2

Markets and Networks

In Thomas Hardy’s 1886 pessimistic novel set in rural England, The Mayor of Casterbridge, Donald Farfrae, a self-described “struggling hay-and-corn merchant” from Scotland, visits Lucetta Templeman, a wealthy heiress. Through a window, they observe the village’s annual hiring fair where laborers seek farm jobs. They overhear a farmer from a distant county refusing to take an old shepherd unless his robust son is part of the bargain. But, the son is reluctant to go because he would have to leave behind the girl he loves.

Lucetta’s eyes, full of tears, met Farfrae’s. His, too, to her surprise, were moist at the scene. “It is very hard,” she said with strong feelings. “Lovers ought not to be parted like that! O, if I had my wish, I’d let people live and love at their pleasure!”

“Maybe I can manage that they’ll not be parted,” said Farfrae. “I want a young carter; and perhaps I’ll take the old man too – yes; he’ll not be very expensive, and doubtless he will answer my pairrpose somehow.”

Farfrae goes outside and hires both son and father. Lucetta praises his kindness and vows “that all my servants shall have lovers if they want them! Do make the same resolve!” Apparently thinking he may have acted rashly, Farfrae replies, “I must be a little stricter than that,” and concludes, “I try to be civil to a’folk – no more!” This fictional incident shows how emotion and sentiment disrupt rational bargaining in the Casterbridge labor market. The hiring process is embedded in social ties that may override pure cost-benefit calculations, as exemplified by the farmer’s offer. Economic network analysis clarifies the impact of diverse social relationships on market dynamics.

A market is a transaction system in which sets of buyers and sellers exchange money for a good or service. The actions by members of both sets comprising the market for a specific product – whether potatoes at a local farmers’ market or derivatives in an international financial market – jointly determine its equilibrium price. As discussed in chapter 1, the neoclassical model of perfect competition assumes the absence of market power: buyers and sellers are too numerous and too small for individual actions to affect prices. Instead, the intersection of all participants’ aggregate supply and demand curves determines both the quantities and prices that “clear the market.” This market model further assumes that information about prices is quickly available to all participants at negligible cost, hence neither opportunism nor strategic manipulation are possible. Because previous transactional histories are unrelated to current price-setting exchanges, markets are atomized institutions in which the social, political, religious, cultural, and other connections among participants are irrelevant. Free markets form the ideological bedrock of modern capitalist economies: if producers and consumers can freely pursue their self-interests, without government interference or constraint, they will collectively choose the most efficient allocation of scarce resources, thus maximizing the utilities of individuals and society. In The Wealth of Nations (1937 [1776]), Adam Smith encapsulated this principle in his famous Invisible Hand metaphor of a capitalist who “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (Book IV, Chapter II, paragraph IX). The self-regulatory dynamics of unfettered markets allegedly create the best of all possible economic worlds.

Economic sociologists and social network analysts reject this Candidean imagery in favor of socially embedded perspectives on markets. Economic exchanges are not isolated from other societal systems, but are continually shaped, impeded, and distorted by social relations linking market participants to diverse societal institutions. Constant intermixing of economic and noneconomic activity results in the “embeddedness of economic action in social networks, culture, politics and religion” (Granovetter 2005a: 35). Social norms, habits, and customs – created and reinforced within kinship groups, friendship cliques, cultural circles, ethnic communities, religious organizations, and political parties – may affect market transactions under a variety of conditions. In contrast to the neoclassical market’s free flow of information among the atomized actors, the networked market model assumes differential communication relations among and between buyers and sellers.

The sociograms in figure 2.1 sketch these contrasting market images, with letters representing buyers (B) and sellers (S) and lines representing their direct communication ties. In a neoclassical market, the buyers are unconnected to one another, as are the sellers. All price information flows between each set, either by direct communication or through open media such as stock-exchange tickers or Websites. In a networked market, buyers and sellers can communicate among themselves, and not everyone is privy to the same price information. Information may be impacted, targeted, disrupted, distorted, blocked, or accessible only through selected channels at substantial cost. Sellers and buyers may collude and coordinate to gain market power advantages. They may form coalitions to undertake collective actions to raise or lower prices for self-interested, even corrupt, purposes that could be detrimental to the larger community’s well-being. Brokers may emerge who find, assemble, and selectively disseminate data to privileged clients for a fee. Market behavior cannot be explained just by rational, utility-maximizing calculations of unconnected buyers and sellers, but must take into account diverse social structures and their attendant psychological motives, such as imitation, persuasion, altruism, even “irrational exuberance” and “animal spirits” (Keynes 1936; Akerlof and Shiller 2009).

Figure 2.1 Neoclassical and networked markets

This chapter examines network structures and processes in three basic types of markets: labor, consumer, and production. A fundamental proposition on market networks is that the participants’ demands for and supply of goods and services are influenced by their direct and indirect relations with one another and also by connections to social actors uninvolved in the market. Another pervasive theme is that the strength of ties among participants and nonparticipants vary in their consequences, with weak ties sometimes more valuable, while under other conditions strong ties can be more important.

Labor Markets

Along with capital and land, labor is one of three traditional inputs to economic production. A labor market is a market where workers (suppliers of labor services) compete for jobs and employers (demanders of labor) compete for employees. The price of labor is wage compensation, typically paid either as an hourly wage rate or as earnings in the form of a monthly or annual salary (piece rate is a rarer third form of payment). Compensation packages may include both direct monetary pay and nonwage (“fringe”) benefits, such as housing, medical care, pensions, and keys to the executive washroom. In contrast to commodity markets, and despite Marx’s critique of “labor commodification,” the price of labor is not strictly determined by the equilibrium intersection of labor supply and demand curves. Unlike iron ore, cabbages, and widgets, additional workers cannot be mined, grown, or manufactured when employer demands for more labor increase. As biological and social beings, employees have limited hours that they’re capable and willing to supply as more labor in exchange for higher compensation. As members of families and voluntary associations, they have distinct preferences for leisure activities versus additional income-generating work. When firms demand more labor, and hence offer higher pay, employees become less willing to supply additional labor (e.g., by working overtime). Instead, they prefer to substitute greater leisure for more work, a tradeoff labeled the “backward-bending labor supply curve” by mainstream economists. This relationship implies that workers’ embeddedness in social networks and family norms shape their preferences about a suitable mixture of work and leisure activities.

For some purposes, labor markets could be treated as homogeneous; that is, all workers are assumed to have roughly equivalent skills and to compete for all job openings in the economy. In such undifferentiated labor markets, relations among workers and firms tend to be diffuse and random, carrying predominantly low-quality information about available job opportunities. However, for other analytic purposes, labor markets should be conceptualized as segmented, or differentiated, by types of labor supplied. Job-seekers possess real differences in skills and experiences that make them more or less valuable to certain employers....