Deciphering Markets and Money

Front matter

Deciphering Markets and Money

A Sociological Analysis of Economic Institutions

Jukka Gronow

Chapter 2. Economic Sociology in a Theory-historical Perspective 19

Classical sociology and economics 19 The advent of Weber’s Economy and Society and the tasks of economic sociology 26 Weber’s critique of the theoretical postulates of Marginalism 28 The historical validity of theoretical economics 34 Weber's own sociological concepts of economy 37 Formal rationality and the importance of accounting 41 Economy and society once again—35 years later 44 Chapter 3. What is Money? 51 The functions of money 51 The secret of the social form of money—or ‘moneyness’ 58 Chapter 4. Sociological Theories of the Market 69 Market identities and status hierarchies 69 Quality uncertainty and market devices 79 Regimes of market coordination 96 Market regimes and the price formation 99

Chapter 5. The Three Social Formations of Taste in

Economic Markets 105 Fashion 105 Social worlds 108 Fields of culture 112

Chapter 6. The Aesthetization of Everyday Consumption 119

Chapter 7. Finance Capital and the New Financial Markets Financialization of almost everything

Market devices and the commodification of risk

Chapter 8. Conclusion

Notes Literature

Index

127 127 137

163 171

Acknowledgements

This work would not have been possible without the support, encouragement, and critical feedback of colleagues and friends. I am grateful in particular to Ilkka Arminen, Patrik Aspers, Arto Noro, Keijo Rahkonen, Aino Sinnemaki, Petri Ylikoski, and Alan Warde, who all read and commented—many of them quite thoroughly—the manuscript at various stages of writing. I also remain indebted to Uskali Maki, who gave me valuable advice concerning some basic issues of economic theory. I found the suggestions and critical comments of the publisher’s two anonymous reviewers extremely useful in trying to make my arguments more coherent and convincing. I have noted the smaller shortcomings and inconsistencies in the text that they pointed out as best as I could. As always, I alone am responsible for the final result.

The Eminentia grant that The Finnish Cultural Foundation generously awarded me was not only welcome as an economic support but also as a sign of others having faith in my project. The faculty of the social sciences at the University of Helsinki has generously provided me with office space and facilities during the years that I have been working on this project.

Last but not least, I am very glad that my book has been accepted in the publication series of the new Finnish academic publishing house, Helsinki University Press. The publishing director, Leena Kaakinen, and the publishing manager, Aino Rajala, have been supportive and very helpful during the whole process of editing and publication.

Preface

This book is an attempt to give at least a provisional answer to two questions that have occupied my mind during the best part of my academic career: What is the relation of sociology to economics, and what can sociology contribute to the analyses of the major economic institutions? From its very beginning, at the turn of the 19th and 20th centuries, sociology’s relation to economics and to the study of economic institutions has been rather complicated and ambiguous. Sociologists have repeatedly criticized what they consider the problematic presumptions of economic theory; they have also argued that one should take the historical specificity and the social embeddedness of the economic relations and institutions seriously into account. At the same time, sociology has made, with some remarkable exceptions, only relatively modest contributions to the analyses of modern economic institutions. It has not succeeded seriously in challenging economics’ conception as the standard interpretation of economic life.

More recently, however, the situation has changed with growing interest among the sociologists in economic phenomena that has already led to many valuable new theoretical insights and empirical results. The growing importance of economic sociology has certainly many causes. The recent economic crises, the increasing importance of the financial markets and the globalization of economy are certainly among the most evident ones. The neoliberal regime of governance, which has dominated political thinking in Europe, North America, and the world at large during the last decades, has led also to viii Deciphering Markets and Money a situation in which the economic discourse has gained an almost hegemonic position in politics as the interpreter of the economic and political reality. As such, it poses an obvious challenge to the other social sciences and sociology in particular. The present study takes up this challenge. With the help of the classics of sociology as well as modern economic sociologists, it presents a contribution of its own to developing genuinely sociological concepts and theoretical understanding of the functioning of the modern economic institutions. As argued here, economic sociology is in need of a specific sociological theory of the commodity markets and money, the two basic social institutions of modern capitalism that go beyond the general thesis of the social embeddedness of economic relations. Therefore, the central question facing economic sociology, to which this study gives at least a partial answer, is how markets and money are possible and socially constituted.

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Economic sociology has experienced a remarkable revival during the last couple of decades, and it has become one of the most innovative fields of sociological research. The drastic recent economic developments—the financial crises above all—took many analysts and experts by surprise. Changes in economic policy in Europe, the United States, and the world at large have also contributed to the increasing interest in the sociological analysis of economic phenomena and institutions by offering new, challenging research questions and demonstrating some of the limits and problems inherent in standard economic thinking and reasoning. For example, the various new instruments which have appeared quickly in financial markets, from subprime loans and loan swaps to futures trading and hedging, have become important new objects of study. Financialization and the numerous new forms of financial markets are in many ways a good test for the relevance and validity of both economics and economic sociology. More often than not these analyses have, however, been rather concrete and historical, undoubtedly of great value as such, in trying to come to terms with the new economic world. At the same time, rather few attempts to develop any more general theoretical understanding, for instance about the causes, conditions, forms and consequences of financialization, deregulation of markets, or other important developments in modern economy, have been on offer.

It has been a commonplace in the introductions to the general treatises, textbooks, and anthologies of economic sociology to admit that economic sociology has not had all that much to offer since the classics of sociology active at the turn of the 20th century, in terms of theoretical inventions and developments of its own and even fewer contributions to the sociological thinking in general. In the opinion of many of its advocates, sociology has been good at criticizing standard economics and its basic postulate of rational economic action characteristic of economic activity in general, also referred to as the postulate of Homo Oeconomicus. It has admittedly also offered quite a great deal of interesting empirical and historical studies of all kinds of economic phenomena, new financial markets included. In a sense, it looks like economic sociology— or sociology in general—has not yet passed over the old dilemma of choosing between abstract theory (in Weber's times presented by Marginalism, and later Neoclassical economics) and economic history (or the historical study of concrete economic phenomena, in the spirit of the German historical school), which Max Weber, one of the acknowledged classics of sociology, posed explicitly in his writings some hundred years ago.

In the introduction to their influential Handbook on Economic Sociology (2005: 6), Smelser and Swedberg wrote that economic sociology has usually concentrated on three main lines of inquiry: 1) the sociological analysis of economic processes; 2) the analysis of the connections and interactions between the economy and the rest of the society; and 3) the study of changes in the institutional and cultural parameters that constitute the economy’s societal context.

Other authors have expressed similar thoughts of the achievements and tasks facing sociological analyzes of economy. Zelizer (2003: 15), for instance, talks about the importance of the social context in which economic decisions are made. However, in her opinion it is important to shift attention from context to content, to the variability of markets, and ‘identify the shared understandings that occur within and behind every market, shared understandings that underlie the very possibility of market activity’ (Zelizer 2003: 108). At the same time, Zelizer admits that the second alternative is the most demanding and challenging one, with fewer promising examples to show. She also reminds her readers about the parallel approach of extending the economic paradigm of rational behavior to such areas of society that economists have usually largely ignored. In doing so, Zelizer has Gary Becker's (1976, 1998) exemplary studies of, among other things, the family institution and addictions in mind. One could characterize Becker as a representative of intellectual imperialism of economics that purports to make economic thinking all inclusive, while taking some of its more obvious limitations into account.

Portes’ (2010)—who has also actively promoted economic sociology—view of the real progress done in the sociological analysis of economy is rather skeptic. As he suggested, each field of sociological study should be able to show three specific contributions of its own: metatheoretical principles, explanatory mechanisms, and strategic objects of research. In his opinion, economic sociology has, in fact, quite convincingly presented some metatheoretical principles of its own. Among them, one could name in particular the critique of the rational choice paradigm as well as the thesis of the social embeddedness of economic phenomena. In addition, it has a great amount of suggestions to the strategic objects of empirical research. However, what economic sociology research is mostly lacking, according to Portes, are systematic ideas and well-argued-for suggestions to the explanatory mechanisms which could seriously complement and compete with the standard explanations of the functioning of economic markets offered in the textbooks of economics. Such explanations should naturally follow from the metatheoretical principles, and they should also be capable of better coordinating the study of the multiplicity of strategic objects as well as to help to draw general conclusions from their empirical results.

Richard Swedberg’s Principles of Economic Sociology (2003) offers yet another interesting evaluation of the state and tasks of economic sociology. After a short introduction to the classics of economic sociology, and a description of the ‘present state of the affairs; Swedberg goes, chapter by chapter, through what he thinks are the main topics of research in economic sociology: 1) economic organizations, 2) firms, 3) economic and sociological approaches to markets, 4) politics and economy, 5) law and the economy, 6) culture and economic development, and 7) gender and economy. The structure of Swedberg’s book shows his close adherence to the undisputed classic in economic sociology, Max Weber. (Swedberg has in fact written a seminal work on Weber: Max Weber and the Idea of Economic Sociology, 1998.) Weber was, above all, interested in the relations between the economy and other social ‘orders; as well as culture. Weber, famous for his work on The Protestant Ethic and the Spirit of Capitalism (2010(1905)), would undoubtedly have added religion to Swedberg’s list of topics.

With the exception of the markets and the firms, Swedberg’s main effort lies in clarifying the relations of economic institutions with other social institutions and processes. Sociologists of organizations have traditionally shared the study and theory of the organization of firms with both political scientists and business economists. This leaves the market as the main economic institution about the functioning of which sociologists should have something of their own to contribute. More generally, the suggested division of labor between sociology and economics leaves sociologists the task of analyzing the social and historical—political, legal, and cultural—conditions and preconditions of economy. This resonates well with Mark Granovetter’s (1985) well-known and much-cited thesis about the principal social embeddedness of economic action and its analytic centrality. To study the different forms of this embeddedness is thus reserved to the economic sociologists as their main occupation (cf. also Granovetter’s Society and Economy, 2017).

In their collection of articles on economic sociology, the editors (Aspers, Dodd & Anderberg 2015: 4) make a useful distinction between sociological accounts of specifically economic phenomena, for instance markets, money, or consumer behavior, and others that do not define economy as a separate dimension of society but treat it on the same footing as the rest of society. Their advice is that, instead of investigating the links between economic phenomena and society, we should presume that all actions, including economic, are social. This is valuable advice, but at the same time it leaves open the question about the specificity of economic institutions and their theory. As social institutions, they obviously share many of the same features as other fields or areas of society and can therefore be analyzed with the general conceptual apparatus of sociology.

Nevertheless, they do obviously also show some important specificities that are not typical, or do not play such a central role, in the functioning of other social formations. Consequently, they would seem to presume their own analytical tools and concepts. As is argued in this study, these concepts circle around the centrality of the comparability and commensuration in economic relations.

It is interesting to compare this approach with Granovetter’s in his Society and Economy (2017: 1). As he pointed out, ‘I present arguments about economic action and institutions that emphasize social, cultural and historical considerations in addition to purely economic ones. He does this by applying such typical sociological concepts, like norms, values, trust and power in analyzing a great variety of economic phenomena, historical and modern, making extensive use of a great number of previous empirical and historical studies. He does not, however, systematically emphasize—or analyze—the specificity of economic institutions compared to other social institutions, or the historical specificity of the economic relations in a modern capitalist economy.

In contrast to Granovetter’s approach, Dirk Baecker (2006), applying Niklas Luhmanns systems theory, begins with the specific system of economy, differentiated from the society and following its own internal principles of functioning. Economy has by no means always been a clearly differentiated social subsystem of its own, the specific function of which is, according to Beacker, the communication of scarcity (Baecker 2006: 40). What is remarkable about the system of economy is that first it, and only it, both creates the problem of scarcity and the means that claim to solve it.' Only in the modern, differentiated capitalist economic system does the quest for overcoming scarcity play a central role. In this perspective, it is important to pay attention to the fact that the economic system is connected to the external world through its own specific media, money. Money is always a scarce resource. The medium of money doubles scarcity because it is both ‘omnipotent; in the sense of being a universal medium of exchange that can realize any wishes or goals, and per definition always scarce: one can always have more of it! (Baecker 2006: 53). As a matter of fact, the only distinctions that money knows are quantitative. It is the quest for money and rent that keeps the capitalist economy running and expanding. Capitalism without economic growth, or rather accumulation of capital, would not be sustainable in the long run.” Jens Beckert (2016) identifies the peculiar dynamics of capitalism in the openness of the future and the incalculability of outcomes of decision making processes that follow from it. These are central questions in his sociological analyses of the economic organizations and institutions of capitalism.

What unites, in spite of their otherwise widely diverging conceptions, Karl Marx’s and Max Weber’s theoretical approaches—one could add Georg Simmel to this list—is that they emphasize the historical specificity of the modern capitalism. What makes economic institutions and relations in a capitalist, market economy specific to Max Weber and separates them from other social institutions, as well as its historical predecessors, is monetary calculation or, as he put it, money and capital accounting, which makes comparing the input and output of economic actions unambiguous and—seemingly—objective. What is typical of the economic action in modern capitalist economy is its formal rationality. (For Weber, calculability and formal rationality were almost synonymous since in his mind, calculability—and commensurability—guaranteed the highest degree of rationality.) To Karl Marx, in his turn, the equal exchange of commodities, the commodity labor power included, mediated through money, and the following self-dynamic process of the accumulation of capital is the basic feature of modern, differentiated economy.

In a well-established market economy, which is characterized by the principle of equal exchange, monetary prices are objective in the sense that they are the same in all acts of exchange independent of who the trading partners might be. They can mostly be taken for granted, and economic agents can orient their actions accordingly. Commodity exchange, or the exchange of equivalents typical of modern capitalist market economies, is by no means the only type of economic exchange. Exchange of gifts played an important role in many previous societies, and gave rise and kept up relations of mutual obligations. In modern economy, they would easily be regarded as corruption. In many societies, riches could change hands forcibly and those in power appropriated them simply with the threat of violence. In a barter economy, the partners exchange their products and services and compare them with each other. The terms of the trade are, however, not as fixed as in the equal exchange and the result of the exchange vary from case to case, from person to person, and are often up to the bargaining skills of the partners. The exchange relations can therefore depend, for instance, on the resources and the urgency of the needs of the particular partners. In addition, cultural norms and local traditions had often a say in what was considered to be a fair price. Even if money can figure in barter too, the prices can vary greatly from one case to another or they tend to be traditionally established. In other words, the institution of money is not in the same sense constitutive in the barter, or any traditional economic formation, as it is in the ‘real’ market of commodities.

It is true, almost tautological, to claim that economic institutions, like all institutions, are socially embedded. Otherwise they would not be social institutions at all. The claim defended here is stronger: markets and money are historically specific social institutions and therefore one has to analyze their specific social constitutions. This means that the economic sociology of the capitalist market economy has a theoretical approach or frame of reference of its own, with tools and concepts of its own. Following Weber, we can identify them in money and capital accounting; following Marx, who perhaps more than anyone else emphasized the historical specificity of the capitalist economic formation, we can identify them in the commodity and money form as the keys understanding the social constitution of the modern capitalist economy. The crucial question is what makes objects traded in the market comparable and commensurate. To put it in another way: how can they have an objective value and a market price?

The lessons learned from analyzing the constitution of economic markets do not restrict themselves to the understanding of phenomena normally regarded as economic. In these times of neo-liberal regimes of governance many social organizations which traditionally operated following other principles than those of economic markets, from universities and schools to social care of children and the elderly, from public broadcasting companies to many governmental core agencies, armies and police included, have been outsourced, privatized and ‘marketized’ in the name of economic efficiency. Marketizing, applied as an almost universal remedy to all kinds of social and economic problems, has created its own problems and controversies (Hirschman 1982). As Miller argues, calculative practices and accounting are a key resource of the ‘liberal form of government (Miller 2001: 381). Using the example of the managerial, or cost accounting, a practice that has spread rapidly to all economic enterprises, he shows how such calculative practices allow individuals to have ‘both the responsibility and freedom to spend money as they see fit’ (Miller 2001: 381). Such managerial practices produce an individual who comes to act as a ‘self-regulating calculating person’ As Miller states, ‘not only can the manager of a global corporation be governed in this (neoliberal—JG) manner, but so too can a doctor, a schoolteacher, or a social worker’ (Miller 2001: 381). What makes this new form of governance important is that it has spread widely outside private firms to many public organizations that traditionally have been governed by relatively autonomous professional or politically elected bodies functioning along traditional rules or are what Weber would call ‘value rational; aiming at the realization of substantive values that cannot be expressed in monetary terms.

Many crucial questions of the conditions and consequences of privatization of public organizations circle around the question of commensuration. In order to operate as private markets, or as is often the case, as pseudo-markets with the public authorities as their main or only buyer, they must rely on some market devices—to use the concept developed by Lucien Karpik (2010)—that turn their incomparable or non-measurable goods and services, such as academic and artistic achievements or the well-being of old people, into comparable and measurable entities. This is done, as we know, with the help of such market devices as citation indices and impact factors or counting the minutes a nurse uses per a customer or a patient, possibly combined with some kind of indexes of customer satisfaction. It is easy to agree with Fourcade (2007: 1018-19) who argued that ‘we simply cannot have a serious reflection on modernity without addressing processes of commodification, marketization, privatization, and ... the powerful role of economics in bringing about these transformations’ Without falling into the trap of the economists’ ‘imperialism, it is important to analyze other than economic institutions with the help of the theoretical tools of comparability, calculability, and commensuration, keeping in mind the distinction between heuristic analogies, useful as such, and real commonalities.

In their article, ‘Commensuration as a Social Process; Espeland and Stevens (1998) take up the central role of commensuration in many social relations and institutions. As the authors define it, ‘commensuration is the expression or measurement of characteristics normally represented by different units according to acommon metric (Espeland & Stevens 1998: 315). Prices of commodities are naturally the best example of commensuration. In order that two otherwise totally different kinds of objects, such as bread and shoes, can have the same price, or that we can say that a pair of shoes is ten times more valuable that a piece of bread, both bread and shoes must have valid prices taken for granted by all partners of trade. In other words, their value is expressed in money. However, money as such does not make them commensurate; on the contrary, the use of money as a means of exchange and accounting presumes that the objects exchanged already have an objective—in the sense of shared and taken for granted—value which can be expressed in numerical terms and thus compared with those of other objects. In order to be comparable and commensurable two objects must obviously be measured on the same measuring stock, as if they both possessed one and the same common substance, differing only to a smaller or greater amount from each other. In other words, they must be in some respect qualitatively similar. As we know economics and its predecessor, classical political economy has two suggestions for such a common quality which all objects of exchange share both deduced by excluding other (un)thinkable alternatives.

Both suggestions have their own problems. In classical political economy it is the labor in general, or in other words, that they all are products of—different amounts or quantities of—human labor. To neoclassical economics this common substance is their utility, that they are more or less useful to human beings or preferred by them. The first alternative, the most famous representatives of which were David Ricardo and Karl Marx, is usually known as the labor theory of value, or the theory of objective value. The second, which the Marginalist economists, Jevons, Menger and Walras invented a couple of decades after Marx’s Capital, which came out in 1868, is referred to as the subjective theory of value. The early Marginalists differed among themselves as far as they thought that the utilities of goods depended on the satisfaction of some kind of objective needs or thought them simply to reflect consumers’ personal likes or preferences, whatever the reasons for preferring one object over another might be. To later neoclassical economists, it has in fact been enough to presume that economic agents can order the objects of consumption according to their preferences. More specifically, according to the concept of the marginal utility, economic actors are presumed to be able to compare the utility of an additional unit of an object or service with the utility of an additional unit of another commodity.

The problem of commensuration does not restrict itself to purely economic processes and relations but covers a much wider range of social phenomena. The problem of commensuration has become more acute with the spread of neoliberal economic policy. It looks like the market logic of exchange would gradually permeate other spheres of society than economy. The list Espeland and Stevens (1998: 315-316) present is impressive in its extensiveness:

Utility, price, and coast benefit ratios are common examples of commensuration, although the logic of commensuration is implicit in a very wide range of valuing systems: college rankings that numerically compare organizations; censuses and social statistics that make cities or nations numerically comparable; actuarial projects that attempt to quantify and compare vastly different kinds of risks; commodity futures that make uniform units out of products that may not yet exist; voting, and the pork-barrel trading of diverse interests that often lies behind it; calculation of different kinds of work in terms of labor costs; and the ad hoc calculations of trade-offs among such potentially incomparable values as career and family; bread and depth in scholarship, and freedom and commitment in love.

In short, commensuration transforms qualities into quantities that can be easily compared (Espeland & Stevens 1998: 316). There is an inherent ambivalence in what it accomplishes. On the one hand, by reducing the amount of the measured information, it simplifies reality by making it one-dimensional, as if all other characteristics and qualitative distinctions of the object were either totally irrelevant or unreadable. As such, they can be discarded. Consequently, everyday experience, practical reasoning, and empathetic identification ‘become increasingly irrelevant bases for judgment as context is stripped away and relationships become more abstractly represented by numbers’ (Espeland & Stevens 1998: 317). As a further consequence, all value becomes relative and the possibility of an intrinsic value, or any absolute or ‘higher’ value, is denied. There are no priceless objects. This conclusion comes, in fact, in many ways close to what Marx called the commodity fetishism, an essential companion of the capitalist relations of production and exchange. As a matter of fact, also ‘real’ or more traditional economic markets face the same problem of commensuration which, at least in the case of standard markets, they seem to solve as if naturally or automatically, without the help of any such constructed valuing systems. According to Marx, in commodity exchange the social relations between human beings take the form of the relations between things, thus hiding their real social nature from the economic actors. On other side of the coin, commensuration and the calculative evaluations are often associated with increasing rationality and efficiency, and accounting is regarded as a prerequisite to them, or even identified with them (Espeland & Stevens 1998: 324).

Classification is not, as such, equal to commensuration. It is reasonable to restrict commensuration to such comparing that uses ratio scales or, at the minimum, scales according to which one can say that something is better or more beautiful than another but not necessarily exactly how much better or more beautiful it is. In other cases, such as the Linnéan system of botanic classification, or the classification of humans in population groups, which Espeland and Stevens use as examples, it would be better to speak simply of making objects comparable for classificatory purposes by identifying their common ‘substance’ relevant in the context.’ Once the objects have been classified into homogenous groups, according to the relevant criteria in question, or to use the authors’ own example, after classifying all inhabitants into population groups according to some criteria agreed upon—age, gender, ethnicity, etc.—we can also count them and say that there are, for example, more Anglo-Americans than Americans of Hispanic origins in the USA today. However, we cannot say that a human being or a group of human beings is worth more than another, whereas one can routinely say that the price of a commodity is so much cheaper or more expensive than that of another.

In introducing their idea of calculative devices in studying economic markets, financial markets in particular, Callon and Muniesa (2005: 1234) make a useful distinction between the various steps of what they call the singularization of a good. According to them, ‘the process of singularization consists of a series of operations resulting in the calculability of the good’? More precisely, after the good has been placed in a frame with other goods and relations have been established between them leading to new classifications that allow comparison, ‘the good can finally be calculated’ (Callow & Muniesa 2005: 1235). As a matter of fact, Callon and Muniesa downplay somewhat the role of ’real’ calculation as a process of quantification, by making it close to Espeland’s and Stevens's broad concept of commensuration that comprehends both qualitative and quantitative comparability, both classification and calculation. One can nevertheless agree that ‘with this broad definition of calculation, the most appropriate dividing like is no longer between judgement and calculation, but between arrangements that allow calculation (either qualitative or quantitative) and those that make it impossible’ (Callon & Muniesa 2005: 1232; cf. Preda 2009: 117).