The Rise of New Economic Sociology: From Institutional Economics to Social Embeddedness

Why do some markets thrive while others collapse? Why do entrepreneurs in tight-knit communities outperform isolated innovators? And why do formal economic rules often fail to predict how real people actually behave? These questions drove the emergence of New Economic Sociology (NES) – a field that insists economic life cannot be understood without accounting for the social world in which it is embedded. To understand where NES came from and what makes it distinctive, we need to trace its intellectual roots, examine its relationship with New Institutional Economics, and explore the rich terrain it has opened up across topics from wealth and entrepreneurship to law and markets.

What is New Economic Sociology? 🔗

New Economic Sociology is a subfield that emerged prominently in the 1980s and 1990s with a clear challenge to traditional economic models. Where mainstream economics pictured individuals as rational, self-interested actors operating in impersonal markets, NES argued this picture was fundamentally incomplete. As sociologist Neil Fligstein has put it, people tend to make an artificial separation between what they do in economic life and what they do in the rest of their lives – but economic processes rely on social relationships just as much as personal life does. NES breaks down that artificial wall.

Key scholars including Mark Granovetter, Neil Fligstein, and Viviana Zelizer played central roles in building this field. Their work collectively argued that economic behavior is always situated within specific social structures, cultural norms, and institutional contexts – and that ignoring these factors produces a distorted picture of how economies actually work.

The parallel rise of New Institutional Economics 🔗

NES did not emerge in a vacuum. It developed alongside – and partly in reaction to – New Institutional Economics (NIE), a reform movement within mainstream economics that was itself trying to bring institutions back into economic analysis. The term “new institutional economics” was coined by Oliver Williamson in 1975, and the field grew into a major intellectual project led by Williamson, Douglass North, and Ronald Coase – all of whom eventually received Nobel Prizes in Economics.

NIE sought to explain how institutions – understood as the rules, norms, and organizational structures governing human interaction – shape economic outcomes. Douglass North argued that institutions exist because of the uncertainties involved in human interaction; they are constraints devised to structure that interaction, and different institutional arrangements produce different economic results. Oliver Williamson focused more specifically on transaction cost economics – the idea that firms, contracts, and market structures exist to minimize the costs of economic transactions. NIE rejected the classical assumptions of zero transaction costs and perfectly rational actors with fixed preferences, recognizing that cognitive limitations and incomplete information are real and matter for how institutions form.

This was a significant intellectual opening. By acknowledging that human behavior is shaped by context and that institutions are not just neutral backdrops but active forces, NIE created space for a deeper conversation between economics and sociology.

The sociological critique of New Institutional Economics 🔗

Despite its advances, sociologists found NIE insufficient. When economic sociology appeared on the academic scene in the mid-1980s, its interactions with NIE were plentiful and often productive – but also contentious. Williamson’s transaction cost framework, in particular, became a target of sustained sociological criticism.

Sociologists including Perrow, Fligstein, Granovetter, Bradach, Eccles, and Powell pushed back against Williamson’s ideas, using social network theory as their main analytical tool. Their core objection was that NIE, for all its sophistication, still treated economic actors as essentially atomized individuals responding to incentive structures. It acknowledged that institutions matter, but still explained those institutions primarily through the logic of economic efficiency – as if institutions naturally evolved to minimize costs and maximize performance.

Sociologists argued this missed something fundamental: institutions are not simply efficient solutions to coordination problems. They are social constructions, shaped by power, culture, history, and network dynamics that have nothing to do with efficiency. A firm does not just exist because it minimizes transaction costs; it exists within a social field defined by relationships of trust, authority, competition, and legitimacy. NIE, critics argued, had an impoverished view of the social context in which economic institutions are embedded.

Granovetter and the concept of social embeddedness 🔗

The intellectual cornerstone of New Economic Sociology is the concept of social embeddedness, developed most influentially by Mark Granovetter. The term was originally created by economic historian Karl Polanyi, who argued that in non-market societies, economic activities are embedded in non-economic institutions like kinship, religion, and politics. Granovetter extended and transformed this concept for the study of modern market economies.

In a landmark 1985 paper in the American Journal of Sociology, Granovetter criticized both economists and sociologists for their diametrically opposed approaches to the relationship between individuals and social structures. Economists took an atomistic view, proceeding from individuals acting on innate interests. Sociologists, meanwhile, often argued that behavior was entirely determined by social norms. Granovetter found both extremes unsatisfying.

Granovetter argued that the neoclassical view of economic action promoted an “undersocialized account” that atomizes human behavior, while substantivists had an “oversocialized” view that refused to see how rational choice could also influence action. His own position was that economic actors are neither atoms outside social context nor slaves to social scripts. Instead, their purposive actions are embedded in concrete, ongoing systems of social relations.

This was not merely a theoretical claim. Granovetter used sociological evidence to show that businesses operate within dense social networks that cut across firms, particularly at the executive level, and that actual litigation to settle disputes is rare because formal measures would damage established relationships. Trust, reputation, and ongoing social ties do much of the work that economists attributed to formal contracts and price signals.

Alongside embeddedness, Granovetter identified a second master concept in New Economic Sociology: the social construction of the economy, drawing on Berger and Luckmann’s work. The idea is that economic institutions – firms, markets, money – are not natural objects but social constructions, produced and reproduced through ongoing human practices and meanings. This dual foundation of embeddedness and social construction gave NES both an analytical vocabulary and a critical edge.

The dynamic growth of New Economic Sociology 🔗

From these foundations, NES grew rapidly into a broad and productive research field. New Economic Sociology drew especially on three strands of sociology: network theory, cultural sociology, and organizational sociology, each of which added new dimensions to the analysis of economic life.

Wealth and inequality 🔗

NES brought a fresh perspective to the study of wealth and economic inequality. Rather than treating wealth accumulation as a straightforward outcome of individual productivity or market efficiency, NES researchers examined how social position, network ties, and institutional access shape who gets wealthy and who does not. Studies on wealth inequality in the United States and on wealth and stratification processes demonstrated that the distribution of assets follows social logics – inheritance, network-based investment opportunities, racially segmented labor markets – that pure economic models cannot capture.

Entrepreneurship and social networks 🔗

The sociology of entrepreneurship became one of NES’s most vibrant research areas. Traditional economics portrayed entrepreneurs as individual risk-takers responding to market signals. NES reframed entrepreneurship as a deeply social activity. Granovetter’s work on the economic sociology of firms and entrepreneurs showed that success depended heavily on social network position, not just individual talent or market conditions. Access to capital, information about opportunities, and the legitimacy to attract partners and customers – all of these flow through social relationships.

Work by Alejandro Portes and others demonstrated that social capital as an attribute of communities and regions can foster collaboration and entrepreneurship, helping explain why some localities and ethnic communities generate disproportionate levels of business activity. Networks based on kinship, ethnicity, or shared experience can generate the trust that markets alone cannot reliably produce.

The cultural dimension: money and meaning 🔗

Viviana Zelizer’s work added a crucial cultural dimension to NES. Her research challenged the economic assumption that money is purely fungible – that a dollar is simply a dollar, interchangeable for any purpose. What Zelizer showed is that people divide money according to the social purposes for which it is used, earmarking funds for specific ends and attaching cultural meanings to different forms of payment. Gift money, household money, welfare money – these are not socially equivalent even when they are numerically identical. This insight revealed that even the most basic economic instruments are saturated with social meaning.

Law, the state, and the economy 🔗

NES also developed a sophisticated analysis of the relationship between law, the state, and economic life. Neil Fligstein’s work argued that market actors depend heavily on governments and society for the social conditions that produce wealth – that state-building and market-building go hand in hand. Governments establish the rule of law, adjudicate conflicts, and define property rights in ways that make stable markets possible. The state is not just an external regulator of the economy; it is a constitutive element of it.

Richard Swedberg and others developed an economic sociology of law, examining how legal frameworks shape market behavior and how markets, in turn, shape legal institutions. This two-way relationship between law and economy – ignored in most economic models – became a productive area of research, with studies examining topics from the legalization of the workplace to the social foundations of contract enforcement.

NES and NIE: divergence and convergence 🔗

Despite their differences, NES and NIE were not simply antagonists. The interaction between the two fields was fruitful: the concept of “transaction cost” became part of sociological language, and sociologists became more receptive to economic ideas than they had been for a long time. Williamson’s framework was even refined in response to sociological critiques – his concept of “hybrid” governance structures was developed partly in response to sociologists’ objections to a rigid market-hierarchy dichotomy.

The key difference, ultimately, is one of emphasis and method. NIE focuses on how formal institutions reduce transaction costs and enable cooperation, still working largely within the logic of rational choice. NES insists that economic institutions like firms, industries, and professions are best explained through the framework of social networks and social construction, not just efficiency optimization. Both fields recognize that institutions matter; they differ in how they explain why institutions take the forms they do and what sustains them.

Together, they represent a broader intellectual shift: the recognition that economic life is too complex and too human to be captured by models that abstract away the social world. As NES has expanded into areas like finance, inequality, globalization, and the sociology of markets, it has continued to deepen that insight – offering tools to understand not just how markets work, but how they are built, maintained, and sometimes broken.

What do you think? If economic decisions are always embedded in social networks and cultural contexts, does this mean that purely market-based solutions to problems like poverty or inequality are inherently limited? And how should policymakers account for social embeddedness when designing economic institutions – particularly in societies where informal networks and formal legal systems operate very differently?

References

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