The Social Network And Financial Crisis

In 2007 the U.S. Subprime Crisis broke out and incurred the global financial crisis. Largely because the Chinese capital market is underdeveloped and limitedly opened to the global market, Chinese financial security has not been significantly affected during this period. However, China is in the transition towards the financial society with gradually loosing governmental restrictions, In this background, it's important for us to understand correctly the financial market and the financial crisis. Therefore, the research on the financial crisis is necessary and of great realistic significance.Financial market and financial crisis have traditionally been considered to be the topic of economics; while in sociology, the related researches are very limited. In fact, financial development depends on the social institutions and the culture and the financial market activities are also embedded in social network. Therefore, sociology is obliged to make contribution to this important social area.Through a study of a famous historical case:the South Sea Bubble, this paper answers a fundamental question:How do the financial bubbles or crisis come out? And the paper argues that the social network as well as the culture and social institutions play a key role in the boom and burst of financial bubbles.The paper amends the tendency of ignoring the actors and other social factors in the structural economic sociology and takes the motives of actors, social institutions and cultures into the network analysis framework. Besides, the paper is also opposed to the profit maximum hypothesis and atomized methodology of economics. By analysis of the historical records of the South Sea Bubble, the paper argues that financial crisis is a process that the financial institutions mobilize the "loose" network of mass investors via the "dense" network of the upper class and the paper draws four propositions as follow:(1) Multiple motives:Financial actors have multiple motives rather than single economic self-interest motive; multiple motives are molded by the social network, cultural and institutions;(2) Network position:Network positions with potential resources are the approaches of the economic strategies and have strong influences on the economic outcomes to both the financial institutions and the mass investors;(3) The advantage of the weak-embeddedness:Financial Institution of strong-embeddedness can mobilize efficiently the social network resources, but in the crisis, the institutions of weak-embeddedness are more likely to survive for the greater flexibility;(4) Network density:Dense network is convenient for share information while loose network is conducive to spread emotions. Loose network structure of the mass investor promotes the spread of optimistic or panic, which leads to collective action.According to the above propositions, this paper argues that the reason of the repetitions of such bubble event is that the social network structure of investors in three hundred years did not change too much.In the end, the paper briefly discusses what we can learn from the South Sea Bubble to understand and prevent the contemporary financial crisis. The research is divided into five chapters:Chapter 1, raise the issue of this research and review the existing studies on the financial crisis and the South Sea Bubble in economics and sociology respectively. On this basis, propose the hypothesis that the financial crisis is a process that financial institutions mobilize the lower loose network via upper dense networkChapter 2, analyze the motives of actors, including government, financial institutions and mass investors in the South Sea Bubble and argue that actors have multiple motives, which form in their social networks and cultural and institutional background. Chapter 3, analyzes action network of the financial institutions and point out that the successful launch of the South Sea Scheme is attributed to its efficient use of network resources. By the comparison of the respective networks of the South Sea Company and the Bank of England, argue that corporate actors of weak-embeddedness is more likely to survive in a crisis because of its flexibility and independence.Chapters 4, provide the overview of the mass investor and the institutions which guarantee the transactions. By case study of an investor network, argue that the network resources are crucial to the economic act and outcome; the loose network structure leads to collective selling and market collapse.Chapter 5, summarize the research and make further discussion. The basic conclusion is that the financial crisis forms and develops in the social networks and a specific cultural and institutional context. The four propositions help to understand and prevent the contemporary financial crisis.