The Limits of Economic Action

Economic action is only one part of the array of social actions that are played out within the modern economy, and does not subsume social action. Weber’s identification of four types of social action demonstrate this point succinctly. What Weber showed was that the economic basis of social action is only one part of other societal effects on our decision making, such as the culture we are raised in or the ethics we develop. Many other theorists, ranging from Hayek to Polanyi, have demonstrated these concepts as well. Hayek’s praxeology has shown us that because economic actions are spread out over a large amount of different individuals and their knowledge. It further tells us that perfect knowledge of all economic activities is impossible, meaning that our lack of full knowledge gives way for ethical and cultural values to influence our economic action. Polanyi also shows us that our economic are deeply embedded within the society we live in. The ideas of reciprocity and redistribution had always been a part of the economic actions of communities and individuals alongside the use of market mechanisms to trade. Then there is the creation of networks within markets themselves. This demonstrates the mixture of social and economic actions that allow for better decision making processes. If we then look at the modern world, we continue to see the development of social action within the market. Despite the modern neoliberal paradigm which sees individuals as rational economic beings, we regularly see the playing out of social action in the economy. Examples include the idea of creative commons on the internet as well as dissemination of knowledge through online encyclopaedias such as Wikipedia, where information is accessible to billions of individuals. Ideas of reciprocity are also expanding through things like the energy internet and collaborative business models. The development of these technologies and ideas show that even within the modern market economy, social action is always present. Despite the market being perceived as an economically rational institution, the involvement of different individuals who value things subjectively means that inevitably social action will play a significant role in how people act in an economy. This then means that despite action being economically oriented, the motivations and means ends can be social and that refutes the initial question, as not all social action can necessarily be economic in basis, with the opposite being the case in many situations.

To determine what can be classified as social or economic actions or a combination thereof we must look to Weber’s classifications and how they are defined in relation to real-world habits that are generally seen as socio-economic. Weber’s definition of economic action is as follows ” peaceful exercise of an actor’s control over resources which is in its main impulse oriented towards economic ends”[1]. This definition appears to actually classify most actions as economic, however there is one caveat, that being the last part of the sentence, “towards economic ends”, showing that action is only economic when the resource in question is used for something of an economic manner. Weber expands here by saying “The definition of economic action must, furthermore, be formulated in such a way as to include the operation of a modern business enterprise run for profit”[2] which to me shows that economic action is being penned into the conception of the profit motive and the idea that goods are bought based on a rational, cost-benefit analysis. This Weber called instrumentally rational action. It then seems that the economic motives in question are based on ideas of profitability and modern economic rationalism. This definition is the basis how we then view economic action in relation to social action, as Weber’s definition was too broad and needed to be codified. Weber also found other types of social action that deviate from the rationality of instrumental action. These were value-rational actions, whereby action is taken because it leads to a valued goal, and ignores other consequences of attaining this goal; affectual action, which is an action driven by emotion; and traditional action, where something is done because it is what is usually done. What these four social action types show is that not all social action can necessarily be economical. Again Weber makes this distinction by telling us that actions with economic goals can be classified as “economically oriented action”[3], with the main forms of this action being either “every action which… takes account, in the pursuit of them, of economic consideration”[4] or “that which, though primarily oriented to economic ends, makes use of physical force as a means”[5]. The first category of these economically oriented actions would seem to include the three types of social action that aren’t instrumental in their reckoning. This then means that while action can be very much geared in an economic way, it does mean that the actions are always rationally driven and that the ends have a truly economic consequence. We regularly see modern examples of this, such as with emotional branding and prestige buying. These phenomena show how non-rational means can lead to an economic end, as consumers are influenced to buy a certain product or from a certain company not because of cost or quality, but rather because the brand has emotional significance. This can be as simple as wanting to go to a particular fast-food restaurant because your parents used to take you there as a child. This type of irrational buying can also be found in the business to business markets. Randall tells us “Today’s B2B (business-to-business) customers may articulate their need for ROI (return on investment), higher performance, a better mousetrap. Yet, they really want: to avoid doing business with “an Enron”; a name or people they can trust; to buy from a “leader.” Strong brands play to these important drivers”[6] showing that business relations are painted by the perceived quality of a brand that isn’t necessarily an attribute of that brand. The effect of emotional branding means that even a simple transaction relating to cost effectiveness and a good ROI isn’t strictly based on economic rationality, and the effect of affectual action, as described by Weber, is present throughout such transactions. Other examples of economically-minded, social behaviour is ethical investment, where investments are made based on how ethically something is produced or how ethically a producer or corporation acts in relation to way it produces or allocates resources. Weber then has shown us that economic action is not necessarily the driver of all economically-oriented actions, and that social actions have as much a part to play in economic transactions as does pure economic rationality. Many other thinkers have demonstrated similar ideas, such as Hayek with his concept of praxeology or Polanyi with his idea of embeddedness. These other thinkers show that social action always has a separate and in many cases equal role with that economic action in the way individuals interact within an economy.

There are other examples of economic thought that show the importance of social action within the economic sphere. For example, Hayek’s ideas of praxeology and catallactics show us the microcosm of economic knowledge that exists within an economy. Hayek specifically used the term catallaxy to describe “the order brought about by the mutual adjustment of many individual economies in a market”[7], showing that the idea of an economy is primed by individual needs and desires. Weber previously showed us that the development of these individual needs and desires are developed through cultural and ethical elements, and that pure economic rationalism can take a back seat to the social influence on our economic habits. We can fundamentally see this in Hayek’s price system, whereby prices are set by our desire for certain products. Hayek saw this as based on economic rationalism, however because of his belief in dispersed knowledge in the economy, it can be logically concluded that people couldn’t always act on pure economic rationality in their decision making, and instead social factors would become involved. Hayek himself stated “the “data” from which ‘the economic calculus starts are never for the whole society “given” to a single mind which could work out the implications and can never be so given.”[8] showing us that economic knowledge is widely dispersed and thus full instrumental rationality along Weberian lines is nigh on impossible as we can never possess the full facts of pricing and distribution. Again this links back to ideas of networks in businesses and ethical investment. The former is based on things like branding and the element of trust this provides despite no necessary economic understanding of a particular company, meaning social actions are at play throughout any transaction. The latter also shows a huge element, as an individual’s prejudices against certain business practices lead them to invest based on other decisions outside of the profit motive. These actions form a part of Hayek’s price system, and create prices that reflects not just economic desires but also ingrained cultural preferences. Even when we look to the works of earlier Austrian economists such as Carl Menger, we see that his subjective theory of value could not be based purely on instrumental rationality, and that social actions such as affectual and traditional actions. Menger’s theory is summed up as “value is subjective and different persons value goods differently depending on the person’s goals in life… Perhaps he wishes to be a hermit who prays most of the day”[9] which shows that value is purely subjective, and that as a result how we value things will inevitably be changed by social factors. This again shows that while these actions are mainly construed as economic, there are huge amounts of underlying social actions that effect our daily transactions. These are seen in our trust in a particular brand or company that isn’t based on any rational economic idea, as well as our cultural preferences affecting how we invest and spend. Another thinker of the time, Karl Polanyi, also talked of the social superseding the economic in life, and how the economy was in fact embedded in society.

Polanyi takes an historical view of economies and the action that drives them. He saw the economic aspect of one’s life submerged in the society in which they live. As Polanyi states “The outstanding discovery of recent historical and anthropological research is that man’s economy, as a rule, is submerged in his social relationships”[10]. This suggests that an individual’s or communities’ economic decisions are made based upon social action, such as the effect such economic behaviour has on the wider community. Polanyi further demonstrates this point, describing how “he acts to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end”[11] illustrating the point that economic means does not necessarily mean economic ends, and that one’s economic actions serve social ends. This in itself is an opposing view to Hayek’s methodological individualism, and supposes that we only think individually when thinking in terms of economic rationalism. However both Hayek’s and Polanyi’s views go back to Menger’s idea of subjective value, as we see that we value things based on ingrained habits developed from our ideas and ethics. Both Hayek and Polanyi have in their theories the ability for social action to make up the lack economic knowledge that an individual has. Polanyi points this out with his idea of embeddedness, where “economic systems, as a rule, are embedded in social relations; distribution of material goods is ensured by noneconomic motives”[12] showing that certain elements of economic life, such as the allocation of resources, were traditionally done via social action i.e. redistribution or reciprocity. This again shows that social action cannot be submissive to economic actions, and in many cases not only are the two equal, but economic action is actually submerged into social action. However Polanyi’s concept cannot go without criticism. Polanyi saw society as fully submerged in societal functions that are removed from a market economy and purely noneconomic. He seems to take opposing view of the neoliberal consensus to its extreme by suggesting that social action based around societal need is more important than economic actions within society. Despite this, Polanyi acknowledges that markets do play a role within economies, even before the advent of full market economies, stating “Though the institution of the market was fairly common since the later Stone Age, its role was no more than incidental to economic life.”[13] showing a disregard for the market in the economic realm and attempting to show that redistribution and reciprocity were the most important elements of classical societies. However North’s analysis shows this to be incorrect. He shows that “all economies have elements of reciprocity, redistribution, and markets. To claim that private reciprocity and redistribution play no part in a market economy is simply incorrect”[14]. North’s examination explains that all economies have elements of that are both social and economic, and that they are tied together in many cases. This problem is addressed by Granovetter, where he shows that the market system is not inherently based on economic rationalism, and that social networks exist within market frameworks and in fact dominates business relationships and how they’re organised.

Granovetter’s analysis shows us that the concept of embeddedness exists within the modern market economy and effects the relationships that are developed in such a framework. One of the main examples of this embeddedness is the organisation of social networks that are found within business relationships. The networks are almost outside the traditional legal and institutional frameworks such as developing airtight contracts guaranteed by the law. Instead, they solve problems on a one to one basis via their social network. This concept was demonstrated earlier by Randall’s article on business-to-business relations and how one element of their development is the element of trust. This trust was cultivated by having a reliable and well-known brand, thus not making it necessarily borne out of economic considerations. Granovetter’s concept of embeddedness has a similar idea. He states “The embeddedness argument stresses instead the role of concrete personal relations and structures (or networks) of such relations in generating trust and discouraging malfeasance”[15] which explains how the development of personal relations becomes an alternative to more concrete structures in dealing with business relations and disputes. This then shows that the development of economic relationships involves social action, and that this social action cannot be quantified as purely economic as the relationships are being developed based on non-economic characteristics of trust and reliability, concepts whose values are entirely subjective. These relations play out more so on the internet, where the anonymity of buyer and seller means the concept of trust can become skewed. However, these kinds of relations are also in many ways explained by Granovetter with his concept of “generalized morality”[16] whereby we develop trust based on our conceptions of how others are meant to act. This again is itself a social action driving an economic action. These concepts have now gone to new heights with much more complex ideas, such as the development of the energy internet and collaborative economics. Rifkin states that “the Third Industrial Revolution, in contrast, give rise to thousands of distributed firms coming together in collaborative business relationships embedded in networks that function more like ecosystems than markets”[17] showing that with the advent of technologies such as the internet the idea of collaboration comes into play through the development of Granovetter-style networks. These concepts would require large amounts of trust to functions, as well as grounded ethics to allow for honest distribution in such a system. Thus the idea of networks is grounded in social action. These examples show that within the market economy itself social networks driven by social action regularly prevail, and that the concept of homo economicus generally associated with a market economy is generally false, as social action is as much a driver of relations and innovation as economic action is.

It seems then that rather than social action being a subsidiary of economic action, many economic actions are subsumed into social actions. Weber’s classifications gave us a good starting definition of what pure economic action is and showed many other actions that while in some way may be economically oriented, had social goals in mind, thus making them social actions. Both Hayek and Polanyi further provide templates of how social action plays out in an economy, with both showing that the economy is an element of society and cannot be wholly separate from it. They also showed that full economic knowledge is impossible, thus making the concept of economic rationalism rather arbitrary if we cannot determine how every economic decision will play out. Then Granovetter showed us that these concepts continue to play out in the modern market economy, and that despite the Neoliberal line of the economy being run on purely rational grounds, we see the development of social networks and collaborative models within the market sphere. Thus the idea that social actions are always economic in basis doesn’t hold up when we see that in many cases, economic action is social in basis, or that the goals motivating one to do something can be created by both social and economic action. This further suggests that the concept of economic rationalism is void as our decisions within an economy are effected as much, if not more so, by our culture, traditions and societies as they are by our instrumental, or rational, action.

[1] Weber, M (1978). Economy and Society. 2nd ed. London: University of California Press. 63.

[2] Weber, M (1978). Economy and Society. 2nd ed. London: University of California Press. 64.

[3] Weber, M (1978). Economy and Society. 2nd ed. London: University of California Press. 64.

[4] Weber, M (1978). Economy and Society. 2nd ed. London: University of California Press. 64.

[5] Weber, M (1978). Economy and Society. 2nd ed. London: University of California Press. 64.

[6] Randall, K. (2006). It’s a Fact: Strong Brand Drive B2B Markets. Available: http://www.brandchannel.com/papers_review.asp?sp_id=1235. Last accessed 22nd Dec 2014.

[7] Hayek, F (2012). Law, Legislation, and Liberty. 2nd ed. London: Routledge. 108-109.

[8] Hayek, F (1958). Individualism and Economic Order. Chicago: The University of Chicago Press. 77.

[9] McMaken, R. (2014). Correcting Scrooge’s Economics. Available: http://mises.org/library/correcting-scrooge%E2%80%99s-economics. Last accessed 24th Dec 2014.

[10] Polanyi, K (2001). The Great Transformation. 2nd ed. Boston: Beacon Press. 48.

[11] Polanyi, K (2001). The Great Transformation. 2nd ed. Boston: Beacon Press. 48.

[12] Polanyi, K (2001). The Great Transformation. 2nd ed. Boston: Beacon Press. 279.

[13] Polanyi, K (2001). The Great Transformation. 2nd ed. Boston: Beacon Press. 45.

[14] Nowrasteh, A. (2013). Karl Polanyi’s Battle with Economic History. Available: http://www.libertarianism.org/blog/karl-polanyis-battle-economic-history. Last accessed 2nd Jan 2015.

[15] Granovetter, M.. (1985). Economic Action and Social Structure: The Problem of Embeddedness. American Journal of Sociology. 91 (3), 481-510.

[16] Granovetter, M.. (1985). Economic Action and Social Structure: The Problem of Embeddedness. American Journal of Sociology. 91 (3), 481-510.

[17] Rifkin, J (2011). The Third Industrial Revolution. New York: Palgrave Macmillan. 104.

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