On the subject of decision making by actors in a market, economists and sociologists find themselves almost irreconcilably opposed. In 2010, the Citizen’s United v. FEC case, the Supreme Court reaffirmed a prevailing notion — organizations are like people, with legal rights and civic responsibility, but do they have feelings too? When they make business decisions, are they totally rational, or do experience social pressures like the rest of us? Whereas economists take a utilitarian approach to explain how utility maximization is the chief determinant in a rational actor’s decision, sociologists promote a normative explanation, placing value in a- rational relationships as a mediating factor on the process. Within normative sociology, though, there is variation — neo-institutional theory focuses on the macro, organizational decisions as they relate to other firms in a market, while social networking theory zooms in on the person as a means of explaining the whole and in doing so, allows us to think about the theories in the same dimension. As an attempt to consolidate micro- and macro-level decision-making processes such that we can understand individual and organization actors in the context of societal norms, social networking theory offers the most comprehensive assessment of market behavior.

       The distinguishing characteristic of transaction cost economics is “just business” in the sense that actors, people and organizations, make decisions based on utility assessment and nothing more. There is the sale and the purchase, and man looks constantly to minimize the cost of a single transaction in order to maximize utility, which in the case of business, means profit. Actors are subject to the bounds of rationality, which is to say they make decisions given available information, and as such, transaction cost economics is the “key to efficiency” (Perrow 1972, pg. 238). Amazon.com Inc., for example, is currently testing taxicabs as an alternative to traditional postal service companies like FedEx and the US Postal Service (Bensinger 2014, 1). That’s not because the Internet retail giant’s CEO is best friends with a cab driver (though he might be) or that the organization’s mission aligns with using yellow cars as a form of civic duty. Rather, Amazon.com is looking to minimize its transaction costs — the cost incurred in a buyer- seller exchange — by using another outsourced company to get products to consumers at fastest, cheapest rate possible. Amazon, an enterprise that has already sought utility maximization through diverse product offerings and, horizontally, the addition of companies like Audible.com, has another option: vertical integration. Amazon could purchase a shipping company like UPS, thus controlling all aspects of its supply chain (Chandler 1977, pg. 7). It won’t, though, because of regulations and costs, vertical integration does not maximize utility as taxicabs might. It’s business. Again, decision-making hinges on bounded rationality, a concept that distinguishes itself in theory from networking and neo-institutional approaches, which rest upon a-rationality.

       Though “arationality” is to be regarded as falling outside the domain of rational or utilitarian models of decision making, it is not to be confused with irrational, which contradicts rationality altogether. Such is the case in normative sociology and, in this case, neo-institutional and networking theories of economics. Here, arationality is a product of social norms that create standards of right and wrong. In neo-insitutional theory, arationality dictates organizations abide by core values shared by constituents, and are therefore come to mimic existing organizations perceived to be abiding by society’s definition of good. Meyer and Rowan distinguish the myth from the reality that is organization decision making (1977, pg. 344): whether the organization practices the virtues is puts forth to that public or not matters little — the key is in the constituency’s belief that what the organization, what Amazon in this case, is doing is “right.”

        Neo-institutional theory accounts for the socially constructed environment as consisting of other institutions which will inevitably influence the ways in which said institution operates. It’s like peer pressure: organizations are expected to proceed with transactions in accordance

with normative market pressures, decisions that that may not increase utility (DiMaggio and Powell 1983, pg. 153). It can manifest itself in three ways: coercive, mimetic or normative isomorphism. Whereas coercive isomorphism arises in industries with strongly established cultural or governmental regulations, mimetic isomorphism occurs when uncertainty in a market incentivizes companies to operate like one another. Similar to coercive, normative isomorphism centers on the power of social networks — organization leaders from similar social-economic backgrounds, the MBA’s hailing from similar institutions, will be socialized into a similar way of managing, and thus respective organizations will mirror a shared school of thought. Society is perhaps another invisible hand that guides the market; “societies (or elites) so it seems, are smart, while organizations are dumb,” following idly along with environmentally implemented (DiMaggio and Powell, pg 156). But while neo-institutionalism describes how an organization comes to look like another, and why it might need to do so, it does not explain a certain paradox outlined by social networking theory: the stronger the relationship, the lower the opportunism.

       The virtue of social networking theory lies in its ability to consolidate the rational with arational decision-making processes such that we are able to understand organizational behavior for both a micro and macro perspective. In some sort of middle ground between transaction-cost economics with neo-institutional theory, social network theorists argue that there is some common ground between the “undersocialized” and the “oversocialized” approaches to market behavior, and that social relationships operate at all levels of transaction in economics. Business, though opportunistic by nature, is self-regulated by relationships — firms small and large are subject to business relationships, and business relations “spill over to sociability and vice versa, especially among business elites” not unlike our Amazon example (Granovetter 1985, pg 496). Those relationships forge trust which, and cause organizations to repeat decisions of and engage with similar organizations to avoid uncertainty. To this end, social networking theory identifies trust and subsequent centrality as a mediating factor on relationships in business.

        Where neo-institutional theory may fall short, social networking approach is attentive, most importantly, to both “power in ‘market’ relations and social connections” within and between firms (Granovetter 1985, 501). Relationships in business affect opportunism such that those with strong relationships, ones based in trust, are less likely to be exploited at the expense of individual gains. Continuing with Amazon as a reference point, we can assume, personnel engaged with real people representing clients and suppliers, forming relationships with FedEx employees, for example, at lunch that will affect the way deals are executed and maintained. Similar personal connections have an effect on utility such that there is value in relationships that might stop a person or company from choosing utility, that trust is an “explicit and primary feature of their embedded ties” (Uzzi 1997, pg 43). Where we saw transaction operate in a space that if it makes more utilitarian sense to compromise a relationship, so be it, social networking suggests that perhaps competitive advantage comes from relationships. As it is with market share, the more central an organization is in this social network, the more it utilitarian power it has. This paradox is as much a factor in decision-making as is personal and organizational utility.

           From the bottom up, it is perhaps easiest to consider organizational behavior given the lessons of social networking theory. Transaction cost economics negates the importance of relationship in the weighing of utility, implying that relationships live outside of economics. In this assessment of economic approach, I, as student who did not fair so well in Econ 101, have argued social networking theory’s due diligence to relationships and their place in a utilitarian market is most inclusive. It seems there are two equally strong, juxtaposing forces operating in decision making, and that social networking theory’s acknowledgement of their overlap allows us to function as utility-seeking individuals in accordance with social norms and pressures.