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 see to the normal accidents perspective is an institutionally-grounded alternative to the that the reverberation of the mortgage psychological accounts of economic meltdown to the rest of the economy is not behavioralism (Robert Schiller, etc). the primary puzzle to be explained in this case. The mortgage meltdown was no small, A third approach informed by normal failure of the sort Perrow had in historical sociology takes a more distal view mind. It was the complete implosion of a and seeks to tease out historical roots of the Page 4 ACCOUNTS

meltdown - crisis in the long durée. Papers increasingly industrialized after the repeal of by John Campbell, Gerald Davis, Greta Glass-Steagall. Banks sought to harvest fee Krippner, and Mark Mizruchi all fall in this revenues by building vertically integrated category. Each provocatively points to a securitization pipelines, stretching from different set of historical factors. Campbell origination to securitization, to underwriting, locates the roots in neoliberal financial to servicing. And in an even more ironic deregulation. While deregulation is an oft- twist, the old industrial stalwarts GE and cited culprit, this is one of the only studies GM were both top-ten players in the sub- that attempts to systematically trace the prime securitization market through their various financial regulatory actions (and vertically integrated subsidiaries, WMC and inactions) which together created the GMAC. Such dynamics are easily lost in conditions for the meltdown. Krippner broader socio-historical narratives. adopts a slightly different approach, arguing that policy makers have sought to expand Fourth, a few of the Markets on Trial credit markets in order to forestall papers address the crisis in an international distributional conflicts and fallout from comparative context. Comparative rising income inequality. Mizruchi focuses approaches beg the useful question of on the fracturing of old elite governance whether the meltdown ought to be viewed as networks, which in an earlier era might have a primarily American debacle (which stepped in and imposed some collectively brought the rest of the world down with it), rational discipline. Finally, Davis views the or as an outcome of globalized market unraveling of the financial sector as the dynamics. For instance, Doug Guthrie and result of a broader movement from a David Slocum use the contrast between the bureaucratic organizational society to an American experience of deregulated ownership society based around speculation and China's robust growth in entrepreneurial action in markets. order to highlight governance advantages of state participation in markets. Yet global By locating the long-term roots of involvement in the American MBS crisis the crisis in neoliberal institutional complicates efforts to draw sharp national transformations, these papers offer a useful distinctions. As Monica Prasad pointed out corrective to the myopic notion that the in the Spring 2009 issue of Accounts, it was crisis emerged from some sudden, episodic precisely the glut of savings from growing bout of Wall Street greed or speculative economies like China that supplied the raw exuberance. But I would also note that this capital to sustain the American bubble. By same historical reach can prove a weakness 2007 foreign institutions were the largest by obscuring processes particular to the class of holders of American mortgage- mortgage finance sector that go against the related assets. grain of broader institutional currents. For instance, Jerry Davis has argued that the Finally, perhaps the most trenchant growth of securitization can be viewed as and bold chapter in the Markets on Trial outcome and exemplar of the decline of volume comes from Marc Schneiberg and large integrated organizations in the Tim Bartely. Their approach differs from the American economy. However, ongoing others. Rather than developing a research by Neil Fligstein and me shows sociological explanation of the financial that, unlike the rest of the economy, crisis, they instead leverage two decades of mortgage finance actually became existing research in economic sociology in VOLUME 9 ISSUE 1 Page 5

order to illuminate new regulatory instance, there is a widespread and woefully paradigms. Their fundamental premise is unempirical debate about the extent to which that regulatory actors have failed to the crisis emerged from within the regulated appreciate the extent to which markets are banking sector or within the unregulated constructed through regulatory institutions. “shadow finance” sector (see for instance Realization of this fact suggests moving the recent exchange between Jeff Madrick from a reactive paradigm that takes the and Jeffrey Freidman in the January 14th existing features of financial markets for issue of the New York Review of Books). granted to one that embraces regulation’s Such debates point to the need for a better ability to shape the very architecture of understanding of the transformation and financial markets, including their decoupling of regulatory boundaries in the localization and segmentation. For instance, banking sector. Indeed, while one set of Schneiberg and Bartley suggest regulators arguments focus on the role of regulatory might devise network-weighted limits rather agencies and regulatory arbitrage by firms, than treating balance sheets as if firms were there is also evidence to suggest that atomistic actors. Penalizing network nominal distinctions between different types centrality would discourage firms from of financial institutions became increasingly pursuing strategies that create systemic risk moot as banks reconglomerated and adopted through dense interlinkages with hybridized forms after the repeal of Glass- counterparties. Steagal. Insufficient analysis of these institutional dynamics is one reason why Spurred by Schneiberg and Bartley's even the Obama administration’s most prognoses, the Markets on Trial workshop politically willful attempts at financial ended with a spirited discussion of how reregulation (e.g. the recently proposed economic sociologists can most effectively “Volcker rule”) appear so confused. shape public understanding and policy debates. Setting aside the tactical question of Second, one topic largely absent how to seize the bully pulpit, I would argue from the markets on trial discussions that sociologists can best distinguish concerns the sociology of credit ourselves from the cacophony of consumption. We know some basic facts commentaries by devising empirically- about sub-prime borrowers from loan-level grounded responses to the unanswered datasets, but we still do not understand what questions which continue to underlie public prompted individuals to take out mortgages debates and plague policy responses. In the they could not afford. This issue has remainder of this essay I briefly discuss two attracted surprisingly little empirical such areas where further research is needed. research given its centrality in public Both are at the core of ongoing debates and debates. There are several stories out there: a both practically beg for a sociological lens. culture of profligacy and associated mythology of ever-rising home prices; The first concerns the institutional victimization by predatory lenders; and the structure of the financial sector and the use of credit as a necessary income mortgage finance industry in particular. supplement in an era when wages stagnated Much lay and learned commentary on the and housing prices increased. Probably the crisis is based on flimsy conceptions of the most pervasive account points to the cultural market from which it emerged. For reconstruction of homes as stable, lifelong Page 6 ACCOUNTS dwellings into homes as short-term individuals and families, sociologists should investments. This, according to many be at the fore of understanding demand-side popular and academic commentators, responses to the expansion of consumer prompted individuals to purchase large new credit. McMansions they could never afford or seek Of course, the financial meltdown out entrepreneurial activities such as raises many other interesting and important flipping houses. Loan-level datasets tell a sociological questions. But the two above more complex story. Over 90% of sub-prime both get to the core of what happened. loans since the late 1990s were for non- Further, both questions address issues on investment properties, and over 60% were which economists have either been refinances rather than new home purchases. questioned or silent. Filling this void offers This suggests the most common type of sub- economic sociologists a unique opportunity prime borrower was using existing home to shape the terrain of wider debates about equity as an income supplement. Ultimately, the sources of the crisis and, hopefully, point sorting out these alternative accounts will to lessons that reorient policies to achieve require additional multi-method research. more sustainable and equitable outcomes in Given the importance of residential real the future. estate in the economy and in the lives of

The Dollar Standard and the Global Production System: The Institutional Origins of the Global Financial Crisis by Bai Gao, Duke University

The global financial crisis that started excessive money supply, which led to the rapid with the sub-prime loan crisis in the United growth of credit for American consumers and a States in 2007 has done severe damage to the collapse in household savings. The excess world economy. Stock markets have fallen, spending generated huge trade deficits and a large financial institutions have collapsed or corresponding outflow of dollars. When the been bought out, and governments in even the dollar weakened, floating currencies were forced wealthiest nations have had to come up with up to uncompetitive levels, while pegged rescue packages to bail out their financial currencies were kept down by foreign currency systems. intervention. This has led to a massive accumulation of foreign currency reserves. In the current debate on the global financial crisis, both the global glut of saving Both arguments highlight the immediate argument and the global glut of liquidity causes of the global financial crisis. argument attribute the origins of the crisis to Nevertheless, they both fall short in response to structural factors. The former argument a more fundamental question: what has maintains that the global outflows of capital contributed to the formation of these structural from the rest of the world to the United States factors in the first place? elevated real exchange rates in the United States and led to the shrinkage of U.S. sectors that Two factors emerge when we approach produce tradable goods and services. The Fed the global gluts of saving and liquidity through cut interest rates in an effort to expand the the lens of institutional analysis: one is the economy and reduce unemployment; however, global production system, and the other is the the interest rate cut fueled excess demand for dollar standard. At the center of the global tradable goods and services. In contrast, the saving glut lie the huge foreign currency latter argument contends that the low real reserves in East Asia and in oil producing interest rate was caused by the United States’ countries. In order to understand these huge VOLUME 9 ISSUE 1 Page 7

reserves, we need to analyze the ways in which patterns of political economies. This pattern is the global production system has profoundly nothing new; it also occurred under the Bretton changed the nature of international trade in the Woods system. past three decades. At the center of the global liquidity glut lies the dollar standard, which has In the early postwar period, the United provided cash to the global economy. As the States served as the major provider of liquidity only currency used to price oil, the dollar is the to the international economy through the key reserve currency in the world. In contrast to Marshall plan. Many countries suffered from a the Bretton Woods system, with its gold and shortage of dollars. Such a special role in the gold-dollar standards, under the current international monetary order, however, enabled international monetary regime the dollar is not the U.S. government to aggressively pursue its backed by gold. The dollar’s special status as global strategic interests by financing, through the key reserve currency has enabled the United budget deficits, extravagant defense budgets, States to borrow globally by supplying dollar- overseas military bases, military aid to its allies, based financial assets. This is the key to and wars in Korea and Vietnam. Meanwhile, understanding the origin of the global liquidity driven by efficiency in resource allocation, U.S. glut. corporations shifted their focus from products to finance and many of them began to invest The oversupply of both saving and heavily overseas. The continuing outflows of liquidity can be linked to two distinct patterns of capital weakened the competitiveness of U.S. political economy: one is characterized by the manufacturing and contributed to the domination of finance in the economic structure, deterioration of U.S. payments. whose major representatives include the United States and Britain, and the other is characterized By contrast, Germany and Japan relied by the domination of manufacturing, whose heavily on exports to promote economic growth. major representatives include Japan, Germany, Their governments preferred stable exchange and China. These two patterns differ in both rates and were reluctant to raise the value of government priorities in international economic their currencies. At the same time, German and policy and guiding principles of corporations. Japanese corporations made great strides in According to the Mundell-Flemming trilemma, building comparative advantages in in an open economy, a government can at best manufacturing production. This had simultaneously achieve two of three major goals significantly improved their trade balances. in international economic policy; stable exchange rates, currency convertibility, and the These trends had led to the continuing autonomy of pursuing domestic policy deterioration of the U.S. payments. Eventually, objectives. All industrialized countries support these factors eroded international confidence in currency convertibility. Governments in finance- the dollar and the dollar faced crises in 1960 and dominant political economies tend to focus on 1968. Driven by the fear of a gold run, the the autonomy of domestic policy making, while United States closed the gold window in 1971, governments in manufacturing-dominant which led to the collapse of the Bretton Woods political economies tend to emphasize stable system. exchange rates. Moreover, private corporations in the former focus on efficiency in research Under the dollar standard that emerged allocation, while those in the latter emphasize in the 1970s, the dollar has maintained its key building competitiveness in manufacturing.. reserve currency status but it is no longer backed by gold. Since oil is priced with the dollar, it The practice of relying upon one has allowed the United States, with big current country’s currency as the key reserve currency account deficits, to print dollars not only to leads to a glut of that currency, driven by finance its oil imports but also to exchange for dynamics of interaction between the two Page 8 ACCOUNTS tradable goods and services with other countries 1990s, China began to attract massive inflows of that need dollars to purchase oil. foreign direct investment from multinational corporations, especially from East Asian Without the fear of a gold run, the U.S. multinationals. The intra-firm trade practiced by began to aggressively use debt financing to multinational corporations greatly expanded maintain policy autonomy. The massive tax cuts exports from China, especially after it joined the and aggressive spending in defense in the early WTO at the turn of the 21st century. This has 1980s generated huge budget deficits and the enabled China to generate huge trade surpluses government increasingly relied upon foreign and foreign currency reserves. The emergence of capital to finance debt. The Fed’s monetary a world factory in China and a world office in policy to contain inflation strengthened the value India lifted the prices for oil and commodities in of the dollar and resulted in a rapid increase in international markets, which stimulated U.S. trade deficits in the first half of the 1980s. economic growth not only for Brazil and Russia, At the same time, private corporations but also for OPEC, and African and Latin significantly increased their outflows of capital, American countries that produce oil and raw launching waves of off-shore production and materials. This snow-ball effect helped create outsourcing, and the financial sector started the another global savings glut, from countries process of securitization. As a result, the role of beyond the major East Asian exporters. manufacturing in job creation has continued to decline. Both trends contributed to the In short, the origins of the global formation of the global glut of liquidity. financial crisis have to be traced back further than the 1980s. A parallel imbalance in the Japan and China, as the largest trading international economy occurred in the early partners of the United States, have recycled their 1960s. This suggests that the practice of relying trade surpluses back to the United States by upon one country’s currency is fundamentally purchasing U.S. debt. The Plaza Accord of 1985 unsound, and that the adoption of floating triggered the Japanese bubble. Under the exchange rates after the collapse of the Bretton pressure of a rising yen, Japanese corporations Woods system has not repaired the fundamental began to shift their production bases first to weakness in the international monetary regime. South East Asia and then to China. In the early

The Sense of Dissonance: Accounts of Worth in Economic Life (2009, Princeton University Press) Book Summary and Interview with Author, David Stark by Sameer Srivastava, Harvard University Organizational Behavior Program

Book Summary:

At its core, The Sense of Dissonance: Accounts of Worth in Economic Life is about the process of search – in particular, the kind of search one undertakes when problems are ill-defined and the value of potential solutions is difficult to judge. This kind of search – which Stark traces to John Dewey’s notion of “inquiry” – typically entails a VOLUME 9 ISSUE 1 Page 9

clash of competing orders of worth, or John Dewey as a point of departure. In evaluation criteria. It demands “reflective particular, they follow Dewey’s advice to cognition,” or the ability to recognize when study processes of “actual valuation” in a new solution category has emerged from a cultural settings and to emphasize the recombination of existing categories (e.g., situations, rather than just institutions, in the parking meter as a recombination of a which the valuation occurs. This guidance hitching post and a clock mainspring). yields textured ethnographic accounts of These concepts form the basis for Stark’s three disparate workplaces: a Hungarian provocative definition of entrepreneurship: factory workshop employing about 100 “the ability to keep multiple evaluative people; a converted loft serving as an open- principles in play and to exploit the resulting layout office for 80 new-media employees; friction of their interplay” (15). and an arbitrage trading room of a major Wall Street investment bank. To cope with the uncertainties associated with this form of Synthesizing the insights from these entrepreneurship, organizations often three cases, Stark then turns to the attempt to displace inquiry with top-down, implications of his project for the field of problem-solving oriented search. They do economic sociology. He sees great potential so, Stark argues, at the cost of missing out for recombinant innovation among new on potential breakthrough innovations. He institutionalism, organizational ecology, and instead counsels organizations to embrace, network analysis. Adopting the narrative of and even actively reproduce, the “perplexing retrospection and projection, Stark points to situations” that give rise to novel several promising recombinant trajectories. recombination. To do so routinely and The first is a shift from classification, which reliably, organizations must articulate undergirds the rationality of hierarchy, to multiple conceptions of what is worthy and search, which emphasizes the temporary use multiple criteria to define organizational nature of categories that are formed from “goods.” Stark refers to this organizational diverse information sources and user form as “heterarchy.” He uses the term to interests. Next is the shift from the diversity contrast the governance system used by such of organizations, which organizational organizations from a hierarchy of command ecology has shown to matter at the level of and a conceptual hierarchy of cognitive economic systems, to the organization of categories. He suggests that heterarchies diversity, which contributes to adaptability have at least two defining features: they by enabling the recombination of already- distribute the task of exploration throughout known solutions. Third is the move from the organization, while coordinating this unreflective taken-for-granteds, which activity through lateral accountability; and emphasize the institutional scripts, rules, and they systematically organize the diversity of classifications that serve as resources for coexisting logics and frames of action. action, to reflexive cognition, which enables people to not only react to, but even actively To develop and illustrate the produce, situations that lead to innovation. principles of inquiry-driven search and Next is the transition from the study of heterarchical organization, Stark and his shared understandings, which have long collaborators (Daniel Beunza, Monique been understood to enable coordinated Girard, and János Lukács) once again take activity, to coordination through Page 10 ACCOUNTS

misunderstanding, which results when form: the state-owned enterprise. The people make conflicting attributions about economy and polity were all governed by a objects, artifacts, and concepts. Finally, single party with monopolistic rules. Yet Stark argues for the need to move from the particular organization that I was single ethnographies to the study of broader studying, which I describe in an early sites of situations. He sees promise in chapter of the book, had remarkable internal hybrid forms of ethnography and network diversity. The workers were leasing analysis and also calls for the study of equipment from their factory and running it innovation across organizational boundaries in the off hours. Within this firm, there and in less well examined settings (e.g., were two very different ways of doing military organizations). things. So there was not a diversity of In the concluding chapter, Stark organizations at the level of the economy, returns to his central themes of search, but there was this curious diversity inside inquiry, and discovery. He also addresses the organization. That sparked me to think the broader social implications of the move about diversity, dissonance, and difference to “hyperentrepreneurial capitalism”; e.g., inside of organizations. I was doing that the potential for employee burnout, the need while I was reading new work that was for organizations to engage user coming out of Paris. Pierre Bourdieu, who communities in a “permanently beta” mode, importantly influenced my thinking, invited and the need to embrace “heterarchical me to come to Paris. I was also reading politics” based on alternative principles of Boltanski and Thevenot’s work on orders of worth beyond market value. Stark believes worth and Latour’s thinking on what would that the principles of inquiry-based search become known as actor network theory. I and heterarchy can be extended to the was also influenced by the American societal level, where they can help generate pragmatists – in particular, John Dewey. So novel solutions to our most challenging the search led me to look at new forms of problems (e.g., the destruction of our natural influence outside of American sociology. and social environment). Could you say a bit more about John Interview with David Stark: Dewey’s influence on your work? Given the book’s emphasis on the process of search, would you comment on the There were several ideas from Dewey that search you yourself undertook in writing were especially important. The first was the it? What were the ideas you drew upon notion of inquiry. Dewey sees inquiry as a and recombined in novel ways and how collaborative endeavor: it is not just did you identify the contexts in which you something than an individual does. Second, develop the theory? for Dewey, inquiry is open-ended. The idea of open-ended and collaborative inquiry I think it’s important to note that my search prompted me to think about the nature of began in Eastern Europe, even though much search and the kinds of search I find most of the material in the book is not set there. I interesting. Search is, of course, the arrived there in the 1980s during a very watchword of the information age. Search interesting time. At the macro-societal engines are the counterparts of the steam level, there was an active effort to suppress engine and the internal combustion engine diversity. So much of the economic activity for the information age. With search was organized around one organizational engines, though, you know what you are VOLUME 9 ISSUE 1 Page 11

looking for. I might, for example, be Why are situations so central to Dewey’s searching for someone’s telephone number. thinking and why have they played such Dewey talks about a different kind of search. an important role in your work? He draws the distinction between problem- solving search, which requires working out I see two kinds of movement in thinking: the right method of analysis to solve a from methodological individualism (for known problem, and problem-generating example, a focus on rational choice models search, which requires figuring out what of human behavior) and from problems need to be solved. The search that methodological institutionalism (that is, a I think is most interesting is not the search focus on steady institutions) to done by search engines. It is this second methodological situationalism. By kind of search: when we don’t know what situations, I mean very concrete settings. we are looking for but can recognize when We might even think of them as moments, we have found it. This is a central challenge although they don’t literally have to last for organizations and individuals. We have moments of time. But we know what we a word for this kind of search in science: we mean when someone says, “We have a call it “research.” In organizational settings, situation here.” It suggests something is including NGOs and the public sector, it is problematic. It’s almost redundant to say a commonly referred to as “innovation.” situation is perplexing or troubling. Dewey’s word for it was inquiry. So inquiry Situations are methodologically privileged is collaborative and open-ended. The third because they are moments when the open- defining feature for Dewey is that inquiry ended character of the world is revealed. takes place in perplexing, even troubling, The analyst can get in and see what people situations. So I started to wonder whether are trying to make sense of. Because they this search – when you don’t know what you are trying to make sense of situations, you are looking for – might be facilitated by have access to the problems and orientations organizations that do not flee from they are working with. The moment of perplexing situations. What if they do not discovery for people in perplexing situations simply tolerate perplexing situations but often also constitutes the element of actively facilitate them? Then I asked discovery for the ethnographer. myself: “What is the most perplexing situation one can be in when working As you noted earlier, perplexing collaboratively with other people?” The situations can give rise to inquiry-driven answer I came up with was situations when search, which is linked to innovation and people don’t share the same principles about entrepreneurship. In the book, you lay what is valuable. Their task is to define out a particular definition of collectively what is valuable, but they don’t entrepreneurship. How would you start out with the same criteria or evaluation contrast your conception of of what is valuable. That is really entrepreneurship with other prevailing perplexing, but it can also be a basis for perspectives? discovery. That is, in a sense, what the whole book is about. First I should say that my definition of entrepreneurship is novel but builds on other people’s work. In the most general terms, it is similar to Schumpeter’s definition Page 12 ACCOUNTS

because I argue that entrepreneurship entails of brokerage and closure -- of connectivity recombination and disruption. It also goes and cohesion. That perspective assumes that back to ideas of Frank Knight, for whom the innovation is about gaining access to ideas, problem of entrepreneurship was very which you then need to implement. important. He saw the discipline of Connectivity, or long distance ties, gives economics as moving away from the study you access to ideas, and cohesion allows you of entrepreneurship. Economics was to implement them. This is a nice idea. looking at all situations as situations of risk There is a lot of terrific work out there on – that is, the future could always be this point – for example, Brian Uzzi and expressed in probabilistic terms. For Jarrett Spiro’s paper in AJS and Ron Burt’s Knight, there were situations that were not work on brokerage and closure. The just ones of risk but ones of genuine problem is that it works like a germination uncertainty. Situations in which all bets theory. Connectivity gives you access to were off: that is, the future could not be ideas that are out there in the environment, thought of in probabilistic terms. That is and then you plant them in the nurturing soil what entrepreneurship is about. The of cohesion. But this perspective does not entrepreneur is not just managing risk; he is answer the question: where do new ideas taking advantage of uncertainty. With these come from? That itself is a kind of action two ideas in mind – that entrepreneurship is problem. Ron Burt’s notion of structural exploiting uncertainty and that holes emphasizes the act of brokerage, entrepreneurship is recombination – I asked, which occurs at the gap between groups. In “What is the uncertainty the entrepreneur my work, entrepreneurship happens at the exploits?” I should note that the overlap, not at the gap. It happens where entrepreneur need not be an individual. If multiple evaluative principles are at play. you start with Dewey’s notion of The friction that comes from ideas battling it collaborative inquiry, the unit of out with each other helps create innovation. entrepreneurship is already some social form We can think about this as a discursive – not the individual. Entrepreneurship is mapping but also in network analytic terms. then about exploiting the uncertainty about This point about overlap is also made in a which principles of evaluation are operating paper that Balazs Vedres and I have coming in a situation. When there is more than one out in AJS on the notion of structural folds. way of looking at what is worthy, then we We argue that entrepreneurship is a group- are more likely to be able to get out of the level process and that the location of cognitive conceptual hierarchies we work in innovation is in the overlap between groups, and reflect on our situation and be able and not necessarily the gap. open to see new kinds of solutions that would not be given within any one frame of In the book, the discussion of worth. That is how the idea of entrepreneurship and innovation leads entrepreneurship as recombination and you to define and characterize a specific entrepreneurship as exploiting uncertainty organizational form that can foster can come together. inquiry-driven search. You refer to this Let me now contrast this perspective form as “heterarchy.” Could you say to that of other contemporary sociologists more about how you define this form – who study entrepreneurship. The currently that is, how would one know if a dominant idea in economic sociology is that particular organization is a heterarchy? innovation happens through a combination VOLUME 9 ISSUE 1 Page 13

Heterarchy is an organizational form, which relatively compressed. So that’s the is not hierarchical or at least has less definitional side of the answer to your hierarchy than one would typically find in question. an organization. Instead of vertical accountability, units and actors are Going back to the discussion of brokerage accountable laterally inside the organization and closure, how do heterarchies manage (though there may still be vertical to implement the innovations they reporting). I borrow from Charles Sabel and produce? others who talk about practices of simultaneous versus sequential engineering The rivalry of ideas within a heterarchy is to show how lateral accountability comes not petty or personal; it is principled. A about. To solve the challenges of good project manager will know when what organizations that are operating in a very he is hearing is about personalities versus fast changing environment, direct and lateral principles. There are some examples of that ties between units can’t just work up and in the book. How do you get things done? down through the hierarchical reporting Well, deadlines help a lot. You have to be structure. So that’s the first feature of able to know when to come to a settlement, heterarchy: it is about who is accountable to which doesn’t mean that we agree on the whom. We saw this in the new media start- substance. Instead, we agree that we will up that I describe in the book. One person make a temporary settlement. Note that this who joined from a large technology firm is very different from ironing out our said, “There is just one thing I can’t figure differences. The pop sociology version is out about working here: who is my boss?” that we get things done when we all sit That person was eventually laid off. In down and reach consensus. Coordination is contrast to that, there was a young then a function of what we share. In this interactive designer. I asked him to whom heterarchical world, people recognize that he was accountable. He said, “I report to there is a time to dispute and then a time to two project managers. But in the end, I’m settle our differences, meet the deadline, and accountable to everyone who counts on me.” get the job done. But even when we make a I thought that was just a great, prescient settlement, we know that this rivalry is still understanding of life in one of these there and will be a basis for dynamism the heterarchical organizations. The other next time we work together on a project. characteristic is that heterarchies don’t just flatten the organization and iron out Does that suggest that heterarchies differences. They don’t just flatten somehow oscillate between different diversity. In fact, there is an ongoing, often modes of working? spirited contestation over what is valuable. So those are the two defining features. The Yes. But it is not that they shift from book has three very different examples of heterarchy to hierarchy. Rather, there are these organizations, including one – the firm oscillations between settlement and rivalry. in Eastern Europe – that is not entirely We show this in the case of the new media successful. In general, though, we are likely firm. They are producing web sites all to find heterarchies in environments where along. They are not just arguing with each there is a lot of uncertainty and in other. Hierarchies are hierarchies of organizations where the strategy horizon is concepts and positions. It is categorical in Page 14 ACCOUNTS

both cases. The idea here is that we can existing questions and existing forms. At keep more than one thing going on in our the same time, one has to break out of the heads at the same time. There is a cognitive existing questions and forms. That’s tough. reflexivity that happens inside heterarchical But that is where interesting work is going organizations. to take place. It’s a challenge for everyone. It’s a challenge for young people because In the book, you also talk about the they are the ones who will do the actual implications of inquiry-driven search and work. That’s the exciting place to be right heterarchy for the way in which research now: being a young person writing a in economic sociology is conducted. What dissertation or starting a new job. It will are the specific implications you see – also be a challenge for more senior people in such as for the choice of research methods the field to recognize the value of work that or units of analysis? does not fit within the existing frameworks.

It’s interesting to think about whether my Toward the end of the book, you broaden inclinations as a sociologist led me to these the discussion from organizations to theoretical views or whether my theoretical society as a whole. You talk about the views have led me to these reflections on problems of “hyperentrepreneurial methods and approaches in sociology. capitalism” and about the potential for Whichever one it is, my answer would have inquiry-driven search and heterarchy to to be that exciting new work in economic address societal-level problems. Could sociology is not going to stay within the you give some examples of what you have existing grooves of the three dominant in mind? theoretical orientations in the field: institutionalism, network analysis, and Heterarchy, or the organization of organizational ecology. I think innovation is dissonance, is awkward and difficult. It’s going to happen in the friction among these. not a purely rosy world, and it’s not some So we should encourage new kinds of panacea. As the epilogue of the new media research strategies, problem articulation, and case goes into, it is not easy to live or work concept formation that are not within any of in a heterarchical setting. If there are those paradigms. That would be multiple performance criteria operating and entrepreneurial. But it’s not going to be there is ambiguity about which one is easy. operative, it can create personal difficulties for people. It can be unsettling. In the very What do you see as the biggest barriers to last chapter of the book, I explore these doing this kind of work? questions at the societal level. I conceive of “hyperentrepreneurial capitalism” as a high I think the challenges are like the challenges performance capitalism. In so many of all types of innovation. It’s not only that domains of life, we find an emphasis on you need to be able find this thing that you high performance. The organizations we are not looking for, but you also have to be work for have to be high performing. able to recognize it when you find it and Surgeons have to be high performing. Our then present it to others in a form they can car is a high performance car. Our cat litter recognize. But because things work so is advertised as high performance. Regional much in a conceptual hierarchy, one has to governments are supposed to be high be able to somehow articulate novelty using performing. The net result is that we live in VOLUME 9 ISSUE 1 Page 15

an era of performance anxiety, whether it’s in the past. To be clear: I’m not the 18 year hold studying for the SAT exam encouraging people to go on strike. But I or the athlete under pressure to break a am encouraging us to think about record. From the bedroom to the organizations that are Möbius strip boardroom, there is this performance organizations: ones that have no clear inside anxiety. That is partly the problem of living or outside. The interesting challenge is how in a society that has multiple performance to mobilize the creative energies of the criteria. There is ambiguity about what is a users, the people who are not even good performance. I’m really struck by the employees. We see greater socialization of extent to which performance is a frame for production but still private appropriation of something that happens in so many walks of the rents. The challenge is to figure out, as a life. society, how to develop these productive energies in forms that are not just market Let me say a bit more about the forms. challenges of operating under multiple frames of what is worthy. One of the really Could you say more about the challenges interesting areas is user-generated you see at the societal level? innovation. Think about Wikipedia. The I started thinking about the solutions to the user is generating the knowledge. Think challenges of high performance capitalism. about social networking sites. The producers The easy ones that are posed have two broad of value are not the employees of the forms. Let’s have one system of value: the organization. They are the people who post market. And let’s have one system of their content. The network relations among values: family values. So we have market them are the valuable thing in the value and family values. The answer seems organization. Market value is not just simple. I’m obviously not going in that embedded in social relations; instead, direction. I’m wondering if, paradoxically, market value is the social relations. I also the answer to high performance capitalism is started to think about what it means that not just more entrepreneurship but employees are not performing the labor they entrepreneurship that is based on the once used to perform. I started to think in multiplicity of performance criteria in all very simple terms, starting with routine walks of life. So we don’t take our examples. I thought about when I go to universities and organize them according to shop, and I take an item off the shelf and put market principles of performance. We don’t it in my cart. Then I go and check out. We subject our regional planners to market don’t think about that act as the performance principles alone. We are genuinely of unpaid labor. But my grandfather would entrepreneurial in saying that we will not have taken me to a general store or hardware only advance our wealth but our worth as a store, where the employees would have gone society. That will happen when there are in the back and brought us back a jar of more and multiple voices speaking about pickles or a tool we needed. We can see this what is worthy – not just the market voice. also in the process of checking out. When we go to Amazon or any online retail outlet Take, for example, the question of and enter in our address and credit card how we value nature. That is a very information, we are performing labor that interesting problem. The answer is not that would have been performed by an employee we figure out how to put a dollar value on it. Page 16 ACCOUNTS

It’s more that we bring into our economy Columbia University where he is Chair of alternative measures of value that are the Department of Sociology and also precisely not ones that could be captured directs the Center on Organizational with price. If we only go the route of profit Innovation. Please see criteria and market criteria, we destroy our www.thesenseofdissonance.com/index.php world. for more information about David Stark and The Sense of Dissonance: Accounts of About the Author: Worth in Economic Life. David Stark is Arthur Lehman Professor of Sociology and International Affairs at

BOOK REVIEWS

Book Review: omitted; no single book can plausibly cover all The Ascent of Money: A Financial History of the of the details. Nonetheless, this almost unlikely World (2008, Penguin Books) task achieves one important goal; it brings the modern financial system into sharper focus. Jiwook Jung This helps deepen our understanding of the latest Sociology, Harvard University financial system meltdown. Although grasping the complexities of the modern financial system Recommending Charles P. Kindleberger’s is still a daunting task, it will be easier once we classical book, Nobel laureate Paul A. understand its historical origins. Hence, Samuelson once said that “sometime in the next Ferguson traces the origins of key components five years, you may kick yourself for not reading of the modern financial system—money and and re-reading Kindleberger’s Manias, Panics, credit, the bond market, the stock market, and Crashes.” Against the backdrop of the insurance, the real estate market, and finally latest financial crisis in 2008, this almost sounds international finance. Along the way, he like a prophecy. In the aftermath of the crisis, attempts to convince us that finance has been the investors around the world who were elated by foundation of human progress. what the free market seemed to have achieved ended up kicking themselves and even each More important, however, he also demonstrates other. What caused all this mess in recent when and how things could go wrong in finance. years? We don’t quite have a clear answer yet. He walks us through historical moments when We have just begun to realize that the global various financial instruments, when abused and financial market is much more integrated than mismanaged, have led to disastrous we thought it to be and, more important, is much consequences. Such moments are abundant in less secure from unexpected shocks than we history: successive debt crises and the ultimate hoped it to be. However, the crisis in 2008 is decline of the Spanish empire in the sixteenth not the first time that people have failed to century, the Mississippi Bubble (arguably the fathom the depth of risk inherent in the financial first stock market bubble which caused, system that they built. In fact, history is full of indirectly, the French Revolution), the Argentine such stories, and these are what Niall Ferguson hyperinflation and debt crisis in the late 1980s, introduces to us in his recent book, The Ascent the collapse of US Savings and Loans of Money: A Financial History of the World. associations in the 1980s, and the latest subprime loan crisis. These events illustrate This book aims at something almost impossible. how finance amplifies our tendency to overreact, It tries to cover, in one stroke, the entire history to swing from exuberance when things are going of finance from ancient Mesopotamia to modern well to deep depression when they go wrong. microfinance. Obviously, much should be VOLUME 9 ISSUE 1 Page 17

Why, then, are we human beings so prone to however, the market can become volatile beyond make similar mistakes over and over again? anyone’s imagination. History matters here again. It is not just because we can learn valuable lessons from the past. It Therefore, the history of finance is not just about matters even more because we often fail to learn the evolution of money, credit, bond, stock, and from history. Ferguson says, “Nothing insurance markets. It is also a history of people, illustrates more clearly how hard human beings involving a few geniuses who struggled but find it to learn from history than the repetitive often failed to overcome inherent instability in history of stock market bubbles” (p. 123). To be finance, some of those who attempted to sure, many of the recurring bubbles and crashes manipulate finance in search of a bonanza, and were attributable to the greed of some the majority of others who swayed between opportunistic groups or individuals. Like craze and panic as markets fluctuated. Because conquistadors in the sixteenth century, people, of these human factors, no financial system in generation after generation, went in search of history has ever been perfectly secure from their own El Dorado in the ever-expanding unexpected shocks. This inherent volatility in world of finance, often winding up with ruinous financial systems can be clearly seen in the results. But this is not the whole story. uneasy relationship between finance and politics. Throughout history, Ferguson As the modern financial system expands, so repeatedly asserts, politics and finance have does our understanding of and, more been inseparable. War and state-building were a importantly, our confidence in our ability to crucial factor in the expansion of the modern control the system. With every new invention of financial system, such as the global bond a state-of-the-art financial instrument, it was market. But at the same time, politics could also thought that we came one step further to the crash the modern financial system. The First ultimate dream of finance—the state of zero World War put an abrupt end to the first era of risk. But the crucial lesson from the history of financial globalization, and it took almost half a finance is that this is an unlikely aspiration. century before another round of financial Every time people thought they had achieved the globalization unfolded in the late 1960s. unlikely goal, they learned the lesson in a very hard way. One recent, and probably the most The vulnerability of global finance to dramatic, example is the failure of Long-Term geopolitical conflicts draws our attention to its Capital Management (LTCM). Led by a dream recent, peculiar aspect—the emergence of team of finance (including two soon-to-be Nobel “Chimerica”, probably the most provocative Laureates—Stanford’s Myron Scholes who claim in this book: developed, with Fisher Black of Goldman Sachs In 2007, the United States needed to and Harvard Business School’s Robert Merton), borrow around $800 billion from the LTCM once thrived with its so-called dynamic rest of the world; more than $4 billion hedging, which was assumed to hedge its funds every working day. China, by contrast, from significant movement in any of the major ran a current account surplus of $262 stock, bond, or currency markets. The success billion, equivalent to more than a quarter of LTCM’s business was so great that the firm’s of the US deficit. And a remarkably assets reached $134 billion in 1998 in only four large proportion of that surplus has years. However, in the same year (and less than ended up being lent to the United States. a year after Merton and Scholes were awarded In effect, the People’s Republic of China the Nobel Prize in economics), the shock has become banker to the United States initiated by Russian default left LTCM with a of America. (p. 335, emphasis added) largely illiquid portfolio of assets that could not Ferguson likens this rather unusual symbiotic be sold at any price. In the long-term, it might relationship to a similar one at the dawn of the be true that the market moves according to some First World War, between the world’s financial elegant mathematical model. In the short-term, center, Britain, and continental Europe’s most Page 18 ACCOUNTS dynamic industrial economy, Germany. It might be too much of a stretch. The global financial About the author market today is substantially different from the global financial market a hundred years ago. Niall Ferguson is Laurence A. Tisch Professor However, an important lesson from the history of History at Harvard University, a Senior of finance is that we must not underestimate the Research Fellow of Jesus College, Oxford risk that is endemic to any financial system. University, and a Senior Fellow of the Hoover Risk-taking may be a virtue in the modern Institution, Stanford University. To find out financial market, but the history of finance more about Niall Ferguson and the research reiterates that risk-taking without due caution connected to this book, visit can be devastating. www.niallferguson.com. Also, to see a television series based on the book, visit www.pbs.org/wnet/ascentofmoney.