Economic Institutions as Social Constructions: A Framework for Analysis

Author(s): Mark Granovetter

Source: Acta Sociologica, Vol. 35, No. 1 (1992), pp. 3-11
Published by: Sage Publications, Ltd.
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 Acta Sociologica(1992)35:3-11

Economic Institutions as Social

Constructions: A Framework for
Analysis
Mark Granovetter
Department of Sociology-, State University of New York at Stony Brook

Institutionaleconomics has moved from a position, earlierin the twentiethcentury,of

drawingeclecticallyon several other disciplines,to a stance of buildingits arguments
almostentirelyout of neoclassicalmaterials.Thispaperarguesthat sucha stancecannot
providea persuasiveaccountof economicinstitutions,andsuggestsa broaderfoundation
based on classical sociological argumentsabout the embeddednessof economic goals
and activities in socially oriented goals and structures.Emphasis is placed on how
economic activitycomes to be coordinatedby groupsof people ratherthan carriedout
by isolated individuals.Firmsin developingcountries,businessgroups, and the origins
of the electrical utility industryin the United States are posed as cases of the 'social
constructionof economic institutions'.It is arguedthat, althoughproperanalysisof such
cases involvesa high level of contingency,these contingenciescan be takeninto account
in a systematictheoreticalargument,and that historicistpitfallscan be avoided. Such
an argumentis posed as the distinctiveagendafor a new economic sociology.
Mark Granovetter,Departmentof Sociology, State Universityof New York at Stony
Brook, Stony Brook, NY 11794-4356,USA.

1. Introduction:the new sociologicaland legal factors,with minimal

economic sociology
The disciplineof economics has seen two
strongand, at firstglance, mutuallyincon-
sistenttrendsover the past twenty years:a
return to dominance by the pure neo-
classical tradition, after a period of con-
tention with competing paradigms,and an
attemptby economists to greatly broaden
their subject matter. This odd, simul-
taneousnarrowingand broadeningof per-
spective has resulted from the virtual
demiseof institutionaleconomicsin its mid-
centuryform.
Earliercontention had resultedfrom the
inability of the neoclassical synthesis to
explain the broad institutionalframework
within which economic transactions take
place.The resultingtheoreticalvacuumwas
filledby 'institutionalist'economics, whose
explanationsdrew on historical, political,
?) ScandinavianSociologicalAssociation,1992
3
use of formal economic reasoning. Such
widely followed American figures as
ThorsteinVeblen, John Commons,Wesley
Clair Mitchell and John Dunlop often
seemedas closely allied to other disciplines
as to economics.
A broad counterattack began in the
1960s,spearheadedby Gary Becker, later
joined by many of the best and brightest
mathematicaleconomists.They inventively
appliedrigorousneoclassicalargumentsto
problemspreviouslyabandonedto the insti-
tutionalists.The expansion of educational
institutions, long considered a cultural
phenomenon,was declaredthe outcome of
rationalindividualsinvesting in their own
capacities (Becker (1964), followed by a
vast outpouring of literature on 'human
capital'. See the critical review in Blaug
(1976)). Rigid wages and long tenures in
internallabor marketswere attributednot
to social pressuresor a 'new industrialfeu-
dalism'(a metaphorcommonin 1950slabor

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 economics), but to 'implicitcontracts'opti-
mallystructuredby rationalemployersand
employees faced with otherwise difficult
problems of shirking and bad faith. (See
the extended discussion in Granovetter
(1988)). Huge wage discrepanciesbetween
categories of workers resulted not from
restrictionson entry based on differences
in grouppower, but from optimalarrange-
mentsfor distributingtalentin society (e.g.
Rosen 1982). Verticalintegrationoccurred
not because of the suppliers' 'conspiracy
against the public' denounced by Adam
Smith, but as an arrangementto reduce
transactioncosts in marketswherebusiness
had become too complex to conduct
between independentunits (see especially
Williamson(1975, 1985)).
This 'New InstitutionalEconomics'- dis-
tinguishedfrom the old by its reliance on
argumentsfor the economic efficiency of
observedinstitutions- was closely allied to
the 'New Economic History', which made
similarclaimsfor historicalsettings. Prop-
erty rights, enclosures, and all manner of
political and legal institutionscame to be
interpreted as the efficient outcome of
rational individuals pursuing their self-
interest(e.g. North & Thomas 1973; Ran-
som & Sutch 1982). And these new inter-
pretationswere appliedeven to spheresfar
from economists'traditionaldomain, such
as the family, crime, altruismand animal
behavior (e.g. Becker 1976, 1981). Rep-
resentativeof the claims of this optimistic
new school is Jack Hirshleifer'scomment,
in a 1985 article entitled 'The Expanding
Domain of Economics', that 'economics
really does constitute the universalgram-
marof social science' (p. 53).
One unifyingtheme of my currentwork
is that the new economic imperialism
attempts to erect an enormous super-
structureon a narrowand fragile base. A
more solid foundationcan be constructed
on the basis of three classic sociological
assumptions:(1) the pursuitof economic
goals is normallyaccompaniedby that of
such non-economic ones as sociability,
approval,status and power; (2) economic
action (like all action) is socially situated,
and cannot be explained by individual
motives alone; it is embedded in ongoing
networksof personalrelationsratherthan
4
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carried out by atomized actors (for an
earlierprogrammatic statementsee Grano-
vetter (1985)); (3) economic institutions
(like all institutions) do not arise auto-
maticallyin some form made inevitableby
external circumstances, but are 'socially
constructed'(Berger & Luckmann1966).
The extreme version of methodological
individualismthat dominatesmuchof mod-
ern economics makes it difficultto recog-
nize how economic action is constrained
and shaped by the structures of social
relationsin which all real economic actors
are embedded. Economists who want to
reform the discipline typically attack its
psychology - proposing a more realistic
model of decision-making(see, e.g., Lei-
benstein 1976). While the psychology in
neoclassicalmodels may well be naive, I
claimthatthe maindifficultylies elsewhere:
in the neglect of social structure. Psy-
chological revisionismhas a following in
partbecauseit does not requireeconomists
to give up the assumption of atomized
actors making decisions in isolation from
broadersocial influences.
Mid-centuryeconomic sociology oper-
ated at the fringes of economic activity,
cedingthe centraltopicsof production,dis-
tributionand consumptionto economists.
The more recent generation of economic
sociologists,who constitutewhat I call the
'New Economic Sociology', have looked
much more at core economic institutions,
andarecloserto suchintellectualforebears
as Emile Durkheimand Max Weber- who
regardedeconomicaction as a subordinate
and special case of social action - than to
the accommodationiststance of mid-cen-
tury sociologists.I
An importantpartof this focus is a socio-
logicaltheory of the constructionof econ-
omic institutions.Sucha theorymust make
dynamicscentral, in contrastto most neo-
classical economic work on institutions
which (like many branchesof economics)
emphasizesthe comparativestaticsof equi-
librium states. Without explicit dynamic
argument,we have the irony that econom-
ics, despite its devotion to methodological
individualism,findsitselfwithno readyway
to explaininstitutionsas the outgrowthof
individual action, and so falls back to
accounts based on gross features of the
 environment. There are two such main
accounts:culturalismand functionalism.
Culturalist accounts explain economic
institutionsas arising from culturalbeliefs
that predispose a group to the observed
behavior, as in the claim that the stress
in Japaneseculture on 'organic'unity and
hierarchicalloyalty produces trouble-free
industrial organization. Functionalist
accountsarguebackwardsfrom the charac-
teristicsof institutions to the reason why
they must be present. Andrew Schotter,in
his Economic Theoryof Social Institutions
(1981)states this principlein unusuallycan-
did (and a sociologist might add, pre-Mer-
tonian)form- that to understandanysocial
institution requires us to 'infer the evol-
utionaryproblem that must have existed
forthe institutionas we see it to havedevel-
oped. Every evolutionaryeconomic prob-
lem requiresa social institutionto solve it'
(p. 2). This implicitlyassumes a system in
equilibrium, since a still-evolving insti-
tutionmight not reveal by inspectionwhat
problem it had evolved to solve. These
highlyellipticaland often tautologicalcul-
turalistand functionalistaccounts become
superfluousonce the social constructionof
institutionsis properlyunderstood.
But it is not enough merely to chip away
at the insufficienciesof neoclassicalecon-
omics.A theoreticallypersuasiveeconomic
sociology must also provide an attractive
alternativethatimprovesupon the explana-
torypowerand predictiveabilityof existing
accounts. Though I argue repeatedly
against the reductionist methodological
individualismof moderneconomics, I have
no taste for the historicistviews of some of
itsotheropponents,who supposethatevery
case is unique and anything can happen.
I stress the contingencies associated with
historicalbackground,social structureand
collective action, and the constraints
imposed by already existing institutions;
but my aim is still that of finding general
principles,correct for all times and places.
This requiresthat the contingenciesthem-
selvesbe systematicallyexploredand incor-
porated into the theoretical structure. It
also requiresus to understandunder what
circumstances economic institutions are
malleableby the forces of social structure
andcollectiveaction, or 'lockedin' in sucha
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way thatthese forces are mainlyirrelevant.
Finally,andclosely relatedto this last issue,
a sophisticated economic sociology will
neitherthrowthe valuable corpusof econ-
omic reasoning out the window, nor be
so seduced by it as to produce a 'rational
choice' argumentthat loses touch with the
classicsociological tradition;rather, it will
seek to understandhow moderneconomics
can be integrated with a social con-
structionist account of economic insti-
tutions,andwhat the divisionof labormust
thereforebe between sociology and econ-
omics.
2. Over- and undersocialized
conceptions of human action
Before discussing institutions as such, I
want to make some general comments on
conceptionsof human action. I begin by
referringto Dennis Wrong's (1961) article
'The OversocializedConceptionof Man in
Modem Sociology'. Wrong complained
that sociologistssaw people as so sensitive
to the opinions of others that they auto-
matically obeyed commonly held norms
for behavior. This 'oversocialized' view
resultedfroman attemptto compensatefor
the neglect of social effects in (what Talcott
Parsons (1937) called) the utilitarian
tradition,whose view of economic action I
would call 'undersocialized'.(For a fuller
accountof this distinction,see Granovetter
(1985)). As Albert Hirschman(1982) has
pointed out, in classical and neoclassical
economics,tradersin competitive markets
are price-takersand thus interchangeable.
The detailsof theirsocial relationsare irrel-
evant.
The classical economists thus treated
these relations only as a drag on perfect
competition. In a famous line from The
Wealthof Nations, AdamSmithdenounced
the use of social occasions by traders to
fix prices. Implicitlyhe recognizedthat his
image of competitive markets was incon-
sistentwith a world where economic actors
knew one another personallywell enough
to collude.In recentyears, a differenttend-
ency has emergedin economists'treatment
of social influences: that is to take them
 seriously but in terms close to Dennis
Wrong's 'overocialized' conception: e.g.
James Duesenberry's (1960) quip that
'economicsis all about how people make
choices; sociology is all about how they
don't have any choices to make', or E. H.
Phelps-Brown'sdescription of the 'soci-
ologists'approachto pay determination'as
assumingthat people act in 'certain ways
becauseto do so is customary,or an obli-
gation,or the "naturalthingto do", or right
and proper, or just and fair' (1977).
This conception of 'social influences' is
oversocialized because it assumes that
people follow customs, habits or norms
automaticallyand unconditionally;nearly
all economists' treatment of 'norms' has
thisflavor,and discussionsof 'conventions'
also run the risk of sliding into an over-
socializedtreatment. But this points to an
irony of great theoretical importance:the
oversocialized approach has in common
with the undersocializeda conception of
action uninfluenced by peoples' existing
social relations.
In the undersocializedaccountthis atom-
ization results from the narrow pursuitof
self-interest; in the oversocialized one -
which originated as a corrective to the
undersocializedone - atomization results
nevertheless because behavioral patterns
are treatedas havingbeen internalizedand
thusunaffectedby ongoingsocial relations.
Thissurprisingconvergenceof underand
over-socialized views helps explain why
economists who try to incorporate social
influenceson economic action fall so easily
into oversocializedarguments. Thus it is
common to attribute distinctive styles of
decision-makingto members of different
social classes, as the result either of class
culturesor of each class'sdistinctiveexperi-
ence in the eductional system (cf. Piore
1975;Bowles & Gintis 1982). But this con-
ceptionof how societyinfluencesindividual
economic action is too mechanical: once
we knowsomeone'ssocialclass, everything
else in his behavior is automatic, since he
is so well socialized - I would say 'over-
socialized'.Thus, I attempt in my work to
thread my way between under and over-
socializedviews, by analyzinghow behavior
is embeddedin concrete, ongoing systems
of social relations.
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3. The social constructionof
economic institutions
I now proceedto discussthe impact of this
'embeddedness'on the social construction
of economic institutionsby focusing on a
problemtraditionallygiven little attention
in economictheory:how andwhyeconomic
activities are carried out not by isolated
individuals, but by groups that entre-
preneursget to cooperate in such larger
entitiesas firms,industriesand inter-indus-
try groups. In other words, I recast the
problem of economic institutions as one
involvingthe mobilizationof resourcesfor
collective action, which opens it up to a
whole stream of thought in sociology and
politicalsciencepreviouslyconsideredirrel-
evant.
FollowingSchumpeter(1926), one may
call those who coordinate the economic
activityof otherwise separate individuals,
'entrepreneurs'. But the neoclassicaltheory
of the firm ignores the entrepreneur
because, as William Baumol points out,
its model 'is essentially an instrumentof
optimality analysis of well-defined prob-
lems, and it is precisely such. . . problems
whichneed no entrepreneurfor their solu-
tion'(1968:67).Thiscommentsuggeststhat
the emphasis in economic theory on the
comparativeanalysisof equilibriumstates
discouragesattentionto entrepreneurship,
whichcan best be thought of as involving
situations where markets are out of
equilibrium.2Related to the failureto pro-
vide dynamicsis the tendency to abstract
awayfrominstitutionson the groundsthat
opportunitiesfor profit will automatically
be taken;if there are institutionalor other
barriersto the taking of such profit, these
will be breached,and since one can count
on this takingplace, the actual process by
which it occurs is not of much theoretical
interest.Correspondingly,institutionsthat
encourage or discourage entrepreneur-
ship are neglected since it is assumed that
it will emerge if there are profits to be
made.3
This helps explain the remarkablefact
that in the recently burgeoningeconomic
literatureon why firms exist, exemplified
by Oliver Williamson's work on 'trans-
actioncost economics'(1975, 1985), entre-
 preneursstill make no appearanceandhow
firmscome to exist receives no attention.
Instead, it is assumed that firms emerge
when needed to reduce transactioncosts.
In the functionaliststyle of the New Insti-
tutional Economics, this emergence is
taken to be automatic.
But economic institutionsdo not emerge
automatically in response to economic
needs. Rather,they areconstructedby indi-
vidualswhose action is both facilitatedand
constrainedby the structureand resources
availablein social networks in which they
are embedded. We can see this in many
accountsfrom developing countrieswhere
firms would greatly reduce transactions
costs but cannot be constructed.What are
the difficulties?
Traditionaldevelopment theory took a
dim view of social structureswhere econ-
omic activity was embedded in non-econ-
omicobligations,supposingthat this would
preventefficientoperations.But wherethis
embeddingis in fact absent, and manyindi-
viduals appear to be rational profit max-
imizers - approximating the 'under-
socialized'model of human action I have
described above - economic activity is
often stymied by lack of the interpersonal
trust required to delegate authority or
resourcesto others (see, e.g., Dewey 1962;
Geertz1963;Davis 1973;D. Szanton1971).
But if such problemsof trustare overcome,
the problemforecastby traditionaltheories
does indeedcome to pass:the fledglingfirm
is often swamped by the claims of friends
andrelativesfor favorsandsupport.As one
abdicatedking in Bali told anthropologist
Clifford Geertz, firms 'turn into relief
organizations rather than businesses'
(1963:123).That is, the welfareof the local
communityis put ahead of that of the busi-
ness as such.
Certain groups, however, such as the
overseas Chinese in Southeast Asia, con-
sistentlyovercome both problems.Trustis
available because the community is so
close-knitthat malfeasanceis not only dif-
ficultto conceal or execute, but often even
hardto imagine. Many accountsthus indi-
cate that Chinese businessesextend credit,
pool capitaland delegate authoritywithout
fearof defaultor deceit. How, then, do the
businessesavoid the second problem, that
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of excessiveclaimsbased on non-economic
ties?
Part of the answer is that overseas
Chineseare typicallya small minority,and
there are simply not enough of them for
suchclaimsto cause trouble.But the organ-
izationof social networksalso limitsclaims,
because people belong to non-overlapping
groups.Kinshipis so clearcutthat the num-
ber of relatives with credible claims on a
businessis small and well-defined. People
also divideinto groupsbased on recency of
immigrationand on home area in China.
Particularbusinesses are organized along
such kinshipand organizationallines, and
it is thus sharplydefined which individuals
can make claims. By contrast, most non-
Chinese Southeast Asian kinship patterns
are more diffuse, so it is hard to limit the
numberof relativeswith legitimateclaims;
and people typicallybelong to many over-
lappinginterestgroups,so that if one is the
core of a business,its membersmay still be
subject to claims from fellow members of
others (Geertz 1963; Dewey 1962; Davis
1973;Lim & Gosling 1983).
Brieflyput, overseasChinesesocialstruc-
ture has a pattern of coupling and dec-
oupling that produces highly cohesive
groupsthat are sharplydelimitedfrom one
another; thus trust is available but non-
economic claims are illegitimate beyond
thesegroupboundaries.These mechanisms
of couplingand decoupling,that define the
boundariesof trust and social affiliation,
must become central matters for a theory
of economicinstitutions.It would be a fair
generalization to say that across such
boundaries,economicactorsmayappearto
act as if following the undersocialized
model of action, and within them, as if
oversocialized- following the dictates of
the group. But this way of viewing the
mattershows that the fundamentalissue is
not to get the right model of individual
action, but rather to understandproperly
how variations in social structure create
behaviorthat appearsto follow one model
or the other. The locus of explanation
movesawayfrom the isolated individualto
a largerandmoresocialframeof reference.
Following out this logic, note that the
argumentabout Chinese firmsimplies that
undersome conditions,it is possible to use
connectionsof familyandfriendshipto dev-
elop efficient firms. But one may suspect
that the consequentoverwhelmingimport-
ance of trustin such firmsdrasticallylimits
expansion even when it would be econ-
omicallyrewarding.How can such a limi-
tationbe overcome?In manycountriesthis
occurs as the result of alliancesof families
into 'business groups'. This widespread
phenomenongoes under many names: the
old zaibatsuand their modem successorsin
Japan; the chaebol in Korea, the grupos
economicosin LatinAmerica, the 'twenty-
two families'of Pakistan,and on and on.
Thoughthere are analysesof suchgroups
in particularcountriesand regions,we have
so far no sustained analysis of the phenom-
enon as a whole, and little realizationthat
thisis a centralaspectof modem capitalism.
The groupsvaryin size, structureand legal
organization,andhave originatedin a num-
ber of different ways. One dimension of
variation, for example, is the extent to
which these groups originated in a single
family group which then extended its
domainthroughacquisitionor alliance, as
in Japanand Korea, or in the coalescence
of a numberof strongfamilyor othergroups
that began independentlyand laterjoined,
as is more the case in Latin America. But
whateverthe originand structure,it is com-
mon for them to span a number of firms
and industries, and to coordinate their
investmentand productiondecisions,often
througha bank that is formedthroughand
closely identified with the group. Such
groupshave a strong and sometimes dom-
inating role in the economies and polities
of their countries.
And despite the variationsin historyand
structure,it is typicalfor such groupsto be
composedof participantswho are, to quote
one economist who has studied them,
'linked by relationsof interpersonaltrust,
on the basisof a similarpersonal,ethnic or
communalbackground'(Leff 1979:663).In
some cases, tne network of personal
relations that initially builds the group
becomes formalizedinto institutionalpat-
ternssuch as holdingcompaniesas in Nica-
ragua(Strachan1979)or patternsof mutual
stockholdingas in Japan (Gerlach 1991).
And then the shape of these institutions
resultsmore from the originalstructureof
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personalrelationsthan from the exigencies
of the market - they are, in effect, con-
gealed social networks.
Economists studying these groups in
developing countries, interpret them as
responsesto marketimperfections,arguing
thattheywill vanishas more 'sophisticated'
marketsappear(e.g. Leff 1979). But when
economistscome upon them in advanced
economies, as in Japan, Korea, France,
West Germany and others, they either
arguethat they are vestigialand will fade -
as used to be arguedfor Japan, thoughthis
is now increasinglyimplausible- or that
they arise in just those economic cir-
cumstancesthat make them efficient. The
argumentsfor developing and developed
economies alike are functionalist tauto-
logiesthat avoidthe centraltasks of under-
standing how such alliances can be
constructedand why capitalisteconomies,
despite their great differences, rarely con-
sist of single, unrelatedfirms.
Just as for firms and business groups, I
arguethat whetherand how an industryis
organizedis a social construction.I use the
case of the electricalutility industryin the
UnitedStates from 1880to 1930.4We want
to explainwhycertainplausiblealternatives
to the privateinvestorowned utilities now
dominant in the United States did not
occur: e.g. public ownership, or private
generationof electricpower by each home
and largeindustrialcompany,whichwould
have consignedutilities to a minor role.
We find a series of stages where the per-
sonal networksof a few individualswere
crucial.From1880to 1892,ThomasEdison
mobilized his considerable personal fol-
lowing, includingsubstantialcapital from
the GermanEmpire, in a bitter struggleto
defeat bankerJ. P. Morgan'svision of an
industryprovidingnot electricitybut gen-
eratorsto homesand businessesto produce
their own electricityon site - the kind of
systemthat, in the United States, became
conventionalfor home heating.
Edison had alwayspreferredcentralsta-
tionsandthoughhe was finallyousted from
GeneralElectricandthe electricityindustry
by J. P. Morganin 1892, the dominanceof
centralstationswas by then too entrenched
for even Morganto reverse.Note that Edi-
son won this battlenot becausehis solution
was the technologically correct one, but
rather because he was able to construct
winningcoalitions of key actors.
One of Edison's main assistantsin this
battle was his personalsecretary,the Eng-
lishman Samuel Insull. In 1892, Insull
movedto Chicagoto take over a small,new
company, Chicago Edison, and brought
with him a unique set of personal ties: to
financiers in Chicago, New York and
London, to local political leaders, and to
inventors in both the United States and
Britain. Many of these had been forged
as the result of his long association with
Edison. His combination of financialand
technical expertise and political connec-
tions allowed him to assemblecapital, pol-
itical favors and ways of operating that
other utility companies had found impos-
sibleto implement,even thoughsome were
well aware of their potential. That is, his
achievementswere due to his politicaland
entrepreneurialskills rather than to tech-
nologicalor organizationalinnovations.
A close studyof the way Insullorganized
ChicagoEdison, with the help of his exten-
sive connectionsand technicalskills, shows
that the structure of the entire industry
derived from the initial organizational
decisionsin what would becomethe largest
andmost successfulfirm.Insullalso shaped
the industryby encouragingregulationby
states (rather than by the federal or local
governments)and by developingthe hold-
ing companyform, that stabilizedrelations
with local industry and with regulators.
Soon, this network of firms, holding com-
panies and regulatorscongealed. Personal
networksstill mattered, but only those of
people central in the holding companies.
By the 1920s, the institutionalforms were
in place, and the outcome that we now see
in the industrywas alreadyvisible.
4. Discussion
In the case of the evolutionof an industry,
as forthe developmentof firmsandbusiness
groups, stable economic institutionsbegin
as accretions of activity patterns around
personalnetworks. Their structurereflects
that of the networks, and even when those
are no longer in place, the institutionstake
on a life of their own that limits the forms
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futureones can take; they become 'locked
in'.5 Thus, economic problems and tech-
nologydo not call forth organizationalout-
comesin some automaticandunconditional
way. Instead, these economic conditions
restrict what the possibilities are. Then,
individualand collective action, channeled
throughexisting personalnetworks,deter-
mine which possibility actuallyoccurs. So
even in identical economic and technical
conditions, outcomes may differ dra-
maticallyif social structuresare different.
Wherefirmsare, in some sense, 'calledfor'
by market conditions, they still may not
arise if no group'ssocial structurecan sus-
tain them; inter-industry'groups' may or
may not arise in favorable economic con-
ditions, dependingon the structureof con-
nections among important families; and
industriesmay be configuredin quite dif-
ferentways, dependingon the shapesof the
interpersonalnetworks of leading actors.
There is thus, in this argument, a high
level of contingencyin the outcomes. This
resemblessituationsin economic dynamics
that are characterizedby multiple stable
equilibriumpoints. Indeed, I believe that a
social constructionist account can help
make such dynamic economic models of
institutions more sophisticated. These
modelsare frustratingbecausethere is little
substantive way to resolve their under-
determination.As in physical cases with
multiple equilibria, you can understand
whichstate the systemhas reachedonly by
lookingat its history.But the contingencies
involvedin this historyare typicallyoutside
the economicframework,and thusseem ad
hoc and unsatisfyingto economists;within
a sociological framework, however, they
can be given systematictreatment.
Notice that such multiple equilibrium
models, even if underdetermined,are far
from the historicist argument that every
case is unique and anythingis possible. In
all my cases there are only a few major
possibilities.In the case of electricutilities,
for example, we see, in effect, three poss-
ible system equilibria- public ownership,
privatedecentralizedgenerationof power,
or privatelyheld utilities.Whatwe argueis
even given the constraintsof the particular
political, technical and economic
parametersin place in late 19th century
 America, other outcomes were unlikely,
butanyof these three mighthave occurred.
Individualand collectiveaction, channeled
throughexisting networksof personal and
politicalrelations,determinedwhichpossi-
bility actuallydid occur.
An importantpart of general arguments
aboutsuchmatterswouldbe to characterize
those circumstances under which there
indeed are multiple equilibria, and net-
works of collective action may determine
outcomes;part of my argumentabout the
utilitieswas that lateron, once the industry
form was locked in, the other possibilities
were foreclosed, and in those periods, less
contingenttheoreticalaccountsmighthave
sufficed.
Also centralto the projectis to formulate
some theoretical principles concerning
social structurethat will cut across all the
cases and offer some explanatorypower.
One such generalprincipleis that the level
of networkfragmentationand cohesion, or
couplingand decoupling,is a major deter-
minantof outcomes.Thatwas centralin the
discussionof malfeasance,in the argument
about the overseas Chinese and in the
discussionof -businessgroups.
Such an argumentbearsalso on the case
of electric utilities. If Samuel Insull, for
example, had been socially located in a
tightly-knitnetworkof close associates, he
mightwell have found it impossibleto con-
structthe outcomeshe did. Instead, he had
relatively weaker ties into several insti-
tutional spheres - financial, political and
technical- that were decoupled from one
another, and this was the reason for his
success. The general principlemay be that
the actor whose network reaches into the
largest number of relevant institutional
realmswill have an enormous advantage.
This may be a case of what I have called
the 'strengthof weak ties' (1973). It relates
also to the work of Norwegian anthro-
pologist FredricBarth, who considers the
ability to breach traditionally closed
spheresof exchangeas the essence of entre-
preneurship(Barth 1966).
The ultimate aim, then, is to produce a
theoreticalargumentwith a high level of
contingencythat neverthelessmeets scien-
tific standardsof generality, and does not
fall preyto ever-presenttemptationsof his-
10
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All use subject to JSTOR Terms and Conditions
toricism. Such an agenda, I argue, is central
to the vitality of the new economic soci-
ology.
Acknowledgements
This paperwas presentedat a conferencespon-
soredby the Centrede Rechercheen Epistmo-
logie Appliqueof the Ecole Polytechnique,on
'The Economicsof Conventions', Paris, 27-28
March1991. It drawson my book-in-progress,
Societyand Economy: The Social Construction
of EconomicInstitutions,to be publishedby Har-
vardUniversityPress.
Received September1991
FinalversionacceptedDecember 1991
Notes
I Fora moredetailedhistoricalaccountof the
economicargumentsof Durkheim& Weber,and
of the interactionsbetweeneconomistsand soci-
ologistsover the courseof the twentiethcentury,
see Granovetter(1990).
2 For elaborationson this theme, see Blaug
(1986)and Kirzner(1973).
3 For a more detailed accountof the ups and
downsin the treatmentof entrepreneurshipby
economists,see Granovetter(1991:Ch.4).
' This section reports on collaborative
work
originatedby PatrickMcGuireand joined later
by me and MichaelSchwartz.
I The idea that institutions may become
'lockedin' despitethe possiblegreaterefficiency
of otherconceivableformsis a generalizationof
the argument for lock-in of inefficient tech-
nologiesby Paul David (1986) and BrianArthur
(1989). Their line of argumentparallelsthat in
industrialorganizationon 'first-mover'advan-
tage.
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