A Weberian Analysis of Business Groups and Financial Markets

A WEBERIAN ANALYSIS OF BUSINESS GROUPS AND FINANCIAL MARKETS

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A Weberian Analysis of Business Groups and Financial Markets Trade Relations in Taiwan and South Korea and some Major Stock Exchanges

SANDRO SEGRE University of Genoa, Italy Translated by Nora Stern Preface by Richard Swedberg

© Sandro Segre 2008 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publisher. Sandro Segre has asserted his right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work. Published by Ashgate Publishing Limited Gower House Croft Road Aldershot Hampshire GU11 3HR England

Ashgate Publishing Company Suite 420 101 Cherry Street Burlington, VT 05401-4405 USA

Ashgate website: http://www.ashgate.com British Library Cataloguing in Publication Data Segre, Sandro A Weberian analysis of business groups and financial markets : trade relations in Taiwan and Korea and some major stock exchanges 1. Economics - Sociological aspects 2. Organizational sociology 3. Capital market - Social aspects I. Title 306.3'42 Library of Congress Cataloging-in-Publication Data Segre, Sandro. [Gruppi economici e mercati finanziari nella sociologia di Max Weber. English] A Weberian analysis of business groups and financial markets : trade relations in Taiwan and Korea and some major stock exchanges / by Sandro Segre. p. cm. Includes bibliographical references and index. ISBN 978-0-7546-7161-9 1. Economics--Sociological aspects. 2. Organizational sociology. 3. Capital market-Social aspects. I. Title. HM548.S4413 2008 306.3'42--dc22 2007046427 ISBN 978 0 7546 7161 9 Printed and bound in Great Britain by TJ International Ltd, Padstow, Cornwall.

Contents Preface by Richard Swedberg

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Introduction

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1 Economic Communities, Business Milieux and Business Groups

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2 Toennies, Weber and Simmel: Their Contributions to Contemporary Research and Theories Concerning Economic Communities

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3 A Weberian Account of Social Norms and Trust in the Stock Exchanges and Other Financial Markets

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Conclusion

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Bibliography Index

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Preface Each good study begins with an important problem, and in the case of this work, it is the following: how can a market operate in a stable manner if market-oriented behavior is self-interested? The author’s answer is similar to Durkheim’s famous argument that a contract can only operate because it contains non-contractual elements. In short, a market can only exist because of its non-market elements. Sandro Segre’s book Business Groups and Financial Markets is, in other words, centered around a paradox; and its three main chapters each provides the reader with arguments towards its solution. In Chapter 1, the reader will find a comparison between modern South Korea and modern Taiwan. In Chapter 2, the focus shifts to three classics in sociology: Ferdinand Toennies, Max Weber and Georg Simmel. And in Chapter 3, the author discusses the nature of financial markets, with an emphasis on the approach that can be found in Max Weber’s work on stock exchanges in the 1890s. In Chapter 1, the author introduces the reader to his two most important categories: the “English” model versus the “German” model (the quotation marks indicate that the models are ideal types and theoretical, in the sense that they are not generalizations based on the economies of England and Germany). In the “English” model there exists a well-functioning business milieux or an economic area within which the actors trust each other because they share the notion that certain norms or ethical ideas must be followed. In the “German” model, the key actors are not small- and medium-sized companies as in the “English” model, but business groups with their own collective identities. Within the business groups relations are typically characterized by domination. The “English” model also produces firms that are effective on the international market with its constant changes. The “German” model, in contrast, produces business groups that have more difficulty in navigating internationally since they are used to relations characterized by authority rather than by genuine competition. In Chapter 2, Segre takes his point of departure in Toennies’s famous distinction between Gemeinschaft (“community”) and Gesellschaft (“society”). According to Toennies modern society, including the modern

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economy, is mainly to be characterized as Gesellschaft, while Gemeinschaft belongs to a world that is passing away. Weber and Simmel, in contrast, both realized, according to Segre, that Toennies’s opposition between the two forms of society was much too sharp, and argued instead that modern organizations as well and modern society are better characterized as a mixture of Gesellschaft and Gemeinschaft. As market (Weber) and money (Simmel) have a rational and interest-related aspect—but they also have a Gemeinschaft dimension. In Chapter 3, the focus shifts to financial markets and especially to Max Weber’s studies of stock exchanges in various European countries about a century ago. Segre notes that Weber contrasted the Berlin Stock Exchange to the London Stock Exchange, and that in doing so, he drew largely on a similar explanation as that between the “German” model and the “English” model. Segre adds that in Germany the firms by tradition have cultivated relations to banks, rather than resort to the stock market, as English firms have done. Again, this brings us back to the “German” versus the “English” model in Chapter 1. What does Segre accomplish with the help of this kind of argument? My own answer is that he has raised, but perhaps not conclusively answered, two important questions—one theoretical and the other practical. The theoretical question has to do with the argument that Weber especially viewed the market not only as an arena of self-interested actors but also as a community. The practical question has to do with Segre’s argument that the “English” model is superior to the “German” model, especially on the international market. Does Weber portray the market along the lines that Segre suggest he does? Yes and no. In discussing the modern market—that is, the market that comes with modern rational capitalism—Weber emphasizes that it is the locus for instrumental and formally rational actions. He does not discuss that it is also a community. Segre meets Weber halfway by stating that he is not reproducing Weber’s argument so much as reconstructing it. Nonetheless, is Segre’s reconstruction legitimate? His argument is that if we take Weber’s portrait of rational capitalism seriously, we must come to the conclusion that Weber saw the market as a community or, to use Segre’s terminology from Chapter 2, that it not only includes elements characterized by Gesellschaft but also elements characterized by Gemeinschaft. This reading of Weber seems roughly correct to me. Weber most certainly emphasized that modern rational capitalism is only possible if it has a rational legal system, that is, a legal system that is efficient and calculable in its actions. Such a system, we assume, would only be able to operate if people trusted each other, as Segre suggests.

Preface

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The practical part of Segre’s thesis is that the “English” model is superior to the “German” model; and he uses South Korea versus Taiwan to plead his case. Implicit is the argument that modern developing countries should follow the Taiwanese or “English” model, if they want to be successful in the global type of capitalism that exists today. It is clear that the “English” model looks considerably better than the “German” model. The “English” model is about small- and medium-sized firms that compete on equal terms with each other, trust each other and operate with assurance on the difficult international market. The “German” model, in contrast, is centered around autarchic business groups, that are not good at relating to other business groups and that feel ill at ease on the international market, where they have to follow rules other than the ones that exist on the inside of their business group. In one sense Segre’s “English” versus “German” model is a replay of AnnaLee Saxenian’s argument in Regional Advantage (1994), where she famously contrasts Silicon Valley to the computer industry around Route 128 in Massachusetts. The firms in Silicon Valley are characterized as democratic, quick on their feet and financed through capital venture firms; the firms around Route 128 are hierarchical, authoritarian and financed through the old Puritan banks of Boston. But just as Saxenian’s picture in Regional Advantage has drawn critique for being a bit too schematic and unable to explain some empirical facts, so one may ask if Segre is not putting all his theoretical eggs into one basket, so to speak, with his argument about the “English” versus the “German” models. In discussing why the Taiwanese model is better than the Korean one, for example, he points to relatively small differences. Taiwanese firms do a bit better internationally, and the country has avoided a downturn of the type that South Korea had to suffer some years ago. But both countries, Segre has to admit, have been successful in industrializing very quickly. And both, after all, belong to the family of the Asian Tigers. One is also justified in wondering if the “English” versus the “German” model is all there is to the mysteries of economic development. The two categories fit very neatly with a number of ideas that are popular today, in the media as well as in the economics journals. Reality, however, has a way of stubbornly resisting general models—and will perhaps do so also in this case. What Segre accomplishes in his book, as I see it, is to raise a number of questions that are of great importance. They are of great importance from the viewpoint of theory as well as of practice. The reader is treated to what is perhaps the best of all: a series of interesting and provocative arguments that raise the discussion to the next level. Richard Swedberg Cornell University, November 2007

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Introduction This book is intended to contribute to explaining the impact of two alternative models of business relations on their ability to face international competition. In order to construct these models, the writings of classical authors, such as Weber and Simmel, on business exchanges and the so-called moral economy have been considered, even though an in-depth analysis of their writings is not our goal. These models should be instrumental to an investigation, from the viewpoint of their potential for competition, of different networks of business relations, as in South Korea and Taiwan, and of leading stock markets. The theme of the moral economy underlines both models. One of the issues that in the last decades have been mostly debated by economic social sciences is whether there exists some forms of “normative constraint on opportunistic behavior” (DiMaggio 1994: 37–8), that is, ethically non-acceptable, and in particular, whether a minimal commitment to norms of reciprocity and fair dealing is required. However, this debate has been largely unaware of the potential contributions by some distinguished representatives of the sociological tradition. They have argued and represented different positions with regard to the importance of ethical considerations in market exchanges, and consequently, the possibility to consider the market as an institution, and economic transactions as coming close to the ethical goal of the moral economy. Weber and Simmel have maintained, in contrast with Toennies, that market exchanges may take an institutional character, and be acknowledged as public interest. However, the social consequences of market exchanges are quite different, depending on whether this acknowledgement, to which corresponds an ethical commitment to observe contracts, is generalized— if not to the whole population—at least to all those who participate in exchanges. Or whether acknowledgement and ethic commitment are circumscribed into particular socio-economic relational contexts, which are relatively closed towards persons and firms that would perhaps participate in exchanges. Two ideal types, or models, of market communities may be then constructed, and the social and economic consequences of approximating to one ideal type or the other are spelled out by some literature that focuses on single firms or on organizational populations. These models involve, as will be argued, a different degree of prevalence of the moral economy.

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The two ideal types are formulated, and the consequences that may be expected from a country’s approximating to either of them are indicated in Chapter 1. The conceptual and theoretical contributions of Weber’s and Simmel’s bearing on these models are dealt with in Chapter 2. Chapter 3 focuses on financial communities, and on some leading stock exchanges in particular, that may be described as closely related to one or the other of these ideal types, and argues that this relationship may be causally linked to their differential development. Principles and normative obligations of some categories of participants in exchanges (such as particular status groups, firms or business groups) may—as Weber and Simmel have argued—support exchanges and markets as an institution when these principles and obligations come in support of market ethics, but the consequences are opposite if they involve a market closure to the advantage of the same categories, and to the detriment of others and of the population as a whole. This disadvantage appears as a competitive inferiority of domestic economy, when it is placed in a system of international exchanges. In particular, Weber was deeply concerned about the fact that an economy controlled by powerful groups of firms might, in the long run, lead the country to be in disadvantageous conditions. For, already in his time, the prosperity of the economy of a country depended on its position in the world market. According to Weber, and to Simmel as well, the ability to compete of a firm, a group of firms, or an economic system, depends mostly on their reliability from the viewpoint of the other participants in the international market community. This work formulates two alternative ideal types of relations among firms and (consequently) market communities; one restricted and closed, the other one wide and open. It maintains that there are national economies, such as Taiwan’s and South Korea’s, which conform rather well to either ideal type, and aims at showing their consequences for firms and market, according to the relevant ideal type of intercorporate relations (Chapter 1). The positions of Weber and Simmel on the one hand, Toennies on the other, on the institutional preconditions (in terms of social relations and culture) of a market community are then reconstructed in a unitary way. The purpose is to shed light on how these ideal types of business relations and market communities may be referred to these authors’ formulations, and how the empirical consequences of the approximation of a market community to the ideal type of an open or closed community conform to Weber’s and Simmel’s statements (Chapter 2).1 1 A previous version of Chapters 1 and 2 was published under the title “Business Communities and Their Milieux: A Reappraisal of Toennies, Weber and Simmel” in International Journal of Politics, Culture and Society, 1998, vol. 11, n. 3, 411–37.

Introduction

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These ideal types may apply to financial markets, viewed as particular economic communities placed in the vaster market community. As to this study, their interest derives not only from their strategic importance in market functioning, but also from the need—particularly felt in these markets—to safeguard the trust of participants in exchanges, and from social and institutional conditions which, according to Weber, meet this need. In a set of pioneering studies, Weber had already pointed to these conditions. These indications are compared with inquiries concerning the reasons for the good functioning and the achievements, in comparison with competitors, of some important stock exchanges of nowadays (Chapter 3).2 In the conclusion, after having resumed the aims and contents of this work, some general theoretical results will be mentioned. A final remark: though the title of this work refers only to Weber’s name, and Chapter 3 deals only with Weber and not with Simmel, both authors prove relevant for a sociological treatment of the theme of trust in markets.

2 A previous version of Chapter 3 was published under the title “A Weberian Account of Social Norms and Trust in Financial Markets,” Max Weber Studies, 2005, 5 (2), 339–69.

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Chapter 1

Economic Communities, Business Milieux and Business Groups Two alternative ideal–typical models of intercorporate relations, between firms and the political milieu, are outlined in this chapter in order to highlight how non-contractual elements—that is, normative, communitarian— in business relations may have a different relevance in the economic achievements of firms and business groups, depending on the prevalence of either model which, using a conventional denomination, are respectively called “German” and “English.” After having defined a few key concepts, such as community, moral economy, organizational field, organizational population, business groups and social capital, and having mentioned the constitutive elements of a “business community” and a “business milieu,” it will be focused on two countries, South Korea and Taiwan, which are respectively characterized—as will be shown later—by the prevalence of features characteristic of the “German” and the “English” model as ideal types. The theoretical reasons for the selection of these two countries will be briefly indicated. When two countries are compared, the case-oriented comparative method is used to identify those underlying similarities and differences between the two nations which may contribute to an explanation of theoretically relevant different outcomes. The approximation of these two countries to the two ideal–typical models will not be taken for granted, but rather argued. This comparison is made in order to explain their different ability, and in general the ability of countries approximating one model or the other, to successfully face competition in an international economic environment (Ragin 1987: Chapter 3; Ragin, Zaret 1983: 740–45). South Korea and Taiwan in Comparative Perspective South Korea and Taiwan have similar religious traditions influenced by China, and are therefore culturally comparable, as emphasized by studies of their capitalist development (Biggart 1997: 221–2; Hamilton 1997: 270–71; Hamilton, Biggart 1992: 198; Scitovsky 1989: 32–3). They have, moreover, experienced since the 1980s a difficult transition to parliamentary democracy (Lee 2007; Sato 2002). What is most important

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here, they are also comparable in economic terms. As the literature on economic development has pointed out, these two countries have experienced high export-led economic growth since the 1960s, still have a remarkable economic development that depends on foreign trade, are of approximately the same economic size, and are advanced capitalist economies that have similar (though not identical) quality of life index, GDP per person, and a relatively equal income distribution. With reference to the time period of the last twenty years, moreover, both countries have become complex economies that trade with similar partners (the US being the main export country, and Japan the most important supply source). They are currently able to offer a full range of products, and to compete worldwide with other advanced nations (Feenstra, Hamilton 2006: 8–9, 345–6; Hattoro, Sato 1997: 343–5; International Monetary Fund 2007: Statistical Appendix, table 2; McMichael 1996: 80–83; www.economist. com/media/pdf/QUALITY_OF_LIFE.pdf). On the other hand, the distinctiveness of their development paths should not be overlooked. “Cross-county differences are especially apparent for South Korea and Taiwan” in the organization of their economies, and also in the economic outcomes that follow therefrom. South Korea as a “highconcentration economy” differ from Taiwan as a “low-concentration economy” (Feenstra, Hamilton 2006: 346; see also Hamilton, Biggart 1992: 187–8). This fundamental difference between the two economies has been indicated, during the last four decades of the past century, by the higher average size of manufacturing firms and higher capital-output ratios in the manufacturing sector in South Korea, as compared to Taiwan (Scitovsky 1989: 36; Timmer, van Ark 2000). Even to this day, business groups in Taiwan receive essential goods and services by “unaffiliated firms and other business groups,” whereas in South Korea they are supplied internally, “through intragroup transactions” (Feenstra, Hamilton 2006: 149). As a further difference, South Korea’s development has been more government-led, in contrast to Taiwan’s more market-led development. Accordingly, in Korea a small number of business groups have worked “as agents implementing the government’s plan in exchange for favored treatment in such areas as subsidized loans.” Networks are accordingly vertically organized. The government has given priority to, and directed, export-led economic growth by cultivating privileged ties with a restricted number of powerful, family-owned, closely supervised and rival business groups. In contrast, in Taiwan the government has refrained from favoring business groups, and development has been promoted “from below” by autonomous, horizontal and flexible networks based on personal relations and mutual trust (Hattori, Sato 1997: 349–50; see also Biggart 1997: 228– 34; Feenstra, Hamilton 2006: 348–58; Hamilton 1997).

Economic Communities, Business Milieux and Business Groups

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The different organization of the Korean and Taiwanese economies and their different mechanisms of development have been given causal relevance in accounting for Taiwan’s superior economic performance, for some authors have pointed to Taiwan’s greater variety of final goods as giving relative immunity to financial crises and economic downturns (Feenstra, Hamilton 2006: Chapter 8). A better performance in a competitive international market is here considered an indicator of success of a national economic system, taken as the unit of analysis. While no empirical assessment of comparative successes is unproblematic, this particular indicator of success is consistent both with authoritative explanations of trade performances of South Korea and Taiwan, and with a leading approach in organization theory. The superior economic performance of Taiwan in comparison to South Korea may be assessed in terms of superior global competitiveness as measured by a number of indicators, and in particular by their respective business competitiveness (World Economic Forum 2007). It may also be assessed in terms of higher responsiveness to international demand, as indicated by higher labor productivity and greater ability to compete in the international market (Feenstra, Hamilton 2006: 2, 8–9, 345–6; Timmer, van Ark 2000). Taiwan outperforms South Korea also according to the Human Development Index, an indirect measure of international performance developed by the United Nations. This index “is about much more than the rise or fall of national incomes. It is about creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests” (United Nations Development Programme 2007). This measure considers indicators such as literacy, education and health opportunities, in addition to a conventional economic indicator (the log of gross domestic product (GDP) per capita at purchasing power parity (PPP) in United States dollars (USD)) (en. wikipedia.org/wiki/Human_Development_Index). In keeping with the theory of organizational ecology (which will be briefly presented later on in this chapter), survival capabilities in such an environment are a function of adaptation and selection processes. Literacy, education and health opportunities are “efficiency enhancers,” to use the World Economic Forum’s expression (World Economic Forum 2007). In other words, by creating and maintaining global competitiveness they concur in upgrading a country’s ability to adapt to the international economic environment, and to diminish its selective pressure on them. It has been maintained that Taiwan’s excellent economic performance may in the long run be endangered by the country’s outsourcing to China of her production of OEM (original equipment manufacturing) and ODM (original design manufacturing). For financial resources to support

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“investment in R&D, intellectual property creations and branding” in Taiwan may become insufficient because of this industrial policy (EastWest Center 2007). This contention seems questionable. First, this pessimistic forecast is not shared by other authoritative sources. According to the Economist, “real GDP growth will average 4% in 2007–11,” driven by both domestic and external demand (Economist Intelligence Unit 2007b). Second, Taiwan companies have greatly profited from playing the role of middlemen in China’s trade relations with the US and other developed countries: Taiwan’s outsourcing to China has promoted steady commercial relations between these two countries to their mutual benefit (Whalley 2006: 9, 12–14). In any case, outsourcing to China similarly affects Taiwan and South Korea, and does not therefore involve any difference in their opportunities to compete economically in the international market (Whalley 2006: 9, 12–14). South Korean companies are heavily involved, as are their Taiwanese counterparts, in import and export trade with China. In fact, these two countries are among China’s most important trading partners (The US–China Business Council 2007). Outsourcing to China, and more generally strong economic interchange with this country, has not been conducive even in the case of South Korea to the expectation of unfavorable consequences. On the contrary, GDP growth in South Korea is expected to remain quite substantial, and comparable to Taiwan, in the next five years. This growth has been imputed, in addition to strong domestic demand, also to growth in the export volume to China (Economist Intelligence Unit 2007a). Outsourcing to China should therefore be beneficial to both countries in the near future, as it has been so far. If the thesis of Taiwan’s outperforming South Korea in the international competition is accepted, there still remain to be explained the reasons for the better achievements of Taiwan, but also for the ability lately shown by South Korea to overcome the economic difficulties encountered in the recent past. In this regard, we will consider some theories concerning organizations—the theory of structural contingencies and the “ecological” theory—and dwell on a recent and complex economic theory, which integrates the previous ones and aims at satisfactorily explaining the reasons for Taiwan’s better competitive capacity on the international markets compared to that of South Korea. Taiwan’s superior performance, it will be argued at the end of the second chapter, may in general indicate the higher achievements of the “English” model against the “German” one. A brief evaluation of both organizational theories and this recent economic theory shows, along with their explicative contribution, some deficiencies in their argumentations that suggest the opportunity to provide a more indepth explanation.

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Business Community and Milieu According to an authoritative definition, all communities share the following characteristics: first, a community is “a web of affect-laden relations among a group of individuals, […] a set of shared values, norms and meanings, and a shared history and identity—in short, a shared culture”; Second, “a relatively high level of responsiveness” to their members’ “true needs,” as they can be empirically determined (Etzioni 1996: 3, 5). This and other contemporary conceptions of community (see, for example, Brint 2001: 8–9; Nisbet, Perrin 1977: 98), have the merit of not implying the false assumptions that the relations among the members of a community are characterized by egalitarianism, inevitable conformity, and the prevalence of face-to-face relations, that is, actors’ simultaneous presence (Cohen 1985: 28–37; Giddens 1990: 114–26; Urry 1987: 228–9). The second and the third assumptions were present in Toennies’s work and have limited its theoretical relevance, as we shall see. Furthermore, these definitions stress not only the structural (in terms of mutual stable relations) but also the symbolic components of a community, in agreement with Toennies (Cahnman 1995: 119–20), and with contemporary scholars as well (Cohen 1985). Finally, while these definitions show on the one hand the enduring, albeit not always recognized, influence of Toennies (Brint 2001: 2–5; Ferrara 1996: 609–10; Giddens 1990: 115) and Durkheim, are on the other hand compatible with the emphasis placed by some contemporary authors—such as Giddens, in particular—on the processes of disembedding and re-embedding of social relations, namely the processes of uprooting relations from local contexts of interaction, their restructuring across indefinite spans of time/space, and their reinsertion within globalized “communities” of shared experience (Giddens 1990: 21, 140–43; see also Albrow et al. 1994: 374–6; James 1996: 31–3). Communities have been further distinguished on the basis of the major reasons for their members’ belonging—shared activities or beliefs—and the constitutive elements of the structural and symbolic components have been better detailed. Interaction frequency, which connotes the structural component, encourages—other conditions being equal—participation in the community life, the creation of mutual support obligations and practices, reciprocally kind feelings, and in short, a strong and conscious adhesion to the community as a symbol of identity. Finally, communities may be produced by the more or less close position of their members, or have an elective nature and therefore disregard any territorial constraint, as in the case of “virtual” (when members interact without getting in touch face-to-face, as in computer-mediated communications) and “imaginary”

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communities (when members share beliefs but do not establish direct relations among them) (Brint 2001). Business, or market communities share activities and beliefs, there is no need to interact in physical closeness, and individuals and firms’ economic action has produced shared obligations and common identities. These communities should not be mistaken for organizational population and organizational fields. An organizational population is defined as a set of organizations which are equally vulnerable in relation to environmental conditions, because they share the same organizational form (that is, the same structure and the same rules). The individual organizations forming a population share, in other words, the possibility to conform to the conditions of the outer environment, and therefore, to collectively survive. This may happen through processes of variation, selection, retention, and finally, competition with other organizations or populations. An organizational, or institutional, field is defined as an orderly set of shared knowledge and norms, as well as a common regulation system. These regulatory, normative and cognitive elements identify an institution. An organizational field includes, therefore, a plurality of interconnected organizations, which take part in an organizational population, have an institutional nature, and deliberately keep to a set of shared rules, norms and knowledge (Baum 1996: 78; Davis 2005: 486–7; DiMaggio, Powell 1983: 148; Hannan, Freeman 1977: 934–8; 1989; Lanzalaco 1995: 111– 19; Lin 2001a: 187–9; Scott 1995: 33–62, 102). At least some of these definitional aspects of community (shared activities and/or beliefs, structural and/or symbolic component) are included in essays concerning the presence and weight of normative elements in business relations. These elements are given as tacit assumptions and therefore are not stipulated or mentioned in contracts. An example is the principle—which regulates activities and beliefs, relations and norms— of honoring commitments, producing a good product (Macaulay 1992: 275), and conforming to the rules of fair competition prescribed by institutional arrangements (Abolafia, Biggart 1991: 218–19). These norms and practices are constitutive of the so-called “moral economy,” that is, “a moral community in which trustworthy behavior can be expected, normative standards understood, and opportunism foregone” (Granovetter 1994: 466–7; see also Lie 1997: 346–7). The necessary trust for building and keeping a moral economy involves, for the actors engaged in economic exchanges, two requirements: a) being trustworthy, in the sense of having a good reputation with one’s partners (trustworthiness); and b) being confident, in the sense of perceiving others’ intentions as benevolent (trustfulness) (Lee 2000; see also Erikson, Parent 2007: 259–60).

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Normative standards, and trust itself, may result from economic action embeddedness in a network of both personal (Granovetter 1985: 504; see also Fligstein, Dauter 2007: 112–13; Lie 1997: 349–51), and impersonal relations, and therefore they change along with the change of the (instrumental and/or affective) contents existing in the network of relations (Woolcock 1998: 185). Normative standards and grant of trust are relevant for the formally rational economic relations of modern capitalism, even when they take place within family relations, and personal relations in general. In that case, impersonal aspects, implicit in the economic calculation of corporate profit, are intertwined with the normative, solidarity and ethical aspects of a moral economy (Swedberg 2005a: 247; Weber 1958: 304; 1981: 356). However, this happens only if the moral position presented to real or potential customers actually corresponds to the value positions and the prevailing practices in a particular organizational population. As it has been shown particularly in the case of organizations operating in the insurance area, this correspondence may fail in presence of one or more of the following circumstances: a) different moral outlooks by different sectors or actors within a field or an organizational population; b) relatively low cohesion and/or internal solidarity within that field or population; c) practices not conforming to moral economy, spread among some categories of actors present in that field or population; and d) authorities’ insufficient institutional control on that sector (Heimer 2001). Behaviors conforming to moral economy assume not only the presence of more or less wide social and normative contexts in which the individual actors’ economic action is placed, but also the relevance of motivations other than individual constraints and incentives. Their presence is not denied or belittled but, it has been argued, they are not enough to ensure actors’ stable cooperation. Keeping to the theses expressed by some representatives of rational choice theory, a normative regulation of the behaviors of actors who want to pursue an individual advantage is in their interest, because otherwise they would not achieve that advantage in the long run. However, cooperative behavior needs some incentives, such as prizes for those who cooperate and punishments for those who do not cooperate, since failing incentives, the pursuit of short-term individual benefits prevails and instead along with common good, individual long-term advantage is sacrificed (the alternative between choosing individual short-term benefit and long-term common good consists in the so-called “prisoner’s dilemma”). To be effective, normative regulation involves cooperation among actors, while it remains fragile if the norms of reciprocity (in the sense of rewarding others’ cooperative behaviors and punishing their noncooperative behaviors through similar behaviors) are only the norms that govern individual advantage pursuit.

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In fact, making others respectful of norms is costly (in the broad sense, not only in economic terms) and there is no interest in shouldering this cost if one has no knowledge and control on future partners in relations. Consequently, norms are not used ultimately as guidance and a constraint in behaviors, and therefore have no credibility. On the other hand, the norms which prescribe the behaviors among the same actors or actors’ groups are credible because in that case, there are collective sanctions supported by mutual social control, which considerably reduce uncertainty in transactions. In this regard, in the economic field, relevant are the norms prescribing correctness and punctuality in honoring one’s commitments, and in general the norms of moral economy, because these norms regulate both contractual and personal and informal relations between the parties. This has been shown in several market sectors, and financials markets represent an important example (Carruthers 2005: 369–70; Elster 1989c; Ferrary 1999; Granovetter 2002: 36–42; Heckathorn 1990: 377; 1993: 382; 1996: 254, 265–7; 2001: 278; Keister 2002: 46–9; Power 2005: 261– 3; Swedberg 2005b: 196). Furthermore, cooperation may be prescribed as a general norm, irrespective of individual advantages that may derive from it (Lindenberg 1996: 309–10). In that case, it achieves a credibility that norms, based on individual advantage, cannot have (Granovetter 2002: 40). Norms, prescribing those with whom one should cooperate, also quite often prescribe those with whom one should not. Therefore, mutual trust tends to remain circumscribed within limited milieux. On the other hand, relations based on trust, which are not closed in milieux relatively impermeable to external interactions, but draw instead advantages from the existence of individual actors’ ties with a plurality of separate groups, result advantageous not only for those actors and groups, but also for a larger community they contribute to build (Granovetter 2002: 52–3). This is also valid, and perhaps particularly, in economic exchanges. Mutual trust, it has been argued, is very important for successful business relations, irrespective of whether internalized norms or economic selfinterest govern trustworthy conducts (Granovetter 1994: 467–8). While personal trust does not require “emotional intimacy,” and may also result from “institutionalized personal ties or informal or informalized codes of sincerity and honor” and Durkheim (Granovetter 1990: 119), interpersonal trust in economic life depends both on “concrete personal relations and structures (or networks) of such relations” (Granovetter 1985: 490–91), and norms of generalized reciprocity (DiMaggio 1994: 37–8). Reciprocity, as a regulating principle of economic action within social action, assumes a non-monetary exchange of equivalences in preestablished times and ways (Polanyi 1968; see also North 1977: 712–15;

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Trigilia 1998a: 274–81). Reciprocity is generalized if this exchange of equivalences takes place among several actors. The benefit they aim at achieving does not come from the actors with which the subjects directly relate, but instead from other actors, and therefore is indirect. As a consequence, all the actors engaged in exchange draw a benefit from it, both individually and as a group (Ekeh 1974: 51–5). The presence of a generalized reciprocity principle among economic actors pursuing a monetary benefit assumes the existence among them of relations based on trust, because of adhesion to ethical norms shared in their milieu, or on grounds of expediency (since infringing those norms would involve being excluded from future exchanges with any other actor of the business community), or because of both reasons. The structural and cultural elements of a moral economy are constitutive of business milieux. Milieu in today’s world refers to “a focus on our daily routines, distinguished by a higher degree of familiarity and competence” that are not bounded by a single locality or culture (Albrow et al. 1994: 380– 83). Milieux, thus defined, presuppose disembedding and re-embedding. In all modern milieux, and perhaps especially in business milieux, “time and space are recombined to form a genuinely world-historical framework of action and experience” (Giddens 1990: 21). Business milieux may be viewed as circumscribed communities that are comprised within the larger business community, are not bound by local interaction contexts, and are characterized by norms and corresponding practices of their own, in addition to the general norms and practices of fair business. Business milieux may not coincide with business groups. Business groups are particular economic groups, which (differently from other bodies, such as consumers’ unions) are formed by dense, legally autonomous, corporate networks that are permanently linked by consolidated economic relations, and often by cross holdings. The network, or the structure, of each group forms an organizational field. Reference will be made later to the concept of organizational population, but a more precise formulation is now necessary of the concept of organizational field in relation to other concepts that will be used in the following pages. The organizational field of a business group may be peculiar to the group, or instead may comprise several business groups and have, thus, the features of a community and the large legitimation that characterize the milieux and the world in which firms operate. The different extension of an organizational field within a business network has important consequences—it will be shown—not only for firms themselves, but also for organizations and institutions placed outside the network. The links among firms, within a group, may be formal (through contractual relations) and/or informal (through non-contractual alliances or interdependence relations) (Granovetter 2005: 429, 435).

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Two Alternative Models of Institutional Relations This definition of business groups differs from more restrictive ones, which introduce among the defining elements not only that of being provided with economic and political power, but also that of group ownership and control by individuals or families (see, for example, Chang 2003: IX–X, 245–6). These characteristics identify a model of relations situated both within business networks, and also in corporations and political institutions. The model corresponding to these characteristics will be referred to as the “German” model, with reference to the business groups that dominated the German economy prior to World War I and became Weber’s object of study. This “German” model will be countered by an “English” model, characterized by a business milieu in which cooperative and non-cooperative relations among reciprocally autonomous firms that do not have control power on the market, intertwine all over its extent. Business groups close to the “German” model are characterized by their closure to relations with external corporations. This brings to the firms belonging to a business group the advantage of saving the costs for starting and negotiating contractual agreements in transactions made within the group, and later on, for managing possible disputes (Williamson 1986), as well as the advantage of securing the cooperation of connected firms in order to gain their either affectively or normatively motivated solidarity. Emotional solidarity, like normative solidarity, and in general cooperative behaviors, cannot be explained only by referring to individual incentives (Granovetter 2002: 37–43; Guillén et al. 2002: 8–9), though a cooperative behavior is often compatible with an evaluation of one’s benefit. In closed groups, a calculation of costs and benefits may show the expediency of cooperative behaviors, since any infringement of this norm is visible to the other members of the group and therefore is easily punishable (Coleman 1990a: 269–76, 318–20; 1990c: 96–8). However, closed groups may easily develop collective identities, which encourage individuals and firms to restrain exchanges within them (DiMaggio 2002: 94–5). This advantage in closed groups—that is, securing the cooperation of those who take part in them—is however counterbalanced by their lack of links, or “bridges,” with external firms and groups, and consequently, by the impossibility to establish cooperative relations with those firms and groups. Business group closure is not only detrimental to external subjects, which as buyers or competitors, are subject to the group economic power. The damage also potentially involves the group itself, which loses the benefits these enlarged cooperative relations might bring in terms of information, control and social capital, meant as an ability to obtain different benefits (such as economic and cultural capital)

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through its belonging to a network of relations or another social structure. Yet, the disadvantage of closure may be balanced by a greater ability to preserve the group resources. This may happen thanks to the availability of the resources of other members who share the same economic interests, and thanks to the close relations, quite often based on collusion and corruption, business groups establish with some sectors of the state, such as parties, government and public administration, in which the state is not in the position to preserve its own administrative and political autonomy. On the other hand, the vast range of illegal behaviors generally resulting from these relations may become a hindrance to institutional innovations that would better allow a country to cope with international competition (Block, Evans 2005: 507– 10; Bourdieu 2005: 76, 87, note 4; Burt 2002: 153–8; Coleman 1990a: 302, 304, 311, 320; Granovetter 2005: 443–4; Lin 2001a: 20, 27; Portes 1998: 8, 15–16).1 Business Groups and Communities As business groups are not necessarily business milieux, it follows that these groups do not always form communities. Closure to competition is not a necessary or sufficient condition for the creation of communities within business groups. Informal, and sometimes illegal, relations that in many business milieux are based on mutual trust, may have a communitarian character (Portes, Haller 2005: 406–407), while, on the contrary, within business groups, beliefs or a common identity are not necessarily shared, although they share activities. The elements that may produce solidarity can be often brought back to the group members (if not all of them, at least those who hold authority and power positions within it) belonging to the same family, whether restricted or extended (Granovetter 2005: 441–2). It is therefore a collective identity, resulting from members’ 1 Orrù’s typology comprehends three types of capitalist organizations: a) an alliance capitalism, in which cooperative relations between political, economic and other institutions are combined with hierarchical links between different cooperation levels; b) a dirigiste capitalism, in which a number of institutional levels are vertically connected through relations of power and authority; and finally c) a familial capitalism, in which ties based on kinship or other ascriptive characteristic prevail (Orrù 1997: 307–10). While the English model and familial capitalism share ascriptive ties as their distinguishing trait, ties—insofar as a country approximates to the “English” model—are not only ascriptive and cooperative. Moreover, the “German” model shares with alliance capitalism the interconnection between different institutions, private and public, and with dirigiste capitalism relations of power and authority within each business group, but cannot be identified with either type of capitalist organization.

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identification with their family of origin. This identification process with the family group is produced by individuals’ sharing of practices and action orientations within the group, which for its members (and also for others) is provided with clearly outlined symbolic boundaries, enjoys positive evaluation, and is opposed to other groups and to the outer world in general (Cerulo 1997: 394–7). An analysis of family groups in positions of command of business groups shows the relevance of micro-interactions and institutionalized practices within those groups, but not outside them. Practices and interactions are embedded in business groups through kinship, marriage and in-law relationship ties. The ambivalent nature of these ties, which are corporate and personal at the same time, contributes to make them fit for the pursuit of a plurality of not always well-distinguished aims (Fine, Kleinman 1983: 103–104) concerning both corporation and family circle. The practice, customary until recent times among South Korean groups, to cultivate close relations with representatives of the political power through marriage ties, seems aimed at preserving the power of the family circle itself. The same goal was apparently pursued by the habit to integrate, whenever necessary, the family circle controlling the group with managers identified during the school or university period, and the lower managerial levels filled with persons originating from the same geographical area (Feenstra, Hamilton 2006: 284–90). By acting in this way, the actors (whether natural persons or firms) belonging to business groups, give sense to their economic action and reproduce it through their interactions, thus imposing limitations to the market, in the sense of closing it to the advantage of the whole group. Relation structures, in this sense, are also symbolic structures, where culture and relations intertwine. As in any other organization, interconnected organizations that form business groups are a social construction, which actors undertake more or less consciously, and provide with meaning and coercive power (Emirbayer, Goodwin 1994: 1437–47; see also Biggart, Beamish 2003; Morgan 1997: 141–5; Scott 1995: 29–31). There are however some questions that remain still open. In the first place, in the case of business groups, and particularly those approximating the “German” model, the question of who exerts that coercive power, and towards whom this socially constructed meaning is addressed. Second, there are the social mechanisms through which micro-interactions and informal practices occur and are legitimated within business groups relating to the social and legal norms enforced outside the group. It is the particular case of institutional milieux (state or market), which are assigned to oversee and control firms, and in turn bind the behaviors of those firms, as well as the individuals who interact within them (Fine 1991: 169–70; Nee 2005:

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55–60). This surveillance, control and regulation activity can be effective only if it encounters actors’—either natural persons or institutions, which are the object of this activity—cooperation. This depends on how networks of firms, and particularly business groups, enter the overall institutional structure. In other words, the effectiveness of an external institutional milieu depends on the fact that at least some of the firms belonging to one of the groups also participate in similar groups. The presence of cross holdings among firms belonging to the same group—as typically occurs among business groups approximating to the “German” model—and the coordination of aims and management that is thus facilitated and often results from it, makes their control by the state and/or by the market quite difficult. Rather, under those circumstances, business groups themselves have good opportunities to control the domestic market and the state (parliament and government), or at least heavily condition them (Davis 2005: 490; Granovetter 2002: 52–3; 2005: 443–5; Portes 1998: 15–16). This happens when among groups a behavior conforming to the mutual cooperation norm prevails, as in Japan, where managers do not own control shares, or where, instead, groups do not worry about reciprocally cooperating, as in the case of South Korea, where ownership and control coincide (and consequently, the group’s management is subject to the particular and arbitrary wishes of the owners) and the individual chaebol establish close relations with the public administration (Chang 2003: 71–2, 170–72, 176–8; Granovetter 2005: 440–41). If the group’s social capital is confined within its own organizational field, which includes the firms that take part in it and the public authorities with which it relates, and therefore there are neither efficient bridges between one business group and another, nor relations based on trust, the superior position of power and authority of a firm over the other firms of the group—as in South Korean groups—however allows this firm to have full availability and complete access to the material (financial and human) and symbolic (innovations and information) resources of the group. Then, it becomes relatively easy to attain the aims of the group itself, of its leading firm and of the persons charged with the management of that firm (Lin 2001b: 17–23; Smith-Doerr, Powell 2005: 390–93). South Korean business groups, like Japanese ones, have a hierarchical production form, in the sense that one firm in the group controls in fact all the other firms belonging to the same network, and imposes on them cooperative relations according to a vertical production integration strategy, even though it does not own all the shares. The control exercised by the leading firm allows the group to achieve production flexibility, however at the cost of sacrificing the independence of controlled with firms regards

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to their marketing and financial strategies. This production organization has been compared with a different one, in which small- and mediumsize firms operating in the same production area keep frequently mutual relations on an equal basis, characterized by mutual trust and cooperation. By confronting two industrial areas of the United States, both specialized in high technology products, this comparison has shown that cooperation relations among hierarchically non-integrated firms allow them to fully use their knowledge, as well as their stock of information and technical staff, in such a way as to obtain competitive benefits and innovation, which are less easily attainable if a hierarchical production form prevails. This superiority has revealed itself particularly in technologically advanced sectors (Vallas 1999: 85–6, 91–2). As this first production organization, like South Korean groups, is very close to the “German” model, while the other production organization shares a few (however, not all, as we shall later see) characteristics of the “English” model, it might be inferred that the second model is in a position to achieve better economic results, in the sense of better chances to survive and thrive in a more or less competitive milieu. Some lately developed theses are worth mentioning, which have emphasized the importance of social capital in obtaining benefits for individuals and for the groups, or organizations, in which they participate. In particular, personal ties of an instrumental nature are relevant for the favorable competitive results achieved by an organization. Emotional (affective) ties have an ambivalent effect when the members of an organization are heterogeneous (by gender, age, income, work experience), because their heterogeneity reduces the group’s performance, but increases its orientation towards the task to be carried out. The instrumental or emotional nature of ties tends to remain, and also orients the activities of an organization. Social capital is formed through reciprocity relations limited to compact subgroups, in which relations are dense, and trust rests on definite sanctions for those who betray it, but also through generalized reciprocal relations when the density of ties is scarce and therefore it is not possible to inflict definite sanctions for those who do keep with the norms of the group (Frank, Yasumoto 1998; Harrington 2001). In a production area characterized by open networks of small- and medium-size firms linked by cooperative relations, relations are at the same time based on restricted reciprocity within firms, and on generalized intercorporate reciprocity. The nature of the ties existing within firms and among them is always instrumental, but may also be emotional when the members of those firms keep personal and/or consolidated relations. Corporate economic achievements are encouraged by a mixture of instrumental and emotional ties, on condition that emotional ties do not

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determine instrumentally inappropriate courses of action. By confronting two American industrial areas, it has been noticed that this does not necessarily happen, and that instead, vertically non-integrated firms seem to achieve better results. Assuming that better opportunities of success (thus defined) are offered by one model of relations among firms or business groups, or between them and the institutional milieu, how can this result be explained? This issue must be considered in more depth. On the basis of the aforementioned American example, when a comparison was made between vertically integrated corporations (which come close to the “German” model) and networks of small and medium firms that keep mutual cooperative relations, remaining in competition with non-connected other ones (approximating the “English” model), the conclusion has always been that networks of vertically non-coordinated firms keeping mutual cooperative relations achieve better economic results. The cooperative relationships between lending institutions, such as banks and their customers, are a case in point (Uzzi 1999). However, as it has been observed, the success of this model of intercorporate relations has not yet received a convincing explanation. Though in the countries in which the “English” model is enforced, it is possible to save transaction costs and there are relations regulated by norms among the firms belonging to a network, neither being an explanation in terms of transaction cost saving (Williamson 1986) or in terms of economic action position within a network of personal relations (Granovetter 2005) proves convincing. Both explanations assume pre-established conditions—respectively, an institutional milieu in which costs are calculated, and a network of relations in which trust may be included among the elements that determine economic action—which would allow the economic actors’ subsequent activity. Still, they do not explain how those pre-established conditions, which are static, may connect themselves with an ever-changing economic milieu. Similarly, an explanation in terms of greater production flexibility in small firms or in industrial districts in relation to mass production systems, is not convincing, either, until it is not proved how these organizational and cultural differences turn into competitive superiority (Feenstra, Hamilton 2006: 17–27, 80). An explanation that intends to be convincing stimulates a few questions related to the theory of organizations. May success be explained by the internal characteristics of economic organizations that a particular model assumes as prevailing (theory of structural contingencies)? Or rather is it a question of the relations existing, on the one hand, between organizational fields or organizational populations, and, on the other hand, the milieu in which these organization clusters are included, so that each model would be connoted by particular relations (ecological theory of organizations)?

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Finally, what consequences involve the different distribution of relations based on trust in the relations among institutional actors, whether either model prevails? Is it likely that the large extent of trust in vast organizational populations, such as the “English” model assumes, makes them stronger to the changes of the outer institutional environment? Or can this result be better achieved, other conditions being equal, through the restriction of relations based on trust within relatively narrow organizational fields, according to the “German” model? Theory of Structural Contingencies The last set of questions concerns trust as a possible resource for a network of firms, and is relevant for both aforementioned theories, which will now be considered insofar as their propositions are consistent with those questions. The theory of structural contingencies focuses on the characteristics of an organization—such as the size, and therefore, the complexity of its structure, and also the strategy, the degree of aim identification, the technology it uses—which grant it the best possibilities to conform to an environment. The adaptation level of an organization to the environment constitutes the research object, while the environment is assumed as a constant element and therefore cannot be changed by the organization. In considering the size and strategy of business organization, a rigid causal relation between environmental conditioning and the organization’s strategy or structure has been deliberately not established. Furthermore, a successful adaptation of the size, or of the strategy, does not mean that it has been rationally pursued. Moreover, it has been found that there is a positive correlation between some individually considered structural characteristics, and the performance of an organization, identified by the achievement of organizational aims. For example, when the environment is stable, and hence, predictable, a marked division of organizational tasks in specialized units and a centralized authority can give the best results for the organization. Size and strategy (that is, its fundamental aims) are considered as contingent elements a business organization should adapt to the changing needs of the environment, assessing in particular whether the environment (the market) is competitive, or—if it is not competitive—what is the firm’s control degree over that environment. Depending on these contingent elements and on the peculiarities of the environment in which the organization is situated, for the corporate management it is a question of keeping or introducing the contingent elements that from time to time are the most appropriate to the environment. A small size provides some advantages to a firm placed in a network of firms (according to an American inquiry based on a small sample), because

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it encourages establishing relations based on trust (in the sense of being confident) between those who run it and others who belong to the same business community, and with whom the firm enjoys a good reputation. In turn, these relations—other conditions being equal—promote the possibilities of growth of a firm. According to other inquiries, small-size firms, by reducing the number of hierarchical levels and the functional specialization of the organizational structure, make the exercise of control and authority over subordinate employees easier, as well as a centralized access to the information concerning the structure that is necessary for making the most appropriate decisions. These advantages set themselves against the advantages that are peculiar of great corporations: possibility to delegate to others, placed at lower hierarchical levels, particular preestablished tasks; specialized training of personnel; use of professionals when tasks cannot be pre-established; creation of a multidivisional structure if different goods or services are produced, leaving to the management the task of coordinating and making strategic decisions; ability to collect information about the outer environment, to which a corporation has to conform (Baum, Singh 1996: 1286–7; Donaldson 1996; Lee 2000). Small or large sizes do not necessarily provide definite advantages to firms. Similarly, a strategy leading to an optimum adaptation to a environment— which is assumed to be stable—may be found regardless of the size of a firm. Considering that the small size of firms is a constitutive element of the “English” model, while the “German” model assumes large firms—or networks of firms—the theory of structural contingencies does not seem therefore to provide arguments for predicting the greater success of either model. The existence of business communities including small firms, with relations based on trust not embedded in relatively impermeable environments, is however consistent with a prediction—keeping to this theory—of a better economic performance of the “English” model, other conditions being equal. In order to make a better-grounded forecast from a theoretical and empirical point of view, it may be useful to consider the ecological theory of organizations, which will be examined in the following paragraph. Ecological Theory of Organizations This theory intends to explain the different possibilities of survival and success of an organization competing with others—which may have a different structure and normative system—within an organizational population and a community formed by organizations. The firms constituting a business community are an example that proves relevant in this case. Differently from the theory of structural contingencies, this theory does not assume a given environment to which a firm has to conform, but rather, necessarily

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limited resources organizations have available in the environment in which they operate. In fact, environment has a particular “carrying capacity” of an organizational population, which binds the number of organizations and the amount of their resources. Organizations that form a population must therefore compete in order to survive and thrive. Competition intensity depends on the number of existing organizations within a population (organizational density). Density, in turn, depends not only on the ability to survive expressed by the existing organizations, but also on the number of new organizations and on the number of organizations that have not succeeded in surviving. Competition density depends also on the size of organizations. Organization number and size, consequently, diminish the carrying capacity of a environment. Relevant, in this sense, is also the size of the organizational population. The smaller the population is, that is, the smaller the number of organizations taking part in it, other conditions being equal, the lowest is the competition among organizations and the highest is the carrying capacity of the environment. The size of a population grows until the limit of this capacity is achieved, and diminishes when this limit is exceeded, so that the ratio between population size and environment carrying capacity tends to be balanced. The ecological theory contains some assertions, empirically validated, concerning small organizations, which—other conditions being equal— have greater difficulties to survive for they lack sufficient resources and qualified personnel, as well as legitimacy or reputation (in the dual sense of notoriety and conformity to institutional norms). Nevertheless, small organizations may counterbalance these elements of competitive inferiority by specializing in production niches in a position to grant them definite advantages in stable environments with predictable requirements. Actually, the competition with similar organizations considerably diminishes—other conditions being equal—their possibilities to survive, because they must compete for the same resources available in their niche (“overlap density”) (Baum 1996: 91). However, informal contacts among these organizations may be useful to avoid this danger if small firms, by coordinating one another, succeed in easily finding new niches in which their own survival is not at stake (Feenstra, Hamilton 2006: 297). The competitive superiority of small firms may also result from new requirements expressed by environments that change their condition (for example, if different markets have been formed for different products in relation with their previous condition), when this change is radical and occurs in a very short time. In both cases, small firms are advantaged by their ability to specialize and quickly conform to the requirements of different environments. On the other hand, large firms, which have at their disposal more than enough resources than those required by their environment (for example,

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a surplus of capital or personnel), find themselves advantaged by nonradical changes in their environment, or by environmental requirements that are complementary to the previous requirements. This resource surplus in large firms, which would be too expensive for small ones, may in fact be used in those circumstances. Large firms, and exclusively these ones, may also unite in order to change the environment, thereby reducing the selective pressure on them. Environment instability may result from a variety of causes related to institutional or technological processes. Among institutional processes, we would remind political instability, regulation or deregulation actions carried out by political authorities and their possible bestowal of legitimacy to some categories of firms. Among technological processes, particularly relevant are innovations that create new achievement opportunities, but also risks and uncertainties for the firms that adopt them. To environment instability, which promotes changes in organizational populations, and hence, in the organizations forming it, factors promoting stability in individual organizations and in general in populations (“structural inertia”) may be opposed. Many stability factors are conceivable, whether within or outside organizations. Internal factors in organizations are, for example: obstacles to change resulting from investments in equipment or personnel; limits in information concerning organizations; costs involved in change; organizational norms establishing tasks and procedures. Stability factors of an external origin may consist of: legal and fiscal barriers aimed at protecting markets; organizations regulations established by central public authorities (for example, laws aimed at fighting economic monopolies); limits to information concerning the outer (economic, legal, and so on) environment; loss of organization legitimacy; possibility that changes, which are appropriate to some particular organizations of an organizational population, may be inappropriate for other organizations. Organization seniority and size might encourage the predictability of behaviors and the formalization of roles, and consequently, the stability of organizational forms and organization longevity. Large organizations, which often are also those of less recent origin, are complex and differentiated, and have sufficient economic and power resources at their disposal (they can in fact reduce the costs of transactions or negotiations with other firms, and control their own economic and political environment) to more successfully and better face environmentrelated changes than small organizations. In addition, large organizations themselves may promote changes, in order to reduce competition and improve their survival possibilities (Baum 1996: 101–106). In market, vertically integrated groups led by a large organization can successfully compete (in terms of product prices) with non-associate firms placed in

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backward and forward sectors within the production flow, despite having to bear the costs for supervision and control of the other companies of the group (Feenstra, Hamilton 2006: 96–8, 118–19). It is however possible to defend the opposite thesis. Empirical inquiries carried out in keeping with the ecological theory of organizations, and concerning large organization superiority, have produced conflicting results. In general, it is not known how stability or instability factors may have an effect (whatever it may be) on the stability or instability of organizations and their populations. A better empirical confirmation has received the assumption, according to which, once a change has started, organizations tend to maintain their current behaviors and orientations. Furthermore, changes of this kind have the greater possibility to be repeated the most when they have been frequent. Continuity, or “inertia,” therefore does not seem to concern organizational structures, but rather the tendency to change in organizations and in their populations that produce that tendency (on the ecological theory of organizations, see Baum 1996; Baum, Singh 1996; Hannan, Freeman 1977; 1989). In short, from the ecological theory we learn that in comparison with small firms, large corporations have greater resources at their disposal. These resources of a different nature allow them to cope better with nonradical and non-sudden environmental changes, as well as changing, often to their own advantage, an environment, and particularly an institutional one (state and market), in such a way as to lower its selective pressure, but are expensive. Small firms can instead compete either with similar firms, or with large corporations, by operating in a plurality of market niches not connected with one another in production terms, in which they draw some advantage thanks to their specialization (which is ever-changing, depending on contingent market requirements), or by establishing a production network concentrated into a particular niche, in the position to oblige other firms working in the same niche to seek new niches in order not to be thrown out of the market (Feenstra, Hamilton 2006: 119). However, small firms risk being overcome not only by the competitiveness of similar firms, but also by their inability to adapt themselves in environments subject to quick and unpredictable institutional or technological changes. Since these theoretical notions have a general character, they consider neither the particular socio-economic contexts in which the competition among business organizations takes place, nor the ability of some firms to influence their environment (their organizational field and population) (Abolafia, Biggart 1991: 214–16). Therefore, these notions are not sufficient to defend the thesis of a greater competitive ability of an organizational business population in which organizations relate to one another according either to the “English” or to the “German” model. Large corporations’ ability

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to control their environment, by making its change gradual and opening themselves to innovation, may put themselves in the position—since these corporations, or business groups do not specialize in particular products— to close the production niches in which small firms are competitive. However, large corporations or business groups can at most control the domestic economic and political–institutional environment, but not the foreign one, so that small and medium firms may create in foreign markets— which in some cases may be of decisive importance for an entire national economy—new market niches in which they succeed in competing with large corporations. By lowering the selective pressure exerted by market and public authorities on firms, business groups’ control of the domestic environment may involve practices not conforming to the constitutive norms of moral economy, and consequently, difficulties to create and maintain trust extend to an entire organizational population. To obtain competitive advantages, it is not sufficient to economize on transaction costs. In addition, the networks of relations based on trust among firms or among those who manage them do not seem relevant in themselves for this purpose. Both explanations, as we have seen, are static and therefore—although potentially useful—cannot give account for the superiority over competitors of firms or business groups in a changing economic environment. But neither do theories on organization, such as the theory of structural contingencies or the ecological theory, seem fully appropriate. Their relevance in this domain is out of question, particularly if they are considered in conjunction with the previous ones. In contrast to transaction cost and network theories, they assume in fact a non-static economic environment, to which networks and business groups must conform when they do not succeed in changing it. The success of a production organization model would then depend on the network or group ability to promptly conform as well as possible to an economic environment, given a pre-existing normative and institutional context. Transaction costs are either non-existent or limited within groups or networks of firms, while among them instrumental relations and relations based on trust are differently combined or have a different extent whether either model prevails. Each production organizational model shows elements of competitive superiority or inferiority, and therefore the better economic performances of the “English” model are not explained. Finally, an explanation recently proposed by Feenstra and Hamilton (2006) will be dwelt on. This explanation intends to give account both of the competitive superiority of Taiwan and South Korea, in comparison with other countries, and of the better achievements of Taiwan production organization, in comparison with the model to which South Korea has approximated. This explanation differs from others, which will now be

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briefly discussed before considering Feenstra and Hamilton’s contribution. These alternative explanations stress on some particular causes as necessary for the economic development of those countries. The World Bank thesis, with reference to Taiwan, South Korea and a few other East Asian economies, that a relative equality in income distribution may be related to economic development, is an example of these deficiencies (Page 1993). Not only, in fact, do both countries display a non-negligible inequality degree, and other countries, such as Brazil, with even higher inequality levels have, nonetheless, experienced a considerable economic development (Bradshaw, Wallace 1996: 103–106; Pieterse 2001: 118–19). Also, a comparison with other explanations stressed by the World Bank and compatible with the so-called modernization theory—such as “efforts to improve the institutional framework for capital market development” (Page 1993)—is absent. How a relative inequality as a development factor is connected with other factors, which the World Bank also considers relevant, remains therefore not ascertained. A different explanation of economic development in Taiwan and South Korea, drawn from a modified version of dependency theory, has also been put forward. While classical dependency theory has viewed development as a result of a “triple alliance” between foreign capital, local capital and the state, new dependency perspectives have paid much greater attention to both specific historical factors and to the role of the state in promoting development by encouraging foreign trade and managing international transactions. As for South Korea, development has been contingent on the state’s ability to finance and regulate international trade, promote with domestic growth a national economy, thus lessening dependence on imports, and achieve relatively equal terms of trade with other countries (Bradshaw et al. 1993). As for Taiwan, the above-mentioned “triple alliance” created an “ever-increasing opportunity for investment and employment, together with fluid mobility,” thus contributing to “the maintenance of stability and the spread of wealth” (So 1990: 161). These two explanations differ in that the former focuses on domestic development factors only, while the latter considers both domestic and foreign factors. They share, on the other hand, a consideration for the role of the state in promoting development. They have, moreover, no interest for a comparative inquiry with other developing countries that may empirically strengthen the causal connections they establish, or for a theoretical inquiry that may support their argumentations by making use of already existing formulations. Finally, they both fail to indicate differences in South Korea and Taiwan’s distinct development patterns and outcomes, as Feenstra and Hamilton (2006) have done. We now turn to a presentation and assessment of their explanation of such differences.

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Feenstra’s and Hamilton’s Economic Theory The explanation provided by Feenstra and Hamilton (2006) considers a variety of factors: it refers to the neoclassical economic theory of the general economic equilibrium; takes into due consideration the theories to which we have previously made reference; finally, identifies, as an explanatory factor of the existence of any production organization, the ability to successfully compete in a plurality of interconnected markets, in which the prices of goods and the demand for them are the immediate causes of the competition outcome. Institutional (state support actions addressed to firms or business groups) and social (alliances among firms) factors take great importance in the context of global economic competition only insofar as they influence these immediate causes, and therefore are not directly relevant. Global competition produces a particular configuration and “carrying capacity” of the world market to coincide with particular and unrepeatable historical factors that determine what goods are requested in a particular moment, their prices and their quantities, and the production organization that succeeds in being competitive given these conditions in the economic milieu. From a careful study of the production organizations of Taiwan and South Korea, Feenstra and Hamilton conclude that both organizations are compatible with the global market capacity, even though the South Korean production organization consists of a limited number of business groups with a vertical integration of production, while that of Taiwan is instead connoted by networks of small- or medium-size firms gathered into particular production niches, or diversified into a plurality of niches not connected with one another. These different production organizations are coordinated by different authorities or hierarchical structures in South Korean firms (vertical coordination), and by structures characterized by reciprocity relations based on trust in Taiwan firms (horizontal coordination). According to these authors, a very relevant historical factor in explaining the world market configuration and “carrying capacity” have been the recent changes undergone in the United States by the retail market in the direction of a strong economic power held by intermediaries in the area of distribution. These intermediaries—such as supermarkets, chains of department stores, stores specialized in discount sales of any product, or in merchandizing particular branded products such as sports goods, computers, luxury wear (Brand Merchandizing), but also vehicle parts and accessories—are in the position to impose their desired prices, quantities and quality to producers. The explanation provided by these authors is very articulate, and deserves being considered in more depth. The superior ability shown by

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the production organizations of Taiwan (but also in America or in other countries) to meet intermediaries’ requirements for all these aspects by quickly producing a variety of good quality end products, has been, according to these authors, one of the decisive element in their extraordinary economic development. South Korean chaebols have instead succeeded in making a name for themselves as finished product manufacturers. In both countries, the state would in fact have limited itself to promoting a development direction that firms were already jointly providing. Therefore, the lower prices offered by Taiwan in order to allow its end products to be exported to the United States, explain, in these authors’ opinion, the greater competitiveness of Taiwan, in comparison with South Korea. This price difference in end products, in turn, requires an explanation, which the authors identify in a much greater differentiation of end products, produced by small and medium firms in Taiwan, compared to the corresponding goods produced in South Korea (intermediate products in the production chain, are instead manufactured in Taiwan mostly by groups of firms which stock up on raw materials on the domestic market and sell their products on the domestic market as well at higher prices than South Korea because of their scarce differentiation) (Feenstra, Hamilton 2006: 147–9). At the origin of the price difference in final goods destined to export, there is, according to these authors, a different economic concentration level. The firms that produce those goods in Taiwan are competitive and not coordinated into groups, and hence, scarcely concentrated. In South Korea, instead, firms are oligopolistic and vertically integrated, and therefore, highly concentrated. A lower industrial concentration degree in Taiwan firms producing final goods, in comparison with the corresponding South Korean firms, involves for Taiwan a greater variety in exported products. These products are offered at lower prices—considering the competition existing among Taiwan firms producing export goods and the high productivity resulting from it—in comparison with the prices of the corresponding South Korean goods, which are produced by groups of firms that are not in competition with one another, and consequently with lower productivity (Feenstra, Hamilton 2006: 299–341). Taiwan’s better performance—in Feenstra’s and Hamilton’s arguing— might be explained in two, reciprocally complementary, ways. On the one hand, a greater variety of final goods made in Taiwan and, therefore, a greater heterogeneity of exported goods, and a lower dependence of this country, compared to South Korea, on a particular product industry (such as a particular type of semiconductor) as to exports. On the other hand, the monopolistic ability of South Korean business groups in the domestic market allows them—within that market—to impose favorable conditions for themselves on their suppliers and buyers. These authors

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consider the vertical integration of South Korean groups as an inefficiency factor, because it involves a scarce production flexibility (in the sense of quick adaptability to demand), while their monopolistic position is a cause of inefficiency, and because it involves higher prices for the goods offered on the international market. This explanation of South Korea’s relative inferiority (although within a context of considerable economic performances) therefore refers back to particular negative and immediately relevant factors, such as the vertical integration of South Korean business groups and their monopolistic control exerted on the domestic market. Social relations and institutions (such as state, market, social and cultural institutions) are not immediately and not a priori considered relevant, but only within the particular context of negotiations, and consequently, of price making. The ability of Taiwan networks of firms to produce an ever-changing variety of export goods is instead explained by reciprocity relations based on trust existing among the managers of those firms. Norms prescribing loyalty and reciprocity, which are an integral part of the Chinese cultural tradition, govern the behaviors of the participants in business relations, whether relatives or acquaintances, and make them possible by providing the necessary trust for organizing production chains of goods destined for export, in competition with other similar chains (Hamilton 1997: 258–89). Reciprocity norms and trust—as Feenstra and Hamilton (2006: 290–98) have underlined along with other authors—have promoted investments, allowed them to achieve economies of scale, and ultimately, successfully competition on international markets. The authors stress the open nature of the networks of firms, as well as their importance as a source of information, funds and mutual control, because the authority of family firms does not extend beyond families. Firm networks in Taiwan form a unitary organizational field, in which rules, norms and knowledge are shared, while the unitary character of the chaebol organizational fields derives from the “patrimonial” authority of those who manage them, and from the subordinate personnel’s loyalty. With this term Weber designates a traditional power, because patrimonial authority “rests on the holiness of tradition” (Weber 1956: 590). Therefore, this is an economic explanation (the lower prices of exported goods, which involve a competitive superiority, are made possible by the variety of final goods and by the approximation of the production organization to perfect competitiveness), but refers back to a cultural factor. In fact, relations whose contents recall the respective cultural traditions would be still relevant in both countries. These traditions, based respectively on reciprocity and authority, would have given rise to radically different ways of managing intercorporate relations, such

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differences are the predominant organizational fields in those countries. Feenstra and Hamilton (2006: 347–60) bolster their argumentation with a careful consideration and rejection of alternative explanations “for the pattern and trajectories of economic development of South Korea and Taiwan” (2006: 347). As the authors maintain, in both countries the economic organization produces effects on entrepreneurs and state officials that narrows their available options. Demand from international trade—with particular reference to the so-called retail revolution which has provided direct links between US retailers and manufacturers in Korea and Taiwan, and increased the demand of goods produced in these countries—has had an impact on their production structure, but effects have differed according to the specific competitive environment. This environment, which includes economic institutions such as firms and groups of firms but also state policies and social networks, grew ever more different in Korea and Taiwan, as local firms used domestic resources, including authority and market power, to satisfy a rising specific demand from US retailers (Feenstra, Hamilton 2006: Chapter 6; see also 9, 71, 295–8, 363–4). Accordingly, a “self-reinforcing cycle of selective matching in the context of increasing demand for exports led very quickly to the development of divergent economic trajectories” (Feenstra, Hamilton 2006: 9). International demand “was exercised in different market segments within the two countries,” as “relatively standardized products” were ordered from Korean firms, while “more specialized, niche products” were supplied by Taiwanese firms (Feenstra, Hamilton 2006: 71). As a consequence, pre-existing patterns of industrial organization have been maintained and strengthened. In the case of Taiwan, as well as of South Korea, the authors own explanation does not seem fully convincing, though theoretically and empirically grounded in the economic and sociological literature on economic development, and extensively referred to it. In the first place, it does not clarify, in fact, which are the actual boundaries of the business milieux in Taiwan, and consequently, those of the economic and moral community within which the aforementioned norms of reciprocity and trust are enforced. In the case of cooperative, personal relations, one cannot understand how a community grounded on shared activities and beliefs, and implying the typical norms and practices of moral economy, may be in the position to keep itself when these reciprocity norms, based on personal relations, lose their importance. The authors maintain this process has occurred in Taiwan in recent years (Feenstra, Hamilton 2006: 292). Other sources point, however, to the persistent crucial importance of personal relations, including family relations, within and between Taiwanese companies, despite a tendency to hire professional managers in a few large companies (Pacific Orient 2007; Spaeth 2004).

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Likewise, it is difficult to understand how a pre-capitalistic cultural tradition may support capitalistic practices and normative orientations, which do not only assume that contracts are observed regardless of one’s personal relations, but also the enforcement of a generalized reciprocity principle between the parties, although circumscribed to a particular organizational population, as that of Taiwan. As a matter of fact, as the authors themselves point out (Feenstra, Hamilton 2006: 334–5), a nonnegligible number of Taiwanese entrepreneurs have established, since the early 1990s, a very competitive industry of electronic products, particularly laptop computers, which operates in cooperation with local component producers and puts personal relations to good use for this purpose, but also makes use of training and professional expertise achieved in the United States and in other developed capitalist countries. Their cultural orientation has therefore resocialized itself in a capitalistic sense. In the second place, it is not clear how, in South Korea, “patrimonial” business milieux may survive if the managerial functions in the companies that take part in chaebols are increasingly entrusted to persons who have achieved high professional training levels, as the authors underline (Feenstra, Hamilton 2006: 286), and if South Korean universities, such as the Business School of the University of Korea, provide degree courses in Business Administration held by teachers who have been trained or have taught in the most outstanding American universities. American Business Schools certainly do not recommend the behaviors that are still customary among chaebol managers/owners, such as cultivating relations based on bribery and collusion with the government and the public administration; entrusting the most important corporate position to family members and former schoolfellows; pursuing one’s personal interest to the detriment of minority shareholders; escaping controls on one’s actions and behavior by shareholders, government, or board of directors. Therefore, it is not surprising that the most articulated criticism to this kind of “patrimonial” capitalism has been made just by South Korean Business School teachers with an American training background or professional experience (Biggart 1997: 223–4; Chang 2003: 170–85). Therefore, South Korean groups that still do not share rules, norms and knowledge with other business organizations and institutions, and whose behaviors lack in legitimation not only from the viewpoint of international business milieux, but also from that of their own local business schools, present the inefficiency factors that Feenstra and Hamilton (2006), as well as other authors, have pointed out, which result from monopolistic or oligopolistic positions on the market, conforming to the “German” model. Though the organizational field of a chaebol is compact, it is, however, limited to the group itself as the chaebol does not adhere to the typical

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norms of international business milieux and does not consequently take part in moral economy, and there is not (at least for the time being) a South Korean moral economy in the position to gather a plurality of chaebols. On the other hand, the board of a chaebol that—although keeping a “patrimonial” nature—due to the lack of persons with the required parental or personal qualifications, and/or objective management requirements, integrates its ranks with managers provided with educational credentials produces in this way two separate and incompatible sets of rules, norms and knowledge, thereby showing that within the group the organizational field is profoundly divided. It becomes then increasingly difficult to carry out transactions with foreign partners, not because they necessarily attribute great importance to those rules (since some of the partners may prove unreliable), and not only because “patrimonial” standards remain relevant in chaebol management and involve economic inefficiencies that unfavorably affect prices, considering that chaebols hold relevant power positions on the South Korean domestic market. But also because uncertainty on their own rules, norms and knowledge, may produce in South Korean groups several internal conflicts and corresponding management uncertainties, which would lower their trustworthiness in comparison with international competitors. Since chaebols dominate South Korean economy, this is consequently a general problem concerning domestic production organization. This problem, which has not been only caused by the cultural peculiarities of that country, affects its competitive capacity and therefore the whole organizational population of the chaebols. However, the reasons why the South Korean economy has effectively recovered from the heavy crisis of the late 1990s and has now entered an expansion stage still have to be explained. In other words, it would be necessary to look into the changes that have occurred in the South Korean organizational population and have made this recovery possible. Weber’s and Simmel’s contributions, which will be considered in the next chapter, may be used for a number of theoretical purposes: specifying the constitutive elements of both models; showing the elements through which Taiwan and South Korea approximate to them; and in the light of these indications, dwelling on the reasons for the recent South Korean recovery, which has taken place even though South Korea approximates to a model of intercorporate relations (the “German” model) considered less efficient in international exchange economy than the other one which has been here considered (the “English” model). Analytical and conceptual innovations should follow from a comparison between these models, rather than between the two countries, in such a way as to make theoretical generalizations possible. Accordingly, different variables are to be found

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in Taiwan and South Korea, such as specific organizational practices and business networks (Hamilton, Biggart 1992), are not considered relevant per se. Rather, they are attributed explanatory relevance if, and to the extent that: a) business networks are open to domestic and international competition, so that groups have limited economic and political relevance; b) between firm relations are competitive; c) ethical standards and mutual trust prevail in business transactions; and d) firms are reciprocally autonomous, and unable to exert control on the domestic market. To the extent that these characteristics of organizational practices and business networks are present, and therefore Taiwan approximates to one model of business relations and South Korea to the other, the boundaries of their respective business milieux, organizational populations and fields are clearly established. Trust and personal relations maintain their importance in both models. Still, the different comprehensiveness of their organizational populations and fields, and the different extension of mutual trust within them affect their ability to compete and survive in the international economic environment, as will be shown in the following chapter. Cultural features, such as a common religious tradition, cannot of course account for the different economic performance of countries that approximate to one model or the other.

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Chapter 2

Toennies, Weber and Simmel: Their Contributions to Contemporary Research and Theories Concerning Economic Communities This chapter focuses on Toennies’s, Weber’s and Simmel’s descriptions and appraisals of the normative and communitarian elements that may be found in business relations. The sociological work of Toennies, Weber and Simmel was inspired by a common concern for the social and cultural consequences of capitalist modernization (Holton, Turner 1989: 71). In their view of capitalism, furthermore, they were influenced by Marx (Bottomore 1978: 128–30). From this concern and influence derives their conception of monetary exchanges and business associations as promoting rationalization, and therefore costitutive, as well as symbolic of modern social relations (Frisby 1984: 107–108; 1992: 53–4, 65). In this regard their different approach will be emphasized here in appraising these normative elements, and the current relevance of their contributions considered, in order to explain the economic action of individual firms, or business groups, in different institutional contexts, which characterize the ideal– typical models represented, respectively, by South Korea and Taiwan. Toennies’s Contribution Toennies differed from Weber and Simmel in that he did not see communitarian relations compatible with modern economic life (for some recent and concise introductions to Toennies’s work, see Adair-Toteff 1995; Bellebaum 1988). Toennies’s ideal types of Gemeinschaft and Gesellschaft refer to two opposed models of society. Gemeinschaft (community) is characterized by togetherness, mutual dependence, and—in Tonnies’s language—natural or essential will (Wesenwille), consisting of common values, concord, attachment, personal trust, and moral obligations, insofar as they are influenced by “the inherited mode of thought and perception” handed over by the previous generations. Communitarian, or Gemeinschaft,

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relations are represented and epitomized by kinship, neighborhood, and friendship, and located in houses, villages and towns, so that relations are face-to-face, or at least spatial proximity makes them possible and frequent. Gesellschaft (society), by way of contrast, is connoted by individualism, impersonal trust, cosmopolitanism, and exchanges are characterized by rational or arbitrary will (Kürwille), namely, by private needs, interests, desires and decisions, all of which are aimed at maximizing the advantages and profits of the individuals participating in the relationship. The individual volitions and the collective will of Gesellschaft associations are regulated by conventions, rather than by traditions and custom, and “remain […] independent of one another and devoid of mutual familiar relationship.” Conventions and, in particular, the rule that contracts must be executed involves a momentary concurrence of wills exclusively for the sake of individual advantage, since a convention “forbids much as detrimental to the interest which the folkways, mores, and religion had condemned as an evil in and of itself.” Except for conventions, the individuals or the corporations—which best represent Gesellschaft relationships—compete with each other without scruples. Mutual hostility is “consequently highly probable, requiring slight provocation to cause an outbreak.” Merchants and capitalists—that is to say, those who are considered capable of freewill—and are therefore full-status citizens, qualified to sign contracts and to engage in business exchanges—are the rulers of Gesellschaft (Toennies 1955: 6–8, 15–28, 41–7, 53–5, 86–96, 132–42, 195, 222–8, 268, 270–71; 1982: 28–9, 32–8; see also Cahnman 1995: 110–13). As ideal types, communitarian associations (Gemeinschaft) and corporations (Gesellschaft) are mutually exclusive categories. They are not mutually exclusive as historical periods, however. In Toennies’s words: “A period of Gesellschaft follows a period of Gemeinschaft,” but communitarian relations do persist “although with diminishing strength even in the period of Gesellschaft.” In fact, “the essence of both Gemeinschaft and Gesellschaft is found interwoven in all kinds of association” (Toennies 1955. See also Cahnman 1995: 191–6; Donati 1988: 229–32). The transition from predominantly Gemeinschaftlike Middle Ages to “increasingly Gesellschaft-like oriented” modern centuries has been brought about above all by trade, and capitalism in general, but it has not been, nor will it ever be, completed (Cahnman 1995: 95–8). Despite the “diminishing strength” of communitarian relations, the cooperative movement has signified a counteracting tendency. As Toennies put it, cooperative associations, which “have obtained considerable power and importance,” have revived “under a form adapted to conditions of Gesellschaft […] a principle of Gemeinschaft economy which is capable of

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further significant development,” because this principle “may become the focus for a resuscitation of family life and other forms of Gemeinschaft” (Toennies 1955: 227–8). Toennies accordingly predicted the gradual transformation of society in a socialist sense, without modifying the legal forms of Gesellschaft (Toennies 1955: 29, 194; 1982: 38). According to Toennies, actually existing societies which are close to the ideal type of Gesellschaft may then include some Gemeinschaft elements. Toennies would not have been surprised, therefore, in learning from contemporary research that modern societies preserve some Gemeinschaft aspects, as long as certain favorable conditions prevail. For example, length of residence strengthens local social bonds and community sentiments (Kasarda, Janowitz 1974); density of acquaintanceship promotes social control of deviance, socialization of the young and care for those in need of help (Freudenburg 1986: 42–50); in addition, “local community networks are founded on kinship ties, even today” (Logan, Spitze 1994: 473). Still, the usefulness of the distinction between Gemeinschaft and Gesellschaft becomes questionable if some essential components of Gemeinschaft as an ideal type are present in societies that, because of the predominance of capitalist economic relations, approximate the Gesellschaft ideal type. In fact, some empirical research findings call into question the fruitfulness of this distinction. In particular: •

•

•

•

The advance of capitalist relations in rural areas may paradoxically create community relations between farmers and farm laborers (Urry 1987: 230). Friendships, and primary ties in general, are maintained even under the adverse conditions produced by the massive inflow of foreigners. Foreigners, unlike Toennies’s merchants (Toennies 1955: 193–4), are not in general “single” and “scattered,” and do not form a “Gemeinschaft of their own,” but mingle with locals (Freudenburg 1986: 39–42). Urbanism, rather than producing the isolation of individuals, “probably promotes the emergence of numerous and diverse subcultures within a community” in cities (Fischer 1995: 568; Urry 2004: 15), as well as communitarian relations in suburbs (Urry 1987: 230–32). Newcomers’ inflow into large metropolitan areas does not necessarily bring about the destruction of previously established communities. Rather, newcomers’ integration may be sought along different paths. In the first place, the community at large may cover household and personal needs, while social ties may be established in the local neighborhood. In the metropolitan areas, moreover, instrumental, Gesellschaft-like goals, like getting established in

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•

•

a job, are pursued in conjunction with expressive Gemeinschaft purposes, such as socializing with neighbors or joining community groups (Guest, Stamm 1993). In modern large cities, where according to Toennies, all inhabitants are supposed to be “attracted outside by business, interest and pleasure, and thus separated from one another” (Toennies 1955: 268), neighborhood organizations have instead tried consistently and simultaneously to accomplish the Gemeinschaft objective of establishing communitarian relations among the area dwellers and the Gesellschaft goal of promoting their interests (Lee et al. 1984). Finally, as previously pointed out, interpersonal links in business milieux are especially significant as sources of trust, enforced by “the sanctioning power of the community,” in non-institutionalized economic relations constitutive of an informal economy (Portes 1994: 430–32). Trust is also essential for the functioning of industrial districts (Diamanti 1994: 405–408; Powell, Smith-Doerr 1994: 385– 8), the establishment of patronage networks connecting job seekers and job control agents (Bian 1994), and the maintenance of “a tightly controlled network unfriendly to outsiders” for the purpose of excluding them from financial markets (Mizruchi, Brewster Stearns 1994: 328–9). Especially in business and financial milieux, then, personal trust “is a prime means whereby social relations of a distanced sort […] are established” (Giddens 1990: 119).

Toennies, in this regard, would however contend that fair business norms, while necessary for maintaining trust, are honored only insofar as instrumental to the pursuit of individual advantage. Contemporary students of the so-called moral economy are close to Toennies’s position when they wonder if “action that appears to meet moral standards” may not be actually motivated by the actors’ “economic self-interest” (Granovetter 1994: 467). This position is certainly plausible in many cases, but against it a number of objections may be raised. First, in large groups, such as a market community in which a great number of economic exchanges occur, the ruthless and opportunistic pursuit of self-interest is not conducive to cooperation for the attainment of a common good. Since the stability of exchanges and therefore the trustworthiness of the business partners are the market’s common good, opportunism is a major obstacle unless some favorable circumstances counteract it. In small and stable groups, in particular, opportunistic behavior is checked not only by the individual member’s interest in the attainment of the common good, but also by the existence of an honor code, the violation of which may entail exclusion from

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the group or other punishment (Elster 1989c: Chapter 3 and Conclusion; Olson 1965: Chapter 2; Williamson 1986: Chapter 2). Second, if self-seeking social actors may obtain an unlawful profit by exploiting other people’s trust (Granovetter 1985: 491–2), business relations that refrain from illegal conduct and abide by moral standards cannot be inspired only by economic self-interest. Whether moral standards are followed or disregarded “depends on the nature of personal relations and networks of relations between and within firms” (Granovetter 1985: 502). Finally, self-interest is compatible with a variety of economic conducts. Specific patterns of relations may be accounted for by moral rules that are valid within particular business communities (Hamilton, Biggart 1992). As a case in point, trust characterizes relations within economically active kinship and ethnic groups (Granovetter 1992: 7–8; 1994: 463; Light 2005: 658–9 and 667, note 47; Light, Karageorgis 1994: 662). It is worth noting, in this regard, that kinship groups are, according to Toennies, the locus of primary, Gemeinschaft ties, whereas in a Gesellschaft context “family life is decaying” and “the residuals of family life acquire a purely accidental character” (Toennies 1955: 26–7, 43–4, 48–51, 223, 267–8, 272). Against Toennies’s theses, it may be argued as follows: first of all, there is historical evidence that “the rational, individualistic conception of marriage” is not new at all (Francis 1987: 25). Second, today’s widespread existence of kinship groups whose members’ collective engagement in business is strengthened by family ties, also point to the actual possibility that Gemeinschaft and Gesellschaft relations are intertwined within the same set of economically active persons. This possibility is made likely by the resurgence of self-employment, especially within ethnic groups, in advanced capitalist economies such as the United States (Light 2005: 653–4; Light, Karageorgis 1994: 650–56; Steinmetz, Wright 1987). It is also promoted by the current tendency in that country to have most of the labor force concentrated in small establishments (Granovetter 1984), where personal relations among fellow workers develop more easily than in large establishments applying assembly line technology (Chinoy 1964: 71–3). Toennies’s aversion to Gesellschaft as a set of social relations and as a model of society, can hardly be denied despite his declaration of value freedom (Toennies 1955: 33; see also Cahnman 1995: 81). In fact, Toennies’s negative description of Gesellschaft and his extolment of Gemeinschaft echoed and legitimated the hostility to modernity and capitalism that was widespread among German academics and intellectuals before and after World War I, and that later constituted one of the main themes of Nazi ideology (see Kaesler 1988; Mosse 1964; Ringer 1969; Stern 1970). The assessment of Toennies’s sociological relevance should however disregard the ideological origins and consequences of

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his famous dichotomy, and rather focus on its theoretical fruitfulness. Some researchers on communitarian relations in contemporary society do refer to Toennies (often in conjunction with the American—of German origin—urban sociologist Louis Wirth, who was influenced by Toennies) (Cahnman 1995: 133–4), but their conclusions in general question or qualify his decline-of-community thesis (see Francis 1987; Freudenburg 1986; Kasarda, Janowitz 1974). Accordingly, Toennies’s reception by contemporary sociology has been generally limited to the use of an ideal type of Gemeinschaft, often incorrectly understood (see Cahnman 1995: 125–45), for the purpose of assessing the advancement of Gesellschaft relations. In compliance with Toennies’s and Weber’s indications concerning the proper employment of ideal types (Toennies 1955: 16; Weber 1956: 9–10; 1973: 198–9, 201; see also Janoska-Bendl 1965: 51–4), many recent appraisals of Toennies’s work have emphasized the distance between empirical reality and the constructs of Gemeinschaft and Gesellschaft. To the extent that historical and modern societies have been characterized by features of both ideal types, the usefulness of this dichotomy becomes questionable. It is not surprising then that Weber, in constrast with Toennies, did not equate Gesellschaft relations (Vergesellschaftung, in Weber’s terminology) with the ideal type of the market which—as he contented—does not involve only (and not even necessarily) an instrumental, individualistic conduct but also a communitarian relationship (on Toennies’s and Weber’s partially different conception of capitalism, see Cahnman 1995: 84–5). Weber’s Theory of Gemeinschaft and Gesellschaft Relations in Business Groups and Milieux As Weber maintained, a communitarian relationship (Vergemeinschaftung) exists insofar as all its participants share a sense of belonging. An association (Vergesellschaftung), on the other hand, involves a relationship based on common interests. These interests are rationally pursued by means of a stipulation which all participants consider binding, whether because they hold the stipulation convenient for the pursuit of their interests, or for other reasons. The association’s agreed upon rules of conduct are more reliable if there is a rational organization in charge of pursuing the goals of the association, and enforcing compliance on its members. Mutual trust among its members is therefore strengthened by the existence of such an organization (Weber 1956: 21–2; 1968: 40–43; 1973: 442–3, 447–52, 472–3). Trust relations among the members of an association should be distinguished from similar relations among the members of a community.

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In fact, the consensual action that characterizes a communitarian relationship and distinguishes it from an association, implies a meaningful orientation toward a number of unspecified subjects: all those involved in a communitarian relation behave as though there were a binding rational stipulation, which in fact does not exist. Whatever the basis of this behavior—consent, coercion, custom, or a combination of them—a community (Vergemeinschaftung) is unstable if every member does not presuppose that all other participants, including those who are unknown, feel bound by, and therefore conform to, the unwritten norms regulating the consensual relationship. Rather than by solidarity, which may also be found in associations, a community is characterized by the presupposition of general compliance with these unwritten norms (Weber 1973: 446, 450– 53, 456–8, 463–4, 470; see also Ferrara 1996: 610; Holton, Turner 1989: 57, 109–10). According to Weber, the market as an ideal type is an important instance both of a communitarian relationship based on consensual action (in the previously mentioned sense), and of an association (for a different interpretation, which stresses the continuity between Toennies’s and Weber’s conceptions, see Holton, Turner 1989: 138–9, 184). Consensual action is relevant insofar as the market partners have confidence in the honest conduct of all, or at least most, other partners, whether actual or potential. There is, on the other hand, a market association to the extent that the partners rationally pursue their interests by exchanging goods in conformance to previous agreements. A market community comprehends, as Weber maintained, both consensual action and rational associations. Business interests may be oriented toward the opening of the market as long as there is an opportunity for profitable exchanges. A consensual action would follow, and the market community would then be strengthened. But the same interests may instead attempt to close the market in order to reap a monopolistic or oligopolistic profit at the expense not only of their competitors but the consumers as well. In this case, the rational associations that may be constituted for the purpose of exploiting the market closure, may be endowed with organizations of their own in charge of enforcing the business partners’ internal agreements (Weber 1956: 44–5, 382–5; 1968: 85, 635–40; 1973: 450–51, 453, 458, 461–3; 1984: 370–71). Consensual actions are constitutive of the market, as an ideal type, which is accordingly designated by Weber as a community. The ethical conduct of all the market operators is contingent not only on the state’s guarantee on the lawful character of the transactions, but also on internal mechanisms of social control. These mechanisms are particularly effective if a group is formed with dense and strong ties, as is the case when business partners customarily trade with each other (Weber 1956: 382–3, 385; 1968:

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636–8, 639–40). In the special case of financial markets, which were closely studied by Weber and will be examined in the following pages, private tribunals instituted by business groups and recruited within their fold, may enforce the norms of fair business on all the group members (Weber 1924: 285–8; 1999: 171–4). Rational Gesellschaft relations are thus instrumental to the preservation of a market Gemeinschaft, or community (Weber 1956: 205; 1968: 346). In most instances, the informal norms ruling the financial communities are strong enough to enforce compliance on all its members (Weber 1924: 276, note 1; 1956: 383; 1968: 637–8; 1999: 158, note 8). Still, state controls and the formal sanctions, including the penalty of expulsion, imposed by these private tribunals may also be necessary to enforce such informal norms. The private tribunals’ sanctions are effective only if the stock exchange operators (in this case generically called financial operators) share a strong sense of honor. The existence of dense ties binding the business partners makes such a sense of honor possible not only for this particular group, but also for any other business group. However, stock exchange operators differ from other economic groups in two respects. First, they derive their own sense of honor from their very privileged status group (Stand) and ownership class. This common origin promotes the establishment of a close group with very dense ties and quite effective instruments of formal and informal social control (Weber 1924: 285–7, 321; 1999: 171–2; 2000: 654. For the concepts of status group and ownership class, see Weber 1956: 177–80, 531–9; 1968: 302–306, 926–38. See also Wenger 1980: 358–69). Paradoxically, private tribunals best achieve their purpose of enforcing the market norms when effective mechanisms of informal control are already in place and make formal state controls almost unnecessary. Second, stock exchange operators and, more generally, the members of the financial community, constitute a business milieu in the sense previously indicated, for the financial community is not only part of the business community at large, but is also bound by norms and corresponding practices of its own (the norms and practices of a highly privileged status group) and is not confined by local or national boundaries (as Weber emphasized with reference to international transactions concerning bills of exchange) (Weber 1924: 263–5; 1999: 143–5). In contrast to Toennies, Weber did not set Gemeinschaft against Gesellschaft relations. Weber did not maintain that Gemeinschaft is dead because “the Gesellschaft relations of the marketplace” have successfully challenged it (Holton, Turner 1989: 193). On the contrary, as Weber showed in his analysis of market relations, and especially of transactions in the financial market, economic actors orient their conduct toward their real and potential business partners, with all of whom they have established a

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Gemeinschaft relation based on mutual trust. In addition, with their actual business partners they have a Gesellschaft relationship based on contract. Gemeinschaft and Gesellschaft relations are thus intertwined. Business milieux are in a superior position to enforce the norms of fairness on the single members, since the sanctions that are imposed by their private tribunals are made effective by the density and strength of ties connecting the partners. Moreover, their mutual trust depends not only on such ties, but also on the thin and weak ties the partners have established with other members of their privileged status group. In this sense, the members of a business milieu form a community embedded within the larger community of all those professionally engaged in business (the market community). The trust binding the members of a business milieu is accordingly of a higher quality than the trust holding together the members of the business community at large, or of some intercorporate syndicate constituted for the purpose of restricting competition (Weber 1973: 450–51). By way of summary, Weber considered three levels of social control exercised by business communities on the ethical conduct of their members: 1. A weak control making ordinary business transactions possible. State courts provide the last resort instrument of control, to be used when informal sanctions are proved ineffective. 2. A stronger and purely informal control carried out by each partner on the others within a group of business operators having dense and strong ties. In this case, exclusion from the group is the sanction for unethical conduct. 3. An even stronger control, both informal and formal (by private tribunals), which each member of a business milieu, and in particular of a financial community, exerts on all the others. This group of members constitutes a financial community characterized not only by dense and strong ties (as any other business group), but also by the weak ties or relations the single members have with other people sharing a privileged social and economic position. The Weberian sociology of business groups and milieux is in broad agreement with contemporary research inspired by, or consonant with Marxist theory, but qualifies some of its contentions. It also anticipates and complements recent advances in the application of network theory to economic sociology. These two points will be considered separately.

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Weber’s Theses on the Political Influence of Business Groups, and of the Capitalist Class in General Empirical research on this subject mostly focuses on the United States only. This is a theoretical limitation, given the considerable diversity of networks connecting the leading positions in the major corporations with one another and with the highest political positions (Vogel 1987: 407; Ziegler 1985). Researchers have striven to corroborate the thesis, originally argued by Marx (1959: 282–9), that the capitalist class as a whole, or the section controlling financial institutions, exerts on decisions made by political institutions, such as the parliament and the government. This thesis has been argued on the following grounds: 1. Irrespective of whether a limited number of families are the principal share owners, large banks, by means of interlocks, are disproportionately over-represented in the board of directors of other banks and financial corporations in relation to the shares they hold (Bearden, Mintz 1985; Kerbo, Delle Fave 1983; Useem 1980: 51–2; Zeitlin 1974). 2. There is a “tendency for large manufacturing establishments to dominate the economic core” and to be “in industries exhibiting higher capital intensiveness and productivity” (Baron, Bielby 1984: 465). 3. Major corporations and banks give substantial financial support to political decisions that are in line with the interests of the capitalist class (Whitt 1979). 4. “Heightened aggregate concentration helps corporations organize to attain their political demands” (Jacobs 1988: 852; see also Baran, Sweezy 1966: 67, 73–4). 5. A narrow elite controlling a variety of leading positions in major corporations, is over-represented in private non-profit organizations pursuing cultural and economic development aims, as well as in other important business organizations. Multiple directors of major corporations are over-represented in business, policy associations and federal, state, and local government advisory bodies (Useem 1979) and have personal relations with government representatives (Moore 1979), with whom a cooperative relationship is maintained—by means of financial support or otherwise—if some legal or monetary advantage is expected in return (Boies 1989; Burris 1987). 6. The similarity of the corporations’ political behavior is strongly influenced by indirect interlocking through financial institutions (Mizruchi 1989: 415), and by a shared conservative ideology (Neustadl, Clawson 1988).

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As we shall better see in the next chapter, the evidence for Weber’s theory of social control within business groups and milieux was gathered in the course of a comparative analysis of the formal and informal organization of stock exchanges in all major capitalist countries (Weber 1924: 279–88; 1999: 161–74). Weber did not, therefore, draw general conclusions from the study of the financial market in a single country, such as the United States. While basically in agreement with the Marxist thesis of capitalist influence on political decisions, Weber maintained that strong and dense ties between the capitalist and political elites are contingent on the weakness of the parliamentary institution, as in pre-Weimarian Germany, and of the working-class organizations, as in Germany and in the United States of his time (Weber 1924: 403–406; 1984: 370–71, 424–85, 505– 506). The particular condition of the Berlin Stock Exchange—namely, the lack of an effective normative regulation of transactions because of the absence of a compact milieu of operators bound by social and cultural ties—consolidated in Weber’s view the uncontrolled financial power of a small group of capitalists, including the representatives of the largest banks, while obstructing the proper functioning of the stock exchange as the locus of price formation. This obstruction prevented the expansion of the financial market, and the competitiveness of the economy as a whole (Weber 1924: 284–7, 318, 320–22; 1999: 168–72, 651, 654–5). The unrestrained control, which the most powerful segments of the German capitalist class—namely high finance and the heavy industry— held on the Berlin Stock Exchange and the nation’s economy as a whole paralleled their political power, exerted in conjunction with the administrative elite and at the expense of the parliament. In Imperial Germany, as Weber maintained, economic stagnation followed from the social, economic and political domination of conservative capitalist interests on the one hand, and the administrative and political elites on the other, interlocked by direct and indirect ties, and connected by means of a cooperative and cozy relationship. The opportunity for corruption provided by this relationship was limited by the esprit de corps of the German civil service. On the other hand, corruption was rampant in the United States, where direct election of government officials not only ruled out the formation of such an esprit or sense of honor, and therefore facilitated the influence of capitalist interests on the public administration, but also prevented the parliamentary control on its conduct (as in England). In addition to stagnation and widespread corruption, the political hegemony of capitalist interests may result in higher inflation rates and, consequently, lower real wages. Furthermore, in England, an effective parliament based on universal suffrage and representing a variety of social interests (including those of

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the property-less strata), a strong capitalist ethos prescribing and enforcing the norms of business conduct, and an entrepreneurial spirit concurred in promoting business transactions, both in the London Stock Exchange and in the economy in general, thus contributing to the country’s achievements in the world’s economic and political competition (Weber 1956: 110, 113; 1968: 186, 191–3; 1984: 351–7, 370–71, 381–4, 395–6, 471–5, 483–6, 527–8, 546; 1988: 115, 139–40; 1992: 217–19). As for Imperial Germany (until World War I), Weber did not especially emphasize the pivotal role of the German banks in intercorporate interlocks, but otherwise he concurred with Marxist, or Marxism-inspired, contemporary theory of business groups and milieux in stressing that the dominant influence of business interests on political institutions depends upon the aggregate concentration of capitalist interest in the financial market and in the whole economic system, and on social interchange with the administrative elite with whom they are interlocked and share a conservative world view. In contrast to contemporary Marxist theory, however, Weber resorted to a comparative analysis in order to show the business’ dominating political influence is not inherent to capitalism. Although this influence cannot be completely eliminated, it may be restricted, as Weber contended, by a set of conditions that then characterized England as the most advanced capitalist country. The thriving of English economic and political institutions presupposed, in Weber’s judgment, the existence of a business milieu whose solidarity did not necessarily rest, and in any case not exclusively (as was the case of business groups in Imperial Germany), on common interests, implemented by direct ties binding its members, and indirect ties between these members and the representatives of the same propertied class, as well as of the bureaucratic and political elites. The solidarity holding together every member of the London Stock Exchange with all the other members and with the business community at large, also presupposed interpersonal trust, hence a strong sense of honor that united the bourgeois as a group, and prevented the establishment of strong connections between the business community and the civil service, while democratic traditions and procedures enabled the English Parliament to represent also the interests of the non-propertied classes. Contemporary research supports Weber’s theses, insofar as the following points are concerned: 1. The interlocks between German cartelist industry and large banks, and the banks’ control of the Berlin Stock Exchange (Gerschenkron 1962: 15–16; Windolf, Beyer 1996: 215–22; Ziegler et al. 1985: 92).

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2. The Imperial German banks’ bias in favor of heavy industry (Neuburger, Stokes 1974: 729; see also Gerschenkron 1962: 15, 45) and the tendency—then and now—to regulate (and consequently limit) competition (Windolf, Beyer 1996: 226–7). 3. The strong influence exerted on the parliament by conservative associations, including those representative of heavy industry, in contrast to the relative impotence of the German Parliament (Puhle 1970). 4. The conservative world view of the German higher civil service, its very selective social recruitment and frequent interchange of personnel with the business world, and especially with banks (Roehl 1967). 5. In England, conversely, the low concentration of the network of interlock between the major business establishments, including the banks, both in current times and before World War I, and the consequent absence of a cartelist economy (Windolf, Beyer 1996: 221–2). In late Victorian and Edwardian England, banks were not instrumental in financing long-term investments. Families, or family companies, controlled many interlocked firms, while business exchanges were coordinated through informal instruments (Gerschenkron 1962: 13–15; Scott, Griff 1985: 216–23). Simmel’s Sociology of Money Economy, Business Groups, and Business Milieux Simmel’s sociology of monetary transactions, while fundamentally different from that of Toennies, paralleled Weber’s in some respects and complemented it in others. Simmel concurred with Toennies in emphasizing the distinction between personal and impersonal trust. As Simmel argued, however, impersonal trust—far from indicating lesser social cohesion— points to “higher states of development” precisely because “trust has lost its specific personal character” (Simmel 1978: 480). Trust—namely “the confidence in the ability of an economic community to ensure that the value given in exchange for an interim value, a coin, will be replaced without loss”—epitomizes “confidence in the socio-political organization and order.” Money transactions require that a relationship be established not only between the money owner, who advances a claim to receive a good or service in return for it, and the seller of the good or service, who trusts that “this claim will be honored,” but also between each of them and the social circle to which they jointly belong (Simmel 1978: 172, 178–9; see also Turner 1986: 98).

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Money, as the most abstract and generally accessible means of exchange, brings about—along with the “objectification of the contents of life”—the greatest size of the social circle of all those that partake in the money economy and, in particular, of all those engaged in commercial trade and monetary transactions, that is, of the business community. Therein, transactions are made possible by impersonal, institutionalized trust. Because of its large size, the circle of the participants in the money economy “affords freedom, independence, and mutual differentiation,” and is accordingly characteristic of modern, socially differentiated society. Since monetary interests establish “relationships between elements” that otherwise would have no connection whatsoever, “while everything personal and specific” is excluded because of its irrelevance for the transaction, money “permits […] an inclusion of the most diverse persons in the same project.” The economic or business community therefore unites individuals whose non-monetary interests are discrepant (Simmel 1978: 294–7, 345–8, 480, 504–505; see also Simmel 1992: 457; Watier 1996: 9–11). A general sense of honor binding all those pursuing business transactions and characteristic of the business community at large, may accompany and strengthen a specific sense of honor, shared by relatively narrow business groups only. Simmel conferred distinctive sociological traits to the general and the specific senses of honor. As for the general sense of honor, ethics set out to regulate the individual’s whole behavior through their conscience, and in particular, business ethics regulate competition according to the objective and impersonal rules of the money economy, which identify business interests with those of society at large. Since competition is considered to promote the public interest, business people do not refrain from ruining with good conscience their competitors as long as lawful means only are employed for that purpose. By prohibiting the use of means that are incompatible with the standards of business honesty, commercial law reflects, and gives support to, the ethical concern lest the public interest might thereby be endangered. Only honest competition—as Simmel contented—corresponds to the pure concept of competition, and accordingly conforms to the public interest. This requirement accounts for the existence of laws barring any conduct of large establishments which, because of their superior market strength, may drive smaller competitors out of business (Simmel 1992: 342–9, 598–600). Moreover, insofar as “society is in no position to renounce the advantages that accrues to it from competition among individuals,” it can hardly tolerate the formation of cartels which, by their complete domination of the market and by making the consumers dependent on them, would make competition superfluous. The advantage

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of the cartel’s members would then entail a corresponding disadvantage of the consumers. Both large establishments, insofar as they prevent competition, and cartels constrain then the scope of economic transactions and, therefore, of the money economy in general (Simmel 1992: 343–4). The existence of a legal system signifies that institutionalized collective ethics make everyone aware of the general consequences of individual action by regulating, shaping and constraining the individual’s behavior and ethic. By the same token, the very large scope of economic transactions forces every participant to take into account the interests of all others in order to promote their own, so that a moralization of social and culturallike may ensue, provided that institutionalized morality holds in check the selfish impulses that are favored by the very impersonality of the money economy (Simmel 1989: 164–8; 1992: 845–6). Monetary transactions are accordingly embedded in a normative context. Simmel’s contention that “only money is free from any quality and exclusively determined by quantity,” indicates that objects are valued “only to the extent to which they cost money,” and that “money is completely cut off from the corresponding relationships that concern it” (Simmel 1978: 279; see also 1992: 845). It does not indicate, however that money is “culturally neutral” or “morally invulnerable,” to the effect that it could not be invested with “moral, social, and religious meaning” (Zelizer 1989: 347–8). On the contrary, the moralization of social relations that flows from the predominance of the monetary economy goes hand in hand with the formation of an ethic that characterizes the status group of those professionally engaged in business, much as a more general sense of honor coexists with a number of specific ethical codes binding the members of more restricted social groups (Simmel 1992: 485–6). While the “increasing extension of money transactions” has favored, and has in turn been favored by, the development of “a common law of commercial transactions,” the “inescapable atomization” of all those that participate in the money economy has precluded them from “the solidarity [characteristic] of the small group.” On the other hand, the homogeneity and cohesion of the small group and the inner solidarity flowing from them, makes this specific sense of honor possible, for honor “originates only within a small group that keeps itself closed, powerful and unassailable by means of the distinct integrity of its members—as for instance, […] the merchant’s honor” (Simmel 1978: 347–9; see also 1992: 600–601). Competition among business people engaged in the same trade is no obstacle to the joint pursuit of common interests and, in particular, to the support of their trade’s social reputation, and hence of the business group itself. The preservation of this collective concept of honor, and therefore of the existence of a unitary social group, is the individual member’s own

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concern, so that the group’s and the individual’s interests fully coincide. The economic group’s concept of honor, however, although “very rigorous in many respects” does not coincide with that of society at large to the extent that is condones some disreputable, when not shady, business practices (Simmel 1989: 166; 1992: 345–7, 604–605). The task of bringing into line the morality of specific business circles with the ethical standards required by the monetary economy is entrusted to legal institutions, and perhaps also to bodies representative of the business world (Simmel 1989: 166; 1992: 345–7, 604–605). It may be assumed then, in keeping with Simmel’s model of business relations, that the highest congruence between public morality and the morality of specific business circles would obtain only under conditions of free competition, and therefore of a full-fledged money economy. The constraints on competition caused by large establishments and cartels would diminish the number and strength of the producers interested in the unimpeded flow of business transactions, and also the economic independence of the consumers, who could then hardly avoid the consequences of questionable business conducts (Simmel 1992: 341–2). Albeit implicitly, Simmel distinguished accordingly between business groups and milieux. Most business groups, in addition to having purely business Gesellschaft-like relations among their members, have a sense of honor of their own that serves the purposes of keeping their members together and, at least in some instances, of compelling the observance of an economic ethic (Simmel 1992: 478–9, 599–601). In this case, the networks of personal relations and the norms of reciprocity, which are characteristic of a business milieu, are consonant with the general norms of the money economy on which the worldwide market transaction of the business community rest. Those business groups, however, that strive after dominance of the market by means of cartels derive their homogeneity and cohesion, rather than from a specific sense of honor, from sharing an objective interest (since it concerns the firm, and not the individual owners) in limiting competition and exploiting the consumers. Moreover, their sense of honor (if any) may condone business practices that common moral standards would find unacceptable, and that the existence of a great number of competitors may keep in check. However, if competition is weak or non-existent, the enforcement of norms of fair business and the alignment with the norms of the group’s own norms and practices are entirely entrusted to the legal system, rather than resulting from mechanisms of informal control. Simmel’s description of the communitarian, Gemeinschaft component in business relations, its presuppositions, and its social and economic effects paralleled Weber’s in some aspects. In fact, both authors argued

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that as long as competition prevails, the Gemeinschaft element of personal trust is intertwined with the Gesellschaft elements of impersonal and institutionalized trust, and of the individuals’ and corporate pursuit of economic interest. As a consequence, the flow of market transactions is facilitated, strengthened, and enlarged. On the contrary, as long as the absence of competition prevails, personal trust (to the extent that it obtains) is not relevant for economic transactions, that solely require that the corporate business partners be mutually aware of possible benefits accruing from the exploitation of market opportunities, and from their joint dominance of the market (at least, the domestic market) at the expense both of their potential competitors and the consumers. Given the irrelevance of personal trust, and the difficulties involved by a purely institutional enforcement of a business ethic, market norms are complied with only if deemed convenient. As a consequence, the domestic market and, to some extent, the international flow of market transactions is restricted. From the economic and political strength of a hegemonic class or large business owners, and the ensuing constraints on free competition, Weber and Simmel argued then that limitations of the money, or market, economy, and ultimately of economic growth would follow. Moreover, Weber maintained that a comparatively higher amount of inflation and corruption, involving even top political leaders, would occur in countries in which large business, rather than free competition, prevails. On the other hand, Weber’s and Simmel’s analyses of the Gesellschaft aspect of business relations complemented each other, in that Weber provided a much greater amount of information on the instruments of formal and informal control of conduct within business groups and the business community at large, and on the conditions of effectiveness of such a control, while Simmel—rather than Weber—directed attention to the normative context in which all those engaged in money exchanges (that is, virtually everybody in modern times) operate. In this context, the coincidence of social with legal norms points to the existence of a general interest in protecting economic transactions from any conduct that may endanger the impersonal trust on which they rest, or limit the scope of the money economy. Accordingly, not only dishonest business conducts are barred but also those that put free competition in jeopardy (Simmel 1992: 344–7). Two Alternative Models of Business Relations Albeit implicitly, Weber and Simmel concurred in constructing two models of business relations, which were first called, for greater convenience, respectively “German” and “English.” We will mention in this chapter the

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major features of both models, focusing in particular on financial markets and on the status and class relations connoting the constitutive relations of the “German” and “English” models. The first model focuses on business groups, and therefore on Gesellschaft relations, characterized by: a) direct and indirect ties between the major corporations, and between them and the leading financial institutions; b) aggregate corporate control of the stock exchange and the economy, and therefore severe closure of the market to domestic small- and medium-size competitors; c) strong connections with the civil service and the political institutions; d) selective recruitment from the propertied class and, as a consequence; and e) relatively limited ability to face international competition and higher inflation rate (as indicator of the economic power of the major corporations over the domestic consumers). The other model, which may be designated as “English,” focuses on business milieux, and therefore on the intertwining of Gemeinschaft and Gesellschaft relations, does not emphasize some components of the former (such as personal and/or institutional relations between corporate representatives and government parties) which may or may not be present, and rules out some other components (such as a dense network of institutional ties connecting the major firms, their joint dominance of the domestic market, and strong personal connections between the business world and the public administration). The “English” model involves, instead, the existence of a business milieu whose members have dense ties and are connected by indirect ties with a status-conscious propertied bourgeoisie, with which they also share entrepreneurial attitudes, a common liberal ideology, and a strong business ethic. These characteristics are an integral part of the “English” model. To establish this model, cooperation relations between non-hierarchically integrated corporations, such as those that can be found in the American industrial area mentioned in the previous chapter, are therefore not enough. The “German” model only, and not the “English” model fits the Marxist thesis of capitalistic dominating influence on political institutions, when capitalistic production relations prevail (Miliband 1969). The distinction between a “German” and an “English” model of intercorporate relations, is similar to another well-known distinction between a so-called “Rhineland” model and an “Anglo-Saxon” model of capitalism. Keeping to this distinction, the “Anglo-Saxon” model differs from the “Rhineland” one in what concerns: a) a financial system based on capital market, instead of bank credit, and consequently a much lower power or influence of banks on corporate management; b) a corporate management’s approach to short-term, rather than long-term profits; c) no effort to personnel requalification and no mutual loyalty between firms and employees, in view of an optimal adaptation of the firm to market

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fluctuations (personnel’s numerical flexibility), instead of—as in the “Rhineland” model—commitment of public administrations and firms to invest in personnel training, with the prospect, for firms and employees, of a lasting employment in the same firm, also with different roles (functional flexibility); d) purely contractual relations between the management and the employees, involving unions’ scarce power to regulate these relations, and no pursuit by both parties of cooperative relations, instead of including contractual relations in a context regulated by laws and habits, and therefore institutionalized, of partially cooperative relations between firms and employees; and e) competitive, instead of cooperative, relations between firms (Mizruchi, Brewster Stearns 2005: 298–300; Trigilia 1998b: 223–31). The distinction between a “German” and an “English” model of relations between individual firms and their institutional milieu, relates with the aforementioned distinction between a “Rhineland” and an “AngloSaxon” model of capitalism as follows. The “German” model shares with the “Rhineland” model the elements of cooperative relations between firms (in particular, large corporations) and the strong influence of banks on the management, while the “English” model shares with the “AngloSaxon” model the elements of competitive relations between firms and the opening of the market to small-size firms. On the other hand, only the “German” model (but not the “Rhineland” model) presupposes a control exerted by large corporations—whether individually, or in association—on the stock exchange and the domestic economy, the closure to small firms of significant market industries, the existence of personal ties between the managers of large corporations and those who hold leading positions in the government and in the public administration. Furthermore, only the “English” model (but not the “Anglo-Saxon” model) presupposes the existence of strong relations, not only contractual, but also social and ethical, between owners or managers of corporations, as a consequence of their common belonging to a business community, and therefore, to a business milieu and a moral community. As indicated, at least some assertions implied by the “German” or “English” models of business relations have been borne out by historical research. The “German” model implicitly outlined by Weber and Simmel, provides a partially accurate description of the US’s network of intercorporate relations, and of the corporate dominant influence on American political institutions. In conformity to this model, major American firms are interlocked with banks, which are at the center of the network, exert joint control on the national economy, and from which firms customarily receive financial and/or legal benefits in return. To the extent that this model is not only descriptive but also explanatory, complete conformity to it should result

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in the United States’ limited ability to face international competition from countries that approximate the “English” model. However, the “German” model does not fully apply to the United States, for American capitalists as a status group—much as their English counterparts—have traditionally upheld the principle of fair business conduct, and maintained their status consciousness by means of clubs and other informal associations, as Weber himself emphasized (Weber 1922: 207–36). Subsequent research in the United States has ascertained that bourgeois social origins and admission to exclusive clubs are necessary, though not sufficient, conditions for “becoming connected to a central leadership circle,” whose members are representatives of major corporations as well as leaders of governmental and non-governmental institutions, and are directly interconnected or placed at short distance in their networks of relations (Davis 2005: 495; Moore 1979: 688–9). Accordingly, the United States partakes of characteristics of both models of business relations, neither of which can therefore explain the country’s ability to face environmental economic uncertainties. A caseoriented comparative analysis should rather focus on countries that closely approximate, respectively, the “German” and the “English” models. None of these countries should be identified with either Imperial Germany or post-Victorian England. While the former, in the late nineteenth century, outperformed the latter not only in terms of domestic growth but also of participation in the world economy (which would seem at first sight the opposite of what should be expected, according to Weber’s reasoning), still this outcome may have ensued from additional conditions (Ragin 1987: 42–3). Especially noteworthy was the German firms’ tendency to favor domestic investments as opposed to the English companies’ marked preference for investments overseas, which eventually limited the country’s opportunities for technological upgrading, and paved the way to England’s relative economic decline. England’s loss of competitiveness started, not accidentally, after massive outflows of funds drained its domestic capital stock (Mommsen 1969: Chapter 2). In fact, Weber underlined the negative consequences that would have occurred to Germany if it had consistently followed what has been called here the “German” model, which does not involve a status-conscious, honest, and competent administrative elite endowed with a power of its own. Weber also stressed the advantages that would have accrued to England, provided it approximated to the “English” model, which presupposes a status-conscious entrepreneurial bourgeoisie, a strong bourgeois ethos, an autonomous administrative and political elite, and free competition. To the extent that England drew a considerable and growing portion of its total revenues from returns on foreign investments, this would have probably

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discouraged in the long run the formation of an entrepreneurial spirit, and promoted a rentier mentality, as in France (Weber 1984: 155–89). Before concluding that Weber’s contention of a better competitive ability of the countries that approach the “English” model than those approaching the “German” one has been empirically disproved, it is therefore appropriate to select for comparative purposes countries whose social, cultural, and institutional characteristics conform as much as possible to one or the other model. As it will be maintained, contemporary South Korea and Taiwan approximate in many important ways, respectively, the “German” and the “English” models of business relations. Weber’s and Simmel’s Contribution to a Network Approach to the Sociology of Business Groups and Milieux in South Korea and Taiwan The specific attributes (strength, density, content) of the network structure of the “German” and the “English” models, and the entanglement of Gemeinschaft and Gesellschaft connections in the “English” model account, according to Weber and Simmel, for the superior economic performance of this model as compared to the other. The characteristics of the “German” model, as evidenced by South Korea, are the following: first of all, in South Korea, values and practices endorsed by culture, based on “property,” have been reinterpreted in a particular capitalist sense, and instrumentally addressed to the pursuit of power and profit on the behalf of the executives, the company, and the conglomerate—or cluster—of firms (Hamilton, Biggart 1992: 197). Therefore, each cluster has its own unitary set of norms and patterns of conduct, while in its relations with foreign countries (and only in them) it conforms to norms of fair business exchanges. Competition and rivalries among executives belonging to the same cluster of firms prevent—at least to some extent—the establishment of personal and institutional links that are strong in terms of emotional intensity (Emirbayer, Goodwin 1994: 1448–9) and shared normative commitments, though such links are usually strong, in terms of frequency, duration and reciprocal exchange. The South Korean cluster of firms, called chaebol, evidence a blending of property and control, both in the hands of powerful interconnected families (Biggart 1997: 228–36; Chang 2003: 158–61, 163–4; Fox 1995; Han 2007), not differently from what happened in Weber’s time among the large German firms. Furthermore, each cluster of firms is connected with the state or some of its administrative sectors by a dense network of ties, while direct links between clusters or conglomerates are almost non-existent, and the network of clusters has accordingly one or more “structural holes.” The countries that approach this model do not promote free competition

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among firms, but rather the creation and consolidation of monopolies or oligopolies in the domestic market. State officials may mediate (as in South Korea) between the rival conglomerates in order to bolster up the conglomerates’ and the country’s competitiveness in the world economic environment (Amsden 1989: 16; Biggart 1997: 222–8; Granovetter 1994: 471; Kim, Suh 1999). Although the South Korean development model, as the one followed by Taiwan and other countries, has depended on exports to economically developed countries, the policies vigorously pursued by the South Korean government have, however, led the country to have its own process of dependent development. These policies have involved addressing public expenditure to education and to the creation of infrastructures, providing support to export of industrial goods and financial support to large corporations, restraining foreign capital influx in the form of direct investments and massive resort to foreign government loans. This approach has proved extremely successful for a few decades, as proved by the considerable growth of the domestic product in a context of political stability. However, since the international environment has proved unstable, the strong ties connecting South Korean large conglomerates with top government officials, and the weak, indirect, government-mediated ties among the chaebol have made the whole system of conglomerates vulnerable to the erratic course of the international market (Bradshaw et al. 1993; Chang 2003: 3–42; Collins 1990: 106–107; Park 1990: 118–19). As a consequence, “instead of individual organizations failing, entire networks fail” (Hannan, Freeman 1977: 952–3, 961) during economic downturns, as might have occurred in South Korea in the 1979–84 period, without prompt government intervention (Collins 1990: 105–106), and in fact occurred twenty years later (1998–99) when the government was forced to face an unprecedented economic and financial crisis that threatened the survival of most major industrial groups. Government intervention did not, however, introduce competititiveness among the chaebol, but limited itself to promoting mergers and agreements and providing them with financial support, and therefore the strict ties between government and large firms, or clusters of firms, did not loosen (Chang 2003: 208–15; Kim, Suh 1999). Competitiveness in the international market may be attained in different ways. In Taiwan, and generally in countries approximating to the “English” model, intrafirm personal networks have been established in conjunction with firms’ networks, thereby constituting a milieu, or unitary organizational field, whereas South Korean business groups have been characterized by impersonal relations both within firms and their networks. Higher competitiveness may also be attained through a different pattern of industrial relations and a different recognition of normative,

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Gemeinschaft aspects in the interactions between the management and the salaried personnel (Granovetter 2005: 446–7; Hamilton, Biggart 1991; 1992: 199–208). “The large organizations”—in this case, the largest firms in the South Korean conglomerates—“control the [organizational] fields and dictate their rules” only in fields that are compatible with the “German” model of business relations. These organizational fields may be characterized as “systems of power,” rather than as “socially constructed meanings” (Fligstein, Brantley 1992: 287). Each conglomerate has an organizational field that has virtually no common areas with the organizational fields of other conglomerates. The absence of trust and exchange relations among South Korean conglomerates have made strategic alliances and coordinated policies with their competitors all but impossible (Granovetter 1994: 465, 470; Powell, Smith-Doerr 1994: 384–5, 389–90). Insofar as they can similarly face market changes, they form an organizational population (Scott 1995: 56) constituted by separate organizational fields. While the “German” model presupposes the existence of Gesellschaft relations within and outside each conglomerate, the “English” model implies the presence of relations—within and among individual firms—that conform both to the Gemeinschaft and the Gesellschaft ideal types. Taiwan’s network of business relations, which provide a close approximation to the network structure of the “English” model, may be described as follows: rather than having frequent, lasting and Gesellschaftlike connections between each cluster of firms (whether individually or jointly) and specific sectors of the state, or forming conglomerations, such as in South Korea, Taiwan’s firms not only do not form, generally speaking, clusters, but also have links with the public administration as a whole that are weak in terms of frequency and duration, and take a Gemeinschaft connotation since they uphold ethical principles in the pursuit of business. In South Korea, the existence of a common legal environment (DiMaggio, Powell 1983: 150) between the chaebol and the same set of state organizations, with which they have a structurally equivalent position (that is to say, are interchangeable with one another) make their organization’s behavior and structure similar. In Taiwan, on the other hand, firms (rather than clusters) have structurally equivalent positions with the state as a whole, whose policies supportive of competition have promoted isomorphism in their organizational structures (Dobbin 2005: 34–5; Hamilton, Biggart 1991: 1001–1004; Hamilton et al. 1990: 120–24; Park 1990: 119–20). In addition, most of Taiwan’s business networks are characterized by a “mutual awareness among participants […] that they are involved in a common enterprise” (DiMaggio, Powell 1983: 148). These participants,

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whether active in the same firm or in a network of export-oriented firms, establish among themselves a cluster of direct and indirect ties, often overlapping with kinship or other personal relations. The same cultural structure, which has promoted mutual awareness among the individual members of the business networks, has also provided legitimacy and stimulus to the pursuit of their own economic interests, along with their firms and their networks, thereby encouraging them to compete successfully in the international economic environment (Chou 1988; Emirbayer, Goodwin 1994: 1438–47; Hamilton, Biggart 1992: 206–208). To some extent, awareness of participating in a common enterprise has also characterized Taiwan’s numerous networks of export-oriented companies trading a specific commodity or set of commodities. Therefore, the ethical nature of Taiwan’s intercorporate ties results not only from the personal ties among those who operate within them— which are “horizontal” networks of family members, friends and coworkers (Feenstra, Hamilton 2006: 290)—but also from this awareness of participating in a common business enterprise. Individual impulses to the pursuit of profits have been tempered by ethical considerations, as demanded by the formal–rational character of the institutions of modern capitalism (Weber 1958: 503; 1981: 356). “Cooperation and coordination in the national network of firms” (Granovetter 1982: 128–9), which are compatible with the “English” model of intercorporate relations, but not with the “German” one, have been achieved on account of Taiwan’s weak intercorporate ties. Taiwan’s firms, in fact, do not establish themselves in general business groups and do not hold power positions over other firms or networks of firms. Cooperation and trust characterize personal relations within small- and medium-size firms, and among them, but these properties, in turn, characterize also impersonal, contractual relations which have formed and consolidated over time among Taiwan’s largeand medium-size firms (Jay-Der, Yeh 1999). The cultural tradition of interpersonal reciprocity has intertwined with the capitalist principle of generalized reciprocity, and has not become an obstacle to the sharing of rules, norms and knowledge, and to the forming of a unitary organizational field extended to the whole business community of Taiwan. By way of contrast, the network structure of South Korea’s clusters (chaebol) is that of a closed group or—in the language of network theory—a “clique.” Accordingly, the inner strong ties binding all the firms of which clusters are composed, have prevented cooperation among the different clusters, even more so if these groups have a collective identity of their own (Granovetter 2005: 446–7), because in general it brings competition among clusters, instead of cooperation (Kollock 1998: 194–5). Taiwan and South Korea are only approximations to their respective

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models of corporate networks, and therefore different degrees of economic competitiveness may also be explained by peculiar characteristics of these countries, rather than by their respective models. In Taiwan, in particular, the domestic market is dominated by large corporations often controlled by the state, and therefore subtracted to competitiveness constraints, while in the foreign market there are sufficient influential business groups to put pressure on the political system. However, export-oriented small firms remain fundamental for the country’s production structure. Furthermore, in business groups, buying firms do not control supplying firms, which may establish contractual relations with different customers. As a consequence, it is possible despite these reservations to set Taiwan within the frame of the “English” model of business relations (Granovetter 2005: 446–7; Jay-Der, Yeh 1999). The lower economic and political relevance of Taiwan’s business groups, the variety of end products, and the flexibility of production (which are much greater than in South Korea, which is disadvantaged by the rigidities produced by the vertical integration of the chaebol) have allowed Taiwan to be better equipped than South Korea to face international recessions, and to be less seriously affected by it (Feenstra, Hamilton 2006: 308–16, 330–32, 341). If these two countries are considered as approximations to the two models of intercorporate relations, the “English” model of business relations, in comparison to the “German,” shows higher economic competitiveness. The fast overcoming of recession in South Korea, although the political influence and the economic power of the major chaebol have not decreased, suggesting that closed networks of firms have some peculiar advantages, such as the control of their environment, as well as the availability of information within themselves and within the environment itself (Davis 2005: 492; Granovetter 2005: 446–7). These advantages, however, are not sufficient to overcome economic downturns and other environmental difficulties if they are not accompanied by a particular ability to exploit the economic and symbolic resources embedded in the group as social capital, and in particular, to put the crucial symbolical resource of collective group identity to good use. This resource is available to those who exert power and authority within the group, and in particular, in the family circle, in the hands of which sufficient shares to control the group concentrate. But the existence of a collective identity in a group of firms—such as it has developed in the major chaebol, and whose importance has revealed itself in the crisis of the late 1990s—presupposes that this group of firms constitutes a business milieu and an organizational field. Within it, prices and internal power relations are established by the dominating firms, but between the group and its foreign partners there is an ever-changing structure of objective power relations (in Bourdieu’s

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words) (Bourdieu 2005: 77; see also Swedberg 2005: 247–9), in which the group gets stronger if it becomes a community. In this case, the community is relatively broad, and certainly broader than a power circle embedded in it, whose members have greater interest and greater resources to mobilize the group’s social capital, but are not able on their own to create and maintain in the group norms of generalized reciprocity and cooperative behavior (Granovetter 2005: 446–7; Lin 2001a: 27; 2001b: 12–23). The enlargement of the organizational field including stable relations between the major chaebol and foreign banks and firms, is another recent element of change in the South Korean economic structure (Chang 2003: 232–7). Only the chaebol, that to some extent have departed from the “German” model—by broadening the area of Gemeinschaft-like relations within the group and opening themselves to a bidirectional exchange with the international economic environment— have succeeded in overcoming the recession. As we shall see, in the chaebol structure of relations some constitutive elements of the “German” model however still remain, and are not conducive to considering these changes as fundamental. Intercorporate Relation Models and Social Capital: A Summary and an Integration This chapter has argued that, in comparison with Toennies’s thesis, Weber’s and Simmel’s conception of business relations is more fruitful, since it does not rule out the significance of communitarian, Gemeinschaft elements in economic transactions, and outlines two models of business relations, which—it has been argued—are instrumental in describing the pattern of such relations in two distinct new industrializing countries, South Korea and Taiwan, and in accounting for the intensity and the specific paths of their economic development. Briefly summarizing the major characteristics of these models, the one we have called the “German” model assumes that a limited number of large firms, or networks of firms (business groups), favor Gesellschaft relations in their own organization or group, and with other firms or networks, exert hegemonic control on the market, and form a close alliance with the administrative and political elites. The other model—denoted as the “English” model—assumes instead that Gesellschaft relations are embedded in a Gemeinschaft context. As a consequence, interactions oriented to the obtainment of material advantages presuppose mutual trust among the business partners, who form a milieu, and between them and the business community as a whole. The better economic performance of countries whose development policies have conformed to the “English” model, rather than to the “German”

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model, has been ultimately accounted for by the prevalence in their fold of relations of mutual trust, and by the effective enforcement of a business ethic. In particular, as South Korea approximates the “German” model, and Taiwan the “English” model, assuming that performance is ultimately indicated by the ability to cope with the uncertainty of the world’s economic environment (connoted by competitiveness and economic fluctuations), we would say that Taiwan has achieved better results than South Korea. True, both countries are considered examples of economic achievements, and in particular, of the ability to compete on international markets with technologically advanced products. In addition, South Korea has fully recovered from the late 1990s crisis and is currently going through a strong expansion period that is forecast to continue in the near future (Economist Intelligence Unit 2007a; OECD Economic Outlook 2006). Yet, it is worth noting that, in contrast to South Korea, Taiwan has never been affected by severe recession. The late 1990s South Korean crisis was countered by a period of further strong development in Taiwan. The dependence of its exports on the United States’ economy, which in 2001 was at the base of a short economic recession that coincided with a recession in the United States for products with high technological contents, has not impeded Taiwan’s robust economic growth as from 2003. This growth has further expanded to other production sectors, in particular the financial sector, and has been promoted by Taiwan’s far greater diversity, in comparison with South Korea, in the composition of its exports. The economic sectors in which both countries have imposed themselves as exporters and are competing with one another, are electronic consumer goods. Taiwan has obtained a significantly larger market shares, thereby evidencing its competitive superiority. The explanation given to this phenomenon underlines not only the country’s organizational innovation, the production flexibility in the network of mostly mediumand small-size firms, and their coordination, but also the state support provided in order to encourage foreign markets’ penetration, as well as the strong connection with local large firms and business groups (Economist Intelligence Unit 2004; 2007c; Feenstra, Hamilton 2006: 80, 339–41; Gereffi 2005: 171–4). This multifactorial explanation integrates but is also compatible with those that, in this chapter, have been considered as the elements of superiority of the “English” model. To this model, as previously said, Taiwan approximates because of the importance of small- to medium-size firms in the domestic economy, the existence of relations based on mutual trust and cooperation, and their ability to promptly conform to market requirements. Keeping with it, the better economic performance of countries whose development policies have conformed to the “English” model, in comparison with the opposite

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model, may be explained by the different structure of their organizational fields and the different import of the Gemeinschaft element in their business relations. Bearing in mind this comparison between different countries and different models of relations within and outside firms or networks of firms, we can try to outline some general structural conditions (concerning the network structure) that favor the economic performance of a particular model (Lin 2001a: 27; 2001b: 17–23). The “German” model, to which South Korea approximates, is characterized by dense networks of firms and derives benefit from network closure, since information and good intercorporate coordination opportunities are available within the group, but is penalized by some specific factors: first of all, the absence of “bridges” or connections with other competing networks of firms and the consequent impossibility to extend its own organizational field beyond the boundaries of the group itself, as well as elements of competitive superiority, with prejudice for the domestic economy (Feenstra, Hamilton 2006: 96, note 12). In addition, the strong disparity—in terms of economic power, political influence and financial resources—between the companies belonging to a group and the others, and—as to the former—among firms that belong to the major groups rather than to minor ones, and finally, within groups, between major and minor firms. The “German” model does not reduce these disparities, and, on the contrary, tends to increase them. New firms are established by the chaebol with the support of the state or banks that, in granting funds to firms, are severely affected by the pressures of the state or of the chaebol themselves. Therefore, social capital has scarce opportunities to extend beyond an already existing organizational field. On the contrary, the “English” model involves a low density in the network of firms and a predominance of medium- to small-size firms, and takes advantage of an easy and frequent extension of the organizational field to new firms, which can provide different kinds of resources, in particular financial and knowledge resources (the latter, above all, are provided by foreign firms situated in environments with a different organizational culture). In addition, the “English” model takes advantage of the ability to conform to the changes occurring in the international economic environment, both because firms do not find any obstacle in the organizational/institutional field to contacts with foreign firms, and also because the mostly medium- to small-size of firms makes any change in them easier (such as statutory and organizational changes, mergers and dissolutions, stable or contingent alliances with other firms). The “English” model excludes strong ties between state institutions and large firms or groups of firms, but is compatible with state policies aimed at supporting firms in general (therefore without preferences for anyone in particular).

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In Taiwan, for example, the State is very active in the field of education, welfare, and the construction of infrastructures, supports private investments through tax cuts, and is in this sense “strong” (Numazaki 1991), but does neither finance firms nor exert pressures in this sense on the bank system, and is in this sense “weak” (Hamilton, Biggart 1991). This contrasts with the situation of South Korea, where new firms are established by the chaebol with the support of the state or the banks that, in granting funds to firms, are strongly affected by the pressures of the state and the chaebol themselves. Therefore, social capital has scarce opportunities to expand beyond an already existing organizational field. The effects of the predominance of the “English” model are not only a good adaptation of the production structure to economic fluctuations, but also a broader access—for persons and individual firms—to resources embedded in the network of firms, given a larger spreading of social capital in comparison with the “German” model. An illustration of this trend is provided by the small- and mediumsize firms set up in foreign countries by immigrants, or immigrants’ families, originating from Taiwan (or from Hong Kong, another Asian country approximating the “English” model, although its migration chain differs from that of Taiwan). Social capital spreading has been achieved by putting already existing ties to good use, and as regards the middle class, by creating new ties through one’s entrepreneurial activities, but substantially without any direct state support. The firms established abroad by South Korean immigrants (their greengrocer’s shops are well-known all over the United States) may strengthen already existing family and entrepreneurial ties within the small firms’ context, but do not change the dominant importance of the large South Korean firms for the production structure of the country, the national and international capital flows, the product composition of exchanges with foreign countries, and the influence—or interference—of the state, through its consular offices, on the South Korean immigrants’ communities abroad. The effect of this interference has been, at least partly, to divide these communities into two segments, one fully integrated—although in a subordinate position—within the ruling organizational population of the home country, consisting of the chaebol and the state institutions, while the other is excluded and therefore forced to rely on its own scarce economic and social capital resources (Dobbin 2005: 34–5; Light 2005: 664; Portes, Mooney 2003: 326; Portes, Sensenbrenner 1993: 1341; Wong, Salaff 1998: 369–71). The South Korean State has not limited itself to provide infrastructures and indirect support to firms, as in the State of Taiwan, but has actively intervened in favor of them. This intervention has taken place not only by aiding business groups with soft loans, rescuing some chaebol

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from bankruptcy and in other ways, as the literature has pointed out, but also by preventing the creation “from the bottom” of partnership ties among small firms that were not promoted or controlled by the chaebol and/or the state. These are the two sources of institutional power, allied with one another, that dominate South Korea and are likely to dominate it in the future until a civil society and a bourgeoisie completely autonomous from them is formed. The comparison between these two countries, in terms of their respective development patterns and outcomes, has been conducted to verify the Weberian (and Simmelian) thesis of a superior economic performance of the “English,” as compared to the “German,” models of business relations. The opportunities of development that accrue to financial markets because of the model of business relations, to which they approximate, have not been dealt with so far. As the World Bank has remarked, Taiwan and South Korea have been endowed with developed financial markets only since the late 1980s. As a consequence, these markets cannot be held responsible for the two country’s economic development (Page 1993). The following chapter will contain a comparison between major financial markets approximating to one model or the other. Attention will be paid to the relations between actors centrally located in the network of financial exchanges, their business milieux, the authorities regulating the financial markets, and other actors constituting their organizational field and population, such as trade partners and in general all those participating in the market community.

Chapter 3

A Weberian Account of Social Norms and Trust in the Stock Exchanges and Other Financial Markets Whether acceptance of the norms which govern financial transactions in modern capitalism implies a calculation of the costs and benefits that result from conformity to them or their violation, or their open or inner endorsement, has been debated. This chapter sets out to reconstruct Weber’s account of how norms are enforced, and trust maintained, in the London Stock Exchange of his times, which he considered exemplary for its organizational effectiveness and incorporation of the capitalist ethos. We will firstly provide a brief description of the sociological literature concerning financial markets in general (not only stock exchanges), with reference to their structure and ability to control improper behaviors, called “opportunistic” in the language of rational choice theory. We will then consider how rational choice theory and Parsonian functionalism have accounted for the existence of social norms and trust, and the extent to which these theoretical perspectives are compatible with Weber’s notions of rational action and social norms. These considerations are preliminary to an investigation on the mechanisms and instruments by which, according to Weber, social norms and trust were upheld and preserved in the London Stock Exchange at the turn of the nineteenth century. Finally, Weber’s account will be discussed against the background provided by today’s structural and cultural perspectives bearing on financial markets, with particular reference to the Berlin and London Stock Exchanges. These stock exchanges, on which focused a comparative analysis carried out by Weber, for some important aspects may be still considered as approximating respectively to the “German” and “English” models of intercorporate relations, with relevant consequences for the weight exerted by them in the international financial system.

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A Sociological Description of Financial Markets Markets may be viewed as “a public feedback mechanism for trading off divergences among firms and between them and buyers” (White 1981: 415). As the market determines for every product the proper combination of volume and quality, the relevant trade-offs concern the ratios between contribution and cost (volume), and between desirability and expense (quality). In particular circumstances, free entrance, that is, pure competition would provide no viable market in the position to survive. Some barriers to entry—such as legal and/or capital barriers—are then necessary to this end (White 1981: 526, 529, note 7; see also White 1992: 41–6). As will be shown, barriers are considered necessary in financial markets, for in these markets free entrance would prevent establishing and maintaining trust, and ultimately destroy them. In this connection, some notions should be provided concerning the conditions for establishing trust among market participants, with particular reference to participants in financial markets. Contemporary sociological descriptions of markets have often followed Granovetter in maintaining that market behavior, like behavior in general, is embedded in “concrete personal relations and structures (or ‘networks’) of such relations,” and that embeddedness plays a relevant role in “generating trust and discouraging malfeasance.” Networks are an important but not sufficient condition for trust and trustworthy behavior, because they may not be dense and pervasive enough, and also because networks and trust may be used for immoral purposes as well. Dense and pervasive networks, in other words, are instrumental in achieving reciprocal social control and trustworthy behavior, irrespective of whether the prevalence of moral standards in business conduct (the so-called “moral economy”) results from economic interest, moral principles, or both. But the networks themselves must be in turn embedded in larger webs of social relations in order to prevent and control “networks of malfeasance” (Granovetter 1985: 490–93; see also Granovetter 1994: 466–8; Granovetter, Swedberg 1992: 9–13). In particular, insofar as the relations between banks and their customer firms are concerned, access to capital is increased, and borrowing costs decreased, when there is a combination of embedded and non-embedded ties. For, embedded ties may overcome the moral hazard inherent to lending, while non-embedded, weak ties provide a greater amount of publicly available information. Properties of the networks (such as duration or multiplexity of the relationship) do not seem sufficient to establish trust, as indicated by access to bank credit, when other considerations militate against trustworthiness (Ferrary 1999; Uzzi 1999). Embeddedness of relations is advantageous to the transaction partners since it provides reliable and otherwise not available information, and thereby reduces

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uncertainty in transactions. Embedded ties between banks and customers are but one form of embeddedness. Other forms are membership in the same board of directors, which provides private information, and membership in the same status group, which supplies credibility to the decision process (Uzzi, Lancaster 2004). Financial markets—in which transactions regarding financial instruments, instead of consumer goods, occur (Knorr Cetina, Preda 2005: 4)—have been the object of particular interest and research, which especially concerns participants and the mechanisms of price formation. Participants in financial markets may trade as brokers, who are members of the local stock exchange. Brokers (whether natural or legal persons) conduct buying and selling on behalf of investors, but never for their own accounts. In the London Stock Exchange, stock brokers are regulated by the Financial Services Authority. Alternatively, participants may trade as market makers, also known as “traders” or, in the London Stock Exchange, “jobbers,” as they used to be called before the introduction of the Electronic Trading and Automated Quotation Systems in 1986. Market makers are authorized by the Stock Exchange Authority to participate in financial exchanges and gain benefits from their activity. These market makers collect from their customers, orders to sell or buy stocks or other shares, deal with brokers, provide for commission ongoing information on bids and offers to the public, and also trade as principals for their own accounts. In the United States, market makers dealing with stocks are called “specialists.” Finally, participants in financial markets may conduct transactions among themselves as agents of financial institutions, such as investment banks or brokerage firms. In this case, transactions—for instance, foreign exchange trading—are not located and organized in centralized exchanges, but may take place anywhere as traders avail themselves of electronic technology, which makes stock brokers and market makers dispensable. This new technology has been instrumental in extending and intensifying international communication among traders and financial institutions (Swedberg 1990: 278–9). Many sociologists would probably at least in part concur with Soros (a leading operator in, and expert on, financial markets) that financial markets are inherently unstable, for participants act on the basis of their best interest as they perceive it, rather than as it actually is. This perception influences “not only [financial] market prices but also the so-called fundamentals that market prices are supposed to reflect […] Boom and bust sequences that are characteristic of financial markets” follow as a consequence (Soros 2003: 5). In these markets, however, prices obtain not only volatility but also stability, depending on conditions on which theoretically guided research

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has shed light. Research on the structural (network) conditions conducive to steady, stable and smooth transactions has concerned transactions involving professional participants in financial markets in which securities, bond and derivatives (such as futures or options contracts) are traded. Derivatives are financial securities, whose prices are established on the basis of the price of another investment, which acts as a reference. Futures, in particular, are derivatives, in which the parties commit themselves to buy and sell particular financial securities or other assets at a future time, having previously agreed on their quantity, and the time and price of the transaction. Options are futures, in which the parties hold the right, but have no obligation, to buy or sell particular financial securities or other assets during a specific period of time or on a particular date. If financial markets are conceived as networks, network size (as measured by the total number of interactions among aggregates of buyers and sellers) and differentiation (as measured by the occurrence of two or more subgroups, and in particular cliques—groups in which each actor relates with all the others—in the network) are inversely correlated with the clique density and stability of stock prices. Clique density promotes coordination between participants in financial markets. As a consequence, there is among them less competition and less risky trading. Disregarding other factors, such as the legal regulation of financial markets and the extent to which firms resort to these markets for their financial needs, greater price stability follows then from clique density, and therefore from the network’s small size and lack of differentiation (Baker 1984). A comparative investigation of different financial markets has supported this conclusion, but a cultural vision of these markets, which emphasizes the symbolic significance actors attribute to monetary exchanges, has supplemented it (Mizruchi et al. 1994: 270–71; Zelizer 1988: 623–8). The study of norms on proper market conducts may be pursued within this cultural framework. In fact, research on financial markets has included both a structural and a cultural approach. Opportunistic (that is to say, unfair towards other participants, and possibly even unlawful) conduct on the part of traders is encouraged in markets, such as bond trading in the 1980s, in which substantial financial gains are available in the relative absence of personal knowledge, stable relations, and informal, formal and institutional controls. In contrast, in the futures market a number of social mechanisms are instrumental to coordinate collective action, and thereby restrain opportunism. Informal norms of fair trade and organizational arrangements make reciprocal control effective, as their violations would involve exclusion from transactions. Such informal norms rest on “dense webs of trust, obligation, and reputation” (Abolafia 1996: 37).

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Moreover, Stock Exchange Committees in charge of surveillance on the members’ business conduct make “self-regulation” possible by exerting formal control, while boards in charge of establishing and interpreting exchange rules are entrusted with institutional controls (Abolafia 1996: 38–63). In still another financial market, foreign exchange trading, control is exerted informally without such committees and boards. Traders abide by a code of honor that forbids opportunistic conducts in their mutual relationships. Violation of its norms would cause, at least in the long run, interruption of relations and loss of reputation (Knorr Cetina, Bruegger 2002: 936–9). In addition to trading, dealers exchange information. Personal knowledge between them strengthens “relationships of familiarity and trust” in their business conducts. As a consequence, “rules of trust, exclusivity, and loyalty” are formed and enforced (Knorr Cetina, Bruegger 2002: 942: see also MacKenzie, Millo 2003: 139–41). From an examination of the sociological literature on markets, with particular reference to financial markets, the following conclusions may be drawn. First, personal relations constitute an important but not sufficient condition for trustworthy behavior in economic relationships. The existence of small networks of dense, stable, and pervasive relations, such as those that exist in cliques, is a further important condition, for these networks make the actors reciprocal informal control possible and easy to perform. Finally, in financial markets formal and institutional controls are necessary to curb and sanction malfeasance. Effective controls are a prerequisite for the steady, stable and smooth flow of transactions in these markets. Rational Action and Social Norms: Rational Choice Theory and the Problem of Trust It has been remarked that “definitions of rational choice vary enormously in breadth” (Heckathorn 2001: 274). It is possible to give this theory, or perspective, a restrictive or an extensive formulation. A set of postulates or axioms describe “thin” rational action theory, as Boudon calls it. They are: methodological individualism; the possibility of understanding action; the existence of reasons in the mind of the actors as causes of their action; the actors’ consideration of the consequences to themselves of their own actions as producing their reasons for acting; finally, their selection of the course of action that has the most favorable balance of costs and benefits. Rational choice theory, so conceived, cannot however—according to Boudon, Elster, and other authors—account for the phenomena involving non-commonplace beliefs, or for normative beliefs that cannot be explained in the light of the consequences for the actors, or finally for behavior, the consequences of which do not affect them at all. A broader

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or “thick” notion of rationality is therefore advocated (Boudon 2003). This conception of rationality, which may be related to Weber’s value or axiological rationality, keeps in mind those reasons, which actors subjectively consider sufficiently strong for behaving as they in fact do. Even though they make little or no reference to Weber, both “thin” and “thick” formulations of rational choice theory—as formulated, respectively, by Coleman, or Boudon and Elster—are relevant for a Weberian theory of institutionalized trust in the modern stock exchanges. Coleman, a leading name among the representatives of rational choice theory, considers social norms as bearing, in particular, on trust relations in financial transactions. As he writes, “A norm concerning a specific action exists when the socially defined right to control the action is held not by the actor but by others.” This control is exerted by “sanctions or threat of sanctions,” which affect the individuals’ utilities, and therefore actions (Coleman 1990a: 243–4). In trust relations, a potential trustor has decided to place trust in a potential trustee in the expectation to gain utility after the transaction has been completed. The trustor, therefore, expects the trustee to be trustworthy (Coleman 1990a: 96–104). In financial transactions, as in other transactions, there are intermediaries in trust relations. Intermediaries, whether persons or organizations, may be described as advisors, guarantors, and entrepreneurs. All such intermediary activities may be found in merchant banking. The trustor lays trust in the advisors’ judgment or credibility, and the latter trusts the performance capability of the trustee, if they think doing so would benefit them, given the available alternatives. The performance capability of the trustees may be trusted, directly or indirectly, by a dense community of actors, each of whom trusts the other’s judgment. Trustees, in this case, are placed at the center of the communication structure. Unlike the advisor, the guarantor experiences losses in resources (not just credibility) if the trustee proves untrustworthy, and therefore needs accurate information on potential trustees. Entrepreneurs as intermediaries combine at their own risk their trustors’ resources, often placed in the hands of third parties, to obtain a benefit for themselves and their trustors as well (Coleman 1990a: 180–88). Whenever there are intermediaries in trust relations, trust may be conferred and withdrawn at any time. The potential for social action on the part of the trustees is accordingly unstable (Coleman 1990a: 196). In their position of intermediaries, trustees must be connected with every one of their trustors in order to receive benefits or sanctions from them. As providing sanctions is costly (in monetary terms or otherwise), it raises the question of who will cover these costs for the common good of all those who have incurred losses because of the trustee’s activities (Coleman 1990a: 270–78). The closure of the network, “the existence of relations

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between those who experience externalities [consequences] from another’s action,” supplies a solution to this second-order free-rider problem, “due to the benefits that each of those who experience externalities of the actor’s action receive from one another” (Coleman 1990a: 278). Network closure, therefore, stabilizes trust relations among trustors (Coleman 1990a: 275–6; see also 1990b). According to Coleman’s version of rational choice theory, cooperation among actors results from the cooperators’ rationally pursued personal interest. More generally, “people, by individually rational action, bring about an outcome that is good for all, or at least not bad for all” (Elster 1983: 29). The pursuit of personal advantage, or “opportunism” would then provide the “cement of society” (Elster 1989c). Elster disagrees. As he remarks, opportunism leaves conduct undetermined, for there can be a number of equally rational, and therefore equally preferable, choices (Elster 1986: 17–20). Also, actors may seek to restrict their own freedom of choice in a variety of possible ways (such as avoiding knowledge about further options, imposing costs or delays to their decisions, eliminating some options from those that may be pursued, and so on) with the purpose of protecting themselves against the dangers coming from themselves, such as passion, preference change, and inconsistency of one’s preferences, which depend on the time elapsing between the moment in which an action project is formed and the moment in which it must be turned into practice (Elster 2000b: 1, 24). What is more, cooperation implies trust, and therefore the partners’ mutual credibility, which threats and promises may not suffice to maintain. Mutual credibility involves, therefore, the existence of social norms. True, norms are not always advantageous to all, or even most, actors involved. Further, at least some of the actors do not in fact follow even norms that would be actually beneficial to everyone (Elster 1986: 23–4). When this is the case, one assumption of individual rationality—of “consistency between beliefs and desires on the one hand and the action for which they are reason” on the other (Elster 1983: 1; see also 1986: 12–16; 1989b, 3–4)—does not hold (Elster 1986: 20–22). Finally, the fact that norms are beneficial does not account for their existence per se, as Merton (1957) pointed out long ago and Elster (1984: 28–35) has reiterated. To ascertain why norms or other social events exist, the relevant causal connections must be specified (Elster 1989a: 3–10). Yet—as evidenced by “the presence of norms of cooperation,” whose origin in individuals is apparently non-selfish—norms may “exercise an independent power, not reducible to adjustment costs” (Elster 1986: 24, 132–3). Norms of cooperation “on the whole, are immensely beneficial” in that they “have useful consequences for other people, at least under

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most circumstances” (Elster 1989a: 117). Generally speaking, norms of social honesty, as embodied in codes of honor, promote credibility when accompanied by the absence of opportunism, in the sense of ruthless pursuit of personal interest. Codes of honor endorse norms which involve reciprocating the other side’s conduct, in the positive sense of keeping promises and returning favors, and in the negative sense of punishing opportunism (Elster 1989a: 113–23; 1989c: 116–18, 134–6, 144, 279–80). Credibility and trust may be sustained if the actors act cooperatively. Within the theoretical framework provided by Game Theory, which is entirely compatible with rational choice theory, a particular cooperative game called “assurance game” is here especially relevant (on assurance games, see Elster 1984: 20–22, 146; Heckathorn 1996: 259; see also 2001: 276–8). “Games,” in the language of game theory, are sets of mutual rule-regulated strategic (reward-seeking) relations, in which participants have alternative choices of conduct and receive different rewards, or pay-offs, according to which alternative they select. While many games are non-cooperative, as pursuing individual preferences does not lead to collectively rational outcomes, assurance games are cooperative, for no participant would benefit otherwise, and obtaining the public good is premised on the collaboration of everybody. Coordination of preferences and obtaining perfect information—in particular, perfect information concerning the other participants—are necessary for collaboration and for making decisions (Elster 1984: 21, 104, 146). To this end, these conditions are met only if everyone cooperates with everyone else. Consequently, any “assurance game” assumes mutual trust and that everyone expects that everyone else is likewise fully informed and willing to cooperate with all other participants. Failing these conditions, participation is not advantageous, since it always involves monetary or other costs. This set of requirements may be met if participants form “a small and stable group” (Elster 1984: 146) characterized by strong internal communication and by its own collective identity (Kollock 1998: 186–8, 192–5). Though Elster objects to “thin” Rational Choice Theory, he then concurs with Coleman that network closure stabilizes trust relations. In assurance games, opportunistic conducts would then be irrational collectively and individually, as they would not be conducive to the public good, and would provide no benefit to any individual participant. Norms prescribing or encouraging participation may be then necessary to prevent “a downward spiral of participation” (Heckathorn 1996: 259), for effective norms—whether self-imposed or imposed by some external authority— would make non-participation more costly to potential participants (Elster 2000b: 1). From the vantage point of “thick” rational choice theory, norms regulating transactions in stock exchanges, and financial markets

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in general, are necessary for their long-term functioning, as long as they are conducive to assurance games that would benefit the market as an institution, and all the individual participants. This was precisely Weber’s argument. In keeping with a “thick” rational choice theory, which considers the Weberian notion of value–rational action as within its purview, and by way of recapitulation, the following statements may be made: a) social norms exist if others receive a right to control a given actor’s actions; b) positive and negative sanctions (rewards and punishments) support social norms; c) the pursuit of individual benefits may not provide a satisfactory account of norm abiding conducts; d) in particular, norms of cooperation may be followed for their own sake, disregarding personal interest; e) credibility and trust presuppose allegiance to norms of cooperation; f) if there is network closure, as in small and stable groups, coordination of preferences and full information make the enforcement of norms of cooperation possible and relatively easy; and, g) hence, network closure promotes credibility and trust. Rational Action and Social Norms: Rational-Choice Theory and Weberian Sociology Whether Weber’s conception of rational action and sociology of norms may be interpreted within the framework of rational choice theory depends, accordingly, on which definition has been adopted. All the authors who have dwelt on the compatibility of Weberian sociology with rational choice theory have focused primarily on the concepts of rational and social action, while norms have often been considered in conjunction with the Weberian concept of value rationality. In this connection, James Coleman has declared that focusing on the rational/purposive action has provided him with “the simplest… foundation” of social theory “in the tradition of Max Weber and Talcott Parsons” (Coleman 1996: 348). Coleman’s reception of Weber has been qualified by serious reservations, however. Coleman’s criticism of The Protestant Ethic and the Spirit of Capitalism evidenced the ambivalence of his intellectual debt to Max Weber. According to this criticism, Weber has failed to solve the so-called micro–macro problem, for no indication has been made of how a macro–sociological problem—the Protestant religious doctrine—was affected, or had been affected by, a micro phenomenon such as the individual values or norms of Protestants. Moreover, no indication has been made of how these norms and values were causally

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related to individual economic behavior, or how the economic behavior of individuals combined to produce a macro phenomenon such as capitalism (Coleman 1990a: 6–10). What is more, “Weber did not include in his theory of rational authority any feedback mechanism to provide information that might affect action” (Coleman 1990a: 613). The appropriateness of these criticisms is questionable, as will be shown later. Weber’s contribution to rational choice theory is then limited—according to Coleman—to the epistemological position of methodological individualism, and the related conception of individual rational action. Coleman’s own rational choice theory of the origins and effectiveness of norms bears no relationship to Weber’s intellectual legacy (Coleman 1990a; 1990b). Jon Elster, too, has shown an ambivalent appreciation of how Weber has contributed to rational choice theory. On the one hand, Elster declares that “Weber’s analyses of action and rationality display a stunning depth of insight.” Elster points to what are in his mind Weber’s “main accomplishments.” First, his stress on emotions, whether reducing instrumental rationality as with spontaneous emotions, or strengthening instrumental rationality, as is the case of durable emotions when made subservient to some end. Second, his analysis of how human behavior may receive guidance by conforming to general principles, such as unconditional adherence to a value, or anticipation of disapproval or practical inconvenience caused by deviating from social norms. Third, his consideration of the influence of emotions, such as guilt and shame, on norms. Further, of the stimuli or values that have produced them. Finally, of the course of action typically ensuing from them. On the other hand, however, Elster points to a number of “serious omissions” on Weber’s part: a) there are several modes of behaving rationally, rather than only one, as Weber is alleged to have maintained. This is so for a number of reasons: because actors may find it too costly investigating the truth of their beliefs, and have no way of assessing the probability of occurrence of relevant events; and because rational actors try to imagine, without a secure foundation, what other actors believe to be their best conduct; b) since there are several modes of behaving rationally, if and how much a given behavior may have been rational cannot be established by comparing that behavior with a perfectly rational one; and c) what is irrational behavior from the viewpoint of others may be rational from the point of view of the actors themselves in the light of their own goals (Elster 2000a). Coleman’s and Elster’s strictures are of a different sort, for Coleman considers only Weber’s methodological individualism compatible with rational choice theory, while Elster finds Weber’s analysis of irrational behavior (including value–rational behavior) more illuminating than his

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dissection of instrumental rationality (Elster 2000a: 40). Other authors have advanced, however, the quite different thesis of full compatibility of Weber’s epistemological writings with the axioms of rational action theory. According to Kiser and Hechter, for instance, Weber articulated “a theoretical and methodological approach to comparative and historical sociology that uses abstract models and intentional action as its main causal mechanism […] Weber was a methodological individualist who argued that it was preferable to begin analyses by assuming instrumental motivation and using abstract models of forms of social relations [such as] ideal types […] The core of Weber’s approach to historical analysis corresponds to emerging developments in sociological versions of rational choice theory” (Kiser, Hechter 1998: 797–8, note 35). Peter Abell, likewise, has argued that “rational choice or action theory may be understood as one possible interpretation of Weber’s program” (Abell 2000: 223). In this connection, he has made reference to Weber’s well-known definition of social action as an action that takes into account the meaning actors confer to other actors’ behavior, and is thereby oriented in its course (Weber 1956: 1; 1968: 4). Rational choice models accounting for interdependent actions involve considerable simplification, and cannot therefore consider “locally detailed and complex” social actions (Abell 2000: 223). Causal explanations of the course and effects of social action, as Abell observes in keeping with Coleman’s reference to The Protestant Ethic and the Spirit of Capitalism, are situated at the macro abstraction level of the social system, rather than at the individual level. Individual actions, however, provide the unit of analysis and observation (methodological individualism). Causal explanations that proceed from macro causes to the micro, or individual, level, and back to the level of macro outcomes, or vice versa, are seen by Abell as consistent with Weber’s epistemology as well as with rational choice theory, for “rational choice theory may be interpreted as one response to Weber’s injunction about causally understanding social action” (Abell 2000: 228. See in general, 223, 228–9, 236; see also Abell 1992). A number of authors concur with Abell in arguing that Weberian sociology is compatible with a broad definition of rational action theory. Boudon (2003), and Hechter, Kanazawa (1997: 194–5), are cases in point. Along these lines, Peter Hedstroem and Richard Swedberg have maintained that “the three key elements of rational choice theorizing” may be found in Max Weber’s sociology. They are: methodological individualism, analytical primacy (that is the primacy of analytical abstractions, and hence of ideal types such as the rational social actor), and intentional explanation (namely, explanation of the actors’ motives, which involves the Weberian procedure of Verstehen). These authors also maintain that Weber’s

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expanded concept of rationality, with its distinction between instrumental and value rationality, is of particular interest for rational choice theory. Not only Weber anticipated rational choice theory by advancing the thesis that the “scope for rational action […] has increased considerably” with modern capitalism. Weber also sought, as they argue, to include value rationality within his broad notion of rational action. Accordingly, “a value may be pursued just as rationally as any material interest,” but value rationality—in contrast to instrumental rationality—does not consider all the consequences of action (Hedstroem, Swedberg 1996a: 138–9. See also Swedberg 1998: 36–9). Finally, Norkus’ attempt to consider the relationship between Weberian sociology and rational choice theory is worth noting (Norkus 2000). As Norkus maintains, Weber’s concept of rationality comprehends both parametric and instrumental rationality. His principle is here expressed—in a way that is compatible with Abell—as follows: “All collective facts can and should be explained as consequences of individual action” (Norkus 2000: 263). The interpretation of methodological individualism may be weak or strict, according to whether sociological institutional rules are included or not in the description. Weber’s methodological individualism was conducive to the study of the macro sociological conditions, such as institutional rules, that make social order possible, and therefore subscribed to the weak interpretation of this principle. A macro analysis of rational action would cast light on how these rules are embodied into and applied by economic, scientific, and legal institutions. Weber’s concept of subjective instrumental rationality is relevant in this connection, as Norkus emphasizes, for instrumentally rational actors must take into consideration the institutional context constraining their actions. Weber has described action as instrumentally rational from the subject’s viewpoint if performed only after deliberation of which alternative means are more appropriate (in terms of effectiveness and importance) to reach the ends pursued, and of what are the expected consequences of pursuing alternative ends. Real actors (but not ideal-type actors) do not usually carry out such an in-depth deliberation, except—at least to a considerable extent—when economic exchanges in competitive modern markets recommend it. Other types of action, such as value–rational, affective or traditional action, are accordingly relevant as descriptive of actions at the individual or micro level of analysis. This analysis might reveal the existence of mixed types, such as actions that are instrumentally rational only in the selection of means, while they are value–rational in the choice of ends. Ultimately, an instrumentally rational actor must keep in due consideration the high costs (monetary or otherwise) involved in any purely instrumental rational action. Accordingly, this actor must decide

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after deliberation on which is the best way to act, namely, whether it is convenient to frame a given contingent decision as instrumentally rational, or rather value–rational, traditional, or affective. All of these authors, then, concur in finding a common ground between the Weberian epistemology and the basic assumptions of rational choice theory. They have laid emphasis on: a) Methodological individualism; b) the procedure of Verstehen, as applied to the reasons that may be attributed to the actors as causing their actions; c) hence, the consideration of the actors’ beliefs and values, as relevant for an evaluation of their value rationality; d) the distinction between value rationality and instrumental rationality. Instrumental rationality has been considered from the actor’s point of view, rather than from the vantage point of those who have other beliefs and/or information than the actor; and e) the different levels of analysis, macro and micro, that are involved in sociological explanations, according to Weberian epistemology and also to rational choice theory. Parsons’ Functionalism and Weberian Sociology Much as some rational choice theorists have done for their own theoretical perspective, Parsons’ functionalism has maintained the existence of a common ground between, on the one hand, his epistemological assumptions and theoretical categories, and Weber’s on the other hand. In Parsons’ interpretation of Weber, as advanced both in his first major work—The Structure of Social Action—and toward the end of his life, Weber’s classification of modes of action orientation has evidenced “a focus of interest on the normative aspect of action systems.” Therein, Parsons formulates a distinction between efficiency norms and legitimacy norms. While efficiency norms “denote standards of the ‘right’ relation of ends and means in a given context,” legitimacy norms denote “the ‘right’ modes of doing things with reference to binding values.” Norms of efficiency, otherwise stated, involve “the efficient adaptation of means to ends” and refer to the actors’ interest, whereas norms of legitimacy by implying “moral obligation” involve the actors’ normative orientation to a legitimate order (Parsons 1937: 649–53, 678–9). Both kinds of norms are learnt in the process, and by means of the socialization process, which fulfills the function to train “individual personalities…to be motivated and technically adequate to the performance of adult roles” (Parsons 1964: 130). A focus on the normative aspect of action is instrumental, as Parsons argues, to formulate “the general concept of rationality of action.” “The atomistic character of utilitarian thought” is thus avoided, with its untenable (as Parsons views it) postulate of the natural identity of interests, while

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the focus on an integrated ultimate value system, which Parsons finds in Weber, is considered by Parsons as incompatible with “the random ends of utilitarianism” (Parsons 1937: 718–19, 773). As Parsons has added elsewhere by way of clarification, “for an act to be judged as rational, the selection of means to the end must conform with certain standards which can be defined by observers and understood by actors. No random […] relation of means to end can be called rational in this sense […] Weber […] argued that binding commitments to ‘maxims’ are crucial […] for stable ‘legitimate orders’ or institutions, and also for ‘customs’ and ‘usages’” (Parsons 1976: 362). This holds true, in particular, for ethics in the capitalist order: “The new economic order”—as Richard Muench has written, with reference to Parsons’ interpretation of Weber—“is both the result of expanding markets and expanding ethical and legal regulation” (Muench 2005: 551). In this connection, Parsons argued that “economic activity takes place within the ‘institutional’ framework of a society,” and therefore “moral sentiments” and in general “disinterested elements of motivation” typically play a role in the determination of the course of such activities. These elements are in the usual case “intimately intertwined” with self-interest (Parsons 1940: 190, 193). Parsons’ stress on Weber’s alleged focus on norms has been questioned as textually unfounded. Conformity to norms may occur, as Weber pointed out, for reasons different than inner adherence to values the norm represent, for habit and self-interest may be also relevant. In particular, as a careful perusal of the relevant texts shows, Weber did not establish any necessary connection between instrumentally rational action and the actors’ adherence to norms. Nor did he state that reference to norms or values is always involved in the selection of ends. Nor did he attribute to values any greater influence on behavior than habit and self-interest. Rather, the pursuit of ultimate values may be incompatible with that of self-interest (Cohen et al. 1975: 233–6. See in this connection Weber 1956: 12–13; 1968: 24–6). These criticisms of Parsons’ interpretation do not of course imply that Weber adopted “the framework of an individualistic positivism,” as they have been construed (Muench 1982: 820, note 23). It has been pointed out, furthermore, that for Parsons “the patterns of behavior motivated by economic rationality and political rationality, though basically cooperative,” may in fact “represent competing subcultures.” By the same token, a conflict may actually occur “between ethical rationality and instrumental political expediency,” which “Weber so profoundly articulated as the tension between the ethic of responsibility and the ethics of expediency and faith” (Alexander 1988: 156–7). Parsons’ position may be thus recapitulated, taking into consideration the criticisms to which it has been subject: a) as ends are non-randomly

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related to means, they may be guided by norms and values; and b) though economic rationality may not be aligned with political rationality, the ethics of the market rests on the legal regulation of market transactions. The Weberian Notion of Rationality A number of Weberian interpreters have expatiated on this notion (see Brubaker 1984; Eisen 1978; Kalberg 1980; Levine 1981; Lindner 1986: 156–8). They have considered not merely those passages in Economy and Society that directly bear on it (see especially Weber 1956: 12–13; 1968: 24–6), but rather Weber’s oeuvre as a whole with particular reference to texts concerning religion, economy, and law. They have often pointed to the frequent occurrence of the term of rationality in Weber’s writings, and the plurality of its apparent meanings (see in particular Brubaker 1984: 1– 2; Eisen 1978: 58–61). Accordingly, they have endeavored to clarify them through conceptual analyses and typologies. The result of their efforts has not been entirely consistent or cumulative, but attention will be paid to interpretative statements on which there seems to be agreement, or at least absence of disagreement. The distinctions between the different meanings, and the corresponding ideal types of rationality has yielded the following typology: • • •

•

Conceptual rationality, which stresses the coherence and consistency of concepts and conceptual frameworks. Instrumental rationality, which stresses the adequacy of the relationship between means and ends. Substantive rationality, which stresses the adequacy of the relationship between values and norms on the one hand, and conduct on the other. Formal rationality, which stresses the extent to which conduct and norms are predictable and calculable.

Cutting through all these ideal types is the distinction between subjective and objective rationality, the former considering the actor’s subjective point of view, the latter having regard for the correct relation between means and ends according to available scientific knowledge. As Brubaker remarks, furthermore, the unifying themes of knowledge, impersonality and effective control provide “the thematic strands,” which “run throughout Weber’s discussion of the rationality of the modern social order” (Brubaker 1984: 30; see in general, 30–35). Rational choice theory—as a general theoretical framework, and also insofar as its compatibility with Weber’s conception of rational action and sociology of norms is concerned—has not dwelt on conceptual rationality, and has conflated instrumental and

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formal rationality. Its reception of Weber has therefore been selective. Moreover, while Parsons’ critique of utilitarianism may be extended to the “thin” version of rational choice theory, his stress on norm allegiance leaves conduct motivated by self-interest unaccounted for. These two points should be considered in some detail. Rational choice theory and the Weberian conception of rationality share the epistemological position of methodological individualism, and intend to explain conducts by imputing plausible motives to social actors. What is more, the distinction between “thin” and “thick” rationality is similar to that between instrumental and substantive rationality. Both instrumental (“thin”) rationality and substantive (“thick”) rationality may account for cooperative (that is, correct, loyal and honest) conduct, and therefore for credibility and trust among participants in stable interactions. To the extent that reality approximates the ideal–typical, abstract condition of network closure, cooperative conduct is rational from a subjective as well as an objective viewpoint, for it is predictable, hence calculable (knowledge), abiding to social norms (impersonality), and amenable to discipline and regulation (control). Rational choice theory and Weber have accordingly considered both micro (subjective) and macro (objective) levels of sociological analysis. The analytical inclusion of value rationality in the conceptual apparatus of rational choice theory may account for normative conduct in a variety of social contexts, including the institutional context of market transactions. In this context, Weberian sociology, rational choice theory (in its broad definition), and Parsonian functionalism lay emphasis on norms and values as a source of conduct regulation. In contrast to Parsonian functionalism, however, only Weber’s notion of rationality and “thick” rational choice theory may explain market conducts that are presumably accounted for by self-interest as well as norms and values. Parsons’ selective focus on norms, and rational choice theorists’ emphasis on self-interest, do not accordingly sufficiently illuminate Weber’s epistemological and theoretical position. Norms, for Weber, may exert guidance on behavior for a variety of reasons, of which the actor may be more or less aware. In particular, norms—or rules (Regeln)—are followed in a variety of different circumstances: a) without any awareness on the part of the actor, who takes for granted and repeats what other people do, until the behavior becomes an unconscious habit; b) as a deliberate application of principles drawn from the actor’s own lived experience; and c) as a consequence of the actor’s upbringing or limitation. Thereby, the actor follows the norm as something worth conforming to for its own sake, and subsequently—thanks to the actor’s own life experience, which has been subject to careful consideration—further elaborates it until the norm guides his or her actions (Weber 1973: 330–31).

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A Weberian Sociology of Social Norms in Financial Markets: A Brief Survey of the Literature Weber’s considered habit, self-interest, norms and values relevant to the formation and upholding of trust and social norms. In this regard, he referred to the social, economic and financial exchanges characteristic of modern capitalism. In particular, insofar as financial exchanges in stock exchanges are concerned, Weber made them the subject of detailed investigations in the 1890s (Weber 1999; 2000). Their content and conclusions, which bear on the crucial relevance of social and legal norms in financial markets, will be epitomized in the following section. A preliminary survey of the literature on these investigations, and on the related topic of how stock exchanges were organized and regulated during Weber’s times, may help illustrate Weber’s account. Besides summarizing Weber’s relevant publications in these research areas, the literature has dwelt on their context. Attention has been paid, in particular, to the fierce debate that occurred in Imperial Germany on the ethical justification and economic consequences of futures trading. This debate was conducted in legal, political and academic milieux.1 Some of these points will be touched upon here. First, the legal regulation of the stock exchanges in Germany, England, and elsewhere toward the turn of the nineteenth century. The literature has dwelt on the variety of formal and informal norms existing in the Austrian and German nineteenth-century stock exchanges, and in particular in the Berlin Stock Exchange. It has also hinted at the debate within the government-appointed Commission of Inquiry into the German Stock Exchanges between those in favor of centralized control, and those who instead favored the administrative autonomy of each German Stock Exchange. The literature has furthermore criticized the innovations brought by the 1895 reform law of the German Stock Exchanges as an ineffective compromise between the opposing organizational principles of free market on the one hand, and on the other hand, government controls, which would prove unable to check speculative abuses. In keeping with Weber, the German normative framework has been contrasted with that prevailing in Paris, New York, and especially London. Second, the presumable reasons that prodded Weber to conduct his research on the stock exchanges. Leaving biographical circumstances aside, specific historical factors have been indicated as plausible motives of his interest in the organization and regulation of stock exchanges. They 1 See Borchardt and Meyer-Stoll’s detailed introduction (1999). Shorter presentations and comments are in Bendix 1960: 23–30; Borchardt 2002; Kaesler 1979: 67–9; Tommasi 1985; Tribe 2002.

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are, namely, Weber’s desire to dispose of “all sorts of ignorant prejudice” (Tribe 2002: 244) concerning the way futures trading operates, and his related preoccupation lest this prejudice should inspire ill-conceived reforms that would prevent Germany from holding its own against its economic competitors. Third, the conclusions of his research and his reform proposals. Weber formulated these proposals in a number of publications, some of which were written as a member of the Commission of Inquiry. In this capacity, he took active part in the debate among economists, jurists and other experts, on the legal reform of the German Stock Exchanges. Finally, the impact of his conclusions on the law that reformed the German Stock Exchanges. The literature has reported Weber’s publicly expressed displeasure with the new law (1896), which prohibited futures trading in grain and curtailed the stock exchanges’ self-regulation prerogatives. A Weberian Account of Trust and Social Norms in Economic Exchanges Economic theory, which is based on the principle of marginal utility, formulates an ideal–typical concept of economic exchange as an action conducted by fictitious perfectly rational actors, and makes use of this concept for theoretical purposes, such as the description and explanation of given economic events. Norms, insofar as applying to such an abstract, ideal exchange, are relevant for indicating the extent to which an actual exchange conforms to this ideal type. The individuals carrying out the exchange may be aware of, and feel bound by, moral norms that prescribe how a fair exchange ought to be. However, they may also follow the norm of fair exchange because doing so has proved, according to their experience, to be instrumental to conducting a successful exchange. The expectation of material and psychological benefits for those who follow this norm, and of costs—including psychological costs (Unfreundlichkeiten, Unlust)—for those who do not, determine in this case the exchange partners’ behavior. Finally, they may follow this norm without any awareness of the benefits yielded by conformity (Weber 1973: 200–203, 330–36). Actions that follow the norm of fair exchange may therefore ensue from different subjective motives, which may be reconstructed in ideal–typical terms. Weber’s well-known typology of social action may be reconsidered here for the particular case of economic action. An exchange of economic goods may be, respectively, considered; a) determined by affects or emotions, as for instance a panic on the stock exchange (Weber 1956: 2, 4; 1968: 6, 9); b) traditional, namely, “determined by ingrained habituation” to the observance of the norm of fairness in business conduct, which—as a “practice […] based on long standing”—has become a custom (Weber

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1956: 12–13, 15; 1968: 6, 9, 24–5, 29); c) Value–rational, to the extent that it is “determined by a conscious belief in the value for its own sake of some ethical […] form of behavior, independently of its prospects of success.” A value–rational conduct may, for example, rule out bargaining between status peers. When the value of honesty provides exclusive guidance in business transactions, however, the prospects of successful exchanges are greatly increased; and, d) instrumentally rational, insofar as they are determined by “rational consideration of alternative means to the end, of the relation of the end to the secondary consequences, and finally of the relative importance of different possible ends.” This is the case when two or more participants in a market exchange compete among themselves to obtain the best exchange conditions (Weber 1956: 12–13, 15, 382–3; 1968: 24–6, 29, 635–7; 2002: 224, note 221). Instrumental rationality is in a sense subjective, for those who have different beliefs or assumptions from the actor are in a position to assess differently the adequacy of the means, which the actor has chosen, to the ends pursued and the consequences that are likely to follow therefrom (Zweckrationalität). Weber would therefore concur with Elster in maintaining that there are several modes of behaving rationally in keeping with the actors’ beliefs or assumptions. In a different sense, however, instrumental rationality is objective (Richtigkeitsrationalität), since those actors who have more information than others are able to assess more objectively this adequacy, and the ensuing consequences (Weber 1973: 432–8). Normatively regulated consensual actions are necessary for any exchange—economic or otherwise—to take place. The consensus (Einverständnis) concerns the validity of this order. In order for this consensus to exist, every actor must assume to a sufficient degree that all other actors, who have part in the exchange, share with them the expectation that the set of guiding principles, or order (Ordnung), regulating transactions will be complied with. In other words, every actor expects that the other actors comply with the agreed upon terms of exchange. A macro phenomenon—such as a religious doctrine, or a set of social norms, or a political or language community—rests on the consensual action of the individuals who are concerned with it. Whether or not they agree on the doctrine, practices, norms, and whatever else constitutes this phenomenon, their factual conformity to its guiding principles, and their empirically correct expectation that the other concerned actors do likewise, are sufficient to create and preserve it. Failure to conform would cause exclusion from the collectivity of those involved in consensual action, in addition to legal sanctions when the state with its coercive apparatus of rational norms backs these guiding principles. In the case of monetary exchanges, every participant extends

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their expectations of compliance beyond their direct business partners, for monetary exchanges presuppose that the actual and potential members of the market community accept money as a means of exchange. Only money-based transactions make it possible to calculate gains or losses, which have occurred as a consequence, and are rational, provided that these calculations make use of the reliable accounting procedures that prevail in, and define, modern capitalism. A capitalist market community presupposes, therefore, normatively regulated consensual actions, backed by the protection the law grants to contracts (Weber 1956: 36–7, 44–5, 58–9, 382–3; 1973: 452–64). Accordingly, monetary and psychological costs and benefits ensue from compliance with the social and legal norms ruling market transactions, and therefore with the expectations prevailing among participants in the market community. An evaluation of these costs and benefits provides the social mechanism accounting for the transition from micro phenomena, such as individual economic actions, to macro phenomena, such as the capitalist economic, social and legal order, and conversely. A social mechanism is a causal explanation which is “specifically tailored for a limited range of phenomena,” and “refers directly to causes and consequences of individual action oriented to the behavior of others” (Hedstroem, Swedberg 1996b: 298–9). A “feedback mechanism to provide information that might affect action” on the part of the rational authority (Coleman 1990a: 613) originates, as Weber maintained, from influential representatives of capitalistic interests. They demand that the legislative and judiciary institutions take into due consideration their expectations, which concern protection of contracts without excessive legal formalism, so that “legal practice” would meet “the need to guarantee or secure […] trustworthy conduct” (Weber 1954: 306, and in general, 304–308; 1956: 506, and in general, 504–506). Coleman’s criticism, that Weber failed to explain how micro and macro phenomena are interrelated, is therefore textually unsupported. Transaction partners pursue different and opposed interests, as manifested in the bargaining process. Still, they share the fundamental interest that the norms enjoining commercial fairness and respect for all contract stipulations be abided by for their own sake. If this is the case, legal sanctions imposed by formal courts are neither necessary, nor customary. To the extent that participants in market transactions have built a reputation of honesty and trustworthiness, they form a business community. Reputation flows from this community, and is accordingly impersonal (Weber 1956: 382–3; 1968: 636–8; 1973: 451, 453, 459– 60, 462; Weber 1999: 171–2; 2002: 224, note 221). To the extent that norms prescribing fairness in business transactions shape economically

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oriented social actions, they provide the market with material rationality. Unlike other forms of material rationality, these norms—far from being an impediment to the accurate calculation of monetary gains or losses— promote the formal rationality of the capitalist economic order (Weber 1956: 44–5, 58–9; 1968: 85–6, 107–109; see also Brubaker 1984: 35–45; Segre 1983: 53–86; Swedberg 1998: 36–9). A rational orientation to the expectation that the other partners will abide by the agreement, and an evaluation of the costs and benefits flowing from the market social and legal norms, may obtain along with the value of loyalty and a subjective commitment to these norms. Rational choice theory with its focus on rational/purposive action does not then provide a satisfactory account of the behavior of the market participants, if this behavior is consistently oriented to the pursuit of the value of honesty in business transactions even to the detriment of monetary gains. A broader notion of rationality, such as that put forward by Boudon, should be accordingly preferred in this particular instance, in which actors apparently combine instrumental and value rationality (Weber 1956: 14; 1968: 28). Moreover, by giving exclusive emphasis on norm commitment, a functionalist account of the behavior characteristic of the ideal–typical capitalist market would leave all rational pursuit of monetary gains unaccounted for. Finally, to the extent that “ingrained habituation” (Weber 1956: 12; 1968: 25) determined this economic behavior, in the sense that conformity to norms of fair business is taken for granted, both rational choice perspective and Parsonian functionalism fail to supply a sufficient explanation. A Weberian Account of Trust and Social Norms in Stock Exchanges According to Weber, the legal and social norm of honesty consistently guided the behavior of brokers in the London Stock Exchange at the turn of the nineteenth century. Self-interest, disinterested endorsement, custom, or any combination of these factors may have dictated compliance with this norm. As Weber remarked, “that which the religiously lived epoch of the seventeenth century bequeathed to its utilitarian heirs was above all a startlingly good conscience (we can say without hesitation, pharisaically good) as concerns the acquisition of money” (Weber 2002: 120; see also Weber 1981: 367). Self-interest, as considered by the “thin” rational choice perspective, and disinterested endorsement of norms, as emphasized by Parsons’ functionalism, may be both relevant in this connection, but neither perspective nor even their combination provide an adequate account of the brokers’ conduct, to the extent that norm conformity was customary and

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taken for granted. Informal control, as Weber contended, is of relevance to well functioning markets, but even more so to financial markets. In all markets, undetected malfeasance, and unethical behavior in general, can diminish impersonal trust and thereby negatively affect business exchanges. In financial markets, however, damage would be particularly serious if transactions are concentrated in a few leading stock exchanges, as it occurred in the London Stock Exchange during Weber’s lifetime (and still occurs), in the light of “the fully indispensable function, which the Stock Exchange must exert in economic life” (Weber 1924: 285; 1999: 169). In Weber’s times, formal social control on the exchange partners was exerted by a court constituted by stock exchange members (brokers and traders), rather than by regular Courts of Justice (Weber 1924: 285; 1999: 170. See also Borchardt, Meyer-Stoll 1999: 21–2). Informal control rested on the business community as a whole, for it provided “the means by which cooperators can locate and interact with each other” (Heckathorn 2001: 277) by establishing the reputation, and hence the trustworthiness, of all participants. The English financial community benefited from an additional source of informal control. By exerting social closure—defined as “the process of mobilizing power in order to enhance or defend a group’s share of rewards or resources” (Murphy 1984: 548)—well-knit and powerful small groups of brokers and traders who mediated all financial transactions were able to exclude from the exchange would be participants, who were considered not qualified in terms of their financial property, and to effectively control with the sanction of expulsion the conduct of single brokers and traders. This control was exerted not only upon the stock exchange members, but also indirectly on the business community as a whole. The relations, which obtained within this small group of brokers as Weber described them, are of interest from the viewpoint of sociological theory. Their great financial weight granted brokers and traders superior power over non-brokers, who were in most cases lesser members of the financial community. Also, the brokers and traders belonging to a highly privileged status group (Stand) and propertied class made them members of a unitary corporate group, and promoted dense and frequent ties among them. Their privileged status, furthermore, was instrumental to enforce and preserve an ethic of commercial honor based on strong capitalist traditions (Weber 1924: 284; 1999: 167–8). To use game theory language, as in assurance games the participants (the brokers) could reach an optimum—a most satisfactory arrangement— not individually, but collectively, taking advantage of the fact that their community was “sufficiently small and stable so that everyone […] [could] really come to know everyone else” (Elster 1984: 21–2). The brokers’

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coordination and absence of competition were required for the joint task of supplying the market with trust as a public good available to all participants in market transactions. The brokers own public good was their monopolistic control over brokerage commissions. “The mere assurance that the other will do the same” (Heckathorn 2001: 277) rested on the brokers and jobbers opportunity to maintain social closure, and thereby secure the economic and social benefits of brokerage. The opportunity to secure these benefits motivated traders and brokers to cooperate with each other, over and above allegiance to norms prescribing this conduct. Mutual control made it virtually impossible for brokers and traders to compete with each other, and provided all of them with reliable knowledge that uncooperative behavior would have been punished certainly and severely. In this connection, Weber remarked that violations of agreements reached, most informally, “by mere signs, entirely unrecorded, and devoid of evidence” were “almost unheard of in the annals of the stock exchange” (Weber 1956: 383; 1968: 636–7). This ethic—whether based on custom, self-interest, allegiance to the status norms or to the brokers’ own code of honor, or any combination of these factors—legitimated discrimination toward those considered less honorable and worthy, for social closure was based on status and class criteria. As a consequence (whether intended or not), the privileges of the propertied class and status group, to which the London Stock Exchange brokers and traders belonged, were preserved along with the economic and social power of the financial elite (Weber 1924: 276, note 1, 279, 285–7, 320–21; 1999: 161, 169–71; 2000: 653– 5). On the other hand, Weber imputed to the absence of futures market the occurrence of speculative crises (Weber 1958: 247–53; 1981: 286– 94). Accordingly, he laid stress on the importance of futures trading—if entrusted to professional and competent brokers and dealers only—for the regular functioning of large financial markets, and for the price stability of the products and currency therein traded (Weber 1924: 301, 310–22; 2000: 631, 643–55). Discussion Weber’s reputation as an expert on stock exchange organization and operation was already established in the 1890s, and has remained so thereafter (Borchardt, Meyer-Stoll 1999: 2–3). Historical research on the Chicago Board of Trade (in which until recent times only agricultural commodities were exchanged) at the turn of the nineteenth century has also borne out some of Weber’s theses concerning the conditions for the regular functioning of futures markets. These markets were then possible—as they are nowadays—only if “social rules of self-restraint and institutional

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means for enforcing the rules” exist, so that malfeasance and therefore uncertainty in transacting are effectively reduced. Cooperation between competitors and de facto barriers to entry were necessary to enforce these rules (Abolafia, Biggart 1991: 221–2; see also Keister 2002: 47–9). Weber not only proved to be a competent student of futures markets, whose investigations on the futures markets of his times are still relevant today. He also anticipated contemporary research on financial markets, and added some interesting theoretical statements of his own. The brokers’ cliquish character of relations among themselves was instrumental in achieving control of transactions in the London Stock Exchange, whether this was their intent or not. Control—in the dual sense that brokers mediated all transactions in the exchange, and that they collectively took care that no misconduct would take place on the part of themselves or their customers—was exerted informally most of the time, though formal control by means of local courts was available. In keeping with Weber’s account of the London Stock Exchange’s formal and informal organization, the great effectiveness of brokers’ control on transactions was a consequence not only of their small number, and stable, mutual, and accordingly often personal relations in their daily business practice. It was also the consequence of their sharing the same propertied class and social status with traders in the exchange. This fact was conducive to social cohesion, and having a similar world view and corresponding moral standards of honesty in business conduct, which were accordingly respected and enforced. This was so for a variety of plausible reasons, which were possibly intertwined. Abiding by these standards was in fact necessary to trade in the exchange (“thin” rationality), but they also conformed to the brokers’ and traders’ normative beliefs (“thick” rationality). In addition, economic activity in general is institutionalized and, therefore, normatively regulated (as Parsonian functionalism has emphasized). From both a structural and cultural perspective, endorsement of moral standards and, therefore, trust in colleagues and business partners resulted from the peculiar network configuration of the relations that existed in the London Stock Exchange at the turn of the nineteenth century. A clique of brokers traded with a cohesive group of jobbers. Representatives of both groups adjudicated cases in the exchange court. Brokers and jobbers, moreover, shared a class and social status background, so that they could easily and frequently intermingle among themselves, and also with others having the same or a relatively similar background. In addition to these elements conducive to social union and coordination, these groups of financial operators were members of the business community at large, whose value of fairness in transactions was possibly the central value in

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the exchange. To be considered honest and trustworthy was, moreover, a desired condition, and the corresponding values were upheld in general. The London Stock Exchange brokers and dealers formed, accordingly, two sub networks connected by a number of links, so that they jointly constituted a single dense network. This network was nested in the much larger network of the British and World’s business community, which in turn represented and gave voice to widely accepted values. The London Stock Exchange was thereby in a position to exert its functions as a leading financial center, in which trustworthy operators performed transactions smoothly and efficiently on behalf of all participants in business exchanges, and ultimately, on the behalf of British society and the capitalist order as a whole. The “English” Model and Financial Markets This chapter has sought to shed light on Weber’s account of trust and social norms in their relation to modern capitalism. It has been shown that norms, both formal and informal, are necessary to the formation and preservation of impersonal trust in the commercial fairness of business partners. In this connection, a Weberian theory of social norms has been reconstructed as follows. First, a dual prerequisite of formal rationality, which is characteristic of modern capitalism, is that there must be a legal framework providing market operators with reciprocal trust by making contractual agreements enforceable; and that such a legal framework be sufficiently flexible to accommodate to their contingent needs. Second, informal social norms prescribing a fair business conduct are a necessary complement to legal or formal norms. Third, the empirical validity of these informal norms depends both on established business traditions sanctioning them and on controls jointly and reciprocally exerted by the members of the business community. Fourth, as shown by norms and patterns of conduct prevailing in the London Stock Exchange at the turn of the nineteenth century, the crucial importance for the capitalistic order of securing trust in financial exchanges may require establishing social closure in order to exert informal control on the brokers’ honesty and trustworthiness. Social closure was obtained by means of: a) a cohesive network of brokers and traders who monopolized transactions in the exchange, selected new members, provided self-regulation, and saw to it that cohesion and moral standards be preserved; and b) selection criteria based on economic class and social status, which maintained social homogeneity within the network and supplied credibility to decision processes in the financial transactions (whether these results were intended or not).

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“Thin” rational choice theory and Parsonian functionalism have contributed to explain why turn of the nineteenth-century London Stock Exchange operators conformed to social and legal norms, despite the considerable short run pay off of non-conformity, but neither perspective has supplied a fully adequate explanation. Conducts aiming at long run benefits, and the subjective endorsement of the norm of honesty in transactions, might have been relevant, possibly in addition to unconscious following of a time-honored tradition. It seems advisable, accordingly, to follow Weber, who did not rule out—in his account of the norms and organization of the London Stock Exchange—either an evaluation of costs and benefits on the part of the operators, or their commitment to general norms of honesty and fairness. But he laid emphasis on characteristics of the transactions between operators, and of their network, which were conducive to the effectiveness and pervasiveness of the local norms. These characteristics may be summarized as a stock exchange brokers’ and traders’ professional and social closure likely exerted with the aim of informally safeguarding trust relations among those who participated, whether directly or indirectly, in financial exchanges. Therefore, Weber laid stress on the informal control procedures in exchanges entrusted to participants themselves with the support of a consolidated tradition of personal and collective respectability. Contemporary literature on this subject has mentioned the existence in today’s financial markets of similar informal practices aimed at controlling participants’ reliability, including internal control associations. But it has also pointed out that these practices have not succeeded in preventing unfair behaviors, and that a combination of formal and informal regulations in these markets may jointly reveal the inconveniences of both of them. In fact, the formal (juridical) regulation started in the United States by the Securities and Exchange Commission (established by a federal law of 1934 in order to prevent crashes on the stock exchange, after that of 1929), creates, along with a greater trust in transaction transparency, also perverse effects caused by the crowding of new participants who develop, in the opinion of many operators, excessive competitiveness. On the other hand, informal regulations result advantageously to the most powerful market operators, who benefit from more information and privileges (but for the fact that they have greater availability of capital of their own, or of other people). Finally, deregulation does not protect these markets at all, since it encourages the formation of closed brokers’ circles, which are not subject to any formal or informal control, and therefore also the spreading of unfair practices that, remaining unpunished, give rise to uncertainty and disorder in transactions. Therefore, the question under debate, nowadays like in Weber’s times, consists in determining which is

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the most appropriate combination of formal and informal regulations— the latter being entrusted to the financial community—for preventing opportunistic behaviors and perverse effects. The literature agrees on the fact that any proposal in this sense should take into due account the historical experience accrued in the major financial markets in relation to the guarantee of exchange transparency, as well as the desired and perverse effects of any regulatory provision in those markets (Mizruchi et al. 2005: 298). Weber’s thesis that the London Stock Exchange owed its functioning— that Weber considered excellent—to almost institutionalized internal control practices, seems tenable. In fact, it is most unlikely that opportunistic behaviors prejudicial to trust in exchange transparency might spread in the London Stock Exchange, bearing in mind that at the eve of World War I it was by far the most important in the world, and out of proportion to the economic weight of the country, whose economic primacy had been undermined by Germany and by the United States (Michie 1999, 70). Whatever its grounds, Weber’s thesis—as it has been now reconstructed—deserves being attentively considered, because it suggests a theoretically fruitful use of the notions we have previously provided of business community and milieu, moral economy and organizational field. These notions should therefore be reconsidered in the light of Weber’s thesis, from which we can draw some general concepts that make reference to them. First; a financial community, like any other community, is such if it involves for all its members a set of shared activities and beliefs, as well as stable mutual relations and common meanings. Second; in order to serve the regular flow of financial transactions, a business milieu or community must be an integral part of the market community at large, and therefore, an integral part of a moral economy, since the flow of exchanges assumes consensual action, and consequently, mutual trust. In particular, the sound functioning of a stock exchange requires that financial operators participating in exchanges (brokers and traders) have particular characteristics promoting their own compliance with ethical capitalist principles (such as belonging to a privileged status group that draws its legitimacy from members’ adhesion to capitalist-bourgeois norms). In addition, participants must be integrated in a business milieu (that of financial operators, in general) without spatial boundaries, keep to a principle of generalized reciprocity, and behave accordingly. From Weber’s thesis two additional general concepts may be drawn. First, the social closure of those who participate in exchanges is necessary (although not sufficient) in order to meet all these conditions. Furthermore, a financial community, which consists in the network of

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stable mutual relations among those who participate in stock exchange transactions, derives its strategic importance for the market community at large from its central position. Centrality, in turn, results from a number of factors, which correspond to as many meanings of this term in network theory (Wasserman, Faust 1994: 178–92). Each member of the financial community, in fact, keeps a number of ties both with other members of the community and with the members of the market community at large; is close to each participant in the market community, because each one of them has the opportunity to directly relate to a stock exchange broker; acts necessarily as a mediator, in their position of trader or broker, for any other member of the market community who wants to relate to others in order to carry out a stock transaction. In a market community, the central position of stock exchanges depends on the way in which firms meet their own financial requirements, whether prevailingly through bank credit, or by resorting to the capital market through stock and bond transactions. The first solution has been, and still is, prevailingly adopted in Continental Europe and in Japan, the second, in Anglo-Saxon countries. Where the financial system is based on bank credit, the major banks have the possibility to establish and strengthen privileged relations with non-banking large corporations and the government. These kind of relations connote the “German” model of intercorporate relations, determines a capital allocative inefficiency penalizing economic growth (Neuburger, Stokes 1974; Mizruchi et al. 2005: 298–300), without preventing banks, large firms or aggregates of firms from adopting opportunistic and malfeasant behaviors (as in South Korea) (Chang 2003: 133–41). The organizational field of firms and business groups, whose relations approximate the “German” model, is incompatible with a central position of stock exchanges in the market community. In fact, not only do firms not make use of the capital stock market for financing themselves, but also stock exchange transactions are controlled by large corporations and banks. In addition, the participation of other actors (natural or juridical persons) is no longer encouraged, and there is still a lack of an appropriate control on the banking system exerted by the state or by a financial community, which can be hardly established within this context of relations. The sociological literature that has comparatively dealt with bank/firm relations in some capitalist countries, including Germany and Great Britain, has noticed a persistent economic and the political power of banks in Germany, despite the globalization process of the financial market and the concomitant increasing presence of institutional investors, such as insurance companies, pension and investment funds, also on the European markets. Banks have an almost public legal status, keep cross holdings

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with large corporations, in which shareholding and managerial control tend to overlap and—as large corporations—are connoted by relations of mutual cooperation, euphemistically called “regulated competition,” while German capitalism is designated as “cooperative.” Recent reforms of the German banking system have taken place on the initiative and under the influence of the large banks themselves, and do not seem to have reduced their power. The organizational field of British firms clashes with the organizational field of German firms, as it is characterized by a much greater separation between ownership and control; by a certain—albeit modest—level of competitiveness among banks; by a much greater weight of institutional investors, who have achieved a dominant importance in the stock and bond markets. However, it distinguishes itself also because financial institutions (including institutional investors) do not have the possibility to control individual firms, since they do not own sufficient participation shares in them, in line with the general shareholding fragmentation existing in Great Britain. Finally, as a consequence of this fragmentation, by a predominance of “managerial” capitalism provided with scarce political power, but also characterized by a reduced interference on the part of political authorities (Coleman 1994; Mizruchi et al. 2005: 300; Windolf 1999; Windolf, Beyer 1996). Keeping with Weber’s thesis, the good functioning of a stock exchange assumes, or at least is facilitated by, the existence of several communities. The market community at large embeds, in fact, a financial community, but in turn may be embedded—as the original capitalist market community, according to Weber—in an even broader class community (the class of bourgeoisie), characterized not only by its own lifestyle, but also by its own ethics. Market and financial communities have partly different organizational fields: the system of shared knowledge, norms and rules of a financial community has in fact additional institutional attributes in comparison with a market community. The need to protect exchanges from misappropriation, which exists in any market, is particularly felt in financial markets, given a relative easiness—lacking effective controls and sanctions—to obtain considerable gains through unfair (“opportunistic”) behaviors that benefit from financial operators’ privileged (in terms of time, quality, amount) possession of information compared to others. The institutional procedures that (nowadays like in Weber’s times, although as from the 1930s, these procedures have been partly formalized through laws that regulate exchanges and establish control bodies) bind operators’ behavior and are supported by controls and formal and informal sanctions, originate from the need to ensure trust (see, for example, concerning American financial markets, Abolafia 1996: 174–7).

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The central position of the stock exchange within the exchange network, which—as we have seen—is possible only in financial systems based on capital market (“English” model) instead of bank credit (“German” model), has effects on exchanges themselves, and consequently, on the development of the domestic economy. In this case, among the different meanings of the concept of centrality, particularly relevant is that of centrality as mediation. In Germany, in fact, bank institutions hold a central position in the exchange network due to their closeness and number of links with other firms, but their mediation function is limited—in general—to domestic, rather than international, exchanges. This relative limitation holds true, though to a much smaller extent, also in the stock exchange transactions managed by the Deutsche Börse Group, which aims at competing with foreign stock exchanges in terms of service provision completeness and efficiency and transaction reliability. Transactions are concentrated in the Frankfurt Stock Exchange that, through the introduction in 1997 of computerized procedures in exchange management, has conformed to the requirements of the international financial community, thereby attracting a large number of foreign participants. Despite this opening toward foreign countries, the German stock markets still remain penalized by the predominance in Germany of a capital market mostly oriented to bank credit. Though the economic weight of this country—as indicated by its GNP—exceeds by about 25 per cent that of Great Britain, and foreign companies total about one half of those listed on the Frankfurt Stock Exchange, the volume of exchanges and the number of foreign companies listed on the London Stock Exchange are much more important than those reported by the Frankfurt Stock Exchange. Using a conventional indicator of size of a financial center, its “capitalization” (the overall market value of exchanged securities), the London Stock Exchange is the major financial center in Europe and the third worldwide (after New York and Tokyo), but the major one—tied with the New York Stock Exchange—relating its capitalization to the Domestic Income, and the very first considering the number of foreign companies participating in transactions (www.deutsche-boerse.com; links: Home>Ueber uns; FWB Frankfurter Wertpapierbörse; www.london-stockexchange.com). The London Stock Exchange is therefore the most international, in the sense that it is the one most open to foreign companies and the one they prefer, and holds a central position in the worldwide network of financial exchanges (Knorr Cetina, Preda 2005: 5; Sassen 2005: 29). Its international performances have been explained by British official sources as a consequence of the corporate governance2 of the companies 2 This term indicates the procedures through which are maintained the relations between general management and board of directors on the one side,

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listed on the London Stock Exchange. This corporate governance has been judged optimum as to the completeness and reliability of provided information, and therefore in the position to reduce, in comparison with other stock exchanges, corporate costs resulting from the placement of securities (doubts on provided information, in fact, make share placement more expensive) (City of London 2006: 5; Sassen 2005: 28–9). More in general, financial markets in Great Britain have been authoritatively rated as “the most efficient in the world” (World Economic Forum 2007). Its superior corporate governance, turning into lower costs for investors, has allowed the London Stock Exchange to become even more competitive than the New York Stock Exchange, although the Securities and Exchange Commission (responsible for the control of all operations carried out there) has tried—apparently not quite successfully—to improve the quality and quantity of the information circulated by the companies listed there, availing itself of a recent federal law in this regard (the Sarbanes-Oxley Act of 2002) (City of London 2006: 5; Swedberg 2005b: 193–5). The informal guarantee of exchange transparency has, therefore, better met the requirements of the financial community at the London Stock Exchange than the formal guarantees provided by the law and by the control authority at the New York Stock Exchange. Both stock exchanges, much more than those based in continental Europe, are interested by investments made by institutional investors. These investors must account for their actions to those (whether natural or juridical persons) who have provided them with capital, thereby showing their trust. According to research in this regard, institutional investors are characterized by a marked partiality for companies that prove to be reliable in the long run rather than grant short-term gains, and try to safeguard their future by limiting their debt in relation to the corporate stock, and spending proportionally more money in research and development (Mizruchi et al. 2005: 289–90). The institutional investors’ prevailing orientation toward these Anglo-Saxon stock exchanges, rather than toward Continental Europe stock exchanges, suggests that the former ensure greater reliability than the latter. The financial market formed by all the exchanges taking place at the London Stock Exchange seems to approximate, for some salient characteristics, to the “English” model. First, a common business milieu whose members accept and share an informal regulation of exchanges. These informal practices, consolidated in the long history of this stock exchange, are at the origin of its reputation of reliability and efficiency the reform of 1986 (the so-called “Big Bang”) left unchanged, though introducing some important innovations (among which, the possibility for and, on the other, anyone—such as bank creditors, shareholders, bond or financial contract holders—who has an economic interest in the company (stakeholders).

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the companies participating in exchanges to act both as brokers and as traders). Second, the central position of this stock exchange (rather than the central position held by large banks, as in Germany) in the network of domestic transactions requesting financial intermediation. Third, the great importance of exchanges in which foreign companies participate, and hence, a great opening to global capitalism. Fourth, the separation between property and control, very advanced in Great Britain, which diminishes the importance of the great propertied families in domestic economy, and hence, in stock exchanges. Furthermore, the lack of strong ties—through cross holdings between the companies represented in it, and between those companies and the representatives of the political power (again, as happens in Germany), so that exchanges are made without interferences by extraneous interests in the position to disturb the market and make transactions non-transparent. To be noticed, finally, that the aforementioned English official sources make depend the international competitiveness of this stock exchange on transaction transparency, thanks to its excellent corporate governance, while the London Stock Exchange website relates the historical tradition of the London Stock Exchange to its efficient regulation of exchanges and its current reputation. Weber’s thesis that the possibilities of an organization to survive and be successful depend on structural (concerning the network of intercorporate relations) and cultural (concerning the relevance of ethical principles in the economic conduct) characteristics is therefore directly confirmed by these sources, and indirectly, by the good approximation of the British financial market to the “English” model. In other words, the successful outcomes of an organization in an open market do not only depend on the prices of offered goods and services. In fact, these prices depend, in turn, on the characteristics (shared norms, rules and knowledge) determining the organizational field in which a particular organization is situated, and consequently, also its reputation and reliability from the viewpoint of the other organizations acting in the same field. The status group position of the brokers/traders operating at the London Stock Exchange has not been investigated, so far. However, financial market experts still think, as Weber did, that a self-regulation of these markets by associations formed by those who take part in them may result advantageously for the participants who hold a powerful position in those associations and markets (Abolafia 1996: 175). Failing effective hindrances, power positions in financial markets may lead those who hold them to take opportunistic behaviors, since they avail themselves of the opportunity to receive information that others do not have available (Mizruchi et al. 2005: 298). The historical and present experience of the London Stock Exchange suggests, on the other hand, that self-regulation

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procedures are beneficial to all participants, on condition that associations may exert their informal control tasks within a pre-established institutional area sanctioned by a strong tradition and considered binding by the majority of participants. Furthermore, research has pointed out that nowadays brokerage activities in financial exchanges are still carried out by operators who personally know and control each other. Computerized remote communication instruments have not diminished the importance of relations based on personal acquaintance and trust even in the institutionalized and global context of financial markets (Clark, Thrift 2005: 243–4; Knorr Cetina, Bruegger 2002; Knorr Cetina 2005: 46–7; Mackenzie 2005: 77; Power 2005: 261–3). Therefore, nowadays, as in Weber’s times, well-functioning financial markets show a blending of personal and impersonal trust. Participants in those markets constitute, therefore, a business milieu and a moral economy that are embedded in the broader market community and promote its extension and functioning. Conversely, from the nontransparency of these markets issue the fragility and closure of the market community as a whole.

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Conclusion Economic sociology has argued and emphasized the importance of trust in market transactions since Weber’s and Simmel’s works. These two classical authors, and other more recent ones, especially those belonging to the 1980s, have maintained that market transactions may constitute a moral economy insofar as participants consider themselves committed, whether because they are convinced of it or on grounds of expediency, to a reciprocally correct behavior, and that the delimitation of economic relations within relatively close circles promotes trust relations or is a presupposition to them. On the other hand, some authors have also authoritatively maintained that a market open to new participants is the basis for the development of a generalized trust that disregards personal relations and requires, as a consequence, the commitment of as many participants in market exchanges as possible to exert a social control that may prevent and discourage opportunistic behaviors. This book has aimed, above all, to shed light on the thesis, originally formulated by Weber and Simmel, that exchanges are better ensured by a particular combination of restricted and generalized trust. In addition, this book has aimed at reconstructing ideal types of production organizations, and hence, intercorporate relations promoting this favorable combination of different kinds of trust; and finally, whether it prevails or not on a different combination, to show its consequences as regards its survival and achievement possibilities within the global market. A Summary In a business community, as in any other community, members must not necessarily be placed in physical proximity, but rather must share activities and/or beliefs, permanently relate with one another, and have a common collective identity. If this community is a business community, or a business milieu embedded in it with its own norms and practices, a source of collective identity is provided by the adhesion to norms and practices of a variety of persons operating in firms connected with one another by means of communitarian relations. There is a moral economy, in particular, when several firms form an organizational or institutional

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field, that is to say, when they reciprocally relate on the basis of shared knowledge, and follow the same norms and rules, in this distinguishing themselves from other organizations belonging to the same organizational population (that is, with which they share the same vulnerability in relation to environmental conditions). In a community in general, and in particular in a business community or milieu, interpersonal and intercorporate relations are characterized by mutual trust. This trust may concern persons or firms that have committed themselves, even tacitly, to observe reciprocity norms (restricted reciprocity) among themselves, or instead persons or firms that do not directly relate, so that their relation presupposes an impersonal trust (generalized reciprocity). In an organizational field there may be one or more business groups defined by dense networks of stable relations among juridically separate firms. There is one single group when in the field only the group’s knowledge, norms and rules are enforced. In that case, the group imposes its own norms and practices and its own collective identity (provided that it has such an identity) over the field it occupies, without leaving space to other firms. While within the group, relations between individuals and groups are hierarchical, or “vertical,” the group relates “horizontally” outside itself—rather than with other groups—with the market and the state, which are institutions belonging to its own organizational environment the group does not succeed in totally controlling. Rather than control, within its national borders the group exerts its influence on the state and the market. However, this influence cannot be exerted on other states and on the global market. A group’s ability to obtain benefits thanks to its belonging to a network of relations—in other words, its social capital—is therefore possible only within the limits of national borders. Outside them, the group must compete either with individual firms or groups in order to survive and assert itself in the world market. Since the members of the group (individuals and firms) relate within it in an (at least prevailingly) instrumental way—that is to say, the group tends not to establish a community—the group, for the ends of international competitiveness, is generally lacking in affect-grounded and symbolic relations. Generalized reciprocity relations, which the group derives from participating in the global market community, are not counterbalanced in general by restricted reciprocity relations within the group, and even less, among groups situated within the national borders. Therefore, each group must count on its own resources, besides those that it might obtain from the state thanks to its privileged relations. These resources are, however, non-negligible, for the group can accrue material (such as equipment and capitals) and symbolic (such as information) resources the individual firms constituting it have available.

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Competitive advantages may be countered by production and/or distribution inefficiencies, which are caused by the power position held by each group on the domestic market, and turn (other circumstances being equal) into higher prices for final goods than those priced by competitors on the international market. Therefore, the respective competitive abilities of business groups may be compared with networks of small- and medium-size firms “horizontally” coordinated (therefore without power and authority hierarchies among them), which compete in the international market as well. The firms connected by these networks keep cooperation relations among them, which are not merely instrumental, but also—as regards the persons operating in these organizations—affect-grounded. The organizational field of these networks is wide and changeable, in the sense that entering in them and going out of them is an easy and frequent practice. As a business group, a network, too, can rely on its own material and symbolic resources. However, the (at least potential) extent of the organizational field sets scarce, and in any case elastic, limits to the attainment of resources. Whereas in the group the available personal resources are those of the families that own and control it, the resources available to the networks derive from the contributions brought by those who take part in them. Not only the families that own firms, but also simple employees may contribute to them, when not through their own economic capital, through information and social capital. Differently from groups, networks of firms do not exert any influence on the domestic market or on local political institutions. The government, parliament and public administration commit themselves to support the economic environment in which the networks operate, but there are no privileged relations between them and the state. Furthermore, in a group there is a vertical production integration, from raw material working processes to end products, and therefore difficulties in conforming to the fluctuations of the world demand for particular products. In networks, instead, production is “horizontally” coordinated through agreements with firms not interlocked in groups, and production can be more easily and quickly conformed to demand. The countries—such as South Korea—in which production is organized by groups that, jointly considered, control the domestic market and exert their strong influence on the local political/administrative authorities, approximate to an ideal–typical model of production organization model, called here “German.” This production model sets itself against an “English” model, in which production is carried out—as in Taiwan— through networks of small- and medium-size firms with no political influence, and cooperation relations established between firms and networks. Production specializations in groups and networks are frequently

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different: for example, cars and electronic large-consumption goods, respectively. However, when produced goods are the same, as in the case of semiconductors, empirical research has evidenced that the networks of small- and medium-size firms, interlocked by cooperative relations, have greater competitive ability in international markets than groups, because they are able to promptly conform to demand. The explanations that have been provided of networks’ competitive superiority in comparison with groups, make reference to organization theories, such as the structural contingency and ecological theories, and also to the neoclassical economic theory of prices in competitive markets. The theory of structural contingencies, which stresses the importance of small sizes as an advantage element in conforming networks to environment, does not seem convincing, because large sizes, too, can offer important advantages in this sense. The ecological theory argues that the environmental carrying capacity of an organizational population, in which organizations compete for their survival, depends on the size of organizations, their number and importance, as well as on the size of the organizational population itself. Though having smaller resources than groups, networks can successfully compete by filling “ecological niches” (specific production domains), thanks to their specialization. Keeping to this theory, this advantage may however be counterbalanced by groups’ greater economic resources, by their greater legitimation and their ability to manipulate the environment. Therefore, the ecological theory of organizations seems too generic for explaining the competitive superiority of networks compared to groups. Finally, the neoclassical theory of prices explains the competitive superiority (in the sense of a better ability to conform to the environment, that is to say, to the international market) of the countries in which networks of firms, rather than groups, characterize production organization by a greater variety of final goods produced for export (and therefore, a lower dependence on the demand for particular products) and a system based on competition, instead of an oligopoly, in the domestic market in which production is carried out, and consequently, by lower prices for exported goods. Competition and variety of final goods have however found, in the study to which reference was made (Feenstra, Hamilton 2006), a non-economic explanation, in terms of cultural traditions of those countries. An adhesion to traditional norms in corporate behaviors, whatever their production organization, would create on the other hand, insurmountable problems to firms in their relations with foreign countries, as they would clash with the need for impersonal trust that asserts itself in the international markets. The neoclassical economic theory, like the organization theories we have considered, does neither exhaustively

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explain the competitive superiority of the networks of firms evidenced by Taiwan, nor the recovery ability shown in recent years by South Korea, which instead has a production organization based on groups. Therefore, we have carried out a review of Toennies, Weber and Simmel’s contributions in this regard. Although all these authors have dwelt on the issue of trust in market transactions, they have, however, provided a different appraisal of it. Toennies’s thesis that business relations have an instrumental nature clashing with the affective and emotional character of the relations existing among the members of family or ethnic groups, not only is not empirically supported, but also did not encounter Weber’s and Simmel’s agreement, since both authors stressed instead the element of impersonal trust in market exchanges. In this sense, Weber used to speak about a market community. This element of trust—such as both authors, who will now be jointly considered, maintained—concerns all market exchanges, if the market is competitive. The presence of capitalist circles interested in exchanges, exerts in that case a control action on transaction transparency both for those circles and for others who share that interest. The ethical requirements of these circles meet with the public ethics embedded in the market as an institution. In Toennies’s language, corporate and communitarian elements are then intertwined. If instead market opportunities are closed because of the presence of privileged groups, other participants who intend to exert control on the fairness of exchanges in order to prevent opportunistic behavior have a very difficult task. The “English” model of intercorporate relations does not only involve a competitive market, despite the presence of mutual cooperation relations among firms and among networks, but also a business milieu that has adopted the ethical/political teachings of the liberal bourgeoisie and is, therefore, committed to keep an ethical behavior in market exchanges, avoiding at the same time trying to establish privileged relations with the political/administrative authorities. Therefore, the organizational field corresponding to this model of intercorporate relations includes the whole body of participants in the market, regardless of their position in it (whether in production, distribution or consumption), provided that they show business reliability. The contrast with the “German” model is clear, as in this model the organizational field is limited to the firms belonging to a group and to the state, and ethical relations are enforced only if they are convenient, that is to say, in the group’s transactions with foreign firms, with which it cannot enforce power positions, as the group operates in a market based on competitiveness. Focusing on the different structure of the organizational fields prevailing in the production organizations of South Korea and Taiwan, it is possible to acknowledge, but also integrate, the previously provided explanations

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of the better “competitive achievements” of Taiwan. Differently from South Korea, Taiwan firms manufacturing final goods, benefit first from sharing knowledge, norms and behavioral rules with other local and international firms, and second, from their limited size, which allows them to easily conform at a lower costs to international demand. With their local partners, these firms continuously exchange information and social capital, in addition to goods and services. In virtue of these regular exchanges, they can easily extend their social capital to new local partners and the foreign companies with which the latter keep relations. If there are difficulties in exporting some particular products, other products may be promptly offered to meet the international demand. It is noteworthy in this regard that in South Korea the business groups that best succeeded in overcoming the economic difficulties of the late 1990s, were those— the major ones—that had developed a collective identity of their own, thus intertwining in their relations Gesellschaft-like elements with other Gemeinschaft-like characteristics, and had opened themselves to foreign countries accepting to establish steady relations with foreign companies operating in the national territory. The element of trust is particularly important in financial markets, as it is relatively easy for some participants—failing effective controls— to profit by privileged information to the detriment of others, thereby obstructing the regular course of transactions. These participants are in general situated in a central position within the network of exchanges and have greater availability of resources, in terms of economic and social capital. Sociological research on financial markets has pointed out that the reliability of their behaviors depends not only on ethical beliefs, but also on the easiness to control each other in virtue of personal relations, such as those established in small, dense circles with stable ties, as well as on institutionalized external controls. As Weber concluded after having compared the relatively closed financial market of the Berlin Stock Exchange with the open market of the London Stock Exchange, the latter owed its ability to operate as a world capital market to the guarantee it provided to all participants—whether real or potential—that exchanges in it were fully conforming to ethical principles of fairness. Rather than from external controls made through laws and courts, this guarantee was the result of controls made within the financial market itself by brokers and traders in virtue of their strict and stable mutual relations strengthened by their common bourgeois/ capitalist social origin and by their common ethics in business, which had the same origin. These controls were integrated by an internal Court of Justice within the stock exchange, which however was rarely called. Paradoxically, the closure of the stock exchange brokers and traders to

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the outer world, by allowing an informal but efficient mutual control on exchange transparency, was actually a presupposition for extending the trust in this market to the whole financial community, and through it, to the whole market community. This behavior, inspired by bourgeois principles of absolute fairness and reliability in business, was rational in several senses. Instrumental rationality in relation to the purpose of gaining in transactions, for a different behavior would have involved for brokers and traders their permanent exclusion from the stock exchange. Value rationality, because this behavior conformed to socially widespread values of honesty and fairness in business relations. Finally, formal rationality, since this behavior conformed to capitalist requirements of predictability and calculability in economic action. Personal relations among the London Stock Exchange brokers went along with their sharing a common culture resulting from their common highly privileged social origin. Their organizational field was stratified into different levels: a first level was formed by knowledge, norms and behavioral rules connoting the closed brokers’ and traders’ circle; a second level included the other members of the financial community; finally, a third level included the market community at large. Therefore, one of the premises for a good functioning of financial markets, keeping to Weber’s thesis, is their inclusion in a market community approximating, as in the case of financial markets, the “English” model of intercorporate relations. Firms listed on the stock exchange are not able to control the market, which is competitive, and keep a separation between property and control. A capitalist/bourgeois ethics permeating listed companies and stock exchange operators involves the existence of ethical relations (regardless of whether they are established on grounds of conviction or expediency) among them, and between them and investors. They are in competition but also have cooperative relations (in the sense of fairly competing and, if necessary, become partners for a contingent common purpose). They keep, in their relations, to a principle of generalized reciprocity, while brokers and traders conform instead to a principle of restricted reciprocity. Finally, the stock exchange market occupies a central position within the market community, so that it constitutes a privileged financing channel for companies preferential in comparison with banks. Over the years that followed Weber’s times, stock exchanges have provided themselves with formal control bodies, and in recent times, have introduced operational practices that were not technically possible in Weber’s times. Nonetheless, in the London Stock Exchange (which Weber considered a well-functioning stock exchange model) traditions and habits continue to have great importance, to such an extent that nowadays the internal and informal control of exchanges still keeps the utmost

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relevance. On the other hand, the previously mentioned typical aspects of the “English” model are still enforced in the London Stock Exchange. Referring to these aspects, Weber argued the hegemonic position of this stock exchange over any other, and therefore—implicitly—the competitive superiority of the “English” model. We have seen that the London Stock Exchange still has a much greater economic importance than other stock exchanges, in relation to the actual economic size of Great Britain, being nowadays the major stock exchange worldwide as regards percentage and absolute number of foreign companies listed there. Weber’s thesis is then confirmed. A comparison with the Frankfurt Stock Exchange, currently the major one in Germany, brings further evidence. If the market in general, and the financial markets in particular, approximate the “German” model, the results are: a limitation in financial exchange volumes; a predominance of internal exchanges in comparison with foreign exchanges; their dependence on the banking system (in general, only the domestic one); and (other conditions being equal) a relatively greater competitive difficulty for firms on international markets, due to the difficulties in obtaining access to the international capital market through stock exchange operations. The importance of stock exchanges for the competitive ability of a country has also been recently recognized in Germany. The reform of the Frankfurt Stock Exchange, through strict controls on exchange transparency and the introduction of computerized procedures, has successfully aimed at opening the German economic system to the international financial markets. This country is, however, penalized by the central position that banks, instead of the stock exchange, still hold (according to the “German” model) within the financial system, and consequently, in the country’s economy. Final Remarks This book has focused on a reappraisal of the theme of trust in market exchanges, aimed at showing the relevance of Weber’s and Simmel’s contributions for an updated research on this subject. From both authors we have drawn alternative ideal–typical formulations—that is, opposing models—of intercorporate relations, as well as suggestions of the consequences, in terms of competitive advantages, for firms and market resulting from the approximation of a national economy to one model or to the other. We have concluded for the competitive superiority of the “English” model resulting from a variety of reasons that all concern trust in market exchanges. In fact, bearing in mind that these are ideal–typical abstractions, that only this model involves:

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a) A coincidence among organizational population, market (or business) community and organizational (or institutional) field. Accordingly, goal rationality is consistent with the formal and impersonal rationality of the market, insofar as congruent with the values of honesty and fair conduct of participants in exchanges, whether natural persons or firms. From this coincidence also follows that market exchanges are legitimate for non-participants as well. According to this model of intercorporate relations, the general legitimacy of market exchanges flows from the peculiar character of the market, when based on free competition. The market, if so characterized, is an open and egalitarian institution that provides collective protection of exchanges against misappropriations (since protection is institutionalized), and the same exposure for all participants to the positive or negative effects of changes in the economic environment. In other words, an expansion or a contraction of the world market may be beneficial or detrimental to all in the same way, disregarding the economic sector in which transactions are carried out. b) The greatest possible breadth in social capital and its availability to all participants without distinction, for all participants share an equal condition within the market and therefore have equal access to information and personal relations useful in exchanges. c) Personal trust among participants, who establish networks of direct relations conforming to the principle of restricted reciprocity, and impersonal trust in the formal fairness of transactions conforming to the principle of generalized reciprocity, are mutually supportive. The networks of direct relations allow all participants to exert their control on the other participants thus known, and make it individually convenient. On the other hand, generalized sharing of those values, which inspire the behaviors of an open and egalitarian market, makes each network strive to protect this market structure from closure practices. In other terms, open market protection is entrusted, rather than to juridical protection, to the participants themselves, gathered into circles in which internal solidarity supports the market as an institution and a moral community.

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Index

Abell, P. 75 Abolafia, M.Y. 10, 24, 68–9, 88, 93, 96 Adair-Toteff, C. 35 Albrow, M.T. 9, 13 Alexander, J. 78 Amsden, M.T. 56 Baker, W.E. 68 Baran, P.A. 44 Baron, J.N. 44 Baum, J.A.C. 10, 21–2, 24 Beamish, T.D. 16 Bearden, J. 44 Bellebaum, A. 35 Bendix, R. 81 Berlin Stock Exchange 45–6, 65, 81, 104 Beyer, J. 46–7, 93 Bian, Y. 38 Biehler, H. Bielby, W.T. 44 Biggart, N.W. 5, 6, 10, 16, 25, 31, 33, 39, 55–8, 63, 88 Block, F. 15 Boies, J.L. 44 Borchardt, K. 81, 86–7 Bottomore, T. 35 Boudon, R. 69–70, 75, 85 Bourdieu, P. 15, 60 Bradshaw, Y.W. 26, 56 Brantley, P. 57 Brewster Stearns, L. 38, 53 Brint, S. 9–10 Brubaker, R. 79, 85 Bruegger, U. 69, 97 Burris, V 44 Burt, R.S. 15

business community 5, 9-12, 15, 30, 47–8, 51, 58, 86, 89, 91, 99–100, 107 business groups 2, 5, 13–18, 25, 29, 43–5, 50–51, 56, 92, 101, 104 business milieu 5, 13, 15, 30–33, 42–3, 45, 50, 52, 91, 95, 97, 99–100 Cahnman, W.J. 9, 36, 39–40 Carruthers, B.G. 12 Cerulo, K.A. 16–17 Chang, S.J. 14, 17, 31, 55–6, 60, 92 Chinoy, E. 39 Chou, T.C. 58 City of London 95 Clark, G.L. 97 Clawson, D. 44 Clegg, S.R. Cohen, A.P. 9 Cohen, J. 78 Coleman, J.S. 14, 15, 70, 72–5, 84 Coleman, W.D. 93 Collins, R. Collins, S.M. 56 Community 5, 7, 9–10, 34, 99–100 Dauter, L. 11 Davis, G.F. 10, 17, 54, 59 Delle Fave, L.R. 44 dependency theory 26 Diamanti, I. 38 DiMaggio, P. 1, 10, 12, 14, 57 Dobbin, F. 57, 63 Donaldson, L. 21 Donati, P. 36 Durkheim, E. vii, 9, 12

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East-West Center 8 Economist Intelligence Unit 8, 61 Eisen, A. 79 Ekeh, P. 13 Elster, J. 12, 39, 69–72, 74–5, 83, 86 Emirbayer, M. 16, 55, 58 English model vii-ix, 5, 8, 14–15, 18–21, 25, 33, 51–65, 93–6, 101–103, 105–106 Erikson, E. 10 Etzioni, A. 9 Evans, P. 15 Faust, K. 92 Feenstra, R.C. 6, 7, 16, 19, 21–2, 24–32, 58–9, 61–2, 102 Ferrara, A. 9, 41 Ferrary, M. 12, 66 financial community 86, 91–3 financial markets 3, 42, 46, 52, 65–9, 81–97, 104–106 Fine, G.A. 16–17 Fischer, C.S. 37 Fligstein, N. 11, 57 Font, M. Fox, J.D. 55 Francis, D. 39–40 Frank, K.A. 18 Frankfurt Stock Exchange 94, 106 Freeman, J.H. 10, 24, 56 Freeman, M.T. 10 Freudenburg, W.R. 37, 40 Friedman, D. Frisby, D. 35 FWB Frankfurter Wertpapierbörse 94 Gemeinschaft vii–viii, 35–43, 51–2, 55, 57, 60, 62, 104 Gereffi, G. 61 German model vii–ix, 5, 8, 14–21, 25, 33, 51–5, 58–65, 92–6, 101–103, 106 Gerschenkron A. 46–7

Gesellschaft vii–viii, 35–43, 50–52, 55, 57, 60, 104 Giddens, A. 9, 13, 38 Goodwin, J. 16, 55, 58 Granovetter, M. 10–17, 19, 38–9, 56–60, 66 Griff, C. 47 Guest, A. 38 Guillén, M.F. 14 Haller, W. 15 Hamilton, G.G. 5, 6, 7, 16, 19, 22, 24–33, 39, 55, 57–9, 61–3, 102 Han, S-K. 55 Hannan, M.T. 10, 24, 56 Hardy, C. Harrington, B. 18 Hattoro, T. 6 Hazelrigg, L.E. Hechter, M. 75 Heckathorn, D.D. 12, 69, 72, 86–7 Hedstroem, P. 75–6, 84, 94 Heimer, C.A. 11 Hernes, G. Holton, R.J. 35, 41–2 Human Development Index 7 International Monetary Fund 6 Jacobs, D. 44 James, P. 9 Janoska-Bendl, J. 40 Janowitz, M. 37, 40 Jar-Der, L. 58–9 Kaesler, D. 39, 81 Kalberg, S. 79 Kanazawa, S. 75 Karageorgis, S. 39 Kasarda, J.D. 37, 40 Keister, L.A. 12, 88 Kerbo, H.R. 44 Kim, E.M. 56

Index Kim, Y.-J. 26 Kiser, E. 75 Kleinman, S. 16 Knorr Cetina, K. 67, 69, 94, 97 Kollock, P. 58-59, 72 Krueger, A.O. Lancaster, R. 67 Lanzalaco, L. 10 Lawrence P.R. Lee, A.B. 10, 21 Lee, B. 38 Lee, S. 5 Levine, D. 79 Lie, J. 11 Light, I. 39, 63 Lin, N. 10, 15, 17, 50, 60, 62 Lindenberg, S. 12 Lindner, C. 79 Logan, J.R. 37 London, B. 26 London Stock Exchange 46, 65, 67, 85–91, 94–6, 104–106 Macaulay, S. 10 MacKenzie, D. 69, 97 market community 1–3, 10, 41, 64, 84, 92–3, 103, 105–107 Marx, K. 44 McMichael, P. 6 Meier, G.M. Merton, R.K. 71 Meyer-Stoll, C. 81, 86–7 Michie, R.C. 91 Miliband, R. 52 Millo, Y. 69 Minz, B. 44 Mizruchi, M.S. 38, 44, 53, 68, 91–3, 95–6 modernization theory 26 Mommsen, W. 54 Mooney, M. 63 Moore, G. 44, 54

129

moral economy 1, 5, 10–13, 25, 30–32, 38, 50, 65-66, 68–9, 82, 86–93, 95–7, 99–100, 104–105, 107 Morgan, G. 16 Mosse, G. 39 Muench, R. 78 Murphy, R. 86 Nee, V. 16–17 neoclassical theory of prices 27–31, 102–103 Neuberger, H. 47, 92 Neustadl, A. 44 New York Stock Exchange 94–5 Nisbet, R. 9 Nord, W.R. Norkus, Z. 76 North, D.C. 13 Numazaki, I. 63 OECD Economic Outlook 61 Olson, M. 39 organizational field 5, 7, 10, 13–14, 17–18, 29, 32–3, 91–3, 96, 101, 103, 105, 107 organizational population 5, 7, 10, 13, 25, 31, 33, 107 Orrù, M. 15 Pacific Orient 31 Page, J. 26, 64 Parent, J.M. 10 Park, Y.C. 56–7 Parsons, T. 73, 77–8, 80, 85, 88, 90 Perrin, R.G. 9 Pieterse, J.N. 26 Polanyi, K. 13 Pope, W. Portes, A. 15, 17, 38, 63 Powell, W.W. 10, 17, 38, 57 Power, M. 12, 97 Preda, A. 67, 94

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Puhle, H.J. 47 Ragin, C. 5, 54 rational choice theory 69–77, 79–80, 85, 88 Rhineland Model 52–3 Ringer, F. 39 Roehl, J.C.G. 47 Salaff, J.W. 63 Sarbanes-Oxley Act 95 Sassen, S. 94–5 Sato, Y. 5, 6 Saxenian, A. 9 Scitowsky, T. 5, 6 Scott, J. 47 Scott, W.R. 10, 16, 57 Securities and Exchange Commission 90, 95 Segre, S. 85 Sensenbrenner, J. 63 Simmel, G. vii-viii, 1–3, 32, 35, 47–51, 53, 55, 60, 99, 103, 106 Singh, J.V. 21, 24 Smelser, N.J. Smith-Doerr, L. 17, 38, 57 So, A.Y. 26 social capital 5, 7, 17–18, 63, 107 Soros, G. 67 Spaeth, A. 31 Spitze, G.D. 37 Stamm, K.R. 38 Steinmetz, G. 39 Stern, F. 39 Stokes, H.W. 47, 92 Suh, S. 56 Swedberg, R. 11–12, 60, 66-67, 75–6, 84–5, 94–5 Sweezy, P.M. 44 theory of organizational ecology 8, 19–25, 101–102 theory of structural contingencies 8, 19–21, 101–102

Thrift, N. 97 Timmer, M. 6, 7 Toennies, F. vii-viii, 1–2, 9, 35–40, 47, 60, 103 Tokyo Sock Exchange 94 Tommasi, C. 81 Tribe, K. 81–2 Trigilia, C. 13, 53 Turner, B.S. 47 Turner, S. 35, 41–2 United Nations Development Programme 7 Urry, J. 9, 37 US-China Business Council 8 Useem, M. 44 Uzzi, B. 19, 66–7 Vallas, S.P. 18 van Ark, B. 6, 7 Vogel, D. 44 Wallace, M. 26 Wasserman, S. 92 Watier, P. 48 Weber, M. vii–viii, 1–3, 11, 14, 29, 32, 35, 40–45, 47, 51, 53–5, 58, 60, 65, 70, 73–4, 77–86, 93, 96–7, 99, 103–106 Wenger, M. 42 Whalley, J. 8 White, H.C. 66 Whitt, J.A. 44 Williams, F. 39 Williamson, O.E. 14, 19, 39 Wilson, H.T. Windolf, P. 46–7, 93 Wirth, L. 40 Wong, S. 63 Woolcock, M. 11 World Bank 26, 64 World Economic Forum 7, 95 Wright, E.O. 39 www.deutsche-boerse.com 94

Index www.economist.com 6 www.londonstockexchange.com 94 Yasumoto, J.Y. 18 Yeh, K. 58–9

Zaret, D. 5 Zeitlin, M. 44 Zelizer, V.A. 49, 68 Ziegler, R. 44, 46

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