Economic Sociology
Economic Sociology
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Chapter 1: Sociology’s Status
1. Science and pseudo-science
• Science has had impressive success in understanding and controlling material and
biological reality
• Central question: what distinguishes successful science from dead ends and everyday
judgments?
• Dead ends: sometimes denotes as ‘pseudo-science’ (astrology, homoeopathy)
• In the long term, at least four (connected & partially overlapping) elements have proven
quintessential
a. Internal consistency
• Logical errors, contradictions, conceptual clarity, openness to falsification
o Language and structure of arguments (mathematic language is conducive to
consistency)
b. Evidence
• Good theory is necessary condition, but also needs confrontation with data, ‘facts’
• In natural science: experiments
o The scientific cycle consists of a and b in continual confrontation
c. Reduction of error
• Some speak of ‘progress’
• However, this wrongly suggests a premeditated direction
• Essential: it is about the direction of reduction of errors, not about making no mistakes
(to the contrary!)
• On average, it is quite safe to say that in science errors become less frequent and less
fundamental
• Very important implication: there is no validity in ‘the age of an idea’, nor in thw opposite
• An indicator of pseudo-science: ‘it is new/ancient knowledge, therefore it is valid’
d. Social organisation
• Central element underlying a-c
o Individual (ethical, attitudinal) dimension: be receptive to refutation, even seek it
(acquired socially)
o Social: it presupposes a system of competition and free exchange of ideas, with
some parallels to market exchange (and some fundamental differences!)
§ Case: Lysenko, Russian agriculturalist, claimed that plants could inherit
acquired characteristics. Officially sanctioned as Soviet policy by Stalin,
leading to expulsion and imprisonment of biologists/agricultural
scientists
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2. Can sociology be scientific?
• In all four dimensions, sociology can meet ‘scientific’ standards (but, as every science, it
can turn pseudo-scientific)
• However, at least two fundamental aspects make sociology differ fundamentally from the
natural sciences
o Sociology can hardly build on experiments
o Sociology deals with humans and their interactions
• More than alternative ways of testing theories, OXO allows for reliable and valid
conclusions
• This makes experiments the most ideal way of testing causal relationships (not
necessarily other goals of scientific knowledge)
• Ground of its superiority: isolation of the effect of treatment (no need to know other
relevant factors)
• Later on, variants have been developed, e.g. for controlling for causal bias (Solomon,
placebo)
• Sociology deals with objects that are hard to imitate in laboratory contexts
o The Northern Irish civil war
• Second best options probably are (large-scale) surveys and quasi-experiments
• Alternative 1: Large scale surveys
o Usually based on (standardised) interviews
o Many variables collected
o Downside in relation to experiments: no control
§ No certainty about causal status of correlates (spuriousness)
o Ex. 1: ice cream and drowning at the seaside
o Ex. 2: listening to ‘unconventional music’ and deviant activities (ter Bogt et al,
2013)
o Dominant strategies: control for possible intervening variables
§ Multivariate designs
o Watch the same elementary units (persons, households, nations) change over
time
§ Time series and longitudinal designs
• Alternative 2: Quasi-experiments
o Often: experiments in the real world (field experiment), so with diminished
control
o Also: non-randomised distribution of groups
o Most promising: natural experiments: ‘accidental’ experiment in real world
§ Cunningham’s ‘men in transit’
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o Comparison with survey
§ No intervention by the researcher
§ Mimics experimental design
b. Human Action
• The object of sociology is: “conscious sentient beings”
• Action of people is fundamentally different from logic of ‘laws’ in nature
• Illustration: water boiling and people in a sauna
• Basically, explanations in sociology are: accounting for reasons (and therefore beliefs,
values, motives, intentions)
• Sociology does less but also more than natural sciences
o Railway station
• Basic strategy: ask people
• Criterion 1: intentionally
• Criterion 2: coordination
• Beware! The same behaviour belongs to different partial sets
• Types of (social) action
o Instrumental rational
o Value rational
o Affectual (emotional)
o Traditional (habitual)
• Conclusion
o ‘Aimless’ or ‘meaningless’ action is a contradiction in terms
o Non-rational action can also be meaningful
o There is more than one type of rationality
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• Social action*
• Instrumentally rational action *
• Value rational action*
• Affectual action*
• Traditional action*
SCIENCE = the intellectual and practical activity encompassing the systematic study of the structure
and behavior of the physical and natural world through observation and experiment.
SCIENTIFIC CYCLE = the continual confrontation of internal consistency and evidence, the process of
deducing evidence from theory and inducing theory from evidence.
REDUCTION OF ERROR = the continuous movement away from error in science, yet we cannot talk
about progress since the direction taken is not known.
QUASI-EXPERIMENT = a study differing from a true experiment in 1-2 key ways, an empirical study
used to estimate the causal impact of an intervention on its target population without random
assignment. Quasi-experimental research shares similarities with the traditional experimental design
or randomised controlled trial, but it specifically lacks the element of random assignment to
treatment or control. Instead, quasi-experimental designs typically allow the researcher to control the
assignment to the treatment condition but using some criterion other than random assignment.
OXO-MODEL = experiment with a randomised distribution in 2 groups (an experimental vs. a control
group) + former gets a treatment, latter not + observation (measurement) before and after stimulus.
PLACEBO = a substance given to someone who is told that it is a particular medicine, either to make
that person feel as if they are getting better or to compare the effect of the particular medicine when
given to others.
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ACTION * = the fact or process of doing something, typically to achieve an aim; intentional deed you
pay attention to (NOT normal breathing, for example). E.g. a murder.
SOCIAL ACTION * = an act which takes into account the actions and reactions of individuals (or
'agents'). According to Max Weber, "an Action is 'social' if the acting individual takes account of the
behavior of others and is thereby oriented in its course". E.g. boxing, you answer in accordance with
what your opponent does; letting an old person sit in public transportation when seeing someone
else doing that.
INSTRUMENTALLY RATIONAL ACTION * = when humans weigh actions in terms of costs and benefits.
E.g. choosing to go or not to go to class.
VALUE RATIONAL ACTION * = when investment is a reward itself; value lies in the behavior itself. E.g.
working out; when the class itself has value to you, when it is interesting/enriching; not going to war
in principle; pure esthetic pleasure (enjoying art, music).
AFFECTUAL ACTION * = purely emotional, rather impulsive action. E.g. hitting a professor because of
disagreement.
TRADITIONAL ACTION * = non-rational but habitual action, something done rather automatically. E.g.
brushing teeth, drinking coffee perhaps, etc.
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Chapter 2: Social Construction
1. Social Construction
a. Introduction
• Two approaches of scientific discipline (economics)
o Object: ‘the economy’
o Basic assumption: maximising behaviour
• In sociology, this is also the case
o Object: social action and social structures
o Basic assumption: reality is socially constructed
• Starting point: biology; the role played by instinct
• In humans, this role is at best partial
• Enormous differences between human societies in structure and preferences of their
members
o Food, hedonic reversal of certain types (coffee, chili peppers)
• World-openness: people can become all different beings regardless of the same genetic
code
• Problem: (relative) freedom from instinctual control may create infinite desires (cf.
consumption)
• Solution: regulation in culture defining what to desire and providing rules how to do this
o Social construction plays a crucial role here
• This culture is both above us; coordinating our actions and aspirations; creating an order,
and in us; creating the perception that the order around us is natural
• This part in use is called a role
o Sister, student, athlete, cleaning lady (people combine roles)
• Role: what is expected from certain structured positions in life, therefore metaphor of
drama
• Application: ‘The Sick Role’
o In general, people are expected to work
o Exceptins: unemployed, sick, under certain conditions
o Sick role has 4 characteristics
§ ‘Normal’ expectations suspended (if legitimised by medical doctor)
§ Innocence
§ Duty to see sickness as undesired
§ Duty to seek competent (professional) help
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• Case: The ‘virgin cleansing myth’
o Belief that sexual intercourse with a (young) virgin heals you from HIV infection,
or from other STI’s
o Cases documented in southern Africa, but also in 16th-century Europe (syphilis)
o Discussion about the incidence, but the mechanism is clear: certain definitions of
the situation determine behaviour
2. A Holy Trinity
3. Deviance
• “Why do norm violations exist and persist?” – Robert K. Merton, “social structure and
anomie”
• Why is there a violation of norms?
o Relapse into nature
o Reaction to dearth
• Society can be depicted as a result of
o Culturally defined goals
o Institutionalised means
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• Cultural goals*
• Institutionalised means*
• Conformity*
• Innovation*
• Ritualism*
• Retreatism*
• Rebellion*
o Final 4 as a type of adaption
SOCIAL CONSTRUCTION * = the construction of reality by the society and its norms. E.g. governments
and religions are social constructs.
HEDONIC REVERSAL * = the reverse reaction to stimuli that opposes the first reaction to them. E.g.
coffee, chili peppers while we’re genetically tuned to dislike these.
WORLD-OPENNESS = people can become all different beings regardless of the same genetic code
(SOCIAL) ROLE * = roles that people “play” in a society. E.g. a father, who is also a son, a husband, a
worker, etc.
THE SICK ROLE = sick people are not required to work but must also be seeking professional help and
be innocent of their undesired sickness.
THOMAS THEOREM = if men (= people) define situations as real, they are real in their consequences.
VIRGIN CLEANSING MYTH = belief that sexual intercourse with a (young) virgin heals you from HIV
infection, or from other STI’s.
OBJECTIVATION = the objective reality existing given internal and external (communicated) reality.
CULTURAL GOALS * = common cultural goals a society strives to achieve. E.g. the American dream.
INSTITUTIONALISED MEANS * = legally allowed and appropriate means to achieve cultural goals. E.g.
working hard to become a CEO.
CONFORMITY * = the tendency of a human who is a part of a society to strive toward its cultural goals
by institutionalised means. E.g. an initially wealthy young economist becoming successful by working
hard.
INNOVATION * = the tendency of a human who is a part of a society to strive toward its cultural goals
by non-institutionalised means. E.g. a young lower-class Italian man becoming a head of the Mafia.
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RITUALISM * = the tendency of a human who is a part of a society not to strive toward its cultural
goals but stick to their current “safe” position and institutionalised means. E.g. bureaucrats who only
care about the stability of their status.
RETREATISM * = the tendency of a human who is a part of a society neither to strive toward its
cultural goals nor to follow institutionalised means. E.g. nihilists, people dropping out of the society
and its norms.
REBELLION * = the tendency of a human who is a part of a society not to strive toward its cultural
goals and not to follow institutionalised means, but, as opposed to retreatism, involves finding a new
goal and striving to reach it by either violent or non-violent means. E.g. activists, terrorists, feminists.
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Chapter 3: Social Change
1. Introduction: Sociology and Modern Times
• There is a paradoxical two-sided relation between the discipline of sociology and the
modern world
o The modern condition is a quintessential focus of sociology
o Sociology is a product of modern society
• Illustrations of ‘sociological’ observations in premodern societies (Ibn Khaldun, Aristotle)
• However, sociology in the contemporary sense only emerged around the turn of the 18th-
19th century (Scottish Enlightenment, Tocqueville, Marx)
• This implies that sociology has a privileged relation with modern times in two ways:
o Without the modern view of society (as a man-made social construct), sociology
was ‘unthinkable’
§ Modern worldview is a necessary condition for sociology to emerge
o Sociology emerged as an attempt to remedy the typical ‘ills’ of modern times
§ Sociology can be understood as an attempt to understand/manage
‘modern’ social problems
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§ Institutionally: differentiation
• Also the institutions of society have come more specialised,
clustered in social systems
o The loss of the church of power in civil administration
o Change of inequality
§ “Industrialisation destroyed the great pyramid of feudal social order”
§ Stats distance decreased, social distance increased
§ Occupational mobility: job opportunities no longer ‘attributed’ by birth
§ Separation of home and work
• Possibilities to take up different social roles at home and work
§ Allowed for the rise of ‘autonomous’ individuals
§ Egalitarianism: many cultural transformations (Reformation,
Enlightenment, 18th century revolutions) laid the foundations of the idea
that people had intrinsically that same (‘equal’) rights
§ Important side-effect and condition of many modern inventions
(democracy: literacy)
§ Egalitarian society coincides with simpler and more fluid differences,
mainly based on wealth: ‘from feudal reciprocities to the contract’
o The modern class structure
§ Marx saw a fundamental division between owners of the means of
production (‘bourgeoisie’) and those who had to sell their labour
(‘proletariat’)
• He saw all proletarians to be ‘in the same boat’, eventually
leading to their acting together to revolutionise economic
relations
§ Weber saw considerable differences in power and life chances between
wage earners
• He created a more differentiated class scheme
§ Also, the occupational and therefore class structure changed dramatically
• E.g. agricultural workers in 20th century evolved in most
European countries from > 50% to <5% of the active population
§ Weber approached class as group who had a similar position on a market
in terms of ‘profit’, leading to similar life chances
§ Best scheme today: EGP class scheme
§ Distinction between service class, working class and self-employed
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§ Created a stark division between the public and the private world
• Changes in how we see patronage
o Personal bonds and taste are not allowed to dictate the
public sphere any more
• At the same time, the personal sphere has become more free
CHAIN OF INTERDEPENDENCE = the chain of the number of people who are dependent on one
another, in the context of making, selling, buying and using goods and services.
SPECIALISATION (INSTITUTIONAL) * = the specialisation of institutions on certain tasks, and not the
entire public sphere. E.g. the church now as a solely religious institution.
SOCIAL ROLE = the position of a person in the society (financial, hierarchical, moral, etc.)
EGALITARIANISM = the ideology that considers all humans being born fundamentally equal (with
equal rights).
LITERACY = the fact of people being educated (read, write, count, etc.)
CLASS = a social cluster of people with similar social roles and positions.
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PROLETARIAT = people who only had labor to sell, as defined by Marx.
EGP CLASS SCHEME = the social class scheme designed by Weber, with a distinction between
service/leading class (top classes), working class (blue collars) and self-employed.
VIOLENCE MONOPOLY = the concept that the state has a monopoly of violence and law enforcement,
i.e. ordinary people can use violence only for self-defense purpose.
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Chapter 4: Economic Organisation
1. The concept of economic organisation
• Two feasible approaches
o Firms and other organised forms
o The ‘organisation’ of the whole economy*
§ Foraging, agricultural, capitalist economic organisation
§ Organised forms of course may be part of a definition of the broader
concept of economic organisation
2. Capitalism
a. Definition
• The pursuit of profit, forever renewed profit
• Marxist formulation: M – C – M’
o M = money
o C = commodity
o M’ = money + an increment (profit)
• Central prerequisite: are private property rights
• Phrased more generally: necessary condition for capitalism is that ‘the individual has a
legal right to exclude others from using an object or person’
c. Types of Capitalism
• Classical typology of capitalism
o Traditional
§ Markets for some sectors
§ Co-existence with autarkic systems
o Political
§ Predatory political profits
§ Profit through force/domination
§ Unusual deals with political authorities
o Rational
§ Free market trade and production
§ Speculation and finance
• Contemporary typologies
o Tax burden and purchasing power (wealth)
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o Esping-andersen’s typology of welfare states
§ Liberal regimes
• Genesis: 19th-century English political economy
• Mainly in Anglo-Saxon countries
• Weak or inexistent social-democratic or Christian-democratic
movements
• Three core features
o Only ‘bad risks’
o Stress on welfare (residual systems)
o Market oriented
§ Social-democratic regimes
• Main difference: magnitude of redistribution
• Concentrated in Scandinavian countries
• Three core features:
o Anti-market, strongly state oriented
o Universalism
o Egalitarian
• Consequence: active labour market policy (employment,
training)
§ Continental regimes
• Genesis: 19th century ‘conservative’ ideas:
o Absolutist etatism
o Catholic social doctrine (Rerum Novarum, 1891)
o Christian democratic or conservative political elites
• Mainly in continental European countries
• Two central features
o Arrangements segmented in professional groups
o Familiarism
• Consequence: passive labour makrt policy (emploment, training)
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• May also facilitate tax evasion
• Case 1: North-Italy (Emilia Romagna), knitwear
o Example of loose network
• Case 2: ICT
o Well-known ideal-typical comparison between Silicon Valley and Route 128
o Example of Fordist regime
o In the long run à Silicon Valley outperformed Route 128
4. Globalisation
a. Definition
• Originally: ‘the expansion of modern capitalism throughout the world’
• Primarily a geographical phenomenon, therefore an ‘expansion’
• Seems to weaken the importance of boundaries of nation-states
• Globalisation literature emerged in the 90’s, and is interdisciplinary
• New approach: distinction between world and global economy
• Global economy is ‘an economy with the capacity to work as a unit in real time on a
planetary scale’
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• Residual welfare system
• Universalist welfare system
• Egalitarian welfare system
• Familiarist welfare system
• Legal regimes
• Diffusion *
ECONOMIC ORGANISATION = 1. Firms and other organised forms 2. The ‘organisation’ of the whole
economy.
CAPITALISM = the pursuit of profit, forever renewed profit, central prerequisite: are private property
rights.
REDISTRIBUTION * = the collection and redistribution of wealth in the economy. E.g. the collection of
taxes and their redistribution to finance social and other activities of the government.
RECIPROCITY * = the exchange between close people, which does not have a monetary character. E.g.
giving each other gifts of friends, family members, etc.
EXCHANGE * = the exchange of whatever objects that have a similar value. E.g. buying something in
return for money, bartering goods.
RATIONAL CAPITALISM = the capitalism based on free market trade and production, speculation and
finance.
POLITICAL CAPITALISM = the capitalism based on deals with political authorities, predatory political
profits or profits through force or domination.
TRADITIONAL CAPITALISM = the historic capitalism based on markets for some sectors and their co-
existence with autarkic (self-sufficient) systems.
LIBERAL WELFARE REGIMES = regimes where the market has the central role, the solidarity is
individual, the redistribution is minimal, and help is provided to the most poor and desperate, not the
ones who are not yet in this state. E.g. USA.
SOCIAL-DEMOCRATIC WELFARE REGIMES = regimes where the state has the central role, the
solidarity is universal, the redistribution is maximal, and the capitalism adapts a socialist model. E.g.
Sweden.
CONTINENTAL WELFARE REGIMES = regimes where the households have the central role, the
solidarity is kin or (professional groups), and the redistribution is high. E.g. Germany, Italy.
BAD RISKS = people who have extreme problems, very poor, completely desperate.
RESIDUAL WELFARE SYSTEM = a system that stresses welfare, the ones who work will have welfare,
the ones who don’t will get something.
UNIVERSALIST WELFARE SYSTEM = a system that stresses benefits for all citizens: once you are a
citizen, you will receive all and the same benefits that everybody else receives.
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EGALITARIAN WELFARE SYSTEM = a system that stresses equality, entitling everyone to more or less
similar benefits, without big differences in status.
FAMILIARIST WELFARE SYSTEM = a system that focuses heavily on families, rights and benefits are
granted to families, and not individuals.
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Chapter 5: Ideal typical markets & the genesis of capitalism
1. The essence of change: market dynamics
a. Market characteristics
• Collins theorises the nature of markets with the help of three central starting points
o Markets are systems of property
§ Markets are based on a particular kind of property – control over
resources
§ ! There is a distinct difference between this conceptualisation of markets
and the one in previous chapter (3 forms of economic coordination: only
exchange refers to market transactions)
• Broader set of types of economic activity in markets (every social
system that entails property)
• No possibility to distinguish property forms as market or non-
market (e.g. those based on force instead of voluntary
transactions)
§ Every period has a ‘system’
• A leading market sector
o Markets tend to expand
§ Generally, expansion happens as regards people, goods, relationships,
territory
§ Markets tend to give rise to higher order (superordinate; trade in trade)
and dependent (subordinate) markets
• Politics and warfare
o Superordinate and competitive markets
§ Warfare leads to growth of production markets
at a lower level
• Status goods
o Important superordinate market consisting of the
production and circulation of cultural goods
o Cost-accelerating tendencies (or decreasing profits) within superordinate
markets often entail crises and transition to another leading market sector
§ In the long run, markets tend to undergo crises, sometimes serious
enough to end the continuation of that system
§ Crises also affect politics, as states are dependent on material resources
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2. Kinship markets
a. Characteristics
• Typical for stateless societies
• Sexual property is principal form
• From that follow control over children, inheritance, residence, household goods
• Total relations: marriage alliance equals military, political, economic, religious alliance
• ‘Kinship capitalism’ is investment in relatives
• Long-term tendency of increasingly male-centred system of sexual property
b. Crisis
• Basic distinction between conservative and aggressively expansive kinship strategies
• Latter: dynamic based on extension of alliances by emerging elite groups
• Intensified by the emergence of ‘pseudo-kin’, kinship ties by fiat
• Leads to the emergence of ‘kinship capitalists’ versus ‘kinship proletariat’
• Former accumulate power/wealth, giving rise to early states, households as elementary
unit: patrimonialism
3. Slave Markets
a. Characteristics
• First structural tendency toward capitalism
• Historically: various forms of slavery
o Greece: debt-slavery
o Islamic societies: military / administrative slavery
o Russia, medieval Korea: agricultural slavery
o US (south): slave plantations
• Primarily focus on ancient Greece & Rome, as chattel slave markets were leading sector
there
• Expansionary dynamic: warfare fed slave supply
• Military/slave dynamic expands internally and geographically (conquest and barbarian
entrepreneurs)
• Innovations in productive sector (military)
o Military hardware: bronze and iron weapons and armour, engineering,
fortifications, multitiered galleys
o Military spillovers in civil economy: road building, construction industry
• Slave market drove growth through subordinate and superordinate markets
o Subordinate: slaves stimulate productive sectors and bureaucracy, up to 30-40%
of Roman labour force
o Superordinate markets of politics and army: politicians and generals as class
investing in expeditions
b. Crisis
• Soldiers evolved from small-scale entrepreneurs (own weapons, land at home) to army of
proletarians working for wages (army weapons, lost land during conscription) for
entrepreneur (general)
o Earlier soldiers-landholders were subjugated by their own products (slaves)
• Supply of slaves dried up after AD 200 through end of military conquests (geopolitical
cause)
• Alternative: creation of semi-peripheral powers, leading to collapse through incursive
migrations
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3*. Islamic slave markets
• Differed from Roman system in bypassing the investment of slaves in the productive
economy
• Slaves were not used in subordinate markets, but in the military and in government
bureaucracies
• Origin: after 800, attempt to avert loss of power to feudal lords
• Central business was not capturing slaves; they were purchased on markets
o Strong impetus to spread of world markets
4. Agrarian-coercive markets
a. Characteristics
• Type of society based upon agricultural production and a militarised state
o Rent coercion
§ Is decentralised and gives rise to expansion due to exchange of display
goods by landed military class
• Ceremonial gift networks or potlaches
• Status display in supernatural dimension: aristocratic display of
churches (become players themselves, fuelling competition and
expansion)
o Tax coercion
§ Is centralised and prefers to impose tax coercion directly to farmers
• If powerful enough, the state may eliminate market
• If King is weak, he will fuel competition further by status display
o Monasteries were often founded as agents of weak
states
b. Expansion mechanisms
• Feudal dynamic (rent-coercion)
o Expansion through rising surplus extraction
§ Rural landlords press rent of peasants upward
§ Peasants respond by increasing production
§ Effect: productive expansion by
• Colonising wastelands
• Intensified cultivation (technological innovation)
• Military expansion (landlords as military producers)
o Expansion through status display
§ Status competition between nobles (housing, cuisine, clothing &
jewellery, patronage in art,…)
§ Evolves around household
§ Possible gain from competition: political weight
§ Effect: cash need to let to monetisation of the countryside
• Corporate religious capitalism (rent-coercion)
o Monastic sectors approximated rational capitalism
§ Free factors of production
§ Political support of exchange and property rights
§ Universalistic and disciplined ethic
o Advantage: escaped household organisation of politics and production
§ More or less freely recruited labour force
§ Like firms: reinvestment of profits in production
§ Reform movements: autonomy from aristocratic patronage
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o Gave rise to strong superordinate markets
§ Banking
§ Educational systems: universities
§ Indulgences: trade in the afterlife
c. Crisis
• After AD 1300
o Feudal dynamic
§ Crisis has to be understood against the background of the rival form:
state tax coercion
• Accessible land was used up, no easily accessible external
territories for conquest
• Emerging power of absolutist state (tax coercion) with strong
superordinate markets (venality of public offices)
o Corporate religious capitalism
§ Europe: Reformation (north) and French Revolution (south)
• End of superordinate markets, monasticism, confiscation of
ecclesiastical properties
§ China: confiscation of Buddhist monastic property after AD 1050
§ Japan: continuation of Chinese market dynamic, ended after 1600s
5. Capitalist markets
a. Characteristics
• Before: large sectors of socio-economic life remain self-sufficient & autarkic
• Long and slow process, with a ‘tipping point’ if certain proportion of economy is market
driven
• Alternative interpretation: several tipping points
o ‘take-off’: early form in monastic traditions, world system around Middle East
(12th-13th centuries), 16th century Europe
o Next dimension: England, 18th-19th century
• Not only a question of market penetration, even more of pyramiding of sub- &
superordinate markets
• Central characteristic: pyramiding of multiple systems in an integrated regime of sub- and
superordinate markets
o Financial markets, where profit is divorced from production
o Education: a currency-like inflation due to the expansion of educational
participation and credentials
• “In modern capitalism, everything is commodified, except the most central commodities
of the previous systems”:
o Sexual property
o Slavery
o Venality of office, tax farming
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• Borders were never really closed
o Some formal collaboration
o Limited illegal migration
o Military rivalry (hardware technology)
o Cultural products (mass media) created demand in the East
MARKET EXPANSION = the expansion of markets regarding people, goods, relationships, territory.
SUPERORDINATE MARKET * = a higher order market. E.g. politics and warfare. An investment in long-
distance and future activities, a purchase of media of exchange that can eventually be cashed in.
SUBORDINATE MARKET * = a market that emerges from a certain industry to support it. E.g.
manufacturing certain commodities needed to manufacture mobile phones.
KINSHIP MARKETS = markets based on sexual property, i.e. ownership of a spouse, and therefore
children, inheritance, etc.
SLAVE MARKETS = markets exercising ownership of slaves as the labor force to produce goods and
services (they were the central form of property though, not producers).
RENT COERCION = when the decentralised coercion gives rise to expansion due to exchange of display
goods by landlord military class.
TAX COERCION = when the centralised state imposes tax coercion directly to farmers.
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SOCIALIST AUTARKY = the self-sufficiency of socialist economies, their closed nature toward the global
economic market.
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Chapter 6: The Challenge of China
1. A conundrum for Eurocentric historiography
a. Some observations
• China was a forerunner in many important technological innovations
o Gunpowder: 11th century invention, adopted by the West in the late 13th century
o Navigation: 7 major naval expeditions (1405-1431), 1681 ships built in the first
phase alone (1404-1407)
o Printing: block printing was invented in the 9th century (Europe: 15th century)
• Teaches us that Europe/‘The West’ has not always been the forerunner (economically
and otherwise)
• China seems to have been ‘ahead’ in economic organisation, innovations, wealth
o Consensus: head start under the Song (960-1279) and Yuan (1279-1368)
dynasties
o Some assert that development came to a standstill under the Ming dynasty
(1368-1644)
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o Clocks technology: technological head start, but China used clocks for
amusement of the court and hardly marketed them
o After 7 maritime expeditions, China turned inward: in 1525, the last oceangoing
ships were destroyed, and the owners arrested
o Printing was developed in 9th century china, but never led to either the take-off in
commercial printing or the explosion of diffusion of dissenting ideas, as it did in
the West
o Technologically: ideographical writing restricted the Chinese to block printing.
While movable type developed in the West (Gutenberg, 1452)
a. Advantage as a trap?
• Technological advancement at the beginning of the Ming dynasty (14th cent.) is clearly
not contested
• Possible explanation for the relative stagnation is a ‘high-level equilibrium trap’ (Mark
Elvin)
o Fast population growth
o The relative standstill is due to a disadvantageous labour supply
o An oversupply of cheap labour and expensive capital favoured labour-intensive
answers
o Therefore, the Chinese lacked the incentive to innovative à a lack of constraints
hampered technological innovations
• On the other hand: expansion of market transactions internally and even externally
• Strongly driven by a luxury market
27
c. Consumption: commodification of a luxury culture
• Some authors take a different approach, focusing on elite consumption as a driving force
behind monetisation and market expansion (compared to expansion of markets in
agrarian-coercive systems)
• During Ming, a refined culture of ‘connoisseurship’ developed, with a strong stress on art
consumption
o Lifestyle books and prose fiction (commoditised)
o Decorative arts such as painting were commercialised even during late Song (13th
century)
• In general, China paid more attention to luxuries than the West
REVISIONISM = the view that challenged the classical one, the view that advocates an intentionally
slower, yet not stopped development of China.
CONFUCIANISM = the belief system of social elite in China, the one that advocated the gentlemanlike
lifestyle.
TAOISM = the belief system of common people in China, the one that advocated belief in mystery and
ghosts.
HIGH-LEVEL EQUILIBRIUM TRAP (ELVIN THESIS) = the situation where an oversupply of labor, which
was also cheap, gave no incentive to innovate.
28
Chapter 9: Social Norms
1. Introduction and definition
• ‘A social norm is an injunction to act or to abstain from acting’
2. Features
a. Sanctions
• Causal efficiency of norms is rooted in sanctions: direct punishment or loss of
opportunities (ostracism)
• Multiplier: adding third-party sanctions to the second-party punishment (gossip)
• General foundation of social sanctions: emotions of shame (violator) and of contempt
(observer)
• Problem: what motivates the sanctioner to invest a cost and a risk in punishing?
3. Externalities
• Behaviour with externalities, e.g. littering, does not automatically generate norms
• Often: generated by outside intervention
• Probably: emerge easier in cases of common adversary (ethnic, social class or other
outsiders) than in ‘game against nature’
4. Applications
a. Codes of honour
• Strong norms often are working in…
o Feuds, vendettas, honorary killings and duels
§ Aristocracy in Ancien Regime in France, 19th century Corsica
o Experimental evidence of cultural production of codes of honour (US: South vs.
North)
• Conducive to violence
29
• Experiment
o Treatment: confederate of the experimenter bumps into male subject and insults him
(‘asshole’)
o Control situation: subjects not insulted or bumped into
§ Organisation of a ‘chicken game’: small corridor, intimidating person (1.9m,
114kg) approaches
§ Measured: distance before subject gives way
• Southern subjects behave differently (enter the chicken game) after
insult, northerners not
b. Norms of etiquette
• Examples: dress code, table behaviour, personal hygiene, greeting ceremonials
• Often very detailed, strongly emotional
• Tend to create boundaries between high and low in society, both ways
• Central conclusion: at first sight; trivial, but often more important in social life than
‘fundamental’ values
SOCIAL NORM * = an unwritten rule saying to act or abstain from acting in a particular way. E.g. not to
go to work naked.
30
UNCONDITIONAL NORMS * = norms that do not require an act of another person in order for the
subject to act or abstain from acting in a particular way. E.g. one would not spit in a public place even
if someone else spits (or does not spit).
CONDITIONAL NORMS * = norms that do require an act of another person in order for the subject to
act or abstain from acting in a particular way. E.g. one would greet a person who entered the room if
she greats him first.
SANCTION * = a direct punishment or a loss of opportunities. E.g. the neighborhood ignoring a certain
neighbor who would listen to loud music after midnight.
OSTRACISM = the exclusion of a violator of social norms from his community or society.
MORAL NORMS * = norms dictated by moral beliefs, such as religions. E.g. abstaining from consuming
alcohol in certain Muslim countries.
CONVENTION * = norms arising from sheer self-interest of subjects. E.g. not crossing the road on the
red light not to be hit by a car.
CODE OF HONOUR * = a belief system based on the preservation or creation of honor, often
associated with getting revenge from an offender. E.g. killing the murderer of your relative in some
communities or cultures.
NORMS OF ETIQUETTE * = norms invented for the purpose of distinguishing people of higher social or
cultural class from those of the lower one. E.g. procedures to be followed at the dining table.
31
Chapter 10: Weber on Religion and the Economy
Relevance
• Relevance of non-economic institutions for economics structures and behaviour
• Historical and comparative hypothetical relevance of religion
• Collective cultural foundations of actions
c. Religious organisation
• Hierocracy: every organisation enforcing order through religious benefits instead of
physical coercion
• Church: rational evolved and universalistic hierocracy
• Sect: religious organisation one has to accede to
e. Ways to salvation
• Expectation and belief in salvation may affect the economy in two ways
o Explicit attitudes toward economic life (ban on usury, consumption taboos)
o Unintended consequences
§ More important (inner-worldly asceticism)
32
b. Stratification as an indicator
• Professional statistics in religiously pluralist countries
• Protestants more often skilled industrial labourer or entrepreneur than Catholics
• Remains of an older relationship
• However: alternative explanations
o Opposite causal relationship (ßà control of wealth)
o Spurious correlation: common cause is minority position, compare Jews and Chinese
(ßà comparing Protestants and Catholics in minority and majority positions)
• Core of the ‘capitalist spirit’: ‘hard and efficient work to gain money’, not only as a means,
but also as a goal, an ethos
• Both work and money become goals, not an end
• Is this real? There are indications that work indeed has taken a more central in people’s
lives
o The ‘lottery question’
o Also, real winners hardly quit working: a survey of 185 lottery winners (3,63 million $
average) shows that only 6% of those working quit working
• Illustrates that modern workers tend to see work as amore than a means to an end
• Also, successful businessmen in general do not necessarily stop their businesses and
become a rentier
• Fundamentally different from:
o Ruthless medieval ‘capitalist’: merely driven by lust for wealth (Florence)
o Medieval work ethic: ‘In the sweat of thy face shalt thou eat bread, till thou return
unto the ground’ – Genesis 3:19
• Core difference between rational capitalist mentality and e.g. medieval culture: work as a
judgment and wealth as an end for a lavish lifestyle
o This ‘ethos’ is pretty irrational
• There is one exception in the Catholic Middle Ages: the religious elites in the monastic
tradition
• Origin lies in the rule of St. Benedict (480-547): ‘ora et labora’
• Gave rise to the other-worldly asceticism of monastic elites: close to the capitalist spirit,
yet withdrawn from the secular world
33
d. Calling (Luther) The Protestant Ethic
• First candidate causal factor of capitalist mentality
• Concept of calling (Beruf) in Bible translation by Luther
• Novelty: work as a duty toward God for everyone
• However: Luther provided a traditionalist interpretation
• Conclusion: candidate is rejected
e. Puritan Protestantism
• Generic term with Protestant denominations: mainly Calvinism, but also Pietism, Baptism,
Methodism
• Not as much the doctrine, but the experienced religious convictions and the practice, built
upon doctrine
• Core: doctrine of predestination (usually a source of fatalism) à extreme loneliness and
uncertainty for faithful
• Response in pastoral work: methodical conduct of life as a sign à this-worldly asceticism
• Relevance: the rational and methodical conduct of life of monks was imported in the
world
• Implies the emphasis on hard work as a central incentive
• At the sane tune: aversion to the fruits of labour (luxury, consumption)
• General effect: capital accumulation, possibility of auto-financing of entrepreneurial
activities, disciplined labour supply
34
• Unintended consequences*
• Capitalist spirit
• Puritan Protestantism
• Doctrine of predestination
• Other-worldly asceticism
• This-worldly asceticism
RELIGIOUS BENEFITS * = everything that may be desirable in religion, reasons for being religious. E.g.
living in heaven after death.
THIS-WORLDLY BENEFIT * = a benefit that can happen during people’s lives. E.g. stronger teeth, good
job.
OTHER-WORLDLY BENEFIT * = a benefit that will happen in another life/after death. E.g. heaven or
rebirth (eschatology).
ESCHATOLOGY = the part of theology concerned with death, judgement, and the final destiny of the
soul and of humankind.
HIEROCRACY = every organisation enforcing order through religious benefits instead of physical
coercion, the kind of organisation which enforces its order through psychic coercion by distributing or
denying religious benefits. E.g. a factory which starts its day by a prayer, so that the workers go to
heaven after their deaths.
CHURCH * = rationally evolved and universalistic hierocracy; one can be born into a church. E.g. the
Roman Catholic church.
SECT * = a sect is similar to a hierocracy or church, but less universalistic, it is a religious organisation
one has to accede to; one cannot be born into a sect. E.g. Jehovah's witnesses.
THEODICY * = explanation of the world as it is, including evil, inequality etc. E.g. the legitimation of
wealth of the rich and privileged people, and the rationalisation of hope for the unfortunate ones
after death.
USURY = the action or practice of lending money at (unreasonably high) rates of interest.
CAPITALIST SPIRIT = ‘hard and efficient work to gain money’, not only as a means, but also as a goal,
an ethos, both work and money become goals, yet not an end.
PURITAN PROTESTANTISM = not as much the doctrine, but the experienced religious convictions and
the practice, built upon doctrine having the doctrine of predestination at its core.
DOCTRINE OF PREDESTINATION = the doctrine that says that all aspects of a human’s life are
predetermined by God even before s/he is born.
35
OTHER-WORLDLY ASCETICISM = practiced by people who withdraw from the world to live an ascetic
life (this includes monks who live communally in monasteries, as well as hermits who live alone).
36
Chapter 11 – Morals and Markets
37
§ The most consistent argument would be that ‘the market’ would reinforce
honest and faithful behavior and attitudes
§ The logic is depended on repeated interaction
• In that case, it is rational to invest in a good reputation by signaling
credibility
o Signaling: communicating a certain worth or value
o Markets fostering cooperation
§ The central features why virtues are promoted through market exchanges
• It presupposes ‘a shared intersubjective orientation’
• It is well-equipped to create this orientation with non-kin and
strangers: it is ‘cooperation with nobody in charge’
§ Three dimensions in thesis of cooperation
• Micro Level
o Societies who are more dependent on market transactions in
their economic organisation, are more generous in dividing
money in ultimatum games (in 15 small0scale societies)
• Macro Level
o Expectation of less conflict between trading nations
• Context
o Market-like situations induce self-regarding behavior and
people prefer reciprocal transactions
o Markets and freedom
§ Von Hayek developed the idea in the post-war period: centralised planning
would end not only economic freedom (capitalism), but is inimical to all types
of freedom
§ Arguments rests on three connected ideas
• Free markets are a desirable end state, because they are freedom in
themselves
• Economic freedom spills over in democratic freedom
• Market life defends against predatory states or economic
concentration
§ Supporting evidence for these propositions
• Substantive freedom
o Most people indeed seem to prefer moderate levels of
choice, but the relationship is non-linear
• Spillover
o In early modern periods, there is some association between
political power spread across economic elites (landholding
and commercial)
o May also imply a please for state redistribution
• However, capitalism without state redistribution seems to foster
economic power concentration rather than to combat it (Piketty
debate!)
o Markets as change agents (creativity and innovation)
§ Schumpeter’s theory of ‘creative destruction’
• ‘the process of industrial mutation that incessantly revolutionises the
economic structure from within, incessantly destroying the old one,
incessantly creating a new one
o This process of Creative Destruction is the essential fact
about capitalism
38
§ Exchange rewards technological and organisational innovation and product
differentiation
§ Applied to cultural products: competition and free production encourage
innovation, creativity and diversity
§ Historically, this only became possible when cultural and economic capital
become broadly available creating a public (‘the audience’)
39
• Things are thus freed from their relational origins
• Because of this, markets are prone to destroy social relations
o Market populism
§ Populism: political doctrine or communicative style
§ Central feature is the contrast in interests between the common people (the
audience for whom the populist message is intended) and the elite
§ Neoliberals intentionally conflated markets with democracy: voters and
consumers rule
§ Paradox: anti-expert and anti-elitist stance was successfully sold by its own
expert class (educated in economics departments and business school)
§ Once crucial difference between democratic choice and market transactions
• The latter is not a social choice, i.e. like voting or protesting is
§ Also, of the market were democracy, it would be census suffrage (voting
dependent on wealth, indicated by taxes paid)
§ Market populism is not a feature of market society, but of a particular kind of
market ideology (a quite proselyte one, indeed)
2. Feeble Markets
• There is a common assumption under both the utopian and the dystopian approach of
moral effects of markets
o They exist of themselves, and mainly are interesting for their effects
o The starting point in contemporary economic sociology is that markets are not such
powerful institutions after all: they are ‘feeble’
§ This turns the causal perspective around: what makes markets bloom?
Instead of: what do markets lead to?
40
o Central problem: the control and enforcement of actions by
overseas agents (the classical principal-agent problem) in
absence of state enforcement
o Two different institutional solutions
§ Maghrib – collectivist:
• Contracts are collectively enforced through
informed social norms and threat of
ostracism
• Effective, but limited to cooperation to
ingroup members
§ Genoese – individualist:
• No self-enforcing collective, hindering social
and moral enforcement mechanisms
• Developed formal organisations to support
exchange: legal system for registration
(formal written contracts) and enforcement
of contracts (permanent courts)
• Effectively enforced trade embargos against
predatory external exchange partners
§ Voluntarist view: good/bad institutions
• One can implement institutional elements promoting markets
anywhere
• Argues that ‘best practice’ institutions are conducive to market
expansion
o Strong property rights
o Developed financial markets
o Corporate governance
• Effect associated with a ‘liberal dream’ scenario
• Analytically close to the realist approach, but deems practicable to
implement good institutions
• Inspired the ‘shock therapies’ in 1900’s to bring market system to
Central Europe and Russia
§ Differentiated view: varieties of capitalism
• Capitalism exists in more than one form
• Contemporary theory of ‘varieties of capitalism’ assumes path
dependency of. Capitalist systems
• Based on three central starting points
o Coordination problems of firms are central
§ Firms are central in this approach: how do they solve
all kinds of problems of asymmetrical information
and control?
§ Supplementary: the same problem arises for other
stakeholders (employees, financiers, shareholders)
have these problems
§ Ideal typica solutions
• ‘Liberal’: market or within the firm
• ‘Coordinated’: mutual long-term
cooperation
§ E.g. Human capital/’skills’ of staff
o Institutional complementarities lead to topics institutional
regimes
41
§ Solutions for one problem, make them advantageous
in another domain too
• Labour and capital markets are either
market orientated and flexible, or stable and
more orientated to long-term relationships
§ Leads to 2 institutionalised ideal types of market
economies
• Liberal: mainly Anglo-Saxon countries
• Coordinated: continental Europe, Japan
o Differences between these regimes are reinforced through
mechanisms of comparative institutional advantages
§ Stability of the systems is explained by the positive
effects of both
§ CA’s suggests specialisation
• Mainly in the different of types of innovation
o Liberal: radical innovation, e.g. in
technology (PC, internet) thanks to
the flexible access to human and
financial capital
o Coordinated: incremental
innovation due to the stable
relations
UTOPIAN * = extremely positive view (of the effect of markets on morality). E.g. the ‘liberal dream’ of
how the morality results from market in market societies.
42
DYSTOPIAN * = extremely negative view (of the effect of markets on morality). E.g. the ‘commodified
nightmare’ of how immorality results from market in market societies.
THE ‘LIBERAL DREAM’ = the view that markets lead to the best possible morality.
RATIONAL EGOIST = the market agent who acts positively out of his self-interest, to maximise his
wealth.
SPILLOVER * = a state or event in one context creates a similar state or event in a seemingly unrelated
context. E.g. slaves should not be commodities but market agents to trade with, thus slavery should
be abolished in market societies.
‘DOUX COMMERCE’ THESIS = the ‘liberal dream’ of the positive effects of markets on societies, on
micro level, individuals become better citizens, on the macro level, the societies are overall better off
due to the markets.
ULTIMATUM GAME = the fact that one absolutely must cooperate in a market to survive (egoism does
not presuppose non-cooperation, paradoxically).
CREATIVE DESTRUCTION = capitalism in itself bears the fruits of lack of stability, by creating new
goods, older ones are destroyed, and this endless process would at the end let societies progress.
THE ‘COMMODIFIED NIRHTMARE’ = the dystopian view of effects of markets on morality, where
social interaction is commodified, monetised and deprived of morality. Moral effects of markets are
corrosive, imply exploitation, generate envy and infinite wants, coercion, corruption and exclusion,
and market populism.
COERCION = in a market society, people tend to become predatory towards one another. Following
from capitalism, you have more pronounced inequality; this creates more poverty and thus destroys
the freedom of choices.
CONSPICUOUSNESS * = lavish consumption in order to impress. E.g. buying expensive cars not
because of their quality or usefulness, but to impress others and make them envious.
PERVERSITY THESIS = view that poor relief corrodes the poor’s willingness to work.
COMMODITY FETISHISM * = the idea that a commodity is a thing, a value in itself, autonomous from
its producer (once the commodity is given a monetary value). E.g. buying useless shoes out of some
maniacal addiction to them, as if they present value in themselves.
POPULISM = political doctrine or communicative style that has its central feature in the contrast in
interests between the common people (the audience for whom the populist message is intended)
and the elite.
MARKET POPULISM = a particular kind of market ideology, whereby voters and consumers must rule
(democracy).
43
REALIST VIEW = while some cultures enable, others inhibit the development of market society.
PRINCIPAL-AGENT PROBLEM = the problem of control and enforcement of actions among the sides of
the exchange.
VOLUNTARIST VIEW = one can implement institutional elements promoting markets anywhere,
argues that ‘best practice’ institutions are conducive to market expansion (strong property rights,
developed financial markets, corporate governance), effect associated with a ‘liberal dream’ scenario,
analytically close to the realist approach, but deems practicable to implement good institutions.
DIFFERENTIATED VIEW = capitalism exists in more than one form, can be varied.
44
Chapter 12 – The state & the economy
1. Introduction
• Major impact of non-economic institutions on the economy, or: necessary condition
• Especially true for politics and law
• Two central functions
o Violence monopoly of the state
o Property rights
45
VIOLENCE MONOPOLY OF THE STATE = the fact that only the state can use violence in a legitimate
way, massively, but when necessary.
POWER = the ability to make others act the way one wants them to.
LEGITIMACY = the lawfulness of execution of power, with the consent of the dominated.
LEGAL (OR RATIONAL-LEGAL) DOMINATION * = authority based on laws and legitimate appointment.
E.g. Germany, where police exert force.
CHARISMATIC DOMINATION * = authority based on the charisma of the leader, his vision; this
domination ends once the leader dies. E.g. Osama bin Laden, Adolf Hitler.
TRADITIONAL DOMINATION * = authority based on tradition. E.g. kingdoms, like Belgium or Spain.
46
Chapter 13 – Sociology of taxation
Relevance
• Looking at real taxation probably is the best way to understand real powers balances
• Taxation structure and levels strongly affect the distribution of wealth, and people’s
actions and strategy
• They also interact with state building and functioning
47
• Why would this be the case for pre-tax?
o Little evidence of high labour supply elasticity
§ In case of high labour supply elasticity, top income earners would respond to
rate cuts by working harder
o Some evidence of rent-seeking
§ Rent-seeking behaviour is behaviour that improves that welfare of the agent
at the expense of the welfare of something else (protection rackets, theft,
management putting effort in increasing their share of turnover, not the total
volume of turnover)
§ Low tax rates induce executives to seek compensation increases at the
expense of the firm’s shareholders and workers
48
§ ‘Impact’ of these differences are simple accounting standards
• They do not assess causal effects (behavioural responses)
§ More importantly, taxes may covary in a surprising way with social spending
• Most solidaristic welfare states rely most heavily on regressive taxes
o Taxes have a differential impact on the income distribution
§ Proportional taxes
• Tax liability and income grow in equal
proportion
§ Progressive taxes
• A rise in income with 1 point à tax liability
rise > 1 point
§ Regressive taxes
• Opposite of progressive tax.
o Sales tax, poll taxes (head taxes)
§ Explanation
• Conducive to economic growth
• Evades undermining the political consensus
• Less capital flight
o Overall higher ability of these systems to sustain elaborate
social spending under globalised economic conditions
o Implicit income taxes in means-tested welfare
§ Many benefits are means-tested (contrary to universal benefits), especially in
liberal welfare regimes
§ The represent an implicit income tax
• Acquiring an income situation that exceeds the threshold, leads to a
lower increase in realised income
o Poor household lives on a monthly welfare check of 500 €
o A job offer with a pre-tax income of 2000 €, would lead to
the loss of the 500 € benefit
o The implicit tax of accepting a 2000 € job, therefore is 500 €
49
4. Making the economy grow
• Taxation is also causally prior to economic and political development
• Main questions
o How does taxation induce economic growth?
o How does taxation induce state development?
• Disciplinary division of labour
o Former is mainly studied by economists
o Latter has been the prime focus of a group of historical sociologists
50
§ Comparative cases: Chile and Argentina
TAX STATE = a state that levies taxes on its population (workers, landowners, etc.)
PATRIMONIALISM = a state where the ruler (monarch) is the sole governor, there is no distinction
between private and public property.
LABOUR SUPPLY ELASTICITY * = the response of income earners on the change of tax rates. E.g. if you
decrease tax rate for the top-level income earners, these people would start working harder, because
it pays off = high elasticity. However, there is very little evidence for this element.
RENT-SEEKING * = behavior that improves the welfare of the agent at the expense of the welfare of
someone else. E.g. a manager that reserves a higher wage for himself, at the expense of other
workers.
TAX CREDIT = additional money received by a worker who has lower income than the threshold
amount of wage.
51
NEGATIVE INCOME TAX = transfer cash payment to persons with a low income based on income tax
declarations, avoiding social stigma.
PRE- & POST-TAX INCOME * = market income, gross revenues earned by market transaction (labor,
self-employment) & income after deduction of taxes and adding negative tax. E.g. 2000$ pre-tax and
1500$ post-tax monthly income of a worker.
POST-TRANSFER INCOME * = available income after adding all benefits (and reducing taxes). E.g.
1700$ after adding all benefits.
TRANSFERS * = benefits received by income earners from government (taxes collected). E.g. child
benefits.
PROGRESSIVE & REGRESSIVE TAX = a rise in income with 1 point leads to a tax liability rise >1 point. A
rise in income with 1 point leads to a tax liability rise <1 point.
MEANS-TESTED BENEFITS * = a benefit/payment available to people who can demonstrate that their
income and capital (their means) are below specified limits. E.g. food stamps.
UNIVERSAL BENEFITS * = benefits given to anyone who fit certain criteria (e.g. with children, of a
certain age, a disability) regardless of income. E.g. child benefits or bus passes for the elderly.
IMPLICIT TAX = a side effect of a situation when receiving income that exceeds the threshold leads to
a lower increase in realised income.
(QUASI)-PUBLIC GOOD * = goods and services that function as if they are public goods (a commodity
or service that is provided without profit to all members of a society, either by the government or by
a private individual or organisation). E.g. education, healthcare.
COST-BENEFIT MODEL OF THE STATE = citizens weigh the costs of funding the government against
the benefits they receive, but do not oppose taxes as such.
52
Chapter 14 – The informal economy
• What do
o the housewife
o the junkie,
o the sweatshop workers,
o the do-it-yourselfer,
o the beggars,
o the cleaning lady and
o the street vendor
• have in common?
o That their activity refers to ‘work’ in some way
o That they are not to be found in official statistics
o That they are called ‘off-the-books’
• Some are prohibited by law, others not
• Some are illegal because of the illegality of the product (drugs)
• Globally: they all refer to activities that are
o ‘Economic’: productive activities
o Not (immediately) registered by formal economic statistics
• Logical typology
o The unrecorded economy
§ Activities that are not recorded by governmental statistical agencies; all the
added value that is not comprised directly in national accounts
§ The official economy ‘misses’ some productive activities because the official
statistics explicitly aim not to include them: unpaid household work,
volunteer work, community transactions (mutual assistance)
• Undoubtedly important
• Illustrated: household and related work adds up to more time spent
in most societies than ‘formal’ work against pay
53
o The illegal/criminal economy
§ Production and distribution of legally prohibited commodities
o The informal economy
§ Economic actions regulated nor protected by the state at large
o The unreported economy
§ Informal activities that circumvent fiscal rules
• Functional typology
o Types of informal activities according to the goal (or the intended function they
serve)
o More or less refer to the advantages for the agent of engaging in informal activities
o As they often exist of exchange, the same transaction may serve more functions
§ Survival
• Poverty driven subsistence work, rather from lack of choice than for
cost reduction or tax profit (urban farming, street vending)
§ Dependent exploitation
• Cost reduction through (partial) reliance on informal work
(subcontracting to undocumented migrants, moonlighting)
§ Growth
• Advantage through efficient organisation (through networks of small
artisans)
2. Embeddedness (P1)
• The paradox of embeddedness
o De Soto described informal markets as ‘true’, because they are free from state
interference
o This lack of state enforcement of contracts, makes pre-state mechanisms of
enforcement necessary
o Typically: those mechanisms emerging from social relationships (reciprocal trust
grounded in on-going relations, social norms)
o “The first paradox of the informal economy is that the more it approaches the model
of the ‘true market’, the more it is dependent on social ties for its effective
functioning”
• Central Italy
o The historical case of the region of Emilia-Romagna is an illustrative case
o Cooperation among artisan-entrepreneurs in order to integrate the whole garment
production chain with multiple small companies
o Strongly driven by ideologically founded sentiments against the central state, creating
strong social ties
o Supported by a local pragmatic variant of communist ideology
• Socialist regimes
o Under totalitarian socialist regimes, the most successful groups that can withstand
total control over the economy, are typically groups with strong intergroup trust
o For example, in Cuba, large-scale black-market exchanges depend on strong personal
ties of bisneros with all other parties: state factory personnel, consumers
o Example of an ethnic minority: Jews in Georgia (former USSR)
54
3. The role of the state (P2)
• The paradox of state control
o “The paradox of state control is that official efforts to obliterate unregulated activities
through the proliferation of rules and controls often expand the very conditions that
give rise to those activities.”
o Basic idea is that the extent of regulation of an economy creates opportunities and
pressure for noncompliance
o However, Portes presents a more complete theoretical framework introducing two
other dimensions
• Portes’ three stage theory of informal activities
o At the country level, Portes explains informal activities with two hypotheses
§ The scope of formal regulatory control of the economy is commensurate with
the size of the informal sector
§ Effective enforcement of formal regulation and of right inhibits the size of the
informal sector
o At the level of individuals and groups, Portes introduces a third: social capital
o The third level refers to the social ties between citizens in a country
§ A country where citizens have strong social ties, norms of reciprocity and
mutual trust among peers in a community
§ Portes expects that communities will be more able to withstand enforcement
of legislation here
§ Opposite: easier for a state to enforce its rules, even to a totalitarian degree
55
o Discrepancies are supposed to indicate the informal sector
§ ‘Currency ratio’ approach: discrepancy between monetary mass and currency
in circulation
o Bias
§ Cash abroad
§ Assumption that informal activities take place in cash
§ Base period without informal activities
§ No differentiation between informal and illegal activities
§ Enormous variation between calculations
• The direct approach
o Direct survey of consumers: the purchases of the household
§ Example: 1986 research in U.S.
• Result: roughly 10% of expenditures were informal
• 83% of the households had at least one informal supplier
§ More recent: Eurobarometer (2007 and 2013)
• Only one in ten self-reported informal purchases
• Large difference indicates methods effects
o Bias
§ No B2B
§ Social desirability bias (people lie about their informal activities because they
fear prosecution or assess it undesirable)
§ Unit nonresponse (people refuse to cooperate to the survey about informal
activities)
§ Item nonresponse (people refrain from answering the question about
informal activities)
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INFORMAL ECONOMY * = the set of economic phenomena unregulated by the formal institutions of
society, i.e. the state at large, denied protection of the state. E.g. housewife, junkie, sweatshop
worker, do-it-yourselfer, beggar, cleaning lady, street vendor.
UNRECORDED ECONOMY * = activities that are not recorded by governmental statistical agencies; all
the added value that is not comprised directly in national accounts. E.g. unpaid household worker,
volunteer, mutual assistance in a community.
ILLEGAL (OR CRIMINAL) ECONOMY * = production and distribution of legally prohibited commodities.
E.g. drug dealer, trader of stolen goods, prostitute.
UNREPORTED ECONOMY * = informal activities that circumvent fiscal rules. E.g. “black” worker in a
small restaurant, worker that is not declared to tax authorities or is declared partially.
SURVIVAL/SUBSISTENCE = poverty-driven subsistence work, rather from lack of choice than for cost
reduction or tax profit. E.g. urban farming, street vending.
EMBEDDEDNESS = the paradox of embeddedness is that the more the informal economy approaches
the model of the “true market”, the more it is dependent on social ties for its effective functioning.
De Soto described informal markets as “true” because they are free from state interference.
REGULATORY CONTROL * = the paradox of state control is that official efforts to obliterate
unregulated activities through the proliferation of rules and controls often expand the very conditions
that give rise to those activities. The scope of formal regulatory control of the economy is
commensurate with the size of the informal sector. E.g. the USA, China.
ENFORCEMENT * = effective enforcement of formal regulation and of rights inhibits the size of the
informal sector. E.g. enforcement of laws via putting criminals in prisons.
DETERRENCE * = the inhibition of criminal behavior by fear, especially of punishment. E.g. strong
judicial system and (unpleasant) prisons.
SOCIAL CAPITAL * = the networks of relationships among people who live and work in a particular
society, enabling that society to function effectively, social ties between citizens in a country. E.g.
communities where social ties, norms of reciprocity and mutual trust among peers are strong will be
more able to withstand enforcement of legislation (e.g. Jewish communities around the world).
THE CURRENCY RATIO APPROACH = discrepancy between monetary mass and currency in circulation.
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THE DIRECT APPROACH = direct surveys of consumers regarding their purchases (of households).
SOCIAL DESIRABILITY BIAS * = people lie about their informal activities because they fear prosecution
or assess it undesirable. E.g. lying that they brush their teeth twice every day, although that is not
always the case.
UNIT/ITEM NONRESPONSE = people who are more engaged in informal activities are more inclined
not to respond to these surveys & people do not want to answer questions about the informal
economy.
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