A socio-dynamic understanding of markets: the progressive joining forces of economic sociology and Austrian economics

American Journal of Economics and Sociology, The,  Oct, 2005  by Anders Liljenberg

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I

Introduction

IT IS A TRUISM that the market is very much an invisible feature of neoclassical economics (see Swedberg 1994). This should, however, come as no surprise, since this successful branch of the social sciences does not set out to understand the market in its own right. It is, and for the better part does Hot set out to be, anything other than the epitome of price theory, by means of which various combinations of assumptions are analyzed regarding their impact on prices and derivatives thereof, subject to highly formalized models. The strength of the assumptions is conducive to the predictive power of these models (see Friedman 1953). Prediction of price (stemming from the parametric character thereof) and not market understanding in general is hence at the core of this agenda. The market, when explicitly referred to, is depicted as a setup of various structural assumptions, a reflective foil known as the "competitive structure" that pertains to the number of actors, the nature of decision making, and the specificity of goods or elasticities of demand and supply, respectively (see Thin 1960, who depicts a "theory of markets" in this vein). Explicit references to the market then become either "over contingent" on the use to which it is put (Is the market, for instance, supply- or demand-side defined? In other words, is it identical to an industry in terms of adapted technology, or is it equivalent to chains of substitution?) or simply "empty," as seen when the market is depicted as identical to the aggregated demand curve (see Tirole [1988] 1995; Demsetz 1982). Apart from anything else, this hardly renders feasible an understanding of the market as a dynamic institution resulting from human action.

This said, it is indeed possible to come up with a few alternatives that pay due respect to the market more in its own right. Such ideas cannot be said to constitute a "remedy," as that would imply the failure of neoclassical economics in this regard. But this agenda cannot possibly be accused of something it does not set out to attain. Instead, such alternatives take on different perspectives by choosing to emphasize issues that point in directions other than prediction of price. There is an army of options to explore, but one clear choice is to home in on two specific facets that are mostly absent in neoclassical reasoning, what this paper terms social and dynamic properties of markets. They are discussed in this paper from within economic sociology and Austrian economics. That these two strands of thought are in fact reconcilable in this regard is safeguarded by a brief discussion of individualism.

II

The Market in Economic Sociology

WHEN TRYING TO GRASP THE MARKET FROM A SOCIOLOGICAL ANGLE, one could always debate whether what unfolds is a "sociology of markets" or a "market sociology." By this latter term is here meant an understanding of the market by means of sociological ideas and tools, while a "sociology of markets" (see Lie 1997) represents more of an overall market scrutiny seen from several theoretical angles) Thus, an emergent market sociology could start out with the idea of the market as a social structure as seen in "some kind of recurrent and patterned interaction between agents that are maintained through sanctions" (Swedberg 1994: 255). This structure can furthermore eventually be thought of as a network, a web of interconnected ties that impacts the manner in which this market is understood. (2) It is natural for such works on markets-as-networks to position themselves as an antidote to neoclassical economics. This is often accomplished rather explicitly. White (1981: 518), for instance, describes his own approach as "[the] embedding [of the] economists' neoclassical theory of the firm within a sociological view of markets," whereas Hagg and Johanson (1982: 31-39) chose to contrast the market heterogeneity of their own perspective with its neoclassical, mostly homogeneous, counterpart. It is obvious that the furthering of such a "markets-as-networks" sociology is still to come forward in an elaborated fashion. This is not to say, however, that any and all bricks of such an edifice are nonexistent.

   A market network is a specific set of economic linkages among a
   Defined set of economic actors, where the set of exchange linkages
   are constitutive of a price-making system and both supply and
   demand crowds (actors) are present. (Baker 1981: 14-15)

From this dictum follows that there are two major constitutive elements to this reasoning on markets, one giving rise to the other: (a) exchange and (b) exchange-linkages relationships. This exchange is, however, much different from the anonymous guise in which it appears in neoclassical economics, which ever since its inception has been much preoccupied with "exchange economies." This is readily seen, as Baker (1981: 4-6) observes that sociologists converge on two major assumptions in this regard. First, "market exchange, as all forms of economic exchange, is embedded and enmeshed in other noneconomic institutions." Second, any market exchange is "a special case, a specific form, of social exchange." What is "economic" is then necessarily subordinate to what is "social." The one has primacy over the other. Acts of social (such as economic) exchange, implying, for instance, the movement of goods subject to the price mechanism, are the particles of the cement that subsequently will keep the whole (such as a market) together. No market is conceived of as a network unless these fundamental insights are made entirely clear. The most deliberate sociological discourse in the area is found within social exchange theory, which "analyzes how the structure of rewards and costs in relationships affects patterns of interaction" (Molm 1991: 475). The core thereof is hence social interaction, "a situation where the behaviors of one actor are consciously reorganized by, and influence the behaviors of, another actor, and vice versa" (Turner 1988: 13-14). This reasoning emphasizes how seemingly rational and mutually dependent actors relate to each other in nets of microsociological structures made up of relationships that result from recurrent acts of exchange between them.