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GRANOVETTER, M. (1985) – Economic Action and Social Structure: The Problem of EmbeddednessAmerican Journal of Sociology, Vol. 91, No. 3, pp. 481-510.

Summary revised in 2013

Summary:Throughout this text, Mark Granovetter attempts to contribute to the ancient discussion of how behaviour and institutions are affected by social relations. He is trying to make the case that economic behaviour should be regarded as embedded in social relations in contrast to the approaches that occupy the individualist or the structuralist pole. The embeddedness approach, he claims, can be the way out of the false dilemma of under- and oversocialized conceptions of human behaviour.

One of the most fundamental questions of social theory is the conception of human action. This by no means trivial question has been most influentially grasped by the Parsonian sociology. In his voluntaristic theory of action Parsons offered an account of human behaviour as being to a large extend structured by internalized norms and values. That – accorfing to many – resulted in an oversocialized, deterministic standpoint. Other schools – the classical and the neoclassical economics in particular – ventured in the opposite direction. Departing from the model of perfect competition, these scholars viewed social relations as a frictional feature, impeding competitive markets. They also shared the common assumption that economic behaviour used to be deeply embedded in social relations in pre-modern societies, but with the development of modern markets economic behaviour gradually became less dependent and more rational indeed.

Granovetter, in contrast, argues that the state of embeddedness of economic behaviour doesn’t differ much in modern and tribal societies, and that in both it is substantial. Ironically, both the under- and oversocialized accounts share the assumption that the actor is best to be approached as an atomized unit. While the undersocialized account stresses the pursuit of self-interest, the oversocialized account puts emphasis on internalized behavioural patterns, which then make an added element in the individual decision-making process. Both approaches, however, ignore the embeddedness of purposive action in concrete, ongoing systems of social relations.

The importance of an appropriate conception of human action becomes apparent in the problem of malfeasance in economic life. Previously, economists withheld peculiar assumptions about what discourages fraud or force. Competition, it was claimed, may suppress malfeasance to an extent. Also, as long as economic competition is a civilized matter, it was assumed that it is mostly pursued by gentlemanly means. Even Hobbes himself, however, noted that there is nothing in the intrinsic meaning of “self-interest” that excludes force or fraud. The school of new institutional economics (representing the undersocialized approach) retreated to the idea of impersonal institutions. It was assumed that malfeasance is comparatively rare thanks to advantageous institutional settings which make it costly to cheat, and which emerged as evolutionary solutions of perpetual economic problems. Such institutions do not seem to generate trust – they merely substitute it. It was acknowledged, however, that some amount of trust is necessary for effective functioning of the market. Economists resolved the tension by introducing the idea of generalized morality, which forces actors to remain upright in face of opportunism (the oversocialized account).

The inadequacy of both aforementioned approaches gives resonance to the embeddedness argument. The author stresses the role of concrete social relations and structures in generating trust and discouraging

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malfeasance. Trust or reputation is not a generalized commodity – it is distributed on the basis of personal or mediated experience. Continuing economic relations are often overlaid with social content that carries strong expectation of trust and abstention from opportunism. Social relations, however, do not simply preclude malfeasance in a functional way. Social relations generate trust, but they also mean enhanced opportunities for its misuse.

Finally, Granovetter criticises the approach of the new institutional economics represented by O. Williamson’s ‘market and hierarchies’ project. Williamson provides an account of distribution of transactions between hierarchical firms and open markets. Among the arguments deployed by Coase half a century earlier, he argues that location of transactions within a firm can be explained through the advantages of ‘bounded rationality’1 and ‘government structure’2. Granovetter argues that the clarity of internal communication of a firm – so much appreciated by Williamson – is overrated and that there is no evidence for the assumption that there are radically looser relationships between actors outside the corporate organization than within. He argues that making a sharp division between “the market” and “the firm” is counterproductive, as in reality the most common mode of economic functioning is a ‘quasifirm’. It may be that the advantages that we associate with a firm do not follow from the formal establishment, but from provision of a denser network of actual social relationships, which determine the high or low efficiency of a particular organization.

Granovetter argues that a balanced and symmetrical argument requires attention to power in market relations and relations within firms. It is necessary to pay attention to the embeddedness of economic rationality in social structures, and it is therefore wise to abandon overarching generalizations and cede to a more proximate level in order to truly grasp the working of the system. The assumption of rational action is problematic, but bearing. What needs refinement is the standard of rationality, which has to incorporate the idea of embeddedness. It is therefore not only that sociology has something to say about economic behaviour – previously exclusively confined to the science of economics – but that sociological expertise there is desperately needed.

1 Actors are unable to predict future contingencies; these can be easier settled internally.2 Opportunism of actors can be overridden by the governing authority.

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