Exploring the Embeddedness of Economy in Society: A New Economic Sociology Perspective

Why do two countries with similar natural resources end up with vastly different economic outcomes? Why do some entrepreneurs succeed through family connections while others rely on formal contracts? The answer, according to New Economic Sociology (NES), lies not just in markets or money – but in the social and cultural fabric that surrounds every economic decision. At the heart of this field is a deceptively simple but powerful idea: economic life does not float in a vacuum. It is embedded in social relationships, cultural norms, and institutional structures that shape what people do, how they trade, and who they trust.

What does “embeddedness” actually mean? 🔗

The concept of embeddedness has its roots in the work of economic historian Karl Polanyi, who argued in his landmark 1944 book The Great Transformation that economic activities in pre-industrial societies were not driven by market logic at all – they were embedded in kinship systems, religious institutions, and political structures. Provisioning, redistribution, and reciprocity governed livelihoods, not supply and demand. For Polanyi, what made modern capitalism unusual was that it attempted to disembed the economy from these social anchors, treating land, labor, and money as pure commodities.

This idea was later taken up and reframed by sociologist Mark Granovetter in his influential 1985 paper, “Economic Action and Social Structure: The Problem of Embeddedness,” published in the American Journal of Sociology. Granovetter argued that even in modern market economies, economic action remains deeply embedded in ongoing social relations. Rather than being a separate and distinct sphere, the economy is embedded in both economic and non-economic institutions – meaning religion, government, family, and community are all just as relevant to economic outcomes as price signals.

The concept of embeddedness expresses the notion that social actors exist within relational, institutional, and cultural contexts and cannot be seen as atomized decision-makers simply maximizing utility. Economic actors are people embedded in webs of relationships, and those relationships matter enormously to the choices they make.

Critiquing earlier views: the undersocialized and oversocialized problem 🔗

Granovetter’s work was partly a critique of how both mainstream economics and earlier sociology had failed to capture the real nature of economic behavior. He identified two opposing but equally flawed positions.

The undersocialized view 🔗

Mainstream neoclassical economics – the tradition running from Adam Smith through Milton Friedman – treats individuals as atomized, self-interested agents making rational calculations in a social vacuum. Economics offers undersocialized arguments because it considers people as completely atomistic and without mutual constraints. In this worldview, markets are neutral, impersonal, and governed by universal laws of supply and demand. Social relationships are treated as irrelevant noise.

The oversocialized view 🔗

On the other side, certain strands of sociology swung in the opposite direction – portraying individuals as entirely governed by internalized norms, cultural scripts, and social roles. The oversocialized view models actors as compelled to behave in a certain way every time, leaving little room for individual judgment or the dynamics of real, ongoing relationships.

Granovetter’s middle ground 🔗

Granovetter argued that both positions were wrong for the same underlying reason: they both ignored the concrete, ongoing networks of social relations in which people actually operate. Economic agents are better understood as balanced actors who make decisions through continuous, tangible social relationships, trust, and network structure – not purely through market logic or purely through cultural scripts. His concept of embeddedness steered a middle course between these two extremes, insisting that people act purposively but always within a concrete social context.

The two pillars of new economic sociology 🔗

Building on Granovetter’s framework, New Economic Sociology developed around two core concepts that constitute the fundamental sociological propositions of the field: embeddedness and the social construction of the economy.

Social networks and embeddedness 🔗

The first pillar is the recognition that economic action is always embedded in social networks. These networks shape access to information, opportunities, and resources. A job seeker who lands a position through a friend’s referral, a business owner who extends credit to a known neighbor, or an investor who backs a founder because of shared community ties – all of these are examples of economic life operating through social structure, not despite it.

Granovetter’s famous concept of “the strength of weak ties” is especially relevant here. Weak ties – acquaintances rather than close friends – are often more valuable than strong ties for finding new economic opportunities, precisely because they connect people to social worlds beyond their immediate circle. This directly challenges the idea that markets are driven purely by impersonal price mechanisms.

The social construction of the economy 🔗

The second pillar, drawn from Berger and Luckmann’s sociology of knowledge, holds that economic institutions, markets, and even the very categories we use to understand economic life are socially constructed. Existing institutions usually take on a kind of natural and self-evident quality – we treat property rights, labor markets, and money as if they were fixed features of the natural world, when in fact they are products of specific historical, cultural, and political processes.

Cultural embeddedness: how values shape economic behavior 🔗

Beyond social networks, NES also emphasizes cultural embeddedness – the way that values, beliefs, and moral frameworks shape economic decisions. This is where sociologists like Viviana Zelizer have made major contributions, arguing that culture is not a peripheral influence but is deeply woven into how markets work and how people assign meaning to money and transactions.

Consider how differently property is understood across societies. In some cultures, land is held collectively through community or family structures; in others, individual private ownership is the default. Protected, transferable, and negotiable property rights provide an avenue for entrepreneurial funding and investment in market-oriented economies – but in societies where customary or communal land tenure prevails, formal property law may be irrelevant or even disruptive to existing economic arrangements.

Similarly, social norms and cultures have higher and more positive effects on the relationship between entrepreneurship and economic growth than formal institutions alone. Cultural attitudes toward risk, failure, family obligation, and collective versus individual success all shape who starts businesses, how they are run, and whether they thrive.

Institutions as the framework of economic life 🔗

NES also draws heavily on organizational and institutional sociology. The logics underlying the formation of institutions and their norms of behavior cannot be removed from the contexts of social interaction within which these institutions exist. Institutions – formal ones like legal systems and regulatory agencies, and informal ones like trust norms, community expectations, and kinship obligations – are the scaffolding within which economic activity takes place.

This is a direct challenge to New Institutional Economics (NIE), which does acknowledge institutions but tends to focus on how they reduce transaction costs for rational actors. NES goes further, arguing that economic behavior is not just shaped by formal rules but by the informal, culturally specific norms that vary enormously from one society to another. Labor markets, contract enforcement, credit access, and investment behavior all reflect these embedded institutional contexts.

Entrepreneurship and property structures in developing countries 🔗

One of the most important testing grounds for NES ideas is the study of entrepreneurship and property in developing and emerging economies. Here, the limitations of purely market-based models become most visible.

In many developing economies, it is necessary to consider the institutional context of formal and informal institutions to better understand the continued growth of entrepreneurship. Informal markets, kinship networks, and non-Western institutions often play a far more prominent role than in industrialized nations. An entrepreneur in rural South Asia or sub-Saharan Africa may depend entirely on family social capital, community trust, and informal credit systems – none of which appear in standard economic models.

The way in which entrepreneurship is allocated may constrain development, particularly when institutional structures concentrate wealth and market power in the hands of a small elite, limiting broader entrepreneurial activity. This is a distinctly sociological insight – the problem is not simply a lack of markets, but the social and institutional arrangements that govern who gets access to them.

Property structures present a similar challenge. Where formal legal title is absent or ineffective, economic activity is governed by customary norms that may be deeply embedded in local social hierarchies, gender relations, or ethnic group membership. The increased strength of the rule of law tends to lead to more diverse sources of investment for continued innovation and firm survival – but NES reminds us that simply transplanting formal legal institutions without understanding the social context in which they must operate often fails.

Challenges and future directions for new economic sociology 🔗

Despite its powerful insights, NES faces genuine theoretical and methodological challenges. One persistent tension is between social structure and individual agency: if economic action is always embedded in social networks and cultural norms, how much room remains for individuals to act differently, innovate, or resist? NES scholars have increasingly tried to develop more dynamic accounts that avoid the trap of reducing individuals to products of their social environment.

A second challenge is global applicability. Much of the foundational work in NES was developed with reference to the United States and Western Europe. Applying these frameworks to economies in the Global South – where informal sectors, customary institutions, and non-market forms of exchange remain central – requires significant adaptation. Scholars have responded by paying closer attention to the diversity of institutional arrangements found across the world and by insisting that no single model of “the economy” can be assumed universal.

Looking ahead, NES is increasingly relevant to questions about platform economies, global supply chains, financialization, and the sociology of markets in rapidly urbanizing societies. The core insight – that markets are social constructions embedded in cultural and institutional life – becomes more, not less, important as economic life grows more complex and interconnected.

What do you think? If economic behavior is always shaped by social networks and cultural norms, does this mean that economic policy needs to be fundamentally redesigned to account for local social contexts rather than applying universal market prescriptions? And in your own experience, can you identify a moment where a social relationship – trust, community ties, or shared values – shaped an economic decision more than price or profit alone?

References

1. https://www.britannica.com/topic/embeddedness
2. https://www.journals.uchicago.edu/doi/abs/10.1086/228311
3. https://en.wikipedia.org/wiki/Embeddedness
4. https://onlinelibrary.wiley.com/doi/abs/10.1002/9781405165518.wbeoss146.pub2
5. https://acawiki.org/Economic_action_and_social_structure:_The_problem_of_embeddedness
6. https://understandingsociety.blogspot.com/2012/07/social-embeddedness.html
7. https://www.academia.edu/35457311/A_review_of_the_paper_Economic_Action_and_Social_Structure_The_Problem_of_Embeddedness_by_Mark_Granovetter
8. https://citeseerx.ist.psu.edu/document?repid=rep1&type=pdf&doi=61f59aaef8767cca2fa80588fd92a0724a9b288d
9. https://link.springer.com/article/10.1007/s11846-025-00887-w
10. https://link.springer.com/article/10.1007/s11301-020-00193-7
11. https://www.tandfonline.com/doi/full/10.1080/20430795.2021.1944750
12. https://link.springer.com/article/10.1007/s11187-009-9198-2