the emergence of organizations and markets, part 2: a guest post by john padgett and woody powell

A guest post by John Padgett and Woody Powell about their new book The Emergence of Organizations and Markets. Read post #1 here:

Single autocatalytic networks generate life, but they do not generate novel forms of life. There is nothing outside of a single decontextualized network to bring in to recombine with what is already there. Self-organizing out of randomness into an equilibrium of reproducing transformations, the origin of life, was a nontrivial accomplishment, to be sure. But this is not quite speciation, which is emergence of one form of life out of another.

Transpositions and feedbacks among multiple networks are the sources of organizational novelty. In a multiple-network architecture, networks are the contexts of each other. Studying organizational novelty places a premium on measuring multiple social networks in interaction because that is the raw material for innovation. Subsequent cascades of death and reconstruction may or may not turn initial transpositions (innovations) across networks into system-wide invention.

Through fifteen empirical case chapters, Padgett and Powell extracted eight multiple-network mechanisms of organizational genesis:

1) Transposition and refunctionality

2) Anchoring diversity

3) Incorporation and detachment

4) Migration and homology

5) Conflict displacement and dual inclusion

6) Purge and mass mobilization

7) Privatization and business groups

8) Robust action and multivocality.

These were the ways, observed in empirical cases, in which multiple networks were perturbed and folded into each other to induce hybridity, recombination, and tipping of production rules and relational protocols into new configurations of interlocking autocatalyses.  As a brief overview of the arguments, we provide short sketches of each of these mechanisms.

1) Transposition and refunctionality

Transposition and refunctionality is the movement of a relational practice from one domain to another and its reuse for a different purpose in the new domain. Transposition and refunctionality is not innovation in the usual sense of a new tool for an old purpose; this is innovation in the sense of a new purpose for an old tool.

In chapter 6, Padgett documents the transposition, via the city council in Renaissance Florence, of the master-apprentice relationship in domestic guilds to the international world of merchant-finance, thereby making the partnership system. In chapter 13, Powell and Sandholtz document the transposition, via venture capital, of the scientific life-sciences lab from the university to the market, thereby making the dedicated biotechnology firm.

Catalysis and reproduction of transposition and refunctionality in both the Florentine and the biotechnology cases were achieved by an unintended chain-reaction through biography: first a breakdown of previous social boundaries—guilds in the case of Florence, science and the market in the case of biotechnology—and second the emergence of a new more fluid open elite, which remade people through the restructuring of careers. Renaissance Florence created not just new banks and new art but also a new type of person—the merchant-republican. Similarly, organizational revolution in the life sciences created a new type of amphibious scientist, comfortable both in the marketplace of patents and in the academy of publications.

2) Anchoring diversity

Eleven regional agglomerations of biomedical research, drug development, and finance in the United States are analyzed by Powell, Packalen and Whitttington in chapter 14: three successful cases (San Francisco Bay Area, Boston, and San Diego) and eight unsuccessful ones (New Jersey, Philadelphia, New York, Los Angeles, Seattle, Houston, Washington DC, and Research Triangle NC). From the perspective of dedicated biotech firms (DBFs), industrial districts catalyze them, but from the perspective of the districts themselves, life-science regional clusters can be considered higher-order emergent organizations themselves.

Two features characterized the three successful regional clusters from the eight unsuccessful ones: (a) a diverse ecology of a variety of distinct types of organizations in interaction—universities, DBFs, venture capitalists, research think tanks, hospitals, and biomed suppliers; and (b) an “anchor tenant” broker, who created a neutral space or “playing field” for all the others to interact. Both features were necessary to turn a competitive market into a more innovative competitive ecology or community.  In the unsuccessful cases, the anchor was a hegemon who squashed the diversity of production rules.

In chapter 17, Lee Fleming and co-authors made a similar point, showing how IBM Almaden Labs—a corporate “university”—functioned as catalyst for scientist careers in Silicon Valley, bridging and transposing networks of scientists in the biotechnology industry with networks of scientists in the computer industry.

3) Incorporation and detachment

Incorporation and detachment involves the insertion of a connected chunk of one network into another, at first without detaching it from its original network. A hybrid organization forms in the (perhaps tension-laden) incorporation overlap. The hybrid eventually detaches to find its own exchange relations. In chapter 5, Padgett illustrates this incorporation-and-detachment mechanism through the creation of the medieval merchant-banking corporation. This was the first ongoing organizational form of international finance in Europe that involved sedentary merchants in offices. The pope triggered this invention by mobilizing Tuscan merchants from his hometown Champagne fairs into papal administration for the Italian crusades. The concept of “corporation” in economics thus originally had religious overtones, as an organ in the body of Christ militant. Later merchant-banks detached from the Church to find their own way in the new patterns of international trade that they pioneered.

A cascade of innovations was triggered by these new Tuscan merchant-banks: they entered into the English wool trade; they created a new tax system in England—customs—to get repaid; they built a wool-textile manufacturing industry in Florence to compete with Flanders; they extended the Italian patrilineage kinship system from feudal lands to merchants. A common stereotype of those who celebrate “impersonal markets” is that that older forms of capitalism were founded on family. The case illustrates the opposite causality: in historical fact, noble family emerged instead out of the company, via a medieval relational protocol called consorteria.

4) Migration and homology

The profoundly consequential modern organizational inventions of joint-stock company, stock market, and governmental federalism were all invented in early-modern Netherlands, Padgett finds in chapter 7, as byproducts of migration and homology. The Dutch Revolt in the late seventeenth century triggered a massive migration of Protestant merchants and artisans from what is now Belgium into what is now Netherlands. Precocious southerners brought advanced commercial and financial techniques, as well as economic connections throughout Europe, with them from Antwerp, to mix with the predominantly nautical and shipping skills in Amsterdam. Southerners were not admitted to the native governing institutions of regencies, but they were blended with native elites in the two collateral pillars of the Dutch Reformed Church and the Dutch East and West India Companies, which were homologous to and modeled on the federalism of the Dutch Revolt itself. The first joint-stock company and the first stock market were nautical extensions into overseas colonialism of the nascent Dutch federalist state. Reading history backward, we tend to think of joint-stock companies as archetypally “private,” but the Dutch East India Company was hardly distinguishable from the Dutch province of Indonesia, with all of the organizational overlap that implies.

Biographical reconstruction to catalyze these organizational innovations into reproductive invention, Padgett argues, was accomplished through Calvinism. The Calvinist organizational system of consistories (boards of observant elders) was generalized to become the multifunctional relational protocol of “lateral control” used by the Dutch in their political and economic organizations, as well as in their religious ones.

5) Conflict displacement and dual inclusion

The organizational invention analyzed by Obert and Padgett in chapter 8 is nothing less than the formation of Germany. Organizational genesis here means the assembly by Prussia in the nineteenth century of geographically disparate German principalities under a new constitutional umbrella of Reichstag, Bundesrat, and chancellery. Obert and Padgett show that this federalist assembly emerged through a repeated whiplash by Bismarck between international-relations networks and cleavages at the European level and political-party networks and cleavages at the domestic level. Bismarck violently transposed war and alliances across international and domestic levels, thereby transforming both Germany and himself.

Conflict displacement was Bismarck’s aggressive style of building networks by breaking them. In a triad of mutually hostile relations, conflict displacement is the attack by an aggressor on a demonized other with the consequence of splitting a bystander, one segment of which joins into fragile alliance with the aggressor.

Dual inclusion was what conflict displacement achieved: the stapling together of the deeply contradictory principles of democracy and autocracy through the mutual-control balancing of “Prussia is in in Germany, and Germany is in Prussia.” Other scholars have noted the future consequences of this contradictory fusion. Obert and Padgett show how this highly combustible fusion was built into the German state and reproduced itself through political party oscillations and realignments.

6) Purge and mass mobilization

In communism, dual hierarchy represented the twin hierarchies of Communist Party and central command economy arrayed parallel to one another with cross-cutting levels of overlapping inspection and control, like a ladder. In chapter 9, Padgett derives the poltical consequences of this multiple-network structure for the dynamics of communist economic reform: under Stalin, under Mao, under Khrushchev, under Brezhnev/Kosygin, under Andropov, under Gorbachev, and under Deng Xiaoping. He shows how this structure imposed four, and only four, families of reform trajectory on its leaders. Reading history forward, not backward, Padgett interprets economic reform, even under Gorbachev and Deng, as a political dynamic within communism rather than  a teleological imitation of Westerners.

The second, most radical of these reform trajectories was “purge and mass mobilization.” Here, upper ranks of hierarchies are purged (and sometimes worse), and bottom tiers, often youthful, are raised up to take their place. Stalin did this first with collectivization and then with his Great Terror. Control was achieved through astronomical rates of upward mobility. Mao also did this with collectivization and with his Cultural Revolution, with somewhat less success than Stalin. Gorbachev tried to do the same thing with perestroika and glasnost, with catastrophic consequences.

The flavor of the first three multiple-network mechanisms of organizational genesis is bridging and hybridity. The flavor of the next three multiple-network mechanisms is explosion and reconsolidation.

8) Robust action and multivocality

The final organizational-genesis mechanism discussed in our book is robust action and multivocality. Robust actions are noncommittal actions that keep future lines of action open in strategic contexts where opponents are trying to narrow them. Successful robust action may ensue when a central broker bridges to segregate blocks of mutual-dislike supporters through distinct networks. The broker’s multiple identities are ambiguous, not in the sense of being vague or uncertain but in the sense that multiple audiences attribute different interests to the broker.

In chapter 9, Padgett argues that robust action was the successful network-bridging strategy employed by Deng Xiaoping in the 1980s to guide post-Mao China to economic development. Deng, like Cosimo de’ Medici, led from a backstage of informal power, not from formal command, and he issued only cryptic remarks that did not convey clear purpose, preferring to respond selectively to others’ initiatives. The organizational invention produced by robust action in early Chinese reform was local-government-as-entrepreneur: profits and patronage orientations were combined. Entrepreneurial communism was not a new micro-behavior; it just previously had been labeled “storming” or “blat”. Through patronage and robust action, Deng transformed this from parasitism to autocatalysis.

Chapter 9 also demonstrates that this robust-action approach of Deng Xiaoping was possible only because of the radical administrative decentralization that Mao had engineered during the Great Leap Forward. Even though Mao opposed markets with every bone in his body, his administrative reforms made possible what Deng achieved. As one consequence, Chinese informal political networks were organized vertically into factions, whereas Soviet informal political networks were organized horizontally into defensive family circles (which Stalin had been desperate to smash). These networks channeled and indeed stimulated what the respective leaders did, so much so that is as reasonable to say that the systems constructed their leaders as it is to say that the leaders constructed their systems. Again, in the short run, actors make relations; in the long run, relations make actors.

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