In 1929, Hungarian writer Frigyes Karinthy’s short story Chains set into motion the theory of social networks. Karinthy’s characters believed any two individuals could be connected through, at the most, five acquaintances.

In his story, the characters create a game out of this notion. He wrote: “A fascinating game grew out of this discussion. One of us suggested performing the following experiment to prove that the population of the Earth is closer together now than they have ever been before. We should select any person from the 1.5 billion inhabitants of the Earth—anyone, anywhere at all. He bet us that, using no more than five individuals, one of whom is a personal acquaintance, he could contact the selected individual using nothing except the network of personal acquaintances."

Almost a century later, we are discovering the power of networks everywhere—in job searches, in finding a restaurant, or in buying a new cellphone. What was considered to be the stock-in-trade of sociologists is now a new lens through which economists view development.

Networks are seen to solve co-ordination problems and provide a cushion to individuals in case of market failures, especially in rural areas where formal institutions are often absent.

In a recent The National Bureau of Economic Research (NBER) research paper (mintne.ws/1uxFZ2x), Erica Field of Duke University, Seema Jayachandran of Northwestern University, Rohini Pande of Harvard University and Natalia Rigol of the Massachusetts Institute of Technology (MIT) suggest that socially networked women may do better in business than others.

In their study, they selected customers of SEWA (Self-Employed Women’s Association), a women’s bank in Ahmedabad, for a business counselling programme. The sample was divided into two categories: one set of women attended the programme alone and the other set comprised customers who were invited with a friend.

Field and her colleagues write, “Involving a friend led participants in our two-day training program to double their demand for loans and significantly expand their business activity, resulting in higher household income. Those who belonged to more restrictive social groups were particularly sensitive to peer involvement. Thus, programs designed to empower women through business training or by giving them loans or cash may be more successful if they harness peer support as part of the program design, particularly when working with clients from restrictive social backgrounds."

Members of historically disadvantaged groups can also benefit from forging new ties.

Rajnarayan Chandavarkar, in his fine history of industries and labour market networks in Mumbai (then Bombay) during the British Raj titled The Origins of Industrial Capitalism in India, notes that known connections and kinship networks benefited a number of people looking for jobs in the city.

But he also pointed out, “It should not be supposed that such segmentation was always rigidly maintained within neighbourhoods, caste or religious ties or network based on kinship or village. Moreover, the social connections which shaped them were diffuse and varied in origin and substance."

The emergence of Kathiawadis in the diamond business in Mumbai perfectly illustrates how new connections are forged as an industry grows.

The story goes that in 1970s Palanpuris, the dominant group in the industry, supported Kathiawadi enterprises when they got an opportunity to widen their market. Cambridge University economist Kaivan Munshi, in his study (mintne.ws/WOjhXi) on networks within the diamond industry in Mumbai, observed an unusually high number of Palanpuri firms with branches abroad in 1979, thereby allowing Kathiawadis to establish their businesses. The Palanpuris assisted Kathiawadi enterprises financially, as a result of strong ties the two groups had developed over years.

Do networks always operate seamlessly, allowing everyone to forge ties and learn about innovations? The answer depends on the context. ‘Wisdom of crowds’ may sometimes be a case of herding or blatant copying of what others are doing. We should be more careful in interpreting whether it’s interaction or mere imitation that drives individual behaviour, several studies point out. In a study (mintne.ws/1pbYt37) on the take-up of Bt Cotton in three villages: Aurepalle in the Mahbubnagar district, Andhra Pradesh and Kanzara and Kinkhed in the Akola district of Maharashtra, Annemie Maertens of the University of Pittsburgh finds that farmers, instead of observing their neighbours’ experience with the new cotton seeds, were merely imitating the more progressive ones.

Most small farmers typically followed a large landowner who had already adopted the improved seeds.

The most influential node in a social network is not always the richest person in an area.

In a recent NBER working paper (mintne.ws/1uoQztu), Abhijeet Banerjee of MIT, and Arun Chandrasekhar and Matthew Jackson of Stanford University show that village gossips may be most effective in spreading information about new seeds or new technology. Gossips sit at the heart of informational networks that ensure messages are spread rapidly, but they are not often local community leaders.

Do networks always work to advance the common good? Not necessarily.

Christopher Barrett of Cornell University cautions (mintne.ws/1CWqKou): “...one must guard against an overly romanticized view of social networks and common knowledge, since communities can equally prove exploitative or dysfunctional. The more bounded the network, meaning the greater the role of strong ties—also known as “social closure" in the sociology literature—greater the power conferred on individuals in position of internal authority."

He further adds “...there is no reliable rule of thumb for telling the difference ex ante between those communities whose social structure proves hospitable to promoting innovation and those that prove inimical." This is where underlying institutions become so important.

Sumit Mishra is a research scholar at the Indira Gandhi Institute of Development Research, Mumbai. Economics Express runs weekly, and features interesting reads from the world of economics and finance

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