**3.2 The two main economic institutions from the sociological perspective**

Institutions and their general functioning might be more important for New Institutionalism and sociological theory than for economic sociology. This general statement has now to be specified with the argument that economic sociology has to deal more with coordination problems and therefore with market institutions and enterprises or labor institutions, but needs also to take into account the economic effects of social standards, rules, norms, cultural knowledge, symbols, rituals, etc.

While economic sociology is more interested in the various forms and functions of the two main institutions in modern economies – markets and firms – it must not neglect the problems of collective action as part of modern economies (e.g. trade unions, consumer groups, pressure groups, European Union, WHO, etc.), nor the need for fundamental social institutions like concepts of rationality or time and how they are used in economic actions.

Whereas coordination problems referring to exchange can be solved by market institutions (market prices and competition) and hierarchies, and are stabilized by social institutions mainly when markets fail or hierarchies and control doesn't work, cooperation problems referring to cooperative work normally need to be solved by hierarchies.

In the following, I am going to show how to deal with the two main institutions of modern economies in sociology with regard to new developments in social theory. The main point is to consider the existence of these institutions on the basis of problems of orientation, coordination, and cooperation.

#### **3.2.1 The large firm**

88 Sociological Landscape – Theories, Realities and Trends

In contrast to economic theory that focuses mainly on exchange and complementary interests, sociology and political theory normally focus on *common interests* and therefore coordinated collective behavior. The classic answer to this is given by Max Weber (see paragraph 2) who argued that a means-end and legally founded order creates an organization ("Verband") that provides rational collective action in all fields. But Weber's solution is based on the assumption of a given legitimacy ("Anerkennung") and is lacking an explanation on how this can be constituted as well as on how collective action in economic fields can be organized by alternative mechanisms when legitimacy fails. Whereas sociologists take common interests seriously when discussing collective actions, they do not ask for the corresponding problems that might be caused by individual interests. This is because they argue like Weber or assume that common interests enforce collective actions themselves. One of the major insights of using a rational-choice theory is that common interests do not automatically lead to collective actions, but also need social institutions to be guaranteed. This means we need to ask when and why intentional actors are able to create social institutions that allow them to solve the various problems that go along with collective action, first of all the various kinds of free-riding, but also problems of defining ends (Offe & Wiesenthal, 1980; Wiesenthal, 1993). Because free-riding is a dominant strategy when common interests are enforced by others, such expectations need to be enforced either inside the group by social mechanisms or by establishing authority and control structures – all of which are also public goods. Economic sociology can use and broaden the concept of public goods to discuss why producer or consumer associations are so rarely to be found in modern economies or what social institutions are possible and necessary to establish and maintain such associations. An economically interesting variation of this general problem is discussed by Russell Hardin and Elinor Ostrom as 'Tragedy of Commons'. Ostrom (1990) in particular showed that the economic use of scarce common goods like water or fish can be

governed within small groups and informal trust-based rules and local knowledge.

Institutions and their general functioning might be more important for New Institutionalism and sociological theory than for economic sociology. This general statement has now to be specified with the argument that economic sociology has to deal more with coordination problems and therefore with market institutions and enterprises or labor institutions, but needs also to take into account the economic effects of social standards, rules, norms,

While economic sociology is more interested in the various forms and functions of the two main institutions in modern economies – markets and firms – it must not neglect the problems of collective action as part of modern economies (e.g. trade unions, consumer groups, pressure groups, European Union, WHO, etc.), nor the need for fundamental social institutions like concepts of rationality or time and how they are used in economic actions. Whereas coordination problems referring to exchange can be solved by market institutions (market prices and competition) and hierarchies, and are stabilized by social institutions mainly when markets fail or hierarchies and control doesn't work, cooperation problems

In the following, I am going to show how to deal with the two main institutions of modern economies in sociology with regard to new developments in social theory. The main point is

**3.2 The two main economic institutions from the sociological perspective** 

referring to cooperative work normally need to be solved by hierarchies.

cultural knowledge, symbols, rituals, etc.

From an institutional point of view there are three perspectives on the business firm described as a privately-owned organization producing for an anonymous market in order to make profit. The first question is: *Why* has that kind of organizational form spread so widely since the late 19th century? Secondly: *What kind of social actions* and *interdependencies*  are typical for this social setting, causing what kind of social institutions? Thirdly: How can we describe the *relationship* between *modern society* and *(large) business firms* in terms of social action and social expectations?

#### *a. Why privately-owned and hierarchically organized (large) business firms*

The first question is well considered because of the inevitable decline of social communities (tribes, families, feudal tenures, cloisters, and guilds) as producers of scarce goods and services during the process of industrialization. Instead, centralized production in the privately-owned industry driven by pure profit-orientation increased and became the very core issue of all social sciences (Swedberg, 2003). Whereas economists and historians point out that the decline of social communities and the rise of privately-owned companies was mostly related to technical innovations, (Neo-)Marxists as well as New-Institutionalists focus on the 'transformation problem' of human labor that arises because of the two main structural elements: private property and profit-orientation. The problem is to transform the abilities of human labor into an outcome that benefits the few owners and therefore coordinates the working process and solves the agency problem by effective structures. This is the very starting point for discussing the possibility as well as the need for centralized control mechanisms by private owners within the firm as an important fact for the overall success of privately-owned firms. Furthermore it is argued that the profit-orientation drives the widening of coordination effects firstly by enlarging the business and secondly by finding more and more rational ways of coordinating a large number of skilled workers. Economists and historians showed that social coordination effects the process of establishing more complex organizational and managerial structures, as well as organizing the production on a large scale and scope (Chandler, 1962; Williamson, 1985; North, 1990).

#### *b. Social expectations within firms*

Therefore, the formal organizational structures as well as the formation of managerial structures gained a lot of attention during the 20th century. One of the most exciting aspects discussed within sociology – especially in the sociology of work – relates to the change of *control systems.* It is stated that direct and personal forms of control lost relevance and were substituted by more technical and bureaucratic forms of control (Edwards, 1979) and lastly by new forms of self-control (Burawoy, 1979; Piore & Sabel, 1984). With this reading, sociology competes with New Economic Institutionalism that offers a strong argument for the rise of various kinds of managerial and structural forms in the 1930s in the US and in the 1950s in Europe because of information overload on the top management, which generated a need for certain kinds of institutions or for organizational change. Managers as well as hierarchies within this framework are regarded as effective mechanisms of coordination established by the private owners.

Economic Sociology: Bringing Back Social Factors 91

The new argument within an institutional frame is to regard business firms as an actor within society. This means firms act not only as economic actors in markets, but also as social actors in social contexts. According to this, we can show that there are different constellations that make societies address social expectations to firms. Consequently, the general focus is to regard firms as part of economic expectations (mostly addressed within markets), formal expectations (mostly addressed by national states and increasingly by international regimes like the EU, WTO, etc.), and also of social expectations (special cultural ideas, norms, principles, etc.). To do so, I suggest not asking how social expectations work in general, but more precisely what constellations make them relevant and what is the logic of the problem behind them. Therefore, with regard to the concept developed above, it is helpful to differentiate the underlying problem and also to consider how it is reflected and defined within a society as a whole or by different groups, respectively. It is important to see that firms in modern society are mainly addressed by the social expectation to provide goods and services that are 'demanded', and this is considered to be best done within

market competition and individually orientated on market prices that create profit.

economic actors such as trusts, investment banks, stock exchanges, etc.

**3.2.2 Markets** 

In this sense, we can firstly state that social expectations become important when markets fail in motivating as well as in coordinating firms. Then social expectations like collective decisions, cultural ideas, etc., can define goods, consumers, and exchange relations. Secondly, social mechanisms like networks, social capital, hierarchy, formal rules, laws, norms, etc. can help to modify negative economic effects caused by private firms like pollution, antitrust, bubbles, etc. In general, firms are to be seen as societal actors that influence not only economy but also social relations and, most of all, social institutions. That requires to analyze how society can enforce such actions that go along with social ideas and norms, e.g. diversity management, corporate social responsibility, philanthropism, etc. As the most problematic and important case we can now consider the actions of firms that exploit social institutions when making use of them, such as temporal rhythms, social relations, social trust, democratic ideas, etc. Then the task will be to analyze how society or social groups can resist and try to reproduce their mechanisms of social integration, especially by means of social institutions that enable individuals to cooperate in order to criticize and sanction powerful

Most classic economics discuss mankind's necessity to organize their survival by producing scarce goods and services (e.g. Adam Smith, Karl Marx, Max Weber, etc.). Sociology focuses not so much on technical but more on the social aspects of economic action and regards economy as socially organized. Therefore, various ways of organizing economy can be differentiated within the framework of institutionalism, what means that economy is to be described as a typical institutional setting – consisting of specific institutions with different functions and effects – with a specific relationship to society. One of the most famous typology states at least four major forms of society-economy relations: 1) the historic buildup on slavery and on ethics based on the 'good life', 2) the feudal system with a substantial production in private households and cloisters framed by overall feudal relations, 3) traditional capitalism founded on traditional habits and structures in guilds and trades, 4)

*c. Social expectations concerning firms* 

In contrast, sociological institution theories in the tradition of Weber state that organizational and managerial structures are part of collective ideas and therefore need to be regarded as an expression of legitimacy and not so much as a mechanism to ensure coordination effects (Dimaggio & Powell, 1991).

Located somewhere in between, conflict theories argue that especially 'labor institutions' (working hours, trade unions, state policy, or international institution systems like the EU) came into being in order to modify the conflict between workers and business owners (shareholders as well as entrepreneurs) (see Fligstein, 2005). The existence of labor institutions in general as well as that of different kinds of labor institutions is interpreted as part of the ongoing process of framing conflicts by using social institutions in a way that keeps the process running.

Most social scientists analyze business firms as a social (action) system that comes into being when formally free actors sell their 'rights' to those that pay them. From the viewpoint of the former actors, the so-called agents, they need to bargain for their 'earnings' and to make sure that they are able to get their sold rights back if they want to or to voice when their rights are hurt. The latter actors, the principals, need expectations about the agents: their abilities, their motivations and their real actions. To enforce such expectations, additional guarantees are helpful – primarily hierarchical control, loan systems, and, sometimes, social norms (Coleman, 1990). Because of the interest structure, such institutions are not to be regarded as a convention, but need to be explained as a coordination system enforcing control and regulating conflicts. Institutions that are engaged and maintained by selfinterested principles mostly have the unintended by-product to hire officials and set up hierarchical structures, which tend to meet their own authority interests at the cost of everyone by building up power monopolies, consuming resources, etc. Another very special adaptation of this situation is provided in the work of Oliver Williamson (1985). He discusses the problem that exchange relations often have costs because the underlying contracts cannot specify all details. Especially when asset specifity works, one partner has to invest specifically in the exchange relation, so social expectations can help to run exchange and therefore improve efficiency. Because of the explored control problem, that is an explicit form of a trust problem, formal and hierarchical institutions are needed but must be regarded as the source of further institutions. For example, managers in large companies who have the task of controlling the workers as well as the finances cause further control problems, but at a much higher level, because of their authority and power.

The hot topic within economic sociology is to show how this process is embedded in social constellations, so institutions are not only regarded in terms of coordination effects, but also in terms of underlying power relations as well as previously defined formal social rights and informal social ideas. While industrial sociology and sociology of work mainly focus on the conflict problem from a power perspective by overseeing the coordination problem, most organization and institution theories (as well as economics) focus on the primary coordination problem, missing the conflict structure and, most of all, the underlying power relations. The heuristic for economic sociology is to regard both processes: the coordination effects as well as the conflict structure that goes along with privately-owned firms and makes power, not effectiveness alone, relevant for analyzing internal structures and processes.

#### *c. Social expectations concerning firms*

90 Sociological Landscape – Theories, Realities and Trends

In contrast, sociological institution theories in the tradition of Weber state that organizational and managerial structures are part of collective ideas and therefore need to be regarded as an expression of legitimacy and not so much as a mechanism to ensure

Located somewhere in between, conflict theories argue that especially 'labor institutions' (working hours, trade unions, state policy, or international institution systems like the EU) came into being in order to modify the conflict between workers and business owners (shareholders as well as entrepreneurs) (see Fligstein, 2005). The existence of labor institutions in general as well as that of different kinds of labor institutions is interpreted as part of the ongoing process of framing conflicts by using social institutions in a way that

Most social scientists analyze business firms as a social (action) system that comes into being when formally free actors sell their 'rights' to those that pay them. From the viewpoint of the former actors, the so-called agents, they need to bargain for their 'earnings' and to make sure that they are able to get their sold rights back if they want to or to voice when their rights are hurt. The latter actors, the principals, need expectations about the agents: their abilities, their motivations and their real actions. To enforce such expectations, additional guarantees are helpful – primarily hierarchical control, loan systems, and, sometimes, social norms (Coleman, 1990). Because of the interest structure, such institutions are not to be regarded as a convention, but need to be explained as a coordination system enforcing control and regulating conflicts. Institutions that are engaged and maintained by selfinterested principles mostly have the unintended by-product to hire officials and set up hierarchical structures, which tend to meet their own authority interests at the cost of everyone by building up power monopolies, consuming resources, etc. Another very special adaptation of this situation is provided in the work of Oliver Williamson (1985). He discusses the problem that exchange relations often have costs because the underlying contracts cannot specify all details. Especially when asset specifity works, one partner has to invest specifically in the exchange relation, so social expectations can help to run exchange and therefore improve efficiency. Because of the explored control problem, that is an explicit form of a trust problem, formal and hierarchical institutions are needed but must be regarded as the source of further institutions. For example, managers in large companies who have the task of controlling the workers as well as the finances cause further control

problems, but at a much higher level, because of their authority and power.

The hot topic within economic sociology is to show how this process is embedded in social constellations, so institutions are not only regarded in terms of coordination effects, but also in terms of underlying power relations as well as previously defined formal social rights and informal social ideas. While industrial sociology and sociology of work mainly focus on the conflict problem from a power perspective by overseeing the coordination problem, most organization and institution theories (as well as economics) focus on the primary coordination problem, missing the conflict structure and, most of all, the underlying power relations. The heuristic for economic sociology is to regard both processes: the coordination effects as well as the conflict structure that goes along with privately-owned firms and makes power, not effectiveness alone, relevant for analyzing internal structures and

coordination effects (Dimaggio & Powell, 1991).

keeps the process running.

processes.

The new argument within an institutional frame is to regard business firms as an actor within society. This means firms act not only as economic actors in markets, but also as social actors in social contexts. According to this, we can show that there are different constellations that make societies address social expectations to firms. Consequently, the general focus is to regard firms as part of economic expectations (mostly addressed within markets), formal expectations (mostly addressed by national states and increasingly by international regimes like the EU, WTO, etc.), and also of social expectations (special cultural ideas, norms, principles, etc.). To do so, I suggest not asking how social expectations work in general, but more precisely what constellations make them relevant and what is the logic of the problem behind them. Therefore, with regard to the concept developed above, it is helpful to differentiate the underlying problem and also to consider how it is reflected and defined within a society as a whole or by different groups, respectively. It is important to see that firms in modern society are mainly addressed by the social expectation to provide goods and services that are 'demanded', and this is considered to be best done within market competition and individually orientated on market prices that create profit.

In this sense, we can firstly state that social expectations become important when markets fail in motivating as well as in coordinating firms. Then social expectations like collective decisions, cultural ideas, etc., can define goods, consumers, and exchange relations. Secondly, social mechanisms like networks, social capital, hierarchy, formal rules, laws, norms, etc. can help to modify negative economic effects caused by private firms like pollution, antitrust, bubbles, etc. In general, firms are to be seen as societal actors that influence not only economy but also social relations and, most of all, social institutions. That requires to analyze how society can enforce such actions that go along with social ideas and norms, e.g. diversity management, corporate social responsibility, philanthropism, etc. As the most problematic and important case we can now consider the actions of firms that exploit social institutions when making use of them, such as temporal rhythms, social relations, social trust, democratic ideas, etc. Then the task will be to analyze how society or social groups can resist and try to reproduce their mechanisms of social integration, especially by means of social institutions that enable individuals to cooperate in order to criticize and sanction powerful economic actors such as trusts, investment banks, stock exchanges, etc.

#### **3.2.2 Markets**

Most classic economics discuss mankind's necessity to organize their survival by producing scarce goods and services (e.g. Adam Smith, Karl Marx, Max Weber, etc.). Sociology focuses not so much on technical but more on the social aspects of economic action and regards economy as socially organized. Therefore, various ways of organizing economy can be differentiated within the framework of institutionalism, what means that economy is to be described as a typical institutional setting – consisting of specific institutions with different functions and effects – with a specific relationship to society. One of the most famous typology states at least four major forms of society-economy relations: 1) the historic buildup on slavery and on ethics based on the 'good life', 2) the feudal system with a substantial production in private households and cloisters framed by overall feudal relations, 3) traditional capitalism founded on traditional habits and structures in guilds and trades, 4)

Economic Sociology: Bringing Back Social Factors 93

entrepreneurs because market prices allow them to calculate how high the costs for labor, land, and machines are and therefore, how much they need to produce and at what prices the commodities have to be sold in order to make profit. Instead of material rationality, means-end rationality in the sense of profit maximization has become more common in economy and society, and finds the necessary institutional setting within mass markets for goods as well as labor (Weber, 1978; Weber, 2000). In the last century, the major tendencies of the enlargement of markets or market relations within societies resulted in a decline of social-relation patterns and boosted the globalization of markets themselves, especially of the financial markets (for a very short introduction, see Carruthers, 1996; Swedberg, 2003b; Stearns & Mizruchi, 2005). Due to globalization, the production system as well as the societal wealth depend increasingly on financial markets4 as the crises in the 1930s and at

The very core of New Economic Sociology are markets. This is due to the description of markets as an ideal model by neoclassical economics in order to deduce equilibrium prices in a formal and empirically testable way. Standard economic theory starts with the assumption of means-end rational actors trying to maximize their utility function (that is assumed to have certain properties: be stable, given and logically sorted) by orientating themselves strictly on market prices. The utility function results from the individuals' structure of preferences that is assumed to have certain properties: to be stable, to be given, and to be ranked in a logical order. Assuming perfect competition and complete information, market prices are to be interpreted as overall and objectively correct information signaling the underlying resource structure and demand structure, and make the market "best practice" of

New Institutionalism in economics as well as in sociology criticizes the ideal-typical model of 'homo oeconomicus' as well as that of a 'perfect-competition market' by arguing that both are 'unrealistic' and furthermore that in reality every market needs a certain spectrum of institutional framework, at the very least property rights and a national state. While New Institutionalism in economics almost always focuses on the problem of transaction costs going along with incomplete contracts and analyzes social institutions as control

To put it more general, economic sociology argues that all market exchange has to deal with the problem of uncertainty because of bounded individual rationality as well as social complexity that makes any kind of social expectation helpful by framing exchange relations and providing either simple orientation or ensuring coordination in the form of social exchange (Granovetter, 1985). According to the notion of social expectations developed above and in order to strengthen our understanding of social institutions in the economic sphere as well as that of markets, we have to give precise arguments as to why and to what degree exchange relations – and as a part of these market relations – make social expectations helpful and advantageous for individuals and society. According to this, we have to show why social institutions may be helpful, possible, and wanted by the

4 Therefore the "varieties of capitalism" or that of production systems are described as different relation patterns between firms and the financial system (Hall & Soskice, 2001) differing in their stability and

the beginning of the 21st century illustrate (Mackenzie & Millo, 2003).

socially coordinating individuals' demand and supply within a given set.

mechanisms in addition to, or as alternative to, markets.

efficiency.

*b. Social expectations within markets* 

modern capitalism with private firms producing and selling in free markets in order to make profit. In the modern western capitalist society, economy works mostly on its own principles and by using information provided by free markets (especially prices).

#### *a. Why markets*

In the last decades, sociologists have learnt a lot about markets through ethnologists, anthropologists and historians.

Beginning with the famous work by Malinowski, we can state that mankind has always had to earn their living by producing and trading, but in pre-modern times had to do it within a social framework that guaranteed the survival for most at a very low level (Polanyi, 1996). Exchange involved not only material goods but also women, children, symbols, etc. and was strongly restricted by spatial, temporal, and social norms. Markets existed but were socially embedded and to a high degree culturally defined as shown in the descriptions of the "Kula Ring" by Malinowski, "Kaffirs" by Karl Polanyi, the "Bazaar Economy" by Clifford Geertz, or the "Agora in Athens" by Richard Swedberg (see for example Polanyi, 1996; Swedberg, 2003b).

As we know today, a social reason for exchange and for establishing markets was the social rule not to trade within one's own tribe, community, or ethnicity (Weber, 1981). The very simple form of exchange needs neither markets nor money, but with growing specialization and division of labor, exchange relations were more and more 'organized' within markets and by means of payment. Karl Polanyi (1996) posits that markets became free from their social embeddedness when the labor force as well as most goods were traded and priced solely through markets.

With the process of broadening, large private-firms markets gained increasing importance by the mid-19th century. "A chain-reaction was started – what before was merely isolated markets was transmuted into a self-regulation system of markets ... The crucial step was this: labour and land were made into commodities, that is, they were treated as *if* produced for sale ... Accordingly, there was a market price for the use of labor power, called wages, and a market price for the use of land, called rent" (Polanyi, 1996: 147). Furthermore, markets as well as firms were no longer a part of society, and production as well as prices were no longer set by law, custom, ethics, or rulers, but by formally free market transactions based on contracts. "In this way an 'economic sphere' came into existence that was sharply delimited from other institutions in society. Since no human aggregation can survive without a functioning productive apparatus, its embodiment in a distinct and separate sphere had the effect of making the 'rest' of society dependent upon that sphere"(Polanyi, 1996: 148).3

What seems most important for economic sociology is what Adam Smith described as the very idea of market competition that is able to motivate individuals' exchange and to coordinate exchange relations within a group of strangers – or at least no longer socially and morally integrated individuals – so that the available resources are used in the most efficient way (Smith, 1950). Market coordination – based on prize building and competition – is to be seen as "best practice" of organizing the production in modern society. In a similar way, Max Weber stated that customers and entrepreneurs increasingly lost their traditional habits and started to act rationally in the sense of orientating themselves on market prices and competition rather than on traditional habits. In doing so, markets are of great help for

<sup>3</sup> For critical remarks see (North, 1977).

modern capitalism with private firms producing and selling in free markets in order to make profit. In the modern western capitalist society, economy works mostly on its own

In the last decades, sociologists have learnt a lot about markets through ethnologists,

Beginning with the famous work by Malinowski, we can state that mankind has always had to earn their living by producing and trading, but in pre-modern times had to do it within a social framework that guaranteed the survival for most at a very low level (Polanyi, 1996). Exchange involved not only material goods but also women, children, symbols, etc. and was strongly restricted by spatial, temporal, and social norms. Markets existed but were socially embedded and to a high degree culturally defined as shown in the descriptions of the "Kula Ring" by Malinowski, "Kaffirs" by Karl Polanyi, the "Bazaar Economy" by Clifford Geertz, or the "Agora in Athens" by Richard Swedberg (see for example Polanyi, 1996; Swedberg, 2003b). As we know today, a social reason for exchange and for establishing markets was the social rule not to trade within one's own tribe, community, or ethnicity (Weber, 1981). The very simple form of exchange needs neither markets nor money, but with growing specialization and division of labor, exchange relations were more and more 'organized' within markets and by means of payment. Karl Polanyi (1996) posits that markets became free from their social embeddedness when the labor force as well as most goods were traded and priced

With the process of broadening, large private-firms markets gained increasing importance by the mid-19th century. "A chain-reaction was started – what before was merely isolated markets was transmuted into a self-regulation system of markets ... The crucial step was this: labour and land were made into commodities, that is, they were treated as *if* produced for sale ... Accordingly, there was a market price for the use of labor power, called wages, and a market price for the use of land, called rent" (Polanyi, 1996: 147). Furthermore, markets as well as firms were no longer a part of society, and production as well as prices were no longer set by law, custom, ethics, or rulers, but by formally free market transactions based on contracts. "In this way an 'economic sphere' came into existence that was sharply delimited from other institutions in society. Since no human aggregation can survive without a functioning productive apparatus, its embodiment in a distinct and separate sphere had the

effect of making the 'rest' of society dependent upon that sphere"(Polanyi, 1996: 148).3

What seems most important for economic sociology is what Adam Smith described as the very idea of market competition that is able to motivate individuals' exchange and to coordinate exchange relations within a group of strangers – or at least no longer socially and morally integrated individuals – so that the available resources are used in the most efficient way (Smith, 1950). Market coordination – based on prize building and competition – is to be seen as "best practice" of organizing the production in modern society. In a similar way, Max Weber stated that customers and entrepreneurs increasingly lost their traditional habits and started to act rationally in the sense of orientating themselves on market prices and competition rather than on traditional habits. In doing so, markets are of great help for

principles and by using information provided by free markets (especially prices).

*a. Why markets* 

anthropologists and historians.

solely through markets.

3 For critical remarks see (North, 1977).

entrepreneurs because market prices allow them to calculate how high the costs for labor, land, and machines are and therefore, how much they need to produce and at what prices the commodities have to be sold in order to make profit. Instead of material rationality, means-end rationality in the sense of profit maximization has become more common in economy and society, and finds the necessary institutional setting within mass markets for goods as well as labor (Weber, 1978; Weber, 2000). In the last century, the major tendencies of the enlargement of markets or market relations within societies resulted in a decline of social-relation patterns and boosted the globalization of markets themselves, especially of the financial markets (for a very short introduction, see Carruthers, 1996; Swedberg, 2003b; Stearns & Mizruchi, 2005). Due to globalization, the production system as well as the societal wealth depend increasingly on financial markets4 as the crises in the 1930s and at the beginning of the 21st century illustrate (Mackenzie & Millo, 2003).

#### *b. Social expectations within markets*

The very core of New Economic Sociology are markets. This is due to the description of markets as an ideal model by neoclassical economics in order to deduce equilibrium prices in a formal and empirically testable way. Standard economic theory starts with the assumption of means-end rational actors trying to maximize their utility function (that is assumed to have certain properties: be stable, given and logically sorted) by orientating themselves strictly on market prices. The utility function results from the individuals' structure of preferences that is assumed to have certain properties: to be stable, to be given, and to be ranked in a logical order. Assuming perfect competition and complete information, market prices are to be interpreted as overall and objectively correct information signaling the underlying resource structure and demand structure, and make the market "best practice" of socially coordinating individuals' demand and supply within a given set.

New Institutionalism in economics as well as in sociology criticizes the ideal-typical model of 'homo oeconomicus' as well as that of a 'perfect-competition market' by arguing that both are 'unrealistic' and furthermore that in reality every market needs a certain spectrum of institutional framework, at the very least property rights and a national state. While New Institutionalism in economics almost always focuses on the problem of transaction costs going along with incomplete contracts and analyzes social institutions as control mechanisms in addition to, or as alternative to, markets.

To put it more general, economic sociology argues that all market exchange has to deal with the problem of uncertainty because of bounded individual rationality as well as social complexity that makes any kind of social expectation helpful by framing exchange relations and providing either simple orientation or ensuring coordination in the form of social exchange (Granovetter, 1985). According to the notion of social expectations developed above and in order to strengthen our understanding of social institutions in the economic sphere as well as that of markets, we have to give precise arguments as to why and to what degree exchange relations – and as a part of these market relations – make social expectations helpful and advantageous for individuals and society. According to this, we have to show why social institutions may be helpful, possible, and wanted by the

<sup>4</sup> Therefore the "varieties of capitalism" or that of production systems are described as different relation patterns between firms and the financial system (Hall & Soskice, 2001) differing in their stability and efficiency.

Economic Sociology: Bringing Back Social Factors 95

this, we mean that all incomes derive from market activities and almost all goods are prized commodities dealt with in markets. As a result, not only the supply and demand of consumer goods is organized by markets, but also labor force, money, religious and social goods (love, friendship, welfare, and trust) are increasingly prized and exchanged on markets. According to the underlying notion of institution, I have to concede that the overall functioning of the market mechanism in the modern western world has brought a new level of material wealth on the one hand (North, 1990; Goldstone, 2009), but also a dramatic change in or loss of social integration on the other (Hirschman, 1986). That means that today, modern societies are ruled to a very high degree by the market mechanism and therefore are contrasted by the need for social integration, bounding, and legitimation. From an institutional point of view we have to take into account that social institutions firstly help by defining and enforcing 'socially defined standards' that might correct market prices as well as market failures. Secondly, social values are also needed for the functioning of markets by defining and legitimation individual's preferences. Both could be seen during the recent financial crisis, making clear that markets can fail and sometimes need to be framed by social values as well as that there is no easy way to substitute market prices because then social exchange must be motivated and enforced by social mechanisms that normally provide the basis for power and conflict (Fligstein, 2005; Nee, 2005). Socially defined patterns of stratification normally need collective decisions, public legitimation as

well as conflict regulations, all of which normally go along with a lack of efficiency.

Modern economy is normally thought of as the subject of economic theories, and sociology is considered to deal with social aspects. During the greater part of the 20th century, sociologists focused on social integration by norms and hierarchies, and economists on market coordination on the basis of the model of man as 'homo oeconomicus'. I wish to posit that within an action-based multi-level framework, we can discuss typical situations of social action – in a broad sense – which make institutions advantegous. A particular social situation is when rational actors pursue their own interests but take others into account. According to this, we can provide arguments about why individuals try to establish and maintain certain institutions, and we can also analyze the functioning of such institutions

This can be done for typical social as well as economic or political institutions. To bring social factors back into the analysis of economy, I have suggested elaborating on typical social configurations that explain why privately-owned firms as well as large consumer markets and market prices have become so important in modern western economies. Furthermore, I have discussed what kinds of problems have to be solved when social action is taking place within large firms and markets. Concerning this, I have argued that in large firms institutions are wanted that allow for efficient coordination and also help to solve conflicts that go along with sharing the coordination effects and the central coordination structure. I have also illustrated that the spread of the market mechanism can be explained as a kind of framing exchange relations in large groups without a moral or normative basis. Firms as well as markets can now be explained as institutions established by socially interdependent actors who try to coordinate their actions in order to gain economic benefits

**3.3 Economy from a sociological point of view** 

with regard to the underlying structure.

yet also generate further problems and unintended by-products.

individuals when acting in markets (see paragraph 2). The general heuristic is to set the main problems apart that go along with exchange and to dissect the underlying problems in markets, especially those that make social institutions advantageous in the modern economy. This can be done in a problem-oriented way by analyzing basic needs for orientation in the sense of what ends and means exist in a market, where markets emerge, who the buyers and sellers are in a market, etc. Sociology can consequently discuss why cultural symbols, social signals, or tacit knowledge help individuals to act socially in markets (Boltanski & Thévenot, 1983; Podolny, 2005; Geertz, 2011). For example, only if 'life', 'salvation', 'love', etc. are regarded as commodities can we choose to provide or to buy a life insurance (Zelizer, 2005), religious salvation and symbols (Wuthnow, 2005), or love, and in doing so create stable markets. This is to fill a blank in economic theory by explaining individual preferences as a result of social processes (Hirschman, 1977) as well as general orientations underlying individuals' actions as means-end rationality in the sense of utility maximization (Weber, 1946).

In the last three decades, New Economic Sociology has focused on the problem of how to guarantee exchange mostly within a group of strangers or at least morally no longer integrated people. All the questions of ensuring exchange relations can be discussed as forms of coordination problems. These problems have many solutions because there is an overall interest in success, but all of these solutions offer a particular benefit that motivates the emergence of social institutions in general, some of which being more likely to emerge, and provides opportunities for using power and strategy. While the problem of social expectations within exchange relations is widely dealt with in economic sociology, according to Mark Granovetter (1985) it is mostly discussed under the broad headline of uncertainty. But only if we differentiate degrees of difficulty, we can explain what institutions might help and come into being.

More interesting for sociology, although far more difficult, are questions concerning the definition of exchange rates (or more widely the question of stratification within a group) when there are no market prices (public goods, when markets are too small) or when market prices do not work (within families, friendship, democracy) or cannot work (because of imperfect competition like within the education system, health care, within an organization, etc.). Whenever market prices do not exist or should not work for social reasons in modern economy, social expectations must define explicitly the worth of goods and services. In other words, the most important aspect in exchange relations, namely what potential producers can expect and what consumers have to pay, must be defined either by law or by collective decisions or by normative ideas about justice or the like. It is obvious that every social definition of exchange rates normally causes conflicts; the greater the differences between the members of a society and the looser the 'social ties', the bigger the conflicts to be solved and the less is rationality of coordination (North, 1977). As Weber stated at the beginning of the 20th century, the central mechanism of modern economy is the market price because prices defined on large markets make individual rational orientation in the economic sphere (especially profit maximization) possible and lead to the highest level of rational production (Weber, 1978).

#### *c. Social expectations on markets*

As Polanyi and others stated, the modern kind of market economy was established in the mid-19th century, and the dominance of market mechanism in modern society was set. With

individuals when acting in markets (see paragraph 2). The general heuristic is to set the main problems apart that go along with exchange and to dissect the underlying problems in markets, especially those that make social institutions advantageous in the modern economy. This can be done in a problem-oriented way by analyzing basic needs for orientation in the sense of what ends and means exist in a market, where markets emerge, who the buyers and sellers are in a market, etc. Sociology can consequently discuss why cultural symbols, social signals, or tacit knowledge help individuals to act socially in markets (Boltanski & Thévenot, 1983; Podolny, 2005; Geertz, 2011). For example, only if 'life', 'salvation', 'love', etc. are regarded as commodities can we choose to provide or to buy a life insurance (Zelizer, 2005), religious salvation and symbols (Wuthnow, 2005), or love, and in doing so create stable markets. This is to fill a blank in economic theory by explaining individual preferences as a result of social processes (Hirschman, 1977) as well as general orientations underlying individuals' actions as means-end rationality in the sense of utility

In the last three decades, New Economic Sociology has focused on the problem of how to guarantee exchange mostly within a group of strangers or at least morally no longer integrated people. All the questions of ensuring exchange relations can be discussed as forms of coordination problems. These problems have many solutions because there is an overall interest in success, but all of these solutions offer a particular benefit that motivates the emergence of social institutions in general, some of which being more likely to emerge, and provides opportunities for using power and strategy. While the problem of social expectations within exchange relations is widely dealt with in economic sociology, according to Mark Granovetter (1985) it is mostly discussed under the broad headline of uncertainty. But only if we differentiate degrees of difficulty, we can explain what

More interesting for sociology, although far more difficult, are questions concerning the definition of exchange rates (or more widely the question of stratification within a group) when there are no market prices (public goods, when markets are too small) or when market prices do not work (within families, friendship, democracy) or cannot work (because of imperfect competition like within the education system, health care, within an organization, etc.). Whenever market prices do not exist or should not work for social reasons in modern economy, social expectations must define explicitly the worth of goods and services. In other words, the most important aspect in exchange relations, namely what potential producers can expect and what consumers have to pay, must be defined either by law or by collective decisions or by normative ideas about justice or the like. It is obvious that every social definition of exchange rates normally causes conflicts; the greater the differences between the members of a society and the looser the 'social ties', the bigger the conflicts to be solved and the less is rationality of coordination (North, 1977). As Weber stated at the beginning of the 20th century, the central mechanism of modern economy is the market price because prices defined on large markets make individual rational orientation in the economic sphere (especially profit maximization) possible and lead to the highest level of rational production (Weber, 1978).

As Polanyi and others stated, the modern kind of market economy was established in the mid-19th century, and the dominance of market mechanism in modern society was set. With

maximization (Weber, 1946).

institutions might help and come into being.

*c. Social expectations on markets* 

this, we mean that all incomes derive from market activities and almost all goods are prized commodities dealt with in markets. As a result, not only the supply and demand of consumer goods is organized by markets, but also labor force, money, religious and social goods (love, friendship, welfare, and trust) are increasingly prized and exchanged on markets. According to the underlying notion of institution, I have to concede that the overall functioning of the market mechanism in the modern western world has brought a new level of material wealth on the one hand (North, 1990; Goldstone, 2009), but also a dramatic change in or loss of social integration on the other (Hirschman, 1986). That means that today, modern societies are ruled to a very high degree by the market mechanism and therefore are contrasted by the need for social integration, bounding, and legitimation. From an institutional point of view we have to take into account that social institutions firstly help by defining and enforcing 'socially defined standards' that might correct market prices as well as market failures. Secondly, social values are also needed for the functioning of markets by defining and legitimation individual's preferences. Both could be seen during the recent financial crisis, making clear that markets can fail and sometimes need to be framed by social values as well as that there is no easy way to substitute market prices because then social exchange must be motivated and enforced by social mechanisms that normally provide the basis for power and conflict (Fligstein, 2005; Nee, 2005). Socially defined patterns of stratification normally need collective decisions, public legitimation as well as conflict regulations, all of which normally go along with a lack of efficiency.

#### **3.3 Economy from a sociological point of view**

Modern economy is normally thought of as the subject of economic theories, and sociology is considered to deal with social aspects. During the greater part of the 20th century, sociologists focused on social integration by norms and hierarchies, and economists on market coordination on the basis of the model of man as 'homo oeconomicus'. I wish to posit that within an action-based multi-level framework, we can discuss typical situations of social action – in a broad sense – which make institutions advantegous. A particular social situation is when rational actors pursue their own interests but take others into account. According to this, we can provide arguments about why individuals try to establish and maintain certain institutions, and we can also analyze the functioning of such institutions with regard to the underlying structure.

This can be done for typical social as well as economic or political institutions. To bring social factors back into the analysis of economy, I have suggested elaborating on typical social configurations that explain why privately-owned firms as well as large consumer markets and market prices have become so important in modern western economies. Furthermore, I have discussed what kinds of problems have to be solved when social action is taking place within large firms and markets. Concerning this, I have argued that in large firms institutions are wanted that allow for efficient coordination and also help to solve conflicts that go along with sharing the coordination effects and the central coordination structure. I have also illustrated that the spread of the market mechanism can be explained as a kind of framing exchange relations in large groups without a moral or normative basis. Firms as well as markets can now be explained as institutions established by socially interdependent actors who try to coordinate their actions in order to gain economic benefits yet also generate further problems and unintended by-products.

Economic Sociology: Bringing Back Social Factors 97

constellations and to find social solutions. But as I have clearly mentioned above, the main sociological task is to explore social interdependencies or situations that cause social

What I intended to do, was to look at economy from a general sociological view and to provide a clear thesis about the rise of the two main economic institutions in modern economy: the business firm and the mass market. By using the tools of social and institutional theory, I argued that under the integrated roof of institution theory we can and should explain as well as analyze economic institutions as a form of social-expectation building. But in order to overcome the restrictions of classics we have to analyze their functioning with regard to individuals and the underlying problem logic of typical social constellations. In doing so, we can now state that market mechanisms help to coordinate strangers or morally no longer integrated individuals, but only based on socially defined preferences, skills, and property rights. Furthermore, we can now argue that most of economic life needs at least additional social mechanisms in order to enforce market mechanisms and sometimes also to be a proper alternative. This is what economic sociology could do in the future, whereas sociology in general could concentrate more on the effects economic institutions have on social life by using and destroying traditional social institutions like temporal rhythms, family relations, religious rituals, traditional knowledge, networks, ethics, etc. This means also considering how firms and market actors can be

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**5. References** 

The integrative perspective of this approach is to elaborate upon variations of the named main situations and their underlying problems and to show when institutions are established to solve the problem and what social effects these institutions can have. Thus, the main thesis is that different kinds of social institutions matter in economic life because they provide mutual expectations in general and thereby solve various problems of social actions in particular. Mass product markets and privately-owned large firms are seen as a result of both the decline of small and morally integrated groups as well as that of formally free and rationally acting individuals that try to improve their lives. One major task for sociology in the future is to conduct analytical and empirical research on understanding the change of social structure brought about by the spread of the named economic institutions. In other words, we do not only need more knowledge about the rise of modern western economy, but also about the way economy is changing and thereby disabling or enabling social institutions.
