Our economy is built on the idea of fair trade. We trade value for value and this allows for goods and resources to move to wherever they are most needed. Of course that’s not ultimately what happens (rather, 1% of the population somehow end up owning 90% of the wealth…) but that’s the general idea.
This adheres nicely to social exchange theory: the notion that human interaction is predicated on this kind of exchange. But what else can be described in this way? Proponents of the theory would claim that most social behavior can be described as a series of exchanges. The idea is that everything from friendships, to business relationships, to romantic entanglements can be described as being weighed up via a cost-benefit analysis along with the comparison to alternatives.
The Implications of Social Exchange Theory
Social exchange theory adheres nicely to Occam’s razor – breaking down social interaction to a very fundamental set of rules. The key assumptions of social exchange theory are that:
- Humans seek rewards and will avoid punishments
- Humans are rational
- Our valuation of cost and rewards is somewhat subjective
Using this as a basis, it can therefore be assumed that we will judge our relationships on the basis of what we stand to gain from them and what we would lose by exiting them.
We remain friends with people who do us favors, make us laugh and look after us when we are vulnerable. We eventually break off relationships with people who appear to be parasitic and who only ever show up when they need something.
Likewise, a business will likely continue to use the services of a third party service provider only for as long as the benefits outweigh the literal costs of doing business with them.
We stay in romantic relationships if they give us sex, intimacy and financial security and break them off once that partner places too much strain on our emotional wellbeing.
Interestingly, social exchange theory also postulates that our ultimate decision as to whether a relationship is rewarding, will be largely subjective. This is likely to be based on our ‘comparison level’, which in turn are born from our past experiences and social influences. In other words, we will tolerate a certain amount from a relationship based on what we witness in our parents’ marriage and what we have been taught to expect by friends and by Hollywood.
While this might seem like a very cold and basic explanation of human interaction, it has nevertheless been used successfully to predict a range of human behaviors and socioeconomic phenomena.
If you have ever read the excellent book SuperFreakonomics, you can see examples of this in action. Here, the author Stephen J. Dubner manages to demonstrate the predictable ways that humans will respond to all manner of economic or social changes in a range of different aspects of life.
Is Social Exchange Theory Accurate?
But does that mean that this is a perfect theory? Not at all. While social exchange theory has many fans and certainly can be useful on a macroscopic level, it is also flawed in many ways.
For one, the assumption that humans are rational creatures is one that is very much open to debate – as many of our decisions seem to stem from impulse or emotion. It’s also very hard to explain genuine demonstrations of altruism via this theory. While some attempts exist (such as the idea of ‘reciprocity norms’), this really can’t explain every example. How about the love that a mother has for her child for example?
Perhaps the best way to decide for yourself is just to think of your own relationships in business and in life: are you in them only for what you can get out of them?
Do you think the other party is?