Economic Action and Social Structure: The Problem of Embeddedness

(reading for week 3)

By Mark Grandovetter


Introduction of the problem of embeddedness

According to Granovetter, people are embedded in social relations which subsequently affect their economic behaviors and decisions.

Utilitarian tradition, including classical and neoclassical economics, assumes rational, self-interested behavior affected minimally by social relations. Therefore, the economic behavior can be freed from social relation as one of independent variables.

Majority sociologists, anthropologist, political scientists and historians are of the view that economic behavior was heavily embedded in social relations in pre-market societies but became much more autonomous with modernization. This view sees that economy as an increasingly separate, differentiated sphere in modern society, with economic transactions defined no longer by the social or kinship obligations of those transacting but by rational calculations of individual gain.

However, few economists agreed with above views, instead, they asserted that embeddedness in earlier societies was not substantially greater than the low level in modern markets. The theory of exchange suggested that since labor was the only factor of products in primitive society, goods must be exchanged in proportion to their labor costs.

Granovetter’s view differs from above two. He asserts the level of embeddedness to of economic behavior may be different but it continues to be substantial.

Over and Undersocialized conceptions in human actions in sociology and economics

Undersocialized, atomized conception of human action, represented by classical and neoclassical economists with utilitarian tradition, is that elimination of social relations from economic analysis. No impact from social structure and social relations on products, distribution or consumption. It is “idealized markets”, and self-regulating economic structures, which are politically attractive.

Oversocialized conception is to assume that people act in certain ways because to do so is of customary, or of an obligation. The social influence, on the other hand, is external and rather automatic.

The common point of both sides is a conception of action and decision carried out by atomized actors. In the undersocialized account, atomization results from narrow utilitarian pursuit of self-interest; in over socialized account, from the fact that behavioral patterns have been internalized and ongoing social relations thus have only peripheral effects on behavior. Granovetter emphasized to avoid the atomization implicit in the theoretical extremes of under or over socialized conceptions.

Embeddedness, Trust, and Malfeasance in economic life

Hobbes saw that there is nothing in the intrinsic meaning of self-interest that excludes force and fraud. Atomized actors in competitive market under self-regulated economic structures internalize normative standards of behaviors as to guarantee orderly in transaction.

In recent years, the concerns for fraud and malfeasance have risen. Granovetter saw two answers for these problems:-

The undersocialized account is found mainly in the new institutional economics. It substitutes institutional arrangement for trust, which leads to Hobbesian situation, in which any rational individual would find way to develop clever ways to “cheat”;

Other economics acknowledge the generalized morality. This conception has the over socialized characteristic of calling on a generalized and automatic response, a moral action. One may wonder how effective this morality would be if large costs were incurred.

The embeddedness argument stresses the role of concrete personal relations and structures of such relations in generating trust and discouraging malfeasance. Economists have pointed out that one incentive not to cheat is the cost of damage to one’s reputation, but this is an undersocialized conception s of reputation as a generalized commodity, a ratio of cheating to opportunities for doing so.

Standard economic analysis neglects the identity and past relations of individual transactors, but rational individuals know better relying on their knowledge of these relations.

Social relations, rather than institutional arrangement or generalized morality, are mainly responsible for the production of trust in economic life.

But social relations are not sufficient to prevent cheating and malfeasance. The reasons are:

1. The trust engendered by personal relations presents, by its very existence of opportunity for malfeasance. The more trust, the more gain in malfeasance.


2. Force and fraud are most efficiently pursued by teams, and the structure of these teams requires a level of internal trust.


3. The external of disorder resulting from force and fraud depends very much on how the net work of social relations is structured.

Disorder and malfeasance do occur when social relations are absent. This suggests that social relations perhaps in some degree inhibit malfeasance, but the level of malfeasance in a truly atomized social situation is fairly low.

The problem of markets and hierarchies

Williamson sought to know under what circumstances economic functions are performed within the boundary of hierarchical firms rather than by market process that cross these boundaries. His answer is that the organizational form observed in any situations is that which deals most efficiently with the cost of economic transactions.

For those that are uncertain in outcome, recur frequently, and require substantial transaction specific investments that cannot be easily transferred to interaction with others on different matters, are most likely to take place within hierarchically organized firms. For those that require no transaction specific investment, such as one time purchase of standard equipment, will more likely take place between firms, which is to buy from markets.

The reason for those transactions been internalized with hierarchies for two reasons: 1). Bounded rationality, which means the transactions are internalized within firm’s governance structure and control. 2) Opportunism, the rational pursuit by economic actors of their own advantage, with all means at their command, including guile and deceit. . It is more efficient to settle internally rather appeal to costly litigation institutions.

Granovetter argued that Williamson overplayed the efficacy of hierarchical power within the firm, but overlooked the role of social relations among individuals in different firms. He argued that social relations and social networks among individuals, especially on executive management levels, in different firms bring in order to economic life.