John F. Padgett is professor of political science and (by courtesy) professor of sociology and history at the University of Chicago. Walter W. Powell is professor of education and (by courtesy) professor of sociology, organizational behavior, management science, communication, and public policy at Stanford University.

The Emergence of Organizations and Markets

By John F. Padgett, Walter W. Powell

PRINCETON UNIVERSITY PRESS

Copyright © 2012 Princeton University Press
All rights reserved.
ISBN: 978-0-691-14887-8

Contents

Contributors,
List of Illustrations,
List of Tables,
Acknowledgments,
Chapter 1 * The Problem of Emergence JOHN F. PADGETT AND WALTER W. POWELL,
Part I Autocatalysis,
Chapter 2 * Autocatalysis in Chemistry and the Origin of Life JOHN F. PADGETT,
Chapter 3 * Economic Production as Chemistry II JOHN F. PADGETT, PETER MCMAHAN, AND XING ZHONG,
Chapter 4 * From Chemical to Social Networks JOHN F. PADGETT,
Part II Early Capitalism and State Formation,
Chapter 5 * The Emergence of Corporate Merchant-Banks in Dugento Tuscany JOHN F. PADGETT,
Chapter 6 * Transposition and Refunctionality: The Birth of Partnership Systems in Renaissance Florence JOHN F. PADGETT,
Chapter 7 * Country as Global Market: Netherlands, Calvinism, and the Joint-Stock Company JOHN F. PADGETT,
Chapter 8 * Conflict Displacement and Dual Inclusion in the Construction of Germany JONATHAN OBERT AND JOHN F. PADGETT,
Part III Communist Transitions,
Chapter 9 * The Politics of Communist Economic Reform: Soviet Union and China JOHN F. PADGETT,
Chapter 10 * Deviations from Design: The Emergence of New Financial Markets and Organizations in Yeltsin’s Russia ANDREW SPICER,
Chapter 11 * The Emergence of the Russian Mobile Telecom Market: Local Technical Leadership and Global Investors in a Shadow of the State VALERY YAKUBOVICH AND STANISLAV SHEKSHNIA,
Chapter 12 * Social Sequence Analysis: Ownership Networks, Political Ties, and Foreign Investment in Hungary DAVID STARK AND BALÁZS VEDRES,
Part IV Contemporary Capitalism and Science,
Chapter 13 * Chance, Nécessité, et Naïveté: Ingredients to Create a New Organizational Form WALTER W. POWELL AND KURT SANDHOLTZ,
Chapter 14 * Organizational and Institutional Genesis: The Emergence of High-Tech Clusters in the Life Sciences WALTER W. POWELL, KELLEY PACKALEN, AND KJERSTEN WHITTINGTON,
Chapter 15 * An Open Elite: Arbiters, Catalysts, or Gatekeepers in the Dynamics of Industry Evolution? WALTER W. POWELL AND JASON OWEN-SMITH,
Chapter 16 * Academic Laboratories and the Reproduction of Proprietary Science: Modeling Organizational Rules through Autocatalytic Networks JEANNETTE A. COLYVAS AND SPIRO MAROULIS,
Chapter 17 * Why the Valley Went First: Aggregation and Emergence in Regional Inventor Networks LEE FLEMING, LYRA COLFER, ALEXANDRA MARIN, AND JONATHAN MCPHIE,
Chapter 18 * Managing the Boundaries of an “Open” Project FABRIZIO FERRARO AND SIOBHÁN O’MAHONY,
Coda: Reflections on the Study of Multiple Networks WALTER W. POWELL AND JOHN F. PADGETT,
Index of Authors,
Index of Subjects,

CHAPTER 1

The Problem of Emergence

John F. Padgett * Walter W. Powell

ORGANIZATIONAL NOVELTY

Darwin’s question about the origin of species is worth posing and exploring as much in the social sciences as it was in biology. Human organizations, like living organisms, have evolved throughout history, with new organizational forms emerging and transforming in various settings: new types of banks and banking in the history of capitalism; new types of research organizations and research in the history of science; new types of political organizations and nations in the history of state formation. All of these examples are discussed in this book. The histories of economies and polities are littered with new organizational forms that never existed before. In biological language, this emergence of new organizational forms is the puzzle of speciation.

We economists, political scientists, and sociologists have many theories about how to choose alternatives, once these swim into our field of vision. But our theories have little to say about the invention of new alternatives in the first place. New ideas, new practices, new organizational forms, new people must enter from off the stage of our imaginary before our analyses can begin. Darwin asked the fundamental question, but our concepts are like those of Darwin before Mendel and Watson and Crick. We understand selection and equilibrium, but we do not understand the emergence of what we choose or of who we are. Our analytical shears are sharp, but the life forces pushing things up to be trimmed elude us.

Novelty almost by definition is hard to understand. Something is not genuinely new if it already exists in our current practice or imagination. The terms innovation and invention, as we use them in this book, mean the construction of something neither present nor anticipated by anyone in the population. We do not mean that planned incremental improvement on what already exists is not possible — quite the opposite. This type of learning occurs far more often than does the production of genuine novelty. The conundrum for both researchers and participants is that logical cognition, no matter how useful for refinement and improvement, is unlikely to be a fundamental process for generating novelty, because logic can only use axioms that are already there.

The literature on “organizational innovation” is voluminous, but that literature largely focuses on learning, search, and diffusion and often uses patents as indicators. The term innovation in organization theory refers to products and ideas, never to the emergence of organizational actors per se. Social science studies processes of innovation, so defined, but mainly by abstracting from the content of innovation itself. Lest this limitation be mistaken for criticism, it is important to remember that Darwin himself never truly answered his own question about the origin of species. He “only” analyzed the natural selection of populations of organisms within species, once species existed. Some parts of social science with an evolutionary sympathy have absorbed Darwin, but natural (or artificial) selection alone does not solve his puzzle of speciation.

Besides this introductory chapter and a coda, this book contains fourteen historical case studies of the emergence of organizations and markets, plus three modeling chapters that apply concepts from biochemistry to social evolution. The case studies are divided into three clusters: four case studies on the European co-evolution of early capitalism and state formation, four case studies on Communist economic reform and transition, and six chapters about technologically advanced capitalism and science. These case studies, discussed below, were selected because all of them contain instances of the historical emergence of organizational novelty. Some chapters also discuss failed emergence as a control group. Not all of the chapters involve speciation in the radical sense of new to human history, but nearly half of them do. All involve speciation in the sense of organizational novelty in the context of the population under study.

The three modeling chapters in part 1 extract the foundational concept of autocatalysis from the existing chemistry literature on the origins of life and then apply this concept, through agent-based computer models, first to the self-organization of economic production and second to the evolution of primitive language and communication. These simple, biochemically inspired models are in no way rich enough to capture the phenomena or the array of emergence mechanisms observed in the historical case studies. But they do provide an analytical framework for specifying with some precision the social science problem of emergence. In this volume, inductive histories and deductive models are viewed as complementary (not competitive) research strategies, both being dedicated to the discovery of social processes of organizational genesis and emergence.

Organizational genesis does not mean virgin birth. All new organizational forms, no matter how radically new, are combinations and permutations of what was there before. Transformations are what make them novel. Evolution, therefore, is not teleological progress toward some ahistorical (and often egocentric) ideal. It is a thick and tangled bush of branchings, recombinations, transformations, and sequential path-dependent trajectories, just as Darwin said it was. Invention “in the wild” cannot be understood through abstracting away from concrete social context, because inventions are permutations of that context.

Historical path dependency does not imply that there are no transformational principles at the base of endless open-ended generation. Scientific prediction in open-ended, creative systems such as life is not the specification of a fixed-point equilibrium. It is the description of processual mechanisms of genesis and selection in sufficient detail to be capable, in the rich interactive context of the study system, of specifying a limited number of possible histories. This is the biology, not the physics, view of science.

A barrier, however, inhibits social science investigation into processes of organizational emergence or speciation. Most social science proceeds according to the logic of methodological individualism. That is, the analyst takes as given some constitutive features of the hypothesized individual or actor (typically preferences, beliefs, and resources) and then derives aggregate or behavioral conclusions from them. “Actors” are objects imbued with boundaries, purposes, and choices whose teleological behavior is explained thereby. Useful as this approach is for many purposes, it creates in our understanding a black hole of genesis. To assume axiomatically that real people are actors makes them logically impenetrable to the theories built upon them. No theory can derive its own axioms. The problem is not that the social science concept of actor is not useful. The problem is that the atomic conception of actor precludes investigation into the construction and emergence of the real people and organizations that we refer to by that abstraction. The whole question of where novelty in actors comes from, so central to any theory of evolution, never arises in the first place.

In this book, we take the following as our mantra: In the short run, actors create relations; in the long run, relations create actors. The difference between methodological individualism and social constructivism is not for us a matter of religion; it is a matter of time scale. In the short run, all objects — physical, biological, or social — appear fixed, atomic. But in the long run, all objects evolve, that is, emerge, transform, and disappear. To understand the genesis of objects, we argue, requires a relational and historical turn of mind. On longer time frames, transformational relations come first, and actors congeal out of iterations of such constitutive relations. If actors — organizations, people, or states — are not to be assumed as given, then one must search for some deeper transformational dynamic out of which they emerge. In any application domain, without a theory of the dynamics of actor construction, the scientific problem of where novelty comes from remains unsolvable.

The example of the human body may help to fix the idea. Viewed from the perspective of ourselves, we seem solid enough: well bounded and autonomous. But viewed from the perspective of chemistry, we are just a complex set of chemical reactions. Chemicals come into us; chemicals go out of us; chemicals move around and are transformed within us. Solid as we may appear from the outside, no single atom in our body has been there for more than a few years. It is possible (and flattering) to see our physical selves as autonomous bodies exchanging food and other nutrients, but it is also possible to see ourselves as an ensemble of chemicals that flow, interpenetrate, and interact. Stability of the human body through time does not mean mechanical fixity of parts; it means organic reproduction of parts in flux. Viewed as chemical reactions, we are vortexes in the communicating material of life that wends through us all.

To explain the emergence of new organizational actors, we take as our starting inspiration — but not as our final model — biochemical insights about the emergence of life. At the theoretical level, our approach is a merger of social network analysis with autocatalysis models from biochemistry. From social network analysis we appropriate an empirical commitment to fine-grained relational data on social and economic interactions through time. For us, emergence of organizations is grounded in transformations in social networks, which wend through organizations, bringing them to life. From autocatalysis we appropriate a commitment to discovering and formalizing processual mechanisms of genesis and catalysis, which generate self-organization in highly interactive systems. For us, nodes and ties in social networks are not reified dots and lines; they are the congealed residues of history — in particular, the history of iterated production rules and communication protocols in interaction. Learning at the human level is equivalent to co-evolution of rules and protocols at the “chemical” level. Actors thereby become vehicles through which autocatalytic life self-organizes.

We regard our infrastructural work of synthesizing social science with biochemistry as essential to defining rigorously the topic of organizational novelty (or more generally novelty of actors) in the first place. Through this, we hope to point the way toward a new path in new social science — namely, toward a theory of the co-evolution of social networks. Actors fall out as derivations of that theory, but they are not the axiomatic starting points. In the rest of our introduction, after a brief overview of the book, we elaborate on this approach and show its empirical relevance.

In our empirical case studies, we find that novelty in new organizational form often emerges through spillover across multiple, intertwined social networks. Hence not autocatalysis within one network but interaction among autocatalytic networks is the key to generating novelty. The empirical chapters in this volume cover a wide sample of historical cases about the emergence of new forms of economic organizations and markets. Generally, throughout the volume, actors refers to organizations and relations to markets. With our emphasis on multiple networks, however, a central finding about the production of novelty in the economic realm will be that other types of social relations — for example, politics, kinship, and science — structure the “topology of the possible,” that is, the specific ways and trajectories through which old economic organizational forms can evolve into new ones.

The empirical case studies of emergence in this volume illustrate and develop our central insight about constructive feedbacks across multiple networks. Part 2, comprising four chapters by Padgett, analyzes the emergence of four organizational inventions in the history of early financial capitalism and state formation — namely, the medieval corporation in thirteenth-century Tuscany, the partnership system in fourteenth-century Florence, the joint-stock company and federalism in seventeenth-century Netherlands, and the Reichstag and political parties in nineteenth-century Germany. Padgett, along with Jonathan Obert in the German case, demonstrates that these organizational inventions in early capitalism and state formation emerged from dynamic feedback among economic, political, religious, and kinship networks.

The four empirical chapters of part 3 analyze organizational emergence, sometimes perverse, in the postsocialist transitions in Russia, China, and Eastern Europe. Padgett compares the political logics of economic reform under Stalin, Khrushchev, and Gorbachev in the Soviet Union and under Mao and Deng Xiaoping in China, documenting in each of these five cases the path-dependent co-evolution between political mobilization and economic reform. Andrew Spicer carries the Russian reform story forward in his case study of the unexpected developments in the history of banking under Yeltsin. Valery Yakubovich and Stanislav Shekshnia examine a more successful case of market emergence in post-Soviet Russia: the telecom industry. David Stark and Balázs Vedres trace the development and reproduction over time of business groups in Hungary, with close attention to their interactions with domestic politics and foreign multinationals.

Part 4, made up of six chapters, focuses on contemporary science and technology sectors. Four chapters by Powell and colleagues apply our theoretical framework to the high-tech case of the emergence of the biotechnology industry within the life sciences. The first chapter, by Powell and Kurt Sandholtz, focuses on the genesis of the first generation of biotech firms in the late 1970s and early 1980s, analyzing how particular attributes and practices were assembled to produce new organizational models for science. The second chapter, by Powell, Kelley Packalen, and Kjersten Whittington, traces the rapid growth and catalysis of these first-generation firms, over the years 1988–2002, into an expansive multiple-network organizational field with distinctive regional locations. They compare the networks of three successful biotech industrial districts with eight failures to congeal. The third chapter, by Powell and Jason Owen-Smith, analyzes the open-elite recruitment dynamics of reproduction within this new industry. Jeannette A. Colyvas and Spiro Maroulis round out the biotech module with an agent-based model of the rapid spread of patenting in the life sciences in research universities. This chapter extends into new empirical ground the formal model of autocatalysis by Padgett, Peter McMahan, and Xing Zhong presented in chapter 3.

Focusing more on the information-technology industry, Lee Fleming and colleagues compare inventor networks in Boston and Silicon Valley, demonstrating the emergence of innovative cross-industry connectivity in Silicon Valley. This innovation stemmed from the career brokerage by IBM of postdoctoral scientists. Through detailed internal records, Fabrizio Ferraro and Siobhán O’Mahony trace the emergence and self-organization of an innovative open-source computing company called Debian, which is as much global community as company.

These empirically rich cases of organizational and market emergence are surveyed in short introductions to each part, which make explicit the links between theory and cases. The empirical chapters were selected on the basis of two criteria: (a) detailed multiple-network information, tracing not just actors but relations among actors; and (b) dynamic networks over time, spanning an observed organizational or market invention of interest. Readers interested in particular application domains may wish to focus on the section closest to their concerns. The rest of this introductory chapter elaborates the theoretical framework that has emerged from these detailed cases.

Our theoretical elaboration proceeds as follows. First, we describe the problem of organizational novelty in the context of multiple social networks. Second, we explain our core dynamic motor of autocatalysis both at the level of chemical and economic production and at the level of the biographical production of persons through interactive learning, communication, and teaching. Third, we describe eight network mechanisms of organizational genesis that we have discovered in our case studies. Finally, we point to the important outstanding issue of structural vulnerability to tipping. The question of multiple-network poisedness is, for us, the next research frontier.

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