ASA ECONOMIC SOCIOLOGY SECTION NEWSLETTER ACCOUNTS Volume 9 Issue 1 Spring 2010

ASA ECONOMIC SOCIOLOGY SECTION NEWSLETTER ACCOUNTS Volume 9 Issue 1 Spring 2010 Section Chair’s Introduction 2009‐10 Editors Jiwook Jung T Kim Pernell Sameer Srivastava The events of the last year and a half, or two if you were watching things Harvard University closely, have led many to question whether the economy operates as most everyone understood it to operate. The Great Recession has undermined many shibboleths of economic theory and challenged the idea that free markets regulate themselves. The notion that investment bankers and titans of industry would never take risks that might put the economy in jeopardy, because they would pay the price for a collapse, now seems Inside this Issue quaint. They did take such risks, and few of them have paid any kind of price. The CEOs of the leading automakers were chided for using private Markets on Trial: Progress and jets to fly to Washington to testify before Congress, and felt obliged to Prognosis for Economic Sociology’s Response to the Financial Crisis— make their next trips in their own products, but the heads of the investment Report on a Fall 2009 Symposium banks that led us down the road to perdition received healthy bonuses this by Adam Goldstein, UC Berkeley year, as they did last year. The Dollar Standard and the Global ProductionI System: The In this issue of Accounts, the editors chose to highlight challenges to Institutional Origins of the Global conventional economic wisdom. First, we have a first-person account, Financial Crisis by Bai Gao, Duke from UC-Berkeley doctoral candidate Adam Goldstein, of a fall Kellogg Book Summary and Interview: School (Northwestern) symposium titled Markets on Trial: Sociology’s David Stark’s The Sense of Response to the Financial Crisis. Organized by Michael Lounsbury and Dissonance: Accounts of Worth in Economic Life by Sameer Paul Hirsch, the symposium brought together economic sociologists Srivastava, Harvard examining the crisis. Book Review:e Niall Ferguson’s The Next we have a piece by Bai Gao, Duke University, reprising a study of the Ascent of Money: A Financial crisis he presented at the ASA meetings in San Francisco. Gao makes a History of the World by Jiwook novel institutional argument about the origins of the global savings and Jung, Harvard liquidity gluts that have been widely identified as contributing to the crisis. Sameer Srivastava, a doctoral student at Harvard, then summarizes a new book by David Stark, The Sense of Dissonance: Accounts of Worth in Economic Life, that takes an innovative approach to understanding economic valuation. Srivastava follows the summary with an interview with Stark. Finally, Jiwook Jung, another Harvard doctoral student, reviews historian Niall Ferguson’s The Ascent of Money: A Financial History of the World, which was made into a PBS series. Ferguson investigates the origins of our current financial system, and examines how it has encouraged outsize risk-taking. This being the inaugural issue of Accounts for 2009-2010, we had planned to call it the fall issue. But scandals surrounding backdating, of checks for World Series tickets by New York governors and of stock options by CEOs, have given us pause. Welcome to the spring 2009-2010 issue of Accounts Page 2 ACCOUNTS Markets on Trial: Progress and Prognosis for Economic Sociology’s Response to the Financial Crisis. Report on a Fall 2009 Symposium, by Adam Goldstein, UC Berkeley It is by now a commonplace crisis. Proceedings from the workshop will observation that the financial crisis of 2007- appear in a forthcoming special issue of 2008 laid bare the failures of market Research in the Sociology of Organizations fundamentalism and the economic theories entitled Markets on Trial: The Economic underpinning it. Indeed, the crisis confirmed Sociology of the U.S. Financial Collapse what economic sociologists have known for (draft versions are accessible through Mike some time: that real markets don't work in Lounsbury’s website). the manner their architects, champions, and regulators would like to believe. As policy- In this essay I critically review the makers grope for regulatory responses, Markets on Trial contributions as a economic sociology has an unprecedented sociological response to the crisis. I discuss opportunity to participate in the the approaches adopted and briefly identify development of a new intellectual strengths and weaknesses of each. I then architecture for economic governance in the point to two unresolved questions that are United States. At the same time, the recent the source of much confusion and meltdown also offers an important misinformation in popular and policy laboratory for economic sociologists to discussions. Answering them offers improve our own understanding of 21st sociologists the opportunity to century finance capitalism. fundamentally reshape the terrain of debates about the meltdown. It was with these dual purposes in mind that Mike Lounsbury and Paul Hirsch Overall, the papers presented at the organized a workshop last October at Markets on Trial workshop cluster into five Northwestern University which brought groups, each reflecting an alternative together several dozen economic sociological stance toward the crisis. The sociologists to interrogate the financial first and most common approach applies the meltdown. The organizers’ aim was to theoretical tools of economic and encourage empirical research on various organizational sociology to illuminate the dimensions of the crisis that could serve as a causes of the crisis in the mortgage-related basis for developing sociologically informed securities meltdown. The unifying premise policy proposals. The result is a stimulating of these papers is that economists and policy and provocative series of papers. Together makers continue to misunderstand how these they outline a range of original insights into markets worked and why they unraveled. the causes the crisis. They highlight Papers by Neil Fligstein and myself, and Jo- economic sociology’s relevance by Ellen Pozner and colleagues provide broad developing new regulatory proposals and sociological accounts of the development of providing new rationales for existing the mortgage finance industry from the proposals. Perhaps most importantly, the 1980s onward. They chronicle how contributions offer a starting point for more institutional developments and firm sustained sociological engagement with the strategies coevolved to produce the rapid puzzles and policy issues raised by the rise of the sub-prime MBS market and its VOLUME 9 ISSUE 1 Page 3 subsequent implosion. Other contributions multi-trillion dollar per year residential focus on particular institutions undergirding mortgage finance business, the largest sector the market for mortgage-backed securities. of the American economy. Clearly such a For instance, Akos Rona-Tas provides an collapse would have wide-ranging systemic interesting analysis of how technologies and effects. It seems the more fundamental expertise factored in the development of question is how we came to ground the credit rating institutions for consumers and largest sector of our economy on an asset financial instruments. Richard Swedberg bubble fueled largely by risky loans to offers a somewhat more social- persons with impaired credit, no down psychological account of the proximate role payment, or no documented income. of collective confidence through a detailed study of the market's response to the Indeed, a second sociological Lehman Brothers collapse. approach to the mortgage meltdown is to view it as an important case of a more One particular theoretical general capitalist tendency toward perspective that animates several of these speculative bubbles. While the recent crisis papers is Charles Perrow’s normal accidents is widely regarded as the most severe since theory. Normal accidents refer to situations the 1930s, residential mortgages were the in which small failures reverberate through third financial bubble to pop in the U.S. complex, tightly coupled systems to produce alone during the past twenty years. What is disastrous outcomes. By shifting it about late 20th and early 21st century explanatory emphasis from the transactional financial capitalism that foments persistent concept of liquidity to the structural concept bubbles? Several of the papers begin to of tight coupling, this perspective offers a address this issue. Mitchell Abolafia argues distinctly sociological portrait of the key that the crux lies not in any mysterious features of the financial system which workings of the market, but rather in the allowed an increase in mortgage defaults to resistance of our contemporary regulatory result in worldwide collapse. Particularly institutions to enact simple, well-understood relevant is the insight that attempts to create restraints on accumulation. Frank Dobbin rationalizing safeguards in tightly coupled and Jiwook Jung meanwhile point to the systems (i.e. default triggers in bond pervasive influence of agency theory in covenants, markets in credit default swaps, orienting corporate behavior toward etc.) often prove self-defeating. This carries unsustainable stock price gains. An important regulatory implications for how interesting intellectual project for economic markets ought to be refashioned in order to sociology would be to extend this line of contain the fallout from future failures. inquiry in order to devise a more general sociological theory of bubbles across Nonetheless, the main downside I different types of markets, thereby offering

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