What is sociological about economic sociology? Uncertainty and the embeddedness of economic action

Theory and Society

Volumn 25, Issue 6, 1996, Pages 803-840

  Beckert, Jens ^a  

^a FREIE UNIVERSITÄT BERLIN   (Germany)

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EID: 0030298725     PISSN: 03042421     EISSN: None     Source Type: Journal    
DOI: 10.1007/BF00159817     Document Type: Review

References (157)

1. See Mark Granovetter, "The strength of weak ties,'' American Journal of Sociology 78 (1973): 1360-1380; Allan Fox, Beyond Contract (London: Faber and Faber, 1974); Fred Hirsch, Social Limits to Growth (Cambridge: Harvard University Press, 1975); Viviana Zelizer, "Human values and the market: The case of life insurance and death in 19th century America," American Journal of Sociology 84 (1979): 591-610.
2. See Mark Granovetter, "The strength of weak ties,'' American Journal of Sociology 78 (1973): 1360-1380; Allan Fox, Beyond Contract (London: Faber and Faber, 1974); Fred Hirsch, Social Limits to Growth (Cambridge: Harvard University Press, 1975); Viviana Zelizer, "Human values and the market: The case of life insurance and death in 19th century America," American Journal of Sociology 84 (1979): 591-610.
3. See Mark Granovetter, "The strength of weak ties,'' American Journal of Sociology 78 (1973): 1360-1380; Allan Fox, Beyond Contract (London: Faber and Faber, 1974); Fred Hirsch, Social Limits to Growth (Cambridge: Harvard University Press, 1975); Viviana Zelizer, "Human values and the market: The case of life insurance and death in 19th century America," American Journal of Sociology 84 (1979): 591-610.
4. See Mark Granovetter, "The strength of weak ties,'' American Journal of Sociology 78 (1973): 1360-1380; Allan Fox, Beyond Contract (London: Faber and Faber, 1974); Fred Hirsch, Social Limits to Growth (Cambridge: Harvard University Press, 1975); Viviana Zelizer, "Human values and the market: The case of life insurance and death in 19th century America," American Journal of Sociology 84 (1979): 591-610.
5. See Mark Granovetter, "Economic action and social structure: The problem of embeddedness," American Journal of Sociology 91 (1985): 481-510.
6. See Jack Hirshleifer and John G. Riley, The Analytics of Uncertainty and Information (Cambridge: Cambridge University Press, 1992); Mark Machina, "Choice under uncertainty: Problems solved and unsolved," in Cook and Levi, editors, Beyond Self-Interest (Chicago: University of Chicago Press, 1990), 90-131. On theories of risk attitudes see M. Rothschild and Joseph. E. Stiglitz, "Equilibrium in competitive insurance markets: An essay on the economics of imperfect information," Quarterly Journal of Economics 90 (1976): 629-649. This strategy of economic theory to reinterpret uncertainty as risk gives a very clear indication that uncertainty itself (defined as a situation in which no probabilities can be assigned to outcomes) cannot be incorporated into the maximizing assumption that stands at the core of economics.
7. See Jack Hirshleifer and John G. Riley, The Analytics of Uncertainty and Information (Cambridge: Cambridge University Press, 1992); Mark Machina, "Choice under uncertainty: Problems solved and unsolved," in Cook and Levi, editors, Beyond Self-Interest (Chicago: University of Chicago Press, 1990), 90-131. On theories of risk attitudes see M. Rothschild and Joseph. E. Stiglitz, "Equilibrium in competitive insurance markets: An essay on the economics of imperfect information," Quarterly Journal of Economics 90 (1976): 629-649. This strategy of economic theory to reinterpret uncertainty as risk gives a very clear indication that uncertainty itself (defined as a situation in which no probabilities can be assigned to outcomes) cannot be incorporated into the maximizing assumption that stands at the core of economics.
8. See Jack Hirshleifer and John G. Riley, The Analytics of Uncertainty and Information (Cambridge: Cambridge University Press, 1992); Mark Machina, "Choice under uncertainty: Problems solved and unsolved," in Cook and Levi, editors, Beyond Self-Interest (Chicago: University of Chicago Press, 1990), 90-131. On theories of risk attitudes see M. Rothschild and Joseph. E. Stiglitz, "Equilibrium in competitive insurance markets: An essay on the economics of imperfect information," Quarterly Journal of Economics 90 (1976): 629-649. This strategy of economic theory to reinterpret uncertainty as risk gives a very clear indication that uncertainty itself (defined as a situation in which no probabilities can be assigned to outcomes) cannot be incorporated into the maximizing assumption that stands at the core of economics.
9. For the notion of double contingency, see Talcott Parsons and Edward Shils, editors, Toward a General Theory of Action (Cambridge: Books on Demand, 1951).
10. See Kenneth Arrow and Gerald Debreu, "Existence of an equilibrium for a competitive economy," Econometrica 22 (1954): 265-290, and E. Roy Weintraub, General Equilibrium Theory (London: Macmillan, 1974).
11. See Kenneth Arrow and Gerald Debreu, "Existence of an equilibrium for a competitive economy," Econometrica 22 (1954): 265-290, and E. Roy Weintraub, General Equilibrium Theory (London: Macmillan, 1974).
12. See Carl Menger, Grundsätze der Volkswirtschaftslehre (Wien: Braumüller, 1871).
13. See Friedrich A. Hayek, Individualism and Economic Order (Chicago: University of Chicago Press, 1948).
14. Frank H. Knight, Risk, Uncertainty and Profit (Boston and New York: Kelley, 1921).
15. Knight, Risk, Uncertainty and Profit, 197.
16. Knight, Risk, Uncertainty and Profit, 229.
17. Knight, Risk, Uncertainty and Profit, 268.
18. This is a widely neglected part of his theory that received appreciation only after the emergence of the new institutional economics. See Oliver Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985).
19. John Maynard Keynes, Treatise on Probability (London: AMS Press, 1973), 34.
20. See John Maynard Keynes, "The general theory of employment," The Collected Writings of J.M. Keynes, Vol. XIV (London: Cambridge University Press, 1973), 109-123.
21. In the essay "The general theory of employment" Keynes writes: "By 'uncertain' knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only moderately uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest in twenty years hence, or the obsolescence of a new invention, or the position of private wealth owners in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and behave exactly as we should if we had behind us a good Benthamite calculation of a series of prospective advantages and disadvantages, each multiplied by its appropriate probability, waiting to be summed." (Keynes, "The general theory of employment," 114).
22. John Maynard Keynes, The General Theory of Employment, Interest, and Money (New York: Harcourt Brace, 1964), 152.
23. See Keynes, "The general theory of employment," 114-117.
24. Keynes, "The general theory of employment," 114.
25. Keynes, "The general theory of employment," 119.
26. See Weintraub, General Equilibrium Theory.
27. Roger Backhouse, A History of Modern Economic Analysis (New York: Blackwell, 1985), 290.
28. See Kenneth Arrow, "The organization of economic activity: Issues pertinent to the choice of market versus nonmarket allocation," Joint Economic Committee: The Analysis and Evaluation of Public Expenditures: The PPB System (Washington, DC: Government Printing Office, 1969), 47-64.
29. Moral hazard can be defined as actions of economic agents who maximize "their own utility to the detriment of others, in situations where they do not bear the full consequences or, equivalently, do not enjoy the full benefits of their action due to uncertainty and incomplete or restricted contracts which prevent the assignment of full damages (benefits) to the agent responsible" (Y. Kotowitz, "Moral hazard," The New Palgrave, Vol. 3 (1987): 549). An example for moral hazard is the increasing likelihood of fire in buildings for which fire insurance exists. Agency problems are especially pervasive in organizations if the owner or the management (principal) cannot attribute the work result of the employee (agent) to the fulfillment of the contractual agreements in the labor contract. This allows for shirking on the side of the agent. This problem was very effectively put to use in labor economics for the understanding of the stickiness of wages. (See Georg Akerlof, "Gift exchange and efficiency wage theory," American Economic Review 74 (1984): 488-500). A classical example for a non-Pareto efficient competitive outcome based on the problem of adverse selection is Akerlof's model of the "market for lemons." (See Georg Akerlof, "The market for 'lemons': Quality uncertainty and the market mechanism," Quarterly Journal of Economics 84 (1970): 79-83). This model demonstrates that the asymmetric distribution of information on the quality between sellers and buyers of used cars prevents the existence of a positive equilibrium price in this market. If used cars on the market have different qualities and the potential buyer does not know the quality of the particular car he wants to buy, he will only be willing to pay the price of an average quality car. This encourages sellers with higher-than-average quality cars to withdraw from the market, which lowers the average quality of offered cars. This circle continues so that no cars will be sold at any positive price. The basis for this competitive outcome is the asymmetric information between sellers and buyers, which gives rise to strategic considerations on both sides. Since the sellers of all but the best cars have an interest in not letting the potential buyer know what the actual quality of the car is and the buyer knows this, there will be no disclosure of accurate information. The buyer knows this and the seller knows that the buyer knows. One of the most important ideas that deal with the situation of market failure was developed by Michael Spence with the concept of signaling. Sellers of high-quality commodities will reveal themselves by giving credible market signals like extended warranties or brand names. The theory is based on the assumption that it is cheaper to produce these signals for producers with high-quality goods. (See Michael Spence, "Job market signaling," Quarterly Journal of Economics 87 (1973): 355-374).
30. Moral hazard can be defined as actions of economic agents who maximize "their own utility to the detriment of others, in situations where they do not bear the full consequences or, equivalently, do not enjoy the full benefits of their action due to uncertainty and incomplete or restricted contracts which prevent the assignment of full damages (benefits) to the agent responsible" (Y. Kotowitz, "Moral hazard," The New Palgrave, Vol. 3 (1987): 549). An example for moral hazard is the increasing likelihood of fire in buildings for which fire insurance exists. Agency problems are especially pervasive in organizations if the owner or the management (principal) cannot attribute the work result of the employee (agent) to the fulfillment of the contractual agreements in the labor contract. This allows for shirking on the side of the agent. This problem was very effectively put to use in labor economics for the understanding of the stickiness of wages. (See Georg Akerlof, "Gift exchange and efficiency wage theory," American Economic Review 74 (1984): 488-500). A classical example for a non-Pareto efficient competitive outcome based on the problem of adverse selection is Akerlof's model of the "market for lemons." (See Georg Akerlof, "The market for 'lemons': Quality uncertainty and the market mechanism," Quarterly Journal of Economics 84 (1970): 79-83). This model demonstrates that the asymmetric distribution of information on the quality between sellers and buyers of used cars prevents the existence of a positive equilibrium price in this market. If used cars on the market have different qualities and the potential buyer does not know the quality of the particular car he wants to buy, he will only be willing to pay the price of an average quality car. This encourages sellers with higher-than-average quality cars to withdraw from the market, which lowers the average quality of offered cars. This circle continues so that no cars will be sold at any positive price. The basis for this competitive outcome is the asymmetric information between sellers and buyers, which gives rise to strategic considerations on both sides. Since the sellers of all but the best cars have an interest in not letting the potential buyer know what the actual quality of the car is and the buyer knows this, there will be no disclosure of accurate information. The buyer knows this and the seller knows that the buyer knows. One of the most important ideas that deal with the situation of market failure was developed by Michael Spence with the concept of signaling. Sellers of high-quality commodities will reveal themselves by giving credible market signals like extended warranties or brand names. The theory is based on the assumption that it is cheaper to produce these signals for producers with high-quality goods. (See Michael Spence, "Job market signaling," Quarterly Journal of Economics 87 (1973): 355-374).
31. Moral hazard can be defined as actions of economic agents who maximize "their own utility to the detriment of others, in situations where they do not bear the full consequences or, equivalently, do not enjoy the full benefits of their action due to uncertainty and incomplete or restricted contracts which prevent the assignment of full damages (benefits) to the agent responsible" (Y. Kotowitz, "Moral hazard," The New Palgrave, Vol. 3 (1987): 549). An example for moral hazard is the increasing likelihood of fire in buildings for which fire insurance exists. Agency problems are especially pervasive in organizations if the owner or the management (principal) cannot attribute the work result of the employee (agent) to the fulfillment of the contractual agreements in the labor contract. This allows for shirking on the side of the agent. This problem was very effectively put to use in labor economics for the understanding of the stickiness of wages. (See Georg Akerlof, "Gift exchange and efficiency wage theory," American Economic Review 74 (1984): 488-500). A classical example for a non-Pareto efficient competitive outcome based on the problem of adverse selection is Akerlof's model of the "market for lemons." (See Georg Akerlof, "The market for 'lemons': Quality uncertainty and the market mechanism," Quarterly Journal of Economics 84 (1970): 79-83). This model demonstrates that the asymmetric distribution of information on the quality between sellers and buyers of used cars prevents the existence of a positive equilibrium price in this market. If used cars on the market have different qualities and the potential buyer does not know the quality of the particular car he wants to buy, he will only be willing to pay the price of an average quality car. This encourages sellers with higher-than-average quality cars to withdraw from the market, which lowers the average quality of offered cars. This circle continues so that no cars will be sold at any positive price. The basis for this competitive outcome is the asymmetric information between sellers and buyers, which gives rise to strategic considerations on both sides. Since the sellers of all but the best cars have an interest in not letting the potential buyer know what the actual quality of the car is and the buyer knows this, there will be no disclosure of accurate information. The buyer knows this and the seller knows that the buyer knows. One of the most important ideas that deal with the situation of market failure was developed by Michael Spence with the concept of signaling. Sellers of high-quality commodities will reveal themselves by giving credible market signals like extended warranties or brand names. The theory is based on the assumption that it is cheaper to produce these signals for producers with high-quality goods. (See Michael Spence, "Job market signaling," Quarterly Journal of Economics 87 (1973): 355-374).
32. Moral hazard can be defined as actions of economic agents who maximize "their own utility to the detriment of others, in situations where they do not bear the full consequences or, equivalently, do not enjoy the full benefits of their action due to uncertainty and incomplete or restricted contracts which prevent the assignment of full damages (benefits) to the agent responsible" (Y. Kotowitz, "Moral hazard," The New Palgrave, Vol. 3 (1987): 549). An example for moral hazard is the increasing likelihood of fire in buildings for which fire insurance exists. Agency problems are especially pervasive in organizations if the owner or the management (principal) cannot attribute the work result of the employee (agent) to the fulfillment of the contractual agreements in the labor contract. This allows for shirking on the side of the agent. This problem was very effectively put to use in labor economics for the understanding of the stickiness of wages. (See Georg Akerlof, "Gift exchange and efficiency wage theory," American Economic Review 74 (1984): 488-500). A classical example for a non-Pareto efficient competitive outcome based on the problem of adverse selection is Akerlof's model of the "market for lemons." (See Georg Akerlof, "The market for 'lemons': Quality uncertainty and the market mechanism," Quarterly Journal of Economics 84 (1970): 79-83). This model demonstrates that the asymmetric distribution of information on the quality between sellers and buyers of used cars prevents the existence of a positive equilibrium price in this market. If used cars on the market have different qualities and the potential buyer does not know the quality of the particular car he wants to buy, he will only be willing to pay the price of an average quality car. This encourages sellers with higher-than-average quality cars to withdraw from the market, which lowers the average quality of offered cars. This circle continues so that no cars will be sold at any positive price. The basis for this competitive outcome is the asymmetric information between sellers and buyers, which gives rise to strategic considerations on both sides. Since the sellers of all but the best cars have an interest in not letting the potential buyer know what the actual quality of the car is and the buyer knows this, there will be no disclosure of accurate information. The buyer knows this and the seller knows that the buyer knows. One of the most important ideas that deal with the situation of market failure was developed by Michael Spence with the concept of signaling. Sellers of high-quality commodities will reveal themselves by giving credible market signals like extended warranties or brand names. The theory is based on the assumption that it is cheaper to produce these signals for producers with high-quality goods. (See Michael Spence, "Job market signaling," Quarterly Journal of Economics 87 (1973): 355-374).
33. In a game of incomplete information the players do not have all information about the parameters defining the game, i.e., the payoff-functions, strategy options, and the information that each player has.
34. See John C. Harsanyi, "Advances in understanding rational behavior," in Elster, editor, Rational Choice (New York: New York University Press, 1986), 82-107.
35. David M. Kreps, Game Theory and Economic Modeling (Oxford: Oxford University Press, 1990).
36. Thomas R. Palfrey and Sanjay Srivastava, "Mechanism design with incomplete information: A solution to the implementation problem," Journal of Political Economy 97 (1989): 668-691.
37. See Peter Hammond, "Uncertainty," The New Palgrave, Vol. 4(1987): 728-733; Harsanyi, "Advances in understanding rational behavior"; A. Postlewaite, "Asymmetric information," The New Palgrave, Vol. 1 (1987): 133-135.
38. See Peter Hammond, "Uncertainty," The New Palgrave, Vol. 4(1987): 728-733; Harsanyi, "Advances in understanding rational behavior"; A. Postlewaite, "Asymmetric information," The New Palgrave, Vol. 1 (1987): 133-135.
39. See Peter Hammond, "Uncertainty," The New Palgrave, Vol. 4(1987): 728-733; Harsanyi, "Advances in understanding rational behavior"; A. Postlewaite, "Asymmetric information," The New Palgrave, Vol. 1 (1987): 133-135.
40. See Robert J. Schiller, "Expectations," in The New Palgrave, Vol. 2 (1987): 224-229.
41. See Hammond, "Uncertainty."
42. For a theoretical challenge to the use of Bayesian decision theory in game theory see Faruk Gul, "On the Bayesian View in Game Theory and Economics," Research Paper # 1991 (Stanford University, 1991).
43. See Akerlof, "The market for 'lemons': Quality uncertainty and the market mechanism"; David M. Kreps, P. Milgrom, J. Roberts, and R. Wilson, "Rational cooperation in the finitely repeated prisoner's dilemma," Journal of Economic Theory 27 (1982): 245-252; S. Rosen, "Implicit contracts: A survey," Journal of Economic Literature 23 (1985): 1144-1175.
44. See Akerlof, "The market for 'lemons': Quality uncertainty and the market mechanism"; David M. Kreps, P. Milgrom, J. Roberts, and R. Wilson, "Rational cooperation in the finitely repeated prisoner's dilemma," Journal of Economic Theory 27 (1982): 245-252; S. Rosen, "Implicit contracts: A survey," Journal of Economic Literature 23 (1985): 1144-1175.
45. See Akerlof, "The market for 'lemons': Quality uncertainty and the market mechanism"; David M. Kreps, P. Milgrom, J. Roberts, and R. Wilson, "Rational cooperation in the finitely repeated prisoner's dilemma," Journal of Economic Theory 27 (1982): 245-252; S. Rosen, "Implicit contracts: A survey," Journal of Economic Literature 23 (1985): 1144-1175.
46. Postlewaite, "Asymmetric information," 134.
47. See Oliver Williamson, Markets and Hierarchies (New York: Free Press, 1975) and Oliver Williamson, The Economic Institutions of Capitalism.
48. See Oliver Williamson, Markets and Hierarchies (New York: Free Press, 1975) and Oliver Williamson, The Economic Institutions of Capitalism.
49. In agency theory organizations are nothing more than a series of contracts between parties.
50. An important exception is the work by economic historian Douglas North who explains the emergence of economic institutions through their function in limiting the choice set of actors. Institutions facilitate market exchanges because of the creation of reciprocal expectations and the reduction of contingency. Institutions "reduce uncertainty by creating a stable structure of exchange" (Douglas North, "Institutions and their consequences for economic performance," in Cook and Levi, editors, The Limits of Rationality (Chicago: University of Chicago Press, 1990), 394). While Williamson assumes that economic institutions are transaction-cost efficient, this notion is not maintained by North. The interests of the state and path dependency allow for the creation and continued existence of inefficient institutional structures in an economy.
51. For this argument see also Glenn Caroll and Richard Harrison, "On the historical efficiency of competition between organizational populations," American Journal of Sociology 100 (1994): 720-749.
52. Hirshleifer and Riley, The Analytics of Uncertainty and Information, 10.
53. Equilibrium refinement refers to attempts by economists to eliminate multiple equilibria by distinguishing between plausible and unplausible equilibria. Equilibrium revelation attempts to reduce equilibrium points by changing the design of the mechanisms played by agents so that only desirable equilibria remain.
54. It is interesting to note that economists react outrightly hostile to these earlier notions of uncertainty. Coddington asserts that Keynes's notion of uncertainty in economic decision-making is ". . . as an analytical issue . . . either innocuous or else quite indiscriminately destructive" (A. Coddington, "Deficient foresight: A troublesome theme in Keynesian economics," American Economic Review 72 (1982): 480). Hirshleifer and Riley "disregard Knight's distinction, which has proved to be a sterile one" (Hirshleifer and Riley, The Analytics of Uncertainty and Information, 10).
55. It is interesting to note that economists react outrightly hostile to these earlier notions of uncertainty. Coddington asserts that Keynes's notion of uncertainty in economic decision-making is ". . . as an analytical issue . . . either innocuous or else quite indiscriminately destructive" (A. Coddington, "Deficient foresight: A troublesome theme in Keynesian economics," American Economic Review 72 (1982): 480). Hirshleifer and Riley "disregard Knight's distinction, which has proved to be a sterile one" (Hirshleifer and Riley, The Analytics of Uncertainty and Information, 10).
56. See Hirshleifer and Riley, The Analytics of Uncertainty and Information; Machina, "Choice under uncertainty: Problems solved and unsolved"; Oliver Williamson, "Calculativeness, trust and economic organization," Journal of Law & Economics 36 (1993): 453-486.
57. See Hirshleifer and Riley, The Analytics of Uncertainty and Information; Machina, "Choice under uncertainty: Problems solved and unsolved"; Oliver Williamson, "Calculativeness, trust and economic organization," Journal of Law & Economics 36 (1993): 453-486.
58. See Hirshleifer and Riley, The Analytics of Uncertainty and Information; Machina, "Choice under uncertainty: Problems solved and unsolved"; Oliver Williamson, "Calculativeness, trust and economic organization," Journal of Law & Economics 36 (1993): 453-486.
59. See Daniel Kahnemann, Paul Slovic, and Amos Tversky, editors, Judgment under Uncertainty, Heuristics and Biases (Cambridge: Cambridge University Press, 1982).
60. See Backhouse, A History of Modern Economic Analysis. However, one notable deviation from the rational-actor assumption is Akerlof's efficiency wage model, which assumes that standards of fairness among workers play a major role in overcoming principal-agent problems of shirking and malfeasance. See Georg Akerlof, "Gift exchange and efficiency-wage theory."
61. See Backhouse, A History of Modern Economic Analysis. However, one notable deviation from the rational-actor assumption is Akerlof's efficiency wage model, which assumes that standards of fairness among workers play a major role in overcoming principal-agent problems of shirking and malfeasance. See Georg Akerlof, "Gift exchange and efficiency-wage theory."
62. See for this point Jon Elster, Rational Choice (New York: New York University Press, 1986), 7.
63. See, for instance, Amitai Etzioni, The Moral Dimension (New York: Free Press, 1988). This does, of course, not mean that there are only empirical critiques of the economic-actor model. Parsons argued in his early work against this type of critique and demonstrated on theoretical grounds that utilitarian theory can only resolve the problem of order by negating the voluntaristic dimension of action. These critiques are not discussed here because they do not demonstrate that, under the conditions assumed in General Equilibrium models, social order (an efficient equilibrium) does not exist. A more ambitious concept of order serves as background to Parsons's critique.
64. For this distinction see Robert Frank, "Rethinking rational choice," in Roger Friedland and A. F. Robertson, editors, Beyond the Marketplace (New York: Aldine de Gruyter, 1990), 53-87.
65. Frank, "Rethinking rational choice," 54 f.
66. This distinction and its definition of "rationality" is, of course, based on a decision heuristics and not on sociological factors. It therefore also does not address the problem of how rationality is socially constituted. This important issue lies outside of the distinction.
67. See Amartya Sen, "Rational fools: A critique of the behavioral foundations of economic theory," Philosophy and Public Affairs 6 (1977): 317-344.
68. See Elster, Rational Choice, 17.
69. Jon Elster, "When rationality fails," in Cook and Levi, editors, The Limits of Rationality, (Chicago: Chicago University Press, 1990), 41.
70. See for this especially Daniel Kahneman, Jack L. Knetsch, and Richard Thaler, "Fairness as a constraint on profit seeking: Entitlements in the market," American Economic Review 76 (1986): 728-741. For a very interesting attempt to show how to incorporate the findings of psychological studies into a sociological theory of behavior under risk, see Carol A. Heimer, "Social Structure, Psychology, and the Estimation of Risk," Annual Review of Sociology 14 (1988): 491-519.
71. See for this especially Daniel Kahneman, Jack L. Knetsch, and Richard Thaler, "Fairness as a constraint on profit seeking: Entitlements in the market," American Economic Review 76 (1986): 728-741. For a very interesting attempt to show how to incorporate the findings of psychological studies into a sociological theory of behavior under risk, see Carol A. Heimer, "Social Structure, Psychology, and the Estimation of Risk," Annual Review of Sociology 14 (1988): 491-519.
72. This is not the case if it can be shown that the deviation from the rational-choice assumption generates superior results. This in fact undermines rational choice as a normative decision-theory. See for this James March, "Behavior and the concept of preference," in Jon Elster, editor, Rational Choice (New York: New York University Press, 1986): 60-81.
73. See Etzioni, The Moral Dimension, and Frank, "Rethinking rational choice."
74. See Etzioni, The Moral Dimension, and Frank, "Rethinking rational choice."
75. See Etzioni, The Moral Dimension.
76. See Etzioni, The Moral Dimension; Martin Hollis and Wilhelm Vossenkuhl, editors, Moralische Entscheidung und rationale Wahl (München: R. Oldenbourg, 1992);
77. See Etzioni, The Moral Dimension; Martin Hollis and Wilhelm Vossenkuhl, editors, Moralische Entscheidung und rationale Wahl (München: R. Oldenbourg, 1992);
78. Jane J. Mansbridge, editor, Beyond Self-Interest (Chicago: University of Chicago Press, 1990);
79. Mancur Olson, The Logic of Collective Action (Cambridge: Harvard University Press, 1965).
80. See Emile Durkheim, The Division of Labor in Society (New York: Free Press, 1984), and Talcott Parsons, The Structure of Social Action (New York: Free Press, 1949).
81. See Emile Durkheim, The Division of Labor in Society (New York: Free Press, 1984), and Talcott Parsons, The Structure of Social Action (New York: Free Press, 1949).
82. See Robert Axelrod, The Evolution of Cooperation (New York: Basic Books, 1984). However, the general claim of game theory to have solved the problem of cooperation has to be rejected. For reasons that cannot be shown here, it can be argued that the problem of cooperation offers a second systematic vantage point for economic sociology. The question would be: "Which social entities put us in a position to act 'irrationally' and make it thereby possible for us to reach superior results?"
83. See Raymond Boudon, "The logic of relative frustration," in Jon Elster, editor, Rational Choice (New York: New York University Press, 1986), 171-196 and Samuel Popkin, "The Political Economy of Peasant Society," in Jon Elster, editor, Rational Choice, 197-247.
84. See Raymond Boudon, "The logic of relative frustration," in Jon Elster, editor, Rational Choice (New York: New York University Press, 1986), 171-196 and Samuel Popkin, "The Political Economy of Peasant Society," in Jon Elster, editor, Rational Choice, 197-247.
85. I am only talking about economic contexts here. The usefulness of rational-choice theory for the analysis of other social situations has to be considered separately, and in many instances, much more critically. An example at hand is, of course, the work by Gary Becker.
86. See Niklas Luhmann, Die Wirtschaft der Gesellschaft (Frankfurt: Suhrkamp, 1988), 119.
87. For this point see Ronald Heiner, "The origin of predictable behavior," The American Economic Review 73 (1983): 560-595.
88. The importance of this point can be seen in two remarks from rational-choice theorists who point to the problem of uncertainty as the Achilles-heel of economic theory: "Assuming that we are facing a choice under uncertainty, does rational-choice theory tell us anything about what we ought to do? The answer is: very little" (Jon Elster, Rational Choice, 6). In a similar vein, economist Charles Schultze points to the crucial status of the assumption for economic theory that actors can act rationally: "When you dig deep down, economists are scared to death of being sociologists. The one great thing we have going for us is the premise that individuals act rationally in trying to satisfy their preferences. That is an incredibly powerful tool, because you can model it" (Charles Schultze, cit. from Robert Kuttner, "The poverty of economics," The Atlantic Monthly, February (1985): 76).
89. The importance of this point can be seen in two remarks from rational-choice theorists who point to the problem of uncertainty as the Achilles-heel of economic theory: "Assuming that we are facing a choice under uncertainty, does rational-choice theory tell us anything about what we ought to do? The answer is: very little" (Jon Elster, Rational Choice, 6). In a similar vein, economist Charles Schultze points to the crucial status of the assumption for economic theory that actors can act rationally: "When you dig deep down, economists are scared to death of being sociologists. The one great thing we have going for us is the premise that individuals act rationally in trying to satisfy their preferences. That is an incredibly powerful tool, because you can model it" (Charles Schultze, cit. from Robert Kuttner, "The poverty of economics," The Atlantic Monthly, February (1985): 76).
90. This leads also to definitions of uncertainty that form the category of risk in Frank Knight's definition. See for instance M. Hashem Pesaran, The Limits to Rational Expectations (Oxford: Blackwell, 1987) and Hirshleifer and Riley, The Analytics of Uncertainty and Information.
91. This leads also to definitions of uncertainty that form the category of risk in Frank Knight's definition. See for instance M. Hashem Pesaran, The Limits to Rational Expectations (Oxford: Blackwell, 1987) and Hirshleifer and Riley, The Analytics of Uncertainty and Information.
92. This shall not be understood in a deterministic sense. Ethnomethodology demonstrated already in the 1960s that actors cannot determine their actions solely based on internalized norms. Herbert Garfinkel in particular showed the necessity for continued creativity on the part of actors for the continuation of action sequences. The orientation on "social mechanisms" is meant in a weak sense that is not intended to negate the intentional aspect of action.
93. Heiner, "The origin of predictable behavior," 564.
94. Heiner, "The origin of predictable behavior," 565.
95. This would also provide an explanation of why, in contrast to the assumptions of modernization theory, modern economies are continuously socially embedded. We would hypothesize that in market societies, in which gain is a legitimate motif for economic transactions, institutions that hinder the realization of this orientation (for instance redistribution due to obligations) come under increased pressure. At the same time the demolishing of social institutions for the regulation of economic activities creates sources of uncertainty which produce in turn a need for renewed institutional guidance. With Giddens we could speak of "manufactured uncertainty" (Anthony Giddens, "Living in a post-traditional society," in Beck, Giddens, Lash, Reflexive Modernization (Stanford: Stanford University Press: 1994), 56-109). But, in contrast to Giddens, this uncertainty would not be the result of increasing institutional relfexivity, but of competing institutional rationalities in modern societies.
96. See Herbert Simon, Administrative Behavior (New York: Macmillan, 1945).
97. Simon, Administrative Behavior, 108.
98. See William Riker and Peter C. Ordeshook, An Introduction to Positive Political Theory, (Englewood Cliffs: Prentice-Hall, 1973).
99. See Herbert Simon, editor, Economics, Bounded Rationality and the Cognitive Revolution, (Brookfield: Ashgate Publishing, 1992).
100. See Geoff Hodgson, "The rationalist conception of action," Journal of Economic Issues XIX (1985): 825-851.
101. See for this point especially the work by Kahnemann and colleagues. Kahnemen, Knetsch and Thaler, "Fairness as a constraint or profit seeking: Entitlements in the market."
102. See Geoff Hodgson, Economics and Institutions (Cambridge: Ashgate Publishing, 1988).
103. Hodgson, "The rationalist conception of action," 826.
104. Hodgson, "The rationalist conception of action," 842.
105. See John W. Murphy, "Reason, bounded rationality, and the lebenswelt," American Journal of Economics and Sociology 51 (1992): 293-304.
106. One of the best formulations of this point goes back to Niklas Luhmann and his critique of Weber's theory of bureaucracy. See Niklas Luhmann, Zweckbegriff und Systemrationalität. Über die Funktion von Zwecken in sozialen Systemen (Tübingen: Mohr, 1968).
107. See for this type of differentiation between sociology and economics Vilfredo Pareto, The Mind and Society (New York: AMS Press, 1935) and Paul Samuelson, Foundations of Economic Analysis (Cambridge: Harvard University Press, 1947).
108. See for this type of differentiation between sociology and economics Vilfredo Pareto, The Mind and Society (New York: AMS Press, 1935) and Paul Samuelson, Foundations of Economic Analysis (Cambridge: Harvard University Press, 1947).
109. This argues of course also contrary to Parsons's distinction between economics and sociology. (See Parsons, The Structure of Social Action). Parsons saw the role of sociology in the determination of ultimate ends while economics dealt with the means-ends relationship under the assumption of maximizing behavior. This analytical distinction allowed Parsons to accept orthodox economics on the one hand and to define a systematic role for sociology in the action frame of reference on the other.
110. See Albert O. Hirschman, The Passions and the Interests (Princeton: Princeton University Press, 1977).
111. Mark Gould, "Parsons' economic sociology: A failure of will," Sociological Inquiry 61 (1991): 89-101.
112. I am not using the term utilitarianism, although the critique of classical sociology against rational-actor models was directed mainly against utilitarian social theory. Charles Camic has shown convincingly that the interpretation of utilitarian theory in sociology is severely flawed and neglects important aspects of the actual writings of authors like Hume, Smith, Bentham, and Mill (Charles Camic, "The utilitarians revisited," American Journal of Sociology 85 (1979): 516-550). In contrast to the sociological opinion, the utilitarian interpretation of social order is far less based solely on atomistic and egoistic individuals. Despite this reinterpretation, the sociological critique can very well be maintained against the parsimonious assumptions of General Equilibrium Analysis.
113. With the exception of Spencer and the recent rational-choice approach in sociology, one can look at the history of sociological thought from Comte to Habermas from the perspective that they jointly reject the possibility of the emergence of a stable social order based solely on self-interest.
114. See Peter Wagner, "Science of society lost: On the failure to establish sociology in Europe during the 'Classical' period," in Wagner, Wittrock, Whitley, editors, Discourses on Society XV (1990): 219-245.
115. See Simon Clarke, Marx, Marginalism and Modern Sociology, 2nd edition (London: Macmillan, 1991).
116. See Clarke, Marx, Marginalism and Modern Sociology, and Norbert Reuter, Der Institutionalismus (Marburg: Metropolis, 1994).
117. See Clarke, Marx, Marginalism and Modern Sociology, and Norbert Reuter, Der Institutionalismus (Marburg: Metropolis, 1994).
118. Spiro Latsis, "Situational determinism in economics," British Journal of Philosophy of Science 23 (1972): 207-245. It has repeatedly been observed that economic theory is designed in a way that allows for only one choice: the utility one assigns to a good or a service. See Brain Loasby, Chioce Complexity and Ignorance: An Enquiry into Economic Theory and the Practice of Decision Making (Cambridge: Books on Demand, 1976). Once preferences are determined, actors rely on a pre-written script for their market exchanges, which is determined by the utility function and the optimizing goal. Firms do not have any freedom of choice because the goal of profit-maximization determines their production function and consequently their factor demand and the quantity of output. Spiro Latsis called this lack of choice in economics "situational determinism."
119. Spiro Latsis, "Situational determinism in economics," British Journal of Philosophy of Science 23 (1972): 207-245. It has repeatedly been observed that economic theory is designed in a way that allows for only one choice: the utility one assigns to a good or a service. See Brain Loasby, Chioce Complexity and Ignorance: An Enquiry into Economic Theory and the Practice of Decision Making (Cambridge: Books on Demand, 1976). Once preferences are determined, actors rely on a pre-written script for their market exchanges, which is determined by the utility function and the optimizing goal. Firms do not have any freedom of choice because the goal of profit-maximization determines their production function and consequently their factor demand and the quantity of output. Spiro Latsis called this lack of choice in economics "situational determinism."
120. As an example: If an employer does not have complete knowledge about an employee's work, the pay cannot - or only coincidentally - equal the marginal product. This leads to the problem of controlling the worker and to the introduction of negative sanctions or positive incentives for the worker not to shirk. If, as assumed in the concept of uncertainty, the pay-off for an investment in control cannot be determined ex ante, it becomes impossible to integrate principal-agent problems simply in a rational-choice framework by adding control costs to the marginal costs of the product.
121. In the course of the development of sociological theory, sociology retreated more and more from dealing with the realm of the economy and theory development occurred independent from economics. At the same time, the problem of order remained as a central aspect of micro- and macro-sociological theory.
122. See Parsons and Shils, editors, Towards a General Theory of Action.
123. See for instance Harsanyi, Advances in Understanding Rational Behavior.
124. Parsons and Shils, Toward a General Theory of Action, 16.
125. See Charles Camic, "The matter of habit," American Journal of Sociology 91 (1986): 1039-1087.
126. See Knight, Risk, Uncertainty and Profit; Keynes, "The general theory of employment"; Simon, Administrative Behavior.
127. See Knight, Risk, Uncertainty and Profit; Keynes, "The general theory of employment"; Simon, Administrative Behavior.
128. See Knight, Risk, Uncertainty and Profit; Keynes, "The general theory of employment"; Simon, Administrative Behavior.
129. See for instance Sharon Zukin and Paul DiMaggio, editors, Structures of Capital: The Social Organization of the Economy (Cambridge: Cambridge University Press: 1990).
130. See Durkheim, The Division of Labor in Society.
131. Max Weber, Economy and Society (Berkeley: University of California Press, 1978), 64.
132. Anthony Giddens, The Constitution of Society (Berkeley and Los Angeles: University of California Press, 1984), 64.
133. See Hodgson, Economics and Institutions.
134. See especially North, "Institutions and their consequences for economic performance," and Williamson, The Economic Institutions of Capitalism.
135. See especially North, "Institutions and their consequences for economic performance," and Williamson, The Economic Institutions of Capitalism.
136. See Paul DiMaggio and Walter Powell, "The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields," American Sociological Review 48 (1983): 147-160.
137. See Harrison White, "Where do markets come from?," American Journal of Sociology 87 (1981): 517-547: and Ronald Burt, Structural Holes. The Social Structure of Competition (Cambridge: Harvard University Press, 1992). John Padgett and Christopher Ansell show, in a fascinating article on the rise of the Medici in Renaissance Florence, the importance of social networks for state building processes. Planning and self-interest cannot explain the power exercised by Cosimo de'Medici, but his structural position within Florentine elite networks can explain this (John F. Padgett and Christopher K. Ansell, "Robust action and the rise of the Medici, 1400-1434," in American Journal of Sociology 98 (1994): 1259-1319).
138. See Harrison White, "Where do markets come from?," American Journal of Sociology 87 (1981): 517-547: and Ronald Burt, Structural Holes. The Social Structure of Competition (Cambridge: Harvard University Press, 1992). John Padgett and Christopher Ansell show, in a fascinating article on the rise of the Medici in Renaissance Florence, the importance of social networks for state building processes. Planning and self-interest cannot explain the power exercised by Cosimo de'Medici, but his structural position within Florentine elite networks can explain this (John F. Padgett and Christopher K. Ansell, "Robust action and the rise of the Medici, 1400-1434," in American Journal of Sociology 98 (1994): 1259-1319).
139. See Harrison White, "Where do markets come from?," American Journal of Sociology 87 (1981): 517-547: and Ronald Burt, Structural Holes. The Social Structure of Competition (Cambridge: Harvard University Press, 1992). John Padgett and Christopher Ansell show, in a fascinating article on the rise of the Medici in Renaissance Florence, the importance of social networks for state building processes. Planning and self-interest cannot explain the power exercised by Cosimo de'Medici, but his structural position within Florentine elite networks can explain this (John F. Padgett and Christopher K. Ansell, "Robust action and the rise of the Medici, 1400-1434," in American Journal of Sociology 98 (1994): 1259-1319).
140. Besides network approaches, rational-choice theory also points to the importance of social structures for the explanation of outcomes. This trait is especially strong in the work by James Coleman. See James Coleman, Foundations of Social Theory, (Cambridge: Harvard University Press, 1990). However, social structures differ from the other mentioned devices in being consistent with the pursuit of calculative rationality by all agents. This, among many other helpful points, was brought to my attention by Paul DiMaggio.
141. Eric M. Leifer and Harrison White, "A structural approach to markets," in Mark Mizruchi and Michael Schwartz, editors, Intercorporate Relations (Cambridge: Cambridge University Press, 1986), 85-108.
142. See Paul David, "Understanding the economics of Poverty: The necessity of history," in William N. Parker, editor, Economic History and the Modern Economist (London: Blackwell, 1986), 30-49.
143. See Samuel Bowles, "The production process in a competitive economy: Walrasian, neo-Hobbesian, and Marxian models," American Economic Review, 75 (1985): 16-36.
144. See Granovetter, "Economic action and social structure: The problem of embeddedness."
145. Besides the article by Granovetter, see as a classic statement of this position Polanyi, The Great Transformation.
146. See Paul DiMaggio, "Interest and agency in institutional theory," in Lynne Zucker, editor, Institutional Patterns and Organizations (Cambridge: Ballinger, 1988), 3-22; Anthony Oberschall and Eric M. Leifer, "Efficiency and social institutions: Uses and misuses of economic reasoning in sociology," American Review of Sociology 12 (1986): 233-253.
147. See Paul DiMaggio, "Interest and agency in institutional theory," in Lynne Zucker, editor, Institutional Patterns and Organizations (Cambridge: Ballinger, 1988), 3-22; Anthony Oberschall and Eric M. Leifer, "Efficiency and social institutions: Uses and misuses of economic reasoning in sociology," American Review of Sociology 12 (1986): 233-253.
148. See for this point Leifer and White, "A structural approach to markets"; Luhmann, Die Wirtschaft der Gesellschaft; March, "Behavior and the concept of preference"; Oberschall and Leifer, "Efficiency and social institutions: Uses and misuses of economic reasoning in sociology."
149. See for this point Leifer and White, "A structural approach to markets"; Luhmann, Die Wirtschaft der Gesellschaft; March, "Behavior and the concept of preference"; Oberschall and Leifer, "Efficiency and social institutions: Uses and misuses of economic reasoning in sociology."
150. See for this point Leifer and White, "A structural approach to markets"; Luhmann, Die Wirtschaft der Gesellschaft; March, "Behavior and the concept of preference"; Oberschall and Leifer, "Efficiency and social institutions: Uses and misuses of economic reasoning in sociology."
151. See for this point Leifer and White, "A structural approach to markets"; Luhmann, Die Wirtschaft der Gesellschaft; March, "Behavior and the concept of preference"; Oberschall and Leifer, "Efficiency and social institutions: Uses and misuses of economic reasoning in sociology."
152. See Marshall Meyer and Lynne Zucker, Permanently Failing Organizations, (Huntington Park: Sage, 1988).
153. See Heiner, "The origin of predictable behavior," and March, "Behavior and the concept of preference."
154. See Heiner, "The origin of predictable behavior," and March, "Behavior and the concept of preference."
155. See March, "Behavior and the concept of preference."
156. See Charles Lindblom, "The science of 'muddling through'," Public Administration Review 2 (1959): 79-88, and James March and Johan Olson, Ambiguity and Choice in Organizations (Bergen: Oxford University Press, 1979).
157. See Charles Lindblom, "The science of 'muddling through'," Public Administration Review 2 (1959): 79-88, and James March and Johan Olson, Ambiguity and Choice in Organizations (Bergen: Oxford University Press, 1979).