Israel Kirzner, my great teacher and a pioneer in the study of the market process, often says that entrepreneurs tend to discover what they have an interest in discovering.  A plastic surgeon, for example, isn’t likely to find a new and profitable way to use web-based teaching technology, nor is an economics professor likely to discover a marketable new method for applying silver nitrate to skin healing.

The common sense of this is that plastic surgeons and economics professors live in different social worlds.  But exactly how do their milieus convey relevant information to them? I think the answer reveals something important about the matrix within which economic development and entrepreneurial discovery take place.

Weak and Strong Ties

In one of my classes last week we discussed the sociologist Mark Granovetter’s pioneering article, “The Strength of Weak Ties” (pdf). It’s one of those seminal, brilliant articles that have made a real contribution to our understanding of how the social order works.  In Granovetter’s view, people do not operate completely atomistically but neither not they impelled by their environment.  They are instead embedded in various social networks via either strong or weak ties.

According to Granovetter, “The strength of a tie is probably a … combination of the amount of time, the emotional intensity, the intimacy (mutual confiding), and the reciprocal services which characterize the tie.”  The tie between a mother and child or between best friends is typically stronger than between two coworkers or friends of friends.

But Granovetter argued that in strong-tie networks, say, of very close friends, so much time and so many places are shared that its members have pretty much the same limited knowledge about a lot of things.  Any new and potentially valuable information would most likely come from outside the group.  The conduit for that information then must be a “weak tie” acting as a “local bridge” between one network and another.

(The helpful terms bonding social capitalstrongly tied social networksbridging social capital, and weakly tied social networks come from Robert Putnam’s book Bowling Alone.)

Granovetter studied a sample of individuals to see how they acquired information about their last job. He found that the most important sources tended to be people with whom they were not strongly tied, which corroborated his thesis.

Coincidentally, in the latest New Yorker, Malcolm Gladwell has an essay, “Small Change,” in which he proposes that strong ties are needed among individuals if they are called on to make great sacrifices – as those in the Civil Rights movement in the deep South often did – rather than weak ties, which are more effective in marshalling concerted action that call for smaller sacrifices, such as in getting people to show up for a campaign rally.

Weak Ties and the Market Process

Even though one often hears war metaphors used in business – “there’s a real battle in the cat food market” – what’s really involved in trade is quite the opposite:  peaceful, voluntary exchange.  Sacrifices and courage are of course needed when making a risky investment, but that is qualitatively different from what what’s needed on a real battlefield where competition is literally “cut throat.”  In such a dangerous place, comrades depend on very strong ties to keep order and discipline.

The buyers and sellers that constitute the free market typically don’t know one another well or even at all.  (Think of Leonard Read’s classic “I, Pencil.”)  Hierarchy among rulers and subordinates requires strong ties, but the horizontal relations among buyers and sellers are more dependent on networks, especially networks that are bridged by weak ties.

So why do entrepreneurs tend to discover what they have an interest in discovering?  Part of it, of course, is that they have the experience to recognize when something in their own field might be a profit opportunity.  But what draws their attention to that opportunity in the first place?  Well, an acquaintance or a friend of a friend might say:  “Hey, somebody just told me something that may be of interest to you….”  In other words, weak ties and the social networks they bridge, convey novel information to entrepreneurs who can then interpret it as profitable or not.

Dynamic Networks and Economic Freedom

Precisely because economic development depends so heavily on weak ties, it’s important to appreciate the environment in which they can emerge.  And in the market process, as agents move freely from place to place, these weak-tie bridges have to form and dissolve constantly.  That environment is economic freedom: private property, free association, and the rule of law.

Ludwig von Mises, the great Austrian economist and the teacher of my teacher, explained how money prices that emerge from the free exchange of private property are indispensable for calculating profit and loss and for making rational choices.  Granovetter and social network theory in turn can explain how entrepreneurs acquire the knowledge that enables them to successfully interpret those prices and often even the knowledge of those money prices themselves.

But forming weak ties requires trust – that is, reliance on others who might take advantage of you – because we’re talking about initiating contact with people and ideas unfamiliar to us.  Fortunately, where economic freedom predominates, the drive to improve one’s situation as one sees it – the principle of human action – has been an almost irresistible force behind the emergence of the conventions of tolerance and trust.  Profit-seeking entails tolerating profound differences in order to take advantage of those differences through trade, and trusting that others will reciprocate.  Just as we have to leave our comfort zones to sample an exotic cuisine, confronting challenging new ideas often takes a leap of faith.  The fruits of all this have been unprecedented social cooperation and the creation of unimagined wealth.

Weak ties make possible the Great Society.

(This column first appeared October 12, 2010.)

Sandy Ikeda
