A model of network capitalism: basic ideas and post-Soviet evidence.

Author:Oleinik, Anton

Localized Transactions as a Subject of Study

Modern discussions on network capitalism shed light on the thesis about the existence of a plurality of models of capitalism. According to a quantitative evaluation of managerial and economic literature, the frequency with which the term "network" is used has risen dramatically during the last decade (Boltanski and Chiapello 1999). The basic idea of network capitalism involves the localization of transactions: economic subjects act locally instead of being involved in transactions in a depersonalized market with a potentially unlimited number of participants.

Mainstream economics has never been characterized by any special interest in the interactions between participants that are socially and spatially close. "Spatial economics and particularly the theory of the location of industrial enterprises flourished in the 19th century, but they were developed in complete isolation from mainstream economics, both classical and neoclassical" (Blaug 1994, 568). This should come as no surprise since a limited number of participants and their nontrivial capacity for influencing outcomes contradict the principles of perfect competition and distort the price mechanisms for reaching a general equilibrium. Even economists who were interested in localized transactions usually paid attention only to spatial closeness; they have been studying the issues related to differential rent, transportation costs, and so on. But geographical space is not the only factor of localization. The same process can be observed in institutional and social spaces. For example, a deal with a supplier that is geographically close can increase costs, if there are doubts as to his reliability. The concept of net work capitalism does not imply an exclusively spatial basis for localized transactions. This accounts for a noticeable difference from traditional and more conventional approaches. (1) The concept of network capitalism can be used to study relations concerning scarce resources when these interactions are bounded in geographical, social, or institutional space. The number of participants is limited, and it influences the final outcome of the interactions.

While mainstream economic theory is of no direct concern to the issues of localization, the institutional approach appears much more fruitful from this point of view, especially in terms of the paradigm of "old" institutionalism and new institutional economics. (2) Historically speaking, the concept of network capitalism refers to a piece in the edifice on which construction was started in the nineteenth century by Karl Polanyi (his concept of "embeddedness" is of particular note), Thorstein Veblen, and John R. Commons (there are links with their concern about collective reciprocity) and continued by modern nonorthodox institutionalists. Mainstream economists, including adepts in neo-institutional economics, are able at most to perceive only one aspect of economic closeness, namely spatial closeness (for example, with the help of the notion of transaction costs). By contrast, nonorthodox economists who are interested in institutions, and particularly in norms and values as factors of market play, can take all aspects of localized transactions into consideration. This article should be viewed as an attempt to summarize recent developments concerning the concept of network capitalism. A more broad and insightful study would be necessary to gain a better understanding of how the existence of networks affects outcomes for pricing, output determination at the micro-level, and cyclical movements, namely to answer a number of questions that economists are accustomed to: Yet, this work remains to be done in the future.

An additional comparative advantage of the concept of network capitalism lies in its applicability to the analysis of the socioeconomic systems representing different stages in historical development. On one hand, this term describes market institutions at the early stages of their evolution, when they are not completely differentiated from social institutions: family, sects, political community, friends, patron/client relationships. On the other hand, as economic sociologists have shown (see, for example, Granovetter 1985), even the modern market is embedded in the institutions whose existence favors the social closeness of its subjects. For example, Mark Granovetter explained the particularities in the industrial organization of electricity production in the first half of the twentieth century--a high volume of electricity produced by private generating units operated by households and firms--by the role played by the network of friends and acquaintances of Thomas A. Edison, inventor of industrial electricity (Granovetter 1994, 89-91). From some points of view, the universal character of the concept might be considered a shortcoming: we need to strongly differentiate common and specific features of the localized transactions in different socioeconomic contexts. Thus, we will pay special attention to the variability of setting up the localized relationships (the second part of this paper) and to a discussion of alternative concepts helping us to understand their nature (the third part). The question of terminology is important less from a linguistic point of view than as a condition for developing a model describing the particularities of the market institutions emerging in the post-Soviet countries. Epistemologically speaking, "we must clarify the basic concepts in order to identify the appropriate questions to be raised and the data to be collected" (Menard 1995, 161). In conclusion, we will discuss the economic and social consequences of network capitalism in its different forms.

Different Paths to Localization of Transactions

There are two paths to localization of transactions: an evolutionary path, when localization results from a spontaneous process, and conscious efforts made in this direction by economic subjects. The evolutionary path corresponds to a situation in which economic action (3) is not differentiated from other everyday activities, mainly from the relationships based on family and kinship. The market is embedded in social ties and structures during the initial stages in its evolution, which limits the scope of economic activities. As far as the second path is concerned, a conscious localization of market transactions is observed in the context of modernity, namely when the spheres of everyday lire are still differentiated. For example, a high level of uncertainty in the external environment incites the individual to protect himself by means of a "protective belt" of the networks (sec Roche 1993, 172). While evaluating potentially large, yet uncertain, profits from transactions with a new partner, the economic subject might prefer a lesser, yet sure, gain from transactions with an old and trustworthy partner. Let us take a closer look at both examples of localization.

Localized Relationships Emerged in an Evolutionary Way

Economic history is rich with examples of the economic transactions embedded in traditional social structures. In her study of a traditional African society, the Orma, Jean Ensminger, American anthropologist, emphasized that its members view including the market partner into their families as a guarantee against opportunistic behavior on the market. "The Orma still place an exceedingly high premium on having at least one close relative of the family in the cattle camp" (1992, 116). This allows them to prevent the opportunism of the agents--the herders at remote cattle camps. In the same way, a medieval merchant would not send cargo into a new region without a relative who is charged to negotiate the sale and obtain a return cargo (North 1990, 120). There are natural limits to the spread of the economic "network" exclusively on the basis of kinship. In the history of Japan in the nineteenth century, Francis Fukuyama found an interesting way to get around the natural limits of family and kinship. Contrary to the Chinese tradition of dividing family estates among sons, in Japan an outsider could become the principal and sole heir, provided that he had undergone the appropriate legal procedure for adoption. In fact, the outsider, a son-in-law married to a daughter, sometimes appears better able to manage the family estate than other close relatives (1996, 172). It should be noted that family-owned conglomerates, zaibatsu, existed in Japan until the American occupation after World War II, although they had moved to professional management much earlier, in the 1930s. The Japanese term zaibatsu means "a clique for money," which illustrates the drift of a traditional structure into the market game. A comparable evolution was observed in most countries; this is not a country-specific phenomenon. Family-based capitalism dominated almost all countries of the first and the second "echelons" of capitalism until the end of the nineteenth century (Boltanski and Chiapello 1999, 54).

The increase in the autonomy of the economic sphere of activity led to a progressive differentiation between the household and the firm. The development of accounting represents an important step in this direction. It enabled every member of the household to have his own account. "The household ceased to exist as a necessary basis for rational business association. The partner was not necessary--or typically--a house member" (Weber 1968, 378). But kin and family networks continue to serve as a basis for economic action in cases when the transformation of the market into an autonomous sphere was slow. About half of Russian businessmen still try to involve close relatives in their businesses. The practice of doing business with friends is even more widespread in the post-Soviet countries (Oleinik 2001a, 15-17).

Special emphasis should be placed on the traditional institutions on which economic activities have been based...

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