INTRODUCTION

Social embeddedness, social capital and the market
process: An introduction to the special issue on Austrian
economics, economic sociology and social capital

Paul Lewis

&

Emily Chamlee-Wright

Published online: 2 February 2008

# Springer Science + Business Media, LLC 2007

Keywords Economic sociology . Trust . Social capital

JEL codes A12 . B40 . B41 . B53

1 General introduction

Two of the most influential concepts in social science over the past two decades have been
‘social embeddedness’ and ‘social capital’. The essays in this symposium examine these
concepts from the perspective provided by Austrian economics, considering their
compatibility with the Austrian theory of the market process and whether reformulating
them in the light of Austrian ideas can contribute fresh insights.

The idea that economic activity is

‘socially embedded’ has received widespread attention

since the publication of Mark Granovetter

’s seminal essay on ‘Economic Action and Social

Structure: The Problem of Embeddedness

’, published in the American Journal of Sociology

in

1985

. Hailed as a landmark in the rise of the so-called new economic sociology,

Granovetter

’s paper has also exerted considerable influence on various heterodox schools of

economic thought (Swedberg

2003

: 33

–37; Davis

2004

). For Granovetter, the term

‘social

embeddedness

’ refers to the fact that people are social beings whose attributes and actions

are conditioned by their location within networks of

‘concrete, ongoing personal relations’

(Granovetter

1985

: 490). These personal relations are significant for two main reasons: the

first concerns the motives that drive people

’s actions; the second pertains to the information

that informs them.

Rev Austrian Econ (2008) 21:107

–118

DOI 10.1007/s11138-007-0033-1

P. Lewis (

*)

Department of Management, King

’s College, University of London, Franklin-Wilkins Building,

150 Stamford St., London SE1 9NH, UK
e-mail: [e-mail]

E. Chamlee-Wright
Department of Economics, Beloit College, 700 College St. Beloit, Beloit, WI 53511, USA
e-mail: [e-mail]

Granovetter argues that the motives that drive people

’s current interactions with one

another are conditioned by the personal relations to which their past dealings gave rise. For
instance, relations of trust may develop between people who have dealt honestly with each
another in the past. The key point about such relations, Granovetter argues

—and here he

departs from standard game-theoretic analyses of repeated interaction

—is that they generate

obligations and standards of behavior (such as norms of reciprocity) the motivational force
of which can induce people to depart from the instrumentally rational and opportunistic
forms of action emphasized by rational choice theory and transaction cost economics in
favor of more cooperative modes of conduct that involve them subordinating the pursuit of
their own self-interest to social norms and rules that encourage the attainment of collective
goals and the common good:

‘[T]rust’... refer[s] to circumstances where one enters a transaction believing that
transaction partners will behave properly for reasons that transcend pure self-interest
(Granovetter

1992a

: 40; also see

1985

: 489

–91,

1999

: 160

–61).

The problem with rational choice theory, game theory and transactions cost economics,

Granovetter argues, is that they postulate an undersocialized model of man, whose
attributes are fixed independently of the relations into which (s)he enters, and so ignore
how people

’s participation in social networks can give rise to alternative sources of

motivation that can dissuade them from opportunistically pursuing their self-interest
(Granovetter

1985

: 490, 504,

1992b

: 4). On this view, researchers need to focus less on

(orthodox) economic analyses of the behavior of isolated, atomistic Robinson Crusoes and
more on sociological approaches that consider how people

’s actions are shaped by, and in

turn shape, networks of social relations (

1985

: 504

–07;

1999

: 160

–02).

Such relations also facilitate the diffusion of information. In particular, as argued by

Granovetter (

1973

), an individual is more likely to acquire information

—about the

availability of a job, for example

—if the interpersonal ties that connect the group of people

with whom (s)he interacts are

‘weak’—in the sense that the other members of the group are

vague acquaintances who meet only sporadically if at all

—than if (s)he participates in a

strong social network, all of whose members are close friends or kin who frequently deal
with one other. For while members of

‘strong’ networks tend to share the same limited set

of contacts, and so have access to similar sources of information, people who participate in
a

‘weak’ network have acquaintances who move in different social circles and so enjoy a

wider range of informational sources.

Another noteworthy feature of the new economic sociology is its emphasis on the social

construction of institutions. The foil against which Granovetter sharpens his ideas in this
respect is provided by transactions cost economics, an approach whose central theoretical
claim, namely that the existence of institutions is best accounted for in terms of their
capacity to reduce the costs of conducting transactions, Granovetter believes to suffer from
serious flaws. The source of the problem, Granovetter argues, lies in the fact that
transactions cost economics relies on a functionalist mode of explanation, purporting to
account for the existence of social phenomena (institutions) in terms of their effects
(namely, their contribution to reducing the cost of various types of transaction). It is simply
assumed, Granovetter argues, that the efficient institutional solution arises automatically in
response to prevailing economic conditions, with the dynamic causal processes that
underpin the development of economic institutions

—in particular, the role of human agency

and entrepreneurial creativity

—being relegated to a role that might charitably be described

as peripheral. This neglect of underlying causal processes is problematic, Granovetter
argues, because it blinds transactions cost economists to the fact that, far from being an

108

P. Lewis, E. Chamlee-Wright

inevitable response to the existence of transactions with specific features, the development
of institutions is a decidedly contingent affair that does not always culminate in the
emergence of an efficient mode of governance (Granovetter

1992a

: 34, 47

–49,

1992b

: 4

–5,

7; also see Foss

1994

: 46

–47, 52–57; Fligstein and Freeland

1995

).

1

For Granovetter, then, the problem with transactions cost economics (and, indeed,

orthodox economics more generally) is that by concentrating on (the comparative static)
analysis of equilibrium states, such approaches pay insufficient attention to the contingent,
dynamic historical processes through which social institutions arise. Granovetter proposes
to remedy this lacuna by offering a distinctively sociological analysis of how social
institutions come into being. Drawing on the phenomenological sociology of Berger and
Luckmann (

1966

), along with Padgett and Ansell

’s (

1993

) analysis of political movements,

Granovetter contends that economic institutions are socially constructed in the sense that
they arise through the mobilization of resources by people whose motivation, knowledge
and endowments of resources, and therefore whose actions, are both facilitated and
constrained by the networks of personal relations within which they are embedded. Far
from being an automatic response to the prevailing economic conditions, the emergence of
economic institutions is contingent upon the capacity of socially embedded individuals to
mobilize the requisite resources. Where the prevailing network of personal relations
hampers their efforts to do so, the efficient mode of organizing transactions may well fail to
emerge. According to the new economic sociology, therefore, the emergence (or lack
thereof) of economic institutions is best explained in terms of the interplay over time
between people

’s actions and the networks of personal relations within which those people

are embedded (Granovetter

1992a

: 47

–49,

1992b

).

2

The influence of social relations on economic activity has, of course, been the central

theme of the burgeoning literature on social capital. First developed by the urban
anthropologist Jane Jacobs (

1961

), the notion of social capital has received enormous

attention in the social sciences since influential contributions by James Coleman (

1988

) and

Robert Putnam (

1993

,

2000

). The concept of social capital is a contested one but, loosely

speaking, the term refers to the informal networks of (non-contractual) relations that exist
between people in society, and to the beliefs and norms

—like trust and reciprocity—to

which those informal relations give rise and which govern the character of the networks in
question. Thus defined, the concept of social capital brings with it the potential

—not always

realized

—for introducing individuals who are socially embedded into disciplines like

economics. Of course, so far as the notion of social capital being a vehicle for introducing
socially embedded individuals into economics is concerned, the devil lies in the details of
how precisely the nature and influence of social relations is conceptualized. There are
numerous examples of research (e.g. Becker

1996

; Dasgupta

2003

) that fail to do justice to

the significance of social embeddedness because social capital is modeled along standard
neoclassical lines, with people still being viewed in a reductionist fashion as isolated atoms
whose motivations and capacities remain unaffected by the social relations into which they
enter (Fine

2001

; Chamlee-Wright

2008

; McNeil

2007

). But as noted below, and as

1

For a similar warning about the dangers of functionalism in the neoclassical analysis of social capital, see

Knorringa and van Staveren (

2007

:2). It should be noted, however, that North (

1990

) and other new

institutionalist scholars go to great lengths to dispel the notion that only the most efficient institutions

‘win

out

’ in the evolutionary process. Further, in his later work, North (

2005

) examines the ways in which belief

structures, or mental models, shape the process of institutional change (or in other words, how the social
embeddedness of institutional change matters).

2

For a case study, see Granovetter and McGuire (

1998

).

Austrian economics, economic sociology and social capital

109

explored in detail in a number of the papers that follow, the Austrian view of people as
social beings

—as distinct from undersocialized Cartesian atoms—provides the basis for

analyses of social capital that do attempt to take seriously the influence of social relations
on the market process.

Granovetter

’s distinction between ‘weak’ and ‘strong’ ties provides the basis for

distinguishing broad varieties of social capital. Bonding social capital involves the existence
of strong social ties between relatively small, homogeneous groups of people who share a
common identity, for example families, kinship groups, and religious and ethnic
organizations. The similarity between the members of such groups, and their familiarity
with each other, underwrites specific, personal relations of trust and mutual solidarity. In
contrast, bridging social capital is to be found in weakly linked networks populated by
individuals who may have little if anything in common with one another and who may never
have met before. Bridging social capital allows people from different parts of the social
structure to cooperate and share resources and thus is often the source of social change.

Granovetter

’s analysis of weak and strong ties also hints at another distinction that

emerges within the literature, namely that between

‘instrumental’ and ‘generalizable’ forms

of social capital. Instrumental social capital is much like any other asset that can be
possessed or deployed, and from which others can be excluded. It might best be
characterized by the image of the

‘favor bank,’ in which I will do this favor for you because

I expect you to repay the favor to me in the future. Instrumental social capital can build
trust and reciprocity but, as in the case of bonding social capital, the trust in question is
invested in particular people with whom we are likely to have strong ties. Generalizable
social capital, on the other hand, refers to generalized forms of trust and reciprocity that are
not so tightly tied to the personal. A driver pulls over to help a stranded motorist not
because he assumes that particular person will repay the favor, but because he assumes that
someone would help him if he were in a similar predicament. Moreover, he assumes he will
be safe, not because he knows the motorist personally, but because he can generally trust
his fellow man. Norms of generalized trust and reciprocity resemble public goods in the
sense that people can benefit from their existence even if they had no part in bringing them
about. And because they are not necessarily tied to the pursuit of common goals, these more
generalized forms of social capital can support cooperation between people who share only
weak ties or even among people who are completely unknown to one another. Broad moral
commitments, most notably to the rule of law, to fulfilling contracts, to the observance of
(private) property rights, and to honoring promises, are particularly important examples of
such generalizable norms (Putnam

2000

: 22; Knorringa and van Staveren

2007

: 4).

Social capital in all its various guises can be viewed as a resource, the use of which can

enable people to achieve goals that might otherwise be unattainable. People often draw on
social capital when they act: they use the contacts provided by networks of social relations
to gain access to information and resources; and they employ their knowledge of the
norms that govern behavior within a particular network to inform both their expectations
of how other members are likely to behave and also their own decisions about how to act.
In this way, social capital can help people to exploit more effectively the opportunities on
offer to them, both within free markets (e.g. Fukuyama

1995

; Ikeda

2002

) and also in non-

market settings (e.g. Ostrom

1990

). And in drawing on social capital, people reproduce

—

or, on occasions, transform

—the network of relations in which they are embedded

(Chamlee-Wright

2008

).

There appear to be strong affinities between the Austrian theory of the market process,

on one hand, and much (though not, as we shall see, all) of the new economic sociology
and

‘social capital’ literature, on the other. In keeping with the new economic sociology, the

110

P. Lewis, E. Chamlee-Wright

Austrian doctrine of

‘true individualism’ portrays people as social animals whose nature

and conduct is profoundly shaped, although not entirely determined, by the economic,
cultural and social capital, and by the information, embodied in the nexus of social
structures within which they are embedded (Lachmann

1971

; Prychitko

1995

; Vaughn

1999

). Moreover, like advocates of the new economic sociology, Austrians disavow the

orthodox model of man as a passive utility maximizer, preferring instead to portray people
as active, alert and creative beings whose proclivity for opportunistically pursuing their
personal interests is at times curbed by their commitment to social rules (Hayek [

1945

]

1948; Kirzner [

1990

] 1992; Fleetwood

1995

: 85, 105). And, consistent both with the new

economic sociology and also with at least some of literature on social capital, Austrians
eschew functionalist explanations in favor of a causal-genetic approach that seeks to
account for the emergence of social and economic phenomena in terms of the interplay over
time between human agency and social structure (Boettke

1776

; Fleetwood

2007

; Lewis

and Runde

2007

).

The contributors to this collection of essays consider whether this common ground is

likely to prove fertile territory for the mutually advantageous exchange of ideas between
Austrian economists, new economic sociologists and theorists of social capital. Their essays
explore both how Austrian economists can benefit from engaging with, and integrating into
their analyses, the notions of

‘social embeddedness’ and ‘social capital’, and also how those

concepts might be developed and enriched through the incorporation of distinctively
Austrian insights into the nature of the market process. The result is a fascinating collection
of papers that will, we hope, inspire further research between Austrians, new economic
sociologists and students of social capital.

2 Summaries of contributions

John Meadowcroft and Mark Pennington challenge the accusation, advanced by
communitarian critics of classical liberalism, that the relationship between the free market
and social capital is parasitical in nature, with commercial activity relying on

—but doing

nothing to replenish

—a society’s stock of social capital. According to the critics, the spread

of markets undermines traditional social institutions and relationships

—such as (those

relationships found in) churches, local communities, and families

—and thereby leads to the

erosion of the shared values and goals they once supported. Deprived of their moral
compass, people are left with no option but to decide how to behave on the basis of the
personal costs and benefits associated with the various courses of action open to them. The
consequent rise in the incidence of instrumentally rational behavior further undermines
the traditional (non-instrumental) foundations of social life, leading ultimately to an outcome
in which most relationships are viewed, not as inherently valuable ends-in-themselves, but
rather as intrinsically worthless means to the end of personal self-gratification.

‘The

dynamism of market processes dissolves social hierarchies and overturns established
expectations,

’ one communitarian critic of the market argues. ‘Status is ephemeral, trust frail

and contract sovereign

’ (Gray

1995

: 99). And because such an anomic society is thought

unlikely to provide the basis for a healthy civil order, communitarians conclude that
government intervention is required to counter the corrosive effects of markets and to
ensure that society has an appropriate level of social capital.

3

3

For examples of such proposals, see Blair (

2002

) and Leigh and Putnam (

2002

).

Austrian economics, economic sociology and social capital

111

Meadowcroft and Pennington highlight a number of flaws in this line of argument,

centering on what they see as communitarians

’ misguided ideas about the types of

relationship necessary for a healthy civil order in modern industrial economies. In
particular, the communitarian critics have lost sight of the fact that the personal trust and
common goals sustained by strong network ties are insufficient to support the extensive
web of cooperation required for people to achieve their goals in advanced industrial
economies. The reason lies, of course, in the elaborate division of labour found in the latter,
which implies that the assistance of the members of a person

’s own family, tribe, religion or

ethnic group is insufficient on its own to bring most of that person

’s plans to fruition. On

the contrary, to achieve their goals individuals must secure the cooperation of a very large
number of people, few of whom share the same concrete objectives and about whom little is
known.

4

In such circumstances, as Adam Smith famously argued, it is wiser for people to

appeal to the self-interest of the countless strangers upon whose cooperation the success of
their own labours depends rather than to their goodwill. And it is through the operation of free
markets, embedded within the institutions of a liberal polity, that the self-interest of those
anonymous others is best harnessed and the information required for effective cooperation
made publicly available (Horwitz

2001

).

Significantly, the market order or catallaxy generated by the working of the price

mechanism is ends-independent in the sense that people do not need to agree on common,
concrete goals. All that is required of them is that they should abide by certain abstract
social rules and norms, such as the laws of property, tort and contract, and norms of honesty
and promise-keeping. One of the great strengths of the market, therefore, is that it enables
people to pursue diverse goals in peace and harmony (Hayek

1973

,

1988

). Accordingly,

given the relatively impersonal nature of such market relationships, given the heterogeneity
of the people who are brought together in markets, and given also the diversity of their
goals, it is the generalized form of trust sustained by bridging social capital

—that is, by

people

’s willingness to abide by abstract rules of the sort noted above—rather than the

personal trust and shared goals underwritten by bonding social capital that is of greater
importance in sustaining the extended order of the Great Society.

What the communitarian critics of the market fail to recognize, Meadowcroft and

Pennington contend, is that it is less the case that commerce destroys traditional values than
that different values and norms of conduct

—different types of social capital—are

appropriate for different contexts: the personal trust and shared goals lauded by
communitarians are suitable for governing the repeated, face-to-face interaction that takes
place between members of close-knit groups; but once we move to the more impersonal
arena of trade between strangers, whose character and needs are largely unknown and
whose goals are diverse and often conflicting, it is the pursuit of self-interest, tempered only
by the willingness to abide by abstract rules and the generalized trust enshrined in bridging
social capital, that is necessary for peace and prosperity (cf. McCann

2002

; Seabright

2004

). Far from privileging economic over non-economic relations and self-interest over

atavistic morality in any absolute sense, classical liberalism commits one only to the view
that self-seeking within markets is the most appropriate way to manage the macro-order of
impersonal relationships with anonymous others, a position that is quite compatible with
the claim that other modes of governance and sources of motivation are more suitable for
regulating the

‘micro-order’ of personal relationships within families and other small

4

As Smith put it in The Wealth of Nations,

‘In civilised society [man] stands at all times in need of the

cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship
of a few persons

’ (Smith [

1776

] 1991: Book I, chp. 2: 18).

112

P. Lewis, E. Chamlee-Wright

groups (Smith

1998

). Or, to put this point slightly differently, claims that competitive

markets undermine cooperation ignore the way that competition facilitates cooperation in
anonymity, between people who feel no affinity for, and have little knowledge of, one other.

Meadowcroft and Pennington also argue that communitarians ignore the many ways in

which markets can actually facilitate the development of social networks and trust. In the
first place, by encouraging the spontaneous development of institutions that supply people
with assurance about the probity of otherwise anonymous others, the market process helps
to cultivate the generalized trust necessary for impersonal commercial exchanges,
augmenting a society

’s stock of bridging social capital. Second, and more generally, by

facilitating successful transactions between people who hail from very different social,
cultural, ethnic and religious backgrounds, markets encourage the creation of new social
ties, thereby fostering the development of social capital. It is not for nothing that the
original Greek word from that inspired Hayek

’s use of the term catallaxy to describe the

spontaneous social order generated in free markets meant

‘to change from an enemy into a

friend

’ and ‘to admit into the community’ (Hayek

1976

: 108).

5

Far from simply devouring

social capital, therefore, markets can contribute to its creation, with successful market-
driven exchange leading to the creation of new links, and greater trust, between people,
which in which in turn encourages them to trade more to further exploit the benefits of
specialization and the division of labour.

The relationship between markets and the broader community of which they form a part

is also a central theme of Virgil Storr

’s essay. Developing his earlier work on ‘multiple

embeddedness

’ and ‘economically conditioned’ social phenomena (Boettke and Storr

2002

), Storr argues that the market is more than simply the locus of competition and

exchange. It is also a

‘social space’ where, in addition to economic transactions, social

relations whose reach extends beyond the narrowly commercial are forged and maintained.
Illustrating his argument with examples of how friendships, camaraderie and even romance
can grow out of commercial contacts, Storr contends that people exploit the opportunities
for personal interaction afforded them by markets to enter into a variety of non-economic
relationships, so that what are initially business or business-like relations spill over into
broader forms of sociability. Storr also suggests that market trading not only facilitates the
growth of extra-catallactic relationships directly

—that is, simply by bringing people

together in markets, and thereby giving them the opportunity to interact with one another

—

but also indirectly. For especially where it brings together people from different cultures,
religions and ethnic groups, trade encourages the development of personal traits and
dispositions

—such as tolerance, understanding, and a willingness to compromise—that are

conducive to the construction of social as well as economic bonds. Ultimately, Storr

’s paper

serves two important, and related, purposes. First, it provides a reminder that talk of the
social embeddedness of economic activity needs to be balanced by an awareness of the
economic influences on social relations. Second, by highlighting in particular the fact that
market-based interaction can support as well as undermine broader social networks, it
provides a sceptical antidote to the claims of those economic anthropologists and urban
geographers who, like the communitarian critics of the market mentioned above, view the
relationship between markets and communities as necessarily being mutually antagonistic.

Emily Chamlee-Wright and Justus Myers examine the extent to which social networks,

in particular those involving

‘weak ties’, facilitate the diffusion of information and social

learning. Chamlee-Wright and Myers use as a foil the work of network theorist Ronald Burt

5

Also see von Mises ([

1949

] 1966: 143

–76, 194–99), who argued that sympathy and friendship can be the

product of trade, not just its cause.

Austrian economics, economic sociology and social capital

113

(

1992

,

2005

). Burt views entrepreneurs as brokers who earn profits by bridging the gaps or

‘structural holes’ between hitherto disconnected networks, thereby facilitating the
(profitable) flow of information between them. While acknowledging that this broad vision
of entrepreneurship has much to commend it, Chamlee-Wright and Myers argue that the
analytical framework in terms of which Burt expresses his ideas short-changes the role of
discovery in social networking. In particular, Burt

’s analysis proceeds on the assumption

that entrepreneurs already possess all the information

—concerning, for example, the

existence of other networks, and the availability of effective partners therein

—required to

calculate the optimal strategy for connecting different networks, and so mistakes the
networking process for one of mechanical optimization rather than creative discovery. This
is an important lacuna, Chamlee-Wright and Myers contend, not least because a Kirznerian-
style analysis of how entrepreneurs discover hitherto unnoticed opportunities for forging
links between networks leads to rather different conclusions about the approach to
networking that is most likely to bear fruit for entrepreneurs.

A closely related point, advanced by Chamlee-Wright and Myers in the second half of

their paper, concerns the potential for social networks to foster widespread social learning
akin to that witnessed in the context of the free market. Market exchange generates
prosperity not just because it benefits the parties most directly involved, but also because
the benefits routinely spill over to people far removed from the original exchange. Yet
without the calculative function of market prices and the profit and loss signals they
generate, the question arises as to whether social network processes possess the feedback
qualities required for widespread social learning beyond the individuals most directly
involved in the social exchange. Although the absence of market prices and profit and loss
signals represent a crucial distinction between market and non-market information flows,
Chamlee-Wright and Myers document how non-priced social networks may, under some
conditions, develop feedback mechanisms that encourage the type of social learning that
takes place in markets in which benefits of social exchange routinely spill over to unknown
others.

As hinted above, the definition of social capital is far from settled. A variety of

competing views can be found in the literature, ranging from those provided by rational
choice and game-theory to social-theoretic accounts that eschew the emphasis on individual
maximization characteristic of orthodox economics.

6

Sandy Ikeda explores this contested

terrain by considering various theoretical perspectives on social capital, focusing in
particular on the way in which they portray both the nature of the social relations of which
it is (at least in part) comprised, and also the trust to which it gives rise, with a view
ultimately to identifying an interpretation of social capital that complements the Austrian
theory of the market process. Ikeda distances himself from rational choice analyses of social
capital, arguing that they provide an inadequate account of the way in which social relations
impinge upon people

’s actions. He is particularly critical of the conception of trust provided

by rational choice theory, contending that generalized trust of the sort underwritten by
bridging social capital involves the belief that people can at times refrain from acting
opportunistically even if when is in their interests to do so. (This is, of course, quite
consistent with Mark Granovetter

’s views on trust, although Ikeda does not refer explicitly

to Granovetter.) This

‘fiduciary’ notion of trust, as Ikeda terms it, is especially important in

the radically uncertain environment created

—and, indeed, presupposed—by the entrepre-

neurial market process. In the latter, the creative and unpredictable behavior of

6

For discussions of the types of debates that have arisen, see Baron et al. (

2000

), Fine (

2001

), Bebbington et

al. (

2004

) and Knorringa and van Staveren (

2007

).

114

P. Lewis, E. Chamlee-Wright

entrepreneurs leaves people without the (probabilistic) knowledge of the consequences of
their actions required for expected utility maximization. In such circumstances, Ikeda
argues, trust can serve as a partial substitute for the absent knowledge, thereby enabling
people to cope with their ignorance and embark upon their plans with some confidence of
success. In the end, as Ikeda understands it, social capital consists of informal norms of
generalized reciprocity and networks of fiduciary trust that emerge spontaneously over time
in public spaces, and that serve to promote the entrepreneurial discovery that drives the
market process.

The importance of trust in enabling people to deal with their ignorance of the future is

also emphasized by Paul Lewis

’s contribution to the collection. Lewis sets out to develop

an account of personal trust that is consistent with three of the central tenets of post-revival,
radical subjectivist Austrian economics, namely its view of people as socially animals
rather than isolated atoms, its radical subjectivism and its focus on economic processes in a
world of radical uncertainty. Drawing on the work of economic sociologists Mark
Granovetter and Brian Uzzi, Lewis suggests that personal trust is best understood is a
discursively constructed social relation that arises when interaction between people is
governed by norms of reciprocity (that is, by the norm which states that one good turn
deserves another and that people should treat others as they themselves would like to be
treated). Significantly, according to Lewis, the reciprocal moral obligations to which
relations of trust give rise are diffuse in the sense that consist of no more than general
injunctions to the effect that one should act in good faith and treat others as one would like
to be treated oneself. However, the vagueness with which appropriate behavior is specified
is precisely what makes trust so important in a world of radical uncertainty because it
means that while people whose interaction is governed by trust cannot predict in detail how
one another will respond in the event of some unexpected state of affairs, each can expect
that the other will refrain from opportunistically exploiting the unforeseen contingency. On
this view, therefore, trust is a social relation that enables people to deal with their ignorance
of the future and so act in a purposeful, goal-driven fashion.

In considering the nature of trust, however, Lewis contends

—more controversially, from

an Austrian standpoint

—that the social structures within which economic activity is

embedded may give rise to imbalances of access to economic and cultural resources, and to
positions of authority, that enable some individuals to exert control the behavior of others.
In such circumstances, there may arise an imbalance of reciprocity, whereby the more
powerful party in a relationship leaves its subordinates with little room for manoeuvre in
performing the activities delegated to them, whilst itself enjoying considerable discretion in
those matters which the less powerful parties have entrusted to it. Hence, according to
Lewis, what might at first sight appear to be relations of genuine trust may in fact be no
more than a façade of trust that conceals a relationship of domination whereby the more
powerful party is able to dictate the terms on which cooperation takes place.

The central focus of Shaun Hargreaves Heap

’s paper is the impact of group membership

on individual subjective well-being or happiness. Hargreaves Heap begins by noting that
the (bonding) social capital that is created when people participate in groups influences how
happy they are not only by facilitating repeated interaction, and thereby cultivating trust and
shared values, but also by influencing the comparisons people make when they come to
assess their own well-being. For Hargreaves Heap, however, in assessing the merits of
different types of social capital, it is important not only to consider the consequences of
group membership per se, but also to take into account the character of the groups, in
particular the content of the shared beliefs and values

—in short, the culture—that bind their

members to one another. The reason lies in the fact that the mutual trust that can obtain

Austrian economics, economic sociology and social capital

115

between members of the same group is often accompanied by a corresponding tendency for
them to distrust and discriminate against outsiders, which manifests itself in extreme cases
in the type of inter-group conflict found in Rwanda and Iraq. The potential for such conflict
may not be realized, however, if the content of the shared beliefs of the groups in question
counters the discriminatory impulses fostered by group membership per se. In particular,
according to Hargreaves Heap, discrimination and conflict may be avoided when, in
keeping with Hayek

’s emphasis on limitations of the our powers of reason, people

acknowledge the fallibility of their own beliefs and the potential benefits to be had from
engaging with alternative points of view.

Last, but certainly not least, Tony Carilli, Chris Coyne and Peter Lesson consider how

government intervention affects the stock of social capital. Their argument begins with an
account of how engaging in certain types of cultural practice enables hitherto unacquainted
people credibly to signal their probity to one another, helping them to forge new social
relationships and thus increasing the stock of social capital. The problem with government
intervention, Carilli and his co-authors contend, is that it can impede this process. By
making a particular practice mandatory, rather than something that only a trustworthy
individual would voluntarily undertake, intervention makes it harder for the trustworthy to
differentiate themselves from the untrustworthy, thereby contributing to the erosion of
existing relationships and impeding the creation of new ones. In this way, government
intervention can crowd out private investment in social networks, undermining rather than
enhancing the stock of social capital and thereby hampering the activities it facilitates.
Carilli et al. illustrate their argument by reference to an account of how the introduction of
civil courts in colonial India in the early 19th century undermined the incentives for
participants in informal credit markets to signal their trustworthiness to one another,
ultimately eroding trust and goodwill between borrowers and lenders.

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