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Andrea Maurer
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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

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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 sociol-
ogy 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 sociol-
ogy. 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, socio-
economic 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
vi 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 theo-
retical 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 historical-
empirical 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 econ-
omy 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 transfor-
mation 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 capital-
ism, 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 empir-
ical 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 eco-
nomic 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.

ix
Contents

Part I Theoretical Perspectives and Developments

1 The Classic Tradition in Economic Sociology . . . . . . . . . . . . . 3
Richard Swedberg
2 Austrian and German Classics as a Foundation? . . . . . . . . . . 19
Gertraude Mikl-Horke
3 James Coleman, Social Capital, and Economic Sociology . . . . 33
Peter V. Marsden
4 Social Factors in the Economy: New Economic Sociology
and the Mechanism Approach . . . . . . . . . . . . . . . . . . . . . . . . 47
Andrea Maurer
5 A French Institutionalism in Economic Sociology? . . . . . . . . . 63
Pierre François
6 Transcending History’s Heavy Hand: The Future
in Economic Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Jens Beckert and Timur Ergen
7 The Aesthetic Moment in Markets . . . . . . . . . . . . . . . . . . . . . 95
Jörg Rössel, Patrick Schenk, and Sebastian Weingartner
8 Economization: How Neo-Liberalism Took Over Society . . . . 113
Uwe Schimank and Ute Volkmann
Part II 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
xii 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
 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 gen-
eral 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: rs328@cornell.edu
# 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
1
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 impor-
tantly, 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 differ-
ent. 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 contem-
porary 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:
3
4 R. Swedberg
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 origi-
nal 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 mis-
take 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 qual-
ify as contributions to the classic tradition in
economic sociology. I will argue that a classic
has something new to say on a number of differ-
ent topics. It can transmit a strong vision in com-
bination 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 sociol-
ogy and neighboring sciences in a successful
manner. After a presentation of some of the peo-
ple 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 nine-
teenth 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 econ-
omy did not yet exist. Tocqueville wrote two
major works during his lifetime, one on the
United States in the 1800s, Democracy in Amer-
ica (Tocqueville 2004), and one on the Revolu-
tion 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 eco-
nomic 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 increas-
ingly 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 struc-
ture through the ways in which it is organized. In
this manner, he pioneered what would later be
called fiscal sociology. He also had many inter-
esting 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 com-
mercial 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
5
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-ori-
ented 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 existen-
tial condition for individual beings. According to
Capital, “labor . . . is a condition of human exis-
tence which is independent of all forms of soci-
ety” (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,
6 R. Swedberg

who constitute the two basic classes of capitalist Marx is also unique among economic
society, will eventually result in a revolution. In sociologists for his organic mix of a historical
communist society, property and work will be approach and an analytical perspective. It is not
shared in an egalitarian manner. easy to combine a diachronic and a synchronic
What characterizes capitalist society, approach in a single analysis, but Marx
according to Marx, is that everything is either a succeeded. There is also his call to action in his
commodity or turning into one. This includes the writings. One of his most famous quotes reads,
individual whose work now becomes something “philosophers have hitherto only interpreted the
that can be bought and sold, resulting in alien- world in various ways; the point is to change it”
ation and exploitation. Work creates surplus (Marx 1978, 144). One may or may not agree
value, which drives capitalist society. “Accumu- with this statement, but it is hard to find a more
late, accumulate! That is Moses and the proph- effective way of raising the issue of whether or
ets,” we read in Capital (Marx 1990, 742). While not knowledge of the economy should have a
the basic law of capitalism is simple enough, its practical value.
impact on society is not. Many different factors,
Marx explains, help to account for the uneven and
at times catastrophic course of capitalist society.
2.3 Max Weber
There are, for example, tendencies within a capi-
talist economy which push the capitalists to
In a formal sense, it was Max Weber who
increase exploitation. There also are factors that
founded economic sociology. It was he who first
make the workers grow in number and eventually
used the term economic sociology (Wirtschaftsso-
become radicalized.
ziologie) and who also provided the very first
Unlike Engels, Marx lacked personal knowl-
detailed account of what it studies and how to
edge of life inside the factories. He did however
approach the topic. From this time on, economic
locate one very rich empirical source on industrial
sociologists were also academics. Marx was a
work in England, namely the reports of the fac-
revolutionary and Tocqueville a politician; both
tory inspectors. These were full of details and
rejected the university as a place to work. Weber
figures on what was happening inside the
laid the academic foundation for economic soci-
factories and became an important source for
ology in Chap. 2 of Economy and Society. The
Capital. Marx described the ill-treatment and
size of this chapter is that of a small book; and it
exploitation of the workers with a realism that is
contains an extremely valuable presentation and
still hard to match. Marx’s second great source for
discussion of the basic concepts of economic
Capital was the literature of the economists.
sociology (Weber 1978, 63 ff.). Weber’s
Unlike Tocqueville who had only read a few
approach also differs from the broad, society-
works in political economy, Marx was an expert,
based analysis of the type one can find in
or rather, he turned himself into an expert after
Tocqueville and Marx. He preferred a consider-
arriving in London in 1849, where he settled
ably more narrow and academic approach,
down for good.
namely an economic sociology that could com-
What Marx wrote on economic theory is still
plement economics.
of great interest to economic sociologists. He
Weber essentially applied his interpretive soci-
should, for example, be credited with having
ology to economic phenomena, creating in this
developed a pioneering analysis of the way that
way an interpretive economic sociology. What is
the categories of economics have come into
distinctive about Weber’s type of sociology is the
being. He criticized the economists for using eco-
importance that is assigned to the element of
nomic concepts without understanding that these
meaning. When one studies the economy, one
presupposed the existence of very specific social
always has to consider the meaning with which
conditions.
the actors invest their actions. This means
1 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 eco-
nomic 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 stan-
dard goal of economic action, but also to profit.
By adding profit Weber could include profit-
making in his concept of economic action.
In this way Weber laid a conceptual founda-
tion 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 profit-
making. The former is centered around the satis-
faction of basic needs, the latter around making
more money. A firm, for example, is a profit-
maker, while the family is a household. The medi-
eval 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
7
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, Bud-
dhism, 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 Protes-
tant 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 econ-
omy as one of social economics
(Sozialökonomik). This type of economics draws
on four disciplines: economic theory, economic
history, economic sociology, and statistics
8 R. Swedberg
(Schumpeter 1954, 12 ff.). The primary task of
economic sociology is to study economic
institutions, and that of economic theory to ana-
lyze 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 stud-
ies 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 contribu-
tion 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 eco-
nomic theory, namely his theory of entrepreneur-
ship. In his late 20s Schumpeter had worked out
the basic ideas for his famous theory of the entre-
preneur, 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 entre-
preneur herself.
While it may be argued, as Schumpeter does,
that the idea of combining economic resources of
different types belongs to economics, it is none-
theless clear that the part of his analysis that deals
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 boundary-
crossing 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 capital-
ism. 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.
1 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 stud-
ied in England, which turned him from a journal-
ist 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, some-
thing 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 jour-
nalist in Austria and as an economic historian in
England, but he turned into an economic anthro-
pologist in the United States in the 1940s. Draw-
ing especially on the work by anthropologists,
Polanyi started to write about economic life in
pre-industrial societies (1966, 1968). This
9
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 ear-
lier 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 Classi-
cal 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 knowl-
edge 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 reciprocity-
redistribution-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
10
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 men-
tality” 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 intellec-
tual 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 rela-
tionship 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 twenti-
eth 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 origi-
nally set out to explain why friends and family
can be of more help in this enterprise, than what
fleeting contacts and acquaintances can. He, how-
ever, 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
R. Swedberg
published in 1985 and which was to become the
manifesto of new economic sociology, “Eco-
nomic 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 eco-
nomic 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 sociol-
ogy. 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 half-
way, as Granovetter had hoped, something that
forced him to, instead, turn his energy to devel-
oping 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
1 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 sociol-
ogy; 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
11
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 suc-
cessful 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 vari-
ous 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 neo-
liberalism could also be found in the new eco-
nomic sociology that had emerged in the United
States. U.S. network sociologists were, for exam-
ple, 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 force-
fully attacked the tendency of economists to ana-
lyze economic life as if social relations did not
exist. The economists’ view of human beings, he
charged, is distorted and cannot be used for sci-
entific purposes. “Homo economicus . . . is a kind
of anthropological monster” (Bourdieu
2005a, 82).
12
2.8 Single Contributions
to the Classic Tradition
So far, in discussing the classic tradition in eco-
nomic sociology, only major figures in economic
sociology have been discussed. However, a tradi-
tion consists of individual contributions, not of
individual people. The following question there-
fore 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 exam-
ple, 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 stud-
ies 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 ana-
lyze 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, some-
thing 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 sociol-
ogy, has rather tenuous links to what was pro-
duced 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
R. Swedberg
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 institu-
tion 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 Price-
less 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 addi-
tion 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
1 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 inter-
mingle 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. Air-
plane 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 tra-
dition can be found in the recent work on valua-
tion 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, how-
ever, 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 con-
tribution of new economic sociology to the clas-
sic 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.,
13
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 eco-
nomic 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.
3 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 soci-
ology as a whole. How exactly does the commu-
nication 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 codifica-
tion 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
14
primary concerns. Suffice it to say that some of
the key figures in economic sociology have devel-
oped models that are applicable to all of sociol-
ogy. 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 eco-
nomic sociology is commendable, what may be
more realistic for most people is to just acquaint
themselves with most works in the classic tradi-
tion, 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 sociolo-
gist. Students who are interested in entrepreneur-
ship 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 com-
bine 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 devel-
oped; 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 recom-
bination. 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 cen-
tury, 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, polit-
ical 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,
1 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 immedi-
ately, the rather direct result of combining ideas
which no one has previously thought of combin-
ing” (Mills 1960, 9). As an example, he mentions
Marx’s theory of capitalism which was the result
of a combination of ideas from German philoso-
phy, 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 interest-
ing ways, they are at the same time drawing on
and grounded in a tradition. Other ways of deal-
ing with the heritage of economic sociology are
no doubt possible, as well as necessary. The rea-
son 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.
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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 backward-
ness of the central European region played a
role (Gerschenkron 1962). In the first half of the
twentieth century, questions of economic organi-
zation 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 con-
sideration not only the economic, but also the
political and ideological aspects of various eco-
nomic forms and organizations. Liberal economic
G. Mikl-Horke (*)
Vienna University of Economics and Business, Vienna,
Austria
e-mail: Gertraude.Mikl-Horke@wu.ac.at
# 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
2
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 devel-
oping such a discipline as a new branch of Mr.
Spencer’s Sociology, which should serve as an
auxiliary science for economics within an aggre-
gate 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, any-
way, currently there is a great tradition of
19
20
economic sociology, or rather of sociological eco-
nomics (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 theo-
retical one, did not eliminate social aspects from
economics. This situation delayed the develop-
ment of sociology as a consistent, independent
discipline with an object of research of its own.
Consequently, still for some time to come a disci-
pline 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 eco-
nomic 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 eco-
nomic theory with sociology, which he under-
stood 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 alter-
native 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 econ-
omy was basic for the understanding of society as
the object of sociology. For the Austrian
economists, it was the theoretical logic of eco-
nomics, 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 econ-
omy 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 concep-
tual 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 sociol-
ogy. 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 inter-
national sociology circles or in economic sociol-
ogy 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 per-
spective 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).
2 Austrian and German Classics as a Foundation?
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 histor-
ical 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 sociol-
ogy 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 inter-
est 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 meth-
odological disputes of his time and aimed at
overcoming the separation between historical
and theoretical methodologies. He saw explana-
tion (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 (Kulturwis-
senschaft) was of great importance for Weber
regarding his methodological standpoint, but
also for the perspective, which he applied to the
21
study of social and economic objects. Throughout
his life, he retained a strong foundation of histori-
cal insight, as well as an awareness of the
necessity of empirical analysis for causal expla-
nation, 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 mod-
ern 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 under-
stand why modern capitalism developed in
Europe and America.
22
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 develop-
ment of capitalism and of modern culture gener-
ally. 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 concep-
tualization in the social sciences, too. Social sci-
ence 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 con-
struction based on ideal assumptions, made pos-
sible 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 valua-
tion. However, in Weber’s time the process of the
rationalization of thought and culture was still
progressing, and he was aware that it could pro-
duce 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 sociolog-
ical 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 methodo-
logical 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 objec-
tive 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 under-
take studies of the cultural meaning of capitalism,
highlighting certain values and ideas that charac-
terize 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 English-
speaking 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 stu-
dent of Austrian economic theory at the Univer-
sity 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 influ-
ence of Marx, Weber and of his mentor, Friedrich
Wieser,1 had great impact on Schumpeter’s think-
ing. He was also influenced by the equilibrium
1
He was successor to Menger’s chair in Vienna.
2 Austrian and German Classics as a Foundation?
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 dynam-
ics 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 techni-
cal 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 histor-
ical circumstances play a role, but they enter the
scene through their impact on the entrepreneur,
the agent of economic dynamism. The entrepre-
neur is a prominent figure in Schumpeter’s think-
ing. 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
23
study to the Business Cycles (Schumpeter 1939).
The historical transition from a commercial soci-
ety to a capitalist society occurred historically due
to the establishment of institutions that were
favorable to individual initiative and risk accep-
tance, thus enabling innovations and the
unfolding of the creative capacity of capitalist
entrepreneurs. Schumpeter was, however, ambiv-
alent 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 think-
ing, often lead to disruptive effects on the econ-
omy 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 neo-
classical 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 eco-
nomic knowledge, and of the influence of ideol-
ogy. 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
24
in sociology was focused on his sociological texts
(see Schumpeter 1991). His economic works are
also of relevance in this respect, because his con-
ception of economic theory was not a conven-
tional 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 differ-
entiation 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-embed-
ding 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
G. Mikl-Horke
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 shap-
ing economic organization. He pursued this in
historical and anthropological studies, which
became his major lines of research after his emi-
gration to England, and later to America. In stud-
ies 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 embed-
ded 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 redistribu-
tive 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 econ-
omy as the livelihood of man (Polanyi 1977). This
2 Austrian and German Classics as a Foundation?
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 peo-
ple 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 recog-
nition 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 Transforma-
tion 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 his-
torical relativity of economic thinking and orga-
nization, 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 neo-
liberalism 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
25
cultural meaning of economic phenomena.
Schumpeter explicitly referred to economic soci-
ology 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 econom-
ics as a combinatory field (Åkerman 1938;
Sombart 1930). Adolph Lowe called his concep-
tion 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 pur-
sue 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 the-
ory with a socialist orientation. Lowe is, however,
hardly remembered today as one of the founders
of economic sociology. His conception of eco-
nomic sociology was that of a practical, political
social science that combines structural and instru-
mental analyses. In the US, sociology was devel-
oping 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 meta-
field 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).
26
Sociology, as it gained recognition and aca-
demic status, and introduced the American con-
ception of empirical social science, turned away
from the traditionally close relation with eco-
nomic science, as well as from a practical, politi-
cal orientation. Intent to prove its scientific
objectivity, sociology was focused on the theoret-
ical 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 mar-
ket, prices, competition, to mention a few, how-
ever, 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 lib-
eral market economy, influenced by the neoliber-
alism of the Mises-Hayek version of Austrian
economics, brought a renewal of interest in eco-
nomic sociology (Baron and Hannan 1994). As
the market advanced into the focus of public and
political perspectives, sociologists felt it increas-
ingly 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 eco-
nomic 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 concep-
tion 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 refer-
ence to his work. Embeddedness referred to a
microsocial network approach and became in
this sense one of the core concepts of new eco-
nomic sociology. The emergence of
neo-institutionalism also had an impact on eco-
nomic 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 organiza-
tional development of firms. Comparative studies
of business systems or of the Varieties of Capi-
talism 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 individual-
ism, which constitutes an analogy to
microeconomic the predominance within eco-
nomic theory (Beckert 1996). The concentration
on markets, moreover, seems to identify the econ-
omy with the market and private enterprise econ-
omy (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, reli-
gion, 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 impor-
tance 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 histori-
cal and anthropological dimensions (Granovetter
2 Austrian and German Classics as a Foundation?
2002). By returning to the study of the classics
their relevance for the tradition of economic soci-
ology 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 capital-
ism 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, stud-
ies on capitalism and its changes were taken up
once again, mostly in the field of political
sciences and political economy, but also in eco-
nomic 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 sociol-
ogy, 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 focus-
ing 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,
27
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 differ-
ent 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 bureau-
cratic or socialist society, as Weber, Schumpeter,
and others had thought. In the focus of the social
sciences today are processes such as the transfor-
mation 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 protection-
ism. 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 think-
ing, including the social sciences, is being
challenged.
Huge multinational enterprises and powerful
global internet firms control the field of competi-
tion globally. This has led to the diminishing
28
power of the nation states over the economy, to
which also the increase in the swiftness of finan-
cial 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 develop-
ment of worldwide, electronic communication
networks (social media) and the impact of digita-
lization 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-colo-
nial, or post-modern movements and the develop-
ment of new global conflicts on ideological,
religious, and cultural grounds, the rise of nation-
alism and protectionism, have turned the econ-
omy 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 con-
scious 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 chang-
ing concepts and methods accordingly. There-
fore, 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 pro-
cesses 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 Mikl-
Horke 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 ambiva-
lent. The classics were aware of the ambivalence
of reality. Social science must take this into con-
sideration 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,
2 Austrian and German Classics as a Foundation?
political science, the science of religion, to soci-
ology. 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 interdisci-
plinary 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 interdisci-
plinary studies has led again to discussions about
the relationship between economics and sociol-
ogy, often under the heading of socioeconomics.
In the current, complex, global, social, and eco-
nomic situation and its manifold interrelations
with social, political, cultural, ideological, tech-
nological, 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 con-
sciousness, 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 sci-
ence is to serve the livelihood of man, that is, the
29
survival and well-being of humanity, or better, of
all people on this earth, and, if possible, in coop-
eration with them. To this end, economic sociol-
ogy as a part of a developing global social
science, must be undertaken and must allow for
the discovery of ideas that can contribute to solv-
ing the problems of our time by taking history and
the future into consideration.
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31
Gertraude Mikl-Horke is a retired professor of general
and economic sociology at the Vienna University of Eco-
nomics and Business Research topics: History of the social
sciences with special emphasis on Austria, social econom-
ics, economic sociology, industrial sociology, Japanese
society, and labor relations. Recent publications: Mikl-
Horke, Gertraude. 2018. Zur Aktualität der Finanzso-
ziologie 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 Wirtschaftsso-
ziologie. In Schlüsselwerke der Wirtschaftssoziologie,
ed. Klaus Kraemer, and Florian Brugger, 135–44.
Wiesbaden: Springer VS. Mikl-Horke, Gertraude. 2011.
Historische Soziologie––Sozioökonomie––Wirtschaftsso-
ziologie. Wiesbaden: Springer VS. Mikl-Horke,
Gertraude.
 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 proj-
ect 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 the-
oretical 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 phe-
nomena; he also hoped that it would encourage
better understanding of problems in economics by
directing attention to constraints that social struc-
tural conditions impose on them (Coleman
1994a). Coleman had a special interest in micro-
to-macro problems in which multiple interdepen-
dent 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: pvm@wjh.harvard.edu
# 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_3
3
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 attain-
ment 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 sociol-
ogy. Different forms of social capital may
advance the fortunes of individual entrepreneurs
or workers, as well as of organizations/firms and
collaborations among them.
1 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
33
34
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 capi-
tal are not unconditionally beneficial, referring at
times (e.g., Coleman 1988b, 14) to an overabun-
dance of social capital in past societies that cre-
ated oppressive social controls and normative
pressures that could stifle innovation. He also
acknowledges social capital’s contingent effec-
tiveness 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 organiza-
tion, 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 exam-
ple when informal adaptations within formal
organizational designs at once provide
individuals with certain advantages and improve
organizational performance (e.g., Blau 1981).
1
In Coleman (1994a, 170) he limits social capital to “any
aspect of informal social organization that constitutes a
productive resource.”
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 exam-
ple, 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 facili-
tate theoretical development and empirical work,
in particular by making falsification possible. In
the same vein, Burt (2005, 4) defines social capi-
tal as “[t]he advantage created by a person’s loca-
tion in a structure of relationships,” suggesting
that research should focus on discerning the spe-
cific 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 for-
mal 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. Includ-
ing organizations within the scope of social capi-
tal 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 impor-
tant indicators of social capital that can contribute to civic
engagement. Individual-group (two-mode) networks offer
a suitable approach to representing affiliations with
3 James Coleman, Social Capital, and Economic Sociology
Coleman was certainly aware of the breadth
and generality of his social capital concept. He
thought its wide scope helped advance his objec-
tive of constructing theory that integrates rational
action assumptions with social structural settings.
He writes (Coleman 1990, 304 f.) that his concep-
tion of social capital groups together and blurs
distinctions among several processes discussed
elsewhere in FST (see below). He notes its multi-
level 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 social-
structural 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 struc-
ture come to be useful, that was not his principal
concern; he seems to have viewed the idea pri-
marily 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 func-
tional 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).
35
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 influ-
ence 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 com-
pensation, 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 proba-
bility 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 overesti-
mate 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, includ-
ing information disseminated by the latter. Sev-
eral 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
36
nuanced assessment of a potential trustee’s reli-
ability, and often a relationship will not have
become strong unless the parties to it offer at
least some signs indicative of their trustworthi-
ness 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 transac-
tion 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 sev-
eral 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. Tightly-
interconnected community structures can deter
bad faith actions on the part of trustees via the
rapid diffusion of information about trustee per-
formance and reputations to potential trustors.
Buskens and Raub (2002) argue that these
social foundations for trust operate via two dis-
tinct 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 trustor-
trustee 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
P. V. Marsden
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 interac-
tion among members substituted for more cum-
bersome formal insurance devices. Among other
exemplars (Coleman 1984) are long-term
contracting arrangements within vertical produc-
tion networks as alternatives to vertical integra-
tion, 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 under-
standing 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 pro-
vide a sufficient basis for cooperation and mutu-
ally 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 sev-
eral ways in which trust could prove disadvanta-
geous. 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
3 James Coleman, Social Capital, and Economic Sociology
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 dis-
investment, 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 infor-
mation from preexisting contacts.4 Related exper-
imental 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, longer-
standing); to a lesser extent, tie strength also
increased the likelihood of deeming a contact
untrustworthy. Closure within a manager’s net-
work—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.
37
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 reli-
ability of potential new partners, and reciprocally
provide the firm with information about its own
conduct. He shows that when partners lack expe-
rience with each other, firms often employ rela-
tively 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 exam-
ple 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 recipi-
ent 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 better-
informed intermediary.
Much research in economic and organizational
sociology examines flows of information
mediated by social networks in some depth, how-
ever. 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
38
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 crea-
tivity sooner than those whose networks are
more firmly embedded within a particular sub-
group. In an especially compelling intrafirm
study that invited managerial participants to set
forth ideas for improving their subunit’s perfor-
mance, 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 compensa-
tion, 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 (involv-
ing 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 knowl-
edge complexity was an important moderator.
When the information transferred was well-
codified, 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
P. V. Marsden
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 expe-
rience 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 crim-
inal 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 cer-
tain 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 man-
date 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 understand-
ing of how and why a set of purposively-oriented
5
The finding that closure can promote some kinds of
knowledge transfer resonates with Centola’s (2018) dis-
tinction 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.
3 James Coleman, Social Capital, and Economic Sociology
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 Addition-
ally, 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 prob-
lematic 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, facili-
tate the monitoring of compliance to a norm; like-
wise, they may support shared provision of
low-cost sanctions such as shunning or publicizing
a target’s reputation for noncompliance. Addition-
ally, 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 infor-
mal sanctions (e.g., Roy 1952). Coleman (1994a)
cites this as an instance in which both conven-
tional cost-benefit criteria and the social structure
7 serve the interests of persons as well as they
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 exam-
ple; see Coleman (1987, 140).
8 harm natural persons. The relentlessness with
If a norm has been internalized, targets self-administer
sanctions. Socialization—or instilling an internal sanction-
ing system—is also costly; see Coleman (1987).
39
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 devel-
opment 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 sug-
gest that in practice, organizations often fail to
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
which they focus narrowly on pursuing particular
goals makes them prone to neglecting the
40
negative side effects of their activities, such as
environmental pollution. He argues that over
time, corporate actors have acquired an increas-
ingly 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 cor-
porate 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
3 Combination of Social Capital
and Other Resources
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 theo-
retical case for anticipating that those with greater
human capital will derive more advantages from
social capital; this suggests that at least some
9 10
See Swedberg (1996) for more about Coleman’s thinking
about organizations and their redesign.
P. V. Marsden
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 wide-
ranging 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
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 creat-
ing them to be in their interest. Those who found
business organizations, for example, are in a posi-
tion 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
Kadushin (1983, 196) suggests that many if not most
network effects are contingent rather than direct.
3 James Coleman, Social Capital, and Economic Sociology
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 reori-
entation 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 some-
what 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 posi-
tioned 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.
41
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 under-
supply 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 socioeco-
nomically disadvantaged students. Coleman also
featured these differences in retention in his gen-
eral discussion of social capital (Coleman 1988a).
Well-known differences in educational outcomes
42
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 cap-
ital to be found around Catholic—and more gen-
erally 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 capac-
ity to mold values via moral and character educa-
tion 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 consti-
tute 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 reli-
gious communities.
While many public schools serve residential
communities that could offer a basis for similar
solidarity, Coleman (1991) notes that neighbor-
hood ties have weakened. Independent private
schools can draw on neither religious nor residen-
tial commonalities and must make deliberate
efforts if they are to create social capital among
P. V. Marsden
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 engage-
ment (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 com-
mon 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 invok-
ing 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 atten-
tion 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 self-
consciously invest in social capital, building
relationships in anticipation that they will receive
instrumental returns in the future; Kadushin
opines that “most people probably derive imme-
diate gratification from making friends” (2012,
166). Coleman’s emphasis on how the public
goods character of much social capital
disincentivizes deliberate investment in its pro-
duction, and on already-existing social
3 James Coleman, Social Capital, and Economic Sociology
organization as a common source of social capi-
tal, 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 exclu-
sion of outsiders when closed networks hoard
opportunities, the tensions between social solidar-
ity and individual autonomy, the downward
pressures on aspirations that discourage individ-
ual 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 par-
ticularistic advantages. Certainly some social
capital-related processes implicated in reward
allocation within competitive arenas, e.g., nepo-
tism and insider trading, are readily seen as such.
Coleman’s observations about social capital’s
limited scope, potential liabilities and inegalitar-
ian 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 stud-
ies 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 con-
vey 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).
43
In particular, he provides accounts grounded in
individual action for how and why those
consequences arise. Presenting the idea in a man-
ner that attracts such widespread attention and
interest to it, however, is a considerable contribu-
tion 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 incorpo-
rate a serious concern with social structure into
transdisciplinary analyses of both social and eco-
nomic phenomena.
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 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 sci-
ence. 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 sociol-
ogy 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: andrea.maurer@uni-trier.de
# 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
4
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 empir-
ically 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 struc-
tural 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).
47
48
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 indi-
vidual 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 tackle methodological issues and build a pool of
As is well-known, sociology covers different methodo-
logical premises and is therefore multi-paradigmatic work-
ing 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 vari-
ety 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 eco-
nomic 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 struc-
tural 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 eco-
nomic sociology as a special variant of action-
based explanations and therefore, allowing it to
collaborate with other action-based approaches to
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
4 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 eco-
nomic sociology, they also highlighted that new
economic sociology needs to sharpen a sociolog-
ical 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 econ-
omy 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 context-
related models that link both social and individual
levels are preferred. (2) In order to improve real-
ism, it is assumed that intentions as well as cog-
nitive aspects are shaped and changed by social
context. Whereas founders of new economic soci-
ology, 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 sociol-
ogy, and survey research due to the writings of Robert
K. Merton and Harrison White (see for an overview
Swedberg 1990; see also Chap. 3).
49
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 pro-
cesses 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 underly-
ing 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 method-
ological 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 informa-
tion 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
50
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 hypoth-
esis 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 mar-
ket 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. Eco-
nomic sociologists criticized fallacies of pure
macro theory and grand theory. Instead, new eco-
nomic 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).
A. Maurer
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 eco-
nomic 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 rational-
intentional 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 empha-
size 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
social context
intentions of actors
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, espe-
cially rational choice based approaches. Later
one, some of the founders of new economic soci-
ology criticized rational choice theory for ignor-
ing 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 socio-
logical perspectives on economy. Within the core
program of new economic sociology, the perspec-
tive 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).
51
due to network patterns. Such causal models are
based on more realistic assumptions at the indi-
vidual 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 cog-
nitive 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 there-
fore 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 context-
related 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 cen-
tral 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
52
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 sociologi-
cal 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 empiri-
cal information, that is what Weber (1949) had in
mind, or to theoretical arguments stemming from
the underlying action theory and adopting eco-
nomic 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).
A. Maurer
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 mean-
ingful 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 action-
theoretically-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 situa-
tional analyses that explore the social reality from the
viewpoint of intentional or rational actors.
4 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 prin-
ciple 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 well-
known 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 action-
based 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 individ-
ual 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.
53
While the founders of new economic sociol-
ogy 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, dis-
miss 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 knowl-
edge 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 mechanism-
based 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 spe-
cial 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 explan-
atory sociology is the aim of causal explanations.
However, economic sociologists seek more real-
istic theories that cover the social change of
motives and action orientation. Mechanism-
based 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
54
action-based explanations
middle range theories
mechanism- models of network
context-related
models models
eg. Hedström,
patterns
eg. Granovetter,
eg. Weber, Merton
Boudon, Schelling Burt, White
Fig. 4.2 Forms of action-based explanations. Source:
Own Diagram
debates on constructing explanations and work-
ing 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. Mecha-
nism models investigate interrelationships
between individual and social levels in order to
explore social processes and describe them in
mechanism models, similarly to what new eco-
nomic 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 soci-
ology 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.
A. Maurer
social constellation mechanism models explanandum
cogs & wheels
Fig. 4.3 Mechanism-based explanations. Source: Own
grand Diagram
theory
action
theoretically
based
based explanations, mechanism models assume
eg. Coleman,
Boudon, Blau 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 action-
based 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 over-
view 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 forma-
tion, 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
4 Social Factors in the Economy: New Economic Sociology and the Mechanism Approach
rumor on insolvency self-fulfilling mechanism
Di Dh
Aj Ai
Bi Bh
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 particu-
lar constellation of DBO and what social pro-
cesses 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 mecha-
nism 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 belief-
formation can be taken as a special type of mech-
anism, 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 for-
mation. 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
Other researchers also use backward reconstruction of
empirical-historical processes to detect relevant
constellations (Boudon 1998; Weber 2009).
55
bankruptcy 3.4 How Could New Economic
Sociology and Analytical
Ah
Bx
Mechanism Approach Work
Together?
New economic sociology and analytical mecha-
nism 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 indi-
vidual 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 collab-
orator 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 consid-
ering the rule of economic theorizing. The other
way would be to integrate one or more mecha-
nism 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 recon-
sider 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
56
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 sit-
uational 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 impor-
tant to state the main causal factors and to use
empirical information about why those particular
social factors become relevant. Analytical mech-
anism 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 pro-
cesses 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 orienta-
tion, while reaching out for collectivistic goods
such as the maintenance of the group. The well-
known 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 ongo-
ing process of network patterns shaping
intentions of individuals and vice versa. Widen-
ing models should help gain a better understand-
ing of how and why network patterns sometime
guide or direct actors to ideas, or to reach for
collectivistic goals, instead of maximizing egotis-
tic utility. It seems that in his early writings,
Granovetter worked in this way and constructed
more realistic explanations then classical socio-
logical 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 analyti-
cal Mechanism Approach in order to get a deeper
understanding of what it means to make
explanations more realistic and to keep to eco-
nomic 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.
4 Social Factors in the Economy: New Economic Sociology and the Mechanism Approach
Mechanism models could explore additional
factors and interrelationships that are used in net-
work 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. Explor-
ing 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 sim-
ple 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
57
patterns might trigger belief formation in uncer-
tain 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 col-
laboration with the analytical mechanism
approach. Both lines could work together by
reconsidering methodological principles, by
discussing the functions and forms of action-
models, 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 action-
based 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 theo-
rize 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,
58
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 trig-
ger points and pathways (for a recent overview
see Hedström and Bearman 2009).
4 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 explan-
atory 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,
A. Maurer
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 eco-
nomic sociology as a research program. Seeing
it as a part of the social science approach and
especially of action-based explanations helps dis-
cover shortcomings and evaluate who might con-
tribute 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 micro-
foundation. 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 sup-
port market exchange and offer testable theses
about the mutual interrelationships between
social factors and intentions and cognitive aspects
of individuals. Mechanism models enhance net-
work 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.
4 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 methodologi-
cal 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 econ-
omy. 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 action-
related 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 pro-
gram 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.
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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 tradi-
tion, François (2011) gives a more precise defini-
tion 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: pierre.francois@sciencespo.fr
# 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_5
5
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 con-
temporary economic sociology. This chapter will
be devoted to the discussion of what can be retro-
spectively designed the French version of institu-
tionalism in economic sociology. A few remarks
should be made to explain this somewhat prob-
lematic 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 uncer-
tainty. 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
63
64
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, inde-
pendent from those inspired by US new institu-
tionalism (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 con-
verged 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 stud-
ies have been conducted in France on this process
(for recent contributions in a Bourdieusian per-
spective, see Benquet et al. 2019). However, the
somewhat rhetorical compatibility of new institu-
tionalism 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
P. François
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 empiri-
cal 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: econom-
ics of quality or economics of singularities, pro-
posed by Lucien Karpik; economics of
convention; and the performativity approach, as
developed by Michel Callon and his colleagues.
5 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 qual-
ity, but which later became an economics of
singularities, while working on the lawyer mar-
ket. 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 trustwor-
thy, committed, and competent? In a market situ-
ation 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 infor-
mation that might help the client make his choice.
Even worse, the quality of the service is impossi-
ble 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 peo-
ple they know. The market relation is no longer a
relation between a customer and a producer, it is a
65
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 cus-
tomer will use to make his choice.
Karpik calls this kind of market a market-net-
work (marché-réseau). He later developed a sys-
tematic 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 typol-
ogy 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 haz-
ard. 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 restau-
rant, the quality of his dinner depends on the
commitment of the kitchen’s team and on the
66
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 peo-
ple 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 cus-
tomer cannot rely on such a personal judgement
device, then he could turn to impersonal judge-
ment 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 every-
one. 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,
P. François
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 cus-
tomer 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 imper-
sonal 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 exper-
tise and schools of thought. Some were
5 A French Institutionalism in Economic Sociology?
statisticians working in the French institute of
public statistics, the INSEE (F. Eymard-
Duvernay, 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 com-
ing 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 contri-
bution, Olivier Favereau proposed a reading of
Keynes, which was very different from the pre-
sentation 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 occur-
rence: 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 some-
times 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
67
behavior, we need to consider that, people rely
on conventions to make their choices when uncer-
tainty 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 devel-
oped 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
68
empirical work, inspired by the program of the
economics of convention. The problem raised by
Eymard-Duvernay and Marchal (Eymard-
Duvernay and Marchal 1997, 2000; Marchal
2015) is a very simple one. When one hires some-
one for a job, how will the candidate’s compe-
tence 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 collec-
tive 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 pro-
cess 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 con-
sidering the qualifications. When using the sec-
ond 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 institu-
tion, according to the definition we gave in the
introduction of this chapter. The third one still
P. François
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 inter-
action, the recruiter works to build a trust rela-
tionship with the candidate. The evaluation is
built upon a symmetric commitment in the rela-
tion, and the recruiter should be careful to get the
signals (of competence, or reliability) the candi-
date 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 micro-
sociological approach, using dense ethnographic
data to analyze hiring processes. Another contri-
bution, 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 macro-
economic 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 con-
text of growing interdependence and slowing eco-
nomic growth. The authors ambitiously intend to
answer this question based on a renewed concep-
tion of social action, that might avoid what
Granovetter (1985) would have called an under-
or 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
5 A French Institutionalism in Economic Sociology?
of economic life, and for Salais and Storper the
choices made about elementary conventions deal-
ing with products qualities, technology, and mar-
ket 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 intel-
lectual resources faces a predictable and calcula-
ble 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 indus-
trial 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.
69
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, design-
intensive manufacturing and precision metal
work in northeast central Italy, and the high tech-
nology 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 frame-
work 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 agree-
ment? 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
70
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 sec-
ond situation, the dispute is first about the rele-
vant 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 inspira-
tion, 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 compet-
ing principles is impossible, and settling of the
dispute goes through what the authors call a com-
promise, in other words, a situation where the
actors involved in a dispute agree to end it with-
out clarifying the principles on which the agree-
ment 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 sociol-
ogy of hackers (Auray 2013), and de Blic’s anal-
ysis of financial scandals (de Blic 2005). On a
comparative and more macro-sociological
ground, Lamont and Thévenot use this frame-
work to systematically compare justification
logics in France and in the United States (Lamont
and Thévenot 2000). The most visible contribu-
tion extending Boltanski and Thévenot’s On Jus-
tification 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 two-
fold. 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 justi-
fication 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 eco-
nomics 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 par-
adigm, did not shift the balance of power, not
even in France, where over the last three decades
the influence of heterodox economists has consid-
erably 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 bal-
anced. 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
5 A French Institutionalism in Economic Sociology?
provided a toolkit from which social scientists can
pick and choose intuitions, which they can com-
bine 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 convention-
alist 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 with-
out 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
71
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 some-
one (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 some-
thing (to detach this product from oneself) and
someone decides to buy it (to become attached to
it), which is a rather trivial idea. More impor-
tantly, 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 onto-
logical 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 metaphysi-
cal point of view, these differences of conception
matter. Their consequences, for an empirical soci-
ology 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
72
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 . . . Cal-
culation 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 defini-
tion (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 deci-
sion, 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. Conse-
quently, in these fields, the economy (as a set of
practices) may validate the predictions of eco-
nomics (as a discipline), not because economics
P. François
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 exten-
sively 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 mar-
ket (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 concep-
tion 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
5 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 for-
mula to elaborate their strategies. They beat the
older ones, who had been trained as traders on the
grain market, and who completely ignored finan-
cial mathematics. After 10 years, at the beginning
of the 1980s, old traders had almost all
disappeared, and all traders used the Black-
Scholes 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. There-
fore, 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 func-
tionalism implied by these approaches. This func-
tionalism 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 situa-
tion (here is the solution). There is no doubt that,
as many social entities, institutions have a func-
tion. Functionalism may be an analytical prob-
lem, 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
73
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 functional-
ism 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 econom-
ics 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 com-
munity of moral individuals. Instead, Amable and
Palombarini underscore the importance of con-
flict. The idea of performativity, as it was devel-
oped 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 develop-
ment 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
74
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 institu-
tion, 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 institu-
tionalism 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 under-
standing 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 com-
pelled 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
5 A French Institutionalism in Economic Sociology?
groups, or the elite) that enforce rule. More gen-
erally, 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 insti-
tution 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 pro-
posed 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 hetero-
geneity in statistical reasoning became an institu-
tion 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
75
systematize mathematical finance in 1950s, in its
theoretical framework and later in the tools that
rely on it, this confusion remains implicit, undis-
cussed, 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 fol-
low 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 cer-
tain devices in specific situations, where relying
on calculus is insufficient. It also helps distin-
guish between the many kinds of devices that
might be mobilized by social actors. These ana-
lytical decompositions are certainly the most use-
ful 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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François, Pierre is a CNRS research professor in
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 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 eco-
nomic 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 decision-
making, 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 decid-
edly different approach. Building on arguments
about how actors form expectations, it
demonstrates how micro-level theory develop-
ment 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: jb1@mpifg.de; te@mpifg.de
# 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_6
6
the investigation of long-standing puzzles in the
analysis of capitalist economies. As will become
clear throughout our chapter, this action-
theoretical focus shall by no means deny the
central explanatory importance of social
structures in sociological analyses of the econ-
omy. Rather, we shall demonstrate how concep-
tual 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 econ-
omy, 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 eco-
nomic 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 strat-
egy. 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
79
80
document in this chapter, the field is
characterized, its youth notwithstanding by a
number of shared classics, common lines of argu-
ment, 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 over-
drawn 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 sociol-
ogy is historically situated. The analytical empha-
sis 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
J. Beckert and T. Ergen
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 con-
textually 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 polemi-
cally summarized his approach to the role of
social norms (Durkheim 1984, 302). Imagined-
futures 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 macroeco-
nomics, in particular, build on models of perfect
foresight (e.g., Lucas and Sargent 1978).
Expectations in this influential view are individ-
ual 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 objec-
tively correct. They emerge from the optimal way
of processing known information. While com-
monly meant as simplifying assumptions to ease
macroeconomic modelling, applications of ratio-
nal 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 informa-
tion, 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
6 Transcending History’s Heavy Hand: The Future in Economic Action
processes. Beckert (2016, see also Beckert and
Bronk 2018) has developed the notion that a
significant share of expectations in modern capi-
talist 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 imag-
ined futures as cognitive devices to enable eco-
nomic 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. Much-
discussed examples of this process are macroeco-
nomic 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 under-
stood 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, quasi-
predetermined 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 pro-
cesses 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
81
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 socio-
logical approaches, not just from models of ratio-
nal 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 pro-
cesses (Thaler 2000).
Sociological analyses of the formation of
expectations aim to complement rather than com-
pete with cultural, institutional, relational, and
structural theoretical programs in economic soci-
ology. 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’ anticipa-
tory capabilities, but also their aspirations and
hopes (Bourdieu 1979; Mische 2009; Bandelj
and Lanuza 2018). To the same effect, the institu-
tional 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, profit-
able, 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.
82
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 well-
documented 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 sociolog-
ical concept of expectations can help to specify
how and when social structures influence eco-
nomic 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 govern-
ment planners did not have straightforward per-
formative 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 administra-
tion strategically used scenarios about national
industrial decline to push tax reform through
Congress. Contrary to the assumptions of schol-
arship on policy paradigms and the power of
economic ideas (Hall 1989), the administration
J. Beckert and T. Ergen
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 eco-
nomic 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-for-
granted 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 mod-
ern 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.
6 Transcending History’s Heavy Hand: The Future in Economic Action
3.1 Consumption
Economic sociology has traditionally focused on
the social constitution of consumption in its treat-
ment 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 seem-
ingly endless demand for consumer goods and
services that is historically unique to modern cap-
italist societies. Anthropological, as well as his-
torical 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 con-
sumer societies are based on the idea that modern
societies impute non-essential goods and services
with symbolic value, with socially shared mean-
ing 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 con-
sumer 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 sym-
bolic qualities, in particular with historical
references, regional associations, and socio-
cultural 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. Sym-
bolically charged goods gain their attraction from
a promise to connect individuals to society, spe-
cific social communities, regions, histories, or
83
personalities. Significant parts of contemporary
advertisement and marketing can be understood
as attempts to convey such promises of transcen-
dence for particular goods or brands, and thereby
constitute a specific form of future orientation of
consumers. Modern consumer societies are sig-
nificantly 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 expectations-
revolution of the 1970s and 1980s. Under
conditions of genuine uncertainty, optimistic or
pessimistic outlooks have less to do with avail-
able information and their proper assessment.
Instead, they often take the form of general confi-
dence, and of emotionally charged animal spirits
(Keynes 1936, 161; DiMaggio 2002). Sociologi-
cal research on the empirical distribution, emer-
gence, and breakdown of consumer confidence
represents a highly important research field.
Sociologists have recently demonstrated that con-
sumer confidence systematically varies by racial
and ethnic background in the United States
(Doherty Bea 2019), while economists are begin-
ning 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 simi-
larly 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 multi-
tude of uncertain future developments, such as
product development, future patterns of consumer
84
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 sense-
making 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 devel-
opment 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
J. Beckert and T. Ergen
consumption, investment is often contingent on
a vague notion of investor sentiment and confi-
dence. 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 busi-
ness 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 phar-
maceutical firms competed for funding, niches,
and prestige in the emerging market for breast
cancer treatment with projected breakthrough-
announcements 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 self-
fulfilling 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).
6 Transcending History’s Heavy Hand: The Future in Economic Action
Compared with studies on private consump-
tion 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 domi-
nation. 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 obvi-
ous candidates for an expectation-based eco-
nomic sociology. It is in innovation processes
that modern societies most routinely debate
uncertain long-term economic, social, and tech-
nological 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 well-
established field in innovation studies and the
history and sociology of technology develop-
ment. Research into imagined futures in
innovation studies can roughly be subdivided
into three lines.
First, innovations and associated socio-
technical 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
85
opportunity structures, and scientific and techno-
logical developments, resulting in the eventual
establishment of a massive public-private institu-
tional 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 state-
society relationships, the law, and national
development.
A second line of empirical research
investigates the micropolitics of the social forma-
tion of expectations in technological develop-
ment. A path-breaking study in this field is van
Lente’s (1993) history of the emergence of mem-
brane technology. While almost an empty signi-
fier at an early stage, interested actors tried to
promote the umbrella term of membrane technol-
ogy 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 signifi-
cantly shaped its development.
Another often observed feature of the
micropolitics of innovation processes is the prob-
lem 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 hydro-
gen 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 his-
torical innovation studies in that it does not look
primarily at how expectations are set, but at how
86
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 heteroge-
neous functions. Universities, corporate
laboratories dedicated to basic research, and
development teams are arguably designed to cre-
ate, 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 empir-
ical research, we now describe some of the core
research questions, frontiers, and challenges of
the analysis of expectations in economic sociol-
ogy. 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 eco-
nomic 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).
J. Beckert and T. Ergen
4.1 Where Do Expectations
Come from?
A core question of all sociological analyses of
expectations deals with their origin and emer-
gence. 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 expe-
rience. If expectations are constituted intersub-
jectively, 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 answer-
ing questions of emergence are attempts to under-
stand variation in expectations between historical
periods and societies. Sociology has a rich tradi-
tion of analyzing changing understandings of
time, and in particular changes of the temporal
rhythms of social life in the course of moderniza-
tion (Zerubavel 1985; Elias 1992). Bourdieu
(1979) has developed ideas on the differences in
future orientations between traditional and mod-
ern 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 particu-
larly abundant in historical political economy
today. Literatures on policy paradigms and domi-
nant 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
6 Transcending History’s Heavy Hand: The Future in Economic Action
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. Increas-
ing aggregate holdings of wealth, expectations of
voters that governments protect that wealth in
times of crisis, and related moral hazards of finan-
cial institutions may help explain the growing
financialization of capitalist economies.
A second major pathway towards understand-
ing 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 socio-
economic 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 back-
ground (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
87
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 sociol-
ogy 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 institutionali-
zation is particularly promising.
A first promising research field starts from the
observation that beliefs about the future in mod-
ern 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. Stud-
ies of the internal logic, selection mechanisms,
and sense-making effects of mass media are sur-
prisingly 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 forma-
tion of expectations hold great promise for socio-
logical 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
88
developments as well as with representations of
the future role structure of markets. A good exam-
ple 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 self-
fulfilling 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 elabo-
rate 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 com-
plementary, this area of research in addition
shows that central banks’ ability to durably influ-
ence expectations in society requires specific
financial market structures. Hence, market
structures serve as the infrastructure for policy
implementation. Braun (2018) captures the
J. Beckert and T. Ergen
resulting entanglements between public and pri-
vate 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 pro-
jection 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, break-
down, and abandonment of imaginaries of the
future remain underexplored. Processes account-
ing 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 consti-
tution 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
6 Transcending History’s Heavy Hand: The Future in Economic Action
to cure dysfunctional structures and practices.
The evaluative structures of expectations repre-
sent a vast and understudied research field. How
do expectations become evaluatively charged?
How do values, norms, and moral structures influ-
ence the emergence and spread of expectations
and projective techniques? What does the preva-
lence of evaluatively charged imaginaries of the
future in modern economies imply for theories of
the rationalization and dis-embedding of contem-
porary 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 ongo-
ing 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
89
developed and the question of who shall partici-
pate 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 soci-
ety. 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 sociol-
ogy is a comparatively young and unconsolidated
research field. Today it is driven mainly by theo-
retical explorations and empirical projects, which
experiment with data sources that indicate actors’
expectations and their influence on social pro-
cesses. While certainly not without potential
drawbacks, the field’s current experimental char-
acter in terms of theory, method, and methodol-
ogy produces a considerable dynamism. As
outlined in this chapter, a number of loosely
shared classics, research questions, and theoreti-
cal arguments structure the recent uptick of socio-
logical interest in the future (Beckert and Suckert
2020). To conclude, we want to highlight three
wider frontiers of the research field: its connec-
tion 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 explana-
tory factors is largely of an exploratory and hypo-
thetical nature. What is more, there is little
systematic work on how sociological analyses of
expectations may contribute to general social the-
ory. 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
90
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 gen-
eral social theory and economic sociology
(Granovetter 1985; Beckert 2009; Joas and
Knöbl 2009). An absence of social norms, rela-
tional 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 for-
mation 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 cru-
cially 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 understand-
ing 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 sociol-
ogy, 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’
J. Beckert and T. Ergen
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 sense-
making 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 exam-
ple on the basis of the large-scale hand- or
machine-coding of textual material. A key chal-
lenge 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 stabil-
ity 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 reconstruc-
tion, 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 signifi-
cant 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 realis-
tic micro foundations for economic sociology
should not be mistaken as being oriented towards
a primarily micro-oriented research program. As
6 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 char-
acterization 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 compara-
tive and historical research. The implications of a
sociological notion of the formation of
expectations are less clear in contrast with macro-
economics 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 macro-
economic problems and theorems from a socio-
logical perspective. Long-standing problems of
macroeconomics, such as swings in consumer
confidence and investor sentiment, cyclical
movements of the economy, breakdowns of eco-
nomic activity, and structural change are
promising fields for a macrosociology of eco-
nomic activity. Equally promising are sociologi-
cal inquiries into influential economic policy
convictions derived from modern macroeconom-
ics, such as the neutrality of money and the
crowding out of private investment by govern-
ment expenditure. At their core, answers to such
questions require hypotheses about how
expectations are formed and how they affect eco-
nomic action. A sociologically rich notion of
expectations should thus provide a starting point
for a realistic macrosociology of the economy.
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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 his-
tory of the postindustrial society.
Research topics: Deindustrialization, economic sociol-
ogy, 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,
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tions and Diversity in Innovation: Evidence from Early
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Oxford University Press.
 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 particu-
lar 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 dis-
posing of products. In contrast, in contemporary
societies there tends to be less emphasis on instru-
mental 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: roessel@soziologie.uzh.ch;
weingartner@soziologie.uzh.ch
P. Schenk
University of Lucerne, Lucerne, Switzerland
e-mail: patrick.schenk@unilu.ch
# 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_7
7
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 infor-
mation 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, aes-
thetic 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 distinc-
tion 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 sociol-
ogy, 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
95
96
acts of judgment in exchanges, but in a social
context, in which processes of aesthetic evalua-
tion 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 funda-
mental 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.
2 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 his-
torical perspective, a comprehensive aestheti-
cization of everyday life can be observed,
affecting an ever-greater number of objects and
J. Rössel et al.
actions, and giving great prominence to individual
lifestyles (Featherstone 1987). In the German-
speaking countries, the theory of aestheticization
has been extensively elaborated by Gerhard
Schulze. His diagnosis of contemporary society
centers on the assertion that people in contempo-
rary societies are especially guided by an experi-
ential 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 drasti-
cally 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 orien-
tation 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
7 The Aesthetic Moment in Markets
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 experi-
ence 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 experi-
ential 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 every-
day 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 every-
day aesthetics focused on speed, physicality, and
action. Typical examples of the Spannung
schema are rock and pop music, trips to the cin-
ema, 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 aestheti-
cization 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
97
boundaries between high culture and popular cul-
ture 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 cover-
age. 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 high-
culture 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 fol-
lowing 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 democrati-
zation 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 authen-
ticity, 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/aes-
thetic attitude, and an emphasis on the individual
person of the producer, and the historical and
traditional connections of a product. In their anal-
ysis of the discourse of the American gourmet
scene, Johnston und Baumann (2007) are able to
empirically identify, in particular, the relevance
98
of (1) geographical connections, (2) artisanal pro-
duction methods, (3) the personality of the indi-
vidual producer, and (4) the embedding of the
production in history and tradition. This focus
on criteria of authenticity is becoming increas-
ingly important for ever-larger sectors of markets
offering products and services with primarily aes-
thetic features (Carroll 2015).
2.2 Aestheticization and Uncertainty
Schulze’s reflections demonstrated very emphati-
cally 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 experi-
ment, 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 signifi-
cantly from a random evaluation (50% correct
attributions), it clearly shows people’s consider-
able 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 get-
ting 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 sen-
sory characteristics. For instance, an experimental
study with students of oenology from Bordeaux
found that most of them were unable to distin-
guish white from red wine just by taste (Morrot
J. Rössel et al.
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 primar-
ily acquired because of their aesthetic features are
characterized by a high level of uncertainty about
their quality. A central approach within econom-
ics 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 ulti-
mately hampers the development of the market.
To solve this problem, Akerlof raised the possi-
bility 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 rep-
resent 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 reputa-
tion is a worthwhile investment strategy for
producers.
In order to more precisely define the asymmet-
ric distribution of information during the
exchange of goods, three different types of
properties can be distinguished (Schneider 1997,
7 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 con-
sumer 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 ecolog-
ical method of cultivation for cereal crops.
The theoretical criterion for distinguishing
between these types of properties is obviously
whether and when consumers can acquire infor-
mation about them. In our view, however, the
uncertainty attendant on aesthetic evaluations
does not depend on asymmetric information dis-
tribution 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 under-
stood? On the one hand, there are no information
asymmetries, as understood by information eco-
nomics; 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
99
extent. Hence, these socially attributed features
cannot be straightforwardly slotted into the cate-
gory system, developed in information economics
to describe the properties of goods, since uncer-
tainty about aesthetic judgments is not based on a
lack of information, but on their social construc-
tion. This also means, however, that quality
judgments themselves are dependent on pro-
cesses 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 theoreti-
cal 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 multi-
dimensionality. 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 com-
bination of these attributes (or others).
Their uniqueness makes singular products
incommensurable. They do not easily lend them-
selves to comparisons (Heintz 2016). Moreover,
in markets for singular products, quality competi-
tion prevails over price competition (Karpik
2010). Singular products are therefore not primar-
ily 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
100
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 mul-
tiplicity 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 any-
more. 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 princi-
ple a different perspective would be equally legit-
imate. 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 exis-
tence 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
J. Rössel et al.
order singular products along an ordinal scale
(Karpik 2011). Rankings do not provide substan-
tive knowledge, only formal knowledge on the
relative position of products within a single hier-
archy. Parker Points are an example. Hence, the
complexity of the quality of singular products is
condensed into a one-dimensional scale, incom-
mensurability 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 spa-
tial 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 custom-
ary 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 spo-
ken word” (Karpik 2010, 45).
Karpik’s typology makes a significant contri-
bution to the sociology of valuation and evalua-
tion 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 coor-
dination. 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
7 The Aesthetic Moment in Markets
authenticity of the product and empower
consumers to make autonomous judgments. Con-
sequently, 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 singu-
lar 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 func-
tional 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.). Sec-
ondly, 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 hierarch-
izations and criteria that are internal to the field,
and not from those outside the field, (e.g., eco-
nomic 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
101
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 acqui-
sition of other types of capital. Lastly, he
differentiates between three forms of cultural cap-
ital: 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). Cul-
tural capital, in particular, can take on different
field-specific forms (Holt 1997). Possessing dif-
ferent 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 cen-
tury, 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 cen-
tral 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 capi-
tal, 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
102
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 his-
tory of the field (Bourdieu 1999, 237). The
objects, goods, and services discussed here are
often avant-garde in character, making a con-
scious 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 educa-
tional institutions and the specific art-related pub-
lic 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 pro-
duction by exchanging the actors and institutions involved.
J. Rössel et al.
knowledge about the codes and conventions rele-
vant in production. For many people from the
lower and middle social classes, works of con-
temporary art are a source of confusion and mis-
understanding, because they generally use their
everyday knowledge to decode these artworks
(Bourdieu 1970). However, this everyday cultural
capital only allows decoding of the surface mean-
ing 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 them-
selves, such as an attractive woman or a sunset
(Bourdieu et al. 1981; Bourdieu 1982). The for-
mal 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 ade-
quate 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 house-
hold of origin.
Although Bourdieu’s theory was primarily
developed for the reception of art, it is also trans-
ferable 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 mar-
ket. It is clear, for instance, that the position of
actors in social space and their family socializa-
tion have a significant influence on taste
dispositions (dry versus sweet wine), on evalua-
tion criteria (importance of artisanal production
methods), and on the main purchasing channels
chosen by consumers. In summary, this discus-
sion of field theory shows that the quality of an
7 The Aesthetic Moment in Markets
aesthetic product is not determined by existing
objective features but is constructed in the field-
specific 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 field-
specific media such as specialist journals, which
constitute the relevant field-specific public
sphere.
3 Empirical Examples
In this section we report results of empirical stud-
ies, that applied and tested the theoretical
concepts, we developed and discussed in the pre-
vious sections. In Sect. 3.1 we study the aestheti-
cization 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 for-
mation 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.
103
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 par-
ticularly influential actors of quality evaluation
and cultural consecration from the German field-
specific 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 con-
sider several theses about the historical transfor-
mation of cultural evaluation processes from the
literature on cultural sociology. Firstly, the above-
discussed theory of aestheticization, which
postulates that evaluation processes are shaped
increasingly by aesthetic standards, while instru-
mental and economic aspects, in a narrower sense
are attracting less attention. Secondly, there is the
claim that in the context of the globalization pro-
cess, the cultural discourse in the individual
countries is becoming more global in scope.
Thirdly, there is the assumption that the tradi-
tional separation between high culture and popu-
lar culture is eroding, and is being replaced by
new symbolic hierarchies, like authenticity. We
104
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 empiri-
cally, 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 prove-
nance from a particular country, it is presented in
the field-specific discourse as an aesthetic prod-
uct, characterized by artisanal manufacture, spe-
cial 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 Ger-
man 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
J. Rössel et al.
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 behav-
ior 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 per-
vasive 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 classifica-
tion 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
7 The Aesthetic Moment in Markets
theory suggests. The impact of rankings on the
demand for fine wine reflects the particular land-
scape 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 nor-
mative 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 forma-
tion (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
105
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 sec-
ondary (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 impor-
tance. 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 theoret-
ical 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
106
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 pro-
mote 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 informa-
tion 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 empiri-
cal 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 sur-
vey (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 produc-
tion obtain significantly higher prices on the wine
market compared to other wineries. Producers
with these symbolic positions make use of sym-
bolic 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
J. Rössel et al.
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 middle-
class 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 sociali-
zation are not only more oriented towards the
autonomous pole of the field in terms of sources
of information, quality criteria, taste, and distri-
bution channels, but are also prepared to pay
higher prices for a bottle of wine. Finally, they
have a greater disposition to view wine consump-
tion 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 hierar-
chy 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.
7 The Aesthetic Moment in Markets
1. The relevance of markets for primarily aes-
thetic 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 back-
ground 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 impor-
tance 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 prod-
uct (Rössel et al. 2018). Of course, wine is a
commodity that has always been mainly
viewed in aesthetic terms. However, our anal-
ysis 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 uncer-
tainty, 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 singu-
lar product, which is distinguished by its
unique combination of features. In contrast to
the assumption made by information econom-
ics (as a branch of economics), this uncertainty
is not based on a kind of information asymme-
try between buyers and sellers, but merely on
the fundamental fallibility of aesthetic
107
judgments, which is based on their socially
constructed nature.
4. As Akerlof (1970) showed, markets with radi-
cal uncertainty about the quality of the goods
and services offered, collapse. In our chapter,
we have discussed two theoretical proposals
explaining mechanisms that reduce uncer-
tainty 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 deter-
mine 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 histor-
ical, social, and geographical background in
which they are embedded, which may be able
to explain the specific role of particular judg-
ment devices. Furthermore, Karpik’s econom-
ics 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
108
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 the-
ory, 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 non-
commercial 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 symboli-
cally 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 addi-
tion, 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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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.
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tures, 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 Journal-
ism in Germany, 1947–2008. Journal of Consumer
Culture 18/3: 453–73. Rössel, Jörg, and Patrick Schenk.
7 The Aesthetic Moment in Markets
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 sociol-
ogy, 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 Journal-
ism 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 Moe-
bius, Frithjof Nungesser, and Katharina Scherke, 131–48.
Wiesbaden: Springer VS. Rössel, Jörg, Patrick Schenk,
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Society 28/4: 363–85.
 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 sci-
ence, 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 differentia-
tion 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: schimank@uni-bremen.de; Volkmann@uni-
bremen.de
# 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
8
to satisfy this nomos in each value sphere; for the
great majority nowadays, this polytheism is essen-
tial for a good life in a good society.
Against the background of this self-
understanding 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-for-
granted 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, pri-
vate 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.
113
114
much stronger or even predominant in formerly
non-economic societal spheres, to the disadvan-
tage 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 sec-
tion, an understanding is outlined of today’s
experiences of economization as a regime of com-
petition 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 sci-
ence 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, entrepreneurial-
ism, 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 differ-
entiation, of all sociological perspectives on mod-
ern 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 state-
dominated 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 func-
tional differentiation. One tradition, which was
4
See Schimank (1996) for a reconstruction of differentia-
tion theories since the sociological classics, and Schimank
(2015b) for a brief overview that includes newer
contributions.
8 Economization: How Neo-Liberalism Took Over Society
already alluded to, sees modern society as func-
tionally 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 higher-
order 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 every-
thing 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 “legiti-
mate 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 arrange-
ment, ranging from food and shelter to socializa-
tion 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 socie-
tal sphere focused on one kind of service.5 This
5
This very brief exposition inevitably sounds like a func-
tionalist deduction, which is not far from a functionalist
115
second tradition of differentiation theory
emphasizes the division of labor inherent to func-
tional 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 provi-
sion—with its autonomy as a prerequisite. In this
way, functional differentiation amounts to a plu-
ral simultaneous striving for perfection of sphere-
specific service provisions.
Of course, manifold tensions and conflicts arise
out of this arrangement. Still, despite such trade-
offs, the side-by-side autonomous service
provisions of specialized societal spheres has pro-
duced a level of quality and quantity unknown
before (see also Chap. 18). Therefore, a well-
working 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 under-
lying needs (see Abrutyn 2016 for more details).
116
character derives precisely from its functional
differentiation. On the one hand, functional dif-
ferentiation brings about capitalism. On the other,
though, capitalism shapes functional differentia-
tion 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 profit-
making. Just as scientists are obsessed by their
pursuit of truth, capitalists are fixated on the pur-
suit of profit. However, as the offspring of func-
tional 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 acquisi-
tion 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 admin-
istration. 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 produc-
tion 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 con-
sumption, paid from the salaries. It is from
U. Schimank and U. Volkmann
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 soci-
etal 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 regu-
lar 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 cumula-
tive 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. Con-
versely, 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 situa-
tion can also improve for service providers in
other spheres and for individuals. Thus, cost pres-
sure is often accompanied by a pressure for com-
modification 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 mod-
ern 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.
8 Economization: How Neo-Liberalism Took Over Society
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 vari-
ous 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 dif-
ferent 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 imper-
ceptible. If this economizing pressure finds no
limits to its growth, it might become a self-
destructive force of modern society. However, in
modern Western societies a rescue mechanism
was found in the last third of the nineteenth cen-
tury 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 counter-
mechanism to capitalist dynamics (Heimann
1980). The safeguard of this counter-mechanism
has been the successful fight for political democ-
racy, so that the majority of the population can
demand that their life chances are improved
(Iversen and Soskice 2019). Thus, a democratic
117
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 capi-
talist 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 cap-
italist 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 transforma-
tion of “organized modernity” to a society “man-
aged by the markets.” This societal
transformation affects non-profit organizations
of service production in the non-economic socie-
tal 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 non-
profit as well as for-profit organizations.
118
2.1 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 vic-
tory 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 exten-
sion 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
U. Schimank and U. Volkmann
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 econ-
omy, 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 perspec-
tive, 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 consider-
ation, 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
8 Economization: How Neo-Liberalism Took Over Society
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 disci-
plined 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 per-
ceived to need hierarchies, or organizations to
function properly. In contrast, neoliberal moder-
nity, 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 bud-
get cutbacks on these service providers, or
thirdly, when they are denied budget increases,
although more money is needed to satisfy a quan-
titatively or qualitatively growing demand for
their services. Service providers have been
confronted with all three situations with increas-
ing 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
119
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 perfor-
mance, 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, ser-
vice providers often tried to increase their
incomes by increasing user fees, museum
entrance fees, for instance, or by increased
donations from private sponsors. These tradi-
tional instruments of cost reduction have not
120
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 com-
petitive pressure on providers of a specific ser-
vice, 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 perfor-
mance, 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
U. Schimank and U. Volkmann
journals, this is a quasi-market where perfor-
mance 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 perfor-
mance 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 over-
view 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 respec-
tive services are more or less met. On the other
hand, sometimes the hierarchical authority delib-
erately 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 competi-
tion, 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
8 Economization: How Neo-Liberalism Took Over Society
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 provi-
sion directly by hierarchical command, but indi-
rectly 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 pri-
vate 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 televi-
sion 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.
121
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, commodifica-
tion 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. Conse-
quently, 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
122
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 guid-
ing value.
However, the greatest risk of a commodified
provision of non-economic services is, that when-
ever 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: profit-
making has become an imperative on a substan-
tial 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 pre-
cisely the threat of shopping around.9 Shopping
around consists of a permanent search for poten-
tial better alternatives to the alternative at hand.
8 which has outsourced most components of the
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.
U. Schimank and U. Volkmann
This is not necessarily motivated by massive dis-
satisfaction, 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 some-
thing 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 distin-
guished. 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 organi-
zation 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 alterna-
tive, 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,
service provision workflow because the internal
units were outcompeted by external alternatives.
However, the other logical extreme is also possi-
ble: all internal units succeed in the competition
with outside suppliers. Superficially, this outcome
looks as if nothing has happened; top manage-
ment made an empty threat. However, the threat
8 Economization: How Neo-Liberalism Took Over Society
is by no means empty, because it lingers
on. Instead of existing in a safe world where
there are clear rules of mutual commitment, orga-
nizational units now find themselves on a perma-
nently 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 sta-
tus. 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 involun-
tary 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
10
To be sure, in many respects organized modernity was
definitely no paradise for hierarchically subordinated orga-
nizational members; but when management was dissatis-
fied 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.
123
3 Societal Costs: Erosion
of Functional Differentiation
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, suc-
cumb 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
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 theo-
retical 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.
124
differentiation, on the one hand, and formal
organizations, on the other, is not at all seen by
Luhmann.
The increased vulnerability of the core person-
nel of service providers of non-economic societal
spheres results in losses of efficiency and effec-
tiveness 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 com-
paring 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 accredita-
tion agencies have been established to imple-
ment 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, effi-
ciency 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 bottle-
neck 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 intolera-
ble 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).
U. Schimank and U. Volkmann
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 competi-
tion may be helpful to motivate high perfor-
mance, 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 gov-
ernment 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 per-
sonnel 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 scien-
tific ideas (Münch 2016, 418).
• Thirdly, losses of effectiveness of service pro-
vision 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
8 Economization: How Neo-Liberalism Took Over Society
advised to take user needs into account. How-
ever, 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 social-
ist 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 com-
mensurate 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 them-
selves 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 differ-
entiation 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 inter-
play of two societal spheres: politics and journal-
ism. However, there may be a danger of an
acceleration of the dynamics of economization
by a fatal combination of economized politics
and economized journalism.
125
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 govern-
ment 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 criti-
cal 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, perma-
nent, financial squeeze, society will be
completely driven by capitalism run wild, which
means a further escalation of the erosion of func-
tional 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
126
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 presenta-
tion 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 conse-
quence of the profit-making pressures they are
subjected to. At least when a certain level of
entertainment is reached, the higher the entertain-
ment 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 well-
known 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 well-
entertained 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
U. Schimank and U. Volkmann
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, includ-
ing the meta-achievement of the democratic wel-
fare 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 aware-
ness of what might happen if economization
pressures increase further. The sociological anal-
ysis 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.
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Schimank, Uwe is professor of sociological theory, Uni-
versity 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 Dia-
logue, eds. Stein Kuhnle, Per Selle, and Sven E.O. Hart,
315–32. Cheltenham: Edward Elgar. Schimank, Uwe.
U. Schimank and U. Volkmann
2015. Modernity as a Functionally Differentiated Capi-
talist Society. A General Theoretical Model. European
Journal of Social Theory 18: 413–30. Schimank, Uwe.
2015. Grundriss einer integrativen Theorie der modernen
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236–68. Schimank, Uwe. 2015. New Public Management
as De-Professionalization: Conceptual Reflections with
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Welfare State Professionalism, eds. Tanja Klenk, and
Emmanuele Pavolini, 183–99. Cheltenham: Edward
Elgar.
Volkmann, Ute is teaching and research assistant, Uni-
versity of Bremen, SOCIUM––Research Center Inequality
and Social Policy, Mary-Somerville Str. 9, 28359 Bremen,
Germany.
Research topics: Sociological theory, diagnoses of our
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Regime der Konkurrenz: Gesellschaftliche Ökonomisier-
ungsdynamiken Heute. Weinheim/Basel: Beltz Juventa.
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sellschaftstheorie und Gegenwartsdiagnosen: Verhältnis-
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 Part II
Empirical Studies and Research Topics
 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 with-
out 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 inter-
net. Heinrich Popitz (1980) formulated the trust
problem in his work on the normative construc-
tion 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: diekmann@soz.gess.ethz.ch
W. Przepiorka
Department of Sociology / ICS, Utrecht University,
Utrecht, Netherlands
e-mail: w.przepiorka@uu.nl
# 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_9
9
The condition for this reliance on the future behav-
ior of others is trust. Where trust is lacking, only
limited and rudimentary forms of sociality are pos-
sible. 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
131
132
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. Second-
hand 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 com-
petence, 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 deliv-
ered with a certain quality and in a certain quan-
tity, 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 forma-
tion 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 cooper-
ation in markets. It also points out some
promising directions for future research.
1
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.
A. Diekmann and W. Przepiorka
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 tempta-
tion 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
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.
9 Trust and Reputation in Historical Markets and Contemporary Online Markets
or as a side product create opportunities for long-
term 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 asym-
metric 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 produc-
tion 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 asym-
metry 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).
133
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 sit-
uation 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 uncer-
tainty about the quality of the goods. In the con-
trol 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 adver-
tise the quality of their goods but are not required
to be honest. The results show that in the experi-
mental 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 repeat-
edly 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,
134
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 mort-
gaged 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 infor-
mation 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 reputa-
tion. It has been shown by means of game theo-
retic 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 par-
ticular (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 coopera-
tion through the two mechanisms of learning and
control. In learning, actors consider information
A. Diekmann and W. Przepiorka
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 informa-
tion transferred by third parties about a certain
trustee, and control is based on the truster’s pos-
sibility 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).
3 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
9 Trust and Reputation in Historical Markets and Contemporary Online Markets
groups; Dunbar speaks of around 150 members of
prehistoric communities (see also Milinski 2016).
In laboratory experiments, the spread of informa-
tion 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 infor-
mation 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 reputa-
tion 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 Norwe-
gian city of Bergen). Burkhardt’s analysis of
commercial networks reveals the dominance of
family relations in the fourteenth century. How-
ever, 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 alter-
native solutions to the trust problem by enabling
merchants to build a good reputation.
135
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 long-
distance 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 informa-
tion 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 func-
tioned, 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 clas-
ses and often switched roles, also played a part. A
merchant could act as an agent for another mer-
chant. As a consequence, and because of the third
136
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 preemi-
nent importance for trade in Europe of the twelfth
and thirteenth centuries. In contrast to the reputa-
tion 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 informa-
tion 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 reputa-
tion 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 pri-
vate law. Violations of the rules could not be
punished under the sanctioning powers of state
officials. Consequently, all market participants
A. Diekmann and W. Przepiorka
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 effi-
ciently 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 informa-
tion 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 mem-
bership in a recognized social group or organiza-
tion. 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 busi-
ness conduct. The Amish people in North Amer-
ica can easily receive credit because the banks
know that the credit agreements are virtually
always kept. A banker with fifteen years of expe-
rience with the evangelical community said, “I
never lost a dime lending to the Amish” (Kraybill
9 Trust and Reputation in Historical Markets and Contemporary Online Markets
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 every-
body.’ 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 child-
hood (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 gen-
tleman, 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 reputa-
tion 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, mem-
bership 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 giv-
ing credit or choosing business partners.
Specialized reputation firms such as credit
bureaus, aka credit reference agencies (CRAs),
collect and provide information on the credit
137
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.
4 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 implemen-
tation of decentralized reputation systems, made
possible by the development of internet
138
technology (Kollock 1999; Resnick et al. 2000).
A person who buys something on eBay, for
instance, is asked to rate the seller after the trans-
action. 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 reputa-
tion 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 consis-
tent 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, inter-
ested in avoiding negative ratings because nega-
tive 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.
A. Diekmann and W. Przepiorka
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 mar-
ket); 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 coopera-
tion were higher in the rating market than in the
stranger market, but the highest level of coopera-
tion 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
9 Trust and Reputation in Historical Markets and Contemporary Online Markets
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 self-
interest of the homo oeconomicus can get an
anonymous online market with a reputation sys-
tem 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 trans-
action. 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 strate-
gic 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
139
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 over-
come the free rider problem in feedback provi-
sion, 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 program-
ming jobs to programmers (Snijders and Weesie
2009), revised its rating system in May 2005. The
platform used an open, double-sided rating sys-
tem before this date, but changed it to a double-
sided blind system thereafter. Surprisingly, feed-
back 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 posi-
tive 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 feed-
back after finished transactions. Other motives such as
warm glow altruism (Andreoni 1990) or indirect reciproc-
ity (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).
140
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 precondi-
tion 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 avail-
ability 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 sub-
ject to contract law. It is possible to take a fraud-
ulent 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 soft-
ware 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
A. Diekmann and W. Przepiorka
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 informa-
tion 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 rela-
tively 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 anon-
ymous actors do business over large geographic
distances would fail on account of the problem of
asymmetric information (Akerlof 1970). Unsur-
prisingly, 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.
9 Trust and Reputation in Historical Markets and Contemporary Online Markets
5 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 gos-
sip and tittle-tattle, and equally so for online rep-
utation indices. In particular, a good reputation
can also be faked to a certain extent. This used to
be called swindling, but is nowadays termed rep-
utation 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 com-
peting 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 Tri-
ple 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
141
reputation systems, the reliability of the informa-
tion 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 reputa-
tion building, there is a further problem in con-
nection 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, there-
fore, 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
142
publish indices and attribute reputations. Recruit-
ment 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). Insur-
ance 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 socio-
demographic information and the payment
behavior of neighbors. As a result, an honest
consumer, who has always behaved in accor-
dance with the contract, receives a point deduc-
tion 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 ques-
tionable assessments of their good conduct and
A. Diekmann and W. Przepiorka
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 mas-
sive misdirection and undesirable side effects
from reputation systems outside markets, espe-
cially 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 interac-
tion 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.
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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 Diek-
mann. 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. Diek-
mann, Andreas, and Wojtek Przepiorka. 2016. “Take One
for the Team”! Individual Heterogeneity and the Emer-
gence 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 Evi-
dence. 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 depart-
ment of sociology/ICS, Utrecht University, Netherlands.
Research topics: Analytical sociology, economic sociol-
ogy, game theory, organizational behavior, computation
social sciences, experimental methods, meta-analysis,
replication. Recent publications: Gambetta, Diego, and
Wojtek Przepiorka. 2019. Sharing Compromising Infor-
mation 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. Informa-
tion, Communication & Society. Przepiorka, Wojtek, and
Andreas Diekmann. 2018. Heterogeneous Groups Over-
come 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 Con-
flict: 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 10
Philipp Bachmann and Gabriele Siegert

1 The Emergence of Attention basic principle of attention markets. In addition

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 Proj-
ect, which literarily captured the developments of
capitalism and emerging shopping arcades in
Paris, Walter Benjamin lamented the many adver-
tising 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: philipp.bachmann.01@hslu.ch
G. Siegert
Department of communication and media research
(IKMZ), University of Zurich, Zurich, Switzerland
e-mail: g.siegert@ikmz.uzh.ch
# 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
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 sociol-
ogy (see Swedberg 1987; Smelser and Swedberg
1994; Steiner 1995, 176) this is appropriate
147
148
because attention is a social phenomenon that, in
modern society, is traded in markets on an indus-
trial scale. For Franck (1998), attention is even
more important than money and power—the typ-
ical 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). Simi-
larly, 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 concep-
tualize 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 atten-
tion, 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 cre-
ativity in attracting attention. Recipients are flexi-
ble 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 “hypercompet-
itive markets” (Hollifield 2006) with countless
communicators and a plethora of content compet-
ing 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 per-
suasion 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 com-
plex market structure, is so integral that we cannot
imagine modern markets without money and
currencies. Is attention really an economic com-
modity? 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
10 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 tempo-
rally 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 Dav-
enport 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 exchange-
ability (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 qual-
ity 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 atten-
tion is the “basso continuo” (figured bass) of all
social actions (2015, 118).
149
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 lon-
ger 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 infor-
mation. 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 infor-
mation 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 informa-
tion 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 cur-
rency 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
150
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 gener-
ation of attention through communication media,
over great distances of time and space is the basic
resource for achieving society’s economic, politi-
cal, cultural, and religious goals, among others.
2.2 The Constitution of Attention
Markets
Due to the imbalance between the technical repro-
ducibility 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 commod-
ity. 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 prob-
lem: 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 dis-
pute 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 qual-
ity 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
P. Bachmann and G. Siegert
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 atten-
tion 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 guaran-
tee 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 tem-
porary 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,
10 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 mea-
sure. 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 ade-
quately 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 econ-
omy of attention (Franck 1998). This media econ-
omy does not focus on hard-to-reach public
attention, but on directly observable public com-
munication, 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 pro-
duction 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 recipi-
ent as a “one-dimensional man” asserting “[t]he
mere absence of all advertising and of all
indoctrinating media of information and enter-
tainment would plunge the individual into a
151
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 brain-
washing 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 persua-
sion knowledge is instructive. Its basic assump-
tion 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 per-
suasion keeps changing. In the ‘game’ of persua-
sion, 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 atten-
tion 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, “Creativ-
ity is a core value in all areas of media produc-
tion” (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
152
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 com-
mon 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 ques-
tion. 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, con-
stant, and demonstrable way. The need to inno-
vate 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
P. Bachmann and G. Siegert
attention markets, and the changes in attention
markets.
Generating attention is a component of any
social interaction, in which one captures the men-
tal 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 destina-
tion. 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 genera-
tion of attention is a specific form among human
activities. It is essentially characterized by strate-
gic planning, delivery and evaluation of informa-
tion 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 cli-
ent, raises awareness among target groups to
influence and trigger actions, especially purchase
and choice. To meet the moving goals, profes-
sional generators of attention embed the persua-
sive 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 edito-
rial media, which recipients consume voluntarily
and purposefully. Public relations experts apply
the selection, presentation, and logic of interpre-
tation of journalistic media to their messages, the
subject of journalistic reporting.
10 How to Buy, Sell, and Trade Attention: A Sociology of (Digital) Attention Markets
3 Attention Markets
in the Digital Age
We can use our sociological framework to answer
the fourth and final question of how digital trans-
formation is changing attention markets. Numer-
ous bestselling, critical nonfiction books deal
with the consequences of the digital transforma-
tion these days. Although authors concern them-
selves with a variety of digital technologies, their
work has one thing in common; they perceive
digital transformation as a disruption in the his-
tory of humanity. For example, Brynjolfsson and
McAfee (2014) speak of the Second Machine
Age. Additionally, bestselling books on digitiza-
tion 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, cul-
tural 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 mas-
sive 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
153
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 funda-
mental 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 prod-
uct. Rather than acting as a gatekeeper, the plat-
form 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 con-
tent, which are not perceived as a targeted distur-
bance. 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 over-
abundance of information sources that might con-
sume 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 classi-
cal institution, no library, no archive, no editorial
office is capable of even approximately
channeling and organizing the information over-
load. 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
154
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 cost-
factor for platforms, but the source of their wealth
instead. When considering social order, we have
noticed that attention markets arise because mar-
ket players spend their money where they find it
most useful, where they expect the highest return
on investment. Platform operators offer their pay-
ing 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 environ-
ment. 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 mea-
sure 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 trig-
ger 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 real-
time 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 strate-
gic planning, delivery, and evaluation of informa-
tion 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 intelli-
gence to manage data flow most effectively will
be successful in targeting actions, especially
purchase.
Finally, we attempt to answer the fourth ques-
tion. The effect of digital transformation on atten-
tion 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 gen-
erate 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 infor-
mation 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 cur-
rency; unlike money, attention does not meet
certain requirements for exchangeability. Atten-
tion 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 equiva-
lence, quantifiable, and measurable in the form of
10 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 dig-
ital age than ever before; it can even be predicted
with higher accuracy. Smart devices open up
possibilities of measurements based on the num-
ber 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,’ ‘dis-
like,’ 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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Bachmann, Philipp is lecturer at the Institute of Com-
munication and Marketing (IKM) at the Lucerne Univer-
sity of Applied Sciences and Arts, Switzerland.
His research interests focus on strategic communica-
tion, 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.
157
Siegert, Gabriele is a full professor of communication
studies and media economics at the Department of Com-
munication 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 Informa-
tionsgesellschaft: 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 Interna-
tional 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
Helge Mooshammer
Since the turn of the millennium, an expanding
range of formal-informal linkages, such as taxa-
tion 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 infor-
mality by the world’s governing bodies is increas-
ingly being seen as critical to achieving a more
sustainable form of global development. How-
ever, current policy approaches are still torn
between framing informality as the root problem,
being a “drag on growth”, as a Latin America-
focused 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 per-
cent of the worlds employed population, were in informal
employment (ILO 2018, 13).
H. Mooshammer (*)
Goldsmiths, University of London, London, UK
TU Wien, Vienna, Austria
e-mail: helge.mooshammer@tuwien.ac.at
# 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
11
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 col-
laboration 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 entrepre-
neurial undertakings. In doing so, I aim to articu-
late a basic typology of spatio-economic policies
that are shaping the role of informal markets in
contemporary urban development.
159
160
1 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 con-
stitute 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 involv-
ing the community of citizens (polis). It was the
place in which the public gathered, and the char-
acter 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 neo-
liberalism, this spatial separation is contributing
to an ongoing concealment of the interrela-
tionships 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 specu-
lative 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 eco-
nomic 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 infor-
mality of these non-conforming markets is linked
to a lack of modernity, legality, profitability, or
H. Mooshammer
public order. Outmoded infrastructure, tax eva-
sion, violations of trade regulations, product
counterfeiting, non-transparent business
relationships, health risks, unregulated employ-
ment 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 popula-
tion 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, informal-
ity also exists independently, producing its own
social, economic, and cultural spheres. Within
this tension, the definition and ascription of infor-
mality has increasingly become a strategic ele-
ment 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 concep-
tual failure of western categories to grasp a sig-
nificant 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 soci-
ology, as well as in architecture, urban anthropol-
ogy, 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 applica-
tion 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 infor-
mality has developed from a simply structured
11 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 globaliza-
tion process. The operative dimension of infor-
mality, 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 econ-
omy, 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 eco-
nomic fabric. Although often characterized by
uneven power relations (Simone 2010), the dis-
tinction between formal and informal is not nec-
essarily 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, particu-
larly 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 soci-
ety along formal lines.2
This attempt to engage with the ambiguities
surrounding the spread of informality is substan-
tially informed by recent discourses in architec-
tural, urban, economic, and geographical studies
2
See, for instance, Hart (2012).
161
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 hand-
book), 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 embrac-
ing 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, trans-
national capital flows, institutional processes, and
bottom-up restructuring (see also Opper in this
handbook). Finally, while focusing on contempo-
rary 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 transforma-
tion 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),
162
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 eco-
nomic 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.
2 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.
H. Mooshammer
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 (shut-
down 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 trans-
formation 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 gov-
ernance implications of formal-informal linkages
through typologies of governance transformation,
e.g., replacement, undermining, support, compe-
tition (Helmke and Levitsky 2004), or comple-
mentary, 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 gover-
nance. 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
11 Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces 163

closure relocation improvement appropriation

(shutdown of trade, (water, sanitary of entrepreneurial
(of trade to peri-urban
facilities, service, energy (privatization,
eviction of vendors environments)
transport, maintenance) commodification)

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

order to trace particular patterns of economic systems prevalent in the former West. With the
incorporation, which can be distinguished from dissolution of the Soviet Union and the integra-
other types of intervention. tion 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
3 Forced Closure: Moscow’s
and market stalls, be it as a temporary setup or as
Cherkizovsky Market
an ad-hoc solution to deliver public services in
new residential areas.
The first case study is an example of the forced
Against this backdrop, the sprawl of vast con-
closure of informal markets. What is notable with
tainer markets, after 1989 in this changing region
this type of intervention is how disputes regarding
was certainly not an anomalous phenomenon.
the spatial conditions (overcrowding, lack of san-
The modular design, strength and adaptability of
itation, and fire hazards) of informal markets
shipping containers made them well suited to use
affected by this mode of radical transformation
as low-cost, multi-story structures that could
have been strategically linked with ideological
accommodate a wide range of businesses, from
attitudes (anti-immigrant, nationalistic, and
service providers to wholesale and retail traders
pro-liberal markets to name a few). There is a
of all kinds. They also allowed for the easy,
recognizable pattern to the political rhetoric
flexible expansion of market areas. As long as
accompanying the enforced clamp-down on oth-
vacant land was available, more rows of stacked
erwise successful markets, which positions them
containers could be added, combining sale units
as extra-legal goings-on that need to be reined in.
on the ground and storage units on top. Some of
At its peak, the Cherkizovsky Market in the
these informal marketplaces, such as the Seventh-
northeast of Moscow was one of the most impor-
Kilometer Market on the outskirts of Odessa or
tant nodes of informal trade across much of East-
the Dordoi Bazaar in Bishkek, Kyrgyzstan have
ern Europe and Eurasia. The market’s layered
reached the size of several dozen hectares of land,
history provides extensive material for multiple
with thousands of vendors vying to sell
interwoven readings. It was also one of the most
low-priced goods. While these markets are still
elaborate and expansive examples of a container
operating, others, such as Moscow’s
market, a spatial typology typical of the kind of
Cherkizovsky Market had to give into pressures
anarchic urbanism that spread rapidly after the
from landowners, politicians, lobby groups, and
collapse of the Eastern Block, the key assets of
investors and were dismantled to make way for
which were speed and unhindered appropriation.
more profitable operations.
While unitization had played an important role in
Built of row after row of stacked containers,
the Soviet Union’s policy of mass production, its
with alleys covered with vaulted Perspex, the
container standards were incompatible with
164
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 Krem-
lin 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 market-
economy 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 arbi-
trary 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 step-
by-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 Phys-
ical 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 com-
mercial 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 end-
less labyrinth of its mile-long halls to keep this
trading organism alive. As a place of trade in the
H. Mooshammer
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 com-
plex 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 vice-
speaker of Moscow City Council announced that
the market would be closed at the end of 2006.
While the owners’ good contacts with the govern-
ment 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 sig-
nificant 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 coun-
terfeit goods. According to a number of interna-
tional 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 Tur-
key, may have contributed to the market’s sudden
11 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 mar-
ket 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.
165
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 eco-
nomic 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 infor-
mal 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 typi-
cally 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 infor-
mal 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 stan-
dard 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 any-
thing long-term, informal markets are thus depen-
dent on the appropriation of available spaces.
Forced to seek out gaps in the urban fabric, infor-
mal markets take on a plethora of different forms.
166
While many occupy spatial margins or the
interstices between different land uses and zones
of authority, informal markets also avail them-
selves 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, character-
istic of today’s exploding metropolises, catalyze a
multitude of interstitial market formations. Build-
ing 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 capac-
ity 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
H. Mooshammer
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 moderniza-
tion 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 neigh-
boring 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 con-
sumer 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.
11 Right to the City, Right to the Market: The Global Struggle of Informal Marketplaces
of identity and occupation in a self-styled atmo-
sphere 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 gentrifi-
cation 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 brain-
child of two antique dealers, who in July 2010,
seeking to expand their business, leased a nine-
acre 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.
167
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, busi-
ness activities and enjoyment become inter-
changeable. 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. Ameri-
can 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 fash-
ion replaces indistinguishable Chinese mass pro-
duction. 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
168
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, includ-
ing a replica pagoda and a gateway flanked by
two kitsch brass warrior statues, making it resem-
ble 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 neigh-
bor 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 fur-
ther 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 shop-
ping area at the periphery, has become a staple of
many market relocation programs, whether vol-
untary 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 pub-
lic 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
H. Mooshammer
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 protec-
tion 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 regenera-
tion 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 single-
handedly 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
11 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 medie-
val 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 popu-
lar 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, border-
ing 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 plen-
tiful supply of cheap new goods, especially
textiles and household goods, had helped make
169
the market a popular meeting place for the grow-
ing 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 lin-
gered, 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 increas-
ingly 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 dot-
ting 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
170
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 sub-
stantial resistance from major sections of the mar-
ket 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 competition-
winning team of Agence Ter and Ana Coello
Llobet, the emblematic elevated motorway has
been replaced by an urban canopy that is sup-
posed 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 dou-
ble 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 stor-
age 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
H. Mooshammer
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 reflec-
tive 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 mar-
ket 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 hier-
archy and repertoire of urban planning oriented
toward stimulating economic growth through cul-
tural assets.
In this sense, the shift of Encants Vells from
outside to inside also marks the shift from infor-
mal 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 bak-
ery, when assembling their signature hot dog. It is
11 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.
6 Arizona Market: Top-Down
Appropriation of Survival
Economies
The fourth type of intervention exemplifying the
wide and often contradictory spectrum of interre-
lated spatial and economic integration, which I
want to address in this chapter, refers to often
highly elaborated measures seeking to appropri-
ate 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, com-
prising 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 strate-
gic position that it assumed after
Bosnia-Herzegovina left the federal state of
Yugoslavia in 1991. The Dayton Peace Accords
171
of November 1995 granted special status to this
disputed territory around the town of Brčko. Its
future was to be decided in an international arbi-
tration process. It was placed under the auspices
of a special supervisor from the Office of the High
Representative (OHR) of the international com-
munity 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 eth-
nic communities by establishing a free-trade
zone, with the aim of consolidating peace.
SFOR soldiers levelled several hectares of farm-
land, 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 check-
point: with wooden huts, improvised stalls, smug-
gled goods, and pirate copies of brand-name
goods. Textiles, food, electronic products, build-
ing 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 eco-
nomic activities at the site and the self-
organization of this gray trade area were extolled
as a model for promoting the sustained develop-
ment 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 pro-
cess 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
172
success story of peace based on the market econ-
omy, at an international level. At the Arizona
Market, the real money was made through prosti-
tution 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 com-
munity (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 super-
visor ordered the closure of the existing market.
In December of that year, ItalProject, an Italian-
Bosnian-Serbian consortium, won a tender to
establish and operate a new market. The consor-
tium 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 proj-
ect 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 eco-
nomic 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 oppor-
tunity 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
H. Mooshammer
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 commu-
nity, 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 shop-
ping 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 infor-
mal 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 post-
metropolitan territory. Hopes that the Arizona
Market might become a model for a self-
organized 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 mount-
ing 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 traf-
ficking. 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
11 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 cele-
brated 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 repeat-
edly falling behind the development of its
neighbors. Virtually none of the plans announced
for the creation of a trans-regional trade and com-
merce 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 build-
ing 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 suprana-
tional 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
173
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 entrepre-
neurial cultures (P2P marketplaces, social entre-
preneurship, gig economy, new intimate
economy, among others) animate a changing cli-
mate of development policies both in contempo-
rary urban economies in the Global North, as well
as in top-tier emerging economies in the Global
South (Mörtenböck et al. 2015). Only by embrac-
ing 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 alterna-
tive 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 develop-
ment of many informal markets, including those
discussed above, has been characterized by a
variety of attempts at integration. Besides
174
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 infor-
mal markets to urban fringes or the dispersal of
market activities into other neighborhoods. Inter-
vention 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 allo-
cation 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 conjunc-
tion 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 gov-
ernance outside state regulation (Meagher 2013).
It is also reflected in the recent rise of self-
employment and increasing state support for
start-ups, micro-businesses, social entrepreneur-
ship, 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).
H. Mooshammer
What these developments point to is that the
growing interaction between the formal and infor-
mal 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 macro-
economic 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 interac-
tion (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).
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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
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spatial production today.
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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
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& READER. Rotterdam: nai010 Publishers.
 Economic Change from an Institutional
Perspective
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 con-
siderable 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 eco-
nomic policy. With neoclassical growth theory
struggling to explain persistent poverty and
inequality despite massive investments in aid,
technology, and human capital, new institutional-
ism offered a new perspective. Human behavior
S. Opper (*)
Department of Management and Technology, Bocconi
University, Milan, Italy
e-mail: sonja.opper@unibocconi.it
# 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
12
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 much-
needed 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 second-
best institutions. Both developments rely on pri-
vate actors rather than state actors. Third, I will
highlight recent work exploring how social con-
text, networks, and local culture influence these
institutional transitions.
177
178
1 Limits of Institution Building
In preparing large-scale reforms across former
planned economies, academic and political dis-
course largely agreed on the role of the state as the
central arbiter of change. The standard prescrip-
tion, 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 trans-
action 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 agree-
ment 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 gradual-
ism. It is true that new laws and regulations can be
modeled after international best practices, hence
the illusion that fast results are possible. How-
ever, being able to identify the key incentives and
constraints that have fostered growth and eco-
nomic 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 adjust-
ment processes of the real and monetary sector.
Country specifics such as geography (e.g., coastal
access or proximity to high-growth countries),
S. Opper
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 proac-
tive 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 sov-
ereign 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 institu-
tional change intensified only around the turn of
the century, when the initial enthusiasm for insti-
tution building ebbed (Greif and Laitin 2004;
North 2005; Greif 2006).1
Historic pathways toward developing anony-
mous markets, economies of scale, and long-
distance trade bear little resemblance to the
realities of institutional change of the late twenti-
eth 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 pre-
ceded, increasing de facto security of property
and fiscal income from 1600 on (Clark 1996).
Institutions were formalized once there was suffi-
cient 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).
12 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 situa-
tion resembles institutional transfers of the eigh-
teenth and nineteenth centuries, when colonizers
transplanted laws and regulations into alien insti-
tutional 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 tran-
sition economies in terms of monetary stability,
and scored high in terms of increasing life expec-
tancy, (with an increase of 2.1 years in China
179
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 knowl-
edge could not have predicted: bottom-up institu-
tional 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 develop-
ment 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. Legaliza-
tion followed, once institutional innovations dif-
fused 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 emer-
gence of political and economic institutions in
the West.
The vital contributions made by grassroots
innovations tend to be underestimated. Early
180
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 conse-
quence of continuous atomized resistance.”
China’s reforms offer numerous examples of
how institutional entrepreneurship at the grass-
roots level influenced national-level policy
reforms. The abandonment of the people’s com-
mune system is a good example. Though often
heralded as an ingenious political decision to start
liberalization policies in the countryside, agricul-
tural land reforms emerged from a bottom-up
social movement (Kelliher 1992; Zhou 1996).
Early efforts to silently reprivatize collective pro-
duction date back to the early 1950s (Zhou 1996)
and gained momentum during the Cultural Revo-
lution (1966–76), when private actors, with either
active local state support or silent acquiescence,
brought increasing shares of land under house-
hold production (Kelliher 1992; Zhou 1996;
Dikötter 2016). Well into the second half of the
Cultural Revolution, these local episodes of col-
lective action were still short-lived and repeatedly
suppressed as capitalist reactionary behavior.
However, after Lin Biao’s death in 1971, a weak-
ened 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 prag-
matism 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
S. Opper
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 fam-
ily farming and eager to abandon the institutional
rules of collectivism. When the central govern-
ment finally endorsed these spontaneous land
relocations in 1982–83 and officially dissolved
China’s people’s communes, de facto decollecti-
vization was moving forward and, in some
provinces, had even been completed (Kelliher
1992; Dikötter 2016).
The social-movement-like spread of land relo-
cation 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 mod-
est savings, which they invested in sideline pro-
duction. 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 ideo-
logically 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 prop-
erty rights were not in place, while the state
continued to prioritize state-owned and state-
controlled 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
12 Economic Change from an Institutional Perspective
Property Rights Law in 2007 (China Statistical
Bureau 2008). The bottom-up movement of insti-
tutional and organizational change followed a
simple pattern (Nee and Opper 2012; see specifi-
cally Chaps. 2 and 4). First, the gradual liberal-
ization 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 busi-
ness 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 Wood-
ruff 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 persis-
tent. 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 grass-
roots 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
181
the risk of experimenting with novel, partly ille-
gal, 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 tempo-
rarily 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 much-
needed 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 self-
undermining (Greif 2006).
Once labor migrated from agricultural to
non-agricultural production, the same develop-
ment of a private firm economy gained momen-
tum (for details, see Nee and Opper 2012). First,
the draw of changing careers was high, as agri-
cultural household income remained low and
alternative employment channels were unavail-
able, 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 proxim-
ity 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
182
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 econ-
omy 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 tempo-
rary 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 spe-
cific challenges. A closer look at China’s econ-
omy is instructive (see Naughton 2007): the
government allowed entrepreneurs to register pri-
vate, rural firms as early as 1987; yet formal
private property protection was not in place until
2007. Product markets were liberalized, but capi-
tal, 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. State-
owned 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 major-
ity 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
S. Opper
arrangements (Rodrik 2008), responding to an
environment, blending institutions of the old and
new systems. A good example is China’s post-
reform, rural industrialization, which relied
heavily on the formation of so-called township-
village enterprises (TVEs). Formally, these were
collective firms. Some portion of these were actu-
ally owned and managed by local townships or
villages (Walder 1995; Peng 2001). Another sub-
stantial share of these firms were de facto private
firms, called red-hat firms, which sought to
secure formal protection from political discrimi-
nation 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 sig-
nal 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 manage-
ment 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, underinvest-
ment, and managerial slack should have followed.
Yet the TVEs of the 1980s and 1990s grew rap-
idly and became the main provider of non-state
employment in rural China. Between 1978 and
2005 total employment increased from 28.3 mil-
lion 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 flex-
ibly 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 house-
hold farming. While state-owned enterprises were
still burdened by lifelong employment guarantees
and social costs, TVEs could rely on local
12 Economic Change from an Institutional Perspective
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 suffi-
cient 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 community-
operated 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 misman-
agement (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 state-
owned 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 produc-
tivity 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
183
privatization and reorganization of TVEs was
certainly costly. Yet as Xu et al. (2014) convinc-
ingly 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 iden-
tity overlap with the old system of state-owned
enterprise production to be perceived as legiti-
mate. 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 legit-
imacy 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 rural-
urban 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 employ-
ment 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 legiti-
macy 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 orga-
nization 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 den-
sity 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 pri-
vate firms, the higher the exit rate of TVEs.
184
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 lower-
level government officials more leeway to partic-
ipate in crafting the new business environment
than initially intended.
3 Social Context Matters
Though the above examples of bottom-up institu-
tional innovation and emergence of second-best
institutions are encouraging, both are context
dependent. Many economies have never
witnessed comparable forms of dynamic institu-
tional change leading to robust economic growth.
As with best-practice institutions, the rise of alter-
native 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 contingen-
cies. I will intentionally leave aside the often-
discussed 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 contin-
gencies, which only recently entered the analysis
of institutional change. In fact, as Beckert (2010b,
S. Opper
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 preserva-
tion 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 follow-
ing 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 busi-
ness 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 applica-
ble 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 government-
controlled resources and substitute for various
safeguard mechanisms, typically provided by for-
mal 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
12 Economic Change from an Institutional Perspective
social support from like-minded actors, institu-
tional 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 accommodat-
ing 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 institu-
tional innovation. Overly closed networks, with
few contacts outside of the social group, may be
well-positioned for building trust and coopera-
tion, 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 envi-
ronment 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 propor-
tion 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
185
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 quanti-
tative evidence. Burt and Burzynska (2017) ana-
lytically 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 clos-
est 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 collec-
tion. Those who continued to rely on their initial
cocoon tended to perform worse.
Besides the importance of the network struc-
ture around the individual entrepreneur for busi-
ness 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,
186
measured as the relative importance of the stron-
gest 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 ear-
lier study, the results support the idea that local
social interactions, homogeneity, and enforceable
trust foster the diffusion of innovative organiza-
tional 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 inef-
fective (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 opportu-
nity 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 adop-
tion of institutions, and the persistence of ineffi-
cient institutions. In a related argument, Meyer
S. Opper
and Rowan’s (1977) earlier work on organiza-
tional forms discusses the impact of rationalized
myths and taken-for-granted scripts on the desir-
ability of distinct institutional and organizational
forms. The limiting role of culture is also reflected
in North’s (2005) later work, which shifted atten-
tion to the importance of belief systems and cog-
nition in explaining institutional development
pathways. If anything, the policy recommenda-
tion 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 intersoci-
ety institutional transfers. Swidler’s (1986) cul-
tural 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 fash-
ion, Rao and Giorgi (2006, 273) define cultural
logics as “the socially constructed, historical pat-
tern 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 institu-
tional 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,
12 Economic Change from an Institutional Perspective
institutional innovations are inconsistent with
local beliefs and cultural logics, institutional
reforms are likely to be stalled or rendered inef-
fective. However, this is not an automatic pro-
cess. 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, natu-
rally deploy local knowledge and available cul-
tural 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 social-
ist production, institutional entrepreneurs intui-
tively returned to preexisting forms of doing
business that facilitate broader social acceptance
and help turn local innovation into a social-
movement-like dynamic. In doing so, innovators
did not stop at replacing collective forms of farm-
ing and production with simple forms of small-
scale 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 long-
established, 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
187
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 suffi-
cient 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 dra-
matically changed how we think about institu-
tional 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 produc-
tive complements to top-down reforms. Third,
second-best institutions have a place in reform
strategies, especially if they induce further insti-
tutional change, as private and state actors search
for more efficient solutions. None of these pro-
cesses is sufficiently captured without under-
standing 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
188
know enough about the interplay between institu-
tional 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 disciplin-
ary 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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190
Sonja Opper is professor at the Department of Manage-
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S. Opper
Connection and Disconnection: Still a Success Factor for
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 Financial Services Governance
in the European Union (EU)
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 rule-
making 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: lucia.quaglia@unibo.it
# 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_13
13
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 regula-
tion, to a large extent. Moreover, the European
Commission is in charge of monitoring the imple-
mentation 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 gov-
ernance 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 reg-
ulatory 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
191
192
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 finan-
cial 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 intergovern-
mental 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 Bank-
ing 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 integra-
tion prior to the crisis (Posner 2005; Jabko 2006).
L. Quaglia
These accounts have emphasized the role of the
Commission in the making of financial regula-
tion, 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 sover-
eign 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 lob-
bying. 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 them-
selves (Baker 2010; Bell and Hindmoor
2015a, b, 2016). In the aftermath of the interna-
tional 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 regu-
lation emerged internationally and in the main
jurisdictions, including Europe. In the EU, regu-
latory 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
13 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 market-
making coalition, led by the UK, also included
Ireland and the Nordic countries. The market-
shaping 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 regu-
latory 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 capital-
ism, 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 intergov-
ernmental 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 transna-
tional forces in the financial industry. Finally, for
the ideational approach, the most powerful actors
are those who manage to articulate the most per-
suasive, however, not necessarily the best ideas,
whether national governments, bureaucrats, or
private financial actors.
193
3 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 sig-
nificant 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 particu-
lar, payment services, and the clearing and settle-
ment 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,
194
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 Com-
mission 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 regula-
tion prior to the crisis, the UK (Posner and Véron
2010) and the most competitive part of the finan-
cial 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 exper-
tise, and were regarded as providing state-of-the-
art 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
L. Quaglia
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 Interna-
tional 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 man-
agement. All in all, the new rules increased the
proportion of capital that had to be of proven loss-
absorbing capacity, (i.e., core tier one equity cap-
ital), 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 environ-
ment. 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
13 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 min-
imum 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 liquid-
ity coverage ratio and a leverage ratio, subject to
supervisory review. The use of a regulation,
which, once approved, would be directly applica-
ble 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 Commis-
sion 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 mem-
ber 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 distin-
guished between powers of prevention, early
intervention, and resolution that regulators were
195
given. In the case of prevention, banks were
required to draw up recovery plans, and resolu-
tion authorities were required to prepare resolu-
tion 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 frame-
work 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. Res-
olution 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 reso-
lution funding, which would raise contributions
from banks. These contributions would be pro-
portionate 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 man-
age its disbursal, but the absence of a single
European banking supervisor and insolvency
regime would make this unworkable at that
196
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 auto-
matically required to split their lending operations
from risky trading activities. Reportedly, this soft-
ening of the proposal was ascribed to the lobby-
ing 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 hold-
ing 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 regula-
tion had already been addressed by other regu-
latory 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 Organi-
zation 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 inter-
national financial crisis. After the crisis, the Reg-
ulation 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 Author-
ity (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.
13 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 author-
ity 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 per-
mitted 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 sol-
vency 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.
197
The reporting of all transactions would be man-
datory and would provide supervisory authorities
with the full picture of these markets.
EMIR was considered a critical piece of legis-
lation 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 direc-
tive, 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 sup-
port from Germany and France. The British gov-
ernment 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 over-
sight 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 Com-
munity 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
198
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 Parlia-
ment 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 macro-
prudential 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 Occupa-
tional 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 Commis-
sion, and the President of the ECB presented an
interim report titled, Towards a Genuine Eco-
nomic 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
L. Quaglia
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 compe-
tent 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 transfer-
ring 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 Mecha-
nism (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 Resolu-
tion Fund (SRF) financed by bank levies, which
were raised at the national level. The Commis-
sion, 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 reso-
lution tools. However, German policy-makers
argued that the Single Resolution Board (SRB)
should be given this power, and insisted on
13 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 agree-
ment 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 intergovern-
mental, partly supranational character. The Regu-
lation 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 instru-
ment in bank resolution, the bail-in, which sub-
stantially reduced the need for public funding to
bail out banks (Nielsen and Smeets 2017). Thus,
the SRM would be fiscally neutral. The instru-
ment of the bail-in was to enable banks to with-
stand financial stress by imposing losses on
creditors (bail-in), without resorting to state-
funded 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 Com-
mission had prepared a draft proposing a new
agency, the European Deposit Insurance and Res-
olution Authority (EDIRA), which would control
a new European Deposit Guarantee and Resolu-
tion Fund. Due to German opposition, the pro-
posal for the EDIRA was removed and the final
Commission document A Roadmap Towards
Banking Union was released. Thus, the final
199
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 unaccept-
able 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 compo-
nent 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 cre-
ation 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 intergov-
ernmental 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 una-
nimity, German policy-makers enjoyed a veto on
any decision to engage in direct bank recapitali-
zation. Under the rules established for the direct
200
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). Subse-
quently, 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 com-
mon fiscal backstop was established, albeit prog-
ress 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 decision-
making, and the allocation of costs via risk-
sharing 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 Capi-
tal 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 inter-
ested parties were invited. At that stage, the Capi-
tal 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 pol-
icy entrepreneur in the Capital Markets Union
(Quaglia and Howarth 2018), which was enthusi-
astically supported by the UK. Those member
states with the most well-developed and
diversified financial sectors, including Ireland,
the Netherlands, Sweden, and Luxembourg
13 Financial Services Governance in the European Union (EU)
joined the UK. These member states unequivo-
cally supported the market liberalization agenda
in the Capital Markets Union. The main continen-
tal countries, notably France and Germany,
expressed their reservations concerning the Capi-
tal Markets Union and so did some of their home
country players, (e.g., domestic banks and invest-
ment firms). Instead, the most competitive parts
of the financial industry, the main transnational
players, such as large banks engaged in securiti-
zation, 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, pri-
vate 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 comple-
ment the Banking Union, and ultimately, to
complete EMU, even though the Capital
Markets Union involved all twenty-eight mem-
ber 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 proj-
ect 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.
201
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 gov-
ernance 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 gov-
ernance in the EU, focusing mainly on the
reforms enacted following the international finan-
cial 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 cer-
tain financial services more than others. However,
taken together, this multitude of incremental
changes amounted to a considerable reform of
financial services governance post-crisis.
202 L. Quaglia

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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 14
Insights in the Context of Institutional
Transformation

Alberto Veira-Ramos and Tetiana Liubyva

1 Introduction: General Attitudes category of respondents that increased the most

Towards Capitalism between 1994 and 2016 is those who support
and Socialism in Ukraine neither socialism nor capitalism (from 20% to
32%). Support for socialism remains relevant
In 2020, almost three decades after independence, but is decreasing in significance (from 22% to
six different presidents have been elected by 14%).
the Ukrainian people in free elections. Several These trends suggest that reforms approved to
governments have been in charge of adapt the Ukrainian economy to a free market
implementing reforms and several constitutional environment did not contribute much to increas-
reforms were approved. The geopolitical direc- ing support for capitalism among the Ukrainian
tion of Ukraine as a nation has changed dramati- population over the past decades. Since support
cally more than once. Such intense sociopolitical for Soviet past has not gained ground either,
history, contrasts with an apparently slow process many Ukrainians are found in an ideological no
of transformation of the Ukrainian economy and man’s land.
institutions, as well as the reluctance of a decreas- This anomy is also observed when Ukrainians
ing, though still significant part of the population give their opinions on how much they feel aligned
to embrace the institutional arrangements with different political movements. According to
associated with liberal democracies and free mar- Fig. 14.2, most Ukrainians do not identify with
ket values. any political movement. Answers such as “I do
Data from the Ukrainian Society Survey sug- not understand these trends,” “I have not decided
gest that many Ukrainians still hold an ambiva- yet” or “None” represent almost 60% of the
lent attitude towards capitalism. Figure 14.1 interviewed population in 2018. However, a
shows that at least 13% to 14% of respondents more subtle distinction between communism,
support such an economic system. Almost a quar- socialism and social-democracy reveals a clear
ter (23–24%) declare to support capitalism, as trend toward decreasing support for communism
much as socialism (to avoid a conflict). Yet the and increasing support for social-democracy. The
other political movement that is recognized by a
growing number of respondents is the national-
A. Veira-Ramos (*)
democratic movement. It seems that political
Carlos III University of Madrid, Madrid, Spain
e-mail: alberto.veira@uc3m.es movements that are classics in Western Europe
are not necessarily those that will be adopted by
T. Liubyva
Institute of Sociology of National Academy of Sciences of most Ukrainians as the main vectors of their
Ukraine, Kyiv, Ukraine political self-reference.
# Springer Nature Switzerland AG 2021 205
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
206 A. Veira-Ramos and T. Liubyva

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 I support Other Hard to tell
proponents of proponents of of them to neither
socialism capitalism avoid conflict

1994 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 2018
Fig. 14.2 Within the political spectrum, there are several that you most support. Source: Ukrainian Society Survey.
partially independent political movements. The following Author’s Calculations
list gives several such movements. Please choose the one
14 Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights. . . 207

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 col-
lapse 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 crimi-
nal 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 chap-
ter 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 Trust Verkhovna Rada

1994 2018

Fig. 14.3 How much do you trust . . .? Source: Ukrainian Society Survey. Author’s Calculations
208
Social groups shaping the Ukrainian state according to
respondents to the Ukrainian Society survey
50%
40%
30%
20%
10%
0%
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, lead-
ing 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 micro-
institutional perspective corrects the former,
indicating that individual evaluations of institu-
tional performance are conditioned by personal
preferences and experiences. In this chapter we
use this theoretical framework to study the evolu-
tion of positive attitudes towards private entre-
preneurship or towards the return to a planned
economy. Unlike trust in political institutions,
attitudes of Ukrainians towards these different
A. Veira-Ramos and T. Liubyva
Workers
Peasants
Inteligentsia
Entrepreneurs/Bussines men
Managers of state enterprises
Leaders of political parties
Military
Police/Security personnel
Judges/Prosecutor
Mafias and criminal elements
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 question-
naire consists of two parts: the monitoring section
(core questions) and the rotating section.
Indicators relate to the following topics: eco-
nomic situation, political situation, legal aware-
ness and social protest, social ethics, conflicts and
trust, interethnic relations, language and religion,
social well-being and public moods, health and
14 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 com-
munication, and social change.
The sample size of each survey amounts to
1800 respondents representing the adult popula-
tion 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 self-
administered 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 dur-
ing 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 government-
controlled territories of Donetsk and Luhansk
1
See https://www.msp.gov.ua/news/16745.html.
2
For more information see http://iom.org.ua/sites/default/
files/nms_round_9_ukr_press.pdf.
209
regions invited these friends or relatives to live
with them in the same settlement. Thus, the sur-
vey 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 fol-
lowing 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
210 A. Veira-Ramos and T. Liubyva

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 2006 2008 2010 2012 2014

No Probably no Difficult to say Probably yes Yes

Fig. 14.6 Would you like to start your own business? Source: Ukrainian Society Survey. Author’s Calculations
14 Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights. . . 211

Table 14.1 Respondents declaring to be in favor of the development of private business (%)
Social groups 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Primary education 29.8 29.5 27.5 32.5 30.0 29.3 39.0 38.1 37.3 38.0 46.2
Secondary 50.1 52.0 53.5 61.3 52.4 53.0 58.4 53.1 57.9 52.1 59.8
Vocational 50.1 56.7 54.1 62.3 60.1 59.8 58.8 58.5 57.1 55.3 60.7
University 59.0 64.2 67.9 74.9 73.0 67.1 68.3 65.6 71.9 69.5 68.5
Employed in public sector 45.7 47.9 44.9 55.3 51.1 53.6 56.9 55.7 54.5 50.3 62.3
In private sector 73.6 68.8 72.0 74.3 66.8 60.3 71.2 66.3 64.0 62.7 69.0
In both sectors 56.3 68.8 75.0 76.9 57.1 37.9 56.3 71.7 80.0 61.4 68.3
Not employed 35.8 39.0 38.1 44.0 38.8 37.3 47.8 45.8 47.5 45.7 54.3
Life depends more on myself 51.7 57.1 63.6 67.7 54.4 54.9 67.3 59.0 60.0 56.2 68.6
The same on me and on external 52.6 55.0 57.7 61.3 58.4 58.7 62.2 63.8 57.9 57.4 65.6
conditions
More on external conditions 38.2 39.3 38.2 44.6 40.7 37.0 48.4 48.3 49.6 48.1 54.8
Poor (not enough for food) 29.5 23.9 49.4 32.4 32.7 35.4 56.9
Enough for food only 42.5 42.4 45.1 44.2 49.8 45.3 54.0
Enough for meagre living 60.0 51.3 62.0 61.7 57.9 58.6 65.2
Enough for all necessities 63.6 63.6 68.6 64.3 61.3 58.7 66.9
Enough for savings 75.6 56.3 70.6 66.2 66.2 78.4 74.7
Lives in a village 39.8 39.5 46.5 45.8 44.2 46.8 56.8
Town up to 250,000 52.5 50.4 61.1 57.4 58.4 50.5 58.6
City 250,000 to 500,000 48.8 48.9 58.0 64.5 55.4 53.2 57.7
City over 500,000 57.0 53.4 63.2 58.5 63.3 63.9 73.3
Employer 80.8 60.7 77.4 72.7 68.2 72.4
Self-employed 56.5 67.3 69.5 76.3 69.0 70.1
Employee 56.0 53.6 64.2 59.2 59.2 66.3
Unemployed 37.3 47.4 47.5 45.0 54.3
Hard to tell 47.1 48.3 57.4 43.2 55.9
Total 43.8 46.2 45.4 52.3 48.3 47.1 56.4 55.4 54.5 52.6 61.5
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 devel-
opment of private business is very clear. If
approval rates did not increase more pro-
nouncedly, 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 dif-
ferent 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 describ-
ing 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 develop-
ment of private business. Similarly, we also com-
bined 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,
212 A. Veira-Ramos and T. Liubyva

Table 14.2 Respondents that would like to start their own business (%)
Social groups 2004 2006 2008 2010 2012 2014
Primary education 22.6 25.0 24.1 28.5 28.5 37.5
Secondary 51.4 51.6 46.4 54.6 48.9 47.0
Vocational 50.7 49.3 51.0 55.0 48.1 50.8
University 56.0 55.2 56.7 63.5 57.8 57.8
Employed in public sector 43.5 44.3 43.8 48.2 41.8 45.1
In private sector 62.9 68.5 63.4 65.7 60.7 68.0
In both sectors 34.5 47.6 62.0 65.0 52.3 78.6
Not employed 29.8 33.3 33.2 38.7 35.6 36.9
Life depends more on myself 53.8 57.3 58.1 61.5 56.7 56.9
The same on me and on external conditions 50.1 50.5 50.7 48.5 49.5 55.3
More on external conditions 30.7 37.7 37.3 44.0 38.3 44.0
Poor (not enough for food) 22.6 39.5 27.9 37.8 36.6 51.4
Enough for food only 34.7 37.7 34.4 41.1 38.1 44.2
Enough for meagre living 43.4 48.6 47.3 52.0 50.4 51.0
Enough for all necessities 62.7 51.9 60.4 60.1 52.7 57.5
Enough for savings 68.1 67.1 68.8 72.7 58.8 68.4
Lives in a village 36.3 40.1 38.5 38.4 39.6 48.1
Town up to 250,000 42.5 46.3 47.9 53.8 47.2 50.1
City 250,000 to 500,000 44.9 47.5 56.6 58.9 43.6 43.5
City over 500,000 45.3 51.8 45.9 51.4 53.5 57.5
Employer 78.6 80.6 85.3 63.6 65.5 62.5
Self-employed 74.3 74.1 84.0 82.4 74.8 62.5
Employee 48.6 53.8 54.6 51.2 58.3 47.4
Unemployed 29.1 33.2 39.0 35.9 36.9 32.7
Hard to tell 34.3 41.3 57.4 38.3 50.0 51.6
Total 41.4 45.6 45.9 49.3 45.7 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 pos-
itive 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 sup-
port to private business. Data shown in
Table 14.2, concerning willingness to start a busi-
ness 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 evi-
dence 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 Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights. . . 213

Table 14.3 Respondents declaring to be in favor of a return to planned economy (%)

Social groups 2002 2004 2006 2008 2010 2012 2014 2016
Primary education 40.2 40.8 36.3 38.4 36.6 43.9 28.8 20.7
Secondary 25.2 30.3 31.3 34.1 31.3 33.0 29.5 29.7
Vocational 25.5 23.9 32.2 27.1 33.6 34.2 27.7 28.2
University 16.0 19.2 21.6 22.5 22.0 22.1 21.2 22.0
In public sector 26.8 29.2 27.9 26.6 31.9 35.8 27.9
In private sector 16.9 21.5 20.0 23.9 25.3 26.8 19.8
In both sectors 16.3 27.6 30.5 12.2 20.5 18.2 22.0
Not employed 37.2 38.6 37.0 35.7 36.4 39.3 31.7
Life depends more on myself 26.3 27.4 24.7 28.8 25.7 29.3 27.6 21.8
The same on me and on external conditions 21.8 21.9 22.4 22.2 28.9 31.9 19.0 21.3
More on external conditions 34.5 39.6 37.3 33.8 36.7 37.3 30.9 30.1
Poor (not enough for food) 45.2 57.2 41.8 38.2 37.8 53.0 31.1 36.6
Enough for food only 32.1 34.7 38.8 39.9 37.6 37.8 28.0 28.8
Enough for meagre living 19.6 25.7 24.3 22.8 27.9 29.7 25.7 21.8
Enough for all necessities 22.5 24.8 24.0 23.6 29.7 28.6 27.0 23.4
Enough for savings 17.1 22.9 10.3 20.8 19.7 30.8 17.7 10.2
Village 30.1 36.6 31.1 31.9 34.6 37.0 27.4 33.5
Town up to 250,000 27.3 28.9 30.8 29.2 30.5 35.2 28.1 24.0
City 250,000 to 500,000 31.7 34.0 29.6 27.0 29.1 31.0 28.0 29.2
City over 500,000 27.8 26.3 27.8 26.9 31.9 30.0 22.1 26.1
Employer 3.8 14.3 23.3 12.1 18.2 24.1 18.8
Self-employed 29.2 16.8 21.5 25.5 26.7 26.2 21.3
Employee 22.9 26.0 23.6 28.4 29.2 21.5 21.9
Unemployed 39.0 37.4 36.6 39.7 31.7 31.1
Hard to tell 41.4 33.3 25.9 34.8 33.3 19.4
Total 29.4 31.8 30.1 29.1 31.9 34.0 26.6 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 adult-
hood. Indeed, attitudes of respondents of different
birth cohorts, shown in Figs. 14.7 and 14.8, indi-
cate that there was an important generational gap,
as one would expect from a micro-cultural per-
spective. The younger generations showed signif-
icantly 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 pri-
vate 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
214 A. Veira-Ramos and T. Liubyva

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 2014

1900-1945 1946-1959 1960-1969

1970-1979 1980-1989 1990-2000

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 develop-
ment 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 sup-
port 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 institu-
tional 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 entre-
preneurship grew among the social groups which
were initially less favorable towards private entre-
preneurship. 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. More-
over, generational divide seemed to decrease
amongst the three youngest generations while
remaining salient compared to the oldest ones.
215
3.2 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 econ-
omy?” 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 accep-
tance 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 sec-
tor, 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 interme-
diate values.
These apparently puzzling results, in principle
inconsistent with the trend towards higher accep-
tance 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
216 A. Veira-Ramos and T. Liubyva

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 with higher expectations, who had higher educa-
those social groups which were more favorable to tional degrees.
the development of private business. In contrast,
support for a return to a planned economy
3.2.1 The Generational Divide
decreased sharply amongst all social groups
Plotting answers to this item by birth cohort, we
which were initially more favorable to this option:
observe the importance of the generational divide
the unemployed, more poorly educated and with
in Fig. 14.10. As expected, (see also Brik and
lower financial status.
Shestakovskyi 2020) older generations,
Combining these results with those from pre-
socialized under the Soviet regime were more
vious tables, one might infer that two processes
inclined to support the return to planned economy
were underway. On the one hand, privileged
than the younger ones were. The evolution over
groups were experiencing some disenchantment
time reflects trends towards convergence until
with the pace at which economic improvement
2014. Salient ups and downs can be partly
was developing in Ukraine, thus, shattering their
explained by sociopolitical events. Events like
expectations and causing some to lean towards
the Orange Revolution of 2004 conceded conver-
support of a strong government. On the other
gence towards lower acceptance to planned econ-
hand, socialization with new values and beliefs,
omy. The return of pro-Russian candidate, Viktor
characteristics of the new institutional
Yanukovich, to power in 2010 provoked
arrangements, were affecting the opinion of
increasing polarization between cohorts. Events
those less privileged and, in principle, more nos-
which occurred during 2014 (Euromaidan)
talgic of the former political regime. In other
again triggered a convergence towards decreas-
words, timid improvements of the standard of
ing support for a planned economy, but after two
living were perceived with less disenchantment
years differences between the cohorts widened
amongst the less privileged than amongst those
again.
14 Attitudes Towards Free Market and Socialism in Ukraine: Empirical Insights. . . 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 2016 2017

1900-1945 1946-1959 1960-1969

1970-1979 1980-1989 1990-2000
Fig. 14.10 Evolution of support to a planned economy by birth cohort. Source: Ukrainian Society Survey. Author’s
Calculations

argue that the lack of improvement of governance

4 Concluding Remarks
performance with democratic institutions
explained the slow decrease of negative attitudes
The data analyzed can hardly be used as evidence
towards private entrepreneurship and the persis-
in support of macro-cultural theories because
tent positive attitudes towards a return to a
there are significant differences within Ukrainian
planned economy, particularly amongst the older
society related to attitudes towards planned econ-
cohorts.
omy and private entrepreneurship. Despite com-
Differences observed between social groups
mon cultural background, significant differences
based on birth cohort, educational attainment,
are observed between various social groups in
financial status, employment situation, place of
their level of support towards the development
residence or locus control are better explained
of private business, or the return to a planned
by micro-cultural and micro-institutional theories.
economy.
From a micro-cultural approach, the differences
Concerning the validity of the macro-
between generations in their attitudes towards
institutional approaches, salient and persistent
private entrepreneurship and planned economy
differences between social groups in their
can be attributed to different socialization pro-
attitudes towards private entrepreneurship and
cesses that individuals went through in their
planned economy do not correspond with the
early lives. The persistence of such generational
observed, almost unanimous, low trust in political
divides can be seen as solid evidence in support of
institutions or the widespread negative evaluation
this perspective, particularly when changes
of aggregate government performance (Veira-
towards higher acceptance of private entre-
Ramos and Golovakha 2020). According to the
preneurship and decreased support for a return
macro-institutional approach, only improved
to planned economy were observed amongst
institutional performance can override low trust
social groups which initially displayed the most
inherited from past deceptive experiences and
negative attitudes to the former and the most
socialization. From this perspective one could
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 capital-
ism 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 differ-
ent 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, genera-
tional 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 per-
haps 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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privatization and the shadow of communism:
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Kyiv: Institute of Sociology of the National Academy
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219
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. Out-
comes 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.
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.
 Alternative Food Networks
and the Socialization of Food
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 fea-
ture 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 reflex-
ive consumers, and even proactive consumers in
contested markets, (e.g., tobacco, genetics, adver-
tising), 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
# 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
15
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 encom-
pass: (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, circula-
tion, 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 agro-
food 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 con-
ceptual framework, came into the field to distin-
guish food networks connecting territories,
products, and people as identities, which claimed
to be alternatives to conventional food provision-
ing systems or alternatives to dominant food sup-
ply chains. The conceptual boundaries of
alternativeness and localness are vague and con-
troversial. Since the 1990s, a growing body of
research directed towards these so-called
221
222
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 orga-
nization, 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 agri-
culture, 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. Neverthe-
less, 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 alter-
native 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 conventionaliza-
tion of alternatives, and the nested markets the-
ory. 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 devel-
opment 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 behav-
ior; 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
15 Alternative Food Networks and the Socialization of Food
rapidly developed including ready-made foods,
the catering industry, nutrition advisors, and all
the services regarding standard setting and infor-
mation technologies. Since the 1990s this market-
ing logic along with the social transformation of
modes of life contributed to reshape food sociali-
zation, 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 capi-
talist world economy, and in the trajectory of the
state system” (1989, 93). They proposed this con-
cept to “link international relations of food pro-
duction 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 corpo-
rate (McMichael 2009), but also as neoliberal
(Burch and Lawrence 2009) or corporate-envi-
ronmental (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 transna-
tional 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 agricul-
tural 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 capi-
talism” 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.
224
2.2 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 ser-
vice economy was not the point which was most
studied in the context of the quality turn. This
shift has included the development of new inter-
mediary 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 corpo-
rate control. This turn relates to all current forms
of institutional restructuring of markets that mobi-
lize 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 procure-
ment contracts. In Europe, for example, an inven-
tory 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 alterna-
tive practices” (ibid.).
G. Allaire
Product designs are debated and negotiated
among various types of actors, private or govern-
mental, 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) pro-
posed 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, econom-
ically, 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 equita-
ble and sustainable food systems, AFNs were
considered as social re-stratification of consump-
tion (Verhaegen 2012).
According to Forssell and Lankoski, the liter-
ature 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
15 Alternative Food Networks and the Socialization of Food
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 proj-
ect, specified by a public label and certification
procedures. The development of accredited certi-
fication 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 existen-
tial threat is part of the organic movement iden-
tity. 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
225
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 par-
ticular in the South. This extension of GI-related
initiatives introduced new concerns for the imple-
mentation 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 community-
based box schemes and local supermarkets.
1
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 Prop-
erty Rights) Agreement is Annex 1C of the Agreement
establishing the World Trade Organization, signed in
Marrakesh, Morocco on 15 April 1994.
226
Conventionalization arises from the upscaling
of alternative markets, and the recognition of
AFNs in rural policies. Conventionalization the-
sis 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 increas-
ingly responded to the squeeze on agricultural
prices and to their instability, due to liberalization
by the development of multifunctional farms pro-
ducing a range of new products and services such
as agro-tourism, landscape management (envi-
ronmental 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 con-
text 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 com-
mon 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 agri-
cultural sectors. They do not only aim to strengthen
agricultural growth. Instead they aim at redefining
G. Allaire
the role of agriculture in society” (van der Ploeg
et al. 2012, 136–37).
It was not always acknowledged that the pro-
duction 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 com-
pose a highly heterogeneous whole that is cur-
rently 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 disso-
ciation and the nesting of these particular
markets.
Van der Ploeg also states that, “two strategic
factors underlie the development and mainte-
nance of these nested markets: the distinctiveness
of the circulating products and services and the
common-pool nature of the key resources that
15 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, wher-
ever 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).
227
the global food market is cracked as a dry land-
scape. While food systems, whatever their scale,
are subject to an overarching set of requirements
and rules, bypasses are always experienced, espe-
cially 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 inter-
national 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 mar-
ket channeled by supermarkets. Both are
connected to a local demand constituted by peo-
ple rejecting western supermarkets. One channels
the local production by exploiting a social-
material 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 conven-
tionalization, 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
228
multiplying private (collective) labels; and by
radical change of the certification system, (Partic-
ipatory 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 under-
cut 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 (quan-
tity and price objectives). We will consider com-
petition 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 com-
petition. They can be distinguished according to
historical periods, economic areas, branches, and
industries, and according to particular market
domains.
3.1 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 institu-
tional conditions for the functioning of markets;
working rules in place allow new markets to
G. Allaire
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 mar-
ket 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 orga-
nization 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 con-
trol 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).
4
Fligstein did not refer explicitly to the concept of con-
vention. 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).
15 Alternative Food Networks and the Socialization of Food
Fligstein used “a social movement metaphor to
characterize action in markets during market cre-
ation or crisis” (1996, 657). When markets
emerge or transform, the action in the market
setting is to promote and obtain collective adhe-
sion on ideas, as in political struggles. Market
struggles regarding conceptions of control
involve social movements across value chains.
Beyond chain specific technical, social, and eco-
logical debates, (e.g., the Round tables for sus-
tainable standards in several sectors as soya, palm
oil, cocoa, forest, establishing the design of
standards and communication models), the qual-
ity 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 strug-
gle 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 multi-
ple divisions in the organization” (ibid., 659).
Diversification implies creating or entering new
markets to increase the probability of firm sur-
vival; 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 eco-
nomic 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.
229
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 col-
lective 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 spe-
cific 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 sec-
toral 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 spe-
cific systems can be categorized as AFNs and
regional competition regimes which support
them as nested market immaterial infrastructures.
These systems are confronted with conventional-
ization, 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 intangi-
ble. Regional innovation strategies, business
230
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 compe-
tition regimes are interactive; the global institu-
tional 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 pro-
cesses, namely governance structures and collec-
tive 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 pro-
ductive models, innovation supports, and collec-
tive 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 empir-
ical 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 col-
lective 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
G. Allaire
governance structure can paralyze individual ini-
tiative. 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 proj-
ect. A written standard does not have a significa-
tion 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 pow-
erful forces. Quality relates to a proper institu-
tional sphere, controlling the rules of exchange.
As markets, qualities are social constructions. In
one aspect quality standards spread as institu-
tional responses to accountability issues, in com-
peting 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 inte-
gration of knowledge. Qualification refers to a
double differentiation of goods: by ordering the
good properties and by the process of naming
15 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, func-
tional, or relational properties; (2) the quality as
having an essential nature or identity. In these
two ways, the potentially infinite manners of see-
ing 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 valu-
able 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 decompos-
able 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 knowl-
edge. A first solution was to isolate the source by
labelling the origin of the animals. However,
because a polemic developed over the causes
231
and the means of transmission of the disease,
that solution did not work. When tests became
available, due to state action, the material organi-
zation 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 eco-
nomics for food quality signaling builds on a
distinction between search, experience, and cre-
dence 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 exam-
ple, 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 cho-
sen, 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 guar-
anty 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 pro-
fessional 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.
232
4.2 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 Taylor-
ism, 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 common-
pool-resources, property rights, and governance
instruments.
The stabilization of creeds in legitimated and
shared heuristics is a key aspect of the stabiliza-
tion of quality conventions. However, the
heuristics which sustain standards can fail
because the dynamics of markets make it impos-
sible 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
G. Allaire
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 certifica-
tion procedures generally are not sufficient to
respond to a quality crisis, which interrupts the
working of any standard. Food scares demon-
strate that the whole multi-scaled system of gov-
ernance, 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. Partici-
patory Guaranty Systems are becoming signifi-
cant 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 con-
strued as a shift away from an industrial market
regime (the modern strategies and policies for
food socialization), towards a media regime (neo-
liberal 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 agri-
culture and food processing. Several institutional
conditions were needed for the diffusion of
15 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 con-
ception 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 vari-
ous sorts of knowledge. This proposition to con-
sider 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 sup-
posed to make markets efficient. Recent financial
crises, developing after the 1990s, have
demonstrated that financial markets are not effi-
cient 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 evalua-
tion 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
233
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 social-
ization. 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 com-
mon 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 resis-
tance 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.
234
In the current market order, alongside domi-
nant 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.
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Gilles Allaire is directeur de recherches honoraire,
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109–35.
 Digital Money for Sustainable
Communities: The Sardex Case
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 trans-
lated 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
# 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_16
16
and used together with all other elements of digi-
tal 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 iden-
tity, 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 interac-
tion 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 polit-
ical 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
237
238
or the dollarization of South American countries
are clear examples of this tendency towards mon-
etary 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 comple-
mentary 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 cul-
tural, governmental, economic, social, and envi-
ronmental areas (Place and Bindewald 2015).
How do these tendencies towards money homo-
geneity and money differentiation change with
the advent of digital money?
With digital platforms and the digital econ-
omy, 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 opment of their region, through encouraging
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 tradi-
tional understanding of the cultural specific diver-
sification 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, redistribu-
tion, 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 exam-
ple, 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 chal-
lenge 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 devel-
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 particu-
lar, how Sardex money triggers specific social
mechanisms (selection, monitoring and sanction-
ing, 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 capac-
ity to create a we-ness and define a common goal.
The fourth section discusses how the Sardex
experience can be considered a form of transfor-
mative democratic experimentalism toward
sustainability, that relies on a theory of money
far from the traditional monetarism of contempo-
rary monetary policies. The limits and the
challenges posed by digital money are also
discussed, namely the risks of the techno-levia-
than 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 ser-
vice with about 55 employees. Credit is granted to
239
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 exam-
ple, (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 experi-
ence, 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 mem-
ber, 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 net-
work 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.
240
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 ana-
lytical purposes. At the same time, the concept of
community remains central in studies of globali-
zation, 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 net-
work 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).
G. Bazzani
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 imagina-
tive 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 com-
mon 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 com-
munity and will show how Sardex money
contributes to the creation of a new type of com-
munity, 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 recip-
rocal 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
16 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 dif-
ferent 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 dis-
persed 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 ideol-
ogy, 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 city-
states, 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 differ-
ent 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 communi-
tarian 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).
241
(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 (Cra-
ven 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
242
supply and demand of goods and services of a
new firm and its complementarity with the ongo-
ing 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 com-
petitive 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, espe-
cially for small quantities of supplies.
The Sardex network also has a system of mon-
itoring 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 effec-
tive 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 coopera-
tion (Ostrom et al. 1992; Sally 1995; Baldassarri
6 distrustful in commercial relations. The clan rela-
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.
G. Bazzani
2009, 2015). Given the rapid circulation of infor-
mation 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 effec-
tive that entrepreneurs report how, from the very
first meeting, the relationship with other members
is different. Joining the Sardex network immedi-
ately creates a sense of familiarity and closeness
among entrepreneurs, that is different from ordi-
nary 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 subse-
quently transformed with greater ease into friend-
lier 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
tionship 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
16 Digital Money for Sustainable Communities: The Sardex Case
network membership becomes a guarantee of reli-
ability, 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 fol-
lowing Sardex membership is 23% for the num-
ber 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 sub-
stitution effect of 13% of customers and 11% of revenues
of the total increase recorded (for details see Bazzani
2020a).
243
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 feel-
ing of not being alone and of having social sup-
port for their economic interactions. The next
sub-section presents how this diverse social inter-
action creates common goals, and a form of col-
lective 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 univer-
sal community of faith (Keller 2003). The reli-
gious 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 mon-
astery, individual efforts were also guided
towards collective goals (the salvation of lives
244
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 char-
acterize other members as trustworthy, desirous
of reciprocity in their transactions, and of foster-
ing the Sardex project. These beliefs, formed by
observing the behavior of others, are then used to
categorize the whole network of members in sim-
ilar terms (Rydgren 2009). Exchanges in Sardex
are perceived by entrepreneurs as fair and sup-
portive, 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 micro-
businesses 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 sys-
tem, 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 work-
ing, 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 asso-
ciate 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 (becom-
ing 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, tradition-
ally 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
16 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 mem-
bership of the Sardex network is not expected to
create opportunities for trade, (i.e., because it
belongs to a different economic sector), the pro-
motional activity engaged in by members towards
the new entry is more similar to a form of prose-
lytism 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 mem-
bership. 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. Nei-
ther his family, nor his business use the kinder-
garten or the toy shop, but he encouraged them
both, together with other companies, to join the
network. This entrepreneur believes that develop-
ing the Sardex network is intrinsically positive. In
the eyes of entrepreneurs such as these, the
regional economic system becomes a real collec-
tive good to which they believe they should dedi-
cate 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
245
will discuss to what extent this form of commu-
nity, aimed at a collective goal, can be considered
a sustainable community.
4 Money for (Un)Sustainable
Communities
Like community, the exact meaning of the con-
cept 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 dif-
ferent 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 partic-
ular. 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 soci-
ety 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
246
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 main-
stream 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
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 mon-
etary union and the euro (Emerson 1992). This mechanism
should bring, the building of a European identity and a real
G. Bazzani
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:
Reasoning in euros is mostly a reasoning of conve-
nience, 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 understand-
ing the world and managing money. It is an ethi-
cally 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).
While the euro is perceived as belonging to a
kind of impersonal global market, and regulated
by impersonal authorities, Sardex currency is per-
ceived as having clear collective goals connected
to the regional community. This type of commu-
nity supports the decrease in wealth inequality
political European integration as secondary effects. Unfor-
tunately, 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).
16 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 participa-
tion 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, tangi-
ble level is a clear merit of the Sardex function-
ing. However, other dimensions of sustainability
still remain uncovered. For example, while
with Sardex the community becomes more resil-
ient, 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 socio-
economic 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 col-
lective 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 com-
munity 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.
247
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 coordina-
tion 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 interna-
tional 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 free-
dom. 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 pay-
ment of social subsidies in the city of Sassari. In this
experiment, social subsidies could not be used, for exam-
ple, 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.
248
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 digi-
tal 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 collec-
tive action for the region’s socio-economic devel-
opment. The change in beliefs regarding how the
economic system functions gives rise to an
unusual interpretation of the link between eco-
nomic 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, sym-
bolic representation, or signifier of an underlying
existing ‘reality’ of economic relations. Rather, it
is a social relation based upon definite and partic-
ular 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 prob-
lem, 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
G. Bazzani
numbers” (ibid., 448).17 The possibility of mone-
tary 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 commu-
nity 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 coordina-
tion, 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
17
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).
16 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 under-
pin 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 investi-
gate money as a source of a specific form of social
ties. Digital money can influence social dynam-
ics; 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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 Groups Matter: Social Embeddedness
of Entrepreneurial Activity
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, eco-
nomic 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: isabell.stamm@tu-berlin.de
# 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_17
17
group that collectively engages in an entrepre-
neurial 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 sociol-
ogy (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 consider-
ation 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 entrepre-
neurial activity (Bruni et al. 2004; DeClercq and
Voronov 2009; McKeever et al. 2015). The other
possibility is that research on the social embed-
ding of entrepreneurial action focuses on, as the
comparative capitalism literature illustrates,
253
254
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 entrepre-
neurial 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 institu-
tional 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 dif-
ferent types of entrepreneurial activity in the same
economy. Hence, different varieties of entre-
preneurship 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 entrepre-
neurial activity as they form a distinct social unit,
beyond the organization. In contrast to
Granovetter’s (1995) use of the term entrepre-
neurial 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 emer-
gence 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 entre-
preneurship (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 selec-
tion and exclusion as maintained and protected by
the institutional environment. Finally, the discus-
sion 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 activ-
ity 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 dom-
inant stream of research within economic and
organization sociology. At the same time, the
sociological perspective on entrepreneurship has
continuously influenced the large and interdisci-
plinary research field of entrepreneurship
(Aldrich 2005, 452). The sociology of entre-
preneurship 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
17 Groups Matter: Social Embeddedness of Entrepreneurial Activity
ventures? Finally, how do entrepreneurial pro-
cesses vary across time and place? In the follow-
ing, 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 entre-
preneurship. 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 empir-
ical approaches to entrepreneurs (Swedberg
2000).
1
This section, hence, does not provide an encompassing
overview of the development of the sociology of entre-
preneurship (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).
255
Embracing a sociological perspective, how-
ever, these same early works voice an unease
about such a strong individualization of entre-
preneurship (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 distin-
guished 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 envi-
ronment, 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 dom-
inant 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
256
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 activ-
ity 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 entrepreneur-
ship, 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 organiza-
tional 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 entre-
preneurship 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 entre-
preneurship 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 Devel-
opment in the USA, or the Global Entrepreneur-
ship Monitor.
This stream of research provides insights into
demographics of entrepreneurship and its diver-
sity, as well as the complexity of the business-
founding 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 con-
vincing 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 con-
vince 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 emer-
gence 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, entrepreneur-
ship 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 resil-
ience whilst following through with the venture.
Within this stream of research, a recent develop-
ment 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 cre-
atively 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 entre-
preneurship. Johannisson (2011) argued that
entrepreneurs, as storytellers and communicators,
17 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 prac-
tical 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 fic-
tional expectations that convince others to pro-
vide 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 per-
spective 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 differ-
ent 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 (capi-
tal, 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
257
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 entrepre-
neurial 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 pur-
suing an entrepreneurial venture (Ruef 2010;
Klotz et al. 2014). Hence, in the process of entre-
preneurship 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 busi-
ness 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 entrepre-
neurial groups are often homogenous in many
aspects (gender, age, education, like-
mindedness), 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.
258
entrepreneurial groups do not suddenly disappear
after organizational emergence. They form dis-
tinct 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 under-
standing of entrepreneurial group dynamics
overcomes the equation of a venture with organi-
zational 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 collec-
tively 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 entrepre-
neurial 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 con-
cept of entrepreneurial groups more closely to a
sociological perspective on small groups
I. Stamm
(Schäfers 1999; Harrington and Fine 2006; Fine
2012b). From this vantage point, entrepreneurial
groups are “aggregations of persons who recog-
nize 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 pros-
pect 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. Mean-
ing 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 ideo-
culture (Fine 2012a, b). A solidified ideo-culture
creates boundaries, separating insiders from those
who stand outside the realm of collective knowl-
edge (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 sug-
gest 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 con-
ceptual 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
17 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 uncer-
tainty. 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 cer-
tain 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 entre-
preneurship 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.
259
minorities, and furthers trust within the commu-
nity. In the formation of an entrepreneurial group,
the position of being part of an immigrant minor-
ity can allow for ethnic ties to be seen as trust-
worthy 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 dis-
crimination, 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, entrepre-
neurial groups aggregate a small number of
individuals, who recognize that they constitute a
meaningful social unit through continued refer-
ence to their shared history, who interact on the
basis of negotiated roles and rules forming a
distinct ideo-culture, and who draft a shared pro-
spective 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
260
will depart from the example of ethnic entre-
preneurship 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: entrepre-
neurial families and start-up teams that co-exist
within the German economic system and corre-
spond to two very different sets of embedding.
4.1 The Entrepreneurial Family
in German Family Capitalism
In entrepreneurial families, as a form of entrepre-
neurial 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 imag-
ined 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, entrepre-
neurial 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 finan-
cial 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 pat-
tern does not only empower entrepreneurial
families within the organization, but makes their
I. Stamm
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 econ-
omy, (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 fam-
ily 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 insti-
tutional 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 educa-
tional function but include ways of coordinating
activity. German families operate in an institu-
tional environment that, for many decades and
up until recently, has embraced the male-
breadwinner 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 differen-
tiation between spouses with the male part taking
on the task of earning an income and the female
17 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 Ger-
man 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 well-
being 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 inter-
generational 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 intergenera-
tional transfers has shown, in vivo transfers usu-
ally 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 heteroge-
neity of entrepreneurial families.
261
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 conju-
gal 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 fam-
ily, entrepreneurial families would mimic
European aristocratic families. Plate et al. (2011)
illustrated a number of historic cases, where capi-
tal 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 nonfunc-
tional pieces, which could also be observed in
other entrepreneurial families.
The relevance of distinction and discrimina-
tion 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 usu-
ally few entrepreneurial families in a local com-
munity 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 suc-
cessful at creating the need to uphold an image of
the respectable entrepreneur to the public and
dealing with precarious situations in the privacy
262
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 dis-
tinct 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 trans-
fer support inclusion of selected, but not all fam-
ily 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 insti-
tutional 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 ideo-
culture and the idea of intergenerational succes-
sion 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 ven-
ture 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;
I. Stamm
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 rela-
tionship.6 This relationship follows the ideal of a
project team that creatively, intensely, and tem-
porarily works together to realize a set goal. Start-
up 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 ven-
ture 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.
17 Groups Matter: Social Embeddedness of Entrepreneurial Activity
surrogate entrepreneur to angel investor and
back). Within this complex network, they elabo-
rate 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, poten-
tial 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 cul-
ture. 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 Friedrichshain-
Kreuzberg, two neighboring districts in the center
of Berlin. According to the Berlin Start-Up Mon-
itor (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, math-
ematics, 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 num-
ber 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 inte-
gration between start-ups supported by equity
capital and those start-ups spinning out of a
263
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 cap-
ital 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 forma-
tion 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 rela-
tionship 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 entrepreneur-
ial groups.
A second stage in the group formation of start-
up teams encompasses team enlargement
(Vanaelst et al. 2006; Scheidgen 2019). The ini-
tial 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 commer-
cial experience or managerial skills
complementing the existing skill set of the team
264
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 addi-
tional 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 manage-
ment 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 func-
tioning group dynamic appears to be an essential
assessment criterion applied to start-up teams by
the start-up field.
I. Stamm
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 tem-
porarily 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 finan-
cial 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 ven-
ture 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 activ-
ity, entrepreneurial families draw from the trust
and solidarity contained in family relationships.
The expectation of sharing tasks among family
17 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. Start-
up 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 exclu-
sion 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 inter-
vention 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 forma-
tion 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 pro-
spective 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 entrepreneur-
ial groups are linked to their respective institu-
tional 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 owner-
managers (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
265
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, start-
up 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 entre-
preneurship not only acknowledges entrepreneur-
ial groups as drivers of capitalist dynamics, but
also draws attention to the emergence and
morphing of such social forms.
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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
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
1
Cf. System of National Accounts 2008, 63: “Fundamen-
tal 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.”
J. Berger (*)
University of Mannheim, Mannheim, Germany
e-mail: jberger@mail.uni-mannheim.de
# 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_18
18
capitalism. Nevertheless, with the gradual imple-
mentation 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 produc-
tion 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 insti-
tutional 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
271
272
organizing the economy (e.g., inequality, unem-
ployment, 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 eco-
nomic 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 organiza-
tion 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 defi-
nition 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
J. Berger
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 histori-
cally 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 appar-
ent 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. How-
ever, 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 mod-
ern times a different type of capitalism that
nowhere else on earth existed: the rational-
capitalistic organization of (formally) free labor.
Unlike Marx, Weber no longer focuses the analy-
sis of capitalism on exploitation, but on the ratio-
nal 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.
18 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 prac-
tically 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
273
2.2 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 pri-
vate 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 target-
orientation, 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 ratio-
nal from a microeconomic point of view to pro-
ceed according to a plan. (b) Capital accounting
ensures the formal rationality of economic activ-
ity (Weber 2019, 182) because it provides both
the entrepreneur and the financiers with an over-
view 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 instru-
ment 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).
274
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 invest-
ment 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 success-
ful, 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 pur-
chasing power ... He can only become an entre-
preneur 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 relation-
ship between the entrepreneur as borrower and
the capitalist as lender, that moves to the center of
5
“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.).
J. Berger
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 perma-
nently 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 sup-
port 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 own-
ership of means of production that could
6
Schumpeter thus understands capitalism as money econ-
omy, 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., planta-
tion economy, slave labor, wage labor) on which it is
based.
18 Capitalism: On the Past and Future of an Economic System
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 com-
mitment to put his labor at the service of capital
for a limited period of time. This implies a com-
mitment 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 capital-
ism and see the securing of property rights as the
central prerequisite of the market economy. How-
ever, capitalism differs from market economy by
highly concentrated distribution of private prop-
erty 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 alleg-
edly 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 pre-
requisite 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 con-
tract (see Roemer 1988).
The employment contract itself also has char-
acteristic features that distinguish it from both a
simple sales contract and a standard service con-
tract, 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.
275
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 cap-
ital than would be the case of a pure sales con-
tract. 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 enti-
tled 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
276
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 moder-
nity, 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 pro-
cess 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 employ-
ment relationship. It follows that, unlike slavery
and serfdom, the reproduction and rearing of chil-
dren have been separated from the
emplyment relationship and have become a pri-
vate 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 capital-
ism. Capitalism, as Weber stressed, is present
where the needs of large groups of people are
J. Berger
met by means of enterprise activities (cf. Weber
1981, 238).9 A capitalist firm is, first and fore-
most, 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 instru-
ment for integrating the population into the econ-
omy. 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 exploi-
tation 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 advanta-
geous 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
18 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 capa-
ble 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 eco-
nomic organization. The principle, to meet the
needs of large groups of the population by capi-
talist 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 imperial-
ism, and the failure of costly experiments with
socialism in nations such as China, India, and
Russia.
This must have something to do with the inher-
ent 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 pro-
vision 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 con-
clude 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.
277
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 popu-
lation 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 capi-
talist 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 tech-
nological 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 controver-
sial, 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).
278
A growing economy is a prerequisite for giv-
ing 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 perfor-
mance 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 enter-
prise” (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 unsur-
passed 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 eco-
nomic 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 produc-
tion is permanently positive. Decades of empiri-
cal 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).
J. Berger
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, ulti-
mate 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 multipli-
cation 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 knowl-
edge, 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 tech-
nological progress as the ultimate source of eco-
nomic development than Schumpeter. For the
private sector enterprises and their employees
who are subject to the dictates of technologi-
cal progress, this dictate entails enormous psy-
chological costs on those subjected to it. In
abstract terms, there is certainly a choice to
avoid this constraint and dispense with techno-
logical progress in its different forms (new pro-
duction methods or new products). A country,
however, which as a whole avoided this con-
straint, would eventually degenerate into a
museum of technology.
15
See Hemmer and Lorenz (2004) for a textbook presenta-
tion of the methods and results of this branch of research.
18 Capitalism: On the Past and Future of an Economic System
3.3 The Socialist Alternative
In the last section, I concurred with Schumpeter’s
view that “the capitalist process, not by coinci-
dence but by virtue of its mechanism, progres-
sively raises the standard of life of the masses . . .
One problem after another of the supply of
commodities to the masses have been success-
fully 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 econ-
omy 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 capital-
ist 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 eco-
nomic system characterized by the socialization
of the means of production and the coordination
of the activities on the firm level by a plan. How-
ever, consumers are free in their choice of con-
sumer 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 contribu-
tion, 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.
279
investment and employment for each company.
Such a system had been implemented in the state-
socialist 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: Informa-
tion 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 impossi-
ble, but only as not being a rationally calculable
system. Such information problems arise for
every central planner on two fronts: The determi-
nation of consumer wishes and the lack of knowl-
edge 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).
280
Agency problems occur at three places in state
socialism. They have parallels in capitalist eco-
nomic 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 manage-
ment 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 social-
ism scores very poorly. It is, perhaps, an attractive
choice if other objectives are to be achieved
through the collective organization of the econ-
omy. Such goals are the liberation of work from
the dictates of capital and its replacement by
democratic forms of economic activity; the aboli-
tion 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 com-
plete the expropriation of all workers through the
expropriation of private owners (Weber 2019,
J. Berger
246) and thus suffocate all freedom in a bureau-
cracy 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 man-
agement decisions. Economic inequality is
expected to decrease, but, due to lower efficiency,
it will be accompanied by lower income per per-
son. 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 capi-
talism, 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 dif-
ference 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 noth-
ing 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 Funda-
mental 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.
18 Capitalism: On the Past and Future of an Economic System
which has been criticized, particularly by
Schumpeter. Not only does the entrepreneur pro-
vide 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 cri-
tique. However, those who engage in such a cri-
tique 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 bet-
ter in the two perspectives mentioned here: effi-
cient 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 self-
administration 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 espe-
cially the subject of a collective decision and how
decision-making is organized can either be deter-
mined 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 achieve-
ment 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.
281
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 homoge-
neous 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 some-
how 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.
282
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 deter-
mining 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 convinc-
ing 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 sys-
tem no longer reliably performs exactly the ser-
vice 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).
J. Berger
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 alarm-
ingly 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 surpris-
ingly 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 long-
term growth of the world’s most developed econ-
omy, 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).
18 Capitalism: On the Past and Future of an Economic System
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 giv-
ing 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 break-
through 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 stag-
nation. 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 neces-
sary to bring actual growth closer to the already
lower potential growth. In order to achieve this
objective, the monetary policy instrument of low-
ering 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
26
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.).
283
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. How-
ever, 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 sta-
tionary 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 agree-
ably and well” (1972, 328). Provided that essen-
tial 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 with-
out 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
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’.”
284
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 pop-
ulation with consumer goods from televisions to
cars, to new homes. The basic problem with tech-
nological 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 environ-
mental 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 competi-
tive thinking are spreading, whereas solidarity and cooper-
ative 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).
J. Berger
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 increas-
ing global warming. According to a new study by
the Potsdam Institute for Climate Research, the
earth is approaching a historical heat record; his-
torical, because in the last 3 million years the
earth’s temperature has never been more than
2 above the pre-industrial level. With an uninter-
rupted 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 capital-
ist system to date can be used for solving envi-
ronmental 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.
18 Capitalism: On the Past and Future of an Economic System
economic principle on which the success of this
form of economic activity is based. In concrete
terms, this means that the consumption of envi-
ronmental resources must have appropriate mon-
etary 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 possi-
ble, in any case, to limit the emission of environ-
mentally 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 con-
sumption. 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 rem-
edy for the problems caused by greenhouse gas emissions
would be a global scheme of carbon taxes that are uni-
formly 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 uni-
versal 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 alleg-
edly threaten the sustainability of capitalist systems, such
as the threat of job loss caused by a new wave of automa-
tion or the threat to the stability of capitalist economies
originating from the increasing importance of an
inherently unstable financial sector. For the former prob-
lem see Frey (2019), for the latter, Minsky (1982).
285
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 commu-
nism (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 num-
bers and the percentage of people living in abso-
lute poverty have fallen drastically, but are still so
high that global economic growth is indispens-
able. 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 confi-
dent 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 antagonis-
tic relations of production, or in a tradition dating
back to Plato private property? The Marxist tradi-
tion predicted the uprising against private prop-
erty, and, as a result, the collapse of capitalism
and the transition to socialism. In fact, however,
286
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 jus-
tice, but it does guarantee efficiency in the use of
resources. For example, with the threat of dis-
missal, 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 corpo-
rate interests. That is a fragile foundation.
Efficiency advantages speak for the enforce-
ment and lasting dominance of the capitalist
mode of production. An organization of the econ-
omy 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 com-
pulsion 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 emer-
gency 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 com-
munism (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 motiva-
tion 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 man-
aged 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 free-
dom of domination. However, workers’ self-man-
agement 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 par-
tially 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 prof-
itability and, as a consequence, the dictates of cost
degression, with some form of communal eco-
nomic 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 inno-
vative 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 participa-
tion in the large-scale enterprises and low prosperity with
high participation in the small-scale co-operatives”.
18 Capitalism: On the Past and Future of an Economic System 287

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 Social Responsibility in the Economy
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 assump-
tion 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 con-
sumption 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 responsi-
bilization (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: sebastian.koos@uni-konstanz.de
# 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_19
19
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 man-
agement standards (e.g., ISO 14001), participate
in public initiatives concerned with human devel-
opment (e.g., Global Compact), and increasingly
contribute resources to provide collective goods.
All these developments manifest a rise and diffu-
sion of responsible economic action in market
economies. Although there are many other phe-
nomena in which morality interferes with eco-
nomic 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 argu-
ably, 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,
289
290
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 mod-
ern 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 cen-
tered theoretical approaches to explain responsi-
ble economic action, before reviewing exiting
empirical studies. I conclude by discussing how
economic sociology and the concept of responsi-
bility 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 econ-
omy as encompassing all activities that relate to
the production, distribution, exchange, and con-
sumption of scarce goods and resources (Smelser
and Swedberg 2005). According to Max Weber
(1978, 63) economic action is “any peaceful exer-
cise 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
S. Koos
‘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, individ-
ual 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 under-
standing 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, deonto-
logical or utilitarian reasoning. In the later per-
spective, moral norms are understood as variable
and observable. Thus, individuals internalize cer-
tain values and norms, regarding just or unjust,
right or wrong, which were learned in socializa-
tion 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, respon-
sibility 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
19 Social Responsibility in the Economy
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 per-
spective, 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 espe-
cially useful in issues of economic ethics for at
least two reasons. First, it allows one to distin-
guish and balance different dimensions of respon-
sibility such as economic, legal, and ethical issues
(Carroll 1999). Secondly, the intended and unin-
tended 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 understand-
ing of what constitutes responsibility using the
example of consumption. In extant literature, con-
sumption 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, con-
sumption 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 individ-
ual 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 eco-
nomics literature on altruism. Rather than defin-
ing altruistic behavior by actors’ other-regarding
motives, economists and socio-biologists prefer
291
definitions that focus on costs or chances of sur-
vival (Piliavin and Charng 1990, 29). Margolis
(1982, 15), for instance, defines behavior as altru-
istic if “the actor could have done better for him-
self 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 eco-
nomic action is always associated with some
additional cost to ensure that negative
externalities are avoided. From a behavioral per-
spective, 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 circu-
larity. 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 prob-
lem 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 dis-
crimination and violation of universal human
rights is an obvious example of immoral or irre-
sponsible consumption behavior. Yet, what
constitutes morality and responsibility? What
product is a good product? These questions are
difficult to answer without engaging in a norma-
tive 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
292
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 corpo-
rate economic actors take into account the
consequences of their actions for public goods?
Economic Sociology has stressed the
embeddedness of action, pertaining to the struc-
tural, cultural, and political context of economic
interaction. Starting from a critique of the rational
action perspective, I first discuss different socio-
logical 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
S. Koos
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 classi-
cal RC model of action. In a critique of the nar-
row 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 fol-
low a cost-benefit analysis (instrumental rational-
ity), 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 espe-
cially 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).
19 Social Responsibility in the Economy
(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 com-
mon 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 under-
stood as being purposeful; thus, actors have cer-
tain 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
293
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 interper-
sonal 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 pro-
cesses like limits to rationality, as studied by
psychologists (e.g., Simon 1955). Thirdly, cul-
tural embeddedness denotes the role of shared
meanings and understandings, which shape indi-
vidual perceptions, values, and repertoires of eco-
nomic 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 eco-
nomic 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 spe-
cific theories need to be added that allow one to
grasp the explanatory mechanism at work
(Beckert 2011).
294
The contextual embeddedness of responsible
economic action has been acknowledged by a
multitude of theoretical approaches, stemming
from political science, sociology, business man-
agement, 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, ecolog-
ical, and reflexive modernization. Other scholars
(Scammell 2000; Harrison et al. 2005a; Scherer
and Palazzo 2008) emphasize the effect of glob-
alization 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, gov-
ernment 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 gov-
ernance 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 gov-
ernance 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 purchas-
ing 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
S. Koos
corporations as a result of the global
ungovernability stemming from economic global-
ization 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 alterna-
tive ways of political participation. From this
perspective, increasing economic affluence
paralleled by a perceived scarcity of mostly non-
material higher order needs result in a societal
value change from materialism to post-
materialism (Inglehart 1997). The rising share of
post-materialist citizens in a country leads to a
shift from price-quality considerations in con-
sumption to demands for environmentally
friendly and fair produced goods and services.
In his myriad writings on reflexive moderniza-
tion, 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 sys-
tem of nation-states” (Beck 1996, 18). From this
perspective, individual actions achieve political
significance by engaging a political frame of ref-
erence 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 every-
where be a direct ballot-paper” (Beck 2000, 70).
Two processes are of critical relevance here: indi-
vidualization and globalization, which “are in fact
two sides of the same process of reflexive mod-
ernization” (Beck 1994, 14). Individualization
means that actors are dissolved of the classical
social formations, like family, class, or occupa-
tion 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
19 Social Responsibility in the Economy
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 per-
spective on responsible economic action. Espe-
cially 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 insti-
tutional 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 miss-
ing 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 responsibi-
lization. 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). Oppor-
tunity structures relate to the external, or rather
political, conditions that make coordinated collec-
tive action more likely to emerge and succeed.
295
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 infor-
mal networks, that enable collective action (King
2008). Finally, social movements propagate men-
tal 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, individuali-
zation or globalization, changes in the gover-
nance 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 con-
sumer 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
2
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.
296
planned behavior (Shaw 2005; Ozcaglar-
Toulouse 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 conse-
quence 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 regard-
ing 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 self-
identity 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 conve-
nience sample and therefore, are not representa-
tive (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 con-
sciousness, expected moral utility, and personal
moral norms. The authors find that, both subjec-
tive 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 post-
materialist (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.
S. Koos
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 stud-
ies 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 cross-
national studies that consider differences in mar-
ket structures and cultural traits.” In a similar
fashion Thøgersen (2010, 171) claims that
existing research has an “unfortunate individual-
istic and individualizing bias,” neglecting the
19 Social Responsibility in the Economy
“macro structural conditions that frame and con-
strain 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 theoreti-
cal 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. How-
ever, 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 econ-
omy and the level of globalization. Some studies,
3 corporations have become immensely powerful
Moreover, most empirical studies that focus on responsi-
ble consumer behavior and CSR fail to provide the theo-
retical 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 capi-
talism, corporatism, and CSR in Scandinavia remains
ambivalent, for it cannot be pinpointed as to what exactly
drives this relationship.
297
using different measures for CSR, show that cor-
porate 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 econ-
omy, 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 eco-
nomic 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 trans-
nationalization 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,
and large, sometimes having assets comparable
to government budgets. This was paralleled by an
information revolution, providing easy, inexpen-
sive, 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.
298
Firstly, the market for virtue (Vogel 2006) is
strongly limited by economic opportunities,
which differ across countries. Second, the com-
plex historically grown institutional arrangements
of modern capitalism provide rather stable
worldviews, norms, and beliefs which are condu-
cive 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. Further-
more, 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 argu-
ment, 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 com-
plexity, 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. Tack-
ling these challenges therefore involves a better
understanding and explanation of how the econ-
omy works. Arguably, economic sociology has an
important role to play here in three different ways:
by providing a critical understanding of evalua-
tion struggles, by analyzing markets as gover-
nance mechanisms, and by identifying the
conditions for responsible economic action.
First, economic sociology has already started
addressing the problems of valuation and evalua-
tion, 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
S. Koos
more thoroughly understood. Second, while
economists and political scientists have
emphasized the ability of markets to address cli-
mate 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 some-
what precarious, under specific conditions it
might help solve collective good problems,
whereby consumers, corporations and civil soci-
ety might gain, if such action complements the
economic governance by the state and organized
interest (Bartley et al. 2015). Therefore, responsi-
bility seems to be an important concept in
addressing pressing social problems from an eco-
nomic 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 Com-
parative 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. Interna-
tional Journal of Consumer Studies 41/4: 363–70. Koos,
Sebastian. 2016. Die organisierte Vermarktlichung der
Moral und die Moralisierung der Märkte. Eine vergle-
ichende 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. Blooming-
ton: Indiana University Press.
 Index

A E
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 187, 200, 208–218, 228, 253–261, 265, 274, 280
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 Finance, 12, 72, 75, 116, 141, 191, 227, 230, 260
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 Institution building, 177–179
Digital money, vii, 237–249
Digital transformation, 148, 153, 154
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,
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
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
Investments, 41, 42, 49, 69, 82–85, 89, 91, 98, 113, 121,
138, 150, 154, 165, 168, 170, 173, 177, 178, 181,

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182, 195–197, 201, 237, 239, 246, 260, 262, 264,
273, 274, 279, 281–284, 297
K Rational choice approaches, 33, 52, 53, 296
Karpik, L., 49, 64–67, 71–74, 83, 99, 100, 103–105, 107
L Responsibilities, vii, 69, 198, 229, 233, 240, 273, 289–298
Luhmann, N., 101, 118, 123, 124, 150, 275
M S
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 Sociology of groups, 254
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 263, 264, 273, 276–281, 284–286, 289, 293–295,
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
Index
R
Ratings, 38, 88, 95, 98, 125, 131, 138–141, 155, 193, 196
Rating systems, 138, 139, 141
Reputations, 36, 39, 56, 66, 98, 105, 106, 131–142,
229–231, 261
Review platforms, 140
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
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,
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