Networking to the Top
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Organizations Leadership Apr 2, 2012

Networking to the Top

Social connectedness could explain wealth inequalities

Based on the research of

Willemien Kets

Garud Iyengar

Rajiv Sethi

Sam Bowles

In the early 1850s, the managers of Hawaiian sugar plantations were facing a labor crisis. Native Hawaiian workers were quickly disappearing, with some moving to California for work and many others dying from disease imported by foreigners. So the managers looked westward, and began bringing in troves of workers from China.

This new labor source was cheap and efficient, but within a few decades, presented another problem. The predominantly Chinese workforce often organized strikes against low wages and long days of manual labor. Many managers argued that the best way to solve this problem was to recruit workers from a wide range of countries so they couldn’t understand one another. As Planters’ Monthly magazine stated in the early 1880s, “By employing different nationalities, there is less danger of collusion among laborers, and the employers … secure better discipline.”

By the turn of the century, plantations were full of workers not only from China but also from Japan, Italy, Korea, Portugal, Puerto Rico, and the Philippines.

Communication and Productivity

This historical anecdote shows that profits can be made from intentionally stifling communication among employees. In a similar vein, encouraging social bonds among employees can sometimes sink productivity. In the 1930s, for example, many American companies sponsored social activities for workers, hoping to promote loyalty to the firm. Instead, these efforts led to stronger bonds between workers and, ultimately, labor unions antagonistic to the company’s interests.

“If you want to be rich, essentially, you want to make sure that the people you interact with are isolated.” — Willemien Kets

“These examples are hard to understand with standard economic theory,” says Willemien Kets„ an assistant professor at the Kellogg School of Management. You would expect, for example, that firms would encourage workers to communicate with each other in order to boost cooperation and productivity. And you would not expect that direct investments in workers through social programs would turn them against the firm.

In a forthcoming issue of Games and Economic Behavior, Kets and her colleagues propose a new mathematical model that can explain these situations. At its heart is the idea that the less socially networked a workforce, the greater the level of inequality between employer and employee.

“If you want to be rich, essentially, you want to make sure that the people you interact with are isolated,” Kets says. “Then they can’t cut you out.”

A Hypothetical Scenario

Kets and co-authors Garud Iyengar and Rajiv Sethi of Columbia University, and Sam Bowles of the Sante Fe Institute, demonstrated this idea in a series of mathematical proofs. To understand their model, consider a simple hypothetical scenario.

Three people—Ann, Bob, and Carol—are working together on a sugar plantation. Bob can talk to Ann and Carol, but Ann and Carol are isolated from each other because they speak different languages.

Working alone, any one of them can harvest only, say, one unit of sugar cane per day. But because of economies of scale, two workers can together harvest four units, and three workers can harvest nine units.

Let’s also say that Ann and Carol know that by themselves, they can only produce one unit per day. So as long as they are paid for one unit per day, they will not attempt to leave the plantation.

Bob, though, knows that the three of them together can make nine units per day. He also knows that he only has to pay Ann and Carol for one unit apiece, leaving him with the other seven units. “Bob knows everyone, and Bob gets rich,” Kets says.

Suppose, though, that Ann and Carol figure out how to talk to each other. “Then the whole picture changes,” Kets says. Ann and Carol can coordinate what the model calls a “deviation,” in which they work together to produce four units. Bob must pay them for four units to keep them from leaving, which leaves him with only five units—a smaller profit than before. In other words, as Ann and Carol become more socially connected, the difference between their wealth and Bob’s wealth shrinks.

Real-World Examples

As it turned out, a similar thing happened on the real Hawaiian plantations. After a few years of working together, laborers of different nationalities learned to speak in a common language, known as “Hawaiian Pidgin.” In 1920, they organized the first multicultural strike against plantation managers.

The model, however, is based only on a few historical examples, and it is unclear how well it will hold up when used for situations in which workers aren’t totally isolated from each other. Kets says testing it under modern work scenarios is an important next step.

It is also important to note that tight social networks in and of themselves are not sufficient for success. The Occupy Wall Street movement, for example, which is protesting the government bailouts of large banks, has grown rapidly thanks in large part to the virtual networks of Facebook and Twitter. This suggests that it has become easier to build coalitions among like-minded people.

But if these networks do not have the financial resources to create an alternative marketplace—such as new banks that operate according to their egalitarian values—then the threat of deviation would not be real, and Kets’ model would not apply.

It seems like more and more of people’s capital is actually social capital: “You know many people, and you can easily get to know other people,” Kets says. “But things get more equal only if more social capital goes hand in hand with access to other forms of capital.”

Note: Historical information about the Hawaiian plantations gleaned from Pau Hana: Plantation Life and Labor in Hawaii 1835–1920, by Ronald Takaki, 1983.

Related reading on Kellogg Insight

How Public Outrage Affects CEO Pay: Compensation changes but does not always decline

Today’s Rising One-percenters: The growing gap between the very rich and everyone

Firming Up the Foundations of Game Theory: Elucidating the role of information in strategic interactions

Featured Faculty

Member of the Department of Managerial Economics & Decision Sciences faculty until 2017

About the Writer
Virginia Hughes is a freelance science writer based in Brooklyn, New York.
About the Research

Kets, Willemien, Garud Iyengar, Rajiv Sethi, and Sam Bowles. 2011. “Inequality and Network Structure.” Games and Economic Behavior, 73(1): 215-226.

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