Social Capital and Social Inequality Corporate Networks in the United States and Germany (1896-1938) Paul Windolf, 1946, professor of Sociology at the University of Trier, Germany. Areas of research: network analyses, economic sociology, historical sociology. From 1987-92 professor of sociology at Heidelberg. Visiting research fellowships at the London School of Economics (1980/81), Stanford/department of sociology (1984), European University Institute, Florence (1986/87), Haas School of Business, Berkeley (1996/97), Center for European Studies, Harvard (1999), fellow of the Wissenschaftskolleg Berlin (2005/06). Publications: Expansion and Structural Change: Higher Education in Germany, the United States, and Japan 1870-1990, Westview Press 1997; Corporate Networks in Europe and the United States, Oxford University Press 2002; Corruption, Fraud, and Corporate Governance: A Report on Enron, in: Corporate Governance and Firm Organization, ed. A. Grandori, Oxford University Press 2004. Paul Windolf Department of Sociology [email protected] Universit of Trier Phone: ++49-651-2012703 54286 Trier Fax: ++49-651-2013933 Germany 1 Social Capital and Social Inequality Corporate Networks in the United States and Germany (1896-1938) 1. Social capital: an unspecific resource 2. Diffuse expectations 3. Corporate networks 4. Quantifying social capital 5. The unequal distribution of social capital 6. The regional distribution of social capital 7. Regression analyses: Who has the most social capital? 8. Stability over time: Multilevel regression analysis 9. Summary Appendix References Abstract Social capital is an unspecific resource that can improve the market opportunities of individuals and the chances of survival for organizations. In this historical study it will be shown that social capital was divided up among big companies during the early twentieth century as unequally as were income and wealth in Western societies. The comparative analyses concentrate on the distributional structure of social capital available to large corporations in the United States and Germany. A great deal of social capital could be accumulated especially by firms that were located in the metropoles of New York or Berlin, had a relatively high number of bankers sitting on their boards of directors, and were among the largest existing enterprises. A multi- level regression shows that these causal relations remained relatively stable through- out the period from 1896 to 1938. Words: 9.987 2 1. Social capital: an unspecific resource Bourdieu has proposed a definition for the term “capital” that goes beyond a strictly economic meaning and enables us to consider various resources that are important for the reproduction of social classes. Among such resources are economic, cultural, and social capital. He expands Marx’s use of the term ‘capital’ and thereby approa- ches Weber’s concept of ‘market opportunities’ (1964: 123). Bourdieu analyzes various forms of accumulated labor, not only wealth in form of the means of produc- tion, but also in the form of socialization or investments in social capital. “Capital is accumulated labor, either in a material form or an internalized, incorporated form” (Bourdieu 1983: 183). Both cultural and social capital are inheritable and influence the market opportunities of the following generation in the competition for social status. The term ‘social capital’ has been applied in many areas of social science in the past decades and has thereby often lost its sharpness (Kadushin 2004). It is defined basi- cally in two different ways. On the one hand, social capital is considered to be a type of public good. This definition makes it nearly synonymous with the cultural and nor- mative integration of a group or with trust and reliability found in business relations.1 On the other hand, social capital is defined as an individual resource that creates competitive advantages. Burt (2001: 33) reduces this meaning to a concise statement: “Better connected people enjoy higher returns.” The imprecise application of the term can be attributed primarily to the lack of a clear differentiation between what social capital actually “is” – meaning the substance of the term – and the instrumental character of social capital – meaning that which one can do with social capital. In order to clarify this, let us first return to the definition offered by Bourdieu: “Le capital social est l’ensemble des ressources actuelles ou potentielles qui sont liées à la possession d’un réseau durable de relations plus ou moins institutionnalisées d’interconnaissance et d’interreconnaissance” (Bourdieu 1980 : 2). Bourdieu defines social capital as the sum of the resources, actual or potential, that are linked with the possession of a durable network of more or less institutionalized relations based on mutual acquaintanceship (interconnaisssance) and recognition (interreconnaissance). The French word reconnaissance has three 1 On this point, see Coleman (1988), Putnam (1995), and Uzzi (1990). 3 meanings: recognition (of a person known), acknowledgment and legitimation in the sense of genuine belonging, and gratitude in the sense of mutual obligation and com- mitment. Thus, the main characteristics of social capital are based on mutual recog- nition and recall (interconnaissance), on institutionalization and stability (durable), and on legitimation and mutual commitment (interreconnaissance). Bourdieu does not name any specific purpose that can be achieved with social capital, but limits his definition to the characterization of a specific form of social relations (inter(re)con- naissance). The creation and continuation of these networks requires work on rela- tions, which can be inherited as social capital and improve the market opportunities of successive generations. In his work The Philosophy of Money, Simmel defines money as an “absolute means.”2 In doing so, he emphasizes the unspecific character that money has as a tool. With money, we can buy all goods and services that have taken on the form of commodities. Money is a general and abstract means, which itself is not based on an inherent value. In a similar sense, social capital is also an abstract and general instrument that can be applied for various purposes. It can strengthen social cohe- sion, create trust, be used to obtain information or to tap the resources of others for one’s own purposes. Often we can achieve something with social capital that cannot be purchased with money. Therefore, if we differentiate between the substance of social capital (réseau durable de relations) and the various functions that social capi- tal can fulfill, it becomes clear that social capital is usually defined in the literature in terms of the aims pursued with this resource. However, it would be reasonable to dif- ferentiate between the instrument and the aims that can be achieved with it. 2. Diffuse expectations In traditional kinship systems, exchange was based on diffuse expectations with re- gard to the scope of the obligation and the time period in which the obligation needed to be reciprocated.3 In modern societies the market is coordinated through specific contractual relations. The transition from social relations based on diffuse expecta- tions to modern exchange relations coordinated through specific contracts is a central element of the modernization process. 2 Simmel (1987: 219). Elsewhere he refers to money as “being solely a means and tool“ (p. 206) or “abstract means” (p. 209). 3 See the term “generalized exchange” in Lévi-Strauss (2002: Chapter XV). 4 Various studies have shown that networks are not coordinated through contracts, but rather through unspecific expectations of reciprocity.4 Therefore, they are considered premodern, and critics have argued that networks could only be productive – if at all – during the early phase of economic development. In developed economies, the market emancipates itself from networks, and market exchange is based exclusively on specific contracts (Stiglitz 2000: 64; Katz 1998: 3). However, a more exact analysis shows that the market and networks exist parallel to one another. Networks do not replace rational market exchange but fulfill a comple- mentary function. They reduce transaction costs, particularly when uncertainty either prevents a contract from being concluded or compels the parties involved to exert considerable effort to do so (Williamson 1985: 50-51). Contracting parties have to resort to substitutes in order to fill the ensuing gaps, and one of these substitutes is the trust that develops within networks. 3. Corporate networks This study will analyze a specific form of social capital, namely, the “réseau durable de relations” that developed in the late nineteenth century between big companies and became one of the most important institutions of managerial capitalism (Mizruchi 1982). Like other forms of social capital, this specific form can be utilized to pursue a number of aims. Banks can use interlocking directorates to control companies to which they have given credit or have introduced on the stock market (Minz and Schwartz 1985). Such ties can help reduce resource dependency between firms (Pennings 1980). Companies can appoint directors of reputable banks to their supervisory boards in order to enhance their reputation (Fohlin 2006). Various studies have proven that companies that hold a key position in the network perform better than do isolated companies (DeLong 1991). Firms that are closely interlocked also create a political lobby group and support