Societies of trust, Page 115-116:
Francis Fukuyama is a political scientist who has explored the intersection of culture, governments, and markets deeply throughout his career. In his 1995 book Trust, he argues that the ability of a a society to form large networks is largely a reflection of that society's level of trust.Fukuyama makes a strong distinction between what he calls "familial" societies, like those of southern Europe and Latin America, and "high-trust" societies, like those of Germany, the United States, and Japan. Familial societies are societies where people don't trust strangers but do deeply the individuals in their own families (the Italian Mafia being a cartoon example of a familial society). In familial societies networks are the dominant form of social organizationwhere economic activity is embedded, and are therefore societies where businesses are more likely to be ventures between relatives. By contrast, in high-trust societies people don't have strong preferences for trusting their kin and are more likely to develop firms that are professionally run.
Familial societies and high-trust societies differ not only in the composition of the networks they form—as in kin and non-kin—but also in the size of the networks they can form. This is because the professionally run businesses that evolve in high-trust societies are more likely to result in networks of all sizes, including large ones. In contrast, familial societies are characterized by a large number of small businesses and a few dominant families controlling a few large conglomerates.
Yet, as we have argued before, the size of networks matters, since it helps determine the economic activities that take place in a location. Larger networks are needed to produce products of higher complexity and, in turn, for societies to achieve higher levels of prosperity. So according to Fukuyama, the presence of industries of different sizes indicates the presence of trust. In his own words: "Industrial structure tells an intriguing story of a country's culture. Societies that have very strong families but relatively weak bonds of trust between people unrelated to one another will tend to be dominated by small, family-owned and managed business. On the other hand, countries that have vigorous private nonprofit organizations like schools, hospitals, churches and charities, are also likely to develop strong private economic institutions that go beyond the family.
Transactopn cost theory and economic sociology, Page 117-120:
It is important to remark that the preexisting nature of social ties does not invalidate Coase's arguments on the cost of links. On the contrary, transaction cost theory and economic sociology are complementary, since the economic effects of preexisting social networks can be interpreted in terms of the cost of links. In the words of Fukuyama: "Certain societies can save substantially on transaction costs because economic agents trust one another in their transactions and therefore can be more efficient than low trust societies, which require detailed contracts and enforcement mechanisms". James Coleman, a sociologist well known for his work on social capital described the transactions between Jewish diamond merchants in New York, who have the tradition of letting other merchants inspect their diamonds in private before executing a transaction. He argues that trust and the social networks of family and acquaintances that implicitly enforces this trust are essential to make these transactions feasible. In the absence of trust these interactions would quickly become expensive, as they would require costly and time-consuming contracts, insurance, and enforcement procedures.
So trust and the social networks that it enables offer an alternative to the formal institutions described by Oliver Williamson. Trust provides a noncontractual, informal, yet highly efficient mechanism to deter malfeasance and enable otherwise risky commercial interactions. In fact, when available trust is a more efficient channel for the formation of economic networks than formal institutions are, since it works without the burden of costly paperwork and enforcement procedures. By making links cheaper, trust enables the formation of networks that can accumulate more personbytes of knowledge.
Social institutions, such as the relative importance of family and a society's level of trust, can help us understand differences in the size of the networks that people form, and hence in the economic activities present in a location. This is true in an international context, but it also works within countries, which often are not culturally homogeneous.
A famous example of within-country variation in social institutions, with consequences for the performance of economic networks is represented by the contrast between Silicon Valley and Boston's Route 128. Route 128 was a technology cluster that competed with Silicon Valley until it began to wane in the 1980s. According to AnnaLee Saxenian, a regional economic development expert who has written extensively on these two clusters, social institutions are among the factors that help explain the difference between these two clusters:
[Silicon Valley's] dense social networks and open labor markets encourage entrepreneurship and experimentation. Companies compete intensively while at the same time learning from one another about changing markets and technologies through informal communication and collaborative practices. Loosely linked team structures encourage horizontal communication among form's divisions and with outside suppliers and customers. The functional boundaries witghin firms are porous in network-based systems, as are the boundaries among firms and between firms and local institutions, such as trade associations and universities.
In contrast, the Route 128 region is dominated by autarkic corporations that internalize a wide range of productive activities. Practices of secrecy and corporate loyalty govern relations between these firms and their customers, suppliers, and competitors, reinforcing a regional culture that encourage stability and self-reliance. Corporate hierarchies ensure that authority remains centralized, and information tends to flow vertically. Social and technical networks arelargely internal to the firm, and the boundaries among firms and between firms and local institutions remain far more distinct in this independent, firm-based system
Saxenian's observation tells us that the regional differences in social institutions affect the size and adaptibility of the networks of firms we know as regional clusters. The firms of Route 128, through their distrust of their employees and other firms, promoted structures that were more hierarchical and less porous, giving rise to a regional cluster that was less adabptable. This lack of adaptobility, in turn, translated into a difference in size, since over the long run the less adaptable Route 128 cluster shrank with respect to Silicon Valley. So social institutions affect not only the size of the networks that people form but also their adaptibility, and this helped Silicon valley leave Route 128 in the dust.
Silicon Valley's porous boundaries and adaptibility are exemplified in Steve Job's famous visit to Xerox's Palo alto Researc Center (Xerox PARC) in late 1979. It was there Jobs learned about graphical user interfaces (GUIs) and object-oriented programming. Ultimately Apple, not Zerox, was the company that succeeded in commercializing these technologies.Intellectual property purists might complain about Apple and not Xerox profiting from these ideas, but a more pragmatic view holds that it was better for the long-term sustainability of Silicon Valley to have Apple (or anyone, for that matter) develop and commercialize ideas that otherwise could have died in the inboxes of Xerox's managers, or. worse, might have been commercialized by a company in a competing cluster. Over the long run, these porous boundaries provided the Silicon Valley network with an adaptibility that allowed firms to pass the baton to one another, even if that passing of the baton was occationally unwillingly. This was the adaptibility that the Route 128 network lacked and which affected its relative ability to sustain a large network capable of accumulating the personbytes of knowledge it needed to compete with Silicon Valley.