biggart delbridge 2004 systems of exchange

SYSTEMS OF EXCHANGE

NICOLE WOOLSEY BIGGARTUniversity of California at Davis

RICK DELBRIDGEUniversity of Cardiff

We develop a classification scheme of systems of exchange using concepts fromnetwork analysis, economics, and cultural sociology. This classification illustratesthat the “free market” is but one possible type of economy and that other types are notbest understood as imperfections. This classification helps to distinguish analyticallyamong qualitatively different types of exchange arrangements and suggests basesfrom which to develop theories about the organization of markets and exchangesystems of various types.

Thirty years ago, organization theorists fo-cused largely on the internal organization offirms and other bureaucratic structures. In re-cent years, however, they have turned increas-ingly toward trying to understand the economiccontext within which firms operate. Promptedespecially by the development of networkedmarkets in Asia, organization scholars have rec-ognized that market organization, not only firmorganization, is a crucial factor in explainingthe activities and character of firms and othereconomic actors.

When organization analysts turned towardthe examination of markets, the prevailing con-ceptualization of a market came from econom-ics. Being a parsimonious construct, the eco-nomic idea of a market failed the needs of manyempirically oriented organization analysts, par-ticularly those rooted in anthropological and so-ciological traditions. Subsequently, in a flurry ofwritings, scholars promoted alternative ways ofconceptualizing market organization. Two setsof ideas about the nature of markets emerged.One conceptualizes markets as structures of so-cial relations and focuses on the organization ofmarket roles into status hierarchies and net-works (e.g., Baker, 1984, 1990; Burt, 1983, 1992;

Palmer, 1983; Podolny, 1993). The other concep-tualizes markets as cultural arenas or focuseson markets as constructed social worlds (e.g.,Abolafia, 1997; DiMaggio, 1994; Fligstein, 1996;Zelizer, 1988).

These conceptualizations are not antithetical,but they do emerge out of and are associatedwith different intellectual traditions and re-search methodologies. Hence, there has beenrelatively little discussion or theory building be-tween these scholarly groups. Our intent in thisarticle is to merge selective elements of theseconceptualizations in a way that offers new un-derstandings to all approaches. To achieve this,we develop a classification scheme that differ-entiates systems of exchange on the basis ofactors’ logics of action and the structure of so-cial relations between actors. The result is asystem typology (Layder, 1998) that facilitatesthe codification of exchange and provides thebasis for subsequent analysis, prediction, andexplanation.

We do three things here. First, we briefly re-view current conceptualizations of market or-ganization. Second, we suggest a classificationof systems of exchange using key insights fromthese conceptualizations, each of which cap-tures elements of exchange in some settings. Weuse the term systems of exchange to distinguishsome types of organized exchange from theprice-based market assumed in the traditionaleconomic approach. “System” suggests that el-ements of each type of exchange arena arestable, loosely coupled, and interdependentarrangements that combine to produce a dis-

We presented earlier versions of this paper at the Amer-ican Sociological Association meetings and at the EconomicSociology Colloquium, Wharton School of Business, Univer-sity of Pennsylvania. We thank George Boyne, Paula En-gland, Sy Goldstone, Mauro Guillen, Gary Hamilton, Rich-ard Swedberg, and Richard Whipp for their comments onthe manuscript, and the AMR reviewers for their helpfulcritiques.

� Academy of Management Review2004, Vol. 29, No. 1, 28–49.

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tinctive social and economic “world” (Scott, 1998:91). The “market” is but one form of exchangearena found in society. We argue that there maybe qualitatively distinct types of socially or-ganized exchange that support substantivelydifferent orientations to economic action and,hence, culturally different trading arenas. Weillustrate this classification scheme with empir-ical examples, and, finally, we suggest how thisconceptualization provides a promising basisfor economic and organization theory develop-ment and empirical analysis.

ECONOMIC CONCEPTS OF THE MARKET

As economic historian Douglass North hasnoted, “It is a peculiar fact that the literature oneconomics . . . contains so little discussion of thecentral institution that underlies neo-classicaleconomics—the market” (1977: 710). Classicaleconomic theorists conceptualized markets asconcrete places, but their focus was on under-standing economic production and price setting,not exchange. Consequently, they failed to de-velop a theoretically useful conceptualization ofempirical markets.1 The economic concept of themarket became increasingly abstract followingthe Methodenstreit or “Battle of Methods” at theclose of the nineteenth century (Swedberg, 1994).Substantive historical and social approaches toeconomics were rejected in favor of mathemati-cal models of market behavior. The demands ofmathematics favored minimalist assumptionsabout market characteristics.

The “perfect market” became a hypotheticalideal wherein conditions for exchange providethe greatest good for the greatest number (Pa-reto optimality). For neoclassical economists, aperfect market is not an empirical reality but,rather, a series of assumptions: a sufficientlylarge number of firms so that no one makesmore than a negligible contribution to output,

homogeneous commodities such that a con-sumer does not prefer one seller’s commoditiesover another’s, independent and dispersed ac-tors, and complete knowledge of all offers to buyand sell (Stigler, 1968). As Demsetz comments,“Markets [now] became empirically empty con-ceptualizations of the forums in which exchangecostlessly took place” (1982: 6).

Modern economists view the market as aprice-setting mechanism and have left its work-ings implied rather than explicitly discussed(see Barber, 1977; Coase, 1988; Rangan, 2000; andStigler, 1968; for discussions of this point).2 Al-though economists recognize that “real” mar-kets do not conform to the hypothesized ideal,they find it a useful fiction and a basis againstwhich to compare both empirical and logicallyderived instances of markets. Deviations fromthe ideal are conceptualized as imperfectionsand social relations between economic actors asfriction.

Institutional economists, who examine bothhistorical and contemporary market settings,have broadened this concept of the market sub-stantially and “relaxed” each of the stringentassumptions of the model—for example, by as-suming information asymmetry or quality differ-ences in products. For the most part, though,institutional economists have preserved thecentral assumption of individual rational inter-est as the basis for economic action.

However, institutional economist Oliver Wil-liamson (1975, 1985) has examined the role ofauthoritative social relations as part of a mar-kets and hierarchy debate, discerning those con-ditions under which transaction costs are less—for example, the asocial market or the socialrelations of the firm—for any given economicsituation. Thus, social forms of governance, suchas relational contracting (or bilateral gover-nance), are rational responses to specific trans-action characteristics, such as recurrent ex-changes involving some asset specificity.

Economists have also drawn on game theoryto explore more realistically issues of interde-pendence between actors. Games such as the

1 Swedberg (1994) recognizes the contribution of Marshall,who saw the market as an empirical phenomenon in its ownright. According to Swedberg, Marshall (writing in the 1910sthrough 1920s) believed that the following five factors wereimportant in understanding markets: space, time, formalregulation, informal regulation, and the familiarity betweenbuyer and seller. Thus, Marshall regarded markets as either“particular” or “general” (Marshall, 1919) where in a partic-ular market a social bond exists between the buyer and theseller that makes the transaction easier, but where in ageneral market the transaction is anonymous.

2 There has been discussion of alternatives to the marketin the economics field of industrial organization. Authors ofsuch work have typically concentrated on transaction costsin exchange and discussed inter alia joint ventures (e.g.,Berg & Friedman, 1978), vertical integration (Blois, 1972), andcooperative agreements (Mariti & Smiley, 1983).

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prisoners’ dilemma illustrate that “the interde-pendence between different people’s welfaremay make the pursuit of individual interestsproduce inferior results for all” (Sen, 1982: 6),such as circumstances where cooperation wouldbe rational and might evolve given some socialstructure (Axelrod, 1984). Game theorists clearlydemonstrate the importance of reputation, his-tory, and social relations generally in establish-ing efficient market exchanges under certainconditions, but their use of experimental andlogic-based research methodologies cannot eas-ily translate into an understanding of how thesefactors shape actual market relations outsidethe experimental setting.

MARKETS AS SOCIAL STRUCTURES

Challenges to the economic conceptualizationof markets and economic action developed inthe 1980s as organization theorists and othersocial scientists became interested in the empir-ical analysis of economic action. The conceptu-alization of markets as social structures, devel-oped in a seminal article by Mark Granovetter(1985), moved discussion away from the neoclas-sical idea of the market as a logical abstraction(“the sum of all buyers and sellers”). Rather,scholars increasingly argued that there are mar-kets, historically developed and varied institu-tions that both shape and constitute exchangerelations. Social relations and institutions in themarketplace are not merely imperfections, ra-tional strategic devices, or a contextual factor,as traditional economists assume. Rather, themarket is constituted by concrete social rela-tions and is not simply a collection of rationalindividuals.

Granovetter’s article revived Polanyi’s (1957)idea that economic action is embedded in socialrelations of various types.3 This approach, pri-marily developed through mathematical net-work analysis of real market settings, was es-

tablished in the 1980s in White’s (1981), Burt’s(1982), and Baker’s (1984) research. Each re-searcher analyzed the network structure of em-pirical markets to demonstrate the significanceof actor connections in influencing market be-havior of various types. For instance, White(1981) argued against the idea that market ac-tors are autonomous and unaware of each other.He demonstrated that markets are composed of“tangible cliques,” where each producerwatches the others and responds to fellow pro-ducers’ actions rather than to the behavior ofconsumers. This structural approach to marketscontinues to be an active research trajectory (cf.Baker, Faulkner, & Fisher, 1998; Burt, 1992).

MARKETS AS CULTURAL ARENAS

Theorists of the social structural approach tomarkets show the importance of relationshipstructure in some, but not all, market settings.They have been criticized, however, for failing totake seriously the idea that values, beliefs, orculture is central in understanding markets(Abolafia, 1997; DiMaggio, 1990; Zelizer, 1988).This leaves them to assume, logically, that it isthe structure of ties, not the content of ties, thatmakes a difference in outcomes.4 Nor do theytake up the idea that various cultures can pro-duce, inform, and sustain different types ofstructures. Proponents of the structural ap-proach recognize the potential significance ofthe interrelations of actors but neglect the pos-sibility of varying cultures or logics of action inwhich actors may be embedded.

DiMaggio explicitly addresses this shortcom-ing in claiming “categories of economic actionare culturally variable and socially constructed”and in demonstrating that culture does “morethan mediate structural or material influences.Culture cannot merely reflect structural posi-tions or material conditions for a ‘cultural effect’to be claimed” (1994: 28).

DiMaggio and Zukin (1990) identify three waysin which culture can affect economic behavior:(1) by influencing how actors define their inter-3 In fact, Polanyi (1971) argued for substantively different

types of economic action, each of which could be found in allsocieties: reciprocity, exchange on the basis of goodwill orobligation; redistribution, the movement of goods or servicesto a “center” and then outward (e.g., taxation); and ex-change, transactions in the market proper. The social struc-tural school has used the idea of embeddedness, but withoutseriously considering the type of market in which embeddedties take place.

4 Uzzi (1997) takes a preliminary step toward the analysisof the content of ties in networks with his recognition of“arm’s length” and “embedded” ties in New York’s apparelindustry. His analysis concentrates on the concept of struc-tural embeddedness rather than cognitive, cultural, or polit-ical forms.

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ests (constitutive effects), (2) by constrainingtheir efforts on their own behalf (regulatory ef-fects), or (3) by shaping either a group’s capacityto mobilize or its goals in mobilizing. A simpleversion of this may be that actors have two“frames” for action, embodying individual and“other-regarding” sentiments, respectively, de-pending on the situation (see also Etzioni, 1988;Harsanyi, 1955; and Sen, 1982).

Friedland and Alford (1991) suggest that, foreach of several domains (family, polity, econ-omy), there is a fundamental “logic of action,”which implies a range of goals, strategies, andbases of evaluation. Accordingly, the logic of themarketplace emphasizes utilitarian reasoning,efficiency, and means-end calculation from thestandpoint of the individual, whereas the logicof the family emphasizes mutual support and acollective orientation. For DiMaggio (1994), cul-ture may represent a finite set of context-dependent orientations and a set of rules forswitching among them.

Actors, therefore, may have different under-standings of “rationality” at different times, de-pending on their situation, the social structuresof the exchange settings, and the social struc-ture’s cultural context. In other words, prefer-ences are socially formed and institutionallyshaped by the specific context (Douglas & Isher-wood, 1979). This is important, because what“rational” action means in practice can varyacross different types of exchange arenas—thatis, “rationality is itself a culturally variable con-cept” (DiMaggio, 1994: 48).

SYSTEMS OF EXCHANGE

The three conceptualizations that we havebriefly characterized—the economic, the socialstructural, and the cultural—each make impor-tant contributions to our understanding of ex-change organization and action. They are not,however, as so often assumed, necessarily op-positional. We take a core element of each toconstruct a systems of exchange classificationscheme. We use this terminology, and not mar-ket, because we want to suggest that the marketas conceived by traditional economic ap-proaches is but one, albeit important, type ofexchange system. Other types, we argue, areneither corruptions nor imperfections of a mar-ket but, rather, may be qualitatively differentarenas for exchange that constitute socially dif-

ferent economic systems. Various “exchangearenas” exist in the global and domestic econ-omy and are not necessarily vestiges of premod-ern or ethnic enclave exchange systems des-tined to develop at some future moment into a“proper” market, although different types of ex-change dominate in some periods and in somelocales.

Systems of exchange—like business systems(Whitley, 1992), or a Taylorist production system(Taylor, 1911)—are composed of elements re-lated synergistically in economic processes of adiscernible type. While elements can be exam-ined independently as units of analysis (e.g.,division of labor, compensation system, author-ity structure), they are organized in ways dis-tinctive to each system, and they include aninterpretive schema that explains and justifiesarrangements. Therefore, system elements aremore than the sum of constituent parts and havecomplementarities among them.

Moreover, there are likely to be importantcommonalities between micro and macro unitsof analysis within the same system of exchange.For example, economic individualism is weak atboth the level of individual actors and firms inJapanese society. Individual and firm identityformation take place in group settings (Gerlach,1992; Kondo, 1990). Groups shape economicorientations and strategy in important waysat both levels of analysis, as well as socialorganization.

We use the term exchange to refer to a “vol-untary agreement involving the offer of any sortof present, continuing, or future utility in ex-change for utilities of any sort offered in return”and that may involve money, goods, or services(Weber, 1978: 72–73). Exchange is one of fourbasic economic activities, the others being sav-ing, consumption, and production, which, inpractice, may be combined (e.g., home pur-chasing can involve consumption and saving,simultaneously). Each form of economic actionmay be subject to organizing, rationalizing, andinstitutionalizing.

CLASSIFICATION AND TYPES IN ECONOMICSOCIOLOGY AND ORGANIZATION ANALYSIS

Classification is an intellectual strategy fordeveloping theoretically meaningful categoriesor types of observed phenomena. Types and ty-pologies, as distillations of empirical observa-


tions, are useful in comparative analysis, hy-pothesis formation, and causal explanation(Martindale, 1981). Layder (1998) notes that typo-logical analysis facilitates systematic and or-dered questioning across phenomena (“Howand why is this similar/different?”), which hasthe effect of generating codes, categories, andconcepts that, in turn, stimulate further concep-tual analysis. Moreover, it encourages theoreti-cal elaboration through “chains of reasoning”by suggesting connections among emergentconcepts: “Overall, the development of typolo-gies can clarify thinking, suggest lines of expla-nation and give direction to the theoreticalimagination” (Layder, 1998: 74). Typology build-ing is particularly helpful, Layder argues, in the“zigzagging back and forth between theoreticalideas, data collection and analysis” (1998: 77)—that is, the dialectical interplay between emer-gent theorizing based on the gathering of dataand the use of extant theory.

Classification schemes such as typologiesmake useful distinctions among complex exam-ples of phenomena and, by simplifying and cod-ifying, turn our attention to critical factors fre-quently found together in empirical situations.For example, in recent years organization ana-lysts, noting the importance of knowledge in apostindustrial economy, have developed classi-fication schemes and typologies that distin-guish among knowledge types (Hargadon &Fanelli, 2002; Spender, 1996). Our intent is simi-lar: to construct theoretically meaningful typifi-cations of exchange systems by extracting cru-cial factors that seem common to a number ofeconomic settings. We abstract from these casesin order to build simple, but not oversimple,types that can be used in theory formation andempirical analysis.

There are several useful typologies of eco-nomic organization. For instance, Ouchi (1980)develops Williamson’s transaction cost ap-proach in outlining the “clan” form of economicassociation, a third mechanism for mediatingtransactions, in addition to markets and hierar-chies. In clans, socialized actors eschew oppor-tunism and achieve efficiency under conditionsof high performance ambiguity in a manner notpossible for markets or bureaucracies. The clanoperates under norms of reciprocity and legiti-mate authority, but the common values and be-liefs of actors create goal congruence and a har-

mony of interests. These are communicatedthrough the implicit rules of tradition.

Powell’s (1990) work on networks also offers analternative to the market-hierarchy dichotomy.Powell distinguishes the network as a form ofeconomic organization with a complementaryand relational basis for action between interde-pendent actors, such as small biotechnology de-velopment firms allying with large, well-fundedpharmaceutical companies able to test and de-velop promising drugs.

Boisot and Child (1988) extend these frame-works in their analysis of the transaction gover-nance structures associated with the infor-mational aspect of transacting. They develop atwo-by-two typology around the extent to whichinformation is diffused/undiffused and codified/uncodified. Markets and bureaucracies sharethe impersonality of codified information, differ-ing in the degree to which that information isshared. Ouchi’s clans reflect a situation whereinformation is diffused but the lack of codifica-tion requires personal, nonhierarchical relation-ships in transactions. From this typology afourth structure is apparent, which Boisot andChild identify as fiefs. Fiefs emerge when theinformation is both uncodified and undiffused.Here, personal relationships are hierarchicallycoordinated.

While the above authors distinguish marketsfrom other forms of economic organization,Swedberg (1994) offers two types of markets associal structures. Building on Weber, his centralargument is that markets are arenas for compe-tition for exchange, and he is interested in howcompetition among a large number of actors(buyers and sellers) becomes exchange among afew. Swedberg elaborates his argument by con-sidering the social structures of ideal types of (1)historical markets and (2) modern capitalistmarkets, as competition becomes exchange.

The typologies of Ouchi, Powell, Boisot andChild, and Swedberg provide useful ideas aboutvarious elements of economic activity and eco-nomic organization, and each has been a help-ful conceptual apparatus for researchers. Ou-chi’s and Powell’s models posited theretoforeunexamined and insufficiently theorized eco-nomic structures of relation (clans, networks)and stimulated the examination of conditionsunder which each would arise. Boisot and Childhypothesized a setting in which the character ofrelations would shape and reflect the character


of information among actors, critical for theoriz-ing the economics of information. Swedbergposited a possible relationship between numberof traders and the character of relations amongthem.

We likewise contribute an economic classifi-cation scheme—one that aims to fuse elementsof the economic, social structural, and culturalapproaches to market organization. Research-ers’ attempts to make sense of very differentpatterns of economic organization and practicein the global economy, and policy makers’ at-tempts to construct meaningful multilateraltrading regulations, motivate our attempt to con-struct an intellectual base point for classifyingand then explaining differences. We combineinsights from each of the three dominant ap-proaches to economic understanding— eco-nomic, cultural, and structural—to show howdifferent rational orientations toward action,and different structures of relations, combineto produce qualitatively different systems ofexchange.

We believe that this schema will give theoret-ical foundation to those studying “varieties ofcapitalism” and economic relations betweendifferently organized economies. Our intentionis to generate hypothetical “worlds of ex-

change” or “model economies” sufficiently com-plex to stimulate insights about connectionsamong various elements internal to the types,and comparison between the types. Our paperbears some resemblance to the work of Douglasand Isherwood (1979), who typologized differentsocial structural environments for saving intheir work on the anthropology of consumption.These authors contrast the extent to which theimposition of group values curtails individualautonomy, and the degree to which individuals’transactions are restricted or “insulated.”

SYSTEMS OF EXCHANGE: RATIONALITY ANDSOCIAL RELATIONS

We posit qualitatively different types of ex-change systems that vary along two dimensions(Figure 1). Each dimension is a critical compo-nent of exchange between actors and is identi-fied by both classical (Parsons, 1968; Weber,1978) and modern theorists (e.g., Frank, 1987;Kahneman, Knetsch, & Thaler, 1986; Mans-bridge, 1990) as a variable component of eco-nomic action. The first dimension distinguishesbetween two approaches to action, instrumentalrationality and substantive rationality, andspeaks to the actor’s strategic orientation

FIGURE 1Systems of Exchange


(“What are my interests?”)—a distinction pro-posed by Max Weber (1978). The second distin-guishes between two orientations toward otherpeople, universalism and particularism, and isconcerned with how the actor understands his orher obligations to the other party in an ex-change (“How do I treat my exchange partner?”).

Weber and Parsons, writing in the early de-cades of the twentieth century, were concernedwith trying to understand the development ofthe world order of industrial capitalism, andthey did so in part by looking at the character ofnon-Western societies such as India and China,which did not develop capitalism indigenously.They noted that these and other non-Westerncultures typically did not contain the instrumen-tal rationality or belief in individualism thattends to characterize Euro-American societies(although this is variable even in the West, asgame theorists suggest; see Marwell & Ames,1981). They saw these differences rooted in so-cial orders structured on different principles ofaction and social relations.

The development, in the twenty-first century,of a global economic system and awarenessthat economies and societies vary substantiallyeven when industrialized suggests that differ-ences may be systemic and that they are notdifferences of degree destined to disappear overtime as they “converge” (Biggart & Guillen,1999). In the literature on comparative capital-ism, scholars argue that there are importantbases on which economic and social orders con-tinue to vary among societies, but, we arguehere, they vary within societies as well. Earlierconcerns about the foundations of economic or-ganization as structured on differences in ration-ality and individualism continue to be sugges-tive bases for understanding differences.

Rationality

Instrumental rationality is “determined by ex-pectations as to the behavior of objects in theenvironment and of other human beings; theseexpectations are ‘conditions’ or ‘means’ for theattainment of the actor’s own rationally pursuedand calculated ends” (Weber, 1978: 24). An actionis instrumentally rational when someone at-tempts to consider all possible means to an endand weighs the alternative means in a decision-making calculus, often in a quantitative analy-sis or accounting (Weber, 1978). Actors may take

into account the relative importance of variousends, the means needed to achieve them, andthe consequences that may come from pursuingalternative means (Kalberg, 1980).

Actors are often concerned with cost minimi-zation, profit maximization, and other forms ofefficiency. Modern capital accounting, formal le-gal procedures, and bureaucratic rules are in-strumentally rational insofar as they enable cal-culability and procedural consistency, and allwere associated with the development of marketcapitalism in Europe (Carruthers & Espeland,1991). No particular goal is necessarily impliedwhen people act in an instrumentally rationalway; rather, goals may be weighed as alterna-tives. When economists assume a rational ori-entation, they typically refer to instrumental ra-tionality, which they regard as a universalorientation, although recent research shows thisto be a highly variable orientation (Frank, 1987;Kahneman et al., 1986).

Substantive rationality is oriented toward val-ues—for example, environmentalism or socialwelfare. As Jon Elster puts it, “Substantive ra-tionality is guided by its consequences” (2000:23) or ends, whereas instrumental rationality isguided by means. Substantive rationality can,like instrumental rationality, be calculating andemploy reason, but a substantive or ethical good(e.g., greening the economy, redistributing in-come, caring for employees) is at its base. Sub-stantively rational action is rational in the sensethat action is predictable and not capricious, butit need not follow the procedural rigor of instru-mental rationality, and actors often feel morallyor emotionally bound to pursue the substantivegoal (e.g., fight poverty), even if they are notsuccessful in achieving the end. The probabilityof success is not critical to substantive ration-ality, whereas it is always part of the calculus ofinstrumental rationality.5

5 Both instrumental and value rationality can be at thebasis of the pursuit of public or private ends. Publicgroups—for example, publicly held firms or business asso-ciations—can pursue their ends instrumentally (e.g., in aprofit-maximizing way) or in a way that is oriented towardcollectively held values (e.g., in a way that sustains “fair”prices). Perhaps more obvious, private individuals andgroups can also pursue economic ends in either an instru-mentally or substantively rational way. It is not the public orprivate nature of the economic actor that determines thetype of rationality.


Political and religious organizations may ob-viously be substantively rational with their ori-entation toward particular goals, but economicorganizations such as cooperative food marketsand socially responsible investment funds arerationally oriented toward substantive pur-poses.6 While analytically distinct, in practice,instrumental and substantive rationalities areoften combined in some way. Instrumentally ra-tional techniques may be raised to the plane ofvalues when practitioners view them as the only“morally” or “politically” correct way to makechoices or to conduct activities. Similarly, thoseattempting to achieve some moral or ethicalgoal may choose to use procedurally rationaltechniques as the best way to reach their sub-stantive ends. Substantive rationality operatesin the economy not as an alternative to eco-nomic motives but as a type of economic motive,one that jointly optimizes values and outcomes,whereas instrumental rationality is motivatedby the optimization of ends.

In allowing for two types of rationality, weintend to account more fully for the varied andsocially constructed logics that inform economicaction—a key assumption of those who see mar-kets as cultural worlds. The empirical recordsuggests that instrumental rationality is but onepossible form of rationality and that culturaldifferences render some populations of firmsand people, and some societies, more able to actin the instrumentally rational way demanded bycapitalism as practiced in the United States(e.g., see Shweder & Miller, 1991). Nonetheless,despite the variability of types of rationality, weagree with a central economic tenet—the ideathat exchange behavior is rational, or at leastintendedly so, whatever type of rationality mayinform it.7

Social Relations

The systems of exchange schema’s second di-mension reflects the structure of social relationsin a system of exchange, which may be as smallas an ethnic enclave or as large as a suprana-tional regional economy.

In recent years, many scholars have adoptedthe Polanyian idea that economic relations areembedded in society, usually by mathemati-cally and diagrammatically examining the net-work structure of relations (Burt, 1988; Granovet-ter, 1985; Polanyi, 1957; Uzzi, 1997). Structuralembeddedness, however, leaves open the ques-tion of the character and culture of social rela-tions in which economic actors are embeddedtogether.

Although the nature of social relations canvary dramatically, Parsons (1968) proposed thesimple dualism of universalism and particular-ism as two fundamentally different orientationstoward others in society (see also Hamilton,1978, for an application of this idea to economicbehavior). Before they can act in reference toothers, people must decide whether to judge aperson by general criteria or criteria unique tothat person. In political settings, universalism isexpressed as individualism—the right of everyperson to be treated equally—and in economicsettings, universalistic relations are those inwhich actors, either individuals or corporate ac-tors, treat, in principle, all exchange partnersthe same: “For instance, the duties of honestyand fair treatment are held to apply to businessdealings with everyone, not only with one’s rel-atives and personal friends” (Parsons, 1968: 550).

Equal treatment can be either because of in-difference or because a higher principle (e.g.,corporate regulations, law, universal ethicalcode) regulates social relations and demandsthat all receive the same treatment before thelaw or principle. For example, the U.S. ForeignCorrupt Practices Act prohibits U.S. citizens fromengaging in bribery, even in countries where itis customary, and insider trading laws prohibitthe private sharing of corporate information.

The existence of a universalistic orientationdoes not mean that actors have an asocial ori-entation but, rather, that exchanges are con-ducted at arm’s length, or that social relations

6 Weber called these orientations to action zweckrational(rational orientation to discrete individual ends) and wertra-tional (rational orientation to an absolute value).

7 Beckert (1996) recently identified two deviations fromrational economic action: irrational behavior with or withoutregret. Irrational behavior with regret violates the predic-tions of economic theory insofar as an actor behaves irra-tionally. However, once the consequences of economic irra-tionality become clear, the actor regrets the action. InBeckert’s words, the actor displays “intentional rationality.”Alternatively, irrational behavior without regret representsa conscious deviation from economic rationality in that anactor holds convictions about just or appropriate behaviorand lets decisions be guided by these normative standards

(Beckert, 1996). The latter case is consistent with Weber’snotion of substantive rationality.


between parties are subordinated to a suprare-lational standard, such as equal treatment.Even arm’s length trades are social insofar asthey take into account the actions of others anddepend on social routines and conventions inorder to execute exchanges.

In settings where a particularistic orientationexists, the nature of the parties’ relation to eachother is taken into account when parties conductexchange. Particularistic societies demand thatactors orient themselves preferentially to thosewithin the structure of relations in which theyare embedded—for example, a family, profes-sional association, ethnic group, class, orcaste—and treat those outside their group affil-iation differently (Parsons, 1951). Examples in-clude the requirement that one favor familymembers in Chinese societies, or that partnersfavor one another in a joint venture. Ties are“strong” in the sense that social identities makea claim on the actors (even though they may notknow each other well, or at all). Under particu-laristic circumstances, “social capital” can be-come important as a way of facilitating ex-change (Coleman, 1988).8

The two dimensions yield a fourfold table (Ta-ble 1), with each entry representing a qualita-tively different system of exchange. Each ofthese system types is a theoretical construct likeany model, including the economic model of a“perfect market,” and no empirical exchangesetting is represented by the hypothetical sys-tem types we posit. However, scholars havenoted that universalism and instrumentalismwere historically linked in the West and thatparticularism and substantive rationality repre-sent the historical roots of East Asian capitalism(Orru, Biggart, & Hamilton, 1997), and we provideexamples throughout to show the ways in whichthe classification system makes meaningful dis-tinctions between varieties of exchange arenas.

We believe that elaborating the elements offour different systems of exchange providesmore realistic conceptualizations than a singlemarket model, while allowing reasonable parsi-mony in theorizing. The test of a classification

scheme, like all theoretical models, is its useful-ness in aiding understanding—not its empiricalvalidity.

FOUR DIFFERENT SYSTEMS OF EXCHANGE

The two dimensions yield four systems of ex-change (Figure 1). Each system assumes a char-acteristic economic logic that supports a typicaltype of economic actor, orientation to action, andrelationship between actors (Table 1). We as-sume that economic actors can either be a sin-gle person or a corporate actor (e.g., firm) in eachsystem. For example, in the United States, eco-nomic independence is the dominant orienta-tion for both individuals and firms (and atthe firm level—and in some cases individuallevel—this is sustained by regulation), while inScandinavian economies individuals and firmsare oriented toward corporatism, a system thatincludes elements of social welfare and grouporganization. Two different economic logics arereflected in the exchange systems of each soci-ety, and the logics operate at multiple levels.

Each element (Table 1) of the types is part of aconceptually whole model economic system.The elements are therefore not units of analysisbut, rather, assumed components of a hypothet-ical system. Each element can be treated as ahypothesis or as a basis for variation seekingwith a “real” economic setting (as the assump-tion of a neoclassical market is used as a basisfor identifying “imperfections,” or whose indi-vidual assumptions may be “relaxed”).

Price System of Exchange

The price-based exchange arena approxi-mates the “free” market depicted by neoclassi-cal economists and is best exemplified by auc-tion markets, such as equity markets or othersettings where strangers compete primarily onprice (or quality as a proxy for price). Actorsenter into price-based markets assuming thatother actors, both sellers and competing buyers,are driven to get the lowest possible price for adesired good. In the purest examples, actionsare motivated by self-interest and unaffected bysocial or moral considerations beyond the self-interested morality of “greed is good.”

This market type is the intellectual and polit-ical basis for Anglo-American–style economies.There is a presumption that economic order will

8 Portes and Sensenbrenner (1993) recognize that socialcapital may facilitate both instrumental and substantive(what they term principled) action. They introduce valueintrojection as a source of social capital, which “emphasize[s]the moral character of economic transactions that are guidedby value imperatives” (Portes & Sensenbrenner, 1993: 1323).


TABL

E1

Syst

ems

ofEx

chan

ge:A

ctor

san

dA

ctio

n

Syst

emEl

emen

tsPr

ice

Syst

emA

ssoc

iati

veSy

stem

Mor

alSy

stem

Com

mun

alSy

stem

Org

an

iza

tion

ofex

cha

ng

eA

uct

ion

ma

rket

Hor

izon

tal

an

dve

rtic

al

net

wor

ksM

ora

lly

reg

ula

ted

exch

an

ge

Col

leg

ial

ass

ocia

tion

;kin

oret

hn

icg

rou

p

All

oca

tive

pri

nci

ple

Sp

otp

rice

Lon

g-t

erm

pri

ceC

lose

stto

valu

e;fa

irp

rice

Pre

fere

nti

al,

tier

edp

rici

ng

Ori

enta

tion

toa

ctio

nIn

div

idu

al

ga

inM

utu

al

ga

inP

rin

cip

led

Rel

ati

ona

l

Nor

ma

tive

act

orA

uto

nom

ous

ind

ivid

ua

l/fi

rmIn

div

idu

al

orco

rpor

ate

act

orin

net

wor

kE

thic

all

yco

mm

itte

din

div

idu

al/

firm

Gro

up

mem

ber

Mu

tua

lex

pec

tati

onS

elf-

inte

rest

Rec

ipro

city

Su

bor

din

ati

onto

eth

ica

lst

an

da

rdS

ub

ord

ina

tion

tog

rou

pn

orm

s

Bre

ach

ofsy

stem

nor

ms

Soc

ial

rela

tion

sA

uto

nom

ous

self

-in

tere

stD

isre

ga

rdof

eth

ica

lp

rin

cip

leD

islo

yalt

y

Sys

tem

reg

ula

tion

Sel

f-re

gu

lati

onor

reg

ula

tion

of“p

layi

ng

fiel

d”

Soc

ial

ties

Org

an

iza

tion

ofco

mm

itte

da

ctor

s;th

ird

-pa

rty

cert

ifie

rsC

omm

un

ity;

coll

egia

lor

der


emerge from the independent and selfish acts ofautonomous individuals seeking their owngain—the “invisible hand” envisaged by AdamSmith (1976). This market type emerged out ofthe institutional history of Western Europe,where crucial underlying conditions devel-oped—notably, individualism, democratic gov-ernment, and decentralized private spheres(Biggart & Hamilton, 1992; Carruthers, 1996;Hirschman, 1977; Polanyi, 1957).

Empirical research on markets shows thatauctions, usually described as the “purest”price-driven markets, are, in fact, mixed types.Charles Smith’s study of commodity auctions(1989) shows that fresh fish, antique, and live-stock auctions operate according to agreed-onrules of participation. Similarly, Mitchel Abola-fia’s (1997) study of financial markets in theUnited States shows the variability of this type.Abolafia found that the bond market, whereactors typically do not see each other, resem-bles, in important ways, the ideal type but thatthe stock and commodities exchanges arestrongly influenced by both social relations andconventions.

The utilitarian assumption underlying price-driven markets is that the greatest good for thegreatest number will be obtained when actors,either individuals or firms as fictive individuals,are autonomous. Regulators, such as the Secu-rities and Exchange Commission in the UnitedStates and the Competition Commission in theUnited Kingdom, exist to prevent actors fromforming economically significant social ties inthe marketplace. Social relations, such as nep-otism and insider trading, are against the logicof impersonality fundamental to the market, andthey threaten the efficient movement of goodsand people according to principles of supplyand demand.

Associative System of Exchange

Associations or alliances between economicactors, often firms, are “voluntary arrangementsinvolving durable exchange, sharing, or co-development of new products and technologies”(Gulati, 1995: 619). Economic alliances can re-duce costs for the allies (Hennart, 1988), involveskill sharing (Hamel, 1991; Kogut, 1988), or im-prove the parties’ strategic positioning (Kogut,1988). Strategic alliances between multinationalenterprises and government-sponsored busi-

ness consortia are examples of exchange basedon durable associations between actors. Actorsin economic alliances assume that, over thelong run, mutual support and reciprocity—notautonomous self-interest—will result in the besteconomic outcome for the parties. Associativeexchange, like the price system of exchange, isoriented toward instrumental rationality andprofit maximization, but actors work in concertwith one or more partners in pursuit of economicends.

Western scholars became aware of the impor-tance of associative exchange with the develop-ment of Asian economies—for example,Gerlach’s study (1992) of Japanese businessgroups and Redding’s work (1990) on Chinesecapitalism. The typology developed in Boisotand Child’s (1988) critique and extension oftransaction cost economics rests, in part, on thattheory’s inability to conceptualize particularisticeconomic relations typical of Chinese societies.

Asian societies never developed the institu-tional conditions, such as unbridled individual-ism, and the legal systems that underlay prop-erty rights and contracts—that support marketsof autonomous individuals. Rather, Asian mar-kets assume relations or networks exist betweeneconomic actors, although the character and ob-ligational basis of network relations varies sub-stantially (Orru et al., 1997). Actors in businessnetworks compete based on price but not asindividuals; rather, they compete as partners orallies in competition with other actors who mayalso be organized into networks or partnerships.

Vertical networks like Korean chaebol, includ-ing Samsung (Biggart, 1998), and Japanese “in-dependent groups,” such as Toyota Motor Com-pany, are examples of vertical networks wherepowerful economic actors control networks ofsmaller firms (Gerlach, 1992). Horizontal net-works tend to link independent actors, includingindividuals, households, and firms, into mutu-ally beneficial business arrangements. Often,horizontal networks are based on a common so-cial identity, such as ethnicity (Hamilton, 1997)or religion (Uzzi, 1997), or they may organize theindependent actors who are members of an in-dustrial sector (Piore & Sabel, 1984; Saxanian,1994). In some instances, alliances based on eth-nic or cultural ties are mixed types and shadeinto what we call communal exchanges, wheresocial relations have a value that shapes theeconomic relationship.


While price-based and associative systems ofexchange are consistent with instrumental ra-tionality, two further systems of exchange—moral and communal systems—are not. We dis-agree with Beckert’s (1996) view that actors inmodern societies do not willingly transcend eco-nomic interests in order to act in accordancewith normatively held convictions. Beckert argues,“This cannot be expected in modern societies be-cause of the institutionalization of instrumentalbehavior orientation and systemic mechanismsthat discourage deviations from instrumental ra-tionality in market contexts” (1996: 818).

Beckert and many others accept what is oftennow a truism based on a partial reading of Po-lanyi. Polanyi holds that “all economic systemsknown to us up to the end of feudalism in West-ern Europe were organized on the principles ofreciprocity or redistribution, or householding, orsome combination of the three” (1957: 54–55).These systems were not based on the principleof gain but, rather, “custom and law, magic andreligion.” Polanyi argues that it was only withthe advent of the “market pattern” that an in-strumental orientation came to dominate botheconomy and society.

Polanyi further argues, however, and weagree, that all forms of economic action can andoften do coexist, or are combined, in all societies(Smelser & Swedberg, 1994). Indeed, by assum-ing the predominance and pervasiveness of aninstrumental rationality, researchers may over-look forms of rational economic action otherthan instrumental rationality in the relations ofeconomic actors, whether they are individuals,firms, or industries. There is ample evidencethat modern actors use substantive rather thaninstrumental rationality in some transactionsand that these are not merely imperfections, re-sidual categories, or transitional institutions.

Moral System of Exchange

Moral exchange arenas9 have, at their base, abelief in a substantive good or value, such as

distributive justice (Shanahan & Tuma, 1994),environmentalism (Berger, 1994), or religious be-liefs (Biggart, 1989; Wuthnow, 1994). Even repug-nant values, such as a belief in ethnic superior-ity, can shape exchange. Actors are rational butonly insofar as their actions are oriented towardputting in place a value or as their substantivelyrational actions are bound by a moral code. Mor-ally informed economic behaviors are found inexchanges between large companies in theglobal economy, as well as between individualswithin a local community.

Recent examples of the institutionalization ofmoral-based exchange systems are voluntarycorporate codes of conduct that regulate laborstandards in international trade. Reported ex-ploitation of third world workers by such com-panies as Nike and Disney led to the establish-ment of an international standard on socialaccountability—SA8000—under which compa-nies’ employment and working practices are au-dited by independent assessors (Crowe, 1998).Adherents to the codes agree, among other stan-dards, not to employ children under 15 years ofage, not to use forced labor, and to pay enoughfor basic needs and not merely the legal mini-mum. Large retailers adhering to the standardsagree to purchase only from manufacturers thatsubscribe to SA8000 and not those that sell at thelowest price. Tsogas (1998) reports that a Euro-pean retailer, C&A, set up an independent sub-sidiary to monitor subcontractors against thecompany’s code of conduct and stopped busi-ness with nineteen suppliers during an eigh-teen-month period following code breaches.

Socially responsible investment funds onlypurchase and sell shares of firms that have com-mitted to moral values of various sorts, includ-ing prohibitions on animal testing, support forunion labor, vendor standards, and absence ofgenetically modified organisms in their prod-ucts. For example, the New Alternatives Fund(NALFX) invests in companies pursuing alterna-tive energy sources, and the Meyers Pride ValueFund (MYPVV) buys stock in companies withprogressive policies toward gays and lesbians.These funds are committed to trading in stocksof companies in order to achieve the best returnconsistent with an underlying value.

The demand for socially responsible tradinghas spawned watchdog organizations—“third-party certifiers”—that are arbiters of adherenceto standards used to produce goods and services

9 All of the exchange types that we describe have moraldimensions, to be sure, but substantive rationality placesvalues as the primary orientating factor of action, whereasinstrumental rationality places primacy on rational methodsfrom which a moral good (e.g., utilitarianism) might emerge.There is also a tradition of moral critique of the market,known as the moral economy. See Lie (1997) for an overviewof this discussion.


claiming to maintain a moral position. One ex-ample is the development of organizations thatcertify sustainably harvested trees—that is,lumber that has been removed from forests inwhich the health of the forest ecosystem ismaintained, including not only tree revitaliza-tion but wildlife and watershed protection.At least four third-party certifiers are active glo-bally—two in the United States (Scientific Cer-tification and Smart Wood), and two in theUnited Kingdom (SCG and Woodmark). Majorretailers and manufacturers, including HomeDepot and Smith and Hawken, have agreed onlyto trade in certified green wood.

Local currency systems are often moral ex-change arenas. In the United Kingdom, LocalExchange Trading Systems (LETS), where buy-ers and sellers trade goods and services in localunits without coins or notes and with no interestpayable on debts, are reported to contribute pos-itively to social cohesion and the redistributionof income (Williams, 1996). LETS members inter-ested in redistribution buy from poorer groupsand use positive discrimination when chargingthose less well off (Lang, 1994). LETS systemscombine elements of a moral exchange systemin their concern for social welfare, but becausethey favor traders within the LETS, they alsohave elements of the fourth type—the communalsystem of exchange.

Exchange arenas based on moral preceptswere common in the premodern Western world,where religious values permeated all spheres oflife, including the economic. Value-based ideassuch as a “just” price, which considered themoral worth of the actors and the products orservices, were commonplace in the Middle Ages(de Roover, 1974). The “Quaker ethic” demandedQuaker retailers sell goods to all at a fixedprice, rather than haggle, which was the pre-vailing practice. “The Quakers’ insistence onselling a particular item at the same price to allcustomers, regardless of their social class, wasbased on their religious assertion that the seedof God existed in all people” (Kent, 1983: 18–19).10 Ethics of conviction and responsibility are

not surprising in a world where religious ideascolored social action of all types, includingexchange.

Morality continues to find a place in contem-porary economic life, however, with prohibitionsor restrictions on the sale of sex, adults asslaves, children for adoption, child labor, votes,political influence, some animals for consump-tion, and human biological parts—what Walzer(1983) calls blocked exchanges. Even where ex-change is permitted, the environmental move-ment and other political movements that es-pouse values have made important inroads tolimit the price-based exchange of goods inmany settings, and to create support for morallycircumscribed exchange.

A moral orientation can be found today in theIslamic banking community, which must accom-modate the Koran’s proscription against interestpayments. Islamic banks provide products thatdo not involve investment in conventional (i.e.,Western) financial services, because charginginterest is seen as usury. Islamic law also bansinvestment in alcohol, tobacco, gambling, por-nography, and pork products.

Islamic banking is a relatively recent phe-nomenon, with banks emerging in Saudi Arabiaand the United Arab Emirates in the mid 1970s(Tran, 2002). It has expanded rapidly, with Is-lamic banks now estimated to serve about 1.2billion Muslims and to manage $180 billion(BBC, 2002). Most recently, an international Is-lamic financial market (IIFM) was set up in Bah-rain to deal with products that comply withSharia law. A small number of Western bankshave also begun offering services compliantwith Islamic law, and it has been suggested thatthe ethical credentials of Islamic financial prod-ucts may hold a wider appeal (Tran, 2002).

Communal System of Exchange

When exchange occurs between parties char-acterized by particularistic relations—for exam-ple, relations of kinship, ethnic ties, or commonmembership in a social order—the nature of thatrelationship may color the exchange. The sub-stantive basis of the relationship—filial piety,consanguinity, and collegiality—will influencethe terms of exchange, including whether or notthe exchange takes place and the price set. Al-though communal and associative relations areboth based on particularism—treating some

10 A “just” price can be altered to reflect the wealth of thebuyer—for example, a higher price for the wealthy—whereas a “fixed” price is given to all. Both are reflections ofethical principles. While haggling is the price-setting mech-anism of auction markets today, it is interesting that fixedprices have come to dominate most retail exchange.


partners with special consideration—“theformer always entail a sense of belonging to-gether, while the latter have to do with rationalagreement, typically involving interests” (Swed-berg, 1998: 33).

Communal relations are those in which actorsshare identity in a community or have somebasis for a shared bond. Communal exchangecan take place between those who share a tiesuch as friendship, common alumni affiliation,or professional or regional identity that tends tosupport an “ingroup/outgroup” orientation(Schluchter, 1981; Weber, 1978)—what Ouchi(1980) and Boisot and Child (1988) refer to asclan. Members of the group are treated prefer-entially, while outsiders are less well treated orare rejected entirely as exchange partners. Thebases on which exchange takes place are oftendictated by the customary rules of participationand distribution established by the group. Theserules or distributional bases are rooted in thesubstantive rationality that forms the basis forthe relations between the parties (e.g., equityrelations between colleagues, favorable termsfor senior members of a family, loyalty to thenation).

Some contemporary religious groups attemptto maximize exchanges with fellow members,helping to bolster the economic vitality of thecommunity. Criminal brotherhoods such as theSicilian Mafia, Chinese Triads, and RussianMafiyas fiercely regulate the terms and condi-tions of exchange and distinguish between in-siders and outsiders. In Russia the Mafiya isdistorting attempts to establish a price-basedmarket (Castells, 1998), and it is establishingnetwork links with other criminal groups.

In many instances, communal exchange is ex-change in kind, or barter—for example, the ex-change of personnel or professional services. Infact, the U.S. government is attempting to defineas fraud the medical profession’s practice of“professional courtesy” in situations where“doctors treat other doctors and their families forfree, or provide discounted services by forgivingtheir colleagues’ insurance co-payments” (Jef-frey, 1999: B4).

Communal and associative relations, whileanalytically distinct, are often combined inpractice. If associative relations between, for ex-ample, strategic allies endure over time, affec-tive relations will often begin to alter the instru-mental bases of the initial relationship (Weber,

1978). Alternatively, communal relations such askinship and alumni ties can be “used” as thebasis for forming associative economic rela-tions, as Biggart (1989) notes was common indirect selling.

In a similar vein, Das and Teng (2002) haverecently drawn on social exchange theory toconsider how alliance constellations such asR&D consortia may be controlled through theencouragement of generalized reciprocity. Intheir terms, alliance constellations develop acooperative macroculture and social sanctionsto guard against instrumental self-interest.

One of the best-documented “alternative” ex-change systems is the Mondragon Co-operativeCorporation (MCC), an excellent example of anexchange system built on both communal andassociative foundations. MCC is the corporateumbrella for cooperative enterprises that havegrown in the Basque region of northern Spain,where, according to Cooke and Morgan, “thepotential of associative action is nowhere moreapparent” (1998: 174).

MCC creates a central governance structurefor the cooperatives, but there is a balance be-tween central control and local initiative of in-dependent cooperatives. All of the co-ops sign aContract of Association, which includes a clauseon intragroup relations:

The Associated Co-operatives will respect theprinciple of intergroup loyalty and mutual assis-tance when formulating future plans concerningproduction, selection of personnel, the establish-ment of business links between co-operatives,where to place orders, and other facets of theirbusiness by which other co-operatives associatedwith the [credit co-operative] Caja Laboral couldbe made to benefit, without affecting the interestautonomy of the Co-operative itself (as quoted inCampbell, Keen, Norman, & Oakshott, 1977: 60).

While the Contract of Association requiresthat co-ops not compete with an existing mem-ber of the group, each is free to buy and sell itsproducts where it chooses, and there is no obli-gation to source from other members of thegroup. MCC believes this would lead to a pro-tectionist ethos, with higher costs and lowerquality (Cooke & Morgan, 1998).

The organizational form for the regional ex-change system is clearly associative but, just asclearly, is rooted in communal social relations.Those who have studied the Mondragon eco-nomic system note that it is embedded in his-


tory, geography, community identity, andBasque ethnic solidarity (Bradley & Gelb, 1983;Campbell et al., 1977; Kasmir, 1996; Thomas &Logan, 1982; Whyte & Whyte, 1988).

LOGICS OF EXCHANGE

These four systems represent qualitativelydifferent orientations toward economic ex-change using theoretical dimensions derivedfrom research and observation about the consti-tution of economic action in Western and non-Western economies. Each system of exchangewe extrapolated constitutes a hypotheticalworld peopled by different economic actors dif-ferentially motivated to trade. In each systemthe logic of exchange varies qualitatively, as doassumptions about those with whom one shouldtrade, along with the norms of exchange. Onewould expect the structure of trading, includingthe presence and structure of networks, to differdramatically in each system of exchange.

For example, in an exchange arena based onprice—a market—actors assume that those theymeet are driven by self-interest and that price,not social relations or private beliefs, will deter-mine offers to buy and sell. When actors in amarket do not act in this way—for example, byfavoring others or exercising nonprice consider-ations—they breach the norms of the market. Inextreme cases they may be sanctioned for col-lusion, insider trading, or price discrimination.The breach of this norm has been at the root ofinvestment scandals in the United States in theearly twenty-first century.

In an exchange arena based on moral pre-cepts, parties to exchange may also be strang-ers. However, a substantive value, not onlyprice, is a determining factor in the exchange ofgoods. Goods are traded when they meet stan-dards for their production or use, and any addi-tional costs for meeting those standards areborne by the exchanging parties. The price is afair or just price, not necessarily the lowest pos-sible price for a like good or service. In recentyears a number of “fair trade” organizationshave sprung up. These are either traders or cer-tifiers (such as the Fair Trade Foundation in theUnited Kingdom) that guarantee that the localproducers of goods or produce—for example,coffee, sugar, bananas, cotton—receive a fairamount from the subsequent sale of their wares.

In contrast to price- and morality-based ex-change arenas, in associative and communalexchange systems, social relations are expectedto play a role in trading. Actors who fail to takeaccount of the social relations between ex-change partners breach exchange systemnorms. The classification system suggests thatappropriate trading partners in one system maybe prohibited in another; insider trading is nor-mative in business groups, strategic alliances,and family networks. Failing to favor friendsand allies breaches norms.

Each of these systems logically results in verydifferent structures of economic organization. Inits purest type a price-driven system would leadto an auction market, where social relations hadno influence on bidding and ultimate prices. Inan alliance exchange system, depending on thenature of the alliances, stable bilateral or mul-tilateral relations, including horizontal and ver-tical networks, would be expected to developover time. Price competition would exist in thissystem, but between trading alliances, notamong individual actors or firms.

Exchange systems based on moral preceptsmight look like an auction market with strang-ers entering into exchanges. However, insteadof distribution being determined only by price,trading in some valued good would be deter-mined by some measure of compliance with theethical base of the system, regulated perhaps byself-policing or arbitrated by a third party out-side the exchange. Third-party certifiers havedeveloped in a number of industries to performthis function.

Communal exchange takes place within thebounds of the group according to shared norms,whether based on religious precepts, sworn loy-alty, nationality, professional norms, or bloodties. Exchange with outsiders might take place,but only under different terms, if at all. Onemight anticipate that group authorities, such aselders, professional leaders, or collegial bodies,might regulate communal exchanges. TheAmerican Medical Association, for example, es-tablishes collegial norms for relations amongmembers who often refer cases to one another.

Clearly, the types represent not only differentprobable organized structures of economic ac-tion and differently motivated actors but alsovery different cultural worlds. Logically, the in-strumental and individualistic economic cultureof a price-driven system is antithetical to value-


based exchange between strategic partners inan associative exchange.

Real systems of exchange, including those weused as illustrations, as opposed to those de-scribed by our analytic construct, are mixedtypes. Historical examples would be expected tohave elements of more than one type. For exam-ple, as we suggested, Asian business groupsoften combine elements of communal and asso-ciative exchange, with Japanese groups betterdescribed as having associative exchange withelements of communalism (Gerlach, 1992), andChinese family networks having more influencefrom communal elements such as kinship (Ham-ilton, 1997). Western market societies based on abelief in the importance of price-driven ex-change nonetheless impose restrictions on pol-lution and other environmentally damaging ac-tion and, hence, incorporate moral elementsand, increasingly, alliances.

DISCUSSION AND CONCLUSION

In the systems of exchange classification wefollow Layder’s call for “structural or system ty-pologies” over and above “action or behaviouraltypologies”—the latter concerned primarily withsubjective meaning, lived experience, motiva-tions, and attitudes. “The importance of systemor structural typologies is that they concernthemselves with depicting the settings and con-texts of behaviour and thus provide the neces-sary requirements for more inclusive and pow-erful explanations of social life” (Layder, 1998:74). Further, “The use of system typologies hasthe effect of broadening the scope of analysis byattending to wider aspects of social organiza-tion and social relations” (Layder, 1998: 75)—thatis, the context in which subjectivity is experi-enced and enacted.

We argue here for the value of a systems ofexchange classification scheme—a “thought-model which combines ideas and evidence intoan analytic construct” (Martindale, 1981: 54). Weintend for this scheme to provide an intellectualbasis for the analysis of exchange relations; thisclassification neither oversimplifies by reduc-ing all exchange to variations of a single modelnor treats all systems of exchange as histori-cally unique occurrences. As Tiryakian notes,“The methodological functions and significanceof a typological classification are basically two-fold: codification and prediction” (1968: 178).

In a few instances below we appropriate theobservations of organization researchers toshow how they fit within the typology to suggestthat the classification offers a way to connectwork not previously connected. We believe thatthis offers the possibility of generating new the-oretical insights and accumulating in new waysour understandings about firms and markets,without making unrealistic assumptions aboutthe character of exchange relations or the ration-ality of actors.

Conceptual Clarity

Mutual neglect by economists, theorists ofeconomic networks, and the culture of economicorganization proceeds, in part, from differentquestions of interest, but also from different con-ceptualizations of what constitutes a market. ForStigler (1968) the market is a set of conditions,while for Abolafia (1997) it is a moral community.The typology offers a useful model that drawslines around different but related forms of ex-change behavior and organization, and it shortcircuits futile debates about what “really” con-stitutes a market. To further confidence in themodel, we can treat each element as a hypothesissubject to confirmation, revision, or refutation.

Conceptual Complexity

Each exchange system type represents a so-cial world with hypothesized elements that aremutually consistent and presuppose internallycoherent relationships and meanings—whatMax Weber referred to as elective affinities(Howe, 1978). While each element of a tradingsystem can be treated as a variable, the connec-tions between elements may be subject to inves-tigation also. Therefore, the model allows re-search into the complementarities of marketfactors (Milgrom & Roberts, 1992) and the possi-ble futility of piecemeal export of select ele-ments into essentially different systems of ex-change—for example, newly marketizingnations (Stark & Bruszt, 1998).

The types each invite us to consider the sys-temic nature of various economies. For example,there have been numerous arguments for theimposition of Western corporate governancestandards (European Bank for Reconstructionand Development, 2002) and the eradication of“enterprise network socialism” (Bernstam &


Rabushka, 2000) in Russia. Our framework dem-onstrates the inherent difficulties of such think-ing, since systems of exchange have historicallybeen predicated on very different logics of ac-tion and social relations. Empirical research hasregularly demonstrated the “path dependence”of such transition processes (Stark, 1996). Ober-schall comments, regarding change in China,that

in the absence of political accountability andwith but shallow submission to the discipline ofthe market, the fixers and wheeler-dealers thriveon corruption that is forever denounced yet willnot diminish until the institutions of a marketeconomy are more fully established (1996: 1034).

More recently, research in the Republic of Ta-tarstan has shown the continuing dependenceof former state-owned enterprises on historicalties:

The post 1992 reform strategy was essentially de-signed to break up historical ties and to allow thecreation of [newly] generated ones along thelines of a free-market “big bang”. It appears thattoo much emphasis on the power of capital rela-tions and market forces to change Russian soci-ety and economy has meant that the institutionalforces that govern the economy (particularly his-torical ties) have been ignored (McCann, 2002: 10).

Analysis of Variance

Like all models, including econometric mod-els, ideal types represent a basis for comparingempirical instances of a phenomenon with abaseline. When organization theorists ask how“bureaucratic” a given organization is, implic-itly they are comparing it to an ideal-type bu-reaucracy, seeking to measure its conformity toor variance from a baseline model. The systemsof exchange classification allows us to formu-late measures of each of the types and then toask such questions as “How communal or self-interested is exchange between firms with inter-locking boards of directors, or in communitieswith elite social clubs?” (Mizruchi, 1996).

Dynamic Analysis

Ideal types crystallize hypothesized elementsof empirical instances and, by their nature, arestatic constructs. The fourfold schema, however,can be used to hypothesize conditions underwhich exchange relations will move from onetype to another, or to different places on a di-

mension. For example, Zelizer’s (1985) work onthe social history of life insurance for childrencan be restated more generally as “when thevalue of a material good is reframed as a moralgood, it will no longer be subject to exchangebased on price,” or “relations between firms willmove from price-based to associative relationsas an industry becomes increasingly concen-trated” (Pfeffer & Salancik, 1978).

It might also be possible to conjecture thecausal nature of system change. For example,repeated exchanges may breed trust, and mar-ket exchange may become associative in char-acter (Zucker, 1986). In contrast, the breakdownof the Japanese keiretsu system, an example ofassociative exchange, to market exchangebased on price has taken place where Japaneseauto firms have accepted Western capital.Toyota, which remains wholly Japanese owned,is pursuing a strategy of strengthening its tradi-tional keiretsu relations.

It is possible to identify circumstances wheredominant actors have been able to manageshifts in the nature of exchange. Dyer and No-beoka (2000) describe how Toyota has createdand managed knowledge-sharing networks,both in Japan and subsequently in the UnitedStates. They show how Toyota has created astrong network identity with rules for participa-tion that motivate members to share valuableknowledge and prevent free-riders. Toyota con-tributed to its strong network ties in the UnitedStates through the promotion of norms of recip-rocal knowledge sharing and consulting as-sistance. In particular, the emergence of trustindicates the transition from low to high embed-dedness, where social relations are particular-istic and exchange is regulated through normsof reciprocity.

Multilevel Analysis

The model presumes to operate at multipleunits of analysis. It supports theorizing aboutexchange relations at the level of actors’ identi-ties, roles, meanings, and actions and at thelevel of institutional factors, such as structuresof control and patterns of organization. For ex-ample, new exchange arenas will draw on ac-tors’ existing stocks of resources, knowledge, andorganizational experiences and will not be con-structed de novo (Westney, 1987; Romanelli,1991). We assume in this article that both corpo-


rate and individual actors populate each ex-change arena, but this can be subject to re-search and modification.

Comparative Analysis

The model provides a basis from which tocompare two empirical instances of exchangesystems and, further, to generate causal expla-nations for differences between cases (Ragin,1987; Smelser, 1973). For example, small firmswith inadequate resources are more likely toengage in alliance exchange than larger firmsin the same industry (Powell, Koput, & Smith-Doerr, 1996). Or non-Western societies without atradition of individualism are more likely to or-ganize exchange in associative or communaltrading arenas than are Anglo-American societ-ies (Biggart & Guillen, 1999). Or firms in knowl-edge-based industries engage in trades withmore cognitive complexity than firms in ma-terials-based industries, and therefore are morelikely to engage in associative exchange (Cohen& Fields, 1999).

Consider the lack of convergence in corporategovernance. Some have argued that globaliza-tion should herald the adoption of a common setof practices, but empirical evidence suggestsvariety remains. These variations may be ex-plained by examining the nature of social rela-tions and logics of action that inform exchangein differing settings. For example, reference toassociative and communal exchange systemsexplains findings that Japanese banks bolsteredstruggling firms with which they had close tiesduring times of financial difficulty (Morck & Na-kamura, 1999). More recently, Khanna, Rogan,and Palepu (2002) reported some evidence of dejure convergence, although not to U.S. stan-dards, but virtually no evidence of de facto sim-ilarity in corporate governance. These authorsconclude that either differences in national sys-tems result in appropriately different gover-nance structures or that globalization effects arenot strong enough to overcome local effects.

Our system typology also provides a frame-work for interpreting the impact of competinglogics of action. In an interesting recent study,Gedajlovic and Shapiro (2002) considered theimpact of economic and social influences onfirm performance in Japan. They show that firmprofitability in Japan is influenced both by eco-nomic incentives (as per the agency theory of

economics) and social context (the redistributioneffects of Japanese business relationships).Their findings show that in Japan the redistribu-tion effects are stronger than agency effects,with poorly performing firms benefiting from thetransfer of financial resources from more profit-able firms. Their research supports others’ find-ings (Lincoln, Gerlach, & Ahmadjian, 1996;Morck & Nakamura, 1999) that Japanese firmssupport other firms with which they have strongties, but it goes further in indicating that “tradi-tional norms of mutual assistance (Dore, 1983)and risk reduction (Nakatani, 1984) extend be-yond formal networks to Japan’s broader enter-prise system” (Gedajlovic & Shapiro, 2002: 573).This reflects the importance of engaging withdifferent systems of exchange in exploring eco-nomic organization and performance.

We believe there are at least two ways inwhich this typology might address contempo-rary concerns with market organization and dy-namics. First, it offers a way out of debates overwhat “really” constitutes a market and ration-ality. Rather than assume that economists are“right” that markets are composed of autono-mous and price-seeking actors (Stigler, 1968), orthat it is “obvious” that durable exchange set-tings constitute a social world where norms ofparticipation shape price (Smith, 1989), or thatmarkets are best described as networks (Baker,1984), the typology would lead us to ask thefollowing: Under what conditions do each ofthese assumptions hold? In which cases doessubstantive rationality, not just instrumental ra-tionality, influence economic action? Each ofthese perspectives has valuable insights, butnone, by itself, helps us to understand the vari-ety of exchange settings and their differing logics.

Second, the typology gives us a theoreticalentree into some of the most interesting socialand economic issues of the day. For example,debates within the International Monetary Fundabout the restructuring of Asian economies werevery much about the correctness of a marketsystem versus the associative and communalsystems in place. The difficulty of marketizinghealth care systems in the United States is, inimportant ways, a reflection of the reluctance ofphysicians to move from an associative moralsystem, where professionals control care ac-cording to nonprice standards, to a price-drivensetting. The recent scandals surrounding ac-counting standards demonstrate the challenge


of regulating a corporate America that has beenencouraged to consider itself as operating in aprice system based on individual gain, self-interest, and self-regulation.

Classification and the analysis of types pro-vide a useful starting point for developing con-ceptual schemas, propositions, theories, and in-sights about the relationship of social structureand economic action. The classification intotypes does not in itself suggest the conditionsunder which each of these systems mightemerge, but opens this line of questioning. Itdoes, however, lead us to see that economists,structuralists, and social constructionists allhave a contribution to make in understandingexchange relations and economic organization,and that they might all be right.

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Nicole Woolsey Biggart is dean of the Graduate School of Management and theJerome J. and Elsie Suran Chair in Technology Management at the University ofCalifornia at Davis. She is interested in the social structural and cultural bases ofeconomic and organizational life.

Rick Delbridge is professor of organizational analysis at Cardiff Business School,University of Cardiff, and fellow of AIM—the Management Research Initiative in theUnited Kingdom. He received his Ph.D. in organizational sociology from the Universityof Wales. His research interests include the organization and management ofinnovation.


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