A Model of Network Capitalism: Basic Ideas and Post-Soviet Evidence

By Oleinik, Anton | Journal of Economic Issues, March 2004 | Go to article overview

A Model of Network Capitalism: Basic Ideas and Post-Soviet Evidence


Oleinik, Anton, Journal of Economic Issues


Localized Transactions as a Subject of Study

Modern discussions on network capitalism shed light on the thesis about the existence of a plurality of models of capitalism. According to a quantitative evaluation of managerial and economic literature, the frequency with which the term "network" is used has risen dramatically during the last decade (Boltanski and Chiapello 1999). The basic idea of network capitalism involves the localization of transactions: economic subjects act locally instead of being involved in transactions in a depersonalized market with a potentially unlimited number of participants.

Mainstream economics has never been characterized by any special interest in the interactions between participants that are socially and spatially close. "Spatial economics and particularly the theory of the location of industrial enterprises flourished in the 19th century, but they were developed in complete isolation from mainstream economics, both classical and neoclassical" (Blaug 1994, 568). This should come as no surprise since a limited number of participants and their nontrivial capacity for influencing outcomes contradict the principles of perfect competition and distort the price mechanisms for reaching a general equilibrium. Even economists who were interested in localized transactions usually paid attention only to spatial closeness; they have been studying the issues related to differential rent, transportation costs, and so on. But geographical space is not the only factor of localization. The same process can be observed in institutional and social spaces. For example, a deal with a supplier that is geographically close can increase costs, if there are doubts as to his reliability. The concept of net work capitalism does not imply an exclusively spatial basis for localized transactions. This accounts for a noticeable difference from traditional and more conventional approaches. (1) The concept of network capitalism can be used to study relations concerning scarce resources when these interactions are bounded in geographical, social, or institutional space. The number of participants is limited, and it influences the final outcome of the interactions.

While mainstream economic theory is of no direct concern to the issues of localization, the institutional approach appears much more fruitful from this point of view, especially in terms of the paradigm of "old" institutionalism and new institutional economics. (2) Historically speaking, the concept of network capitalism refers to a piece in the edifice on which construction was started in the nineteenth century by Karl Polanyi (his concept of "embeddedness" is of particular note), Thorstein Veblen, and John R. Commons (there are links with their concern about collective reciprocity) and continued by modern nonorthodox institutionalists. Mainstream economists, including adepts in neo-institutional economics, are able at most to perceive only one aspect of economic closeness, namely spatial closeness (for example, with the help of the notion of transaction costs). By contrast, nonorthodox economists who are interested in institutions, and particularly in norms and values as factors of market play, can take all aspects of localized transactions into consideration. This article should be viewed as an attempt to summarize recent developments concerning the concept of network capitalism. A more broad and insightful study would be necessary to gain a better understanding of how the existence of networks affects outcomes for pricing, output determination at the micro-level, and cyclical movements, namely to answer a number of questions that economists are accustomed to: Yet, this work remains to be done in the future.

An additional comparative advantage of the concept of network capitalism lies in its applicability to the analysis of the socioeconomic systems representing different stages in historical development. On one hand, this term describes market institutions at the early stages of their evolution, when they are not completely differentiated from social institutions: family, sects, political community, friends, patron/client relationships.

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