Behind the Market Sta=
ge where
Real Societies Exist
W=
riting at
the time of “Washington Consensus” policies.
“…current
diagnosis about growth failures… that government’s behavior and
excessive interference with economic activities are considered the source of
nearly all the existing troubles.”&n=
bsp;
(p. 534)
Free market forces
Strengthen market mec=
hanisms
Reduce the role of th=
e state.
‘The way the re=
cipe is
usually presented implies or suggests that the market is system that can be
planted with guaranteed success at any soil at any time.”
Perhaps supporting
infrastructure may be needed, but the market is seen as transferable.
Contrast to Weberian view that markets function only if embedded =
in an
appropriate social structure.
This ensures market o=
rder by
ensuring low cost enforcement of rules, allowing the emergence of honesty a=
nd
thus trust.
Writing in reaction t=
o Granovetter’s 1985 ‘Economic Action and S=
ocial
Structure: The problem of
Embeddedness”
T=
wo main
points.
1) First, looking at market rules and= how they can emerge. He defines t= hree main types of rule systems: <= o:p>
Established and susta=
ined in
a spontaneous decentralized way (good equilibrium from the
beginning)
Through conscious
coordination (multiple equilibria exist, want t=
o get
to the good one)
Resorting to external
sanction systems (stuck in a bad equilibrium)
=
2)&n=
bsp;
Institution=
s are
not sufficient to make the market order an effective regulating device. These institutions need to be supp=
orted
by norms of generalized morality.
Society, culture, and historical processes matter. Critical of new institutional econ=
omics,
that identifies institutional change as a response to informational
constraints. And that these e=
volve
in response to changes in relative prices.
=
1.&n=
bsp;
The social
conditions of the market.
The market mechanism =
consists
of the free play of abstract (supply and demand) forces linking anonymous
agents together in a decentralized way.
Personal relations ca=
n exist,
but have no bearing on the transactions.
Individual identities=
and social
backgrounds do no matter.
Self interest propels=
market
behavior.
This was a selling po=
int
– methodical action by interest-guided behavior preferable to those
generated by feelings.
M=
arxian
analysis.
In traditional or
In capitalist society,
individuals are abstract actors who are not socially differentiated. Laws and rules exist not for the p=
urpose
of differentiating people, but for defining rights and duties of agents
considered strictly equal in the market.&n=
bsp;
People become differentiated by objectifying themselves in money val=
ues. ‘money
unifies a society of independent beings.’
‘money
is man’s alienated self’.
A person’s attr=
ibutes
are a function of purchasing power, not inherent.
Markets have the powe=
r to
transfigure persons by erasing or concealing their original personal traits=
and
substituting new qualities acquired by money.
Money appears as a co=
ncrete
instrument which enables individuals to abstract or detach themselves from
their community background to meet as impersonal beings.
Growing ability of
individuals to distance themselves from the pressures of community live and
thereby enlarge their possibilities for intensive self-seeking capital
accumulation.
The problem of market=
order:
How is it that each acting in his or her own self interest leads to s=
ocial
order and cohesion and not anarchy and chaos?
Standard general equi=
librium
theory assumes people are candidly selfish, but incapable of malevolence.
One way of thinking a=
bout it
is that it is assuming perfect information / perfect competition prevents a=
ny
actual manifestation of fraudulent behavior.
‘perfect
competitions turns out to be the absence of all interaction among
individuals’
Trying to explain how=
market
norms can emerge from the free interaction of rational selfish agents. ‘an
auctioneer emerges’
Stable order can be p=
roduced
in the markets only by assuming the existence of social rules or norms
constraining individual behavior.
Some theoretical atte=
mpts to
address this, but make assumptions about information sharing that are not a=
ll
that plausible.
…it is impossib=
le to
bring out the coherence of the market system without positing fundamental or
constitutive rules that constrain the agents’ behavior. The problem of institutions or soc=
ial
norms can not be evaded. North
‘to reduce uncertainty by establishing a stable (but not necessarily
efficient) structure to human interaction’
T=
ransaction
costs – the costs of measuring the valuable attributes of what is bei=
ng
exchanged and the costs of protecting rights and policing and enforcing
agreements.
P=
risoner’s
dilemma.
R=
epeated game.
T=
it for
tat.
Bilateral reputation
mechanism, works in small groups with repeated interactions over time.
M=
ultilateral
reputation mechanism. I refuse to deal with anybody who =
has
cheated a member of my community.
Community is an information sharing mechanism. (what i=
s the
punishment for those who refuse to punish?) Moral norms can arise within the g=
roup
to support this piece of the puzzle.
This works, but the s=
ize of
the group will influence the ease of information transmission. Across groups, trust is
manufactured. Gift
exchange. We could thi=
nk
about the exchange of gifts as a practice supporting and underlying trust by
being a transaction in the non-commodity sphere. Conversion or being absorbed into a
religious system can be another way of manufacturing trust.
Trade takes place wit=
hin
these communities and across linked communities. With strangers, ‘purely comm=
ercial
trade relations are understood as a kind of interaction akin to the state of
war’.
=
Granovetter, with his ‘embeddedness’ article, a=
rgued
that the role of personal relationships is the structure that fulfils the
function of sustaining order.
Rational individuals =
are less
interested in general reputations than in whether a particular other may be
expected to deal honestly with them.
We will cover the
Issue of imperfect
information again arises. How=
can
we get people to agree to enforce if information is imperfectly shared? One idea – the merchants est=
ablish
private judges who centralize information and act as adjudicators. The
‘law merchant’ example.
Move to a state enfor=
cement
system.
I=
I Trust and Generalized morality.
‘dense
networks of close and continuous business relationships are not sufficient =
to
solve the problem of trust in market exchanges when the division of labor is
well developed.’
The state can fill th=
is role.
However, as he notes,=
the
state can also be too strong with denunciations and the like in the
To limit this, the do=
main of
public power must be restricted.
“life in society as we know it woul=
d be
intolerable if formal rules should be required for each and every area where
interpersonal conflict might arise.
The cost of operating=
law enforcing
agencies must not be too high.
C=
onvergent
expectations.
Assurance game page 7=
57
Dynamic aspects ̵=
1; can
‘cheater’ types invade and replace honest types? Can the presence of cheaters turn =
not
cheaters into cheaters? ̵=
6;mutants’
765 – moral norms.
Honesty is more likel=
y if:
1)&n=
bsp;
a large number of people have a preference for ho=
nesty
to start with.
2)&n=
bsp;
They have
sufficient trust in others’ predisposition toward honesty.
3)&n=
bsp;
Their bent =
for
honest is strong enough not to be easily discouraged by bad experiences whi=
le
it is easily enforced by good experiences.
4)&n=
bsp;
Cheaters are
subject to strong guilt feelings when they are free riders among many honest
dealers
5)&n=
bsp;
Honest peop=
le are
willing to sanction breaches of honesty conventions even when their own
interests have not been harmed by the observed breach.
G=
ets into
the idea of internalization of norms. This gets us to an idea that emoti=
ons
return to have a positive role in society as they lead to internalization of
constructive norms.
For generalized moral=
ity to
be capable of sustaining order in the marketplace it is essential that conc=
ern
for others or ability to see things from another’s viewpoint be based=
on
feelings toward a large reference group actually encompassing all the relev=
ant
market transactions.
(Do unto others /
=
Generalizable ethics “shatters the fetters of kin”=
;
This suggests that th=
e rise
of markets in the west originates with a somewhat unique history rooted in a
culture of individualism pervaded by norms of generalized morality.
However, moral norms =
are
subject to ‘erosion’. Reinforcement as ‘secondary socialization’. Primary is with parents / family,
secondary is in schools, churches, factories….
A=
lso from
the state / rulers. Positive demon=
stration
effect.
Civil society also can
reinforce norms through exposure and sanction.
‘Role models as
signaling device that there are honest people around’, and can be
‘norm reactivators’.
‘Rather than a =
habit
leading to mechanically determined outcomes, generalized morality appears a=
s a
predisposition towards co-operation that may be activated by certain favora=
ble
circumstances and remain latent when these circumstances are absent’.=
T=
hey
dynamics of norms – where do they arise?
Hulme, evolutionary approach to institutional change. M=
oral
behavior arises from rational considerations. People think it through and realiz=
e they
need rules and norms to guide them for commercial society to work. People figure out that unbridled
selfishness undermines them both, so they try to figure out how to find rul=
es
of social regulation. Hulme =
identifes property, law, government as outcomes of the
evolution of human society.
Rules and norms serve as an assurance device, and can be passed on
through education and customs to become internalized. Markets create an incentive / bene=
fit to
develop rules, leading to spontaneous market order. Markets gradually and unconsciously
create the social conditions that make them viable. Commerce brings about moral improv=
ement.
In contrast, we have =
Burke and
others arguing that the needed moral norms must pre-exist in society for a
market economy to develop. Pa=
rsons
‘society is prior to and regulates utilitarian contracts between
individuals’.
Smith, while seeing t=
he
market as a source that generated ‘better behaved’ people saw an
additional need for developing institutions, and viewed it as a political
task. The social order of the
market must be fabricated in a political context to ensure that self intere=
sted
behavior was socially desirable.
A critical question:<=
span
style=3D'mso-spacerun:yes'> how can trust arise in a society w=
ith a
history of distrust? One sugg=
estion
is an external agency provides assurance.&=
nbsp;
But why trust the external agency?
Idea of path dependen=
ce
– the process by which we arrive at today’s institutions si relevant and constrains future choices.
He notes that when we=
look at
Greif, we should keep in mind that the expansion of trade was not a result =
of
new institutions arising in response to new gains from trade. They were a precondition for trade
expansion, but are tied to social and political factors. This is at odds with the ‘in=
duced
institutional change’ version of the Hulme
approach described above.
T=
he erosion
of moral norms.
A fundamental idea is=
that
the self interested behavior that makes markets work also carries within it=
the
incentives to undermine the institutions that restrain self interest yet ma=
ke
markets work. There is a logi=
cal
tension that continues to play out over time.
One reason this may b=
ecome
more pronounced is that through division of labor and specialization, the
family component of socialization becomes undermined, thus undermining the
primary socialization of the needed norms.=
Another is that as
consumerist society expands, it undermines our ability to identify with a
larger society, so we lose the empathy for others that is the foundation of=
the
norms in the first place.
I=
V The risk of transplanting the market into unreceptive soils.
The main tension is b=
etween
the identity based networks coming into contrast with the impersonal nature=
of
market relations. A few cases=
are
presented to illustrate these tensions.
Conclusion:
Generalized morality = is not a commodity that can be easily called for as the need arises. It is actually embedded in the historically-determined cultural endowment of a society. Government can play a role in supp= lying this, but needs something to build upon already in the cultural endowment.<= o:p>
It needs to occur as =
people
are freeing themselves from old ties (to become part of the generalized mar=
ket
society).
And the state needs t=
o be ‘an
impartial third party’, rather than a corrupt / biased patronage mach=
ine.
In the end, he cites =
the role
of civics, which gets close to some of the governance concepts we have work=
ed
with so far. Here the nuance =
is
that: we need norms to be changing to allow generalized morality; we need t=
he
state to foster the emergence of these norms; the state can foster them by =
good
governance or undermine trust even further by bad governance.
Moore in response:
One point is that muc=
h of
what markets do is inter-business, rather than consumer market. Inter business markets lend themse=
lves
to repeated interaction, and are the ones to expand if the market is to exp=
and.
Another is that insti=
tutional
and corporate reputations may enter into the system. Buying Wegman=
’s
milk is based on a trust level with the Wegman’s=
institution.
He notes that the bas=
ic model
of perfect competition in some ways blinded economists to the way inter
business markets actually work. If
prices are all that matters, then we don’t have to worry about social
networks. But the practice of
business seems to have quite a significant element of networks.
Another problem has t=
o do
with dividing the world into ‘economic’ and ‘social’=
;,
and positing tension between the two.
Like “behind the market stage where real societies exist’=
;. Social are affective, benign, mark=
et are
self-interested.
‘sociologists
seem generally to have viewed themselves as guardians of a distinct and
valuable sphere of human life under threat from the market’
Fafchamps and Minten
Recently liberalized,=
and
Basic idea at the sta=
rt: Formal legal institutions are powe=
rless
to deter malfeasance unless victims voluntarily seek their protection by
reporting crime to authorities and brining legal suit against opportunistic
breach of contract.
Benefits outweigh cos=
ts if
they go to the formal institution.
=
1)&n=
bsp;
cost of leg=
al
action
=
2)&n=
bsp;
time factor=
=
3)&n=
bsp;
uncertainty=
about
compensation
=
4)&n=
bsp;
fear of rep=
risal
Although hard evidenc=
e is
lacking, there is a case to be made that things are pretty bad with
People don’t ha=
ve much
confidence in the courts and justice system by the findings of an attitudin=
al
survey.
The business community
appears to rely on arrangements amongst themselves that are based on
trust.
Data gathered in 1997=
, three
regions. =
850 the
first visit, 739 the next.
Traders at three leve=
ls:
=
1)&n=
bsp;
Urban trade=
rs in
the regular markets.
=
2)&n=
bsp;
Urban trade=
rs
outside the regular markets.
=
3)&n=
bsp;
Traders in =
rural
markets.
These traders trade:<=
span
style=3D'mso-spacerun:yes'> rice, cassava, potatoes, beans, and
peanuts.
67% report rice is th=
e main
component of their trade.
Table one shows annua=
l sales,
and value added estimates. No=
te
high standard deviations.
Gini for sales is .76=
, for
value added is .70.
Average trade margin =
is 15%,
there are multiple trades to get to the consumer – the consumer price=
is
75% higher than the final price.
Working capital of ab=
out
$2000, few have own transport, few use phones.
Most transactions are=
in
cash, a few on credit.
Table two for theft a=
nd
breach of contract incidence.
On average less than =
5% of
sales and purchases were affected by breach of contract, and 8% experienced
theft.
How to reconcile with=
the
finding that of 364 interviews conducted by the ministry of justice, 65% of
people listed theft as their number one concern?
The lower incidence r=
eflects
steps taken to lower exposure. Over
a third refrain from hiring somebody new for fea=
r of
exposure. Think about that in=
terms
of the employment generation that never happens.
Table three takes us =
through
some exposure indicators.
Table four shows that=
they
check each delivery for quality.
This means you have to be there, and you have to go through the rice=
to
check for bad quality mixed in. That
would be a bottleneck!
Not storing stocks ov=
ernight
eliminates the risk of theft. But
also of selling the rice the next morning!
See table 5 for t tes=
ts, and
six for regression results. N=
ote
endogeneity issues. Also, it =
is a tobit model (but I think it is a two stage switching t=
obit)
V=
arious
other measures in other tables.
Most things are as
expected. One interesting ins=
ight
is that traders with family members in the business face a higher incidence=
of
contractual breach.
This tells us somethi=
ng about
when it is more likely that a theft or a breach will occur.
Then the next questio=
n is
what happens if one does occur.
T=
able 11. O=
nly
around a third of the time do you call the police. And there is no effect on the
probability of recovering stolen items if you call the police. Of those who went to the police, 2=
4% got
the stuff back. Those
who did not, 35%.
T=
he threat
of courts and the use of courts pretty minor. T=
hey
solve it face to face.
Contractual obligatio=
ns are
seen as ‘outside the purview of the law’.
Recourse to courts an=
d police
is low because traders perceive these institutions to be too antagonistic a=
nd conflictual. <=
/span>
When they sort it out
themselves, they succeed (85%) and trade is resumed (91%).
Breach of contract oc=
curs
within the context of long term relationships.
The trade relationship
constitutes its own collateral.