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markets on trial

I attended a really interesting conference this weekend that brought together some leading economic sociologists and organizational scholars to talk about the financial crisis.  Research in the Sociology of Organizations will publish the conference’s papers. You can download early drafts of the papers here.

The authors were asked to think about what sociological theory has to say about the causes of the financial crisis and to speculate about potential solutions. The conference was mainly focused on the former question, although towards the end discussion drifted to policy.  The papers were very diverse, but one idea came up in several papers. The idea was that the crisis was a kind of normal accident that was made possible by the organizational structure of the financial system. As Charles Perrow theorized, accidents can be thought of as the product of organizational systems that are highly complex and tightly coupled. Decision-makers have a hard time figuring out how the system works as a whole due to its complexity, but when one part of the system breaks down, for whatever reason, the entire system is vulnerable to collapse due to the interdependence of the different parts. The idea comes out most strongly in the papers by Schneiberg and Bartley and Palmer and Maher.

The conference created a lot of lively discussion about the need to make economic sociology more relevant to policy.  Although no single policy solution emerged, it was one of the best conversations I’ve ever been a part of in which economic sociologists strive to make their research relevant and not just theoretically interesting. So it was a good step forward. Still, I wondered what policy experts and regulators would say to the commentary. As Jerry Davis remarked in his concluding comments, “markets on trial” felt a bit like a kangaroo court. No financial economists or fed officials attended. Of course, I don’t think that the ideas need to be validated by an economist to make them good, but if economic sociology is ever going to make a move into the realm of regulation and policymaking, that interaction needs to take place.

The other part of this equation is the political mobilization it would take to make the policy solutions of economic sociologists politically viable.  One only needs to look to law and economics to see an example of how academics mobilized their ideas as part of a political coalition to institutionalize a particular set of policy solutions. As we talked about in a series of posts last year, Steven Teles’s fascinating book about the rise of the conservative legal movement illustrates how this coalition formed and influenced regulatory processes. Making major transformations like some of the scholars propose requires having access to mobilizing resources and a political will that economic sociologists haven’t had in the past.  The workshop was a great opportunity to get something like that started.

 

Written by brayden king

October 25, 2009 at 10:43 pm

12 Responses

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  1. Hmm, I haven’t looked too deeply into these papers, but they strike me as looking at a broken car and citing X, Y, Z as the problems. But those factors may be common to many cars, and don’t say why that particular car failed.

    Which is to say: economists and regulators will listen to organizational theories if they explain not just why certain things in the US failed, but why firms and systems failed or succeeded in general; worldwide and in the US.

    In particular, there seems to be a lot of angst against deregulation. But many European countries managed to have horrible financial systems without that ideology. The worst part of the US system wasn’t the unregulated hedge funds, but the tightly regulated banking system–with Fannie/Freddie coming out pretty bad. It may still be a contributor, but a theory of the financial crisis should do more than overdetermine n = 1.

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    Thorfinn

    October 26, 2009 at 12:27 am

  2. btw, I don’t see any articles tackling one huge org issue: the fact that all major IBanks shifted from being limited liability to public entities. Aside from dramatically amping up the incentive to take on risk, this also created a public barometer of trust which could spiral downward and create a self-fulfilling prophecy.

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    Thorfinn

    October 26, 2009 at 1:49 am

  3. […] King of orgtheory.net recaps a conference he attended this weekend on organizational dynamics in the financial crisis: The papers were very diverse, but one idea came up in several papers. The idea was that the crisis […]

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  4. i don’t think any of these papers have a clue. see the testimony of andrew lo to congress. lo’s point is, what regulators have required to be disclosed is grossly incomplete. the world hasn’t had regulation. it’s had an illusion of regulation. Legitimation forces have endorsed policymaker delusion. Remember Alan Greenspan. His great pride was the very large number of non-official metrics he used to judge the state of the economy. He asserted his command of unofficial metrics (the “pulse”) was why policymakers should cede authority to him. So a regulator in that view has to be an insider endowed with secret sauces, career-accumulated grimoires, a rollodex and so on. To rephrase Summers’ “there are idiots”: there are information sets and networks of trust. Which is not to say that regulators have to get the best information set. But we’ve regressed to the era before Tjalling Koopmans created national income and economic statistics. Those statistics are no long sufficient to manage the modern economy. There has been an ongoing delegitimation of official statistics, to the point where today a politician or an economist has to juggle two or more information sets — one the official story, and one the personal view of the expert. The same illusion of regulation has occured in drug regulation. The tolerance and political management of multiple sets of books is the new reality. But there is no effort to reconcile them. I think the development is implicit in Meyer and Rowan, their model always had not just rationality, not just ceremony, but both. But in their models were always dupes — either the rationalist or the ceremonialist. I don’t think in their model they considered the possibility that the rationalist and the ceremonialist would shake hands and try to work together for the sake of mutual survival, undeluded and cynical. But in regulation, that’s the current state of affairs. The dependence of regulators on insider information sets is key to its continuation, because it imposes huge costs to a regulator who alienates friends and goes blind, and it maintains regulators who get advance warnings of trouble via their rollodexes, at an agreed-to price.

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    Tony

    October 26, 2009 at 4:12 am

  5. Thanks, Brayden. I’d just add that the Guillen and Suarez paper also makes the normal accidents case, though it wasn’t discussed much at the conference since they weren’t there in person.

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    Tim

    October 26, 2009 at 5:37 am

  6. Great post Brayden.

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    Michael Bishop

    October 26, 2009 at 4:07 pm

  7. It is really interesting that a bulk of the papers focused on normal accidents — that indeed makes it somewhat tough to suggest something policy-wise (though, presumably there’s some important experiential learning going on).

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    tf

    October 26, 2009 at 4:30 pm

  8. Hey, there’s policy here : “people are mostly stupid (or atleast not getting any smarter) – so everyone should stop making things that other people dont easily understand.”

    (sorry if that’s kinda snarky)

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    sd

    October 26, 2009 at 5:22 pm

  9. You should read the papers before you get too snarky. Some of the papers include sound policy recommendations (see Fligstein; Schneiberg and Bartley, for example). You can debate whether the policies would be good/effective but you should at least read them before you discount the project.

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    brayden

    October 26, 2009 at 5:45 pm

  10. I’m impressed that a couple of the commentators here seem to have digested (and dismissed) 18 lengthy papers in under 2 hours after Brayden’s post. I had access to them for a couple of weeks, spent 1.5 days reading, and still didn’t fully read them all by the time of the conference. Maybe my slow reading corresponds to my slow-witted enthusiasm for many of the ideas presented?

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    Jerry Davis

    October 26, 2009 at 8:48 pm

  11. I liked the Schneiberg and Bartley paper a lot, and there’s a lot to be said about the privatization of regulation. I also apologize for skimming a bit and presuming Brayden’s summary excused skimming, which it doesn’t. Still, I associate normal accidents, as an explanation, with domains like nuclear plants and NASA. Such domains seem very different from a financial market, or from a view of multiple markets with arbitrage based on information difference and an acceptance of zero-sum gaming. The rules of the road from one to the other are different. I guess I’m a conservative who needs some Verstehen in a concept, i.e., an explanation of how it works in a context for an actor, to use it. I certainly would not apply the explanation I proposed, of a mediated agreement with penalty clauses between two information sets, and use it to explain nuclear power or NASA accidents. To me an explanation that makes sense in a local context is stronger in part because it makes sense there. I’d be scared how a person in finance would interpret a theory of normal accidents there — as another way to pass risk to no one other than to an ultimate bail outer perhaps, since it puts no one on the hook.

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    Tony

    October 26, 2009 at 11:28 pm

  12. […] book providing a sociological take on the financial crisis and collapse coming out shortly.  I blogged earlier about the workshop where many of these papers were presented. The volume, Markets on Trial, has a […]

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