The Wave-Particle Theory of Relational Economics

THE WAVE-PARTICLE THEORY OF RELATIONAL ECONOMICS

The wave-particle theory of light provides a metaphor for the application of relational economics.  The particle theory of relational economics, expressed in several definitions of social capital, suggests the relationship is a capital good (an asset) or even a medium of exchange.  We are also proffering a wave theory of relational economics, which suggests that the relationship is a dynamic or motivating energy with intrinsic value.

The Particle Theory.  The social capital movement has moved the relational economic paradigm forward in a major way.  Social capital theory addresses Block’s (2002) concern that relationships are not a currency in economics, by recognizing the value of relationships in interactions and trade.  Putnam points out that there is economic value in social networks: “Just as a screwdriver (physical capital) or a college education (human capital) can increase productivity (both individual and collective), so too social contacts affect the productivity of individuals and groups.”  He further notes that “Whereas physical capital refers to physical objects and human capital refers to properties of individuals, social capital refers to connections among individuals—social networks and the norms of reciprocity and trustworthiness that arise from them."  Lin distills the description of social capital to:  “investment in social relations with expected returns in the marketplace.”  Lin further notes that “Individuals engage in interactions and networking in order to produce profits.”  Further, “capital is seen as a social asset by virtue of actors’ connections and access to resources in the network or group of which they are members.”

So while developments in social capital are recent and are still emerging, some definitions of social capital retain elements of greed-based self-interest economic theory:  they retain a profit motive, assuming that there must be a selfish benefit to the trading party (e.g., the relationship exists to produce a profit).  Some social capital theories treat social relationships as “capital” and attempt to quantify social factors and place them in the economic equation.  So, much like the accountant who must have as many debits as credits, these theories quantify the social relationship in economic terms so that the ledger is always in balance.  For example, they may say that the trade with a less-well-off childhood friend is quantified by the $2,500 cash the friend actually pays for the car plus the $500 value of the relationship.  In this respect, social capital theory does not present a new economic paradigm, but interjects the relationship into the self-interest economic paradigm with different (social) variables to explain what the economic theory itself does not explain.

While still treating social capital as capital which facilitates an exchange, Robison, Schmid and Siles move beyond economic self-interest definitions of social capital to the relational economic paradigm, based on enlightened self-interest.  They define social capital as sympathy, an internalization of another’s well-being – the ability to care about another:  “Social capital is a person’s or group’s sympathy toward another person or group that may produce a potential benefit, advantage, and preferential treatment to that other person or group of persons beyond that which might be expected in a selfish exchange relationship.”  Under this paradigm, a social network is a place where social capital lives but it is not social capital.  Social capital can be used to increase profits, but that is not what social capital is.  To them, a definition of social capital must satisfy the requirements of capital and be of the form A=B (i.e., capital = sympathy).  In social capital, doing good for others is motivated by self interest that derives from sympathy.  Since their definition results in the internalization of another’s well being, the self-interest out of which a person acts is based on that internalization and includes sympathy for the other person as well as incorporating their own needs.  So to act inconsistent with the needs of the other person would be acting against their own enlightened self-interest, eroding their internal integrity.  In a sense, this definition incorporates the common good (the balancing of “what can I use” with “what can I contribute”) right within the person’s own enlightened self-interest, and interaction takes place in the context of this enlightened self. 

Under this paradigm, in the relational interaction the trading range expands and socio-emotional goods are exchanged as well as objects and money.  Socio-emotional needs, which are not satisfied in arms-length relationships, are satisfied from sympathetic relationships.  In other words, if the only good I receive in the exchange is the physical good, the terms and levels of exchange will be different than if we are exchanging both physical and socio-emotional goods.  So out of self interest we develop relationships of sympathy because we find in these that our needs are met and incidentally, they are more productive economically.  I have compassion because of my sympathy for you and I have made your well-being the same as mine.  When this occurs, my decisions account for how they will benefit you as well as me – I wouldn’t complete a transaction unless we were both benefited.  In other words, we only exchange if we are both made better off and are receiving something of value greater than what was sacrificed.  If what I have is of more value to you than to me, you must offer to me something that is of more value than what I give up – otherwise I refuse to exchange.  Social capital doesn’t change this requirement, it only provides another way that I can be benefited by the exchange.  For example, if I care about you, then I receive some positive reward from seeing your well-being improved.  The alternative is to assume we make choices that leave us worse off.

The Wave Theory.  In the wave theory of relational economics we see relationships not as a capital good, but as a dynamic which has intrinsic value of its own.  As Block (2002) notes, we can see relationships as an end in themselves.  In other words, since I am concerned about your well-being, I will act in a manner to delight you.  The value of this relational dynamic is illustrated by Jim Graley’s experience:  his typical auto body repair shop was unfriendly to women (e.g., pinups on the walls of scantily clad women; unfriendly waiting room).  He read in a GM Newsletter that women are the key decision makers in 70% of new car purchases, and wondered whether that would apply to car repairs.  But he realized that his shop did not match the new-found dynamic, so he modified his systems and processes to enhance his business’s relationship with women – to show them that he cared about them – because he sympathized with their unpleasant experience when they visited his shop.  He cleaned up the shop, purchased uniforms, hired a woman facilitator, and provided a car wash after the car repair.  In other words, he was balancing their needs with his own self-interest – he sympathized with them, making their well-being part of his own.  His new-found relationship with women resulted in a tripling of his sales in one year (from $525,000 to $1.6 million).  (Conlin.)  So the organization which understands both the dynamics of the relationship as well as the dynamics of need can integrate the needs and resources in a manner to marshal the organization’s resources to develop those relationships, resulting in the expansion of existing markets or even the development new markets. 

            So in relational economics and under Robison, Schmid and Siles’ definition of social capital as sympathy, rather than a public or common good resulting unintentionally from a focus on economic self-interest, instead value is created from the balance of economic self-interest with the public good or customer needs.  In fact, under relational economics, profit does not remain invisible, but rather feeds back into the system as a resource to sustain relationships with constituents, including customers, employees, and shareholders.  Deming (1986) taught this principle in his description of the “Chain Reaction” which begins with improving quality.  This decreases cost and improves productivity.  This permits firms, with better quality and lower price, to capture the market (i.e., strengthen relationships with customers), permitting the business to stay in business and provide jobs and more jobs.  As Scholtes has noted, this "Chain Reaction" ultimately provides a "return on investment" to the shareholder, who is also a constituent.  Or, conversely, as Block (2002) noted, if an organization is not able to serve its customers, it has failed to serve its internal constituents.