Circular Flow of Goods and Services

14 03 2010

Jenna Doucet (December 2009).

The Circular Flow of Goods and Services

Economic Sociology in the New Millennium by scholars Carruthers and Uzzi (2000) is a compelling paper that offers an in-depth analysis of  economic sociology theories and how they can be used to explain the interactions between businesses, households, and government which form our understanding of the economy.

Carruthers and Uzzi (2000) begin their paper by briefly highlighting the history of economic sociology. The authors describe that economist have come to accept as wisdom theories of “ how organizations influence individual action and respond to the environment” (p. 487) based on the economist’s “black box” metaphor of internal organization. The authors explain the focus from internal organization to the organization’s influence on economy as the “shifting from firms to markets” (p.486).

Businesses make up one of the sectors of the traditional circular flow model. Businesses are responsible for making the central decisions that affect what and how much of a product or service is available to household consumers and they make these decisions based on self-interest. In an attempt to describe the importance business plays in the circular flow of the economy, Carruthers and Uzzi (2000) state: “ Economic sociology must extend its distinctive approach to organizations, states, and markets if it is to widen its understanding of economy and society” (p.486). Understanding the new trends of how firms operate within, how they adapt to widespread privatization, corporate restructuring, and outsourcing gives economists greater perspective on how organizations “alter profoundly how wealth is accumulated and distributed” (Carruthers & Uzzi, 2000 p.486).

Households also play an important role in the circular flow of goods and services. Colander (2008) states that “households are the most powerful economic institution. They ultimately control government and business, the other two economic institutions” (p. 63). The power of households comes in the form of votes that are cast to “determine government policy” (p.63), and which products and services business will produce and sell. Carruthers and Uzzi (2000) illustrate the power households have on businesses by demonstrating how corporations such as STATA, recognize and take advantage of consumer sovereignty in their decision- making. One of Carruthers’ and Uzzi’s (2000) key beliefs is the roles of business, households and government are “ in the process of being deconstructed into their constituent elements and reconfigured into new roles through identity bricolage” (p.487). What STATA and many other organizations are doing to remain competitive is to redefine the classic textbook circular flow of goods and services model by “literally turning customers into suppliers!” (p.487). Organizations today are transforming the way they interact with households and are more than ever relying on the consumer’s needs and desires (Carruthers & Uzzi, 2000). Businesses are able to take advantage of technology to transforms the “one way flow of information from seller to buyer into a two-way flow” (Carruthers & Uzzi, 2000, p. 487).

Carruthers’ and Uzzi’s (2000) opinion on the role government and institutions play in the circular flow model are not widespread accepted . According to Carruthers and Uzzi (2000) the power of government and institution lies in the theory of political embeddedness. In Economic Action and Social Structure: The problem of Embeddeness, Granovetter (1985), although a supporter of the theory, writes that:

It has long been the majority view among sociologist, anthropologists, political scientists, and historians that such behaviour was heavily embedded in social relations in premarket societies but became much more autonomous with modernization.

Non-supporters of the embeddeness theory believe that economics “can better be understood as resulting from the pursuit of self-interest by rational, more or less atomized individuals. My opinion on the issue rests with authors Carruthers, Uzzi and Granovetter as I believe the “autonomous” model to be too simplistic, and although I agree that households carry most of the decision-making power in the circular flow of goods, I also believe that the government’s interaction with the economy plays helps shape consumer and household decisions. Colander (2008) states that “ Government plays two general roles in the economy. It’s both a referee (setting the rules that determine relations between business and households) and an actor (collecting money in taxes and spending money on projects, such as defence and education) (p. 64).

In conclusion, Carruthers’ and Uzzi’s (2000) paper demonstrates the complex nature of the interactions between businesses, households and government and illustrate how decisions affecting the economy are made by all three. Some scholars would argue that their approach to economics and the flow of goods and services is too socialist, as with the controversy of embeddeness, however, I would contend a socio-economic approach is the best way to explain the circular flow theory.

References

Carruthers, B. & Uzzi, B. (2000). Economic sociology in the new millennium. Contemporary Sociology. 29(3), 486-494. Retrieved on December 18th, 2008 from: JSTOR database.

Colander, C. (2008). Economics (7th ed.). New York: McGraw-Hill.

Granovetter, M. (1985). Economic action and social structure: the problem of embeddedbess. The American journal of sociology. 91(3), 481-510. Retrieved on December 19th, 2008 from: JSTOR database.

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