Embedded Social Capital Networks: Biblical Foundations and Business Practices

Paul N. Wilson, Professor

Department of Agricultural and Resource Economics
University of Arizona
P.O. Box 210023
Tucson, Arizona, 85721-0023
Tel. (520) 621-6258
Fax (520) 621-6250
Email pwilson@ag.arizona.edu

Selected Paper presented at the 2011 Conference of the Association for the Study of Religion,
Economics, and Culture, Washington, D.C., April 7-10, 2011.
 Embedded Social Capital Networks: Biblical Foundations and Business Practices

“Trust is an important lubricant of a social system. It is extremely efficient; it saves a lot of

trouble to have a fair degree of reliance on other people’s word.” (Kenneth Arrow, 1974, p. 23)

“Without the concept of transaction costs, which is largely absent from current economic theory,
it is my contention that it is impossible to understand the working of the economic system, to
analyze many of its problems in a useful way, or to have a basis for determining policy.” (Ronald
Coase, 1988, p. 6)

“Trust is at root of any economic system based on mutually beneficial exchange. If a significant
number of businesspeople violated the trust upon which our interactions are based, our court
system and our economy would be swamped into immobility.” (Alan Greenspan, 1999)

Motivation
The well-established fields of moral philosophy and political economy nourished the
intellectual roots of the founding fathers of economics. Emersed in the tradition of logic and
ethics, Adam Smith (1723-1790), a Deist, initially raised specific questions about the creation of
wealth and then utilized rigorous descriptive analysis to explain the detailed workings of the
economic system of that time. Smith’s metaphor of the “invisible hand” stimulated later
economists to develop a dominant economic theory where the driver of self-interest, or even
economic greed, in a decentralized economy produced a superior distribution of economic
resources compared to distributions created by other social mechanisms and public policies.
Influential theorists like Walras (1834-1910), Jevons (1835-1882), Edgeworth (1845-1926), and
Pareto (1848-1923) built their theories and analytical models on their narrow interpretation of
Smith's general economic paradigm. Edgeworth speaks for the quartet when he states that “the
first principle of economics is that every agent is actuated solely by self-interest.” (p. 16, 1881).
Yet a closer reading of all of Smith’s work reveals that ethics serves as the societal glue that
holds societies together, not markets (Evensky 1993). Core common values in society provide
the institutional foundation and framework for competition and market exchanges. Ethics, not
self-interest, drives the creation of wealth.

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 Alfred Marshall (1842-1924) popularized the economic paradigm based on self-interest
while Cournot (1801-1877), Hicks (1904-1989) and Samuelson (1915-2009) operationalized the
theory by borrowing optimization tools from mathematics. As a result, our current mainstream
neoclassical paradigm rests on the behavioral foundation of rational, self-interested individuals.
This narrow self-interest, according to some, is nothing more than psychological egoism where
selfishness forms the foundation of all decisions (Blau 1964). Yet in its defense, the reigning
self-interest assumption, combined with econometric tools, produces strong empirical support for
this view of fallen humanity.
Nobel Laureate Amartya Sen (1982), however, criticizes the narrowness of our traditional
model by calling idealized economic man a “rational fool”. He goes so far as to state that “The
purely economic man is indeed close to being a social moron.” (p. 99). Commitment and the
accompanying human relationships, according to Sen, are important but ignored in traditional
economics. Sen defines commitment as an agent’s obligation to another party beyond the
personal consequences of the agent’s decision. Commitment overcomes the traps associated
with public goods and principal-agent conflicts. Commitment contains rules of behavior that
exhibit mutual trust and a sense of responsibility in human relationships. According to Sen, the
widely used “one all-purpose preference ordering” in mainstream economics ignores
relationships based on commitment, thereby creating a rational fool.
Hollis (1998) uses game theory to illustrate the commitment failure of two individuals
which precludes them from reaching a social optimum as they travel down the “Enlightenment
Road” using their rationality as their sole decision rule. Hollis shows convincingly that self-
interest, even enlightened self-interest, fails to produce an individual or group optimum. In fact,
Hollis’ model collapses into what he calls “The Rational Choice” which is the sub-optimal,
egoist outcome where two individuals fail to move along the Enlightenment Road beyond the
first decision point. The lack of mutual trust leads to the common prisoners’ dilemma where
both parties lose relative to the optimal “Triumph of Reason” solution.
One could claim that the academic discipline of economics experienced an intellectual
separation, if not a divorce, over most of the 20th century from commitment or relational
considerations in human behavior by pursuing a highly elegant, and powerfully predictive model
of self-interested behavior. However, over just the last three decades behavioral economics
(Kahneman and Tversky 1979), bounded rationality (Simon 1982), social capital considerations

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(Coleman 1984), and cooperative game theory (Slikker and van den Nouweland 2001) have
begun to reestablish a more human face in mainstream economic analysis. For example, recent
happiness research by economists has explored the determinants of emotional well-being in
societies. However, Frey and Stutzer’s (2002) review of the happiness literature reveals a
reliance on only material prosperity and institutional variables, ignoring human relationships as
an explanatory variable. Bjornskov (2003), on the other hand, found that social capital (e.g.
general trust, civic participation, perceived corruption) matters much more than income in
explaining people’s satisfaction with their lives, particularly in higher income societies. Finally,
Flinn (2006) argues that the quality of human relationships in economic life-along with resource
allocation, distribution, and scale and interdependencies-is one of the four fundamental issues on
which we should evaluate every economic system.
This note first explores Biblical foundations associated with relationships. With this
background, I propose a fourth governance tool for managerial economics, embedded social
capital networks (ESCN), to complement our standard tools of markets, hierarchies, and
contracts. A ESCN is an engaged pattern of relational links or associations between parties
(individuals or organizations) that produces mutual value. Following this section is a discussion
of the empirical evidence supporting the important role of ESCN in business transactions.
Finally, I conclude the paper by attempting a brief answer to the question “So what?” in light of
the initial normative, Biblical foundations.

Biblical Foundations for Committed Relationships

In the evangelical Christian tradition, relationships, as outlined in the Bible, form a
central unifying theme in God’s plan of redemption. From creation in Genesis 1 to the second
advent of Jesus Christ in the final chapter of Revelation, relationships or community between
two or more parties dominate Scripture. Biblical narrative, prophesy, poetry, and commands all
center on a vertical relationship with the creator of the universe or horizontal relationships within
his creation. All relationships, in this tradition, should reflect the desires of the creator and give
him glory. The quality of these relationships, most importantly a personal relationship with
Jesus Christ, indicates a person’s current and eternal place in God’s promise-plan.
An exhaustive review of Biblical relationships exceeds the scope of this paper and the
exegetical abilities of the author. Yet critical relational structures in Scripture inform Christians

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of God’s expectations for his creation. A comparison of these Biblical foundations with current
economics and business models reveals the perfect wisdom of God versus the cognitive
limitations and imperfectability of man. I report evidence, later in this paper, that selfless
behavior while not existing in business in its pure Biblical form, exists in the mutual value or
commitment that agents regularly place on their business relationships apart from their
transactions’ purely financial benefits.
A starting point is the orthodox Christian understanding of the one triune God—God the
Father, God the Son, and God the Holy Spirit—which presents the perfect example of an ESCN.
Embedded because all three have one mind and work together in perfect harmony; social capital
because their relationship is simultaneously mutually pleasing; and networked because they
seamlessly communicate and associate (John 12:47-50; 14:9-21). Immutable trust and
orchestrated collaboration characterize this eternal relationship.
Creator-creation forms a second relationship in God’s plan of redemption (Genesis;
Psalms 8:3-9). God designed the world to give him, the creator, all glory (Psalms 19, 24;
Romans 1:18-20) and humans serve as God’s productive stewards (Genesis 1:26-28). Creation
yearns for the return of Christ to be released from the bondage it suffered at the Fall (Genesis
3:17-18; Romans 8: 20-22). God commands humans to work together to create prosperity within
the constraints of a fallen world.
Throughout history, God has interacted relationally with a faithful remnant through a
series of promises or covenants. Noah received the promise that never again would the earth be
destroyed by a flood (Genesis 9). God promised Abraham that he would become a great nation,
be blessed, have a great name, be a blessing to other nations, and have a specific area of land
(Genesis 12:1-3; 15). God promised an eternal kingdom to David (2 Samuel 7:12-14; 22:51).
The nation of Israel received promises for well over 1,500 years with the condition that they
must be holy or set apart for God (Exodus 24:3; 34:28; Leviticus 11:44a; Deuteronomy 29;
Joshua 24; 2 Chronicles 15, 23, 29, 34: Ezra 10; Nehemiah 9, 10). Rarely did Israel reciprocate
on its part of this relationship. Finally, the greatest promise of all, and the fulfillment of other
promises, is God’s promise-plan of redemption for those who put their faith in Jesus Christ as
their Lord and Savior (see Romans; Galatians; Ephesians).
The Law of the Covenant—the Ten Commandments—serves as an example of ESCN
living (Exodus 20: 1-17). God specifies, in the first four commandments, the normative

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relationship he requires between man and himself while the remaining commandments clearly
relate to relational living with one another. This most basic of all human institutions clearly
establishes man as a relational being, first with God and then with his fellow man.
Finally, the Bible presents clear normative rules for relating to one another in ESCN.
Believers must witness to others (Genesis 22:18; Nehemiah 5:9; Matthew 28: 18-20), help the
poor and helpless (Amos; Matthew 25: 31-46; Micah 6:8), love others and recognize diversity of
individual gifts in the community of faith (Romans 12: 9-16; 1 Corinthians 12:12-31, Ephesians
4:9-16), live in peace (Romans 12: 17-21), and submit to governing authorities (Romans 13:1-7).
In addition, Christians are called to look out for the interests of others, not just our own
(Philippians 2:3-4), place the interests of others above their own (1 Corinthians 10:24), lay down
their lives for their friends (John 15:13), be a servant of all (Mark 9:35), and join together in
marriage, man and woman, to become one (Ephesians 5:31). Jesus Christ summarized all the
above when questioned by the spiritual and intellectual leaders of the day (Matt. 22: 34-40; Mark
12:28-34). The priority relationship is to love God with our entire being: heart, soul, mind and
strength. God’s second commandment is to love others as we love ourselves. Biblical
foundations clearly point to obedient relationships forming an integral dimension of being human
and living as a believer.

ESCN in Business
In contrast to the preceding normative Biblical standards, many analysts today claim that
human relationships exist primarily as a byproduct of the pursuit of self-centered, individualistic
goals, at least for most members of American society. Nearly 200 years ago, Alexis de
Tocqueville (1805-1859) coined the word “individualism” as he analyzed the fledgling American
democracy. He recognized the tension between the dignity of the individual and the desire to
enhance the public good through community. De Tocqueville understood that John Locke’s
(1632-1704) political philosophy that individuals only work together when it maximizes their
own self-interest was uniquely constrained in the American context by a sense of communal
well-being beyond the individual (Bellah, et.al. 1985). The Judeo-Christian ethic imperfectly
tempered fallen humanity’s natural, egoistic desires. And even John Locke, like Adam Smith,
considered mutual trust to be the “bond of society.” Americans’ concern for the interests of
others and their genuine reciprocity created productive communities less encumbered by free

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riding, prisoner’s dilemmas, agency conflicts and negative externalities. This constrained self-
interest has evolved over our history, however, to an increasingly dominant ethic of self-
centeredness. Linden (2002) argues that individualism and separation from relational
commitment are now the principal building blocks of modern society. Emptiness of the
“unencumbered self” is more prevalent while sightings of selflessness are increasingly rare in
modern popular culture. But is this true for modern business culture?
Business firms organize resources in order to produce goods and services demanded by
buyers or consumers. Successful businesses survive and prosper while those firms that produce
at relatively high costs and fail to meet consumer needs experience economic losses and fail.
Coase (1937, 1988) asked the questions “Why do firms exist?” and “Why is the market not relied
upon for all our needs?” Coase responded that firms are a least-cost means of economic
coordination when the market alternative is too costly. Market costs arise in exchanges when
transaction costs are significant, search costs are daunting, and negotiation costs are intimidating.
As a result, firms traditionally govern their coordination activities using three tools: markets,
contracts, and hierarchy.
Although business managers spend most of their days working and making decisions
with other people (Kotter 1999), markets remain the principal governing mechanism in the
traditional economic theories of the firm. Decentralized decision-making by many agents in the
buying and selling of goods and services arguably produces optimal levels of individual and
social economic welfare. Relative prices signal scarcity and determine the optimal allocation of
resources. Agents trade when they realize mutual gains. As a complement to this traditional
neoclassical model, the Austrian school of economics builds on the information role of markets
by directing analytical attention to the role of the business entrepreneur who responds to market
information by innovating, adapting, and evolving. Assuming that markets are in constant
disequilibrium, the “nimble and fleet of foot” entrepreneur in the Austrian model creates
economic value by creating new goods and services. In recent years, game theory and industrial
organization economics have evolved from this basic market governance structure, incorporating
competitive and cooperative relationships into their conceptual frameworks.
Contracts and hierarchies complete the triumvirate of governance mechanisms in the
traditional theory of the firm. By contracting, two agents come together to agree on a mutual
exchange of goods and/or services. Both parties negotiate in their self-interest, producing a win-

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win contract. Their agreement, either in written or verbal form, specifies the conditions of the
agreement and the responsibilities of each party, including how the two agents will work out ex
post contracting difficulties. In contrast, hierarchies govern business organizations through the
exercise of rule-based power. Administrative practices, management direction, and supervisory
control drive employee expectations and performance irrespective of formal market signals or
well-designed labor contracts. Individuals surrender their perceived self-interest to the power-
based self-interest of their superiors. Employees have the right to escape the hierarchy but only
by leaving the firm.
I claim that business firms complement their governance toolkit of markets, contracts,
and hierarchies by utilizing ESCN. As noted by Sen (p.98, 1982), “To run an organization
entirely on incentives to personal gain is pretty much a hopeless task.” ESCN complements the
other strands of the business governance cord or structure (Figure 1). Managers utilize a
business-specific governance cord to strengthen their performance. Traditional economic
theories, as noted earlier, largely ignore the economics of the fourth strand (ESCN) in their
explanations of firm-level economic performance.
Embedded
Macauley’s (1963) early empirical research discovered that many business firms fail to
use formal contracts to govern business transactions, but rather turn to verbal agreements and
handshakes to seal business deals. This surprising finding led to a closer look at the social
structure of business transactions (Granovetter, 1985; Grabher, 1993). The emergent
embeddedness literature argues that all human transactions take place in a social or relational
context. The extremes of this continuum may range from love to hate, trust to suspicion,
sympathy to indifference, with the intensity of the context varying for each agent. In the case of
ESCN, parties to a transaction have emotional attachments (i.e. commitment) and personal
knowledge to varying degrees. Ignorance of this relational context produces an inaccurate
understanding of the full nature of the transaction.
Social Capital
In a related literature, Coleman (1984, 1988) and Putnam (1993, 1995) have contributed
the seminal ideas on the role of social capital in society, and in economic transactions. Social
capital is represented as bilateral or multilateral associations where interaction between
individuals or groups produces mutual value. Others have defined social capital as “the potential

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benefits, advantages, and preferential treatment resulting from one person or group’s sympathy
and sense of obligation toward another person or group” (Social Capital Interest Group 1999).
Selected operational characteristics or value flows of social capital are goodwill, flexibility,
mutual forbearance, loyalty, reciprocity, reputation, sympathy, trust, and understanding. As
implied earlier, these value-producing relationship variables are embedded in economic networks
and facilitate the governance of the business firm.
I recognize the “good, the bad, and the ugly” characteristics of ESCN in the business
arena. Over-embedded business relationships can thwart the timely resolution of business
problems between firms (the bad). Strong, embedded networks of multilateral associations can
produce a social environment of hate, discrimination, and preferential treatment for a minority or
even illegal activity (the ugly). This paper generally concentrates on “the good” or welfare
enhancing contribution of social capital and ESCN.
Putnam and Feldstein (2003) make an important distinction between bonding social
capital and bridging social capital. Bonding social capital is relatively easier to build because the
relationship exists between similar or like people. People with common interests, beliefs, and
values can develop significant social capital at low cost in terms of time and money. In contrast,
bridging social capital between widely different people presents greater relational challenges. In
business, bonding social capital exists within the firm, and between the firm and its suppliers and
buyers along the value chain. Relationships with competitors and other business people would
be a moderate form of bridging social capital. The ability of this firm to work closely with a
regulator (e.g. a state’s department of environmental quality) or a labor union is a strong form of
bridging capital.
Like other forms of capital, businesses invest in social capital with the expectation of a
future flow of benefits. Agents exploit ESCN for economic gains in activities beyond the core
association, creating positive externalities for the business. In a production economics
framework, ESCN can substitute for or complement other inputs (e.g. time, physical assets).
Like buildings, machinery, and even human capital, ESCN requires maintenance on the behalf of
the stakeholders in the association or relationship. Relationships can depreciate or appreciate in
value as well as suffer from obsolescence.

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Network
Like social capital, network analysis is increasingly utilized in social science research
(Wasserman and Faust 1994; Scott 2000; Goyal 2007). From two-party dyads to networks
within networks, the social network analysis literature in the business context is well established
(Rangan 2000; Gnyawali and Madhavan 2001; Tompkins 2001). Burt’s (1992) idea of structural
holes serves as one example (Figure 2). The existence of social capital within a network only
produces valuable brokerage opportunities if the owner of the capital can exploit the situation for
their competitive advantage. In Figure 2a only one party bridges the structural hole between four
diverse groups. This discontinuity between exchange relations (a structural hole) presents
entrepreneurial opportunities for the bridging party. Businesses in value chains with structural
holes can exploit these bridging opportunities. As well, social capital “rich” individuals working
in a business network full of structural holes enjoy a competitive advantage over “poorer”
colleagues. The network illustrated in Figure 2b reflects more widely connected relationships
and less room for creating an economic advantage because of relationship “failure”.
Three fundamental differences contrast ESCN and more common forms of business
assets. First, ESCN demonstrates nonrivalness. The use of the asset by one party does not
deplete it for another party. For example, both parties can simultaneously draw on the social
capital in a supplier-buyer relationship without reducing the network “account”. Secondly,
ESCN assets have mutuality of association. If one party withdraws from the network or
association, then the social capital embedded in that relationship most likely will disappear
unless the relationship resides with an organization. A final differentiation is measurement. On
a daily basis businesses count and value their physical assets. The costs and benefits associated
with the development and maintenance of ESCN present unique measurement challenges, often
deterring empirical research into the magnitude and importance of this economic variable.

Business Practices: The ESCN Empirical Evidence

Business firms report that ESCN reduces transaction costs, i.e. the costs of interacting
with other people (Uzzi, 1997; Wilson, 2000). According to business managers, ESCN reduces
their search costs, the costs of finding information, and the cost of finding business partners as
well. ESCN facilitates communication between business associates over time and space. The

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time, effort and financial resources invested in ex ante and ex post contracting, monitoring and
enforcement are minimized in business relationships characterized by an ESCN.
The business management literature reveals significant empirical support for efficiencies
associated with ESCN. Adler and Kwon (2002) point out that ESCN (1) influences career
success and executive compensation, (2) assists in job searches, (3) facilitates the efficient use of
resources, (3) reduces labor turnover rates, (4) encourages entrepreneurship, and (5) strengthens
inter-firm relationships. Economists have discovered in their research that the social capital in
ESCN even alters the terms of trade (i.e. price) (Robison, Myers and Stiles 2002). Knack and
Keefer (1997) report that the presence of social capital, principally in the form of trust, reduces
exchange, transaction, and relationship costs, thereby producing economic benefits for society.
Trust, an important component of “good” ESCN, is the assurance that a party to a
transaction will not opportunistically exploit the vulnerability of the other party. In the case of
the transaction relationship frontier in Figure 3, stakeholder A under an embedded, mutual trust
regime will not make decisions in their favor that reduce the level of value to stakeholder B. By
abusing B’s trust, stakeholder A would be worse off not only because B is worse off but in
addition, the value of their business relationship is jeopardized. Zajac and Olsen (1993) note that
an attached value above and beyond the explicit terms of trade represents a significant part of
many business transactions. Business relationships carry an exchange or commitment value that
must be considered in firm governance decisions, according to the authors. Where you place
yourself in this three-dimensional space reflects, in Sen’s framework, the level of commitment to
your exchange partner. Some economists, however, argue that trust is too difficult to measure, is
nothing more than far-sighted self-interest, and is not worthy of dedicated research (Williamson
1993). As a result, the value of economic transactions traditionally lies along the “Value to
Stakeholder A” axis in Figure 3.
Another criticism of ESCN is found in Nooteboom, Berger and Noorderhaven (1997)
where the authors report that trust between business partners may create rigidities of loyalty and
reciprocity that reduce flexibility and competitiveness. In contrast, other research has discovered
that blind trust in business is rare because businesses evaluate past performance and reliability
regularly and the opportunistic temptation to defect from trustworthy behavior is observable and
immediately confronted. The consensus of the management and economic research literatures
on trust and trustworthiness reveals that this positive characteristic of ESCN reduces transaction

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costs, increases productivity through greater information sharing, strengthens inter-firm
alliances, manages unforeseen contingencies more efficiently, and facilitates timely transactions
(Dyer 1997; Gulati 1995; Jefferies and Reed 2000; Lorenz 1999). The nature of trust has been
shown to be important in small-business transactions (Wilson and Kennedy 1999), business
associations (Rademakers 2000), buyer-seller exchanges (Sako 1992), and exporting clusters
(Schmitz 1999).
Other critics argue that ESCN can become over embedded where “groupthink” limits the
business participants’ ability to respond efficiently and effectively to market changes (Grabher
1993). Cliquishness within the network can deter innovation and weaken competitiveness.
Nevertheless, many organizational analysts argue, based on management theory and empirical
evidence, that networks are efficient governing mechanisms for governing economic exchanges
(Powell 1990; Burt 1997; Powell and Smith-Doer 1994). Certain types of exchanges even rely
more heavily on relationships and reputation than common market considerations (i.e. price)
(Larson 1992). ESCN provides management a means for overcoming operational challenges
associated with uncertainty, sparse and inaccurate information, and time demands on their
decision-making.
Ethnographic studies of business networks have produced useful insights into the
economic nature of ESCN. For example, Larson (1992) found that reciprocity, reputation, and
trust were important explanatory variables in understanding the duration and stability of
exchange structures for a wide range of firms (e.g. telecommunications, clothing manufacturing
and sales, and computer manufacturing). According to the results from 58 firms, the network
provided an efficient means of timely communication. Competitive pricing was a necessary but
not sufficient condition for network stability. Larson found that a regular demonstration of
commitment held the network together. “We move quickly for that company” was a frequent
characteristic of these business networks. Along with the good or service, useful information
was exchanged in these embedded transactions.
Uzzi (1997) studied the supply and buyer networks of entrepreneurial businesses in New
York City. A key finding reveals how networks create time economies. Trust within the
network economized on the business’ cognitive resources, time, and attention process without
jeopardizing effective decision-making. Inter-firm conflict or problems were worked out “on the
fly.” A common, but to some surprising, theme in these inter-firm relations was altruism, where

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managers would make decisions in the interests of others and against their own short-term
interests, and to preserve their relational commitments (Refer back to Figure 3). Uzzi is the rare
analyst who reports the existence of over-embeddedness (the bad), where some firms pass over a
social capital threshold that then constrained their economic performance by insulating the firm
from market and technology information available outside the network.
More recently, Wilson (2007) reported on the economic role of business-to-business
(B2B) dyads. An exploration of the trust relationships in 27 buyer-seller dyads in the Arizona
dairy industry revealed that only two buyers largely relied on an impersonal market relationship
for sourcing their basic feed needs. Ten out of twelve buyers used a mix of contractual
obligations and personal relationships to create an acceptable level of assurance in their critical
feed supplies. Sellers also classified the trust relationship with their buyers as a similar
contractual and relational mix. Twenty-two of the 27 dyads exhibited a high degree of mutual or
symmetric trust in their transactions. What may be even more revealing is how these buyer-
seller dyads mirror the four characteristics of Axelrod’s (1984) tit for tat tournament. B2B
relationships choose cooperation over conflict, extend forgiveness for mistakes, hold others
accountable for cheating, and conduct their transactions under transparent rules.
So What?
ESCN-based human relationships in business have both social and economic value to the
participants. Economic analysis misses an important component of the governance lives of
business managers by historically ignoring the composite value of ESCN. ESCN may or may
not dominate the governance structure of a business; however, business managers frequently
note that their work days are largely dominated by ESCN development and maintenance, and not
in market transactions, contract negotiations, and hierarchical decisions. ESCN represents a
critical resource for the optimal management and long-term survival of the firm.
Empirical research supports the claim that ESCN enhances productivity. First,
production relationships exhibit greater technical efficiency in the presence of ESCN. Take
labor performance for example. It is well documented in the management literature that strong
manager-employee relationships increase labor productivity. Secondly, ESCN creates
complementarities in the process of producing goods and services. For example, a strong
commitment to the business enterprise due to employees’ positive relationship with their
supervisor enhances the productivity of physical capital.

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 Reduced daily uncertainties in business operations represent a second contribution of
ESCN. Hassles are minimized, time is saved, information is accurate, and the manager
experiences greater assurance that people will do what they say they will do. Because academic
economists, including the author, rarely experience the hectic world of business operational
management, our standard economic models of the firm downplay the value of good, but not
theoretically optimal, decisions made within a one-minute time constraint. ESCN reduces the
probability that these good decisions will be bad decisions.
Empirical research in the economics of trust consistently reveals that “good” social
capital, in intra- and inter-business relationships, reduces transaction costs. These costs often are
associated with the opportunity cost of the manager’s time spent developing, maintaining, and
monitoring relational interactions with others. This well-established phenomenon can be
represented in the following system of functional relationships (Figure 4). Suppose transaction
costs (TC) are a function of time demands (TD) and trust (TR). In this framework increased
allocations of time increase the transaction costs for the manager. However, higher levels of
trust reduce the demands on the manager’s time and reduce transaction costs. Trust reduces the
costs of getting things done, or the costs of executing a business plan (Bossidy, Charan and
Burck 2002).
The final response to the question of “So what?” involves a sense of community.
Business managers clearly value the relational nature of ESCN with employees, customers,
suppliers, and even competitors; far more so than is captured in our standard economic models of
the firm. Shared beliefs or a common ethic stimulate and maintain this relational commitment,
not pure economic self-interest. This combination of bonding and bridging social capital creates
a resilient work environment that is constantly buffeted by the turbulence of globalization,
political crises, price shocks, and sin. ESCN provides greater economic, social and even spiritual
meaning and stability in the volatile world of business.

A Concluding Reflection
Contrary to popular belief, normative Biblical foundations of relational behavior based on
mutuality, commitment, trustworthiness, collaboration, stewardship, forgiveness, sacrifice, and
selflessness have not disappeared from the economic landscape. In the competitive world of
business, these foundations, albeit imperfectly and incompletely, reveal themselves in day-to-day

14
firm-level governance. Business experience indicates that these foundational behaviors assist the
firm in managing uncertainty, asymmetric information, and timeliness. We will enhance our
understanding of the economy and our teaching of business economics and management by
actively engaging and analyzing the reality of ESCN as a governance tool.

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Figure 1: The Structural Cord of Firm Governance

Hierarchies

Governance
Markets
Strategy Contracts

ESCN

Figure 2: Same People But Two Alternative Networks

a. A Structural Hole in the Network

b. Embeddedness in the Network

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Figure 3: Three Dimensional Relationship Space for a Transaction

Value to A and B’s Relationship

+ Value to Stakeholder B

-
-
- +
Value to Stakeholder A

Source: Adapted from Greenhalgh, 2001.

Figure 4: A Potential Relationship Economics Framework

Trust (TR)

Time Demands (TD) 45O Transaction Cost (TC )

TC

20