in Europe: The battle of the systems. Manchester: Manchester University Press. Woll, C. (2013). Lobbying under pressure: The effect of salience on European hedge fund regulation. Journal of Common Market Studies, 51(3), 555–572.

Lucia Quaglia is professor of political science at the University of Bologna, Italy. She was professor of political science at the University of York (2012–17) and awarded various research fellowships. Research topics: Financial governance, finance, macroeconomic governance, Economic and Monetary Union, Banking Union. Recent publications: Quaglia, L. (2020) The Politics of Regime Complexity in International Derivatives Regulation, Oxford University Press. James, Scott, and Lucia Quaglia 2020. The UK and Multi-level Financial Regulation: From the Crisis to Brexit. Oxford: Oxford University Press. Dannreuther, Charlie, Scott Lavery, and Lucia Quaglia. 2019. Brexit and the Future of British Capitalism. New Political Economy (special issue). Bulmer, Simon, and Lucia Quaglia. 2018. The Politics and Economics of Brexit, Journal of European Public Policy (special issue). Howarth, David, and Lucia Quaglia. 2016. The Political Economy of Banking Union. Oxford: Oxford University Press.

Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights in the Context of Institutional Transformation

14

Alberto Veira-Ramos and Tetiana Liubyva

1

Introduction: General Attitudes category of respondents that increased the most between 1994 and 2016 is those who support Towards Capitalism neither socialism nor capitalism (from 20% to and Socialism in Ukraine

In 2020, almost three decades after independence, six different presidents have been elected by the Ukrainian people in free elections. Several governments have been in charge of implementing reforms and several constitutional reforms were approved. The geopolitical direction of Ukraine as a nation has changed dramatically more than once. Such intense sociopolitical history, contrasts with an apparently slow process of transformation of the Ukrainian economy and institutions, as well as the reluctance of a decreasing, though still significant part of the population to embrace the institutional arrangements associated with liberal democracies and free market values. Data from the Ukrainian Society Survey suggest that many Ukrainians still hold an ambivalent attitude towards capitalism. Figure 14.1 shows that at least 13% to 14% of respondents support such an economic system. Almost a quarter (23–24%) declare to support capitalism, as much as socialism (to avoid a conflict). Yet the A. Veira-Ramos (*) Carlos III University of Madrid, Madrid, Spain e-mail: [email protected] T. Liubyva Institute of Sociology of National Academy of Sciences of Ukraine, Kyiv, Ukraine

32%). Support for socialism remains relevant but is decreasing in significance (from 22% to 14%). These trends suggest that reforms approved to adapt the Ukrainian economy to a free market environment did not contribute much to increasing support for capitalism among the Ukrainian population over the past decades. Since support for Soviet past has not gained ground either, many Ukrainians are found in an ideological no man’s land. This anomy is also observed when Ukrainians give their opinions on how much they feel aligned with different political movements. According to Fig. 14.2, most Ukrainians do not identify with any political movement. Answers such as “I do not understand these trends,” “I have not decided yet” or “None” represent almost 60% of the interviewed population in 2018. However, a more subtle distinction between communism, socialism and social-democracy reveals a clear trend toward decreasing support for communism and increasing support for social-democracy. The other political movement that is recognized by a growing number of respondents is the nationaldemocratic movement. It seems that political movements that are classics in Western Europe are not necessarily those that will be adopted by most Ukrainians as the main vectors of their political self-reference.

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_14

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Attitudes of respondents towards Capitalism or Socialism in 1994 and 2016 50% 40% 30% 20% 10% 0% I support the I support the I support both proponents of proponents of of them to socialism capitalism avoid conflict 1994

I support neither

Other

Hard to tell

2016

Fig. 14.1 Some political forces want Ukraine to choose the way of socialism, others desire the way of capitalism. What is your personal attitude towards these forces? Source: Ukrainian Society Survey. Author’s Calculations

Support of respondents towards political ideologies in 1994 and 2018 50% 40% 30% 20% 10% 0%

1994 Fig. 14.2 Within the political spectrum, there are several partially independent political movements. The following list gives several such movements. Please choose the one

2018 that you most support. Source: Ukrainian Society Survey. Author’s Calculations

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Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights. . .

The decrease of support for the Communist ideology is confirmed by results shown in Fig. 14.3. Yet the significant decrease in the level of trust people have in the Communist Party (from 15% to 5% between 1994 and 2018) is not compensated by a proportional increase in people’s trust of political parties in general. Moreover, trust in the Ukrainian parliament, Verkhovna Rada, has also decreased. Transition into a new institutional and economic context implies relegation of old values and ideologies. However, it seems that most Ukrainians are not automatically adopting a new set of values or ideologies to replace the former ones. A plausible explanation for the persistent lack of trust in newly created institutions after independence, as well as the lack of popular alignment with ideologies typical of liberal democracies is that following the collapse of the Soviet regimes, governmental performance declined as opportunism and malfeasance reached critical points (Nee and Swedberg 2005). In line with this viewpoint is the widespread perception revealed by the Ukrainian Survey data, shown in Fig. 14.4, that the country, including political representatives, is managed by oligarchs and mafias.

Indeed, Ukraine constitutes one paradigmatic example of a society displaying low trust in the political institutions that emerged after the collapse of the Soviet regime (Mishler and Rose 1994; Dogan and Higley 1998). This apparent bleak landscape should not hide the fact that mafias were cited in first place, unrivaled by any other category only until 2004. After the Orange revolution, entrepreneurs and leaders of political parties are also seen as groups that participate in shaping of the Ukrainian state. One may consider two options for combating the mafias and criminal elements, which, according to large share of the Ukrainian public opinion, are shaping the future of the country. First, is the return to a planned economy, with total government control and second, the implementation of liberal reforms to ensure a free market environment with equal opportunities. The main contribution of this chapter is to analyze several items from the Ukrainian Society Survey, thus giving insight concerning which path Ukrainian people are leaning towards. To do so, we will rely on theoretical perspectives developed to explain institutional trust and put them to the test. The development of trust (or the absence thereof) towards political institutions of societies

Percentages of respondents who trust or somewhat trust the cited institutions in 1994 and 2018 50% 40% 30% 20% 10% 0% Trust Communist Party

Trust political parties 1994

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Trust Verkhovna Rada

2018

Fig. 14.3 How much do you trust . . .? Source: Ukrainian Society Survey. Author’s Calculations

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Social groups shaping the Ukrainian state according to respondents to the Ukrainian Society survey Workers

50%

Peasants

40%

Inteligentsia Entrepreneurs/Bussines men

30%

Managers of state enterprises

20%

Leaders of political parties Military

10%

Police/Security personnel Judges/Prosecutor

0%

Mafias and criminal elements Fig. 14.4 In your opinion, which of the following social groups play a powerful role in shaping the Ukrainian state? Source: Ukrainian Society Survey. Authors Calculations

in transformation can be approached from a cultural and institutional perspective. Cultural perspectives emphasize the importance of early life socialization (Almond and Verba 1963; Putnam 1993; Inglehart 1997) while institutional approaches highlight the performance and utility of institutions (Dasgupta 1988; Coleman 1990). Mishler and Rose (2001) distinguished, within each perspective, a micro and macro variant, leading to the establishment of four testable hypotheses. Macro-cultural theories emphasize the importance of national traditions and leave little room for variations among individuals. Micro-cultural theories allow for variations between individuals, derived from different socialization experiences. The macro-institutional approach points to the aggregate performance of institutions that enhance economic growth and limit corruption as being the key elements that can promote institutional trust. The microinstitutional perspective corrects the former, indicating that individual evaluations of institutional performance are conditioned by personal preferences and experiences. In this chapter we use this theoretical framework to study the evolution of positive attitudes towards private entrepreneurship or towards the return to a planned economy. Unlike trust in political institutions, attitudes of Ukrainians towards these different

paths for economic development are more diverse, and therefore, more suitable for insightful research, as we will show in the following sections of this chapter.

2

Description of the Data (The Ukrainian Society Survey)

The Ukrainian Society Survey was carried out by the Institute of Sociology of National Academy of Sciences of Ukraine starting from 1992 under the direction of Natalia Panina and Evgenii Golovakha, heads of the research program. Its data track the public opinion of the Ukrainian population and they have been used repeatedly to shed light on the sociological reality of Ukraine and its reluctant transformation (Golovakha 1996; Golovakha and Panina 2003, 2008, 2009; Golovakha et al. 2020). The survey was conducted annually until 2006, later biennially in even years. The questionnaire consists of two parts: the monitoring section (core questions) and the rotating section. Indicators relate to the following topics: economic situation, political situation, legal awareness and social protest, social ethics, conflicts and trust, interethnic relations, language and religion, social well-being and public moods, health and

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Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights. . .

social support, leisure, local living conditions, ecological situation, financial state, work and employment, education, transportation and communication, and social change. The sample size of each survey amounts to 1800 respondents representing the adult population of Ukraine (18 years and older). Sampling is three-staged, stratified, and random with quota screening in the last phase. In the first stage, localities are selected in the geographical regions. In the second stage, specific postal addresses are chosen at convenient highway routes and/or crossroads. In the third stage, respondents are chosen. The quota screening of respondents in the final stage by sex and age is performed. All the surveys are conducted using the selfadministered method, where respondents completed the questionnaires by themselves. Starting in 2014, fieldwork was not carried out in Crimea, or in non-government-controlled areas of the Donetsk and Luhansk regions. Sample size of the survey did not change though. The survey was redistributed among other regions of Ukraine. Data from 2014 were collected in June–July, after the occupation of Crimea and the beginning of the hybrid war in Donbas, before main military engagements in Ilovaysk and at Donetsk airport. Internally displaced persons (IDPs), those who left occupied territories (both Crimea and Donbas) and registered in other parts of Ukraine had opportunities to be included in the sample. Estimated number of IDPs in Ukraine varied during the war years. The number of registered IDPs in the territory of Ukraine, according to Ministry of Social Politics data (February 2019) is more than 1.3 million,1 in comparison to August 2016 of 1.7 million. Some IDPs were not registered, but this share is relatively small.2 No explicit question is included in the survey to identify IDPs, but 18.9% of respondents in 2018 reported they had friends or relatives who moved from the conflict zone in Donbas to other territories in Ukraine. Up to 18.7% of respondents in Kyiv City and 14.5% of respondents in governmentcontrolled territories of Donetsk and Luhansk 1

See https://www.msp.gov.ua/news/16745.html. For more information see http://iom.org.ua/sites/default/ files/nms_round_9_ukr_press.pdf. 2

209

regions invited these friends or relatives to live with them in the same settlement. Thus, the survey confirms the official reports claiming that most IDPs settled in Kyiv, government-controlled areas of the Donetsk and Luhansk regions, and other Eastern regions next to the conflict zone (Kharkiv, Dnipro, Zaporizhzhia). At the same time, such redistribution of respondents indicates relevant presence of IDPs in other regions, among respondents in survey data after 2014. Residents of Donbas or Crimea who answered the survey in other regions of Ukraine may have brought in some of their former regionally specific features, especially in opinion questions. At the same time, the percentage of these types of respondents is estimated to be no more than 4–5% and therefore would not significantly influence results.

3

The Evolution of Attitudes Towards Private Entrepreneurship and Support of Socialism

To identify changes in attitudes towards private entrepreneurship, we used two items included in the Ukrainian Society Survey: (1) the level of approval of Ukrainians for the development of private business, and (2) the percentages of those who declare they would like to start their own business. To measure support for a return to a government-controlled economy we rely on the item, which explicitly poses the question to interviewees of what should be the role of the government in regulating the economy. The results of these analyses are presented in the following sections.

3.1

The Evolution of Attitudes Towards Private Entrepreneurship

The evolution of the answers to the questions “What is your attitude towards the development of private business in Ukraine?” and “Would you like to start your own business?” included in the survey until 2014, and displayed in Figs. 14.5 and 14.6, reveal that attitudes towards private

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Attitudes towards private business in Ukraine 100% 80% 60% 40% 20% 0%

Completely disapprove

Disapprove more than approve

Difficult to say

Approve more than disapprove

Completely approve Fig. 14.5 What is your attitude towards the development of private business in Ukraine? Source: Ukrainian Society Survey. Author’s Calculations

Would you like to start your own business? 100% 80% 60% 40% 20% 0% 2004

2005 No

2006 Probably no

2008 Difficult to say

2010 Probably yes

2012

2014

Yes

Fig. 14.6 Would you like to start your own business? Source: Ukrainian Society Survey. Author’s Calculations

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Table 14.1 Respondents declaring to be in favor of the development of private business (%) Social groups Primary education Secondary Vocational University Employed in public sector In private sector In both sectors Not employed Life depends more on myself The same on me and on external conditions More on external conditions Poor (not enough for food) Enough for food only Enough for meagre living Enough for all necessities Enough for savings Lives in a village Town up to 250,000 City 250,000 to 500,000 City over 500,000 Employer Self-employed Employee Unemployed Hard to tell Total

1994 29.8 50.1 50.1 59.0 45.7 73.6 56.3 35.8 51.7 52.6

1996 29.5 52.0 56.7 64.2 47.9 68.8 68.8 39.0 57.1 55.0

1998 27.5 53.5 54.1 67.9 44.9 72.0 75.0 38.1 63.6 57.7

2000 32.5 61.3 62.3 74.9 55.3 74.3 76.9 44.0 67.7 61.3

2002 30.0 52.4 60.1 73.0 51.1 66.8 57.1 38.8 54.4 58.4

2004 29.3 53.0 59.8 67.1 53.6 60.3 37.9 37.3 54.9 58.7

2006 39.0 58.4 58.8 68.3 56.9 71.2 56.3 47.8 67.3 62.2

2008 38.1 53.1 58.5 65.6 55.7 66.3 71.7 45.8 59.0 63.8

2010 37.3 57.9 57.1 71.9 54.5 64.0 80.0 47.5 60.0 57.9

2012 38.0 52.1 55.3 69.5 50.3 62.7 61.4 45.7 56.2 57.4

2014 46.2 59.8 60.7 68.5 62.3 69.0 68.3 54.3 68.6 65.6

38.2

39.3

38.2

44.6

40.7 29.5 42.5 60.0 63.6 75.6 39.8 52.5 48.8 57.0 80.8 56.5 56.0

46.2

45.4

52.3

48.3

48.4 49.4 45.1 62.0 68.6 70.6 46.5 61.1 58.0 63.2 77.4 69.5 64.2 47.4 48.3 56.4

48.3 32.4 44.2 61.7 64.3 66.2 45.8 57.4 64.5 58.5

43.8

37.0 23.9 42.4 51.3 63.6 56.3 39.5 50.4 48.9 53.4 60.7 67.3 53.6 37.3 47.1 47.1

49.6 32.7 49.8 57.9 61.3 66.2 44.2 58.4 55.4 63.3 72.7 76.3 59.2 47.5 57.4 54.5

48.1 35.4 45.3 58.6 58.7 78.4 46.8 50.5 53.2 63.9 68.2 69.0 59.2 45.0 43.2 52.6

54.8 56.9 54.0 65.2 66.9 74.7 56.8 58.6 57.7 73.3 72.4 70.1 66.3 54.3 55.9 61.5

55.4

Source: Ukrainian Society Survey. Author’s calculations. Figures for uneven years are not shown for sake of space but could be made available upon request. Blank spaces mean that the corresponding item was not included in the survey in the given year up to 2005

entrepreneurship became more positive over time. The decrease of those disapproving of the development of private business is very clear. If approval rates did not increase more pronouncedly, it is due to the persistent high percentages of those who had some difficulties expressing a clear opinion on the matter. To understand the nature of these trends, we split the sample into categories according to different criteria such as education, social class, employment status, place of residence and birth cohort. It should be mentioned that given the complexity of ascribing individuals to categories of social class, which are typical in western countries (Simonchuk 2010, 2011, 2020) we utilized one item of the survey, as a proxy for social class, to which respondents replied describing the financial situation of the household. The

possible answers rank from “Poor, not enough for food” to “Enough for all necessities and savings,” as can be seen in Tables 14.1, 14.2, and 14.3. Additionally, one indicator of “locus control” is also used. This item classifies respondents depending on whether they believe life depends more on themselves or more on external conditions. For the sake of simplicity, we present the results after combining the two groups replying, “completely approve” and “approve more than disapprove” to the question about the development of private business. Similarly, we also combined those who replied “yes” and “probably yes” to the question about starting one’s own business. According to a micro-institutional theoretical perspective, there should be significant differences between groups of individuals,

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Table 14.2 Respondents that would like to start their own business (%) Social groups Primary education Secondary Vocational University Employed in public sector In private sector In both sectors Not employed Life depends more on myself The same on me and on external conditions More on external conditions Poor (not enough for food) Enough for food only Enough for meagre living Enough for all necessities Enough for savings Lives in a village Town up to 250,000 City 250,000 to 500,000 City over 500,000 Employer Self-employed Employee Unemployed Hard to tell Total

2004 22.6 51.4 50.7 56.0 43.5 62.9 34.5 29.8 53.8 50.1 30.7 22.6 34.7 43.4 62.7 68.1 36.3 42.5 44.9 45.3 78.6 74.3 48.6 29.1 34.3 41.4

2006 25.0 51.6 49.3 55.2 44.3 68.5 47.6 33.3 57.3 50.5 37.7 39.5 37.7 48.6 51.9 67.1 40.1 46.3 47.5 51.8 80.6 74.1 53.8 33.2 41.3 45.6

2008 24.1 46.4 51.0 56.7 43.8 63.4 62.0 33.2 58.1 50.7 37.3 27.9 34.4 47.3 60.4 68.8 38.5 47.9 56.6 45.9 85.3 84.0 54.6 39.0 57.4 45.9

2010 28.5 54.6 55.0 63.5 48.2 65.7 65.0 38.7 61.5 48.5 44.0 37.8 41.1 52.0 60.1 72.7 38.4 53.8 58.9 51.4 63.6 82.4 51.2 35.9 38.3 49.3

2012 28.5 48.9 48.1 57.8 41.8 60.7 52.3 35.6 56.7 49.5 38.3 36.6 38.1 50.4 52.7 58.8 39.6 47.2 43.6 53.5 65.5 74.8 58.3 36.9 50.0 45.7

2014 37.5 47.0 50.8 57.8 45.1 68.0 78.6 36.9 56.9 55.3 44.0 51.4 44.2 51.0 57.5 68.4 48.1 50.1 43.5 57.5 62.5 62.5 47.4 32.7 51.6 50.6

Source: Ukrainian Society Survey. Author’s calculations. Figures for uneven years are not shown for sake of space but could be made available upon request and only for 2005

resulting from their different personal experiences. Favorable attitudes towards institutions, which are characteristic of the new socio-economic context of free markets are expected to be stronger, more deeply rooted among social groups that have benefitted the most from the transformation of the Ukrainian economy. The data from the Ukrainian Social Survey confirm all the expectations derived from the micro-institutional approach. Those with higher education, higher financial status and living in more urbanized areas were more inclined to approve private business than those with lower education, fewer financial resources and those living in rural areas. Additionally, those employed in the private sector showed more positive attitudes towards the development of private business than those employed in the public sector

or not employed. As expected, a higher degree of locus control is also associated with higher support to private business. Data shown in Table 14.2, concerning willingness to start a business reveals exactly the same patterns. It is well to note that while positive attitudes towards private entrepreneurship increased remarkably amongst those social groups which were initially more reluctant towards it, these positive attitudes stagnated or even decreased amongst those groups initially more in favor of private entrepreneurship. Concerning the former group, such results may be interpreted as evidence that individual socialization experiences, as proposed by micro-cultural theories, are also playing a role in the reshaping of attitudes and beliefs of the Ukrainian society, making younger generations increasingly more favorable towards private entrepreneurship regardless of their

14

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Table 14.3 Respondents declaring to be in favor of a return to planned economy (%) Social groups Primary education Secondary Vocational University In public sector In private sector In both sectors Not employed Life depends more on myself The same on me and on external conditions More on external conditions Poor (not enough for food) Enough for food only Enough for meagre living Enough for all necessities Enough for savings Village Town up to 250,000 City 250,000 to 500,000 City over 500,000 Employer Self-employed Employee Unemployed Hard to tell Total

2002 40.2 25.2 25.5 16.0 26.8 16.9 16.3 37.2 26.3 21.8 34.5 45.2 32.1 19.6 22.5 17.1 30.1 27.3 31.7 27.8 3.8 29.2 22.9

29.4

2004 40.8 30.3 23.9 19.2 29.2 21.5 27.6 38.6 27.4 21.9 39.6 57.2 34.7 25.7 24.8 22.9 36.6 28.9 34.0 26.3 14.3 16.8 26.0 39.0 41.4 31.8

2006 36.3 31.3 32.2 21.6 27.9 20.0 30.5 37.0 24.7 22.4 37.3 41.8 38.8 24.3 24.0 10.3 31.1 30.8 29.6 27.8 23.3 21.5 23.6 37.4 33.3 30.1

2008 38.4 34.1 27.1 22.5 26.6 23.9 12.2 35.7 28.8 22.2 33.8 38.2 39.9 22.8 23.6 20.8 31.9 29.2 27.0 26.9

29.1

2010 36.6 31.3 33.6 22.0 31.9 25.3 20.5 36.4 25.7 28.9 36.7 37.8 37.6 27.9 29.7 19.7 34.6 30.5 29.1 31.9 12.1 25.5 28.4 36.6 25.9 31.9

2012 43.9 33.0 34.2 22.1 35.8 26.8 18.2 39.3 29.3 31.9 37.3 53.0 37.8 29.7 28.6 30.8 37.0 35.2 31.0 30.0 18.2 26.7 29.2 39.7 34.8 34.0

2014 28.8 29.5 27.7 21.2 27.9 19.8 22.0 31.7 27.6 19.0 30.9 31.1 28.0 25.7 27.0 17.7 27.4 28.1 28.0 22.1 24.1 26.2 21.5 31.7 33.3 26.6

2016 20.7 29.7 28.2 22.0

21.8 21.3 30.1 36.6 28.8 21.8 23.4 10.2 33.5 24.0 29.2 26.1 18.8 21.3 21.9 31.1 19.4 25.7

Source: Ukrainian Society Survey. Author’s calculations. Figures for uneven years are not but could be made available upon request. Blank spaces for 2003 and 2005 and when the item was not included in the survey the given year

position in the society. Concerning the latter group, this could be due to a ceiling effect or to disenchantment with the slow pace at which reforms were implemented and economic growth below expectations.

3.1.1 The Generational Gap When doing research in former socialistic countries, one must take into consideration the generational divide that differentiates those cohorts socialized under communism from those who did not experience it during their early adulthood. Indeed, attitudes of respondents of different birth cohorts, shown in Figs. 14.7 and 14.8, indicate that there was an important generational gap, as one would expect from a micro-cultural perspective. The younger generations showed significantly higher levels of acceptance and support

towards private entrepreneurship. It can also be observed that initial levels of support for private entrepreneurship from the different cohorts did not vary much over time. This puzzling finding constitutes a challenge for the interpretation of results already presented. If attitudes towards private entrepreneurship remained rather constant for all cohorts, what could be the reason for the changes observed in Figs. 14.6 and 14.7 and Tables 14.1 and 14.2? One plausible explanation to reconcile both findings would stem from assuming that changes in attitude amongst certain social groups may have been driven to a great extent by generational replacement. Changes in the Ukrainian society could be viewed, therefore, as a function of changes in the composition of the population, rather than a function of how people changed their attitudes over time. The decreasing

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Respondents in favor of developing private business by birth cohort (%) 100% 80% 60% 40% 20% 0% 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2008 2010 2012 2014 1900-1945

1946-1959

1960-1969

1970-1979

1980-1989

1990-2000

Fig. 14.7 Evolution of favorable attitudes towards private business by birth cohort. Source: Ukrainian Society Survey. Author’s Calculations

Respondents who would like to start their own business by birth cohort (%) 100% 80% 60% 40% 20% 0% 2004

2005

2006

2008

2010

2012

1900-1945

1946-1959

1960-1969

1970-1979

1980-1989

1990-2000

2014

Fig. 14.8 Evolution of willingness to start a business by birth cohort. Source: Ukrainian Society Survey. Author’s Calculations

14

Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights. . .

number of individuals who belong to older cohorts (the group more hostile to the development of private business), combined with the corresponding increase in the number of individuals belonging to the youngest generations (those more in favor of private business), could explain not only a significant part of the increase in the part of the population that favored private business, but also the relatively slow pace at which such change is occurring. It also allows for one to assess the apparent irreversibility of such a trend. Trends observed for categories of people who are on average less inclined to support private entrepreneurship could be explained partly by generational replacement or by the process of adjusting to institutional changes as well. In fact, the process of adjusting to institutional change could be reinforced by generational replacement as younger cohorts of adult respondents had already been socialized under the new institutional context. The generational replacement mechanism was coherent with the data showing that positive attitudes towards entrepreneurship grew among the social groups which were initially less favorable towards private entrepreneurship. Convergence was observed around the relatively high levels of acceptance shown by the social groups that were initially more favorable to this institution. However, stagnation and slight decreases of favorable attitudes towards private entrepreneurship observed amongst the higher educated, for instance, could not be explained. Results from plotting birth cohort versus variables reflecting attitudes towards private entrepreneurship showed differences that were more consistent with the micro-cultural approaches than with the macro-cultural theories. Younger generations, socialized under the new institutional arrangements, displayed significant differences compared to older cohorts that remained constant over time. This was despite the fact that they shared the same national cultural background and lived under the same historical context of socio-economic transformation. Moreover, generational divide seemed to decrease amongst the three youngest generations while remaining salient compared to the oldest ones.

3.2

215

Support to Socialism

The Ukrainian Society Survey between 2002 and 2017 included the question, “What do you think is the government’s role in regulating the economy?” It allows people to answer, amongst other options, that “the return to planned economy with complete government control is a necessity”. We interpret this to be a strong indicator of support of the former socio-economic system. The results from the data analysis shown in Fig. 14.9 revealed that a quite steady 25–30% of respondents chose this option and there was little variation observed over time. Also, almost half of the population thought that combination would work best, and the government should have a role in market practices. This also showed acceptance of both models by the Ukrainian population. Differences between social groups on their aggregate support to a potential return to a system of planned economy seemed to decrease over time between the different social categories. However, convergence did not occur around the lower initial values shown by social groups which were less inclined to support central planned economy. Those included the more highly educated and those employed in the private sector, with higher incomes and living in more urbanized areas. In fact, support of a return to a planned economy increased amongst those initially less favorable to it and decreased amongst those initially more in favor of it. Thus, differences between groups on this matter decreased over the years converging to intermediate values. These apparently puzzling results, in principle inconsistent with the trend towards higher acceptance of private entrepreneurship, which was described above, can be explained by considering that there is a decreasing proportion of individuals answering, “difficult to say”. Thus, both options, “return to planned economy” and “government role should be minimized” or “government should combine control and market practices” grew at the expenses of the latter. What is more complicated to explain is that the growth of

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Attitudes towards adequate role of government in regulating the economy 100% 80% 60% 40% 20% 0% 2002

2003

2004

2005

2006

2008

2010

2012

2014

2016

2017

Difficult to say A return to planned economy with complete government control is a necessity Government control should be combined with market practices The government’s role must be minimized – the market regulates everything Fig. 14.9 What do you think is the government’s role in regulating the economy? Source: Ukrainian Society Survey. Author’s Calculations

partisans of a planned economy occurred amongst those social groups which were more favorable to the development of private business. In contrast, support for a return to a planned economy decreased sharply amongst all social groups which were initially more favorable to this option: the unemployed, more poorly educated and with lower financial status. Combining these results with those from previous tables, one might infer that two processes were underway. On the one hand, privileged groups were experiencing some disenchantment with the pace at which economic improvement was developing in Ukraine, thus, shattering their expectations and causing some to lean towards support of a strong government. On the other hand, socialization with new values and beliefs, characteristics of the new institutional arrangements, were affecting the opinion of those less privileged and, in principle, more nostalgic of the former political regime. In other words, timid improvements of the standard of living were perceived with less disenchantment amongst the less privileged than amongst those

with higher expectations, who had higher educational degrees.

3.2.1 The Generational Divide Plotting answers to this item by birth cohort, we observe the importance of the generational divide in Fig. 14.10. As expected, (see also Brik and Shestakovskyi 2020) older generations, socialized under the Soviet regime were more inclined to support the return to planned economy than the younger ones were. The evolution over time reflects trends towards convergence until 2014. Salient ups and downs can be partly explained by sociopolitical events. Events like the Orange Revolution of 2004 conceded convergence towards lower acceptance to planned economy. The return of pro-Russian candidate, Viktor Yanukovich, to power in 2010 provoked increasing polarization between cohorts. Events which occurred during 2014 (Euromaidan) again triggered a convergence towards decreasing support for a planned economy, but after two years differences between the cohorts widened again.

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217

Respondents who think a return to planned economy is a necessity by birth cohort (%) 100% 80% 60% 40% 20% 0% 2002

2003

2004

2005

2006

2008

2010

2012

2014

1900-1945

1946-1959

1960-1969

1970-1979

1980-1989

1990-2000

2016

2017

Fig. 14.10 Evolution of support to a planned economy by birth cohort. Source: Ukrainian Society Survey. Author’s Calculations

4

Concluding Remarks

The data analyzed can hardly be used as evidence in support of macro-cultural theories because there are significant differences within Ukrainian society related to attitudes towards planned economy and private entrepreneurship. Despite common cultural background, significant differences are observed between various social groups in their level of support towards the development of private business, or the return to a planned economy. Concerning the validity of the macroinstitutional approaches, salient and persistent differences between social groups in their attitudes towards private entrepreneurship and planned economy do not correspond with the observed, almost unanimous, low trust in political institutions or the widespread negative evaluation of aggregate government performance (VeiraRamos and Golovakha 2020). According to the macro-institutional approach, only improved institutional performance can override low trust inherited from past deceptive experiences and socialization. From this perspective one could

argue that the lack of improvement of governance performance with democratic institutions explained the slow decrease of negative attitudes towards private entrepreneurship and the persistent positive attitudes towards a return to a planned economy, particularly amongst the older cohorts. Differences observed between social groups based on birth cohort, educational attainment, financial status, employment situation, place of residence or locus control are better explained by micro-cultural and micro-institutional theories. From a micro-cultural approach, the differences between generations in their attitudes towards private entrepreneurship and planned economy can be attributed to different socialization processes that individuals went through in their early lives. The persistence of such generational divides can be seen as solid evidence in support of this perspective, particularly when changes towards higher acceptance of private entrepreneurship and decreased support for a return to planned economy were observed amongst social groups which initially displayed the most negative attitudes to the former and the most

218

positive ones to the latter. Change caused by generational replacement is coherent with this approach, though not sufficient to explain all the observed variations. The micro-institutional perspective would argue that an increased tendency towards capitalism is based on the individual’s personal experiences. A growing number of individuals who, over the past decades, experienced the benefits of the market economy more intensely, though timid, would be the source of changes. Differences observed between social groups are entirely consistent with this approach. However, explaining the evolution of the attitudes of different groups over time requires complementary insight, as mentioned above, provided by the micro-cultural perspective. The Ukrainian society has been undergoing great transformations triggered by timid improvements in the standard of living, generational replacement, and changes in the sociodemographic composition of its population. Social groups which are more in favor of private entrepreneurship and more hostile to return to planned economy are growing. Such mechanism of social change may cause these transformations to not be very visible but, at the same time, makes them irreversible. Ambivalence and division about which path to undertake transforms into intense political competition, which in turn, results in frequent changes of government. This path may not be the fastest towards a complete transformation of the Ukrainian society, but perhaps it allows different layers of the population to participate in the process and not feel excluded from political life. This has certainly contributed to reinforce the sentiment of national unity over the decades (Veira-Ramos and Liubyva 2020), despite the numerous episodes of political turmoil.

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Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights. . .

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Simonchuk, E. (2011). Dynamika Sotsial’no-klasovoyi Struktury u Postradyans’kiy Ukrayini [Dynamics of social-class Structure in Post-Soviet Ukraine]. Ukrayins’ke Suspil’stvo. Dvadtsyat’ Rokiv Nezalezhnosti. Sotsiologichnyy Monitoring, 68–83. Simonchuk, E. (2020). The dynamics of class structure in post-Soviet Ukraine. In A. Veira-Ramos, T. Liubyva, & E. Golovakha (Eds.), Ukraine in transformation (pp. 55–90). Cham: Palgrave Macmillan. Veira-Ramos, A., & Golovakha, E. (2020). Empirical evidence of persistent institutional duality in Ukraine. In A. Veira-Ramos, T. Liubyva, & E. Golovakha (Eds.), Ukraine in transformation (pp. 19–34). Cham: Palgrave Macmillan. Veira-Ramos, A., & Liubyva, T. (2020). Ukrainian identities in transformation. In A. Veira-Ramos, T. Liubyva, & E. Golovakha (Eds.), Ukraine in transformation (pp. 203–228). Cham: Palgrave Macmillan.

Alberto Veira-Ramos is assistant professor at the Carlos III University of Madrid, Spain. Research topics: Demography of the labor market in European societies, the occupational distribution of immigrant population in Spain, social changes in Ukraine. Recent publications: Veira-Ramos, Alberto, Tetiana Liubyva, and Evgenii Golovakha, eds. 2020. Ukraine in Transformation: From Soviet Republic to European Society. Cham: Palgrave Macmillan. Fedakova, Denisa, and Alberto Veira-Ramos. 2019. Job Security across Europe: Predictors of Subjective Job Security in Northern, Southern, and Central European Countries. Central European Societies on the Map of Europe 5/1: 100–17. Schmelzer, Paul, and Alberto Veira-Ramos. 2018. Outcomes of Unemployment Episodes during early Career for Mismatched Workers in the United Kingdom and Germany and the Mediating Effects of Education and Institutions. Research in Social Stratification and Mobility 55: 99–108.

Internet References

Tetiana Liubyva works at the Institute of Sociology of National Academy of Sciences of Ukraine, Ukraine. Research topics: Impact planning and assessment of social projects, social changes in Ukraine, media literacy. Recent publications: Veira-Ramos, Alberto, Tetiana Liubyva, and Evgenii Golovakha, eds. 2020. Ukraine in Transformation: From Soviet Republic to European Society. Cham: Palgrave Macmillan. Murrock, Erin, Joy Amulya, Mehri Druckman, and Tetiana Liubyva. 2018. Winning the War on State-Sponsored Propaganda: Results from an Impact Study of a Ukrainian News Media and Information Literacy Program. Journal of Media Literacy Education 10/2: 53–85.

USTR (Office of the United States Trade Representative). (2019). Special 301 report. April 2019. https://ustr. gov/sites/default/files/2019_Special_301_Report.pdf [2020.01.01]. Hart, K. (2012). The informalization of the world economy. Keynote lecture for the 24th conference of the Societa’ Italiana di Economia Pubblica, Pavia, 24–25. September 2012. http://thememorybank.co.uk/2012/ 10/17/the-informalization-of-the-world-economy/ [2020.01.02].

Alternative Food Networks and the Socialization of Food

15

Gilles Allaire

1

Introduction

Since the 1990s, the developing global economy has undergone important changes in market structures and governance regimes, which entail the ways of competition and coordination among economic actors, businesses, professions, social movements, the states, international agencies, and local governments. Trade liberalization and the decline of institutional prices in the agro-food sectors, resulting from national agricultural policy reforms, were driving forces for a change in the then prevailing competition regimes in major value chains and regional economies. Contractual regulation by voluntary standards partly substituted state regulations. One important feature of this change was that quality mattered as source of competition within firms, market segments, and regions, which implies contentious institutional rearrangements. Quality can be referred to by using two apparently opposite conceptualizations. One is the emerging of reflexive consumers, and even proactive consumers in contested markets, (e.g., tobacco, genetics, advertising), or advocating alternative practices. The other conceptualization is the emergence of informed consumers, not necessarily reflexive, which allows market efficiency according to the neoliberal rhetoric, that sees in the free market an G. Allaire (*) Institut National de la Recherche Agronomique, Toulose, France

accomplished form of public governance (by the public). The representation of citizens, as informed consumers, assumes that these citizens are dependent on the market for their sustenance and personal services. The principal features of these changes encompass: (i) the internationalization of food provision systems; (ii) a quality turn and services turn in production and markets; (iii) an appropriation or privatization of public food production resources, both upstream with the patenting of genes, and downstream with the design of intangible qualities related to modes of production, circulation, or delivery (Allaire 2004, 2013); (iv) the multiplication of market quality standards and of standard setting organizations (Allaire 2010); and, finally, (v) a de-professionalization of agrofood chains, which accompany upscaling of markets. This evolution allowed for affirming various policies in developed and emergent countries, as well as developing multi-actor initiatives, both at the international and local levels. Alternative Food Networks (AFNs), as a conceptual framework, came into the field to distinguish food networks connecting territories, products, and people as identities, which claimed to be alternatives to conventional food provisioning systems or alternatives to dominant food supply chains. The conceptual boundaries of alternativeness and localness are vague and controversial. Since the 1990s, a growing body of research directed towards these so-called

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9_15

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alternatives has developed. While local food networks and specific quality products had been cast aside as remnants or marginal phenomena in the shadow of food industrialization, they were seen proliferating alongside the liberalization of agricultural policies. However, those are not the same as the previous family and community networks. They also involve different social experiences and jurisdictional contexts. Today, even farmers’ markets and farm direct sales are instituted and regulated. The concept of AFNs covers a wide variety of phenomena related to product qualification and market identities: organic, fair trade, geographical indications, and regional, local, quality, artisanal, natural, ethnic, and premium specialties, even today urban agriculture, and types of market organization, from transnational standards (organic, fair trade, and specific corporate quality schemes) to various forms of short food supply chains. Several collective books, special journal issues, and often cited papers refer to this heterogeneous variety. AFNs are presented as responses to the crises of conventional, intensive, and productivist agriculture, and also as a response to a growing social demand, supported by popular media, for a wider variety of distinctive food, as well as a demand for health security. They claim to reintroduce ethical, human values into the world of food, moving against its industrialization. In the terms of Campbell (2009), food from somewhere contends against food from nowhere. Nevertheless, several authors discussed the claims of AFNs and questioned the nature of alternativeness. An obvious divergence exists between the popularity of AFNs which benefit from large media coverage and their weight in the global food economy, and their social and ecological impacts. Krausmann and Langthaler (2019) noted recently, that in western industrialized countries, the rise of the food from somewhere segment and the increasing demand for organic produce (organic farmland has expanded to roughly 4% currently). They concluded a study on agriculture and food trade in a socio-ecological perspective by stating that “a fundamental shift

G. Allaire

towards a more sustainable agriculture, however, cannot be observed” (Krausmann and Langthaler 2019, 93). The understanding of these phenomena stimulates one to rethink the functioning of markets and how market hegemony develops. Alternatives are not outside the market economy. On the contrary, they bring new goods (ethical and care values) into the relentless movement of commoditization of all the resources for human life, and at the same time they participate in the reappraisal of these values by creating new social relations. A restricted focus on alternative food hides the global food economy and politics. Browsing the literature on AFNs, we first will examine conceptual dynamics and how the alternative initiatives are integrated in the theories of transformation of food systems or regimes. After that, we will consider political economy issues regarding the concept of food regime, the debate around the quality turn and the conventionalization of alternatives, and the nested markets theory. Finally, we will propose a conceptual framework for addressing markets as control projects, quality as social order, and regimes of competition.

2

How to Position Alternatives in Social Change

This section explains the contrasts in the development of AFNs, which can be related to two historical processes. On one hand, there is a social demand relating to the rising of revenues, level of education, and individualization of social behavior; on the other hand, the demand or quest for the diversity of experiences, and mobility. We see a claim for sovereignty, generally interpreted as moral or ethical behaviors, in these quests. For food markets, two decisive movements have occurred since the 1970s: the supermarket revolution and consumer movements (see also Koos in this handbook). These prompted the development of mass food production and markets. Downstream actors gradually take over from upstream actors, in directing innovation. In the context of overproduction, a service logic

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rapidly developed including ready-made foods, the catering industry, nutrition advisors, and all the services regarding standard setting and information technologies. Since the 1990s this marketing logic along with the social transformation of modes of life contributed to reshape food socialization, and to the emergence of AFNs. We will examine theoretical approaches addressing this emergence.

2.1

Food Regimes

Harriet Friedmann and Philip McMichael introduced Food Regimes (FR) to “explore the role of agriculture in the development of the capitalist world economy, and in the trajectory of the state system” (1989, 93). They proposed this concept to “link international relations of food production and consumption to forms of accumulation broadly distinguishing periods of capitalist transformations since 1870” (ibid., 95). The contrast between extensive and intensive capitalist accumulation distinguishes the first two food regimes described. They are a British centered food regime, ranging from 1870–1929, and a US dominated regime from 1947–73. This approach was developed in numerous studies published in journals such as Sociologia Ruralis and Journal of Peasant Studies. Several authors announced the emergence of a third food regime since the 1990s, more often referred to as corporate (McMichael 2009), but also as neoliberal (Burch and Lawrence 2009) or corporate-environmental (Friedmann 2005). Free markets and competition are seen as the organizing principles of this third food regime, in contrast to the previous two. The principle for the first would have been empire, and for the second the State. The result would be the creation of a truly globalized agriculture, seen as a transnational space, integrated by commodities markets under the power of supply chain managers. According to McMichael “In contradistinction to previous food regimes constructed by hegemonic British and US states, the food regime under neoliberalism institutionalizes a hegemonic relation whereby

223 states serve capital. This, to me, is the distinctive organizing principle by which corporate rights have been elevated over the sovereign rights of states and their citizens—the World Trade Organization (WTO) rules (among other ongoing trade agreements) made this clear” (McMichael 2016, 649).

This move is particularly illustrated by agricultural research, where agrochemical and seed companies now control a large part of the activities, even in public institutions. They do this partly by the development of non-state or hybrid standard setting organizations, which reflect compromises around quality conventions (Daviron and Allaire 2018). Whether or not such a regime was currently in place, was an issue of debate (McMichael 2009). From Friedmann’s perspective, “we have not yet seen the full-scale (hegemonic) establishment of a [new] food regime” (2005, 231). She suggests that a corporate-environmental food regime “is emerging as part of a larger restructuring of capitalism” and in order to understand the present transformation, she proposes shifting “the focus of analysis of past food regimes toward periods of restructuring instead of periods of stability” (ibid., 231). She argues that “regimes appear less as static structures and more as provisional compromises among some of the contending social actors, who manage to create a new interpretive frame in common. . . . Times of contention offer real choices of direction. More than one compromise is always possible. Social movements play a key role, both in unfolding crisis and in emerging relations of wealth and power. The emblem of quality standards, which is presently reconfiguring relations among social movements, transnational corporate food supply chains, governments and international organizations, appears to be the basis for new and contending frames, and thus for one of several possible new regimes” (ibid., 236).

In light of this, we can consider social reactions to stalemates and to the damages of the Fordist agricultural model, including a search for energy efficiency, change in the geography of food, and transformations of the institutional settings of markets.

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2.2

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Quality Turn and Conventionalization of Emerging Alternatives

What is known in the literature as the quality turn appears to be one aspect of the emergence of a third FR. In numerous studies and in diverse manners this turn was related to the rise of the service economy; the transformation of consumers; the change in trade circuits; reformed food policies; and new technologies for food processing and provision. The shift towards service economy was not the point which was most studied in the context of the quality turn. This shift has included the development of new intermediary industries that has gained a strategic importance in food channelling and has included a new type of governance regime. Knowledge services have included qualification procedures (audits, patents pertaining to design and business models). In our view, the quality turn is not limited to the emergence of AFNs, even if we take these alternative networks in the broadest sense, it includes quality assurance schemes under corporate control. This turn relates to all current forms of institutional restructuring of markets that mobilize a multitude of public and private standards (in B2B relations), or voluntary standards, that inform the consumer (Reardon et al. 2001; Fulponi 2006). Under pressure from the retail sector, which aims at covering itself vis-à-vis consumers, third-party certification (TPC) has been introduced in many areas of retail procurement contracts. In Europe, for example, an inventory compiled for the European Commission in 2010 lists more than 440 different systems, most of which were established in the previous decade, for a wide range of marketing public standards have been developed since the creation of the European Single Market (1992). Hatanaka et al. (2005, 354) argue that TPC “reflects a broader shift from public to private governance” and the growing power of supermarkets to regulate the global agro-food system. These authors state that TPC “also offers opportunities to create alternative practices” (ibid.).

Product designs are debated and negotiated among various types of actors, private or governmental, scientific experts or NGO representatives, being specialized or not. Due to the predominance of supermarkets and the increasing role of the media in the circulation of quality representations, Allaire and Daviron (2006) proposed calling this new configuration the market media regime. International multi-party forums produce standards for sustainable development, while social movements, which have acquired an international base, promote a moral economy. While in a first period, from the mid-1990s to the beginning of the 2000s, alternative food systems were put on the research agenda for their distinction from conventional systems, thereafter, this simple distinction was called in question. Proponents of AFNs claim (i) that the production and consumption of food through AFNs are closely tied together spatially, economically, and socially; (ii) that AFNs redistribute value through the network against the logic of commodity markets; (iii) that they substitute trust against the outbreak of food scare and the loss of confidence in industrial food; (iv) and that they create new forms of political association and food governance. Even so, AFNs rapidly come under critical scrutiny. More than simply a springboard for the construction of more equitable and sustainable food systems, AFNs were considered as social re-stratification of consumption (Verhaegen 2012). According to Forssell and Lankoski, the literature often addresses a specific type of AFN or a specific sustainability-related issue, “it is hard to form a clear overall picture of the sustainability promise of AFNs” (2015, 63). Nevertheless, the authors argue that indirect impacts of learning and participation in reflexive networks may be highly significant for sustainability. Yet the reference to social movements and the reflexive consumer is not enough to isolate true AFNs, since social movements interfere with capitalist firm strategies. After the pioneering work of Julie Guthman (see Guthman 2004), who analyzed agribusiness involvement in the Californian organic sector, the so-called conventionalization thesis was

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documented regarding organic food production and marketing, fair trade (Staricco 2016), and other alternatives. This thesis denies so-called AFNs the qualification as alternatives but, it was challenged as the only interpretation of food economy dynamics. What is at stake here, is the signification of the concept of alternativeness. It is worth persisting in qualifying AFNs as alternatives if we simply define alternative as a promise of difference (Le Velly 2017). Moreover, in our view, the controversy on the conditions of the promise achievement is part of the identities of these alternatives. In Western Europe, the organic movement emerged in the 1920s, as a radical criticism of industrial society and science. As soon as the enlargement of this movement began (in the 1970s), there was a fight among the producers between an economic, and a moral and ecological points of view. However, the majority, if not all, was seeking recognition and when the EU set a specific regulation (1991) the various components of the organic movement participated in building and implementing the regulation in collaboration with scientific experts. A consensus established itself on a market project, specified by a public label and certification procedures. The development of accredited certification bodies, on a large scale, tended towards divesting the organic movement of the property of conception of organic practices, but not completely. Unity of the movement is maintained by the existence of an international, non-governmental federation (IFOAM) and the setup of additional labels by local networks which seek to by-pass the conventionalization processes (Allaire 2016; Poméon et al. 2018). While conventionalization is denounced inside the movement as a threat to the organic products’ specific identity and of a collapse of the corresponding remunerative market, the market is still there, expanding. In one sense this existential threat is part of the organic movement identity. Conventionalization reflects a differentiation in the domain of organic food supply chains, long or short, and of marketplaces (producer market vs supermarkets). Behind the material and logistic differentiation of supply chains, one finds the

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divergence of the perceived ways of reaching the objective of the organic movement, and also of reaching effective compromises within the component of the movement.1 Geographical Indications (GI) which have existed since the nineteenth century, have been a marketing label, used in the wine and spirit sectors by large firms since the beginning. The adoption of the WTO TRIPS Agreement2 and its provisions for GIs has extended the range of countries implementing the GI protection, in particular in the South. This extension of GI-related initiatives introduced new concerns for the implementation of GI rights. It concerned the quality turn in two manners. In codes of practice quality specifications, where sustainability concerns took a rising place, were added to the criterion of the area of production. The GI label was also extended to products other than wine, especially to cheese and meat. Rural policies in Europe (and then in the South by FAO projects) promoted GI as a way of local development. Generally, such a standardization procedure assumes market upscaling. While some examples of success can be exhibited, there were failures when localized systems were unable to support production upscaling. Thus, we can say nowadays, that this policy was an attempt to conventionalize localized food systems, and that parts of these systems found ways to survive outside this label. In the case of local food, there is no specific social movement promoting the idea. However, today this term is abundantly present in media magazines, private strategies, and policies. The concept of local food includes both communitybased box schemes and local supermarkets.

According to IFOAM (2007): “The development and professionalization of the organic sector, accompanied by increased international trade has called for third party certification to become the norm in most developed organic markets; nevertheless, Participatory Guaranty Systems have never stopped to exist and serve organic producers and consumers eager to maintain local economies and direct, transparent relationships.” 2 The TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement is Annex 1C of the Agreement establishing the World Trade Organization, signed in Marrakesh, Morocco on 15 April 1994. 1

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Conventionalization arises from the upscaling of alternative markets, and the recognition of AFNs in rural policies. Conventionalization thesis questions the frontier between AFNs and wider market infrastructures, as does the theory of nested markets.

2.3

Nested Markets

European farmers, among others, have increasingly responded to the squeeze on agricultural prices and to their instability, due to liberalization by the development of multifunctional farms producing a range of new products and services such as agro-tourism, landscape management (environmental services), and on-farm processed products. Multifunctional farms and alternative modes of production are associated with the idea of resistance assimilated with peasant autonomy. European researchers introduced AFNs and their promises, in the debates about the design of rural development policies. This took place in the context of the reform of the Common Agricultural Policy (CAP). Multifunctionality was debated as competing rationale and objective to redirect rural development strategies and policies. Finally, the rural development pillar of the CAP (in 2000) was justified by the provision of public goods from private land, essentially environmental good practices, and notably the conversion to organic farming was subsidized as an environmental service. Van der Ploeg et al. (2012) recognized common features in rural policies, in different contexts (Europe, Brazil, China) and related them to the principle of sustaining newly emerging nested markets. Previous policies were. “focused on creating the conditions (for example, by providing credit, seeds, and infrastructure) under which farmers could increase production and the surpluses be effectively delivered to the urban economy . . . Current rural development policies are distinctively different. They have emerged in countries that are characterized by abundantly productive and rapidly growing agricultural sectors. They do not only aim to strengthen agricultural growth. Instead they aim at redefining

the role of agriculture in society” (van der Ploeg et al. 2012, 136–37).

It was not always acknowledged that the production of new services needs the construction of new markets. As these authors highlighted, the diversification coming with new products and services is accompanied by the creation of new markets, which are governed in distinctive ways alongside or within the general agricultural and food markets. Significantly different cases of nested markets are studied in the book edited by Hebinck et al. (2015): (1) institutional or public markets, (e.g., public program in Brazil against poverty); (2) local food, using very different situations: in one case local producers sell at a price below supermarkets (the dominant system presenting important transaction costs), in the other the short chains do not necessarily offer the consumer a price advantage, but rather a service; (3) specific quality food, including GIs, organic, and fair trade. According to van der Ploeg “the mainstream markets and these emerging nested markets compose a highly heterogeneous whole that is currently characterized by several, often contrasting, trends and trajectories” (2015, 36). He proposes a conceptual framework for understanding how these new markets are nested within the wider markets. The argument refers to both institutional and economic integration of the food markets, (the latter via the price system). Nested market prices are set according to the prices of commodities; however, the pricing procedure is independent. This view is different both from a dualistic approach of economic development as well as from the thesis of the mainstreaming or absorption of alternatives and social critique in the dominant system. It raises the question of which competition regime allows both the dissociation and the nesting of these particular markets. Van der Ploeg also states that, “two strategic factors underlie the development and maintenance of these nested markets: the distinctiveness of the circulating products and services and the common-pool nature of the key resources that

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Alternative Food Networks and the Socialization of Food

make up the socio-material infrastructure.”3 In this concept, socio-material infrastructure means “the set of specific artefacts and rules that are used to channel flows of good and services between places and people” (van der Ploeg 2015, 24). These extraordinary markets can nest in wider markets because they bridge real economy structural holes. The imperfections of the general commodity markets are interpreted as structural holes, which are opportunities for collective action to search for a bypass. A structural hole “is identical to the absence of social relations” (van der Ploeg 2015, 28). Historically, the bridging of structural holes often results in the construction of new markets (ibid.). Private standard-setting organizations are developing as an institutionalized solution to global problems, which arise when international conventions or national regulation are absent. They also develop as a way of getting around WTO rules, thus limiting the states’ ability to enforce production requirements over the products they import. A large majority of food circulation is regional or local. Only about 15% of all the food produced in the world today crosses international borders. According to Krausmann and Langthaler, in 2010, it was only 12% of all harvested crops, but food trade was on a fast rise. “[S]ince 1961 global exports of agricultural products have increased from 0.17 Gt/yr. to 1.4 Gt/yr. in 2016, that is, at a much faster pace than production. The share of exports in harvested crops has doubled” (2019, 87). While this rise of trade does not cancel out local transactions, national markets in the WTO era were interconnected and subjected to finance as the 2008 crisis showed, and the whole remaining 85% (not crossing the borders) is still part of the world market. Van der Ploeg views the world market as “a metaphor that is used to describe global modes of governance that: (1) impose one and the same set of global regulations and parameters on transactions, wherever and whenever they take place, and that (2) simultaneously centralize the value flows through a few nodes” (2015, 27). Nevertheless, 3 Common-pool resources refers to the work of Elinor Ostrom (1990).

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the global food market is cracked as a dry landscape. While food systems, whatever their scale, are subject to an overarching set of requirements and rules, bypasses are always experienced, especially in transition periods. Bypass ways are competition avoidance strategies. They are behaviors to protect the actors from the competition on mass markets. Grouiez and Koleva (2018) analyzing the transformation of the dairy industry in the post-communist economies of Bulgaria and Russia, highlight two avoidance strategies with different time frames: (i) taking opportunist short-term advantage on a speculative market; and (ii) targeting protected market segments (nested markets), alongside the general mass market. A western European firm became a dominant actor in this industry and achieved integration of the dairy industry in the global mass market by diffusing institutional rules. The strong market power gained by international businesses left little room for local operators. However, some of the latter were able to resist this pressure. Two very different opportunities seized by local independents processors are described for creating nested markets, alongside the newly dominant mass market channeled by supermarkets. Both are connected to a local demand constituted by people rejecting western supermarkets. One channels the local production by exploiting a socialmaterial infrastructure sustained by the resilience of local institutions. The other takes advantage of the low prices of the international market of milk powder to produce cheap products for the poor local population. While the first way can claim bearing the social virtues of van der Ploeg’s nested market, the impacts of the second way are more controversial. This one suggests that speculative and even mafia business are also bridges over market chasms. The analysis presented by Grouiez and Koleva has a large generality. Avoidance strategies are generally searched for in order to resist conventionalization, even in the case of alternative markets, as we have seen for organic food and geographical indications. Poméon et al. (2018) show two types of avoidance strategies from organic standard regime conventionalization: by

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multiplying private (collective) labels; and by radical change of the certification system, (Participatory Guaranty Systems).

3

Markets as Social Orders and Competition Regimes

Economic sociology distinguishes two levels of market order analysis. Stable expectations formed by socialized actors constitute the building blocks of market institutions, while the notion of the order of markets refers to the institutional arrangements in which coordination problems can be solved, and markets stabilized. According to Fligstein, there are two sources of instability of market orders: (1) the tendency of firms to undercut one another’s prices, and (2) “the problem of keeping the firm together as a political coalition” (1996, 659). The term, competition regime in the current economic literature refers to international trade regulations (tariffs and other barriers), and to competition law at the national or sectoral level. In microeconomics competition regime covers the patterns of a firm’s strategic behavior (quantity and price objectives). We will consider competition regimes in a broader sense. Competition regimes are the sets of institutions which control competition within market spaces and create these spaces. They consist in representations and rules, governed at different levels of the society, which identify transaction formulas. Conventions of cooperation are not only a limit to competition, but also are necessary to socially authorize competition. They can be distinguished according to historical periods, economic areas, branches, and industries, and according to particular market domains.

3.1

develop, and (2) the market dynamics are given by political projects. “Processes within the market reflect two types of political projects; the internal firm power struggle and the power struggle across firms to control markets” (Fligstein 1996, 659). To name these struggles, Fligstein borrows the concept of control project from White (1992). Control conceptions, although related to cultural and political projects, are not external to the market economic order. Instead, prevailing conceptions of control form a market institutional regime, under given governance structures. The social material infrastructures supporting nested markets are stabilized by shared conceptions of control as they are for mass markets. Conceptions of control gather conventions of productivity regulating the struggle for the organization of productive structures, and conventions of quality, which relate to the struggle among economic actors to control product design.4 According to Fligstein, once a conception of control is dominating a specific market or polity, it is collective and thus a fallible instrumental resource. When distinguishing the two levels of power struggles, within and between firms, Fligstein had industries dominated by big firms in mind. However, depending on the type of industry, on the legal forms of entrepreneurship, and on the cooperation instruments, there are other protagonists in setting control projects in a given market. There are multiple social scenes where conceptions of control are confronted. Even in the case where a supply chain is managed by a captain company, there are numerous stakeholders and intermediaries participating in standard setting and in communication. We can also see multiple, committed actors that cross firm borders such as professional bodies, communities of practice, and various types of cultural and political alliances (social movements).

Markets as Control Projects

The market as politics metaphor developed by Fligstein combines two arguments: (1) modern state-building rests on the creation of the institutional conditions for the functioning of markets; working rules in place allow new markets to

4 Fligstein did not refer explicitly to the concept of convention. Convention theory (Thévenot 2006) is used to analyze the varieties of food markets, particularly in France. For the circulation and mobilization of convention theory in the Anglo-Saxon agrofood literature see Cheyns and Ponte (2018).

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Fligstein used “a social movement metaphor to characterize action in markets during market creation or crisis” (1996, 657). When markets emerge or transform, the action in the market setting is to promote and obtain collective adhesion on ideas, as in political struggles. Market struggles regarding conceptions of control involve social movements across value chains. Beyond chain specific technical, social, and ecological debates, (e.g., the Round tables for sustainable standards in several sectors as soya, palm oil, cocoa, forest, establishing the design of standards and communication models), the quality forums are at stake, those which are not chain specific (labor and gender issues, corporate social responsibility, or climate). Some organizations, groups, or collectives, which are parts of social movements in transition periods and which struggle to represent these movements, are integrated in governance structures as holders of collective interests during the phase of stabilization. This is the case of trade-unions, farmers’ or consumers associations, and diverse non-governmental organizations. Focusing on firm organization, Fligstein states that the actors “simultaneously use two internal principles of organization to indirectly control competition: (1) integration and (2) diversification which is often accompanied by producing multiple divisions in the organization” (ibid., 659). Diversification implies creating or entering new markets to increase the probability of firm survival; Fligstein recalls the classic Chamberlin (1933) argument on quality differentiation as a process of creating markets. We argue for an enlargement of the analysis of the interplay of these two principles to include all forms of economic organization, even in the structuring of alternative markets and food channels. The two principles of integration and diversification go together. A small or even large enterprise, a farm or a producer group are never alone to engage in diversification; facilities are needed in terms of productive resources (specific inputs, skilled workforce, and property rights), in terms of selling social-material infrastructures, and in terms of communication models (Brunori 2007), and media. These are requirements for success.

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Integration and diversification strategies are innovation processes that engage collective and public resources in the building of socio-material infrastructures. Therefore, economic actors engage, especially in transition phases, in negotiations to pool resources. Competition strategies available locally depend on local collective capacities to cooperate, as well as on the global institutional context.

3.2

Change in Competition Regime

Competition regime is defined by a combination of market institutions that delimits domains of cooperation and domains of competition in a specific market or field. Market differentiation and stabilization processes in general depend on the creation and management of two common pool resources systems: collective innovation capacity and collective reputation; this is not a prerogative of the nested markets. Dervillé and Allaire (2014), studying the impact of the deregulation of the European dairy market in mountainous areas in France, found three different regional production systems corresponding to three regional competition regimes, all characterized by a specific combination of coordination instruments. Market liberalization destabilizes strongly regional competition regimes, which depend on the generic resources provided by sectoral national public policies. In these regimes, the risk of delocalization of production is high. That is buffered by regional competition regimes, which mobilize specific coordination instruments, namely strong inter-professional governance structures of specific local production systems protected by a European label (AOP). These specific systems can be categorized as AFNs and regional competition regimes which support them as nested market immaterial infrastructures. These systems are confronted with conventionalization, which weakens the regional capacity to resist delocalization. Regional competition regimes result from the creation, pooling, and management of collective resources. These resources are essentially intangible. Regional innovation strategies, business

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models, standards, and governance structures are indeed collective working rules elaborated by market actors, which they agree to respect, in order to benefit from a stable environment. Regional competition regimes and global competition regimes are interactive; the global institutional context shapes the available regional competition strategies, and local solutions to coordination problems are dispersed, thus transforming the global institutional framework over time.

3.3

The Place of the Collectives

Two common pool resources systems are crucial for market stabilization and differentiation processes, namely governance structures and collective reputation, or rather a guaranty of a stable market position by social visibility through the media. The first one is constituted by all the collective structures which contribute to elaborate production and market solutions. What is shared is knowledge. The innovative capacity of a group depends on its capacity to collect and process information in its domain of action. The flux of the resources system is the solutions which are discovered. These include improvement of productive models, innovation supports, and collective competencies, as well as relations with local and regional authorities (Dervillé and Allaire 2014). The second is the collective reputation, concerning a group, a product, or an area, which is subjected to social dilemma. Numerous empirical studies related to Geographical Indication value chains or other types of specific value chains suggest that, in the case of market up scaling, differentiation of products, bearing collective reputation, can become unreadable and standard specifications and classification systems can lose their efficiency due to losing significance in a larger space. The limitation of innovation can be a provisory solution to maintain reputation, but a paradox enters the scene, which is the opposite of the opportunism generally seen as a cause of collective action failure. When change implies several levels of coordination, a strong

governance structure can paralyze individual initiative. This is viewed as a threat to the collective identity. If the differentiation in markets is inefficient, it is the consequence of a lack of integrative capacities and a defect in the governance structures or in their hierarchy, which are symptoms of a crisis of the dominant conception of control. What threatens market identities is the proper functioning of a standardization regime. A standard is dispersed by the process of imitation, if its use is legitimated, and if the diffusion of the standard carries some social signification or project. A written standard does not have a signification per se, but in relation to a doctrine of quality control as well as market control. The shared quality representation among market participants assimilates the specifications and the heuristic content of the standard, giving it strength, but also its fallibility. If its significance is weakened, a standard loses its efficiency and its value. The market can turn abruptly to panic as food scares demonstrate. Crises of confidence and panic are not specialties of finance, but indeed, threaten all intangible qualities. It is one of the causes of developing alternatives as bypasses.

4

Quality as an Institutional Order

Quality standards are common models and share intangible resources. While, for a specific market or for a stage of market economy, quality reflects the conceptions of the most organized and powerful forces. Quality relates to a proper institutional sphere, controlling the rules of exchange. As markets, qualities are social constructions. In one aspect quality standards spread as institutional responses to accountability issues, in competing ways. Cultural and moral dimensions of quality are highlighted by sociologists, while economists generally consider quality as an issue of information distribution among market participants. Qualification is a process of the integration of knowledge. Qualification refers to a double differentiation of goods: by ordering the good properties and by the process of naming

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Alternative Food Networks and the Socialization of Food

itself. This process depends on two rival rational myths (Allaire and Wolf 2004): (1) the reduction of qualities to a set of knowable, physical, functional, or relational properties; (2) the quality as having an essential nature or identity. In these two ways, the potentially infinite manners of seeing items are reduced to identifiers capable of being used as categories.

4.1

Alternative Qualification Paradigms

The two alternative paradigms distinguished by Allaire and Wolf (2004), which are embraced and pursued as projects by competing networks, can help to characterize alternative conceptions of control. The decomposition paradigm gives valuable representations of innovation that is founded on the collection of highly detailed data obtained through continuous automated monitoring at all stages of production and marketing. The identity paradigm corresponds to a transcendental form of knowing. We find the two paradigms at play in framing standards as well as in the struggle for the standards setting regulations. This is what Tim Lang and Michel Heasman (2004) call food wars. They distinguish between a life sciences integrated paradigm, which refers to the first myth (from GMOs to fortified food, including the precaution principle as a policy instrument introduced after the food scares of the 1990s), and an ecologically integrated paradigm, which refers to the second myth. No procedure can rely on perfectly decomposable methods or on any generality, which introduces potential organizational slack. Failure in qualification does not happen for a recognized property or a stabilized procedure, but rather for emergent concerns, especially in crisis situations. Only the progression of the crisis reveals the nature of the failure. For example, the Mad Cow crisis in Europe started with the revealing of a critical, emergent property of certain mad cows. The problem initially came from a lack of knowledge. A first solution was to isolate the source by labelling the origin of the animals. However, because a polemic developed over the causes

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and the means of transmission of the disease, that solution did not work. When tests became available, due to state action, the material organization of the market chain had to be reorganized; and finally, the whole European system of control of sanitary standards was changed due to the developments of that crisis. Market globalization enlarges the scope of the crises of quality. Contemporary research in mainstream economics for food quality signaling builds on a distinction between search, experience, and credence goods such as goods which cannot be assessed by experience. The first categories are related to the first way of classifying items by their properties, while the credence issue does not concern intrinsic properties but their causes or their effects in their entirety. These credence attributes are transcendent in qualifying a product from outside. A buyer of organic food, for example, has confidence in the certification scheme for organic products, otherwise the market for organics would not exist. However, this is not the reason why the consumer buys organics; the belief, which is the reason why organics are chosen, is related to saving the planet and through this, preserving the consumer’s own health. The credence issue is in the adhesion to such ideas and in the legitimacy of the media which transport them. In situations where experts can cheat, err, or simply fail due to lack of knowledge, reputation, or certification mechanisms are viewed as guaranty of the expertise in term of capacities of the experts to which the credence issue is translated. However, the basis of the issue of credence for a market to develop is not fundamentally in the certification of the expertise of producers or experts. It relates to the intangible part of any standard. Behind the intrinsic expertise of a professional or behind the intrinsic measurable properties of a product, the credence issue relates to the social relevance of the service it provides (for example being organically produced), it relates to a quality doctrine, the sharing of beliefs and ideas related to a conception of control.

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4.2

G. Allaire

Quality Regimes Tripartite Standard Regime and Crises

Busch (2018) distinguishes four components to the changes in the food economy: first, a new de facto internationalized standards regime; second, the extension of assembly line technologies to much of the agri-food chain; third, a New Taylorism, and fourth, the rise of Big Data, which permits all of this to become real. Every actor in the supply chain is expected to conform to a wide and ever-growing variety of legal and de facto standards. A tripartite standard regime (TSR), developed in the last few decades as specific institutions, named a triple transformation, linking standards, certifications, and accreditations (Loconto et al. 2012). This regime developed in a transversal way within different industries, but also by transnational organizations, and it concerns alternatives in the conventionalization phases. What the TSR does is establish a private global system of governance that extends far beyond that of individual firms. A new form of sector delimitation emerges corresponding to identity quality standard markets. The development of the tripartite standards regime of market regulation rests on the development of a new cultural environment, both in the sense of complementary changes in conceptions of control and in the sense of new institutional arrangements, in terms of commonpool-resources, property rights, and governance instruments. The stabilization of creeds in legitimated and shared heuristics is a key aspect of the stabilization of quality conventions. However, the heuristics which sustain standards can fail because the dynamics of markets make it impossible to come up with a permanent solution to the problems of classification of quality values that would ensure perfectly stable market nomenclatures. The evolving experiences of actors are challenging shared value orderings, as well as does the price competition, which is always challenging cooperative arrangements. While the transformation of quality heuristics can be incremental over a long period of time by

acculturation mechanisms, certain movements of opinion can provoke rapid reversing of values putting the concerned market in trouble. With any heuristic criticism, the ambivalence of market knowledge reappears, called quality crisis. While certification provides information in the sense that given properties are made explicit, it can also completely fail in this role when buyers’ concerns are substituted. Incremental changes in certification procedures generally are not sufficient to respond to a quality crisis, which interrupts the working of any standard. Food scares demonstrate that the whole multi-scaled system of governance, including professional, scientific, and administrative competencies, is challenged when quality crises occur. Certification systems compete on reliability. While the legitimacy of TPC is mainly based on its claimed independence, this independence was denied by several authors, confirming that a TPC is above all, an instrument to control competition, working in stable conceptions of control. Participatory Guaranty Systems are becoming significant regarding AFNs, but the TSR regime and TPC still concern nested markets since contended strategies permit their integration in wider markets.

4.3

Markets Regimes, Towards a Media Regime

Historical distinction can be made in considering institutional regimes of market building. Allaire and Daviron (2006) distinguished the merchant, industrial, and media market regimes. The recent transformations in the food economy can be construed as a shift away from an industrial market regime (the modern strategies and policies for food socialization), towards a media regime (neoliberal socialization). From local markets and from the merchant companies which were assuring long distance trade, the competences to qualify products have moved to professions and modern state administrations with the industrialization of agriculture and food processing. Several institutional conditions were needed for the diffusion of

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Alternative Food Networks and the Socialization of Food

industrial models as an historical form of food socialization. These conditions encompass the principle of grading for commodities traded at a distance (primarily corn), future markets, and also the adequate distribution of cultural resources to diffuse industrial production models, and to adapt the principle of grading to enlarge markets. The nationalization of agricultural markets during the second food regime, both in the sense of market growth nationwide and of the installation of national trade barriers, corresponds generally with the organization of productive sectors in which governance structures and dominant conception of control are anchored and in which professional and administrative competences are articulated. In the new media regime, these competences are distributed in hybrid networks, mingling various sorts of knowledge. This proposition to consider a new market regime converges with the idea of the construction of a tripartite standards regime. The role of media is becoming recognized. As highlighted by Phillipov, “at the intersection of food politics, media texts and everyday material practices, we are seeing media’s increasing power as a key actor in food systems debates and as a motor of food system transformation” (2019, 2). Transactions under the media regime tend to be controlled by publicization. Markets are information processing, which supposedly takes account of the various information sources, and thus is supposed to make markets efficient. Recent financial crises, developing after the 1990s, have demonstrated that financial markets are not efficient in this regard. Food scares have demonstrated that it is the same for the food markets in the media regime. Institutional economists argue that financial evaluation is the outcome of a logic of opinion and mimetic choices (Aglietta and Orléan 1982). The evaluation of qualities in the media regime is likewise a logic of opinion. Many procedures that make up new marketing devices provide publicity for the firms’ results, for the product tests, or for the characteristics and impacts of public policies, well beyond professional and specialist circles. The media regime brings a whole social

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technology of market observation to bear, which includes the circulation of the debates on public issues that goes with the proliferation and opening-up of quality forums.

5

Conclusive Considerations

While alternativeness is not a precise concept, alternative food signals more global changes in the food economy. Alternatives considered in the AFN framework encompass product identity, market channels, quality assurance responsibility, and socio-material infrastructures for food socialization. The change in the global competition regime including the quality and service turn, tripartite standard regime, and nested market develops into contentious and complementary strategies. The post-World War II compromise regarding food provisioning was based on the modernization of agriculture, involving States, firms, and farmers’ professional organizations. Reformed agricultural and food policies involve new actors, consumers, ecologists, local governments, taxpayers, NGOs, situated outside the previous professional spheres and specialized networks. Stressing global change is also to highlight failures and struggles. We did that by considering the inequalities in the distribution of the competences to control markets, the contingency of institutional changes, and the communality of competition avoidance strategies, which profit from failures in the extending mass market. Two conditions, in terms of competition regime, were shown to be necessary for the development of new markets, which may or may not claim to be alternative. The first is the formation of coalitions in order to create innovative capacities as common pool resources. Even if numerous studies have been developed to identify and analyze the common pool resources in multiple domains material and immaterial, there is a strong resistance on the part of economists and politicians to recognize that condition. The second is the role of social movements in circulating institutional innovations, in a context of crisis of democratic society.

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In the current market order, alongside dominant conceptions of how markets perform, there are necessary alternative views, and avoidance strategies. There are several ways for different new markets to emerge, differing by their protagonists, their visions of the future, and their social and ecological impacts, but integrated in transforming economies.

References Aglietta, M., & Orléan, A. (1982). La Violence de la Monnaie. Paris: Presses Universitaires de Frances. Allaire, G. (2004). Quality in economics: A cognitive perspective. In M. Harvey, A. McMeekin, & A. Warde (Eds.), The qualities of food (pp. 61–93). Manchester: Manchester University Press. Allaire, G. (2010). Applying economic sociology to understand the meaning of “quality” in food markets. Agricultural Economics, 41(1), 167–180. Allaire, G. (2013). The multidimensional definition of quality. In L. Augustin-Jean, H. Ilbert, & N. Saavedra-Rivano (Eds.), Geographical indications and international agricultural trade: The challenge for Asia (pp. 71–90). London: Palgrave. Allaire, G. (2016). Que Signifie le “Développement” de l’Agriculture Biologique? Innovations Agronomiques, 51, 1–17. Allaire, G., & Daviron, B. (2006). Régimes d’Institutionnalisation et d’Intégration des Marchés: Le Cas des Produits Agricoles et Alimentaires. SympoScience, 101–114. Allaire, G., & Wolf, S. A. (2004). Cognitive representations and institutional hybridity in agrofood systems of innovation. Science, Technology and Human Values, 29(4), 431–458. Brunori, G. (2007). Local food and alternative food networks: A communication perspective. Anthropology of Food S2. Burch, D., & Lawrence, G. (2009). Towards a third food regime: Behind the transformation. Agriculture and Human Values, 26(4), 267–279. Busch, L. (2018). The new autocracy in food and agriculture. In G. Allaire & B. Daviron (Eds.), Ecology, capitalism and the new agricultural economy: The second great transformation (pp. 85–110). London: Routledge. Campbell, H. (2009). Breaking new ground in food regime theory: Corporate environmentalism, ecological feedbacks and the “food from somewhere” regime. Agriculture and Human Values, 26(4), 309–319. Chamberlin, E. (1933). The theory of monopolistic competition. Cambridge, MA: Harvard University Press. Cheyns, E., & Ponte, S. (2018). Convention theory in anglophone agri-food studies: French legacies, circulation and new perspectives. In G. Allaire & B. Daviron

G. Allaire (Eds.), Ecology, capitalism and the new agricultural economy: The second great transformation (pp. 71–94). London: Routledge. Daviron, B., & Allaire, G. (2018). Alternative sketches of a second great transformation. In G. Allaire & B. Daviron (Eds.), Ecology, capitalism and the new agricultural economy: The second great transformation (pp. 276–290). London: Routledge. Dervillé, M., & Allaire, G. (2014). Change of competition regime and regional innovative capacities: Evidence from dairy restructuring in France. Food Policy, 49 (1), 347–360. Fligstein, N. (1996). Markets as politics: A political cultural approach to market institutions. American Sociological Review, 61(4), 656–673. Forssell, S., & Lankoski, L. (2015). The sustainability promise of alternative food networks: An examination through “alternative” characteristics. Agriculture and Human Values, 32(1), 63–75. Friedmann, H. (2005). From colonialism to green capitalism: Social movements and emergence of food regimes. New directions in the sociology of global development. Research in Rural Sociology and Development, 11, 229–267. Friedmann, H., & McMichael, P. (1989). Agriculture and the state system: The rise and decline of national agricultures, 1870 to the present. Sociologia Ruralis, 39(2), 93–117. Fulponi, L. (2006). Private voluntary standards in the food system: The perspective of major food retailers in OECD countries. Food Policy, 31(1), 1–13. Grouiez, P., & Koleva, P. (2018). Transforming the dairy sector in post-communist economies: Actors and strategies. In G. Allaire & B. Daviron (Eds.), Ecology, capitalism and the new agricultural economy: The second great transformation (pp. 243–255). London: Routledge. Guthman, J. (2004). The trouble with “organic lite” in California: A rejoinder to the “conventionalization” debate. Sociologia Ruralis, 44(3), 301–316. Hatanaka, M., Bain, C., & Busch, L. (2005). Third-party certification in the global agrifood system. Food Policy, 30(3), 354–369. Hebinck, P., Schneider, S., & van der Ploeg, J. D. (Eds.). (2015). Rural development and the construction of new markets. London: Routledge. Krausmann, F., & Langthaler, E. (2019). Food regimes and their trade links: A socio-ecological perspective. Ecological Economics, 160, 87–95. Lang, T. E., & Heasman, M. (2004). Food wars: The global battle for mouths, minds, and markets. London: Earthscan. Le Velly, R. (2017). Sociologie des Systèmes Alimentaires Alternatifs: Une Promesse de Différence. Paris: Presses des Mines. Loconto, A., Stone, J. V., & Busch, L. (2012). Tripartite standards regime. In The Wiley-Blackwell encyclopedia of globalization (pp. 2044–2051). Malden, MA: Blackwell Publishing.

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McMichael, P. (2009). A food regime genealogy. The Journal of Peasant Studies, 36(1), 139–169. McMichael, P. (2016). Commentary: Food regime for thought. The Journal of Peasant Studies, 43(3), 648–670. Ostrom, E. (1990). Governing the commons: The evolution of institutions for collective action. New York: Cambridge University Press. Phillipov, Michelle. 2019. Introduction. In Alternative food politics. From the margins to the mainstream, eds. Michelle Phillipov, and Katherine Kirkwood, 1–19. London: Routledge. van der Ploeg, J. D. (2015). Newly emerging, nested markets: A theoretical introduction. In P. Hebinck, S. Schneider, & J. D. van der Ploeg (Eds.), Rural development and the construction of new markets (pp. 16–40). London: Routledge. van der Ploeg, J. D., Jingzhong, Y., & Schneider, S. (2012). Rural development through the construction of new nested markets: Comparative perspectives from China, Brazil and the European Union. Journal of Peasant Studies, 39(1), 133–173. Poméon, T., Loconto, A., Fouilleux, E., & Lemeilleur, S. (2018). Organic farming in France: Alternative project or conventionalization? In G. Allaire & B. Daviron (Eds.), Ecology, capitalism and the new agricultural economy: The second great transformation (pp. 207–226). London: Routledge. Reardon, T., Codron, J.-M., Busch, L., Bingen, J., & Harris, C. (2001). Global change in agrifood grades and standards: Agribusiness strategic response in developing countries. The International Food and Agribusiness Management Review, 2(3–4), 421–435. Staricco, J. I. (2016). Towards a fair agro-food regime? A Regulationist reading of the fairtrade system. Revue de la régulation [Online], 20. Thévenot, L. (2006). Convention school. In J. Beckert & M. Zafirovski (Eds.), International encyclopedia of

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economic sociology (pp. 111–115). London: Routledge. Verhaegen, E. (2012). Les reseaux agroalimentaires alternatifs: transformations globales ou nouvelle segmentation du marche? In D. Van Dam (Ed.), Agroecologie: Entre pratiques et sciences sociales (pp. 265–279). Dijon, France: Educagri editions. White, H. C. (1992). Identity and control. Princeton, NJ: Princeton University Press.

Internet Resources IFOAM. (2007). Participatory guarantee systems: Shared vision, shared ideals. www.ifoam.org [05.02.2020].

Gilles Allaire is directeur de recherches honoraire, Institut National de la Recherche Agronomique, France. Research topics: Political economy, markets institutions and functioning, economy of common pool resources, analysis, and assessment of rural and environmental policies. Recent publications: Allaire, Gilles, and Benoit Daviron, eds. 2018. Ecology, Capitalism, and The New Agricultural Economy: The Second Great Transformation. London and New York: Routledge. Allaire, Gilles. 2018. The Ambivalent Capitalist Socialization of Agriculture. In Ecology, Capitalism and the New Agricultural Economy: The Second Great Transformation, eds. Gilles Allaire, and Benoit Daviron, 2018–48. London and New York: Routledge. Allaire, Gilles. 2019. L’ambivalence des communs. Développement Durable et Territoire 10/1: 1–20. Allaire, Gilles, Julie Labatut, and Germain Tesnière. 2018. Complexité des communs et régimes de droits de propriété: le cas des ressources génétiques animales. Revue d’Economie Politique 128: 109–35.

Digital Money for Sustainable Communities: The Sardex Case

16

Giacomo Bazzani

1

Introduction: The Emergence of Digital Money

The main innovation within the money field in the twenty-first century is the spreading of digital monies. In pre-modern and in modern times, monies were mainly analogical: coins represented the quantity and the value of the metal from which they were made. Also, the banknotes, which are not made of precious metal, gained and maintain their value because they represent the exact imprint of the original mold owned by the central authority. They keep their value because they are analog to the mound surface. Paper currencies can be transported and exchanged much more easily than coins, and each one may also express the value of a huge amount of coins. However, digital monies realize much more than banknotes in money usage. They can move instantly from one side of the globe to the other, thanks to the Internet. They are also used without deteriorating over the years. Digital money seems to overcome many of the problems of analogical money. The information regarding the ownership and value of the money is translated into the digital form of the binary code which provides more stability and reliability, less counterfeiting, and the facility of storage. Digital money can also be easily connected to G. Bazzani (*) Florence University, Florence, Italy e-mail: giacomo.bazzani@unifi.it

and used together with all other elements of digital life, especially with digital platforms (e.g., Google, Facebook, Airbnb, eBay). Today, digital platforms and digital monies can link all aspects of our life together (Khera 2019, 6). Digital identity, social media, financial investments, e-commerce, health records, crowd founding, and instant messaging are just some examples. Digital platforms operate thanks to the presence of digital money, but at the same time, they also influence the nature and the social uses of money itself. Money already has a great influence on social dynamics in its analogical form. Analogical money was crucial in influencing social interaction in modern cities in the nineteenth century (Simmel 2004) and also in contributing to the long-term process of rationalization of modern societies (Weber 1978). However, the emergence of digital money poses new challenges to the understanding of the relationship between money and society. Contemporary sociological research on money relies on two main approaches to explain the reciprocal influence between money and society that have been synthesized in the homogeneity and differentiation tendencies (Dodd 2012). Homogeneity comes from the political will of the modern states to impose money hegemony over the territories, in order to raise taxes and impose sovereignty (Ingham 2004). Powerful countries still struggle for monetary hegemony in the globalized world (Cohen 2012). The creation of the Euro monetary union

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or the dollarization of South American countries are clear examples of this tendency towards monetary homogeneity.1 On the other hand, money proliferation and differentiation continue even under the political control of the national states. From a micro-perspective, Zelizer (1989, 1995, 2010) describes the processes of earmarking: there are local, familiar, and individual ways to use money that change over time and may shape what money is. At the same time, over the last 30 years at the local level, money differentiation has continued with the creation of 4500 complementary currencies (CCs), community credit, and alternative financial systems (Blanc 2013). These systems have brought a large variety of currencies into being, which have sought to address a wide range of specific aims and objectives, in the cultural, governmental, economic, social, and environmental areas (Place and Bindewald 2015). How do these tendencies towards money homogeneity and money differentiation change with the advent of digital money? With digital platforms and the digital economy, Apple, Google, Facebook, and Amazon are the tech giants that may pose serious challenges to state sovereignty over money and its hegemonic tendency. The Libra, for example, was created in 2019 by Facebook, hoping it would become a global means of payment (Taskinsoy 2019). If Facebook users start to use Libra, the group of private companies running Libra would quickly become something similar to the most important central banks of the world. At the time of writing, however, it seems that Libra will not be implemented, due to legal restrictions and the fear of politicians and central bankers of losing the money control (Murphy and Stacey 2019). However, the advanced coding processes, used for Libra and other cryptocurrencies, provide the technical possibility of creating money outside a central political authority. The success of Bitcoin money is a clear example of the capacity digital money has to overcome state limits, brave political authority 1

Dollarization refers to the situation in which a country substitutes its own currency with the US dollar (Melvin 1988).

G. Bazzani

and public regulation, along with controversial effects (see Maurer et al. 2013; Karlstrøm 2014; Kethineni et al. 2018; Dodd 2018; Hayes 2019). Not only do digital monies challenge the trend toward money homogeneity, but also the traditional understanding of the cultural specific diversification of money use and value. CCs are usually seen as a byproduct of community efforts to satisfy their needs and reach their sustainability goals, (i.e., economic development, redistribution, environment). They are mostly considered the outcome of a collective movement for social change (economic activism, see Forno and Graziano 2014; Bosi and Zamponi 2015), but not its origin. On the contrary, when money meets digital platforms it can also contribute to shaping new forms of social ties and collective action (Sessions 2010). Social interaction, mediated by digital platforms is able, for example, to easily include or exclude members and to encourage or discourage new trust relationships (Bennett 2008; Nelms et al. 2018). Even in the more impersonal forms of digital money, like Bitcoin, the related digital platforms for social interactions among users create new communities of users (Dodd 2018; Swartz 2018). The influence of digital money in social ties is the new challenge to the traditional culturalist explanation of money diversification. From this perspective, money diversification is not only an effect of different cultural backgrounds, but money itself is able to shape values and practices (Evans 2009; Bazzani 2020a, b). Although there are many CCs that support the creation of new communities (Seyfang 2018), the chapter focuses on a successful example, the case of Sardex CC, a digital money created in Sardinia (IT) in 2010 with a powerful capacity to create a new community with common goals and shape social interaction. Sardex money, as well as many other types of money, is imbued with a utopian view of society (Dodd 2015) that directed the founders towards the definition of specific money features and functioning. This money was created to support the socio-economic development of their region, through encouraging cooperation among entrepreneurs, and favoring local exchanges of goods and services. The social

16

Digital Money for Sustainable Communities: The Sardex Case

effects of this digital money exceed the traditional understanding of cultural money diversification and suggest the consideration of how the rise of digital money may shape individual behavior, values, and social dynamics. The second section introduces the Sardex history, its characteristics, functioning, and regulation. In the third section the Sardex social effects are presented, in particular, how Sardex money triggers specific social mechanisms (selection, monitoring and sanctioning, signaling, and belief formation) that shape a different type of social interaction and build a new community aimed towards the production of collective goods. Sardex money creates a form of hybrid community between the two main community models, the Greek community, and the monastic community, thanks to its capacity to create a we-ness and define a common goal. The fourth section discusses how the Sardex experience can be considered a form of transformative democratic experimentalism toward sustainability, that relies on a theory of money far from the traditional monetarism of contemporary monetary policies. The limits and the challenges posed by digital money are also discussed, namely the risks of the techno-leviathan or digital kleptocracy. The conclusion argues that digital monies may have completely different effects than the classical, sociological accounting of modern money, which turns the social world into an arithmetic problem. Digital money may create new communities and shape a form of social interaction based on a high level of trust, a sense of familiarity, and social support. Creating money is a terraforming operation that requires a new sociological agenda to investigate money as social ties.

2

The Case of Sardex Money

Sardex is a CC founded in 2010 in Sardinia (IT) by a group of young friends, who had emigrated for study or work. Sardex money is a currency with the same value as the euro but based on mutual credit that can be used by firms affiliated with the Sardex network. The homonym company, Sardex Ltd, manages the lending service with about 55 employees. Credit is granted to

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companies that can spend it buying products or services from other companies belonging to the Sardex network. Interest is not applied to the debts or the credits in Sardex. Sardex, like older CCs LETS and the Switzerland WIR, for example, (see Amato and Fantacci 2013), cannot be converted in euro. The zero-interest rate of Sardex stimulates the exchange of goods and purchases. Indeed, there are no advantages for a company to keep a surplus in its Sardex balance because no interest is gained. Companies pay Sardex Ltd an annual fee to be part of the network. This fee varies between 200 € for small cooperatives to 3000 € for large companies. Sardex Ltd has a clause in its statutes that all profits must be reinvested in the company (Dini et al. 2015, 27). Sardex Ltd operates as a commercial consultant, promoting the network and the entry of new firms. The network now has more than 3500 companies involved, with relevant growth rates. It also has developed 15 other regional networks in other Italian regions. Similar experiences are being developed in France, Spain, and the UK (for a detailed presentation of the Sardex experience, see Bazzani 2020a). Sardex Ltd is organized in different areas of activity: ICT team, media team, research and development team, and advisory team. The most innovative department of Sardex Ltd is the broker service that provides a call center service for members and a general supervision of the Sardex market by the head of the broker service. Members can call the broker service for support to find suppliers of specific goods or services they need, or to obtain qualified advice on the market trends or suggestions for marketing strategies. With a specific request of a product from a member, the broker service can provide the quotes, or ask the firms to contact the member directly. The broker service has access to the Sardex digital platform, where all transactions in Sardex can be monitored. Thanks to this, the broker service: (1) evaluates companies for entry into the network and proposes their initial credit line; (2) grants special lines of credit to companies for investments or daily business; (3) monitors member accounts which show few exchanges and suggest possible marketing strategies.

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The broker service aims at a Sardex dynamic market where members have a good number of transactions and are content to remain in the Sardex network. The broker service and the rules for how Sardex operates produce a velocity of money circulation that is eight times faster than euro circulation (Littera et al. 2014). Section 3 will present how Sardex money can influence social relationships during transactions and how it can create a new form of community among members.2

3

The Sociological Analysis of Sardex Money

The concept of community is one of the most widespread and controversial concepts in social sciences research, and also in philosophy.3 Some scholars suggest that, given the different concepts and usages associated with the term, it is actually not possible to have a shared definition in the academic debate (Day 2006; Bell and Newby 2012); that would imply its uselessness for analytical purposes. At the same time, the concept of community remains central in studies of globalization, hyper-individualism, rising inequality, and related counter-movements, often overlapping with the term neighborhoods and whole fields of urban and rural sociologies (Gottdiener and Hutchison 2006; see also Mooshammer in this handbook). This complexity is due to the concept of community “is one that addresses the essential nature of association, of cultural cohesion, and of the territorial cohesion 2

The analysis uses 37 semi-structured interviews done in 2017 with entrepreneurs (E.) member of the Sardex network and 11 interviews with the Sardex management and employees of different areas of activity. The sample of firms was differentiated by the number of employees, business sector, year of entry in Sardex, proximity to the regional capital, and peripheral area. Interviews were conducted by the author, took place in person, and were transcribed. The evaluation included coding and categorizing, for details and for the complete analysis of the interviews see Bazzani (2020a). 3 Hillery found 94 definitions of community (1955). For an introduction to the different uses of the concept see Keller (2003), Irwin (2016).

of individuals” (Irwin 2016, 265). The concept offers a visible dimension to the broader forces of society that influence and link individuals together (ibid., 248 f.). At the community level, the abstract idea of society takes a tangible form, and social constraints coming from the material, historical, educational, normative, and imaginative contexts can be traced by the researcher, and their interrelation can clearly be observed (Keller 2003; Cresswell 2015). In this broad area of studies, a common denominator in the concept of community refers to “locale, common ties, and social interaction” where “relationships are closer than casual relationships because the group shares some common goals, values, and perhaps a way of life that reinforce each other, creates positive feelings, and results in a degree of mutual commitment and responsibility” (Bruhn 2011, 13 f.). Community members share spatial or mental boundaries and also coordinate social action in light of common goals, but the conditions and mechanisms that transform the co-presence of individuals in a place, into a community are diverse. In Western history, there are two main models of community: the Greek and the Christian types of community. This section will present the two models of community and will show how Sardex money contributes to the creation of a new type of community, which is a hybrid of the two models.

3.1

The Construction of Locality and Commonality

In the Greek tradition, the spatial commonality of place in a city is the basis of the contractual process that forged Greek society. In Aristotle, the individual and the community were in a reciprocal relationship, embodied in the deliberative activity (Trott 2014). Civic rituals, religious ceremonies and festivals occurred in common places of the city; they shaped the form of the individual belonging to the collectivity and, in this way, they created the community. Culture, norms, and rules were forged and transmitted

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Digital Money for Sustainable Communities: The Sardex Case

through these rituals and with the law.4 Money was very important in the development of the Greek polis because it “facilitated the trade and dramatically increased the scope of items that could be traded” (Swedberg 2003, 135) both with community members and with foreigners. The borders of the Greek city-state defined the boundaries of the community that, together with rules, manifested a web of social possibilities and constraints, where specific forms of repeated social interaction could take place. The nature of the boundaries of the community changed with the modern process of massive urbanization of the population.5 The community belonging to modern cities does not necessarily coincide with the border of the human settlement anymore, but within the same spatial border different communities may take place, in the form of a community of interests or values. With the advent of the information age and digital space, the community may also be displaced and dispersed in the form of the digital community (Plant 2004). In this context, the local dimension of community is not a geographical area, but much more a set of boundaries and belongings that could still represent a territory, but they can also be defined by the sharing of a religion, an ideology, a knowledge, an interest, or a passion 4 The jointly spatial and political nature of the Greek community is evident also in the etymology of the word politics that comes from the Greek polis that means citystates, while ethics comes from ethea that means habitats, and, more in general “‘society’ stems from socius, signifying ‘sharing’—and sharing is done in a common place” (Casey 1997, xiv; cit. in Irwin 2016, 250). 5 Classical sociologists described this process with different emphases and expectations. For Durkheim (1997) urbanization and labor division represent the shift towards a big community linked together by the organic solidarity, while for Marx (1926) the community continues to be the local dimension of a larger form of association in society. Tönnies (1955) sees the advent of modern society as a real change in the nature of association: in the past communitarian form (Gemeinschaft), social ties were primarily based on shared values, emotions and direct reciprocity, while in modern society (Gesellschaft) they are based on interests and contractualism. Simmel (1971) and Weber (1958) also recognize this shift but they treated the two poles as a typology that allows the observation the characteristics of modern form of association and social action (for an introduction, see Irwin 2016).

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(Webber 1963; Wellman 1992). When the boundaries of the community move from a space of places and geographical border to a space of flows (Castells 2000), belonging to the community can often be chosen or avoided or be limited to a specific task (Colombo et al. 2001). This is a community of a different nature than the community defined on a geographical base and ascribed status. This community offers a different experience of community to the individuals. Community based on interest or ideology, for example, can change over the life course of the community and it can also be strategically chosen and achieved, while a geographical community may have more rigid norms for entry or exit, that makes that more similar to an ascribed status. In the space of flows, it is common for people to belong to different, multiple communities (Craven and Wellman 1973). However, even in this context, communities continue to be supportive for individuals (Wellman and Wortley 1990; Wellman 1992, 1999). Indeed, in the community, the presence of common ties means the presence of strong ties, (i.e., related to the presence of intimacy, kinship, friendship, neighborhood, or to belongings of a different nature), which make people feel close to each other (Campbell and Lee 1990) or which can provide various kinds of social support (Fischer 1982; Wenger 1992). The constitution of achieved communities can be favored by the virtual/real places created by digital monies and digital platforms, where repeated social interaction can take place. Sardex money has this capacity of creating a common place where repeated social interaction takes place under specific rules.

3.2

The Sardex Functioning for a Different Social Relationship

Entry into the Sardex network of members is free of charge, but it is subject to the acceptance of the contractual rules about how the network functions and the evaluation of their prospective level of network transactions in the firm complementarity. The broker team of Sardex evaluates the potential

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supply and demand of goods and services of a new firm and its complementarity with the ongoing Sardex market (for details, see Bazzani 2020a, Chap. 3). This type of evaluation and selection procedure is necessary to ensure that membership brings economic benefits to the firms; new members must be able to immediately buy the goods and services they require from the network and to find potential buyers for their goods and services. The selection of members developed by Sardex sets the boundaries of the Sardex network and offers a competitive advantage to those selected (Elias 2000; Maurer 2016).6 The competitive advantage, due to the entrance selection mechanism, is confirmed by the presence of long exchange networks that cross Sardinia (Iosifidis et al. 2018). It is very unlikely that such long exchange networks, sometimes 100 miles long, would be used outside the Sardex network, especially for small quantities of supplies. The Sardex network also has a system of monitoring and sanctioning which is useful in supporting market exchange with a high level of trust among members. Sardex Ltd monitors transactions and constantly collects feedback from members with the broker team call center (see Diekmann and Przepiorka in this handbook). Exclusion is the most radical sanction, in the case of serious misconduct against other members. The sanctioning mechanism, however, is effective thanks to the monitoring system that discourages misconduct (Burt and Knez 1995). Monitoring in Sardex is not carried out solely by Sardex Ltd monitoring, but also through peer monitoring. As in the case of the Greek polis, the boundaries of the network facilitate occasions for repeated interaction; direct communication and repeated interaction creates the conditions for horizontal monitoring and fostering cooperation (Ostrom et al. 1992; Sally 1995; Baldassarri

6 The selection made by Sardex, unlike the selection between feudal lords described by Elias, will never result in one company monopolizing an entire economic sector because the broker management intentionally operates to provide multiple offers in each sector, to ensure members have freedom of choice.

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2009, 2015). Given the rapid circulation of information within the Sardex network, horizontal monitoring carried out by members can lead to a fast-reputational sanctioning through word of mouth or the Sardex members’ Facebook page. Reputational sanctioning on the Facebook page can shatter a firm’s credibility, and as a result, its business within the Sardex network. The Facebook page is followed daily by many members who use it to publicize, or search for discounts or special offers on goods and services in Sardex. A post or a comment that raises doubt as to whether a member has behaved correctly can rapidly destroy, in a generally permanent way, the member’s chance of transacting within the network. Thanks to this monitoring and sanctioning system, being a member of the Sardex network is perceived by entrepreneurs as a guarantee of high reliability. The reliability signal is so effective that entrepreneurs report how, from the very first meeting, the relationship with other members is different. Joining the Sardex network immediately creates a sense of familiarity and closeness among entrepreneurs, that is different from ordinary commercial relationships. We have made many friends with Sardex customers who have also come from far away . . . Sardex unites us and this creates a closer relationship from the first meeting. Even with euro customers we have a wonderful relationship but in Sardex we have formed a ‘clan’, let’s call it that: a new way of approaching (E. 10).

The initial diversity of relationships is subsequently transformed with greater ease into friendlier relations than in the euro market. The revocation of clan relationships provides a good idea of how much network membership transforms the nature of economic relations between entrepreneurs. Normal commercial relations are characterized by strong competition and sometimes by opportunistic behavior, which means entrepreneurs tend to be very detached and distrustful in commercial relations. The clan relationship avoids the initial distrust and places the potential competitor outside the group to which they belong; the other members are natural allies within the market. The signaling effect of

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Digital Money for Sustainable Communities: The Sardex Case

network membership becomes a guarantee of reliability, and a facilitator of economic initiatives (Bacharach and Gambetta 2001; Beckert 2005). Members perceive the presence of an ethical code of conduct among members that stabilizes the behavioral expectations of alter, and makes it easier to strike economic deals, and carry out transactions. The high level of reliability accorded to alter within the Sardex network allows entrepreneurs to accept terms of payment, which would normally be considered too risky to be accepted within the euro market. This form of cooperation is unrealistic to entrepreneurs in the euro market. Monitoring, sanctioning, and signaling are mechanisms that support a high level of trust among Sardex network members (Sartori and Dini 2016), and facilitate their economic transactions and social relations.7 These effects of the Sardex network are confirmed both from quantitative data of the business of firms in the Sardex network as well as by the perceptions of the entrepreneurs. The use of Sardex increases business of the firms. The average increase following Sardex membership is 23% for the number of customers and 26% for revenue.8 The increase in business with the Sardex currency is highly significant, especially in the light of the widespread economic recession and the weak performance of the parallel euro market. After the 2008 economic crisis, the Sardinian GDP shrank by 9.1% (Banca d’Italia 2018, 13). The data are consistent with entrepreneurs’ perceptions regarding the performance of their businesses after becoming members of the Sardex network, especially for small firms: In Sardex I have a very long waiting list, I program jobs for clients seven months ahead because I have so much work. . . . My first customer was a jeweler in a nearby town for whom I did 5,000 Sardex of work and he is still waiting for me for other work he

7 The moment in which the given trust is reciprocated from the partner, by doing what is expected, is the basic element of cooperative behavior (Gambetta 1988; Cook 2001). 8 Both values are net of the estimated euro-to-Sardex substitution effect of 13% of customers and 11% of revenues of the total increase recorded (for details see Bazzani 2020a).

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has commissioned . . . Sardex has turbo-charged my business! . . . Before I used to hope clients would call me now, I hope they won’t because I am behind in deliveries, I have to ask them to wait (E. 4).

These interactions provide members the feeling of not being alone and of having social support for their economic interactions. The next sub-section presents how this diverse social interaction creates common goals, and a form of collective action aimed towards the creation of collective goods.

3.3

The Emergence of We-ness and Collective Action

After the Greek polis, the second main historical model of community is the monastic community coming from the medieval Christian conception of Augustine and Thomas Aquinas. The boundaries of the community were not limited by geographical borders, as in the Greek case. Notwithstanding monks often lived isolated from the rest of the social context, the boundaries of their community transcended and overcame the walls of the monastery, and the geographical borders of the city, until they embraced a universal community of faith (Keller 2003). The religious life of pray and work (ora et labora) was brought about in commonality of faith and for the common good of all humanity. In the Christian form of community, the nature of the common ties still resides in material artifacts as in the Greek case, (i.e., the Greek public places and the Christian monastery), but the common “belonging” is also strongly supported by ideals that transcend the locality. However, the Greek and the Christian conception of community both show the capability of creating the we-ness of a common belonging among individuals, and of setting collective goals. The Greek polis was able to forge a commonality among individuals, where individual goals were not opposed but moderated by the local community in light of collective goals. In the life of prayer in the monastery, individual efforts were also guided towards collective goals (the salvation of lives

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and souls), but they were not limited to the local community, rather they embrace the whole of humanity.9 In both cases, the greatest honor for individuals came from the ability to put common good above individual gain (Keller 2003), and through this, when people perceive that everyone is cooperating towards a common goal, the sense of community develops (McMillan and Chavis 1986). Sardex members perceive relations with other member entrepreneurs differently from relations with entrepreneurs who use only euros. Members observe that economic relations are conducted differently in Sardex, and this leads them to characterize other members as trustworthy, desirous of reciprocity in their transactions, and of fostering the Sardex project. These beliefs, formed by observing the behavior of others, are then used to categorize the whole network of members in similar terms (Rydgren 2009). Exchanges in Sardex are perceived by entrepreneurs as fair and supportive, but they think those interactions also have a redistributive capability between small and big firms and support the local community. In the euro market, large companies have far more effective marketing tools at their disposal than smaller companies, but in the Sardex network, the same marketing tools are available to all companies, both large and small. Many microbusinesses make strategic use of the marketing resources offered by the Sardex network, and successfully increase their sales. Small businesses think that these resources give them the chance to compete more effectively with larger companies. In this sense, they interpret the effects of the Sardex currency as a redistribution of resources for competitiveness between small and large businesses. Sardex users develop specific beliefs regarding the role of Sardex currency in the economic system, comparing its operation and impact with that

9 The Christian conception of community is not far from the idea of global community described by Bauman (2001a, b). Here, space and time become less relevant for determining the chance of social interaction in rich countries and, in this way, locality is not the source of community anymore.

G. Bazzani

of the euro. The Sardex currency is often used in a context where traditional credit has disillusioned entrepreneurs; indeed, many Sardinian firms have no access to bank credit. The banking system is no longer seen as supporting local economic development. However, entrepreneurs see Sardex and its limited circulation, as the currency’s explicit support for developing local businesses: Sardex provides benefits for our territory because the money stays here, with salaries and taxes. The greater the number of Sardinian companies working, the greater the benefits for Sardinia (E.19).

Entrepreneurs still consider Sardex primarily as a tool for increasing their company’s business but, once they use the Sardex currency, almost half the entrepreneurs interviewed, began to associate it with ethical goals linked to the collective benefits they recognized as being derived from the Sardex project. Although it could well be true that increased circulation and use of the euro would result in collective economic benefits, entrepreneurs tend to associate the use of the euro with exclusively individual benefits (becoming wealthier), or onerous obligations, such as paying bank interest and taxes. The Sardex money creates opportunities because business activity is not seen as being entirely guided by entrepreneurs’ individual interests, but it is also perceived as being guided by collective interests. The currency’s modus operandi allows entrepreneurs to address ethical issues, traditionally confined to non-economic, philanthropic issues through their normal business activity: In Sardex it’s different, I don’t know why, but an atmosphere of trust and collaboration is created. It is as if there were a common mission which does not exist in any other type of commercial activity. This common mission is developing our region through the participation of its residents: I know that what I spend here in Sardinia will remain in Sardinia (E.34). Those who think of their children are pleased their region benefits from the [Sardex] network. Those who join the network and understand it realize its value for our region (E.2).

The benefits attributed to the Sardex currency go beyond mere individual and network gains; they include a collective benefit extended to the

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Digital Money for Sustainable Communities: The Sardex Case

geographical boundaries of the area where the currency circulates. Doing business in Sardex allows the emergence of a new we-ness, which is able to contribute to a collective interest of the region’s socio-economic development. This common goal can also be seen in the entrepreneurs who enthusiastically support the Sardex project. Some entrepreneurs become promoters of the Sardex currency among their contacts, even when they will obtain no direct economic advantage. If the new company membership of the Sardex network is not expected to create opportunities for trade, (i.e., because it belongs to a different economic sector), the promotional activity engaged in by members towards the new entry is more similar to a form of proselytism or propaganda, close to the activism of political party volunteers: There is a really nice toy shop, I talked to [the owner] for a year to persuade him to join and now he is really happy. Now he complains that he would have liked to join the network earlier. I always advise trying it for a year, if you realize that it doesn’t work for you, then don’t renew your membership. But they have all remained, even the creche. Our creche and kindergarten are both in Sardex (E.18).

This entrepreneur has become a real promoter of the Sardex network in his neighborhood. Neither his family, nor his business use the kindergarten or the toy shop, but he encouraged them both, together with other companies, to join the network. This entrepreneur believes that developing the Sardex network is intrinsically positive. In the eyes of entrepreneurs such as these, the regional economic system becomes a real collective good to which they believe they should dedicate time and energy: I use the broker service for finding companies and for proposing companies for network membership. This happens naturally, no money is exchanged for this, it is all done because we believe in the project and we want it to grow (E.22).

Within the network there are also occasions, though far more sporadic, in which using the Sardex money generates the development of prosocial behaviors, which go beyond the boundaries of the economic system. Section 4

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will discuss to what extent this form of community, aimed at a collective goal, can be considered a sustainable community.

4

Money for (Un)Sustainable Communities

Like community, the exact meaning of the concept of sustainability is also highly debated, but it remains a keyword in the planning of future policies, and in many academic debates (Meyer 2009). As in the case of the agenda for sustainable development of the United Nations (2015), a sustainability program refers to a well-advised use of limited natural resources, together with the development of the economic and social resources necessary to guarantee wealth, public solidarity, and democracy. In particular, the sustainability agenda aims to satisfy these needs of the present generation, but not at the expense of future generations. Different perspectives of social change are developed within the broad umbrella of sustainability, often connected to different ideological standpoints. Adloff and Neckel (2019) suggest considering three ideal types of sustainability approaches that are connected to different social structures, practices, and imaginations: the imaginaries of sustainability as modernization, transformation, or control. According to this framework, the Sardex case would be classified as a form of transformative democratic experimentalism, because money functioning is designed to encourage new and alternative forms of social ties and economic operations. However, the transformative capacity of money is not an exclusive property of Sardex. People who project the functions of money always imbue money with an ideology related to society in general, and to the social ties in particular. The sum of an ideal view of society, with an abstract action model of social interaction often produces money that tries to carry a utopian society forward (Dodd 2015). Money organizes social interaction and exchanges with a precise set of rules; an action model of social interaction is always necessary to design money functioning. It can span from the selfish utilitarianism of a

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monetarist approach to the egalitarianism and fair behavior embedded in Ruskin’s Labour money (Ruskin 1928; Dodd 2015, 82). Both Sardex and the ordinary modern state money are imbued with utopianism. In the mainstream monetarist approach adopted by central banks for managing money supply, money also supports the building of an ideal society. Money is considered a commodity, like other goods that need to circulate freely in the market to produce an affluent society. The market competition, supported by the free circulation of money, should bring the best aggregate utility to the citizens in the long-term. This model of money functioning relies on the utilitarian action model: individual and firms’ efforts for profit should produce the best possible outcomes for consumers with the decreasing of prices and the emergence of products with better quality. This expected long-term collective benefits, legitimate money functioning and also the secondary effects such as unemployment or rising inequalities.10 Nevertheless, the outcomes of this idea of money functioning and the related policies are controversial (Amsden 2001). This idea of the nature and of the effects of money circulation still backs monetary policy of central banks (Beckert 2016). It produces economic forecasting (MacKenzie et al. 2007) and this causes real effects with the implementation of the related economic policies (Çal{şkan and Callon 2009).11 Sardex utopianism is very different from the monetarist perspective and utilitarianism connected to it. Sardex money fosters

cooperation, not competition among users, and it also redirects the long chain of the global markets to the short chain at the local level. This selection of a production chain, which favors small local businesses at the expense of larger companies is perceived as an effect of the Sardex currency, which helps support the regional economy:

10 For Polanyi, this idea of self-regulated market with expected long-term benefits implied a “stark utopia.” “Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness. Inevitably, society took measures to protect itself: but whatever measures it took impaired the self-regulation of the market, disorganized industrial life, and thus endangered society in yet an other way.” (2001, 3) 11 The four freedoms of movement of money, goods, services, and persons are at the heart of the European integration project, and specifically, of the European monetary union and the euro (Emerson 1992). This mechanism should bring, the building of a European identity and a real

While the euro is perceived as belonging to a kind of impersonal global market, and regulated by impersonal authorities, Sardex currency is perceived as having clear collective goals connected to the regional community. This type of community supports the decrease in wealth inequality

Reasoning in euros is mostly a reasoning of convenience, while the reasoning in Sardex is a project which grows together with the community. In our sector there are small food-producing companies with quality products which promote their territory. By choosing to buy the products of these companies, we complete the production chain, from the producer to the customer, describing that land, that product, that company, promoting them together with our region (E.22).

Entrepreneurial activity and collective action towards a common goal are forms of social action that are traditionally kept separate: the collective benefits are expected as a consequence of market efficiency and money free circulation. Entrepreneurs using Sardex think that using the Sardex currency brings collective benefits to their region. In other words, it can be argued that entrepreneurs associate company business conducted in Sardex as an economic activity with values that traditionally are extraneous to the company’s economic activities: The product my restaurant offers works really well with Sardex because it is a new way of understanding the world and managing money. It is an ethically correct world. Just look—Sardex invests in marketing and the workforce, not in multinationals. They are not speculative investments that only benefit a few people, Sardex by its nature benefits everyone (E.20).

political European integration as secondary effects. Unfortunately, unexpected negative political consequences are emerging: nationalism rises in European countries as well as unexpected redistribution effects (Matthijs and Blyth 2015; Streeck 2015; see Veira-Ramos and Tetiana Liubyvaand in this handbook for the case of Ukraine).

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Digital Money for Sustainable Communities: The Sardex Case

and increases the level of social capital, as other social institutions do (Putnam 2000; Putnam et al. 2003). However, in this case, the community does not pre-exist nor is it the effect of civic participation or other social institutions producing social capital. The Sardex community is created only through the use of this specific type of money.12 The capacity to bring economic activity and economic outcomes much closer to a local, tangible level is a clear merit of the Sardex functioning. However, other dimensions of sustainability still remain uncovered. For example, while with Sardex the community becomes more resilient, cohesive and coordinated, it is still not clear whether or to what extent it can support goals that overcome the local dimension of community.13 Indeed, Sardex money transforms the individual aim to profit in a broader collective socioeconomic development of the region, but it is not clear to which extent digital money may include collective aims, which are not restricted to a geographical area. This is a challenge that many local communities have started to consider, especially regarding climate change.14 The experiences of digital communities show how they may have a broad range of goals (Plant 2004) and also how they can mobilize real collective movements (Cumbers et al. 2008). New digital monies could include broad global aims, (e.g., reduction of carbon emissions) through, for example, the simple traditional tools of monetary 12

Notwithstanding it could be argued that Sardinian community already existed before the coming of Sardex money due to established close kinship ties (Pinna 1971), it is evident how the we-ness and the common goal of the Sardex community do not exist in parallel to economic activity with euro money. Moreover, the development of similar experiences in different contexts support the thesis of the exogenous creation of the community (Bazzani 2020a). 13 There are two main risks connected to the local boundaries of community: one is the exclusivity provided by a real sense of belonging (Miller 1990) and the second is the effects of constraint over individual freedom (Etzioni 1998). For the distinction between bridging and bonding communities see Putnam (2000). 14 See, for example, the cases of New York City, under its One NYC 2050 program, or Bristol which established the Bristol SDG Alliance working to raise awareness about the SDGs in the city, or the Helsinki City Strategy 2017–2021.

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cost and incentives. Digital money tracks every transaction and the carbon emissions could be easily (dis)counted in the payment price. The total transparency of the market transactions stored in the database of digital monies offers a very powerful tool for monetary policy, as well as for economic and social policies.15 State taxation, for example, can be easily collected directly during the transaction and also, if necessary, change over the time and be diversified at regional, local, and individual levels for specific policy purposes. However, along with this powerful tool for social coordination also rises the risk of its despotic use by the authorities, which has been already identified as risk of the techno-leviathan (Dodd 2018, 44) or the digital kleptocracy if the data are owned by few private companies, as in the case of tech giants promoting the Libra (Khera 2019, 7). While the main problem raised by the international financial markets is the risk of taking money out of the control of political, democratic authorities, digital money, to the contrary, would allow the monetary authority to obtain perfect information on economic transactions and a potentially enormous influencing capability on markets. This ability, of course, also brings the risk of an excess of control over individual freedom. However, the issue seems much more related to the quality of democratic control than to the chances of tracking transactions which is offered by the digital money.16 Totalitarianism, surveillance, and exploitation, which are possible effects of big data (Rao 2019), are also possible without big data. Meanwhile, big data and digital platforms are used also by anarchist groups (e.g., with the Bitcoin project). However, it is evident that the chance of social control, in such cases, is facilitated and requires fewer resources. In the case of the social credit system in China, for

15 Sardex money experimented as a tool for digital payment of social subsidies in the city of Sassari. In this experiment, social subsidies could not be used, for example, for gambling. 16 The access of the fiscal authorities to all the bank accounts and their transactions is already not far from the market transparency of digital money.

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example, Liu talks about algorithmic governance (2019, 31). The increasing availability of personal data needs an even advanced form of democratic control.

5

Conclusion: Money as a Social Tie

The risks and new possibilities embedded in digital money suggest the need for a neutral distance for investigating the phenomenon. Money is imbued with utopia and creates rules, norms, and also collective aims. Sardex money shares a utopian view of mutual-credit and cooperation, and it can develop a new community and collective action for the region’s socio-economic development. The change in beliefs regarding how the economic system functions gives rise to an unusual interpretation of the link between economic activity and collective well-being. Zelizer has shown how values and social practices shape money functioning and its effects (1995, 2010), while the Sardex case suggests that money functioning can shape social practices and constitute a new community. This evidence encourages one to investigate how digital monies may shape social interaction and change society. “Money is not a ‘commodity’ which stands in a relatively stable relationship to other commodities, nor is it merely a reflection, symbolic representation, or signifier of an underlying existing ‘reality’ of economic relations. Rather, it is a social relation based upon definite and particular social structural conditions of existence” (Ingham 1996, 523). Modern state money was a primary tool to free individuals from ascribed status and norms related to community ties, because “the complete heartlessness of money is reflected in our social culture, which is itself determined by money” (Simmel 2004, 347). Money as a unit of account can turn the social world into an arithmetic problem, through “regulating both individual and social relations as calculative functions. Their cognitive ideal is to conceive of the world as a huge arithmetic problem, to conceive events and the qualitative distinction of things as a system of

numbers” (ibid., 448).17 The possibility of monetary calculation (Weber 1978, 81) of the social world frees individuals from pre-modern social ties. Digital money brings this calculative social world at its extreme consequences because it became, not only calculable but also coded in the binary form. As a main paradox of the social change, after this binary coding, the social world shaped by digital money started to become less abstract. Sardex money reconnects individuals and reinforces social ties with a sense of familiarity, trust, and social support that is mostly due to its functioning, and the easy connection between digital money and digital platforms. However, Simmel noted that also for modern money when barter is replaced by money transactions a third factor is introduced between the two parties: the community as a whole, which provides a real value corresponding to money. The pivotal point in the interaction of the two parties recedes from the direct line of contact between them, and moves to the relationship which each of them, through his interest in money, has with the economic community that accepts the money (Simmel 2004, 176).

Both Sardex and modern money introduce a new community into the social interaction, which would not exist without money. However, while the community described by Simmel weakens social ties, the Sardex community reinforces them. Much more, in the Sardex case, the rules of money circulation create new social ties, and collective actions that do not exist without this money. Sardex allows strong trust relationships among members and a form of social coordination, that is the pre-condition of a new type of money “claim upon society” (ibid.). With digital money, thanks to its binary nature and its connection with digital platforms, third parties may easily be inserted into the social interaction of the economic exchange; these third elements connect the two parties which form a bigger context. The binary nature of digital Also, Zelizer stresses how money “may well ‘corrupt’ values into numbers” (1989, 347). That money is not culturally neutral, and that this non-neutrality influences the exchanges is well described also by Dodd (1994, 13).

17

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Digital Money for Sustainable Communities: The Sardex Case

money and its connection with digital platforms facilitates the introduction of third parties into the social interaction associated with economic exchange; these third parties connect the social interaction of the economic exchange to a wider context. In this sense, producing money is a terraforming operation (Zimmer 2017, 329) that shapes society. The advent of Sardex, as well as other digital monies, offers the occasion to underpin a new sociological agenda for the study of money as the origin of specific forms of social relation. While contemporary monetary policies generally deal with inflation and credit cost, a new sociological research agenda should investigate money as a source of a specific form of social ties. Digital money can influence social dynamics; it can balance competition and cooperation; it can have redistribution effects; and forge the boundaries and the goals of new communities. What if money would be imbued and planned with a view of a sustainable future?

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G. Bazzani Liu, C. (2019). Multiple social credit systems in China. Economic Sociology the European Electronic Newsletter, 21(1), 22–32. MacKenzie, D., Muniesa, F., & Siu, L. (2007). Do economist make markets? On the performativity of economics. Princeton, NJ: Princeton University Press. Marx, K. (1926 [1852]). The Eighteenth Brumaire of Louis Bonaparte (E. Paul & C. Paul, Trans.). London: Allen and Unwin. [Karl Marx 1852 Der achtzehnte Brumaire des Louis Bonaparte. Die Revolution: Eine Zeitschrift in zwanglosen Heften 1.] Matthijs, M., & Blyth, M. (Eds.). (2015). The future of the Euro. Oxford: Oxford University Press. Maurer, A. (2016). Social mechanisms as special cases of explanatory sociology: Notes toward systemizing and expanding mechanism-based explanation within sociology. Analyse & Kritik, 38(1), 31–52. Maurer, B., Nelms, T. C., & Swartz, L. (2013). When perhaps the real problem is money itself! The practical materiality of Bitcoin. Social Semiotics, 23(2), 261–277. McMillan, D. W., & Chavis, D. M. (1986). Sense of community: A definition and theory. Journal of Community Psychology, 14, 6–22. Melvin, M. (1988). The dollarization of Latin America as a market-enforced monetary reform: Evidence and implications. Economic Development and Cultural Change, 36(3), 543–558. Meyer, J. W. (2009). World society. Oxford: Oxford University Press. Miller, D. (1990). Market, state and community. Oxford: Clarendon Press. Nelms, T. C., Maurer, B., Swartz, L., & Mainwaring, S. (2018). Social payments: Innovation, trust, bitcoin, and the sharing economy. Theory, Culture & Society, 35(3), 13–33. Ostrom, E., Walker, J., & Gardner, R. (1992). Covenants with and without a sword: Self-governance is possible. American Political Science Review, 86, 404–417. Pinna, L. (1971). La Famiglia Esclusiva: Parentela e Clientelismo in Sardegna. Bari: Laterza. Place, C., & Bindewald, L. (2015). Validating and improving the impact of complementary currency systems through impact assessment frameworks. International Journal of Community Currency Research, 19, 152–164. Plant, R. (2004). Online communities. Technology in Society, 26(1), 51–65. Polanyi, K. (2001 [1944]). The great transformation: The political and economic origins of our time. Boston: Beacon Press. Putnam, R. D. (2000). Bowling alone: The collapse and revival of American Community. New York: Simon & Schuster. Putnam, R., Feldstein, L., & Cohen, D. J. (2003). Better together: Restoring the American Community. New York: Simon & Schuster. Rao, U. (2019). Biometric IDs and the remaking of the Indian Welfare State. Economic Sociology the European Electronic Newsletter, 21(1), 13–21.

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Ruskin, J. (1928). Time and tide, and munera pulveris. London: Macmillan. Rydgren, J. (2009). Beliefs. In P. Hedström & P. Bearman (Eds.), The Oxford handbook of analytical sociology (pp. 72–93). Oxford: Oxford University Press. Sally, D. (1995). Conversation and cooperation in social dilemmas. Rationality and Society, 7, 58–92. Sartori, L., & Dini, P. (2016). From complementary currency to institution: A micro-macro study of the Sardex mutual credit system. Stato e Mercato, 36(2), 273–304. Sessions, L. F. (2010). How offline gatherings affect online community members: When virtual community members meetup. Information, Communication, and Society, 13(3), 375–395. Seyfang, G. (2018). Working outside the box: Community currencies, time banks and social inclusion. Journal of Social Policy, 33(1), 49–71. Simmel, G. (1971). On individuality and social forms: Selected writings. Chicago: University of Chicago Press. Simmel, G. (2004 [1900]). The philosophy of money. (T. Bottomore, & D. Frisby, Trans.). London: Routledge. [Georg Simmel 1900 Philosophie des Geldes. Leipzig: Duncker & Humblot.] Streeck, W. (2015). Why the Euro divides Europe. New Left Review, 95, 5–26. Swartz, L. (2018). What was Bitcoin, what will it be? The techno-economic imaginaries of a new money technology. Cultural Studies, 32(4), 623–650. Swedberg, R. (2003). Principles of economic sociology. Princeton, NJ: Princeton University Press. Tönnies, F. (1955 [1887]). Community and association. London: Routledge and Kegan Paul. Trott, A. M. (2014). Aristotle on the nature of community. Cambridge: Cambridge University Press. Webber, M. W. (1963). Order in diversity: Community without propinquity. In L. Wingo (Ed.), City and space: The future use of urban land (pp. 23–54). Baltimore, MD: The Johns Hopkins University Press. Weber, M. (1958). The city. Glencoe, IL: Free Press. Weber, M. (1978 [1922]). Economy and society. Berkley, CA: University of California Press. [Max Weber 1922 Wirtschaft und Gesellschaft. Tübingen: Mohr.] Wellman, B. (1992). Which types of ties and networks provide what kinds of social support. In E. Lawler, B. Markovsky, C. Ridgeway, & H. Walker (Eds.), Advances in group processes (Vol. 9, pp. 207–235). Greenwich, CT: JAI Press. Wellman, B. (Ed.). (1999). Networks in the global village. New York: Routledge. Wellman, B., & Wortley, S. (1990). Different strokes from different folks: Community ties and social support. American Journal of Sociology, 96(3), 558–588. Wenger, G. C. (1992). Help in old age—Facing up to change: A longitudinal network study. Liverpool: Liverpool University Press. Zelizer, V. (1989). The social meaning of money: “Special monies”. American Journal of Sociology, 95(2), 342–377.

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Zelizer, V. (1995). The social meaning of money: Pin money, paychecks, poor relief and other currencies. New York: Basic Books. Zelizer, V. (2010). Economic lives: How culture shapes the economy. Princeton, NJ: Princeton University Press. Zimmer, Z. (2017). Bitcoin and potosí silver historical perspectives on cryptocurrency. Technology and Culture, 58(2), 307–334.

Internet Resources Blanc, J. (2013). Community and complementary currencies, practices and research: state of the art. In Unrisd Conference International Symposium on Potential and Limits of Social and Solidarity Economy: Special Session on Alternative Finance and Complementary Currencies. Geneva: International Labour Organization. Retrieved May 6–8, 2013, from http:// www.unrisd.org/sseconf/ Dini, P., van der Graaf, S., & Passani, A. (2015). Socioeconomic framework for BOLD stakeholders. OpenLaws.eu Deliverable D2.3.d1, European Commission. Retrieved November 19, 2019, from http:// eprints.lse.ac.uk/62819/ Murphy, H., & Stacey, K. (2019). Where it all went wrong for Facebook’s Libra. Financial Time. Retrieved October 15, 2019, from https://www.ft.com/content/ 6e29a1f0-ef1e-11e9-ad1e-4367d8281195 Taskinsoy, J. (2019). Facebook’s Project Libra: Will Libra sputter out or spur Central Banks to introduce their own unique cryptocurrency projects? Available at SSRN. Retrieved July 20, 2019, from https://ssrn. com/abstract¼3423453 United Nations. (2015). Transforming our world: the 2030 Agenda for Sustainable Development. Retrieved February 11, 2020, from https:// sustainabledevelopment.un.org/post2015/ transformingourworld/publication

Giacomo Bazzani is research fellow and adjunct professor of sociology at Florence University, Florence, Italy. Research topics: Money, uncertainty, sustainability, prosocial behavior. Recent publications: Bazzani, Giacomo. 2020. When Money Changes Society. The Case of Sardex Money as Community. Wiesbaden: Springer VS. Bazzani, Giacomo. 2020. Money as a Tool for Collective Action. Partecipazione e Conflitto, special issue: Rethinking Money, Rebuilding Communities. A Multidimensional Analysis of Crypto and Complementary Currencies 13/1. Vignoli, Daniele, Giacomo Bazzani, Raffaele Guetto, Alessandra Minello, and Elena Pirani. 2020. Uncertainty and Narratives of the Future: A Theoretical Framework for Contemporary Fertility. In Analyzing Contemporary Fertility, ed. Robert Schoen. London: Springer.

Groups Matter: Social Embeddedness of Entrepreneurial Activity

17

Isabell Stamm

1

Introduction

Economic sociology theoretically and empirically uncovers the social structuring of economic actions, sheds light on the institutionalization of economic practices, or points towards the social construction of markets (Swedberg 2003; Smelser and Swedberg 2005; Maurer 2017). In short, economic sociology strives to understand the social embedding of economic actions. The sociological treatment of entrepreneurship feeds into this overall framework by viewing entrepreneurship as an institutionally embedded economic action (Weber 1988; Swedberg 2003). Institutions, which are commonly referred to as agreed upon and generalized rules of the game (Streek and Thelen 2005), shape and provide direction for entrepreneurial activities. These entrepreneurial activities can change industries, markets and even institutions (Schumpeter 1980; Aldrich and Fiol 1994; Dorado 2005), and as such are drivers of economic welfare and capitalist dynamic. The most recent twist in a sociology of entrepreneurship highlights entrepreneurship as future-oriented activity bundles and especially as a collective action of entrepreneurial groups (Thornton 1999; Ruef 2010; Stamm et al. 2019). In this setting, entrepreneurial activity goes along with the formation and maintenance of a small I. Stamm (*) “Entrepreneurial Group Dynamics”, Technische Universität Berlin, Berlin, Germany e-mail: [email protected]

group that collectively engages in an entrepreneurial venture. These groups and the rules on how they form and maintain boundaries are a specific aspect of the institutional environment of entrepreneurial activity and one that has not received systematic attention in economic sociology (Harrington and Fine 2006). One reason for this oversight may be the focused attention that other units of analysis such as markets, networks and organizations have received in economic sociology, which has left the particularities of small groups in a blur. In this chapter, I suggest that a way of bringing this blur to focus is to pay more attention to the variety of small groups in their institutional settings which are coordinating entrepreneurial activity. This overall endeavor requires the consideration of two conceptual directions. First, there is a need to revisit the link between social groups and entrepreneurial activity, as Granovetter (1985, 1995), Aldrich and Zimmer (1986) or Portes and Sensenbrenner (1993) previously called for. Research on the social embedding of entrepreneurial action as an economic action, however, either remains on a micro-level pointing to the relevance of an individual entrepreneur’s position in structures of power relations, gender relations, or networked social capital for entrepreneurial activity (Bruni et al. 2004; DeClercq and Voronov 2009; McKeever et al. 2015). The other possibility is that research on the social embedding of entrepreneurial action focuses on, as the comparative capitalism literature illustrates,

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mainly the institutional environment of organizations rather than the people involved in creating, owning, and managing these organizations (Streek 1997; Hall and Soskice 2001). Second, there is a need to acknowledge the diversity of small groups involved in entrepreneurial activity and supported by specific institutions. An often-cited example is migrant entrepreneurship that feeds from institutional rules in ethnic groups (Aldrich and Zimmer 1986; Granovetter 1995). More recently, Lehrer and Celo (2016) demonstrates how small groups of German family members are closely linked in their entrepreneurial activity, and that this link is maintained and protected by a particular institutional setting that they refer to as familial sector. Adding to this, Lehrer and Celo (2016) suggest that this familial sector co-exists in bifurcation and symbioses with other sectors supporting different types of entrepreneurial activity in the same economy. Hence, different varieties of entrepreneurship can exist (Dilli et al. 2018). In this chapter, I will develop both directions. More specifically, I suggest paying more attention to small groups engaged in coordinating entrepreneurial activity as they form a distinct social unit, beyond the organization. In contrast to Granovetter’s (1995) use of the term entrepreneurial group, which refers to the subpopulation of ethnic entrepreneurs, I use the term as suggested by Ruef (2010) to refer to a small number of individuals providing financial, timely and emotional contributions. Yet, I seek to expand upon Ruef, not only by supposing that these groups continue to exist beyond the emergence of an organization, but also by enriching this concept with key insights from a sociology of small groups (Fine 2010, 2012b). I further argue that there are multiple forms of small groups, and this variation matters in order to identify and understand various forms of entrepreneurial groups that may co-exist within an economy but are maintained and protected through particular institutional settings. As such, this discussion will contribute to an explanation of how differing institutional environments may foster varying entrepreneurial activity.

I. Stamm

The discussion will proceed as follows: The starting point forms a cursory overview of key arguments put forward in a sociology of entrepreneurship (Sect. 2). Next, I enhance the concept of entrepreneurial groups utilizing insights from group sociology and argue that various forms of entrepreneurial groups exist that navigate group formation and maintenance in their respective institutional settings (Sect. 3). I continue by illustrating the link between entrepreneurial groups and their institutional setting, with the examples of entrepreneurial families in German family capitalism and start-up ventures in the Berlin start up field (Sect. 4). For each of them, I discuss the character of the specific form of the entrepreneurial group and ways of member selection and exclusion as maintained and protected by the institutional environment. Finally, the discussion returns to a macro-level perspective and brings both forms of entrepreneurial groups and their respective environment into a comparative perspective (Sect. 5). By doing so, the usefulness and limitations of an entrepreneurial group lens to enrich the economic sociology understanding of heterogeneous forms of entrepreneurial activity is highlighted.

2

The Role of Groups in a Sociology of Entrepreneurship

The sociological discourse on entrepreneurship derives its origins from classic writers such as Weber, Sombart, or Schumpeter and has remained a lively, but never a large or even dominant stream of research within economic and organization sociology. At the same time, the sociological perspective on entrepreneurship has continuously influenced the large and interdisciplinary research field of entrepreneurship (Aldrich 2005, 452). The sociology of entrepreneurship has raised key questions such as: Under what conditions can entrepreneurial actions occur? In what ways do entrepreneurs reproduce and challenge existing social orders? How do entrepreneurs recruit engagement by employees, investors, and customers in their

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Groups Matter: Social Embeddedness of Entrepreneurial Activity

ventures? Finally, how do entrepreneurial processes vary across time and place? In the following, I will briefly elaborate upon key arguments and conceptual directions put forward by the sociology of entrepreneurship, which have changed and morphed the very definition of entrepreneurship. The goal of this section is to set the stage for the remainder of the chapter, in which I will then attend to the latest twist in a sociology of entrepreneurship by studying small groups as collective actors engaged in the entrepreneurial process.1

2.1

Unease About the Individualized Entrepreneur

Early works in economic sociology express a fascination with heroic, mostly male, individuals who single-handedly turn inventions into innovations, take on risks, and strive to increase wealth (Aldrich 2005; Ebner 2005; Deutschmann 2008). Despite the differences in their approaches, Max Weber (1988), Werner Sombart (1987), and Joseph Schumpeter (1980) share an understanding of the entrepreneur as a physical person, equipped with specific cognitive competences and character traits, who has internalized meritocratic and capitalist values, and has the ability to mobilize resources. The entrepreneur, as embodied in Andrew Carnegie, Benjamin Franklin, or John D. Rockefeller, is an economic actor who realizes imagined tasks with little compromise but lots of enthusiasm. This ideal has deeply influenced conceptual and empirical approaches to entrepreneurs (Swedberg 2000). 1

This section, hence, does not provide an encompassing overview of the development of the sociology of entrepreneurship (as e.g., Aldrich (2005) does). Rather it focuses on selected arguments needed to understand the ensuing discussion of the institutional embeddedness of entrepreneurial groups. I will not touch upon the large and influential idea of institutional entrepreneurship, which focuses on how embedded actors generate new institutions by crafting and implementing organizational forms and practices that break with established institutions (DiMaggio and Powell 1983; Battilana 2006).

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Embracing a sociological perspective, however, these same early works voice an unease about such a strong individualization of entrepreneurship (Aldrich 2005; Ebner 2010). Schumpeter suggests that being an entrepreneur is only an episode in one’s life course, and entrepreneurs can only temporarily be distinguished from managers or capitalists (Schumpeter 1980, 116). Consequently, he turns to studying bundles of activities and arrives at his famous definition that entrepreneurship is a recombination of production factors to create something new, even though he allows for the degree of newness to be rather small (Schumpeter 1980, 240). Both Weber and Sombart state how such entrepreneurial activity bundles themselves are a product of socio-historical change. Hence, to understand entrepreneurship by zooming in on the sequence of activities is incomplete as long as economic dynamics, in their institutional environment, are overlooked (Sombart 1987; Weber 1988). This image also has sustainably influenced entrepreneurship research. In fact, a process view of entrepreneurship has turned out to be the dominant approach in this interdisciplinary research field (Gartner 1988; Moroz and Hindle 2012). This approach carries forward the unease about an over-individualized view of entrepreneurship, even claiming at times that asking, “who is the entrepreneur—is the wrong question” (Gartner 1988).

2.2

Entrepreneurship as Future-Oriented Activity Bundles

In accordance with Schumpeter, scholars largely view entrepreneurship not as a single act, but rather a series of interlinked activities that occur over time and that are aimed at getting new things done (Lumpkin and Dess 1996; Swedberg 2000, 2009). For Schumpeter, such entrepreneurial activities and their new things can even have the power to destroy existing institutions. There are, however, considerably differing conceptions of what these new things actually are. From a social science view, two conceptions, organizational

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emergence, and entrepreneurial opportunity, are particularly relevant.

2.2.1 Organizational Emergence The currently dominant literature suggests that the process of getting new things done brings about organizational emergence (Aldrich 2005; Davidsson et al. 2008; Hjorth et al. 2015). Hence, entrepreneurship is a process in which activities are coordinated. The venture is organized to the degree that a goal-directed activity system, or in others words an organization emerges and enters the population of organizations (Gartner 1985; Aldrich and Ruef 2006). Accordingly, this stream of research looks at the activity patterns during the early phases of founding, called nascent entrepreneurship, up to the early years of an organization. It embraces the idea that charisma and informal organizing can transform into formal bureaucracy and authority systems, and that this formalization eventually undermines entrepreneurial activity (Sombart 1987; Weber 1988; Ebner 2005, 265). This view further considers existing organizational forms within a population of organizations that entrepreneurs can either imitate or innovate (Aldrich and Ruef 2006). From this perspective, entrepreneurship has become synonymous with organizational emergence; the term entrepreneur is used interchangeably with founder. While the largely management dominated field of entrepreneurship studies tends to focus on particularly successful start-ups, also known as unicorns, or on high-tech industries, mostly in order to derive best practices, a social science view on entrepreneurship seeks to encompass all forms and kinds of new business foundings (Brüderl et al. 1992; Aldrich 2005; Welter et al. 2016). In this context, some exceptional, collaborative, and multi-year research projects have been implemented such as the Munich Founder Study, the Panel-Study of Entrepreneurial Development in the USA, or the Global Entrepreneurship Monitor. This stream of research provides insights into demographics of entrepreneurship and its diversity, as well as the complexity of the businessfounding process. In terms of what it is that

I. Stamm

entrepreneurs are actually doing, many different bundles of activities have been uncovered. These activities occur in a variety of sequences, and nascent entrepreneurs follow no fixed sequence of activities (Carter et al. 1996; Aldrich 2005). Further, initial attempts for business founding can be followed by lengthy gestation periods before intensive activities begin, if they do so at all (Aldrich 2005). An essential common feature of these entrepreneurial activities seems to be that founders behave as if their imagined venture was a reality (Gartner et al. 1992). They offer a convincing interpretation of reality, an attractive vision of the possible future, and a prescription of how to reach that vision. By producing and directing such future images, founders may convince others of the tangible reality of their venture (Aldrich 2005).

2.2.2 Entrepreneurial Opportunity An alternative reading of entrepreneurship as a process does not emphasize organizational emergence as the new thing, but rather some degree of innovation through creating, discovering, and exploiting opportunity (Shane 2007; Alvarez and Barney 2010). In this setting, entrepreneurship connects closely to the capacity to break with old orders or at least discover niches and holes within existing orders. Entrepreneurship also entails the proofing of prove endurance and resilience whilst following through with the venture. Within this stream of research, a recent development emphasizes the performative character of entrepreneurship. Strongly influenced by practice theoretical thinking (e.g., Bourdieu 1977; Schatzki 1996; Reckwitz 2002), this view suggests that entrepreneurship––or rather entrepreneuring––is an “ongoing practice of creatively organizing people and resources according to opportunity” (Johannisson 2011, 137). Entrepreneuring arises in the flow of events; it is a sequence of orchestrated activities carried out by socially constructed entrepreneurs (DeClercq and Voronov 2009; Gartner 2010; Vestrum 2014). This growing trend adheres to and enhances a storytelling aspect of entrepreneurship. Johannisson (2011) argued that entrepreneurs, as storytellers and communicators,

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Groups Matter: Social Embeddedness of Entrepreneurial Activity

come to be viewed as dependable figures in the capitalist economic system. They utilize strategies of encouraging other people’s beliefs in their competence and trustworthiness. At the same time, this approach reminds us that entrepreneurial storytelling is grounded in a practical awareness of entrepreneurs performing in a specific institutional setting (Garud et al. 2018). In summary, entrepreneurship can be described as activity bundles directed towards an imagined future that involves the creation of something new. Drawing from Beckert’s (2016) understanding of imagined futures, one could argue that entrepreneurs, although constrained by their social embedding, draft and narrate fictional expectations that convince others to provide credit, invest in their ventures or purchase their products or services, among other actions. Such imagined futures, built into the process of entrepreneurship, play a key function in moving and directing capitalist dynamics (Harrington 2017).

2.3

Entrepreneurship as Collective Action (Re)producing Groups

Looking at the activity bundles during the early start-up phase of a venture from a network perspective yielded further important insights to a sociology of entrepreneurship. Departing from his social structural view on economic activity, Granovetter suggested that entrepreneurs utilize two kinds of social relationships, for very different reasons (Granovetter 1985, 1995; Ferrary and Granovetter 2009). By leveraging social relations with acquaintances (weak ties) they induce new knowledge into the entrepreneurial process, which is vital for obtaining new resources (capital, employees, but also other material resources). It helps identify new opportunities and provides input for drafting future visions (Granovetter 1985). In this sense, entrepreneurs engage in bridging between disassociated networks. By leveraging regular interactions with family members, friends, and strong ties or colleagues, entrepreneurs use trust and solidarity generated in strong ties, two key ingredients that enable a

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regular coordination of entrepreneurial activity (Granovetter 1995; Ferrary and Granovetter 2009). These studies on monitoring activities during organizational emergence illustrate tie formation and more specifically the formation of entrepreneurial groups during this process (Munich Founder Study, PSED, GEM). Ruef (2010) suggests an understanding of entrepreneurship as a recruitment process in which focal entrepreneurs convince others to provide capital, their labor capacity or emotional support in pursuing an entrepreneurial venture (Ruef 2010; Klotz et al. 2014). Hence, in the process of entrepreneurship not only do organizations emerge, but entrepreneurial groups arise, morph, and reproduce.2 (Granovetter 1995; Thornton 1999; Ruef and Lounsbury 2007; Thornton et al. 2011). Ruef (2010) shows that the vast majority of new ventures in the US is carried forward by groups that are predominantly based on strong tie relationships. Entrepreneurial groups consist of spouses, siblings, parents and their children, friends, and former colleagues. They are mostly dyads and triads but are sometimes larger small groups. When forming venture collaborations, entrepreneurs seek allies among their most trusted confidants and in their further recruitment of business partners, capital, employees, or customers they utilize the network relationships available to them. Given that such networks differ depending on the social position of the involved members (Granovetter 1985), we can expect, as Ruef suggests, to find differing recruitment patterns and multiple pathways of entrepreneurial groups (Ruef 2010). Considering such a relational demography approach can explain why entrepreneurial groups are often homogenous in many aspects (gender, age, education, likemindedness), but considerably different forms of entrepreneurial groups can exist parallel to each other (Stamm et al. 2019). Moreover, such

2

In the interdisciplinary entrepreneurship literature such small groups engaged in venture creation are often referred to as entrepreneurial teams or new venture teams. In the following, I will use the term entrepreneurial groups as suggested by Ruef, but I will expand on its meaning.

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entrepreneurial groups do not suddenly disappear after organizational emergence. They form distinct social units that differ from but intertwine with the organization. Such entrepreneurial groups can also not be equalized with the ethnic, friendship, or family communities they may be embedded in. Embracing entrepreneurial groups as a distinct social unit that is intertwined with, but different from the organization, requires the acceptance of entrepreneurial groups as economic actors in their own right, and are embedded in institutional environments that go beyond just the attached organization. In any case, a sociological understanding of entrepreneurial group dynamics overcomes the equation of a venture with organizational emergence (Aldrich and Ruef 2006; Ruef 2010; Jin et al. 2017), but also considers that such a venture can be a matter of wealth and job creation (Welter et al. 2016), or a generational spanning family project (Nordqvist and Melin 2010). Hence, group members can act collectively under the pressure to earn an income and create their own jobs. They strive to increase their economic and/or social wealth, dream of emancipating themselves or driving change (Welter et al. 2016).

3

The Dual Problem of Solidarity

The concept of entrepreneurial groups ultimately classifies the idea of entrepreneurs being heroic individuals as a myth (Harper 2008). This approach also exceeds the dominant process understanding in entrepreneurship by suggesting that entrepreneurship is a collective action (Lounsbury 1998; Thornton 1999; Ruef and Lounsbury 2007). Nevertheless, knowledge about the inner workings of entrepreneurial groups remains cursory, which prohibits probing into the connections between forms of entrepreneurial groups and the logics, roles, and rules these groups follow in their local contexts. In order to further develop a sociology of entrepreneurship, I suggest connecting the concept of entrepreneurial groups more closely to a sociological perspective on small groups

(Schäfers 1999; Harrington and Fine 2006; Fine 2012b). From this vantage point, entrepreneurial groups are “aggregations of persons who recognize that they constitute a meaningful social unit, interact on that basis, and are committed to that social unit” (Fine 2012b, 21). They feature a shared history, an ideo-culture, and a shared prospect on the future (Fine 2012b). The bundled and consecutive activities of group members constitute their joint pathway, during which they share experiences and identify themselves as contributors to the venture. Meaning derives not from interaction as such, but through continuing references that historicize the group and a group style that filters and localizes collective representations (Fine 2010, 2012a, 168). Within the group, interactions routinize and a system of knowledge, beliefs, behavior, and customs forms what Fine refers to as ideoculture (Fine 2012a, b). A solidified ideo-culture creates boundaries, separating insiders from those who stand outside the realm of collective knowledge (Fine 2010, 2012a). Entrepreneurial groups are sites of activity, identification, and social relations supporting a shared vision of creativity, but they are also fragile as career trajectories of group members may veer in different directions (Fine 2012b, 168). Over time not only may participants of groups change, but also the very definition of the group may change, which makes membership fluid (Fine and Harrington 2004, 352). Finally, entrepreneurial groups also believe in a common future as a social unit, which provides expectations of continuity or may suggest the possibility of change. As mentioned above, the joint drafting of fictional expectations is also key to entrepreneurial activity and guides economic actions. If one applies such a small group perspective on the collective action of entrepreneurship, Ruef’s (2010) idea of varying recruitment patterns can be grasped as differences in the way groups select their members and draw boundaries. In order to understand these differences, the conceptual idea of a dual problem of solidarity that has been described for ethnic entrepreneurship (Aldrich and Zimmer 1986; Aldrich and Waldinger 1990; Granovetter 1995), is instructive

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Groups Matter: Social Embeddedness of Entrepreneurial Activity

and, as I suggest, could be used as a guiding principle to understand group member formation and maintenance in respective institutional settings more generally. Granovetter (1995) suggests that drawing from trust relationships is particularly important for the coordination of economic activity under uncertainty. As noted above, entrepreneurs first turn to trusted relationships in order to recruit employees, financial capital, material resources, or simple advice. It is on the grounds of trust relationships that entrepreneurial groups select their members and maintain their boundaries. Based on these observations, Granovetter (1995) suggests a dual problem of solidarity: building small groups on insufficient solidarity leads to a failure of trust, while uncontrolled solidarity results in excessive non-economic claims constraining entrepreneurial activity. An entrepreneurial group’s pathway of including certain members while excluding or not even approaching others can be seen as a strategy to deal with the dual problem of solidarity and can eventually bring about balanced solidarity. These inclusions and exclusions are a case of embedded agency, allowing for some strategic decision making within an institutionally structured setting.3 In the case of immigrant minority communities4 such as Chinese, Korean, Japanese, or Philippine communities, sociologists of entrepreneurship have illustrated how the constructed ethnic identity influences member selection and boundary maintenance in entrepreneurial groups (Aldrich and Zimmer 1986; Aldrich and Waldinger 1990; Granovetter 1995). Ethnicity as a shared home culture offers norms of proper behavior, creates social identity among immigrant 3

Granovetter uses the terms coupling and decoupling, whereas I refer to inclusion and exclusion in order to differentiate the terms from their meaning in organization theory and to emphasize the crafting of group boundaries. 4 Granovetter uses the term ethnic group in the sense of a larger social group sharing an ethnic identity. I substitute his use of ethnic group with the term community in order to avoid confusion, with a different understanding of group that I will use for the remainder of this chapter: groups in the sense of small groups.

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minorities, and furthers trust within the community. In the formation of an entrepreneurial group, the position of being part of an immigrant minority can allow for ethnic ties to be seen as trustworthy and also to influence inclusion tendencies. In this case, ethnicity then becomes the dominate source of trust, which may or may not overlap with other strong tie relationships (such as being family members). Minority communities face discrimination, which actually nurtures inclusion tendencies of community members as trust beyond the clearly defined boundary of the minority community falls of sharply (Granovetter 1995). While Granovetter (1995) has described the role of ethnicity to solve the dual problem of solidarity in certain institutional settings, he suggests that other communities, which are not as easily identified, may fulfill similar functions in the entrepreneurial process. He calls economic sociologists to consider the nexus between social groups and entrepreneurial activity in various institutional settings (Granovetter 1995). The general point raised here is that conditions, which raise the salience of group identity and boundaries, play a key role in understanding the complex balance of inclusion and exclusion in the formation and maintenance of entrepreneurial groups.

4

Two Types of Entrepreneurial Groups, Two Sets of Embeddedness

Based on the previous considerations, entrepreneurial groups aggregate a small number of individuals, who recognize that they constitute a meaningful social unit through continued reference to their shared history, who interact on the basis of negotiated roles and rules forming a distinct ideo-culture, and who draft a shared prospective future. Entrepreneurial groups form in intertwinement with their respective institutional context and hence, we can reasonably assume that depending on which form of small groups they refer to in the institutional fabric, various types of entrepreneurial groups exist. In the following, I

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will depart from the example of ethnic entrepreneurship and will apply the idea of inclusion and exclusion in the formation and reproduction of entrepreneurial groups. I will also suggest two other forms of entrepreneurial groups: entrepreneurial families and start-up teams that co-exist within the German economic system and correspond to two very different sets of embedding.

4.1

The Entrepreneurial Family in German Family Capitalism

In entrepreneurial families, as a form of entrepreneurial group, selected family members jointly engage in entrepreneurial activity. Their shared experience pertains to prior and ongoing interactions within the family and to their joint engagement in the business. They establish an ideo-culture that is distinct from the family and that has effects on organizational structures and cultures. The group’s ideo-culture and its imagined future draws from institutional roots around family solidarity, transgenerational transfer, or family status in local institutions. Gómez-Mejía and colleagues emphasize that for entrepreneurial families the success of the venture is subordinate to the fulfillment of the family’s financial, social, and affective needs (Gomez-Mejia et al. 2015). Through their engagement in entrepreneurial activity, entrepreneurial families seek to support the involved households and want to accumulate wealth, but they mainly seek to build identity, ensure family influence, and increase their local social status (Gómez-Mejía et al. 2007; Welter et al. 2016). Based on previous research in finance, Lehrer and Celo (2016) emphasize that the overriding financial strategy of family firms is to avoid jeopardizing family control through dependency on external providers of credit or financial equity. This characteristic feature of entrepreneurial families steers their inclusion and exclusion movements in the formation and reproduction of the group towards selected family members, who are protected from outside influences. This pattern does not only empower entrepreneurial families within the organization, but makes their

organizations more resilient to financial market demands (Lehrer and Celo 2016). Lehrer and Celo (2016) argue further that these characteristics of entrepreneurial families are embedded in a familial sector in German economy, (i.e., the presence of institutions to promote and protect closely held family ownership). They identify three key elements constituting this set of embedding. First, entrepreneurial families mainly adhere to the organizational practice of using retained earnings to finance the development of their business venture. Second, banks are expected to be providers of occasional loans and protectors of a family’s privacy rather than being a strategic partner in investments (see also Deeg 2010). Third, politics and inheritance taxes are exceptionally benevolent to long-term family engagement in business ownership (see also Beckert 2008; Carney et al. 2014). All of these factors influence and support an inclusion of family members in entrepreneurial groups during group formation and reproduction. The line of argument put forward by Lehrer and Celo (2016) is convincing and marks an important advance in economic sociology. At the same time, the authors remain very much focused on the firm and market coordination and continue to ignore important aspects of the institutional environment under which such family members engage collectively in entrepreneurship. I suggest that digging into the depth of family institutional settings will help unveil another set of explanatory factors, which protect and help maintain entrepreneurial families as a specific form of entrepreneurial groups. Particularly interesting from the perspective of entrepreneurial families are family ideals, which not only rest on the family’s emotional or educational function but include ways of coordinating activity. German families operate in an institutional environment that, for many decades and up until recently, has embraced the malebreadwinner ideal for organizing the family (Pfau-Effinger 2004). At the center of this ideal, which is rather traditional in comparison to Northern European countries, is the task differentiation between spouses with the male part taking on the task of earning an income and the female

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Groups Matter: Social Embeddedness of Entrepreneurial Activity

part caring for home and the off-spring (Grunow et al. 2006). For many decades, this image was engraved in cultural gender norms and formed a key reference point in the social welfare system in Germany (Fagnani 2012). Although this ideal has been discredited in the rise of gender equality and a dramatic shift in the social policy making, actual task differentiation among the majority of German couples is changing slowly (Fagnani 2012). This organizational aspect of the family in Germany suggests that family members share tasks in order to contribute to the overall wellbeing of the family. Hence, when starting an entrepreneurial venture in such an institutional environment, family members are expected to support, maintain, or improve the family status quo. This institutional context nourishes inclusion tendencies of entrepreneurial families, resting ownership of the business in the hand of a small group of spouses and/or siblings. Furthermore, institutionalized rules of intergenerational transfer within families in Germany effect the way entrepreneurial families view their venture as spanning generations, and hence, the way they reproduce the entrepreneurial group within the family. As research on intergenerational transfers has shown, in vivo transfers usually follow the ideal of provision for family members in need, while postmortem transfers are expected to consider all offspring with equal parts (Albertini et al. 2007). Up until the end of the tenure of the founding family members, the venture thus provides resources and privileges that can be utilized to support family well-being or help family members in times of economic hardship. The venture may further be seen as a steppingstone enabling future generations to move into professional careers. Although the majority of entrepreneurial families do not engage in joint entrepreneurial activity across generations,5 for those that do, bequeathing 5

Remarkably, most research on entrepreneurial families pronounces a long-term outlook of their engagement and the wish that the business will be passed on across generations (Le Breton-Miller and Miller 2006; Colli 2013). However, this generalization seems biased towards large family firms and does not keep up with the heterogeneity of entrepreneurial families.

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turns into an important issue. As Beckert (2008) elaborated, the German legal and taxation code has a tradition of viewing property as family property and the legal owner as trustee for the estate of the clan. Both legal regulations of bequests and inheritance law create favorable conditions for transgenerational support in conjugal families, which makes transfer of business ownership within the family more attractive than outside the family. Klein (2004) suggested that in their way of retaining ownership within the family, entrepreneurial families would mimic European aristocratic families. Plate et al. (2011) illustrated a number of historic cases, where capital spread across the family network. Yet, this is only part of the story. In fact, having most of the family wealth tied to a business makes it hard to fulfill the norm of bequeathing equally to all descendants. German inheritance law ensures that all children will receive a mandatory portion, which can result in the need to sell the business in order to create enough liquid capital to pay non-involved parts of the family. Bohler and Hildenbrand (1997) as well as Breuer (2009) remind us of the tradition among farming families, waiving their property rights to protect family wealth from being broken into nonfunctional pieces, which could also be observed in other entrepreneurial families. The relevance of distinction and discrimination of entrepreneurial families in their local communities which fosters exclusion seems worth mentioning in this context. Previous research has emphasized that family owners feel especially obliged to cultivate a good reputation in the local community (Colli 2013; Deephouse and Jaskiewicz 2013). Given that there are usually few entrepreneurial families in a local community and that entrepreneurship offers a way of social upward mobility for those less educated or with less training, including those educated and trained outside a European context, engagement in entrepreneurial activity makes entrepreneurial families a distinct part of the local community (Granovetter 1995). Not all entrepreneurs are successful at creating the need to uphold an image of the respectable entrepreneur to the public and dealing with precarious situations in the privacy

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of the entrepreneurial group. In the case of wealth accumulation entrepreneurial families may feel envied and estranged from their local communities, again leading to exclusion. The identification of entrepreneurial families as a distinct sub-group within their local community may be another driver for entrepreneurial families to continue to partner with selected family members. To sum up, while the ideal of the family being a task differentiated solidarity community and institutionalized rules around generational transfer support inclusion of selected, but not all family members in entrepreneurial families, the social status of entrepreneurial families in reference to their local community supports exclusion of other potential collaborators. These features of the institutional context of families thus mark additional factors, which are able to explain the specificity of entrepreneurial families as entrepreneurial groups. In these groups the co-engagement with family members and closely held ownership mark the content of their joint history, shape their ideoculture and the idea of intergenerational succession as a prospective future.

4.2

The Start-Up Team in the Berlin New Venture Field

In contrast, start-up teams, as another form of entrepreneurial group, select team members on the basis of creating a functioning meritocratic work team. Their shared experience pertains to prior, and especially to ongoing interactions of working jointly on a new venture project. They establish an ideo-culture centered around group dynamics, complementary competences, and a temporary character of their joint engagement. The group’s ideo-culture and imagined future draw from institutional roots around new forms of work and exit-orientation. As I will argue in the following, such start-up teams are also closely intertwined with a distinct set of institutional embedding. The term start-up team, or new venture team, usually refers to a team of co-founders that have financial stake in an entrepreneurial venture and co-work in the endeavor of bringing their founding idea to fruition (Lechler 2001;

Schjoedt et al. 2013). Start-up teams commonly rest upon friendship or collegial ties, yet the type of tie in this constellation is less relevant as it becomes coded with a layer of strong working relationships. Hence, start-up teams may very well consist of brothers or friends, but key to the shared past, ideo-culture, and prospective future of this entrepreneurial group is their work relationship.6 This relationship follows the ideal of a project team that creatively, intensely, and temporarily works together to realize a set goal. Startup teams engage in collective action to succeed with their venture idea, but also for the experience of being in a start-up project in the sense of a career sequence and a personal challenge. Such start-up teams are typically associated with an entrepreneurial ecosystem (Brown and Mason 2017; Spigel 2017), a term frequently used to describe an organizational field centered around new venture creation (DiMaggio and Powell 1983; Aldrich and Ruef 2006), in which start-ups hold close connections to each other as well as to university, community, and financial actors. I will refer to such entrepreneurial ecosystems as new venture fields. For the Silicon Valley, as most famous and successful of such new venture fields, researchers have emphasized that start-up teams operate in regional density, with flat hierarchies and frequent social interactions turning informal networks into an important success factor (Swedberg 2003). In her in-depth study on the Silicon Valley, Saxenian (1996) argued further that this new venture field is an exceptional case formed by a local culture of shared understandings and practices, which values high competition and risk-taking (Saxenian 1996; Gold 2018). Advancing a social-structural argument, Ferrary and Granovetter (2009) describe the heterogeneity of agents and the multiplexity of agent relations in the Silicon Valley as constitutive and nurturing for start-up teams (e.g., an entrepreneur moves from being a start-up team member to mentor or 6 Remarkably, family ties are not fully alien to the Berlin new venture field as the case of the Samwer brothers, the founders of Zalando and owners of the equity investment firm Rocket Internet, famously illustrates.

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Groups Matter: Social Embeddedness of Entrepreneurial Activity

surrogate entrepreneur to angel investor and back). Within this complex network, they elaborate upon the relevance of venture capitalists in the embedding of start-up teams in the field (Ferrary and Granovetter 2009). The success of a venture not only depends on its innovativeness, but on its embedding in the complex network which grants access to financial resources, potential team members and expert knowledge (Ferrary and Granovetter 2009). In Germany, a number of such new venture fields are emerging in Rhein-Ruhr, Stuttgart, Munich, Hamburg, and Berlin, which in some ways seek to imitate the Silicon Valley, but are bound to local infrastructure, networks, and culture. I will limit my discussion to research on the Berlin start-up scene, which developed after the unification of East and West Germany in 1989, hence it is much younger than the Silicon Valley, and today is ranked as one of the top three new venture fields in Europe (Ernst and Young 2019). Most of the activities of start-up teams are locally clustered around Mitte and FriedrichshainKreuzberg, two neighboring districts in the center of Berlin. According to the Berlin Start-Up Monitor (2018), almost half of the surveyed start-ups operate in software and software development, fin-tech, and online marketplaces. The Berlin start-up scene is dominated by male academics in their mid-30s. About 84% of the entrepreneurs surveyed in the Berlin Start-Up Monitor (2018) hold an academic degree, mainly in management or economics, but also in computer science, mathematics, or engineering. In her study on the Berlin new venture field, Scheidgen (2019, 2020) describes that start-up teams profit from the agglomeration of young, often international professionals, linked to four universities, entrepreneurial education programs, public funding for start-up activities, and a number of co-working spaces, incubators, and accelerators. Characteristic for the start-up scene are regular events providing opportunity for informal and formal networking. According to Scheidgen (2020), what is peculiar to the new venture field in Berlin is the low degree of integration between start-ups supported by equity capital and those start-ups spinning out of a

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university context, mainly scientists who seek to commercialize their findings by participating in public funding programs. While both rest upon a start-up team, the embedding of these teams differs (2020). Start-Ups supported by equity capital are part of a dense entrepreneurial community with vivid, informal exchange, multiplexity of agents, and a key role for venture capitalists. At the same time, start-ups spinning out of university incubators and state actors form a second and somewhat removed network. Nevertheless, Berlin start-up teams share some essential features that become obvious in their group formation process (Ucbasaran et al. 2003; Cooney 2005). The initial team formation is set on the creation of a functioning work team. Strong social relationships between team members are common and come with a number of advantages but are not essential to the formation of a functioning team. While most start-up teams are comprised of two founders who have been friends or colleagues for several years, other teams emerge from a random meeting of acquaintances within the start-up community or within the scientific community (Scheidgen 2019). The fact that start-up teams can form even on the basis of acquaintances suggests that in the process of team formation the initial tie becomes coded with a strong work-based relationship that then serves as an anchor point for the joint entrepreneurial activity. Anecdotes about the work-spirit during this initial phase form an important reference point for the development the team’s social identity. Work norms and fictional expectations about new digital work appear to be central institutional anchor points maintaining start-up teams as particular form of entrepreneurial groups. A second stage in the group formation of startup teams encompasses team enlargement (Vanaelst et al. 2006; Scheidgen 2019). The initial start-up team searches for and actively selects additional team members, which can include another co-founder, a surrogate entrepreneur, or an angel investor. The additional team members should bring in an outside perspective, a commercial experience or managerial skills complementing the existing skill set of the team

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that faces the challenges of a pitch-culture, the need to write up a business plan, and master the dependence of digital infrastructure (Clarysse and Moray 2004; Vanaelst et al. 2006). As Scheidgen (2019) proposes, the difference between start-ups supported by equity and start-ups spinning-off the university context is the influence of private equity investors on the one hand and state funded programs on the other. In both cases, however, the start-up team considers assumed expectations of financial field actors in their selection of additional team members. For some start-up teams this means catering to anticipated expectations of venture capitalists, blueprints communicated in the entrepreneurial field, and learned customs. For others this means catering to formalized requirements set by public funding programs (mainly the EXIST program) (Scheidgen 2019). In both cases, the enlarged start-up team is comprised of the initial work team supported by team members fulfilling anticipated strategic field functions (Lim et al. 2013). Anticipated expectations of venture capitalists and funding policies both imply ideas about how an ideal start-up team should look. These ideas include a minimum and maximum number of such team members and suggest that they should include heterogeneous expertise (Ebner 2010). This implied image about start-up teams seems to be biased towards highly trained professionals and prior entrepreneurial experience, turning team expansion into a rather exclusive and demanding act. We can reasonably assume that this ideal has institutional predecessors as it strongly resembles typical images about partnerships in industrial firms led by a management and technical executives, who were often brothers, although empirical research is lacking. Further, investors look at the dynamic within the group as a key factor to assess whether they trust a team to succeed in the market or not. Contrary to family capitalism, where the family is granted the freedom of going through stretches of conflict, or disharmony, the presenting of a friendly and functioning group dynamic appears to be an essential assessment criterion applied to start-up teams by the start-up field.

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Finally, start-up teams act within institutionalized rules of an exit-orientation (DeTienne and Cardon 2012), which support a project-logic of their joint engagement (Boltanski and Chiapello 2003) and represent an entirely different approach to group reproduction than succession in entrepreneurial families. For equity capitalists, supporting new ventures is only temporarily relevant and aims at realizing a return of investment at a given point. Similarly, start-up members enter a team on temporary terms until a set goal has been achieved or they move on to other professional or private projects (Wennberg et al. 2010). This finitude of the start-up team materializes in the co-founder contract, which at the moment of founding an organization already anticipates the case of a team member exit (Breugst et al. 2015). The exit-orientation in start-up teams thus seems to be driven by financial market actors but also maintained and nourished by destandardized and projectified ideas of work and career. To sum up, while the ideal of a functioning work team and the anticipation of an investor’s expectations support inclusion of selected team members in start-up teams, a prescribed group size, an implied need for complementary skills, and an exit-orientation support exclusion of team members from other network actors. A further examination of the institutional origins of the implied images of start-up teams in the new venture field appears to be necessary to explain how, aside from the key role of equity capital actors, this form of entrepreneurial group is created and maintained.

5

Variety of Groups, Variety of Entrepreneurial Activity

The two forms of entrepreneurial groups–– entrepreneurial families and start up teams–– each represent solutions to Granovetter’s dual problem of solidarity. By creating an alliance of family members engaged in entrepreneurial activity, entrepreneurial families draw from the trust and solidarity contained in family relationships. The expectation of sharing tasks among family

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Groups Matter: Social Embeddedness of Entrepreneurial Activity

members, waiving rules of generational transfer, and discrimination on the basis of social status drive inclusion of family members and exclusion from the wider kinship network as well as other social groups within the local community. Startup teams on the contrary, create a functioning work team as a basis for trust and solidarity. A potential lack of solidarity is filled on the grounds of social cohesion within the team, a belief in a termed future, and the strategic fulfillment of field expectations about the team. Inclusion and exclusion in start-up teams considers harmonious work relations, complementary competences, and the temporary character of their co-engagement. Although both forms of entrepreneurial groups are socially constructed, start-up teams appear strikingly more vulnerable to manipulative intervention from the new venture field. Putting entrepreneurial families and start-up ventures in juxtaposition underlines that the type of tie (strong or weak, family or friends) is not relevant per se, for entrepreneurial group formation and maintenance. Rather, it is the family or the work team as a reference of solidarity that is embraced in the history, ideo-culture, and prospective future of the group. These references of solidarity are protected and supported by the respective institutional setting. The relationship between entrepreneurial group and its social embeddedness differs from, but is strongly related to, the embeddedness of the respective attached organizations (i.e., family firms and new ventures) as they coordinate activity on markets. The discussion further illustrates how within one variant of capitalism, the German coordinated market economy, multiple forms of entrepreneurial groups are linked to their respective institutional settings that co-exist and successfully nurture entrepreneurial activity. In the case of Germany, entrepreneurial families are still seen as the dominant form of entrepreneurial groups (Berghoff 2006; Lehrer and Celo 2016). As an indicator of German family capitalism, empirical studies often refer to the dominance of ownermanagers (who are often supported by non-owning family members) and ownership closely held within one family, some even stating that more than 90% of all businesses in Germany

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are family firms (Gottschalk and Keese 2014). However, as we have seen in this discussion, the involvement of multiple family members in an entrepreneurial group does not yet qualify this group to be an entrepreneurial family. In co-existence with entrepreneurial families, startup teams are flourishing in the Berlin start up field and across other regions in the country. In light of this discussion, entrepreneurial groups can be seen as an intermediate analysis unit. They open up an understanding of the social embedding of entrepreneurship towards highly relevant institutional arenas such as the family or work teams, which have thus far been overlooked. A small group perspective on entrepreneurship not only acknowledges entrepreneurial groups as drivers of capitalist dynamics, but also draws attention to the emergence and morphing of such social forms.

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I. Stamm Deephouse, D. L., & Jaskiewicz, P. (2013). Do family firms have better reputations than non-family firms? An integration of socioemotional wealth and social identity theories. Journal of Management Studies, 50, 337–360. DeTienne, D. R., & Cardon, M. S. (2012). Impact of founder experience on exit intentions. Small Business Economics, 38(4), 351–374. Deutschmann, C. (2008). Der Typus des Unternehmers in wirtschaftssoziologischer Sicht. In A. Maurer & U. Schimank (Eds.), Die Unternehmen der Gesellschaft: Gesellschaftstheoretische Zugänge zum Wirtschaftsgeschehen (pp. 40–62). Wiesbaden: VS Verlag für Sozialwissenschaften. Dilli, S., Elert, N., & Herrmann, A. M. (2018). Varieties of entrepreneurship: Exploring the institutional foundations of different entrepreneurship types through ‘varieties-of-capitalism’ arguments. Small Business Economics, 51(2), 293–320. DiMaggio, P. J., & Powell, W. W. (1983). The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48(2), 147–160. Dorado, S. (2005). Institutional entrepreneurship, partaking, and convening. Organization Studies, 26 (3), 385–414. Ebner, A. (2005). Entrepreneurship and economic development: From classical political economy to economic sociology. Journal of Economic Studies, 32(3), 256–274. Ebner, A. (2010). Varieties of capitalism and the limits of entrepreneurship policy. Journal of Industry, Competition and Trade, 10(3–4), 319–341. Ernst and Young AG. (2019). Start-up-Barometer Europa: Analyse der Kapitalfinanzierung europäischer Start-ups. St. Gallen: Ernst and Young AG. Fagnani, J. (2012). Recent reforms in childcare and family policies in France and Germany: What was at stake? Comparative Child and Family Policy, 34(3), 509–516. Ferrary, M., & Granovetter, M. (2009). The role of venture capital firms in Silicon Valley’s complex innovation network. Economy and Society, 38(2), 326–359. Fine, G. A. (2010). The sociology of the local: Action and its public. Sociological Theory, 28, 355–376. Fine, G. A. (2012a). Group culture and the interaction order: Local sociology on the meso-level. Annual Review of Sociology, 38, 159–179. Fine, G. A. (2012b). Tiny publics: A theory of group action and culture (Russell Sage Foundation Series on Trust). Russell Sage Foundation: New York. Fine, G. A., & Harrington, B. (2004). Tiny publics: Small groups and civil society. Sociological Theory, 22(3), 341–356. Gartner, W. B. (1985). A conceptual framework for describing the phenomenon of new venture creation. Academy of Management Review, 10, 696–706.

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Groups Matter: Social Embeddedness of Entrepreneurial Activity

Gartner, W. B. (1988). Who is the entrepreneur? Is the wrong question. American Journal of Small Business, 12(4), 11–32. Gartner, W. B. (2010). A new path to the waterfall: A narrative on a use of entrepreneurial narrative. International Small Business Journal, 28(1), 6–19. Gartner, W. B., Bird, B., & Starr, J. (1992). Act as if: Differentiating entrepreneurial from organizational behavior. Entrepreneurship, Theory & Practice, 16, 13–32. Garud, R., Gehman, J., & Giuliani, A. P. (2018). Why not take a performative approach to entrepreneurship? Journal of Business Venturing Insights, 9(2), 60–64. Gold, B. (2018). Silicon Valley start-ups and corporate innovation: Approaches to resolve the innovator’s dilemma. Wiesbaden: Springer Gabler. Gómez-Mejia, L. R., Haynes, K. T., Núnez-Nickel, M., Jacobson, K. J. L., & Moyano-Fuentes, J. (2007). Socioemotional wealth and business risks in familycontrolled firms: Evidence from Spanish olive oil mills. Administrative Science Quarterly, 52(1), 106–137. Gómez-Mejia, L. R., Patel, P. C., & Zellweger, T. M. (2015). In the horns of the dilemma: Socioemotional wealth, financial wealth, and acquisitions in family firms. Journal of Management, 44(4), 1369–1397. Gottschalk, S., & Keese, D. (2014). Die volkswirtschaftliche Bedeutung von Familienunternehmen. München: ZEW Stiftung Familienunternehmen. Granovetter, M. (1985). Economic action and social structure: The problem of embeddedness. American Journal of Sociology, 91(3), 481–510. Granovetter, M. (1995). The economic sociology of firms and entrepreneurs. In A. Portes (Ed.), The economic sociology of immigration: Essays on networks, ethnicity, and entrepreneurship (pp. 128–165). New York: Russell Sage Foundation. Grunow, D., Hofmeister, H., & Buchholz, S. (2006). Late 20th-century persistence and decline of the female homemaker in Germany and the United States. International Sociology, 21(1), 101–131. Hall, P., & Soskice, D. (Eds.). (2001). Varieties of capitalism: The institutional foundations of comparative advantage. New York: Oxford University Press. Harper, D. A. (2008). Towards a theory of entrepreneurial teams. Journal of Business Venturing, 23(6), 613–626. Harrington, E. B. (2017). Fraud and fantasy: Toward a new research agenda for economic sociology. Review symposium. Socio-Economic Review, 15(1), 241–258. Harrington, E. B., & Fine, G. A. (2006). Where the action is: Small groups and contemporary sociological theory. Small Group Research, 37(1), 1–16. Hjorth, D., Holt, R., & Steyaert, C. (2015). Entrepreneurship and process studies. International Small Business Journal, 33(6), 599–611. Jin, L., Madison, K., Kraiczy, N. D., Kellermanns, F. W., Russell Crook, T., & Xi, J. (2017). Entrepreneurial team composition characteristics and new venture

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performance: A meta-analysis. Entrepreneurship Theory & Practice, 41(5), 743–771. Johannisson, B. (2011). Towards a practice theory of entrepreneuring. Small Business Economics, 36(2), 135–150. Klein, S. (2004). Familienunternehmen: Theoretische und empirische Grundlagen (2. Auflage ed.). Wiesbaden: Gabler. Klotz, A. C., Hmieleski, K. M., Bradley, B. H., & Busenitz, L. W. (2014). New venture teams: A review of the literature and roadmap for future research. Journal of Management, 40(1), 226–255. Le Breton-Miller, I., & Miller, D. (2006). Why do some family businesses out-compete? Governance, longterm orientations, and sustainable capability. Entrepreneurship Theory & Practice, 30, 731–746. Lechler, T. (2001). Social interaction: A determinant of entrepreneurial team venture success. Small Business Economics, 16(4), 263–278. Lehrer, M., & Celo, S. (2016). German family capitalism in the 21st-century: Patient capital between bifurcation and symbiosis. Socio-Economic Review, 14(4), 729–750. Lim, J. A. Y., Busenitz, L. W., & Chidambaram, L. (2013). New venture teams and the quality of business opportunities identified: Faultlines between subgroups of founders and investors. Entrepreneurship Theory & Practice, 37(1), 47–67. Lounsbury, M. (1998). Collective entrepreneurship: The mobilization of college and university recycling coordinators. Journal of Organizational Change Management, 11(1), 50–69. Lumpkin, G. T., & Dess, G. G. (1996). Clarifying the entrepreneurial orientation construct and linking it to performance. The Academy of Management Review, 21 (1), 135–172. Maurer, A. (Ed.). (2017). Handbuch der Wirtschaftssoziologie. Wirtschaft und Gesellschaft. Wiesbaden: VS Verlag für Sozialwissenschaften. McKeever, E., Jack, S., & Anderson, A. (2015). Embedded entrepreneurship in the creative re-construction of place. Journal of Business Venturing, 30(3), 50–65. Moroz, P. W., & Hindle, K. (2012). Entrepreneurship as a process: Toward harmonizing multiple perspectives. Entrepreneurship, Theory & Practice, 36(4), 781–818. Nordqvist, M., & Melin, L. (2010). Entrepreneurial families and family firms. Entrepreneurship & Regional Development, 22(3–4), 211–239. Pfau-Effinger, B. (2004). Socio-historical paths of the male breadwinner model––An explanation of crossnational differences. The British Journal of Sociology, 55(3), 377–399. Plate, M., Groth, T., Ackerman, V., & von Schlippe, A. (2011). Große deutsche Familienunternehmen: Generationenfolge, Familienstrategie und Unternehmensentwicklung. Göttingen: Vandenhoeck & Ruprecht. Portes, A., & Sensenbrenner, J. (1993). Embeddedness and immigration: Notes on the social determinants of

268 economic action. In American Journal of Sociology, 98, 1320–1350. Reckwitz, A. (2002). Toward a theory of social practices: A development in culturalist theorizing. European Journal of Social Theory, 5(2), 243–263. Ruef, M. (2010). The entrepreneurial group: Social identities, relations, and collective action (Kauffman Foundation Series on Innovation and Entrepreneurship). Princeton: Princeton University Press. Ruef, M., & Lounsbury, M. (Eds.). (2007). The sociology of entrepreneurship. Amsterdam: Elsevier. Saxenian, A. L. (1996). Regional advantage: Culture and competition in Silicon Valley and Route 128. Cambridge, MA: Harvard University Press. Schäfers, B. (1999). Entwicklung und Grundlegung der Gruppensoziologie. In B. Schäfers (Ed.), Einführung in die Gruppensoziologie: Geschichte, Theorien, Analysen (pp. 19–36). Wiesbaden: Quelle und Meyer. Schatzki, T. R. (1996). Social practices: A Wittgensteinian approach to human activity and the social. Cambridge: Cambridge University Press. Scheidgen, K. (2019). Social contexts in team formation: Why do independent start-ups and university spin-offs form teams differently? Historical Social Research, 44 (4), 42–74. Scheidgen, K. (2020). Degrees of integration: How a fragmented entrepreneurial ecosystem promotes different types of entrepreneurs. Entrepreneurship & Regional Development. Schjoedt, L., Monsen, E., Pearson, A., Barnett, T., & Chrisman, J. J. (2013). New venture and family business teams: Understanding team formation, composition, behaviors, and performance. Entrepreneurship Theory and Practice, 37(1), 1–15. Schumpeter, J. A. (1980 [1942]). Kapitalismus, Sozialismus und Demokratie. 5. Auflage. Uni-Taschenbücher 172. München: Francke. Shane, S. A. (2007). A general theory of entrepreneurship: The individual-opportunity Nexus. New horizons in entrepreneurship. Elgar: Cheltenham. Smelser, N. J., & Swedberg, R. (Eds.). (2005). The handbook of economic sociology. Princeton, NJ: Princeton University Press. Sombart, W. (1987 [1902]). Der moderne Kapitalismus. Leipzig: Duncker & Humblot. Spigel, B. (2017). The relational organization of entrepreneurial ecosystems. Entrepreneurship Theory & Practice, 41(1), 49–72. Stamm, I., Cruz, A. D., & Cailleut, L. (2019). Entrepreneurial groups: Definition, forms and history. Historical Social Research, 44(4), 7–41. Streek, W. (1997). The German economic model: Does it exist? Can it survive? In C. Crouch & W. Streek (Eds.), Political Economy of Modern Capitalism: Mapping Convergence and Diversity (pp. 33–54). London: SAGE. Streek, W., & Thelen, K. (2005). Introduction: Institutional change in advanced political economies. In W. Streek & K. Thelen (Eds.), Beyond continuity: Institutional change in advanced political economies (pp. 1–39). Oxford: Oxford University Press.

I. Stamm Swedberg, R. (2000). The social science view of entrepreneurship: Introduction and practical applications. In R. Swedberg (Ed.), Entrepreneurship: The social science view (Oxford Management Readers) (pp. 7–39). Oxford: Oxford University Press. Swedberg, R. (2003). Principles of economic sociology. Princeton, NJ: Princeton University Press. Swedberg, R. (2009). Schumpeter’s full model of entrepreneurship: Economic, non-economic and social entrepreneurship. In R. Ziegler (Ed.), An introduction to social entrepreneurship: Voices, preconditions, contexts (pp. 77–106). Cheltenham: Edward Elgar. Thornton, P. H. (1999). The sociology of entrepreneurship. Annual Review of Sociology, 25, 19–46. Thornton, P. H., Ribeiro-Soriano, D., & Urbano, D. (2011). Socio-cultural factors and entrepreneurial activity. International Small Business Journal, 29(2), 105–118. Ucbasaran, D., Lockett, A., Wright, M., & Westhead, P. (2003). Entrepreneurial founder teams: Factors associated with member entry and exit. Entrepreneurship Theory and Practice, 28(2), 107–128. Vanaelst, I., Clarysse, B., Wright, M., Lockett, A., Moray, N., & S’Jegers, R. (2006). Entrepreneurial team development in academic spinouts: An examination of team heterogeneity. Entrepreneurship Theory and Practice, 30(2), 249–271. Vestrum, I. (2014). The embedding process of community ventures. Entrepreneurship & Regional Development, 26(7–8), 619–644. Weber, M. (1988). Gesammelte Aufsätze zur Religionssoziologie. UTB. Religionswissenschaft 1488–90. Tübingen: J.C.B. Mohr (Paul Siebeck). Welter, F., Baker, T., Audretsch, D. B., & Gartner, W. B. (2016). Everyday entrepreneurship: A call for entrepreneurship research to embrace entrepreneurial diversity. Entrepreneurship Theory and Practice, 41(3), 311–321. Wennberg, K., Wiklund, J., DeTienne, D. R., & Cardon, M. S. (2010). Reconceptualizing entrepreneurial exit: Divergent exit routes and their drivers. Journal of Business Venturing, 25(4), 361–375. Isabell Stamm is head of the research group “Entrepreneurial Group Dynamics,” Technische Universität Berlin, Germany. Research topics: Economic sociology, Mittelstand, entrepreneurship, small groups. Recent publications: Stamm, Isabell, Allan Discua Cruz, and Ludovic Cailleut. 2019. Entrepreneurial Groups––Definition, Forms and Historic Change. Historical Social Research 44/4: 7–41. Stamm, Isabell, Fabian Bernhard, and Nicole Hameister. 2019. Empirische Befunde zu Unternehmerfamilien in Deutschland. In Soziologie der Unternehmerfamilie, eds. Heiko Kleve, and Tobias Köllner, 115–41. Wiesbaden: Springer VS. Barbera, Francesco, Isabell Stamm, and Rocki DeWitt. 2018. Entrepreneurial Legacies and Transgenerational Entrepreneurship in Family Firms: From Imprinting to Imagined Futures. Family Business Review 31/3: 352–78.

Part III Societal Views on Economy

Capitalism: On the Past and Future of an Economic System

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Johannes Berger

1

Introduction

Capitalism is best understood as an organizational form of the economy in which privately owned enterprises employ workers, with the aim of making a profit by selling the commodities, which are produced by using wage labor, on markets for goods and services. To clarify this definition, a worker is any person employed by a company against the payment of a salary. These companies can be the private property of entrepreneurs who manage the business of the company, or they can be companies financed by investors and directed by managers on behalf of the investors. Not only the manufacturing sector is included in this entirely new kind of economic organization, but trade and banking as well. Excluded is only the government as a non-market producer.1 All the elements mentioned in this definition: private property, markets, commodities, and wage labor existed long before the emergence of Cf. System of National Accounts 2008, 63: “Fundamental to the distinction between corporations and government is the basis on which production is undertaken. Corporations produce for the market and aim to sell their products at economically significant prices. Prices are said to be economically significant if they have a significant effect on the amount that producers are willing to supply and the amounts purchasers wish to buy.”

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J. Berger (*) University of Mannheim, Mannheim, Germany e-mail: [email protected]

capitalism. Nevertheless, with the gradual implementation of the capitalist form of production and distribution of goods, an entirely new form of economic organization has emerged. It differs fundamentally from the former ways of production and has become the predominant, if not the only form of economic activity in the world today. The central task for social science research is to find an answer to the question: Why, of all possible forms of economic activity, does this particular one dominate world economy today? Following Max Weber and Joseph Schumpeter, I see the answer to this question, in the unique capacity of this economic system to provide large masses of the population with goods of daily use, on a constantly rising scale. Capitalism, it is claimed, performs this task more efficient than any other economic system. In order to understand this unique capacity, it is indispensable to take a closer look at the institutional structure of this system. I will focus on this question in Sect. 2. Section 3 will deal with the issue of why capitalist economies are so exceptionally successful in producing economic growth. In spite of the overwhelming success of this completely new form of economic activity, its emergence and worldwide implementation has been accompanied by ongoing criticism which highlights its downsides and emphasizes the disadvantages, instead of the advantages, connected with it. This criticism not only refers to the economic side of this novel form of

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organizing the economy (e.g., inequality, unemployment, poverty, and exploitation of workers), but also to its detrimental social and cultural effects. Since the 1970s, criticism concerning the degradation of the natural environment has gradually come to the fore. Since the search for alternatives is fueled by this criticism, Sect. 3 will also deal with the question of whether socialism is a plausible alternative to the predominant economic form, and whether it is able to cure the ills of capitalism. Today the critique of capitalism and its future prospects focuses on two major issues: stagnation tendencies on the one hand, and environmental destruction on the other hand. Problems of this kind will be addressed in Sect. 4. In the final section, I will discuss the pros and cons of non-socialist reforms of capitalism.

2

Main Features of a Capitalist Economy

2.1

Rational Organization of Formally Free Labor

The capitalist organization of the economy is a late product of development; this applies at least to modern capitalism, (in the spirit of Weber). There have been debates as to whether or not the economy was already capitalistically organized in antiquity (Weber 1924 among others), and whether or not this form of organization may have existed in other parts of the world even before the European expansion (see e.g. Collins 1997). When considering this issue, one realizes that everything depends on the definition of the term capitalist, which, as Weber emphasizes, can naturally be carried out in many different ways (see Weber 1924, 13). If one does not limit the concept of capitalist economy, Weber continues, to a certain type of capitalist exploitation: the exploitation of alien labor by contract with the free worker but allows it to apply everywhere where objects of possession, being exchanged in market transactions, are used by private individuals for the purpose of economic acquisition, then nothing is more solid than a rather extensive capitalist imprint of entire

epochs of ancient history (ibid. 15), and as I may add, entire epochs in the history of other cultures. Throughout this chapter, I deliberately limit the term modern capitalism to the particular type of capital valorization mentioned by Weber. The capitalist economic order of modern times, based on contractual labor, is unique in a double sense. It is a late and improbable product of development, not a logical step on a scale of economic forms. It is also the result of a historically unique constellation of structures and forces that only existed in early modern Europe.2 Modern capitalism comes with a radical change of economic life. This transformation and fundamental innovation only become apparent when the capitalist enterprise is placed at the center of the analysis.3 Even an economy in which only small independent producers exchange goods with each other (Marx’s simple commodity production) would still be covered, for example, by the definition of capitalism as a private-decentralized economic system. However, what distinguishes modern capitalism from all previous forms of capitalist economic activity is the employment of wage earners by the owners of a monopoly of means of production (capital). Marx was aware of that. The consequences of this new form of work organization at the firm level, and on the level of the economy were his life-long concern. As to the fundamental importance of the use of labor power as a commodity in capitalist enterprises, Max Weber followed Marx. The Occident, Weber (1920, 7) writes, knows in modern times a different type of capitalism that nowhere else on earth existed: the rationalcapitalistic organization of (formally) free labor. Unlike Marx, Weber no longer focuses the analysis of capitalism on exploitation, but on the rational organization of work. However, both agree

2 Weber (1981, Chap. 4) and Schluchter (1991, Chap. 10). The prerequisites for the emergence of modern capitalism include particular innovations in the field of law, e.g., the separation of private and business assets, which remained completely unknown in antiquity (Weber 1924, 22). 3 Cf. Sombart (1916, 6): The least that must be in existence to be able to speak of capitalism is a capitalist enterprise.

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Capitalism: On the Past and Future of an Economic System

that in modern capitalism, labor is only formally free. It would be materially free if the design of working conditions was the responsibility of the employees themselves. However, the freedom to conclude contracts gained through the abolition of bondage does not guarantee the owners of labor power, the freedom to decide on the use of their assets. With the rental of this commodity, of human labor, to the firm, the right to do so is transferred to the firm’s management. Weber seems to put even more emphasis on this central feature than Marx does. “The formal right of a worker,” he writes (Weber 1978, 729), “to enter into any contract whatsoever with any employer whatsoever does not, in practice, represent for the employment seeker even the slightest freedom in the determination of his own conditions of work and it does not guarantee him any influence on this process.” “Nowhere else on earth”: The radical change of all social relations, people were accustomed to, which modern capitalism has brought with it, cannot be emphasized more strongly. Until the middle of the eighteenth century, there was practically no improvement in the living conditions of the great mass of the population, and only then would the constant growth of the economy become the sign of the era. The world-historical significance of this innovation is underestimated if, in an effort not to be exposed to the accusation of Euro-Centrism, many students of economic development insist on observing developments comparable to those in modern Europe, in regions outside Europe. The radical nature of this change is underestimated if one sees, in accordance with the new economic history, the decisive innovation merely in the establishment of secured property rights. In the same vein it is often overlooked that it was ultimately the operation of capitalist enterprises on the grounds of private property rights, which was the basis for escaping hunger and early death (cf. Fogel 2004).4

4 In the transition from a traditional to a capitalist mode of production, hunger and misery were increasing among the working population. However, in the long run, wage labor is the safest way to access food and raise the standard of

2.2

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The Capitalist Firm: A Rational Organization?

As mentioned above, the rational organization of labor on the grounds of rational technology (see Weber 1980, 323) is the element that distinguishes modern capitalism from the ancient forms of adventurer and predatory capitalism. Not only does this kind of capitalism need a judiciary and administration whose functioning can be rationally calculated (ibid. 322), but the modern forms of enterprise are themselves bureaucratic organizations, the continued existence of which lies in the hands of a professionally trained private civil service. According to Weber, work, in a capitalist enterprise, is rationally organized for several reasons. (a) As a formal organization, the company is characterized by targetorientation, bureaucratic coordination and rule binding instead of personal arbitrariness. Even if it was irrational from a macroeconomic point of view to replace the market with the plan as a coordinating instrument, it would be quite rational from a microeconomic point of view to proceed according to a plan. (b) Capital accounting ensures the formal rationality of economic activity (Weber 2019, 182) because it provides both the entrepreneur and the financiers with an overview of the state of the business. (c) Ideally, the choice between the various investment options is made on the basis of internal economic considerations only (maximizing the expected profit) and not on the basis of considerations alien to the economic system. (d) The labor force is selected on the basis of performance and willingness alone––any quotation would limit the rationality of the enterprise. (e) With the threat of dismissal, firm managers finally have an instrument at their disposal to get maximum effort out of their workers (cf. Weber 2019, 281). When discussing the competition of economic systems, one can see that the great historical alternative to the capitalist organization of the economy, namely, socialism lost the competition due to its

living of the wage dependent population. See also Drèze and Sen (1989).

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lack of a similarly effective instrument for solving the problem of labor incentives. The question arises, to what extent is this analysis of the capitalist enterprise as a rational organization of formally free labor still valid today? Weber’s image of the capitalist economy needs to be corrected in two ways. Firstly, it stands out that in the concept of the enterprise, as a bureaucratic organization, there is actually no place for the entrepreneur. “If human nature felt no temptation to take a chance, no satisfaction (profit apart) in constructing a factory, a railway, a mine or a farm, there might not be much investment merely as a result of cold calculation,” Keynes (1936, 150) said. Without entrepreneurial boldness, which is irrational from the point of view of the calculation of expected values, there is no investment activity. This activity if successful, creates new job opportunities, enriches the consumer world with new products, and changes the face of cities and landscapes. However, if business speculation does not pay off, the seed is sown for an economic crisis. Even before Keynes, Schumpeter emphasized the role of entrepreneurship. The entrepreneur’s task is “to change the course of the process” (Schumpeter 1934, 121) or “to enforce new combinations by withdrawing work and soil services from their usual uses” (ibid. 140). Thus, the main achievement of the entrepreneur is transcending “the most ordinary run within given production functions” and combining factors in a new way (Schumpeter 1939, 88).5 Secondly, in order to be able to carry out his new combinations, “the entrepreneur needs purchasing power ... He can only become an entrepreneur by becoming a debtor before” (Schumpeter 1934, 148). No other economic entity, by its very nature, is a debtor in the same sense. Thus, it is no longer the relationship between capital and labor, but rather, the relationship between the entrepreneur as borrower and the capitalist as lender, that moves to the center of “It is leadership rather than ownership that matters. The failure to see this ... is the common fault of both the economic and the sociological analysis of the classics and of Karl Marx” (Schumpeter 1939, 103 f.).

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theoretical interest. “Capitalism,” Schumpeter (1939, 223) wrote very decidedly, “is a form of private property economy in which innovations are carried out by means of borrowed money, which in general, though not by logical necessity, imply credit creation.”6 Granting credit to businessmen and thereby their indebtedness, not the rational organization of work, is the essential element of economic process (Schumpeter 1934, 149). It is done solely “for the purposes of innovation.” In order to be able to pay his debts, the entrepreneur is compelled to implement such innovations. Only such successful innovations can ultimately explain the basic characteristics of the capitalist economy that a fee is paid permanently for loan capital (Weber 2019, 188) and, what is more, can be paid at all.

2.3

The Labor Market

Modern capitalism is linked to the existence of a labor market on which labor power is exchanged for money.7 As is the case for all markets under modern conditions, it is also true for this market, that the exchange transaction is money-mediated. Historically, the modern labor market is a latter day product of development. It was only with the abolition of the poor laws in England, in 1834 (Polanyi 1957, Chap. 8) that a labor market was enforced nationwide. With the abolition of support for the poor, the only way for the displaced population to secure their livelihood was to offer their labor for sale on labor markets. The labor market is thus based on the double freedom of the workers: they are legally free and they are liberated (Marxists would say robbed) from ownership of means of production that could

6 Schumpeter thus understands capitalism as money economy, just as Marx and Max Weber did before him but unlike neoclassical economics. Money is not a veil that lays itself over real conditions, but an essential element of economic activity in capitalism. 7 Wallerstein (1979), defines capitalism as a system for making profit, regardless of the type of labor, (e.g., plantation economy, slave labor, wage labor) on which it is based.

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guarantee them a livelihood, independent of the labor market. Both the labor market itself and the goods traded on it differ from other markets (and goods) in some unique ways. The commodity traded on labor markets is not exactly labor, but labor power; more precisely, the worker’s commitment to put his labor at the service of capital for a limited period of time. This implies a commitment to follow the employer’s orders. Marx’s political economy of capitalism is entirely based on this distinction between labor power and labor. This distinction was still present for Weber, too. It has only been lost in economic approaches that speak of the market economy instead of capitalism and see the securing of property rights as the central prerequisite of the market economy. However, capitalism differs from market economy by highly concentrated distribution of private property rights. While recent institutional economics has highlighted the fundamental importance of private property for economic activity,8 it has not insisted on the difference between a capitalist economic system and a system of private property rights, nor has neoclassical economics that allegedly dispenses with institutions altogether, focused on this difference. The equal distribution of business property would be just as hostile to capitalism as the abolition of private property by means of collectivization. The indispensable prerequisite of a capitalist economic system is the existence of a class of persons for whom it is optimal (optimal in the sense of making the best of the situation) to terminate an employment contract (see Roemer 1988). The employment contract itself also has characteristic features that distinguish it from both a simple sales contract and a standard service contract, which usually provide for the delivery of goods or services in return for a certain payment. An employment contract greatly resembles a lease. Incompleteness is characteristic of it. The

8 The textbook by Furubotn and Richter (1998) provides a good overview of this field of research.

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employee allows the employer to specify, at a later date after the writing of the contract, the effort that is required of him. As Simon (1957) has pointed out, this artificial arrangement has advantages for both sides and is chosen precisely for this reason: The employer does not have to negotiate a new contract every time the tasks change and can determine the service to be provided at a time when he has a better overview of what is required for operational purposes. The rule of capital is condensed into the right to complete an incomplete contract. This right lies with the entrepreneur, because only he possesses the necessary business assets. The employees, with their consent to the employment contract, have relinquished all rights to control production (cf. Hart 1995). The employee is paid a higher wage for this submission to the command of capital than would be the case of a pure sales contract. However, this arrangement lays the grounds for conflicts that may cause inefficiencies, as well as lead to the whole arrangement being called into question. If employees anticipate that the employer will make decisions that are exclusively in the company’s interest, which the latter is entitled to do under the employment contract, and ignore their distinctive interests, they will react with restraint and perform less than they would in a situation of mutual trust. The resulting potential downward spiral was addressed by Fox (1974).

2.4

A Closed System of Markets

Only with the establishment of labor markets is it possible to establish a closed system of markets. The company obtains all factor services required for production by entering factor markets and then sells its products on commodity markets. The commodity form, a figure already known to antiquity, thus becomes universal in capitalism. Sraffa (1960) characterized the capitalist mode of production as “the production of commodities by means of commodities.” In this respect, it is a truly autopoietic system (Luhmann 1988) that is able to decouple itself from its environment in important matters, based on its self-reference. Although sociological system theory regards all

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subsystems of modern society as functionally differentiated, there is no better place to study what this means in concrete terms, than in the example of the modern economy. In the course of the establishment of the capitalist mode of production, economic and political spheres start to diverge. In the pre-capitalist era, they were still more or less intertwined. The political domination of the country and its people included economic domination as well. Before the dawn of modernity, the organization of production was not sharply separated from the exercise of lordly power. Today, on the other hand, state territorial rule has no longer any economic connotations. At the same time, the economy is free not only from political but also from communal ties. Polanyi (1957) lamented the result of this process that he described as disembeddedness. He did not gain a real understanding of the advantages of this detachment, nor did his followers. Disembeddedness can be seen in the fact that a capitalist firm (despite different tones of the German Works Constitution Act), typically speaking, is not a community. The employment relationship is largely exempt from communalization with the entrepreneur. In any case, this is true in a large historical comparison with bonded labor and especially with slave labor. Since then, the callous cash payment (Communist Manifesto) has more or less shaped the employment relationship. It follows that, unlike slavery and serfdom, the reproduction and rearing of children have been separated from the emplyment relationship and have become a private matters concern for employees.

3

Capitalism and Modern Economic Growth

3.1

Structural Innovations at the Company Level

In the previous section, I focused on the capitalist enterprise in elaborating the structural innovations that came into the world with capitalism. Capitalism, as Weber stressed, is present where the needs of large groups of people are

met by means of enterprise activities (cf. Weber 1981, 238).9 A capitalist firm is, first and foremost, a rational undertaking, and it ensures that the consumption needs of the population are met. Employment in enterprises provides the vast majority of the population with the necessary means to purchase goods produced by enterprises. The labor market thus becomes the central instrument for integrating the population into the economy. Capitalism, as Plumpe (2019) stressed, is a kind of economy for the lower classes, not for the wealthy. It is also worker-friendly, to the contrary of Marx’s theory of exploitation, seeing capitalism as hostile to workers. The central components of this innovation at the organizational level, the employment contract and the orientation towards profitability, have been the subject of criticism, which has not ceased to date. The employment contract is criticized for subjecting the employees to the dictates of the entrepreneur, on the one hand, and for the exploitation resulting from this subjection, on the other hand. The orientation towards profitability is criticized because of its blindness towards other objectives assumed to be of higher value. The critics overlook, however, that the employment contract is entered into voluntarily and is advantageous for both contracting parties, otherwise it would not be agreed upon. In addition, they also overlook the fact that the focus on profitability does not amount to unrestrained greed for gain. It belongs in the cultural-historical nursery that this naïve definition is abandoned once and for all. Boundless greed for gain is not in the least equal to capitalism, and even further from its spirit (see Weber 1920, 4). Despite this plea, the majority of contemporary critics of capitalism still adhere to this naïve definition.10

9 It is not necessary for the entire range of products to be provided by firms organized in this way. Self-employment in retail, crafts and professions (doctors and lawyers), as well as public enterprises, also contribute to the supply of goods and services. 10 Weber continues stating that capitalism can almost be identical with taming, at least with rational tempering, of this irrational drive (Weber 1920, 4). Under conditions of full competition, the most that can be achieved with the

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Capitalism: On the Past and Future of an Economic System

This institutional innovation for covering everyday needs was invented and realized for the first time in Western Europe; from there it spread throughout the world. Today, with a few exceptions (North Korea and Venezuela, for example), the vast majority of the world’s countries have adopted the capitalist mode of production. It occurs in many variants, which may differ according to the degree of state control or the sectors left to this mode of production. However, it is always a conceptual characteristic that the coverage of these needs, at least in the field of consumer goods for daily needs, is left to capitalist firms. The remaining question is how to explain its unique success. Nations are quite capable of making a choice between different forms of economic organization and of enshrining this choice, as in their constitution, for example. In a post-colonial world, the implementation of this form of economic activity is no longer the result of a foreign imposition. On the contrary, not the market economy but a centrally planned economy was often imposed as the dominant form of economic organization. The principle, to meet the needs of large groups of the population by capitalist firms employing workers on the firms’ own account was not imposed by Western imperialism on non-Western cultures, but was chosen by their own political leadership after the end of imperialism, and the failure of costly experiments with socialism in nations such as China, India, and Russia. This must have something to do with the inherent advantages of this form of organization. They consist in promising a production of the social product that is as waste-free as possible,11 the inclusion of the large majority of the population in the economy through the offer of job opportunities, and the constantly improving provision of consumer goods to the population. pursuit of profit is avoiding losses after settlement of all contractual payment obligations. 11 The extent to which this promise is fulfilled, in countries that organize their economies on a capitalist basis, is not under discussion here. But it would be premature to conclude from the fact of environmental pollution that the economy is its central cause. For the market-based solution to the pollution problem, see Sect. 4.2.

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Angus Deaton summarizes the essence of this worldwide success as “the greatest escape ... from poverty and death,” which human history has ever experienced (Deaton 2013, 23). The foundations for this success were laid in the Enlightenment and the Industrial Revolution. Building on these foundations, “living standards [have] ... increased by many times, life spans have more than doubled, and people live fuller and better lives than ever before” (ibid. 23).12

3.2

Growth as the Main Achievement of Capitalism

The profoundly improved provision of the population with everyday goods and the dramatic increase in life expectancy would not have been possible without a reliably growing economy, that is, precisely without the basic feature of capitalist economies that has fallen into such disrepute in the post-growth literature. There are certainly dark sides to this process, particularly social inequality and environmental pollution. Different population groups have participated in the growth successes in many different ways, especially within the rising economies. Fairytale wealth, greed and addiction to enrichment are concentrated among groups of people associated with the political leadership of the countries. However, it would be quite wrong to assume that inequality, for example, continues to grow globally. On the contrary, the rise of China and India has helped to reduce global economic inequality over the last two decades.13

12

Frey offsets the long-term economic successes of technological innovations since the Industrial Revolution against the suffering and privations to which the groups of people directly affected were exposed, above all, through the loss of jobs. “The ‘Great Escape’ ... didn’t immediately turn the cottage of the commoner into a Garden of Eden” (2019, 8). 13 Twenty years ago, this contention was still controversial, whereas, to my knowledge, it is widely accepted today. Two outstanding examples of the rich literature on this subject are Firebaugh (2003) and Bourgignon (2015). For an overview see Berger (2019a).

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A growing economy is a prerequisite for giving the vast majority of the population a chance to escape poverty and early death. Societies of the West initially demonstrated this and countries like China or India have followed. The only economic form with a built-in mechanism for growth is entrepreneurial profitability capitalism. Schumpeter (1942) clearly saw that. The mere fact, he writes, that during the capitalist period production grew steadily on average “does not in itself provide a sufficient link between the performance and the capitalist engine.” Rather, “there is an understandable relation between the capitalist order and the observed rate of increase in output” (ibid. 72). It would be wrong to account for the latter “by a sequence of favorable circumstances unconnected with the mechanism of private enterprise” (ibid. 81). Schumpeter describes this mechanism by means of two characteristics: first, the reduction of motives as a prerequisite for rationalizing decisions. “Both business success and business failure are ideally precise” (ibid. 74). The relevant point of view is not the suppression of motives other than economic ones, but that the capitalist order creates a “schema of motives that is unsurpassed in simplicity and force” (ibid. 73). Second, in contrast to common, stereotyped criticism, it is simply not true that “private profits ..., both in themselves and through the distortion of the economic process they induce, are always a net loss for all excepting those who receive them” (ibid. 76). The classics of political economy, especially Adam Smith,14 have made this view disappear, but in the literature, which is critical of growth, this thought has returned with a vengeance. While cost accounting and profit orientation guarantee a comparatively waste-free, or low-waste, consumer-oriented economy, they do not guarantee that the growth rate of total production is permanently positive. Decades of empirical growth research have shown on which factors

14 The pursuit of private benefits leads to a better supply of consumer goods to each and every person. This is perhaps the most powerful idea of Smith’s Wealth of Nations (Smith 1950).

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growth is ultimately based, apart from favorable circumstances, such as the availability of cheap energy.15 The research distinguishes between immediate and ultimate causes. The decisive, ultimate cause is the enforcement and safeguarding of property rights. Investors in a business must be sure of being protected from fraud and theft; of being able to have their rights upheld in court; and of having the tax system leave at least enough of the potential return to retain incentives to invest. The decisive, immediate causes are the multiplication of the inputs of capital and labor on the one hand, and technological progress on the other. Economies that have reached a state of steady state, (in which the input ratio of capital and labor remains constant), will only grow if there is technological progress. However, even before this state is reached, technological progress is crucial, as it is already included in new capital goods, which replace used-up capital goods. In any case, technological progress must always be implemented at the corporate level. Enterprises are pursuing technological progress in order not to be outperformed by competitors. “New knowledge, new inventions, and new ways of doing things are the key to progress” (Deaton 2013, 9). This is the central message of empirical growth research. No other economist has more sharply highlighted or more decisively emphasized technological progress as the ultimate source of economic development than Schumpeter. For the private sector enterprises and their employees who are subject to the dictates of technological progress, this dictate entails enormous psychological costs on those subjected to it. In abstract terms, there is certainly a choice to avoid this constraint and dispense with technological progress in its different forms (new production methods or new products). A country, however, which as a whole avoided this constraint, would eventually degenerate into a museum of technology.

15 See Hemmer and Lorenz (2004) for a textbook presentation of the methods and results of this branch of research.

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3.3

Capitalism: On the Past and Future of an Economic System

The Socialist Alternative

In the last section, I concurred with Schumpeter’s view that “the capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses . . . One problem after another of the supply of commodities to the masses have been successfully solved by being brought within the reach of the methods of capitalist production” (Schumpeter 1942, 68). To be sure, Schumpeter is absolutely silent on the potentially negative consequences of this success. (I will come back to these problems in Sect. 4.) Prior to this, I want to back up to the argument of the superiority of a capitalistically organized economy regarding growth by including alternative forms of economy in the analysis. Functional explanations like this demand, among other factors, that the same result could not be achieved by other means. I limit the consideration of these alternatives to state socialism on the one hand, and cooperative or self-managed market socialism on the other. The question then is whether these alternative forms are either at least as efficient as the capitalist economic system or not. If they are not, do they achieve other economic or non-economic goals that are considered valuable, but which are neglected in a capitalist system? It goes without saying that this examination in a short article can only be rather cursory.16

3.3.1 State Socialism State socialism is generally understood as an economic system characterized by the socialization of the means of production and the coordination of the activities on the firm level by a plan. However, consumers are free in their choice of consumer goods. A centrally drawn up plan determines the amount and type of output, 16

Between the poles of capitalism and socialism there are many mixed forms, including the social market economy. A more recent and detailed presentation of alternatives to capitalism is Corneo (2017). Corneo, unlike this contribution, defines capitalism as a system of private property and market exchange, thus making no distinction between a market economy and capitalism. For the reasoning put forward here, however, this distinction is essential.

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investment and employment for each company. Such a system had been implemented in the statesocialist countries of the Eastern bloc in the past. Just as capitalism did not prevail purely by chance, socialism did not perish purely by chance, or because of envy or enmity of the Western world, but due to systemic reasons. I see them facing two insoluble problems: Information problems on the one hand, and agency problems on the other. By the former, I mean fundamental deficiencies in information, which inevitably make it impossible to draw up a plan. By the latter I mean principal-agent problems. These consist in the uncertainty of the principal as to whether the agent is actually acting in the principal’s interests and not in his own personal interests. Such problems are also omnipresent in capitalist economies, but they can be solved more easily in this form of production, than they can be in the context of state socialism. Information problems have been highlighted, most notably by Friedrich von Hayek (1948, Chaps. IV and VII), as the cause of the economic inferiority of socialism. Von Hayek, as well as von Mises, did not regard socialism as impossible, but only as not being a rationally calculable system. Such information problems arise for every central planner on two fronts: The determination of consumer wishes and the lack of knowledge concerning the firms’ technical possibilities for creating the product required by the plan. In order to rationally plan the economy, the central planners would have to know all possible combinations of production factors in every firm for every single product of the economy, for different output quantities. In addition, rational planning would require perfect insight into the preferences of households and therefore how households would choose between the various conceivable consumption structures.17 In order to solve the task of setting up a plan and ensuring that it is realized, the central planner would not only have to be omniscient, but also omnipotent and above all benevolent. In short, he would have to possess God-like qualities.

17

Cf. Corneo (2017, Chap. 6).

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Agency problems occur at three places in state socialism. They have parallels in capitalist economic systems but can be solved there in a system-compliant way. John Roemer has put these problems in a nutshell: Communist societies faced principal-agent problems in three important types of relationships: between managers and workers in factories and collective farms; between government planners and firm managers; and between the public and the planners. Managers must try to get workers to carry out their production plans, planners must try to get managers to carry out the planning bureau’s plan, and the planners, in a socialist regime, are supposed to be agents doing the best they can for their collective principal, the public (Roemer 1994, 38).

Since the threat of dismissal as a means of discipline is absent in socialism, there are few incentives for employees to follow the directives of management. You pretend to pay me, and I pretend to work, was a common attitude to work in socialist economies. As long as the management realistically expects that non-viable enterprises will be rescued by the state budget for overriding reasons, the incentives to fulfill the plan are weak (cf. Kornai 1992, Sect. 8.4: soft budget constraint). The planning bureau’s orientation towards consumer wishes fails, not only due to the lack of information about these wishes, but also because such wishes are not a given in a socialist system. Consumer tastes are generally suspected of being false desires to be changed by socialist education. From an efficiency point of view, state socialism scores very poorly. It is, perhaps, an attractive choice if other objectives are to be achieved through the collective organization of the economy. Such goals are the liberation of work from the dictates of capital and its replacement by democratic forms of economic activity; the abolition of the worker’s separation from the means of production; distributive justice; and, above all, the termination of exploitation. However, there is nothing to suggest that socialism will make workers freer, more equal or more autonomous. According to Weber, socialism would only complete the expropriation of all workers through the expropriation of private owners (Weber 2019,

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246) and thus suffocate all freedom in a bureaucracy that was no longer tamed by any counter forces. The process of separating workers from the means of production would thus continue. The socialization of the means of production and their transfer to state ownership would not change the exclusion of the workers from management decisions. Economic inequality is expected to decrease, but, due to lower efficiency, it will be accompanied by lower income per person. This is not an attractive perspective for those subject to such a system. Due to the importance of the assertion of exploitation in the history of the critique of capitalism, I will deal with it in more detail at this point––in place of the many other critiques. After all, the transition to socialism was motivated by the hope of ending exploitation, which was seen as constitutive for capitalism. The complaint concerning exploitation is based on a fact, which can hardly be denied: Typically, workers do more work per day, week or year than they get back in the goods they can buy from their wages.18 Exploitation consists in the systematic difference between the working time that an individual employee performs and the working time that he receives back in the form of wage payments. In macroeconomic terms, this is reflected in the difference between the net product of the economy measured in amounts of labor and the share of the net product, which is also measured in amounts of labor, received by employees. The rest goes to the capitalists as profit. Positive profits are then the final proof of the existence of exploitation. Such evidence, however, suffers from several weaknesses at the same time. Firstly, they paint a picture of the entrepreneur as though he did nothing else than allow the workers access to his means of production in return for a wage payment which is lower than the product of labor. This is an extremely naïve picture of entrepreneurship, 18

This does not need to apply to all workers. Whether wage labor implies exploitation depends on the level of wage payment. Under the validity of the Marxian Fundamental Theorem (exploitation is the sole source of profit) company profits would then only be possible if the millions paid to the top management result from their exploitation of the low-income earners.

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which has been criticized, particularly by Schumpeter. Not only does the entrepreneur provide productive technology, on the basis of which it is possible for the workers to produce a product that is higher than their wages, he also works himself and in this role has a claim to the entrepreneur’s wage. Profits are not an income without a service in return.19 Secondly, there is no type of economy in which the direct producers receive the entire net product. Marx (1970) in his Critique of the Gotha Program has already seen it that way. Any growing economy must divert part of its net product for investment purposes. Then merely the fact that in capitalism, decisions about the use and the amount of the investment are made by the management remains open to critique. However, those who engage in such a critique overlook the fact that the growth success of capitalist economies is based precisely on this separation of roles.

3.3.2 Cooperative Socialism Cooperative socialism does not perform any better in the two perspectives mentioned here: efficient organization of the economy and achievement of objectives in dimensions beyond efficiency. Its key feature is not submission to a centrally established plan, but operational selfadministration and coordination of firm decisions by markets. In principle, all decisions assigned to management in a capitalist firm are transferred to the employees. Which particular issues are especially the subject of a collective decision and how decision-making is organized can either be determined by state legislation or left to the companies themselves. The two extremes are that everything is discussed and decided on in plenary meetings of the workforce or that everything is delegated to an elected management. However, the greater the powers of management, the closer it becomes to a normal capitalist business. Even in capitalist

19

It might be said that exploitation is the genuine achievement of the entrepreneur. “The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all,” Joan Robinson (1962, 45) noted.

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firms, the employees may have graduated rights of participation, at the least, this is not excluded.20 The hopes associated with this producer socialism are directed towards the abolition of authority at the firm level as the main evil of capitalist business organization.21 To the extent that worker-governed firms are strictly aligned with market signals, this objective is subject to narrow limits. Two disadvantages have to be accepted in order to achieve the objective of the liberation of labor. Firstly, decision-making in an economic democracy is much more difficult than in an owner-managed business or in a corporation where the management is responsible to the owners of the capital. In the case of controversial decisions regarding qualifications and income, particularly when the workforce is not homogeneous but diverse, there will be protracted decision-making processes. These can jeopardize consensus. There is no guarantee at all that decisions taken in a plenary meeting will somehow be better than decisions taken by management. Secondly, the distinction between profit income and wage income, typical for capitalist enterprises, and the associated separation of roles is blurred. Contrary to what is expected of the supporters of company self-administration, this is by no means always advantageous. During an economic downturn, employees have to forego their income from profits. Like independent entrepreneurs, they must bear the business risk. The advantage of role separation in capitalist operations is precisely that the risks are unequally distributed. Risk-averse persons will prefer a fixed salary to a variable salary depending on the business situation. In the economic literature defending market socialism, it is often assumed, without hesitation that employees would prefer a mixture of a lower salary and greater operational freedom and self-determination to a combination 20 Cf. only the employee participation rights, typical of capitalism in the Federal Republic of Germany. 21 By contrast, the central planning of production aimed at providing the population with consumer goods is labeled consumer socialism.

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of less self-determination and a higher salary. The simple fact that self-governing companies are, up to now, restricted to a niche existence in the market economy speaks against this assumption. In addition, there are particular problems in determining the wages for a heterogeneous workforce and in investing in an uncertain future. Depending on the qualification structure of the employees, the decision on the income of the individual groups of employees will vary. It is not even clear which criteria should be used to decide on the level of pay (e.g., equal pay for all or incentive wages). As far as future-orientated investments are concerned, older workers will be reluctant to support decisions of this type if the return on such investments comes after their period of employment has expired.

4

Future Prospects

It seems, the capitalist economy has established itself worldwide because of the lack of convincing alternatives to it. However, true as this may be, it does not include an eternal guarantee for the existing system. It could be, firstly, that this system no longer reliably performs exactly the service on which its superiority and attractiveness are based: the reliable and continuous increase of the output of goods. Secondly, it could be that the negative side effects, slowly but surely, outweigh the successes at some point. Finally, it could be that the demand for this particular achievement decreases with increasing wealth.

4.1

Does Growth Come to an End?

In Germany, for example, gross domestic product per capita increased more than fivefold in real terms between 1950 and 2012, despite economic slumps and the decline caused by reunification.22 It has continued to grow in recent years. Overall, the standard of living of almost all population groups has risen to an extent that no one could 22

Information on the long-term development of the industrialized countries is available and very well highlighted by Max Roser (www.ourworldindata.org).

have foreseen, and it has thus completely revolutionized the living conditions of the broad mass of the population that had been customary for centuries. This constant improvement of the living conditions was not, however, accompanied by an equally constant increase in inequality. The Gini coefficient of net equivalent household income today in Germany is around 0.3, the same as it was at the beginning of the 1960s. Such a value means that two arbitrarily chosen incomes differ on average by about 1080 euros.23 This too is an amount that does not seem alarmingly high, but such a judgment depends on the social values, held by the observer.24 However, growth rates have fallen from decade to decade, from an average of 8.2% in the first decade after the founding of the German Republic to a meager 0.9% between 2000 and 2010.25 In 2009, output fell by 5.6%, the largest in the history of the German economy. In the following 2 years, the economy recovered from this slump with growth rates of 4.1% and 3.7% respectively. However, thereafter, these rates remained below 2% in real terms. In 2018, growth amounted to 1.5%, a figure that is still surprisingly good in the long term; in addition, the lower the growth rates are, the more the widespread criticism of growth loses its persuasive power. The numbers seem to speak for themselves. Before drawing hasty conclusions from them, however, it should be remembered that the longterm growth of the world’s most developed economy, the USA, was only 1.8% per capita. So, at best, only an even further downward move from this value could be regarded as proof of darkening 23

This follows from the definition of the Gini coefficient: G ¼ Δ/2μ, with Δ ¼ the mean difference of income and a value for μ, the average net income in Germany, of 1800 euros. See Berger (2019a, Appendix A3). 24 The Gini coefficient, like all measures of inequality, ignores the question of whether differences in income are justified or unjustified. 25 Figures for the USA: Real per capita economic growth in the USA was 2.35% between 1970 and 1980, 2.23% between 1980 and 2000 and only 0.8% between 2000 and 2010. The deceleration called for in the post-growth camp has also taken place in the USA. However, the growth rates (in constant dollars of 2010 after the Great Recession of 2009 between 2010 and 2018 in constant dollars of 2010 once again reached 2.2% on average).

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growth prospects. Piketty (2014), for example, expects the advanced economies to grow by 1–1.5% in the future. Even if growth of this magnitude is below the long-term average, it should not be equated with stagnation, thus giving rise to corresponding fears. Growth would still be of considerable magnitude. Due to the potential threat to economic and political stability posed by declining growth rates, fears of a long-lasting stagnation are widespread. Regarding the explanation of this phenomenon, supply-theoretical and demand-theoretical approaches are at odds with each other. Gordon (2012) substantiates corresponding fears with a supply-theoretical argument. A lack of breakthrough investments is the ultimate reason for the age of modern economic growth coming to an end, according to Gordon. Since the pond of economically usable technical innovations is practically empty, technologically feasible growth is reduced.26 The developed countries first, but after them also the countries that today still grow at rates far above those of the mature countries of the West, will enter a period of stagnation. Summers (2015) also fears a period of sustained stagnation in the USA and the Eurozone. However, he does not blame the supply-side for this fear, but substantiates his classically Keynesian argument with a lack of demand from the private sector for capital goods. On this line of thought, the final reason of secular stagnation is a chronic excess of saving over investment.27 Today, negative real interest rates are necessary to bring actual growth closer to the already lower potential growth. In order to achieve this objective, the monetary policy instrument of lowering nominal interest rates is no longer available, as nominal interest rates could not fall below the zero lower bound on nominal interest rates because of the alternative of holding cash at zero

Brynjolfsson and McAffee (2014) firmly contradict this diagnosis. 27 A capitalist system works smoothly if “the workers spend what they get, and capitalists get what they spend.” (An aphorism attributed to Michael Kalecki by Joan Robinson.).

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interest rates. To fuel inflation instead, by means of monetary policy is not a feasible policy because of the threat of undermining financial stability. In such a situation, massive fiscal interventions alone would offer a way out. However, governments would not want to do this due to unfounded fears of raising national debt. Summers defines stagnation as a situation in which negative real interest rates are required to balance savings and investments in a growing economy. A more traditional view, shared by John Start Mill and Karl Marx, is to envisage a stationary economy that would be free from the need for growth and its consequences for everyone’s lifestyle. Keynes painted such a stationary economy in the most beautiful colors, in which poverty was finally defeated because of economic growth in the past. “For the first time since his creation, man will be faced with his real, his permanent problem––how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest (!) will have won for him, to live wisely and agreeably and well” (1972, 328). Provided that essential parameters of the social structure do not change, (e.g., the employment rate must remain constant) and there is no competition between countries, so, growth driven by technological progress as a tested means of conflict resolution could actually be dispensed with. Then one would be able to say farewell to the age of capitalist growth with The Moor has done his guilt, the Moor can go (Friedrich Schiller). This Brave New World would be a world without the need for growth.28 The latter is currently fed primarily by two sources: the ageing of the population and public debt. Only societies with growing economies can grow out of the national debt and provide their growing army of pensioners with the means to live on, without cutting the incomes of the gainfully employed. How will the economy grow if the population

26

28

Easterlin (1981, 16) is much more skeptical about these prospects: “While it would be pleasant to envisage a world free from the pressure of material want ... a more realistic projection for the developed countries is of a world caught on a ‘hedonic treadmill’.”

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stops growing and technological progress slows down? Population growth is a highly effective stimulus to the capitalist economy, which unlike any other, is designed to provide a growing population with consumer goods from televisions to cars, to new homes. The basic problem with technological progress is that it does not happen on its own, but must be generated by investment in research and development. The central question here is whether the truly great inventions that stimulate growth have not all already been made (see Gordon 2012).

4.2

Negative Effects of Economic Growth

Currently, the very general idea that the negative effects of economic growth are slowly but surely destroying its positive effects is mainly fed by environmental policy arguments. Other reasons, such as the social or cultural consequences of growth, are much more controversial.29 However, offsetting the harmful effects of environmental pollution against the positive effects of economic growth in terms of employment and increased incomes is anything but easy. One possibility would be to supplement the system of national accounts in environmental economic terms.30 I am not aware of any calculation indicating that the gross domestic product corrected for environmental factors will shrink from year to year if the burden on the environment is taken into account. Probably the increase is smaller, but a weaker

29

It is, for example, worthwhile checking whether the popular claim can be maintained that egoism and competitive thinking are spreading, whereas solidarity and cooperative behavior are on the retreat. Which kind of data would back this claim? Would these tendencies, if confirmed, indicate a definite boundary of the dominant economic system? Finally, do such developments, provided they exist, really have their roots in the economic system or rather in the much broader process of the rationalism of Western culture? 30 For an overview of the corresponding approaches, see Federal Statistical Office, Germany (2014).

increase is not identical to the decrease of a quantity.31 It is also not the case that the state of the natural environment, in all dimensions, that is, air, water, and soil is increasingly deteriorating in all zones of the earth. For example, air quality in Germany has improved over the past 25 years (Federal Environment Agency, press release of 7 November 2018). This certainly does not mean that it has already reached a level which is not harmful to health. Nevertheless, the regional improvement in this area is an example of the fact that even when an ecological factor is taken into account, the assessment of the actual status and the development of public welfare can be quite positive. Today, apocalyptic fears about the future of mankind are driven primarily by news of increasing global warming. According to a new study by the Potsdam Institute for Climate Research, the earth is approaching a historical heat record; historical, because in the last 3 million years the earth’s temperature has never been more than 2 above the pre-industrial level. With an uninterrupted emission of greenhouse gases, however, the atmosphere could be heated up by more than 2 . As alarming as this news may be, it is no reason to condemn, on a whim, a way of business organization that ultimately has overcome hunger and early death (Fogel 2004). The economic exploitation of technical innovations by entrepreneurs that formed the core of the capitalist system to date can be used for solving environmental problems as well. If the problem is the perpetual emission of greenhouse gases, and therefore not the increase of the national product per se, then its solution does not lie in the dismissal of this economic method by abstaining from further growth, but rather in the consistent application of the 31 Environmental economic calculations depend on many preliminary decisions on which, if I am right, there is no consensus at all. The main problem is to find a common denominator for calculating the positive and negative effects of a growing economy on human welfare. Gross domestic product is not in itself a welfare indicator, but only a component of a more comprehensive index of human welfare.

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economic principle on which the success of this form of economic activity is based. In concrete terms, this means that the consumption of environmental resources must have appropriate monetary costs, that is to say it is subject to prices that at least approximately correspond to the damage caused by the use of these resources. Whether or not zero emissions are achieved by this means depends on how they are designed, but it is possible, in any case, to limit the emission of environmentally harmful greenhouse gases according to political targets. This requires, however, that not only the production of the national wealth be taken into consideration, but also its final consumption. The example of the energy sector in particular shows that its environmental problems do not arise mainly at the point of the extraction of fossil fuels, but in the consumption of these substances by consumers. There are two ways of managing this consumption in a market economy: by (1) levying a CO2 tax or (2) issuing tradable emission permits for consumption sectors such as transport, for example.32 In an intellectual climate of viewing the market economy as the root of all evil, such instruments will have hard times.33

4.3

A Lacking Demand for Growth?

The idea that economic output could one day reach a level that would make any further efforts 32

William Nordhaus relies more on a Pigou-tax. “According to Nordhaus’ research, the most efficient remedy for the problems caused by greenhouse gas emissions would be a global scheme of carbon taxes that are uniformly imposed on all countries” (The Royal Swedish Academy of Sciences: The Prize in Economic Sciences 2018). 33 Tirole (2017, Chap. 9) argues for a single carbon price to meet the climate challenge. “The first priority of future negotiations ought to be an agreement to establish a universal carbon price compatible with the objective of no more than a 1.5 to 2 degree Celsius increase in average global temperatures” (Tirole 2017, 229). For reasons of space, I cannot elaborate on other developments that allegedly threaten the sustainability of capitalist systems, such as the threat of job loss caused by a new wave of automation or the threat to the stability of capitalist economies originating from the increasing importance of an inherently unstable financial sector. For the former problem see Frey (2019), for the latter, Minsky (1982).

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to increase the national product pointless is not a contemporary one, but looks back on a venerable tradition. John Stuart Mill painted the utopia of a stationary economy, Karl Marx defined communism (as opposed to socialism) by decoupling consumption from previously performed labor. In an essay, written in 1930, John Maynard Keynes saw the time come when man would be free for the first time from pressing economic cares and could use his lifetime for more joyful things. Keynes speculated that this state could be reached in about 100 years after the writing of his essay. That would be in the year 2030. Unfortunately, that is not what it looks like at the moment. In global terms, the absolute numbers and the percentage of people living in absolute poverty have fallen drastically, but are still so high that global economic growth is indispensable. In addition, the difficulties of the lower income groups in the developed countries to cope with their income are also so substantial, particularly in view of rising energy and housing prices that turning away from growth appears to be a luxury for the better off. Keynes was confident that with the devaluation of the accumulation of wealth “great changes in the code of morals” (Keynes 1972, 329) would occur. Even if this were true regarding the wealthy classes, to expect it from the lower income strata is not only de facto, but also morally built on sand.

5

Non-socialist Reforms of Capitalism

The question arises as to whether the deficits, described above, can be remedied by means of non-socialist reforms. The critics of capitalism do not even agree on the components of the capitalist economy that are primarily responsible for problems such as economic crises, income inequality and unemployment. Is it the market, the monetary system, the banking system, the creation of credit money by banks, the antagonistic relations of production, or in a tradition dating back to Plato private property? The Marxist tradition predicted the uprising against private property, and, as a result, the collapse of capitalism and the transition to socialism. In fact, however,

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socialism has collapsed, while private property and the capitalist type of economy based on it have proved surprisingly stable. As has been argued above, this is no coincidence. This form of economy does not guarantee distributive justice, but it does guarantee efficiency in the use of resources. For example, with the threat of dismissal, the capitalist enterprise has a very simple and effective instrument at its disposal to secure the employees’ motivation. A socialist economy, on the other hand, can only rely on the intrinsic motivation of the members of the work collective, that is, their willingness to set aside their personal interests (less strenuous work) in favor of corporate interests. That is a fragile foundation. Efficiency advantages speak for the enforcement and lasting dominance of the capitalist mode of production. An organization of the economy beyond the use of dependent employment in profit-oriented enterprises would only be more likely if the economic system could be adjusted on three fronts: the compulsion to work, the real subsumption under capital (Marx 1970), and the wage form as a remuneration scheme. The compulsion to work would cease if all (adult) citizens were to receive a basic income that would secure their livelihood, regardless of whether they were employed or not, whether they were in an emergency situation or whether they could earn a living for themselves. Van Parijs (1995) viewed the granting of an unconditional basic income for all as the direct transition from capitalism to communism (directly, without first taking a detour via socialism). Indeed, the decoupling of contributions to the social net product and access to consumer goods is a fundamental feature of communism. Not only the increase of the tax burden and the probable decrease of the motivation to work, both with the consequence that the national product, from which the basic income is to be financed, will shrink, speak against a basic income on a sufficiently high level, but above all the ethics of the work society, still in force. Ethics is at odds with the idea that people who are able to work, participate in the national product, without contributing to its production. Subordination to the command of capital (Marx) would disappear in a laborist economy

J. Berger

in which the separation of managers and the managed would be overruled. Vogt (1986) developed the main features of such an economy. In it, workers exchange lower wages for more freedom of domination.34 The proposal is entirely based on a manifest interest of the workers in the freedom of domination. However, workers’ self-management can be much more strenuous than the mild dictate of a temporally, objectively and socially limited submission to authority. Finally, a typical feature of capitalist enterprise is fixed remuneration, regardless of whether the firm is flourishing or threatened to go bankrupt. Wages are contractual income, profits a residual income that only accrues after all contractual obligations have been fulfilled. Weitzman (1984) has outlined a model in which employees are paid at least partially in profit shares (if profits accrue at all) in addition to a fixed basic wage. Such a remuneration scheme would at least partially eliminate the separation of two types of income, typical of capitalist firms: contractual income and residual income. The question remains whether this is truly an attractive option for workers. In conclusion, one can speculate with Weber (1988, 60) about the chances of replacing the principle of private economic profitability and, as a consequence, the dictates of cost degression, with some form of communal economic solidarity. In any case, the change in values necessary for this end cannot be planned. What speaks for entrepreneurial capitalism is that it is in a better position than any other system to supply the masses with ever increasing and innovative consumer goods without further destroying the environment. In light of that, there are good reasons to believe that for the foreseeable future the capitalist form of the economy will prevail. Acknowledgement I’m grateful to Andrea Maurer, Ulf Kadritzke and Peter Preisendörfer for helpful comments. The chapter draws on some of my former writings (see Berger 2014, 2019b).

34 Similarly, Meade states (1976, 16 f.): “citizens could freely choose between high prosperity with low participation in the large-scale enterprises and low prosperity with high participation in the small-scale co-operatives”.

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References Berger, J. (2014). Kapitalismusanalyse und Kapitalismuskritik. Wiesbaden: Springer essentials. Berger, J. (2019a). Wirtschaftliche Ungleichheit. Zwölf Vorlesungen. Springer VS: Wiesbaden. Berger, J. (2019b). Warum Kapitalismus? Berliner Journal Sonderband Große Transformation? Zur Zukunft moderner Gesellschaften, 75–95. Bourgignon, F. (2015). The globalization of inequality. Princeton: Princeton University Press. Brynjolffson, E., & McAffee, A. (2014). Race against the machine: How the digital revolution is accelerating innovation, driving productivity, and irreversibly transforming employment and the economy. New York: W.W. Norton. Collins, R. (1997). An Asian route to capitalism: Religious economy and the origins of self-transforming growth in Japan. American Sociological Review, 62, 843–865. Corneo, G. (2017). Is capitalism obsolete? A journey through alternative economic systems. Cambridge, MA: Harvard University Press. Deaton, A. (2013). The great escape. Health, wealth, and the origins of inequality. Princeton: Princeton University Press. Drèze, J., & Sen, A. (1989). Hunger and public action. Oxford: Oxford University Press. Easterlin, R. A. (1981). Why isn’t the whole world developed? The Journal of Economic History, 41(1), 19. Firebaugh, G. (2003). The new geography of global income inequality. Cambridge, MA: Harvard University Press. Fogel, R. W. (2004). The escape from hunger and premature death, 1700–2100. Europe, America and the Third World. Cambridge: Harvard University Press. Fox, A. (1974). Beyond contract. Work, power and trust relations. London: Faber and Faber. Frey, C. B. (2019). The technology trap. Capital, labor and power in the age of automation. Princeton: Princeton University Press. Furubotn, E. G., & Richter, R. (1998). Institutions and economic theory. The contribution of the new institutional economics. Ann Arbor: The University of Michigan Press. Gordon, R. J. (2012). Is U.S. economic growth over? Faltering innovation confronts the six headwinds. NBER Working Paper Nr. 18315. Hart, O. (1995). Firms, contracts and financial structure. Oxford: Clarendon Press. Hayek, F. A. (1948). Individualism and economic order. South Bend, IN: Gateway Editions. Hemmer, H.-R., & Lorenz, A. (2004). Grundlagen der Wachstumsempirie. München: Vahlen. Keynes, J. M. (1936). The general theory of employment, interest and money. London: Macmillan. Keynes, J. M. (1972 [1930]). Economic possibilities for our grandchildren. In Essays in persuasion. The collected writings of John Maynard Keynes, Band IX (pp. 321–332). London: MacMillan.

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Kornai, J. (1992). The socialist system. The political economy of communism. Oxford: Clarendon Press. Luhmann, N. (1988). Die Wirtschaft der Gesellschaft. Frankfurt: Suhrkamp. Marx, K. (1970 [1875]). Critique of the Gotha Programme. In K. Marx & F. Engels (Eds.), Selected works (vol. III, pp. 13–30). Moscow: Progress Publishers. Meade, J. E. (1976). The just economy. London: Allen & Unwin. Minsky, H. P. (1982). The financial-instability hypothesis: Capitalist processes and the behavior of the economy. In C. P. Kindleberger & J.-P. Laffargue (Eds.), Financial crises: Theory, history, and policy (pp. 13–47). Cambridge: Cambridge University Press. Piketty, T. (2014). Capital in the twenty-first century. Belknap: Cambridge, MA. Plumpe, W. (2019). Das kalte Herz. Kapitalismus: Die Geschichte einer andauernden Revolution. Berlin: Rowohlt. Polanyi, K. (1957 [1944]). The great transformation. The political and economic origins of our time. Boston: Beacon. Robinson, J. (1962). Economic philosophy. Harmondsworth: Penguin Books. Roemer, J. E. (1988). Free to loose. An introduction to Marxist economic philosophy. Cambridge, MA: Harvard University Press. Roemer, J. E. (1994). A future for socialism. London: Verso. Schumpeter, J. A. (1934 [1911]). The theory of economic development. Cambridge, MA: Cambridge University Press. Schumpeter, J. A. (1939). Business cycles. A theoretical, historical, and statistical analysis of the capitalist process. New York: McGraw-Hill. Schumpeter, J. A. (1942). Capitalism, socialism and democracy. New York: Harper & Brothers. Simon, H. A. (1957 [1942]). A formal theory of employment relation. In H. A. Simon (Ed.), Models of man. Social and rational (pp. 183–195). New York: Wiley. Schluchter, W. (1991). Religion, politische Herrschaft, Wirtschaft und bürgerliche Lebensführung: Die okzidentale Sonderentwicklung. In Religion und Lebensführung Band II (pp. 382–504). Frankfurt: Suhrkamp. Smith, A. (1950 [1776]). The wealth of nations, London: Penguin. . Engl. Orig. 1776. Sombart, W. (1916). Der moderne Kapitalismus. Historisch-systematische Darstellung des gesamteuropäischen Wirtschaftslebens von seinen Anfängen bis zur Gegenwart. Zweiter Band. München: Duncker & Humblot. Sraffa, P. (1960). Production of commodities by means of commodities. Cambridge: Cambridge University Press. Statistisches Bundesamt. (2014). [Federal Office of Statistics, Germany]. Umweltnutzung und Wirtschaft. Bericht zu den umweltökonomischen Gesamtrechnungen.

288 Summers, L. H. (2015). Demand side secular stagnation. American Economic Review, 105(5), 60–65. Tirole, J. (2017). Economics for the common good (S. Randall, Trans.). Princeton: Princeton University Press. Van Parijs, P. (1995). Real freedom for all. What (if anything) can justify capitalism? Oxford: Clarendon Press. Vogt, W. (1986). Theorie der kapitalistischen und einer laboristischen Ökonomie. Campus: Frankfurt/M. Wallerstein, I. (1979). The rise and future demise of the world capitalist system: Concepts for comparative analysis. In The essential (pp. 71–105). New York: The New Press. Weber, M. (1920). Vorbemerkung. In Gesammelte Aufsätze zur Religionssoziologie (S. 1–16). Tübingen: J.C.B. Mohr (Paul Siebeck). Weber, M. (1924). Agrarverhältnisse im Altertum. In Gesammelte Aufsätze zur Sozial- und Wirtschaftsgeschichte (pp. 1–288). Tübingen: Mohr Siebeck. Weber, M. (1978 [1922]). Economy and society. An outline of interpretive sociology (Transl. and ed. G. Roth & C. Willich) Berkeley: University of California Press. Weber, M. (1980). Parlament und Regierung im neugeordneten Deutschland. In Gesammelte politische Schriften (pp. 306–443). Tübingen: J.C.B. Mohr. [Max Weber 1994. Parliament and Government in Germany under a New Political Order. In Political Writings. Texts in the History of Political Thought (Transl. and ed. Peter Lassmann and Ronald Speirs, pp. 130–271. Cambridge: Cambridge University Press.] Weber, M. (1981 [1923]). Wirtschaftsgeschichte: Abriss der universalen Sozial- und Wirtschaftsgeschichte. 4. Aufl. Berlin: Duncker & Humblot. [Max Weber

J. Berger 2013. General Economic History. (Transl. Frank Knight). Mansfield: Martino Publishing.] Weber, M. (1988). Methodologische Einleitung. In Gesammelte Aufsätze zur Soziologie und Sozialpolitik (pp. 1–60). Tübingen: Mohr Siebeck. Weber, M. (2019). Economy and society. A new translation. (Trans. and ed. K. Tribe). Cambridge, MA: Harvard University Press. Weitzman, M. L. (1984). The share economy: Conquering stagflation. Cambridge, MA: Harvard University Press.

Internet References System of National Accounts 2008. New York 2009. Retrieved from January 2020, from http://www. unstats.un.org The Royal Swedish Academy of Sciences: The Prize in Economic Sciences 2018. Retrieved from October 11, 2019, from https://www.nobelprize.org/prizes/ economic-sciences/2018/summary/

Johannes Berger is professor emeritus at the University of Mannheim, Germany. Research topics: Theory of society, economic sociology, social change in industrial societies, social inequality. Most recent publication: Berger, Johannes. 2019. Wirtschaftliche Ungleichheit. Zwölf Vorlesungen. Wiesbaden: Springer VS.

Social Responsibility in the Economy

19

Sebastian Koos

1

The Age of Responsibilization

In recent decades affluent capitalist democracies have faced far reaching economic and political changes and challenges. The current COVID-19 pandemic, the global financial crises, a decline in labor unionism (Ebbinghaus and Visser 1999), welfare state retrenchment (Korpi 2003), and globalization (Held et al. 1999) have all put the postwar economic order of embedded liberalism under pressure (Ruggie 1982). As a consequence, many view civil society and the private assumption of social responsibility as a viable solution to the declining capacity of states and social partners in economic governance (European Commission 2001; Ruggie 2004). This development is reflected in a shift of corporate conduct and consumption patterns across affluent democracies towards a market for virtue (Vogel 2006). Other observers have called this a moralization of markets (Stehr et al. 2006), or the age of responsibilization (Shamir 2008). Consumers increasingly use their purchasing power to voice their political, environmental, or ethical interests (Beck 2000; Scammell 2000; Micheletti et al. 2004; Boström et al. 2005; Harrison et al. 2005b). This is illustrated not only by rising sales of environmental and fair labeled goods, but also through widespread S. Koos (*) Department of Politics and Public Administration, University of Konstanz, Konstanz, Germany e-mail: [email protected]

boycotts of large corporations, like Shell, Nestlé, or Nike. Similarly, on the corporate side, the consideration of social and environmental issues such as Corporate Social Responsibility (CSR) is on the rise (Brammer and Millington 2003; Vogel 2006; Gjølberg 2009; Kinderman 2012; Lim and Tsutsui 2012). Businesses have started to publish sustainability reports, apply environmental management standards (e.g., ISO 14001), participate in public initiatives concerned with human development (e.g., Global Compact), and increasingly contribute resources to provide collective goods. All these developments manifest a rise and diffusion of responsible economic action in market economies. Although there are many other phenomena in which morality interferes with economic orthodoxy (Zelizer 1979; Healy 2000), in this chapter I focus exclusively on issues of responsibility in production, or more generally in profit making, and consumption since arguably, both actions constitute the core of modern capitalism (Smelser and Swedberg 1994). Economic action here will be understood as responsible if it does not harm the common good, and thus, has no direct or indirect negative effects on third parties (Campbell 2007). Arguably such responsible economic action is often related to extra monetary, transaction, or opportunity costs. In a more common parlance, responsible economic action refers to a way of consuming or running a business which is also directed towards the well-being of others or the common good (Beckert 2005). From a sociological perspective,

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such action is of central interest, in that, it challenges the rigid assumptions of the behavioral model of homo economicus in the only domain where pure formal rationality, carried out by solely self-interested utility maximizing actors, seems to hold true, namely the economy of modern market societies (Smith 1974; Fligstein 2001). Therefore, the question arises of how to make sense of socially responsible action in such a context. To answer this question, I discuss micro- and macro-theoretical explanations of responsible economic action as well as existing empirical research. On the level of actors, I discuss models of action, which allow for the disentanglement of the theoretical mechanisms that drive responsible economic action. On the context level, I draw on institutional and social movement theories as well as culture and globalization to highlight dimensions of the contextual embeddedness of responsible economic action. I will first introduce the concept of responsible economic action. Thereafter, I present both actor and context centered theoretical approaches to explain responsible economic action, before reviewing exiting empirical studies. I conclude by discussing how economic sociology and the concept of responsibility can help address the grand challenges of the twenty-first century.

2

Defining Responsible Economic Action

What renders action responsible? How can such actions be defined for economic actors? First, I start by elaborating on what economic action is, before turning to the issue of how morality and responsibility in sociological terms should be conceived. Scholars generally describe the economy as encompassing all activities that relate to the production, distribution, exchange, and consumption of scarce goods and resources (Smelser and Swedberg 2005). According to Max Weber (1978, 63) economic action is “any peaceful exercise of an actor’s control over resources which is in its main impulse oriented towards economic ends.” Such action is propelled by “a desire for

‘utilities,’” which, in his perspective, includes both householding and profit-making (Swedberg 1998). For sake of simplicity in this chapter I will mainly focus on two types of economic actions: the purchase of goods and services by individuals as an integral aspect of householding, as well as business related actions by corporations. These can be distinguished by the type of actor, individual versus corporate, as well as the orientation, provisioning versus profit seeking, and the embedding of both in different social contexts. The question that renders economic action responsible, needs to be discussed in the context of broader sociological debates on morality and responsibility. Generally, in a sociological understanding morality refers to some basic principles and norms in a given community or society about right or wrong in human conduct (Hillmann 2007). Morality can be either understood as a normative or descriptive concept (Jähnichen 2008). In the former, ethical standards are negotiated by drawing on, for instance, deontological or utilitarian reasoning. In the later perspective, moral norms are understood as variable and observable. Thus, individuals internalize certain values and norms, regarding just or unjust, right or wrong, which were learned in socialization and manifest in social action (Kohlberg 1981). In a sociological understanding moral behavior can then be defined as actions that are carried out in “accordance with some principle which is oriented (also) toward the well-being of others or the common good and is followed even if it demands to forgo additional personal profit or utility” (Beckert 2005, 7). As an alternative to the concept of morality, responsibility has gained growing prominence regarding all kinds of economic activities (Carroll 2008). From a philosophical perspective, responsibility is a relational concept, which connects a subject with an object which must be cared for, based on normative criteria provided by an authority (Heidbrink 2011, 190). Three main forms of responsibility can be discerned (ibid., 191). In the ethical sense, actors can be held responsible for the consequences of their actions according to some moral principles. In a judicial understanding, responsibility points to the

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sanctionability of actions based on existing law. Finally, in the social sense, responsibility refers to the voluntary assumption of certain actions, based on social expectations. From a sociological perspective, according to Coleman, “responsible behavior can be defined as that which takes into account the interests and rights of others” (Coleman 1990, 556). The concept of responsibility has proven especially useful in issues of economic ethics for at least two reasons. First, it allows one to distinguish and balance different dimensions of responsibility such as economic, legal, and ethical issues (Carroll 1999). Secondly, the intended and unintended consequences of purposeful action become much more central and precarious, (e.g., supply chains of multinational companies), due to increasing complexities in global market economies. Since responsibility focuses on the consequences of actions, it is therefore, better equipped to address these unintended consequences, than the concept of morality (Heidbrink 2011; Heidbrink and Schmitt 2011). I will zoom in to provide a better understanding of what constitutes responsibility using the example of consumption. In extant literature, consumption is understood as responsible either by focusing on the consequences of, or the motivations for consumption (OECD 2002; Micheletti 2003; Harrison et al. 2005a; Sassatelli 2006; Devinney et al. 2010). In the former, consumption is seen as responsible if it seeks to avoid negative externalities, or to bring about social change. In the later, responsible consumption is based on certain values, attitudes, and norms of justice or benevolence. Such definitions can be called psychological since they refer to the motivations or aims of a specific type of individual action. In a parsimonious psychological or interest-based definition, economic action would be understood as responsible if actors take the public consequences of their private economic actions into account. One alternative to the dominant psychological definitions can be found in the behavioral economics literature on altruism. Rather than defining altruistic behavior by actors’ other-regarding motives, economists and socio-biologists prefer

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definitions that focus on costs or chances of survival (Piliavin and Charng 1990, 29). Margolis (1982, 15), for instance, defines behavior as altruistic if “the actor could have done better for himself had he chosen to ignore the effect of his choice on others.” The difference between responsibility and altruism is the orientation of the former towards a common principle or shared norm, which at first glance does not need to be costly. However, I argue, that responsible economic action is always associated with some additional cost to ensure that negative externalities are avoided. From a behavioral perspective, economic action can be defined as responsible if it avoids any harm to third parties or to the common good. On markets, this involves additional (monetary, transaction, or opportunity) costs, beyond markets prices, to ensure collective goods are not affected. In this sense, responsible consumption would take place when people pay a surplus for goods to ensure that minimum labor standards in less developed countries are met. Both definitions are plagued by two issues to different degrees, namely normativity and circularity. The question of normativity (1) refers to the fact that one has to define what morality or responsibility actually means in a specific context and point in time. A drastic example of this problem would be the boycott of Jewish shops in Nazi Germany. For an arguably large number of people at that time, boycotting Jewish shops seemed surprisingly unproblematic in moral terms. Thus, boycotting Jews and buying German back then, might have even been perceived as forms of responsible consumption. However, such discrimination and violation of universal human rights is an obvious example of immoral or irresponsible consumption behavior. Yet, what constitutes morality and responsibility? What product is a good product? These questions are difficult to answer without engaging in a normative discussion of what is right or wrong. The issue of circularity (2) poses an equally severe problem. Most definitions of moral economic action refer to the purpose, aim, or motivation of a consumption or production decision as the basic definitional criteria. Thus, the good intention renders the action responsible. However, since

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motivations form an important part of the explanations for such behavior, such definitions run the risk of mixing explanandum and explanans and therefore employ circular argumentation. These problems cannot be easily resolved by using either a psychological or a behavioral approach. To some degree, normativity can be avoided by adhering to prescriptive statements of desirable outcomes, provided by representative political institutions such as governments or the United Nations (UN). For example, if the UN defines sustainable development as one of its main goals, this can be used as a benchmark according to which responsibility of economic action can be assessed. Circularity could be avoided by focusing on the outcome of action such as reduced use of pesticides, increased wages, or fewer accidents, rather than on its motives.

3

Explaining Responsible Economic Action

Under which conditions do individual and corporate economic actors take into account the consequences of their actions for public goods? Economic Sociology has stressed the embeddedness of action, pertaining to the structural, cultural, and political context of economic interaction. Starting from a critique of the rational action perspective, I first discuss different sociological action theories (Boudon 2003; Hedström 2005). Subsequently, the concept of contextual embeddedness (Zukin and DiMaggio 1990) is outlined, and its openness to integrate context specific theories that focus on social change in explaining the emergence of social responsibility in the economy is discussed.

3.1

Action Theoretical Approaches

The classical rational choice theory employs far reaching assumptions of human agency, which render the explanation of responsible economic action problematic. For most rational choice

theorists, the precondition for speaking of rational action is that actors maximize their individual utility by instrumentally deciding on the least costly means to reach a given end (Elster 1989; Hedström and Swedberg 1996). Thus, actors have a set of egoistic, self-interested preferences and are fully informed about objective constraints. By balancing preferences and constraints, they choose the one alternative of action that maximizes their utility (Opp 1999, 174). The assumptions of the neo-classical or rational choice (RC) model of human action have been widely criticized for being atomistic (Granovetter 1985), too narrow (Opp 1999; Boudon 2003), or plainly unrealistic (Margolis 1982; Etzioni 1988). Yet, according to Granovetter, although “the assumption of rational action must always be problematic, it is a good working hypothesis that should not easily be abandoned” (Granovetter 1985, 506). Many sociological action theories have been developed in response to the issues of the classical RC model of action. In a critique of the narrow model, Opp (1999) suggested a wide version of rational choice. He relaxes the rigid assumptions of RC, allowing all kinds of constraints, which are also subjective, and preferences which are also non-egoistic, to enter the utility function. In a different criticism of the narrow version of RC, Boudon (1998, 2003) develops a cognitivist model of action, of which rational choice is only one special version. In Boudon’s understanding, the core of action can be constituted either by instrumental rationality (RC), by cognitive rationality, or axiological rationality.1 Thus, actions do not necessarily follow a cost-benefit analysis (instrumental rationality), but are undertaken because an individual holds some belief to be likely, true (cognitive rationality) or fair, good, or unfair (axiological rationality), and has strong reason to believe so 1

Affective and traditional action, as in Weber’s (1978) classical ideal types, should also be considered here. While traditional or routine types of action might, to some degree, be subsumed under cognitive reason especially affective behavior, can hardly be reduced to Boudon’s model, since, at least in its ideal-type, it is by definition, not cognitive (Schimank 2005, 44).

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(Boudon 1998, 826). This is not congruent with Opp’s wide version of RC. Boudon (2003) concludes that efforts to include values and beliefs in wide versions of rational action theories may not always be suitable, for actors draw on values and norms, but not necessarily to increase their individual utility. Rather actors rely on them because they believe that they are true or just evaluations based on shared ideas, moral convictions, and normative beliefs. The outlined theories share the two most common denominators of social action theories (Rössel 2008, 233): desires (or in the corporate case, interests) and opportunities (Elster 1989; Opp 1999). Hedström (2005) adds beliefs as a third component to these two elements. In his simple DBO model, Hedström assumes that action can be explained by certain constraints, desires or interests, and beliefs. In this model, individual and corporate action is firstly understood as being purposeful; thus, actors have certain desires and interests which provide reasons for their action. Secondly, the choice of actions is limited by resources and costs (Elster 1989). Thirdly, they have beliefs “as proposition (s) about the world held to be true” (Hedström 2005, 38). Such a concept of action seems open enough to integrate all kinds of individual and contextual determinants, like value orientations, institutions, or culture. At the same time, it is specific enough to provide an understanding of the mechanisms that connect macro contexts to individual action. Furthermore, the basic elements of these models can also be found in social psychological approaches, like the theory of planned behavior (Ajzen 2005), which is frequently used in studies of consumer behavior, and in political science theories, like the civic voluntarism model (Verba et al. 1995).

3.2

Contextual Embeddedness

Having discussed a sociological action theory, I now turn to the concept of embeddedness and the context of responsible economic action. Embeddedness is one of the core concepts of the

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New Economic Sociology (Smelser and Swedberg 2005). It was popularized by Mark Granovetter (1985) in a critique of the atomistic perspective of both the neoclassical model and Parsons’ normativistic approach to social action. According to Granovetter (1985) action needs to be understood and explained in its structural embeddedness in social networks to overcome the over- and under-socialized understandings of action. In an older account, Polanyi (1963) uses the term embeddedness with a different meaning. In The Great Transformation, he describes the dis- and re-embedding of the market-economy in society as a double movement, using a rather institutional understanding of embeddedness (Beckert 2007). Zukin and DiMaggio (1990) draw on these approaches and provide an encompassing typology of four kinds of embeddedness of economic action: structural, cognitive, cultural, and political. The first type refers to Granovetter’s notion of actors as connected through different kinds of interpersonal relationships. The structures and positions within such networks are crucial in providing information and opportunities for action (e.g., Granovetter 1973). The second form, cognitive embeddedness, refers to patterns of cognitive processes like limits to rationality, as studied by psychologists (e.g., Simon 1955). Thirdly, cultural embeddedness denotes the role of shared meanings and understandings, which shape individual perceptions, values, and repertoires of economic action (e.g., Zelizer 1979). Finally, political embeddedness refers to the struggle over power, manifested in institutions, like the state or corporatist arrangements, that impact economic decisions and processes (e.g., Siaroff 1999; Hall and Soskice 2001). This chapter focuses especially on the last two meanings of embeddedness, which will be termed contextual embeddedness here. Yet, the notion of embeddedness in its different meanings can only serve as a starting point, which as a heuristic, provides a research perspective. Thus, more specific theories need to be added that allow one to grasp the explanatory mechanism at work (Beckert 2011).

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The contextual embeddedness of responsible economic action has been acknowledged by a multitude of theoretical approaches, stemming from political science, sociology, business management, and economics (Beck 2000; Micheletti 2003; Campbell 2006; Crouch 2006; Matten and Moon 2008; Seyfang 2009). In her seminal book on political consumerism, Micheletti (2003) distinguishes at least four macro theoretical explanations for the emergence of and national differences in responsible consumption practices: governance changes, post-modernization, ecological, and reflexive modernization. Other scholars (Scammell 2000; Harrison et al. 2005a; Scherer and Palazzo 2008) emphasize the effect of globalization for both responsible consumption and CSR. Furthermore, macro theoretical explanations of corporate responsibility often use institutional explanations (Hiß 2006; Matten and Moon 2008; Kinderman 2012). Others have emphasized the importance of social movements (Balsiger 2010; Dubuisson-Quellier 2013). According to the governance approach, government failure has led to the search for new governance solutions, which require cooperation between the state, civil society, and economic actors in order to provide a new steering capacity in a complex globalized world (Micheletti 2003, 6). The emergence of new policy instruments, like eco labeling schemes, can be seen as a governance innovation which propel the rise of green consumerism (Mol et al. 2000; Jordan et al. 2004; Boström and Klintman 2008). Similarly, the emergence of CSR has been driven by new governance initiatives like the United Nations Global Compact, or the Global Reporting Initiative (Bartley 2007; Lim and Tsutsui 2012). In a more general perspective, globalization is seen as a process which deprives citizens and their organized representations of political power (Norris 2002). The drivers of this process are multinational enterprises and supra-national institutions which gain influence (Harrison et al. 2005a). Consumers react by using their purchasing power to signal political interest (Scammell 2000; Beck 2000). The globalist hypothesis is also reflected in the CSR literature. On the one hand, NGOs and consumers put pressure on

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corporations as a result of the global ungovernability stemming from economic globalization and its discontents (Gjølberg 2009). On the other hand, globalization leads to the diffusion of CSR as a new institutionalized myth (Hiß 2006). The post-modernization approach focuses on the process of value change as a driver of alternative ways of political participation. From this perspective, increasing economic affluence paralleled by a perceived scarcity of mostly nonmaterial higher order needs result in a societal value change from materialism to postmaterialism (Inglehart 1997). The rising share of post-materialist citizens in a country leads to a shift from price-quality considerations in consumption to demands for environmentally friendly and fair produced goods and services. In his myriad writings on reflexive modernization, Beck (1994, 1996, 1998) assumes an epochal change from first to second (or reflexive) modernity, which can be characterized by the process of individualization and by an increase in manufactured risks (risk society). With the advent of reflexive modernity, he associates the emergence of a new form of politics, termed subpolitics. The “concept of ‘subpolitics’ refers to politics outside and beyond the representative institutions of the political system of nation-states” (Beck 1996, 18). From this perspective, individual actions achieve political significance by engaging a political frame of reference in all kinds of decisions in everyday life (Holzer and Sorensen 2003). Thus, consumption becomes politicized as “citizens are discovering that the act of purchase can always and everywhere be a direct ballot-paper” (Beck 2000, 70). Two processes are of critical relevance here: individualization and globalization, which “are in fact two sides of the same process of reflexive modernization” (Beck 1994, 14). Individualization means that actors are dissolved of the classical social formations, like family, class, or occupation and forced to assemble their own biography. “This type of individualization does not remain private: it becomes political in a definite new sense,” by inducing politics into everyday life transactions (ibid., 16). Globalization works as a

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catalyst, accelerating these processes by the “intensification of worldwide social relations which link distant localities in such a way that local happenings are shaped by events occurring many miles away and vice versa” (Giddens 1990, 64). Other scholars adopt an institutionalist perspective on responsible economic action. Especially in the research on corporate responsibility, a number of studies focus on the embeddedness of CSR in institutions of the political economy that constitute different national business systems, varieties of capitalism, and worlds of welfare (Esping-Andersen 1990; Whitley 1990; Hall and Soskice 2001). Inspired by diverse institutional theories, two contradictory hypotheses, institutional mirror versus substitute, have been proposed on the role of institutions. On the one hand, Matten and Moon (2008) claim that in liberal market economies and residual welfare states, explicit forms of CSR substitute for missing institutional arrangements. On the other hand, Campbell (2007) develops an institutional mirror perspective arguing that coordinated market economies and extensive welfare states provide the regulative and ideational basis for business commitment to social responsibility. Responsible consumption product labels have been seen as new policy institutions (Jordan et al. 2004). Boström and Klintman (2008) suggest eco labels as a new type of institution that guides green consumerism, an argument which is somewhat similar to the governance argument discussed above. Yet, Boström and Klintman (2008) focus on how labeling institutions emerge and not how they affect consumer behavior. A final perspective focuses on social movements as driving forces of responsibilization. Social movement approaches attempt to explain the prerequisites for collective action that aims at achieving social change. We can see the application of the so-called political process model, which takes political opportunity structures, mobilizing structures, and framing processes into consideration (King 2008). Opportunity structures relate to the external, or rather political, conditions that make coordinated collective action more likely to emerge and succeed.

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Such opportunities can be provided by political systems but can also come through market and industry structures (Koos 2012b). Mobilizing structures refers to formal organizations or informal networks, that enable collective action (King 2008). Finally, social movements propagate mental frames which may motivate actors to assume responsibility for collective goods, for instance, by constructing new valuation devices for ethical consumption (Dubuisson-Quellier 2013). In sum, macro theoretical explanations of responsible economic action focus on processes of social change like modernization, individualization or globalization, changes in the governance structures, the impact of political institutions, and the mobilization by social movements. Most of the theories or hypotheses do not provide a precise mechanism which relates the context to individual responsible action. As will be discussed in the next section, there is little empirical research that empirically tests these explanations.

4

Empirical Studies of Social Responsibility in the Economy

I will first discuss empirical studies that focus on micro-sociological explanations, before turning to context specific empirical studies. A large number of empirical studies on responsible consumer and corporate action are exploratory or descriptive and do not test theories at all (Micheletti et al. 2004; De Bakker et al. 2005; Harrison et al. 2005b).2 Those studies that draw on a theoretical model, in the case of responsible consumer action, often apply the theory of For the field of CSR research De Bakker et al. (2005, 300) report that almost 89.8% of all articles on corporate social responsibility and corporate social performance are solely descriptive (37%), prescriptive (14.3%), conceptual (13.5%) or exploratory (25%). Only 10.2 % are predictive in empirically testing theoretically grounded hypotheses. In the field of responsible consumption research, a look at two major edited books by Harrison et al. (2005a) and Micheletti et al. (2004) reveals that in the former only 1out of 14 articles and in the later only one out of 16 articles are predictive. 2

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planned behavior (Shaw 2005; OzcaglarToulouse et al. 2006; De Pelsmacker and Janssens 2007) and only more recently have they applied a wide rational choice approach (Sunderer and Rössel 2012). Boudon’s cognitivist model has not yet been applied to this type of action. In the theory of planned behavior any action is seen firstly as a consequence of the intention to act, which again is conceptualized as a function of specific attitudes, subjective norms, and behavioral controls (Ajzen 2005). The factors include certain beliefs regarding the planned behavior, specific attitudes, the consideration of the expectations of others towards an action, and subjectively perceived external constraints of the situation. Because Fair Trade consumption is unlikely to be driven by self-interest, Shaw (2005) adds ethical selfidentity and ethical concern to better account for the ethical dimension of Fair Trade. Shaw and colleagues find empirical support for these dimensions, yet the tests are based on a convenience sample and therefore, are not representative (Shaw 2005; Ozcaglar-Toulouse et al. 2006). Other studies find that the perceived difficulties in getting such products due to high price or lack of availability constrain the intention to purchase Fair Trade products (Uusitalo and Oksanenen 2004; Becchetti and Rosati 2007). Sunderer and Rössel (2012) use a wide rational choice model to explain the frequency of fair trade consumption, considering subjective (e.g., perceived lack of shopping opportunities) and objective constraints (household income), as well as three different types of moral motives, which are fair trade consciousness, expected moral utility, and personal moral norms. The authors find that, both subjective constraints and all three types of moral motives have a significant impact on fair trade consumption. Household income, however, does not have a statistically significant effect. In fact, one of the most consistent findings of all studies on responsible consumption is the importance of certain moral orientations or postmaterialist (or universalist) values (Opp and Roehl 1990; Thøgersen and Ölander 2002; Stolle et al. 2005; Ozcaglar-Toulouse et al. 2006; De Pelsmacker and Janssens 2007; Hughner et al.

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2007; Andorfer and Liebe 2012; Sunderer and Rössel 2012). Yet, most of these studies also confirm the importance of certain constraints and resources, or the subjective perceptions and related beliefs about them (Hughner et al. 2007; Andorfer and Liebe 2012). The research on organic food consumption emphasizes the variety of beliefs in what the term organic actually means to consumers. For example, a large number of people belief that organic food is healthier, tastes better, is safer, better for the environment and the local economy, even though the first three claims lack scientific support (Hughner et al. 2007, 101 ff.). Research on CSR is by far narrower, when linking theory with an empirical approach. Most studies here focus on the business case for CSR, that is the link between the social and the financial performance of a firm (Kurucz et al. 2008). Thus, following a narrow rational choice model, firms’ responsible business practices are explained by their positive impact on profit. Empirical results on this relationship are inconclusive. While Orlitzky et al. (2003) in a meta-analysis find support for a positive effect of a firm’s social performance on its financial revenue, Schreck (2011) in an econometrically advanced approach cannot detect any relationship at all. Other studies focus on a broader, yet still mostly structural set of indicators, like ownership structure, company size, or managerial discretion (Adams and Hardwick 1998; Navarro 1988). Only rarely are the actual motives of managers and CEOs taken into consideration to explain CSR (Hemingway and Maclagan 2004). Overall, the empirical studies on CSR find firm size, profit, and private ownership robust determinants of corporate responsible activities. While most studies consider the theoretical importance of contexts, due to data limitations contextual determinants are often neglected empirically. According to Andorfer and Liebe (2012, 428) “there is a need for additional crossnational studies that consider differences in market structures and cultural traits.” In a similar fashion Thøgersen (2010, 171) claims that existing research has an “unfortunate individualistic and individualizing bias,” neglecting the

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“macro structural conditions that frame and constrain individual choices.” Therefore, I now turn to the contextual embeddedness of responsible economic action. Different from the actor-centered research outlined above, there are few studies that seek systematic empirical evidence for macro theoretical explanations of responsible economic action.3 The few existing studies, however, often arrive at contradictory results. In the following I will first discuss the comparative research on consumer and thereafter, the research on corporate responsibility. Regarding responsible consumption, a couple of studies focus on the impact of the political culture, especially on aggregate levels of generalized trust (Sønderskov 2009; Neilson and Paxton 2010). Neilson and Paxton (2010) report a positive impact of regional levels of generalized trust on individual political consumption. However, Sønderskov (2009) does not find any impact of aggregate levels of generalized trust regarding organic food consumption. Similarly, neither aggregate levels of education, nor affluence impact the per capita consumption of organic groceries. Only a post-materialist culture has a statistically significant impact in his study. Yet, Koos (2011, 2012b) in two studies, finds that the economic opportunity structures, such as national affluence, and the structure of retailing systems are most important in explaining political and sustainable consumption. In the CSR literature, only a few comparative empirical studies focus on the impact of national institutional arrangements of the political economy and the level of globalization. Some studies, 3

Moreover, most empirical studies that focus on responsible consumer behavior and CSR fail to provide the theoretical mechanism which relates the macro level to micro action. Midttun et al. (2006) address the relationship between old institutional forms for the embedding of the economy, like welfare states, and new forms, like CSR. Differing between weaker and stronger institutional embeddedness, they do not provide a rationale of how the old forms impact the new forms. Yet, without such a mechanism, the strong correlation between welfare capitalism, corporatism, and CSR in Scandinavia remains ambivalent, for it cannot be pinpointed as to what exactly drives this relationship.

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using different measures for CSR, show that corporate responsibility mirror the dominant national logics of corporatism, neo-liberalism, or public welfare (Midttun et al. 2006; Gjølberg 2009). Other studies find that CSR is rather a substitute for institutional arrangements of political economy, widespread in liberal market economies but of only marginal importance in coordinated ones (Jackson and Apostolakou 2010; Kinderman 2012). In a different study, Koos (2012a) finds that corporatist and welfare institutions interact in a way so that CSR can be seen as both a substitute and a mirror of existing institutional arrangements. Regarding globalization, Gjølberg (2009) finds that countries with a large share of multinational corporations and high foreign direct investment are more likely to have high CSR engagement. In sum, little empirical research addresses the contextual embeddedness of responsible economic action, highlighting the need for more comparative research in this field.

5

Grand Challenges, Responsibility and Economic Sociology in the Twenty-First Century

Over the last decades, responsibility has become an important concept, due to several changes (Smith 2003; Scherer and Palazzo 2011). Most importantly, globalization and the transnationalization of supply chains has shifted the locus of production from well-governed countries and regulated labor markets to places that suffer from a lack of governance. At the same time, corporations have become immensely powerful and large, sometimes having assets comparable to government budgets. This was paralleled by an information revolution, providing easy, inexpensive, and fast access to media, and information from all around the world through the internet. These processes shifted the focus from governments to corporations and consumers as responsible economic actors. Yet, as has been shown in this chapter there are important limits to the assumption of economic responsibility.

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Firstly, the market for virtue (Vogel 2006) is strongly limited by economic opportunities, which differ across countries. Second, the complex historically grown institutional arrangements of modern capitalism provide rather stable worldviews, norms, and beliefs which are conducive to civic economic responsibility in only some cases (Koos and Sachweh 2019). Third, being based on unequally distributed financial means, responsible consumption reproduces social inequality in civic participation. Furthermore, political consumption might be used to foster undemocratic or irresponsible goals, lacking democratic legitimacy. Finally, on the corporate side, CSR potentially comes with the bitter flavor of paternalistic patronage (De Geer et al. 2009). Moreover, used as a political argument, the voluntary assumption of economic responsibility by firms might even contribute to the further regress of the welfare state (Kinderman 2012). Societies in the twenty-first century have been and still are confronted with many grand challenges or wicked problems. Such challenges are characterized by involving high levels of complexity, uncertainty, and evaluative struggles affecting a large number of people, often on a global scale (Ferraro et al. 2015). Problems such as climate change, pandemics, global migration, or social inequality are often inherently related to the organization and functioning of the global economy, markets, and economic action. Tackling these challenges therefore involves a better understanding and explanation of how the economy works. Arguably, economic sociology has an important role to play here in three different ways: by providing a critical understanding of evaluation struggles, by analyzing markets as governance mechanisms, and by identifying the conditions for responsible economic action. First, economic sociology has already started addressing the problems of valuation and evaluation, as well as of uncertainty in the constitution and development of markets (e.g., Beckert 1996). Yet, struggles on how global issues are framed, understood, and evaluated, how this in turn is absorbed by markets, and affects social inequality and environmental preservation still needs to be

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more thoroughly understood. Second, while economists and political scientists have emphasized the ability of markets to address climate change, some economic sociologists have provided important insights into the difficulties of markets as forms of economic governance (e.g., Engels 2006). Third, as this chapter has shown, economic sociology has also something to say on the difficulty for consumers and corporations to assume responsibility (Koos 2012a, b). While responsibility in economic action is always somewhat precarious, under specific conditions it might help solve collective good problems, whereby consumers, corporations and civil society might gain, if such action complements the economic governance by the state and organized interest (Bartley et al. 2015). Therefore, responsibility seems to be an important concept in addressing pressing social problems from an economic sociology perspective, since it connects economic action to its consequences for the broader common good.

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Sebastian Koos is assistant professor of corporate social responsibility at the department of politics and public administration and member of the cluster of excellence on The Politics of Inequality at the University of Constance. He served as chair of the Economic Sociology Research Network (ESA) from 2015 to 2019. Research topics: Economic sociology, organization studies, and political sociology, more specifically, corporate social responsibility, sustainable and political consumerism, political economy, social movements, and social inequality. Recent publications: Koos, Sebastian, and Patrick Sachweh. 2019. The Moral Economies of Market Societies: Popular Attitudes Towards Market Competition, Redistribution, and Reciprocity in Comparative Perspective. Socio-Economic Review 17/4: 793–821. Frangi, Lorenzo, Sebastian Koos, and Sinisa Hadziabdic. 2017. In Unions We Trust! Analysing Confidence in Unions across Europe. British Journal of Industrial Relations 55/4: 831–58. Koos, Sebastian, Triin Vihalemm, and Margit Keller. 2017. Coping with Crises: Consumption and Social Resilience on Markets. International Journal of Consumer Studies 41/4: 363–70. Koos, Sebastian. 2016. Die organisierte Vermarktlichung der Moral und die Moralisierung der Märkte. Eine vergleichende Analyse der Fair-Handelsbewegung und der Entstehung ethischen Konsums in Europa. Berliner Journal für Soziologie 26/2: 171–99. Bartley, Tim, Sebastian Koos, Hiram Samel, Gustavo Setrini, and Nick Summers. 2015. Looking Behind the Label: Global Industries and the Conscientious Consumer. Bloomington: Indiana University Press.

Index

A Action-based explanations, 48, 50–59 Action theories, 52, 53, 58, 79, 80, 292, 293 Advertising, 123, 126, 147, 148, 150–154, 221 Analytical mechanism approach, 48, 53–59 Austrian school, 7, 21 B Banking Union, 192, 198–201 Benjamin, W., 147, 149, 151 Bottom-up institutional change, 177, 187 Boudon, R., 55 Bourdieu, P., 11, 49, 64, 67, 74, 80, 81, 83, 86, 87, 91, 99, 101–103, 105–107, 113, 115 C Capitalism, v, vii, 4, 6–9, 14, 15, 21–28, 68, 70, 82–86, 89, 115–118, 125, 126, 137, 147, 151, 193, 205–208, 218, 223, 253, 254, 260–262, 264, 265, 271–286, 289, 295, 297, 298 China, v, 7, 84, 142, 164–167, 173, 177–185, 226, 247, 277, 278 Classes, 5, 6, 8, 14, 23, 24, 74, 75, 99, 102, 105, 106, 123, 124, 135, 147, 169, 181, 211, 275, 276, 285, 294 Classics, v, vi, 3–15, 19–29, 56, 80, 83, 89, 98, 101, 102, 107, 114, 133, 149, 205, 229, 254, 278 Coleman, J.S., v, vi, 33–43, 50, 53, 131, 134, 142, 184, 208, 291 Communities, vi, vii, 22, 34, 36, 39, 42, 64, 73, 80, 81, 83, 85, 87, 133–137, 160, 162, 165, 167, 171, 172, 179, 180, 182–184, 186, 197, 222, 228, 237–249, 258, 259, 261–263, 265, 276, 290 Conception of control, 228, 230, 231, 233 Confidence, v, 37, 83, 84, 91, 224, 230, 231 Consumption, vii, 7, 11, 12, 80, 82–85, 96, 97, 99, 102, 105–108, 116, 166, 172, 180, 223, 224, 276, 279, 285, 289–291, 294–298 Convention of quality, 223, 232 Convention theories, 58, 228 D Digital money, vii, 237–249 Digital transformation, 148, 153, 154

E Economic and Monetary Union (EMU), 193, 198, 201 Economic informality, 159, 161, 162, 173 Economics of conventions, 64, 66–71, 73 Economics of quality, 64–66, 71 Economics of singularities, 64–66, 99, 105 Entrepreneurship, v, 8, 14, 15, 64, 173, 174, 177, 180, 187, 200, 208–218, 228, 253–261, 265, 274, 280 European Union (EU), vii, 172, 191–202, 225 Expectations, 28, 35, 40, 41, 49, 79–91, 104, 118, 125, 131, 132, 134, 212, 213, 216, 228, 243, 257, 258, 263–265, 291, 296 F Field theory, 102, 103, 105 Finance, 12, 72, 75, 116, 141, 191, 227, 230, 260 Financial services, 191–201 Food supply chains, 221–223, 225 G Globalization, v, 27, 103, 104, 160, 161, 166, 167, 174, 191, 231, 240, 289, 290, 294, 295, 297 H Hart, K., 160, 161, 173 I Identities, 50, 51, 59, 82, 90, 105, 115, 123, 164, 167, 182, 183, 221, 222, 225, 230–233, 237, 259, 260, 263 Informal economies, 89, 159–162, 165, 173, 174 Informal markets, vii, 159–163, 165, 166, 168, 171–174 Information economics, 95, 98, 99, 107 Innovations, vi, vii, 8, 9, 12, 15, 23, 34, 82, 85–86, 90, 170, 173, 179, 185–187, 194, 222, 229–231, 237, 255, 256, 272–274, 276–277, 283, 284, 294 Institutional innovations, 179, 181, 183–186, 198, 233, 277 Institutionalism, vi, 49, 63–75, 177, 187 Institutional rules, 134, 139, 140, 180, 184, 227, 254 Institutional transitions, 177, 187 Institution building, 177–179 Investments, 41, 42, 49, 69, 82–85, 89, 91, 98, 113, 121, 138, 150, 154, 165, 168, 170, 173, 177, 178, 181,

# Springer Nature Switzerland AG 2021 A. Maurer (ed.), Handbook of Economic Sociology for the 21st Century, Handbooks of Sociology and Social Research, https://doi.org/10.1007/978-3-030-61619-9

303

304

Index 182, 195–197, 201, 237, 239, 246, 260, 262, 264, 273, 274, 279, 281–284, 297

K Karpik, L., 49, 64–67, 71–74, 83, 99, 100, 103–105, 107 L Luhmann, N., 101, 118, 123, 124, 150, 275 M Markets, v–vii, 8–11, 13, 23–28, 37, 38, 47, 49–51, 58, 63–75, 82–84, 88, 89, 95–108, 117–123, 125, 132–142, 147–155, 159–174, 177–183, 188, 192–194, 196–198, 200–201, 205–218, 221–234, 239, 240, 242–244, 246, 247, 253, 260, 264, 265, 271–277, 279, 281, 282, 285, 289–291, 295–298 Mechanism, 24, 27, 54–58, 117, 132, 133, 135, 136, 186, 191, 198, 199, 215, 218, 242, 278, 279, 293, 295 Mechanism approach, vi, 47–59 Merton, R.K., vi, 4, 14, 49, 52–54 Middle range theories, 53, 54 Migration, 160, 181, 183, 298 Mises, L., 20, 23, 24 Modernization, 27, 86, 91, 96, 166, 233, 245, 294, 295 Moralities, 5, 83, 289–291 N Neoliberalism, 8, 11, 25, 26, 114, 160, 223 Norms, 21, 34, 38–39, 41, 42, 66, 68, 80, 89, 90, 136, 139–141, 178, 179, 181, 240, 241, 248, 259, 261, 263, 290, 291, 293, 296, 298 O Online markets, vii, 131–142 Organic farming, 226 Organizations, vii, 19–27, 33, 34, 36, 39–41, 43, 64, 69, 70, 82, 86, 87, 90, 113, 115, 117, 119–124, 134, 136, 152, 161, 165, 174, 183, 187, 196, 221–223, 227–229, 231–233, 253, 254, 256–260, 264, 265, 271–274, 276, 277, 280, 281, 284, 286, 295, 298 P Peer-to-peer economies, 174 Performativity theory, 64, 71–73 Popper, K., 52, 58 Private actors, vii, 88, 177, 180, 181, 184 Private firm economy, 180–182, 187 Project logics, 264 Q Quality turn, 221, 222, 224–226

R Ratings, 38, 88, 95, 98, 125, 131, 138–141, 155, 193, 196 Rating systems, 138, 139, 141 Rational choice approaches, 33, 52, 53, 296 Reputations, 36, 39, 56, 66, 98, 105, 106, 131–142, 229–231, 261 Responsibilities, vii, 69, 198, 229, 233, 240, 273, 289–298 Review platforms, 140 S Sardex money, 238–248 Schumpeter, J.A., vi, 7–8, 10, 14, 15, 19–22, 25, 27, 85, 86, 253–255, 274, 278, 279 Self-organized cooperation, 140 Self-organized economies, 279 Simmel, G., 19, 20, 83, 122, 148, 154, 237, 241, 248 Singular products, 99–101, 104, 105, 107 Social actions, 20, 51, 56, 68, 79–82, 90, 148–150, 153, 240, 246, 290, 293 Social capital, vi, vii, 33–43, 101, 134, 247, 253 Social change, 53, 55, 82, 84, 89, 90, 148, 151–154, 209, 218, 222–228, 238, 245, 248, 291, 292, 295 Social factors, v, vi, 47–59 Socialization, 12, 39, 208, 212, 216, 217, 221–234 Social networks, 34, 37, 41–43, 50, 134, 184–186, 293 Sociological explanations, 26, 48, 50, 52, 80 Sociology of groups, 254 States, v, 3–5, 7, 9–11, 24, 27, 40, 56, 69, 70, 72, 83, 86, 88, 113, 115–122, 124–126, 133, 134, 136, 140, 151, 153, 159–162, 164, 166, 167, 171, 173, 174, 177–185, 187, 191–201, 207–209, 221, 223, 224, 226, 227, 229, 231–233, 237, 238, 246–248, 255, 263, 264, 273, 276–281, 284–286, 289, 293–295, 298 Sustainability, v, 84, 224, 225, 238, 239, 245, 247, 285, 289 T Trust, 34–37, 41, 49, 66, 68, 131–142, 149, 184–186, 207, 208, 217, 224, 238, 239, 242–244, 248, 257, 259, 264, 265, 275, 297 W Weber, M., vi, 3, 4, 6–9, 11–14, 19–25, 27, 28, 47, 48, 52, 53, 55, 58, 81, 113, 137, 237, 241, 248, 253–256, 272–274, 276, 280, 286, 290, 292 Western societies, 113, 117, 125 White, H.C., 49 Wittgenstein, L., 74, 75