Mark Granovetter -

Embeddedness
Through this essay, Mark Granovetter tries to answer the long-standing
question of "how behaviour and institutions are affected by social relations?".
He tries to make a point that economic behaviour and institutions should be
regarded as embedded in social relations.

Sociologists have felt that embeddedness was highly prevalent in pre-

market societies but gradually has been reduced with modernization. The
economy was seen to be increasingly separated from society, with economic
transactions being more rational and based on the individual gain. This
embeddedness position was associated with the "substantivist" school of
thought. On the other hand, we have the "formalist" position, where it was
believed that even in tribal societies, economic behaviour was sufficiently
independent of social relations. According to this position, embeddedness rather
than being a result of social relations is more often a result of the pursuit of self-
interest.
However, for Granovetter embeddedness was lower in premarket
societies than is claimed by substantivists and has changed less with
modernization, but that at the same time it is also more substantial than what
formalists thought.

He talks about the oversocialized and undersocialized conceptions of

human action. In the oversocialized conception, economic behaviour was
heavily embedded in social relations in premarket societies, where people were
sensitive towards each other's opinions and obedient to the dictates of
consensually developed norms and values. Here obedience was not perceived as
a burden. Whereas in the under-socialized ‘atomized’ conception of human
action, social relations and social structures do not have any impact on
production, distribution and consumption. For example, in the competitive
markets, no producer or consumer can influence the aggregate supply or
demand. Social relations (especially poor relation issues like mistrust) become a
frictional drag that impedes competitive markets. Adam Smith recognized that
social atomization is necessary for perfect competition (in other words,
relationships only screw things up).

Ironically despite the contrast between the undersocialized and

oversocialized conceptions, both have a common conception of action and
decision carried out by atomized actors. In the undersocialized account,
atomization results from the narrow utilitarian pursuit of self-interest and in the
oversocialized one, from the fact that behavioural patterns have been
internalized and ongoing social relations thus have only peripheral effects on
behaviour.
However, Granovetter argues that these oversocialized conceptions of how
society influences individual behaviour are mechanical and is an external force.
The decision-making capacity of an individual is constructed through
socialisation. He talks about culture being an ongoing process, continually
constructed and reconstructed during the interaction.
Even when economists do take up social relationships seriously, they
divert from the history of relations and their position with regard to other
relations i.e. what may be called the historical and structural embeddedness of
relations. The individual ties between actors are generalised and the actor's
behaviour is seen to be a result of their role positions.

According to Granovetter, a fruitful analysis of human action requires us

to avoid the atomization of the under and oversocialized conceptions. For him,
it is necessary to eliminate the idea that actors are similar to atoms, unrooted to
a social context. Granovetter takes a middle position between the two extremes
of over-socialized and under-socialized view.

He then goes on to talk about the question of trust and fraud in economic
life. According to Oliver Williamson, economic actors do not merely engage in
the pursuit of self-interest but also in opportunism- where agents may act with
guile and deception in transactions. Previously, economists withheld peculiar
assumptions about what discourages fraud or force. It was claimed that
competition, may suppress malfeasance to an extent. Also, as long as economic
competition is a civilized matter, it was assumed that it is mostly pursued by
gentlemanly means. However, Hobbes argued that fraud or force can't be
excluded from self-interest.
In the new institutional economics (representing the undersocialized
approach), social institutions and arrangements were seen as an efficient
solution to economic problems. Here, even malfeasance is seen to be
comparatively rare thanks to advantageous institutional settings which make it
costly to cheat, and which emerged as one of the evolutionary solutions for
perpetual economic problems. Such institutions do not seem to generate trust
but merely substitute it. Other economists, however, have acknowledged that
some amount of trust is necessary for the effective functioning of the market.
Economists resolved the tension by introducing the idea of generalized
morality, which forces actors to remain upright in the face of opportunism (the
oversocialized account).
 Embeddedness theory, instead, acknowledges that ongoing networks of
social relations between people and discourages malfeasance. People guide
their choices based on past interactions with others and continue to deal with
those they trust. In social networks, the presence and evolution of trust can both
hinder and foster malfeasance, which demonstrates that social networks alone
are not a deterrent. Trust for Granovetter is, therefore, a feature of social
relations and social networks. Granovetter says that malfeasance does occur
when social relations are absent but in case of a truly atomized social relation
the probability for it to happen becomes very low.

Granovetter critiques the approach of the new institutional economics

presented by Williamson in 'Market and Hierarchies'. Williamson asked under
what circumstances economic functions are performed within the boundaries of
hierarchical firms rather than by market processes that cross these boundaries.
The new institutional economics argues that the organizational form observed in
any situation is that which deals most efficiently with the cost of economic
transactions. Some transactions that are uncertain in outcome, recur frequently,
and require substantial “transaction-specific investments”, these transactions
which cannot be easily transferred to interaction with others and thus take place
within hierarchically organized firms, while those that are straightforward, non-
repetitive and require no transaction-specific investment take place between
firms i.e. across a market interface.
According to Williamson, there are two reasons for the internalization of
transactions- bounded rationality, which is the inability of economic actors to
properly anticipate the complex chain of contingencies relevant to the long-term
contracts; and opportunism which is the rational pursuit by actors of their own
advantage, with all means at heir command which also includes guile and
deceit.

For Hobbes, the market in the atomised state neglects the role of social
relations among individuals. But Williamson opposes this. He considers social
relations to be important. Further, it discourages the scope of deceit and also
builds trust. Granovetter says that there is a constant social relation across
firms.
Granovetter says that there is much evidence that shows us the extent to
which business relations are mixed up with social ones. It is well known that
many firms are linked by interlocking directorates so that relationships among
directors of firms are many and densely knit. Business relations often spill over
onto sociability, especially among business elites. There is no clearcut boundary
between business relations and social relations.
Talking about the dispute settlement between firms, Granovetter refers to
the study of Macaulay in which he says that the settlement of disputes is eased
by the embeddedness of business in social relationships without involving
legality. Hence for Granovetter, social relations between firms are more
important than authority in bringing order to economic life.
It is not only at the top levels that firms are connected by networks of
personal relations, but at all levels where transactions must take place.
Macaulay gives an example of salesmen who often act as purchasing agents.
Salesmen have gossip about competitors, shortages and price increases to give
purchasing agents who treat them well. Thus there are many social relations at
play in the economic transactions.
Another example is that of subcontracting which in many industries presents
opportunities for sustained relationships among firms that are not organized
hierarchically within one corporate unit (quasi-firm). Here he cites Eccles’
example of the relations between the general contractor and sub-contractors in a
construction business, where these relations are generally stable and continuous
over fairly long periods of time.

Lastly, Granovetter summarizes the differences in explanation and

prediction between Williamson's markets and hierarchies approach and the
embeddedness view.