The Great Transformation Part 1: The Market

The Great Transformation by Karl Polanyi opens with a discussion of the changes in industrial societies in the 1920-30, which he says wiped out the social structures of the 19th Century. His explanation of that change begins with a history of markets, and their role in creating what he calls the market society. In mainstream economic theory, there is no definition of the term market, as I discuss here. I found a definition of market economy in Economics by Samuelson and Nordhaus, 2005 ed. p. 26.

A market economy is an elaborate mechanism for coordinating people, activities, and businesses through a system of prices and markets. It is a communication device for pooling the knowledge and actions of billions of diverse individuals. P. 26.

This is obviously not an analytical definition. I argue here that it means that a market economy is any economy except a command and control economy.

Polanyi takes a completely different tack in defining the term market. He begins with a discussion of the way economies functioned in the earliest societies. Production and distribution of goods, he says, are based on three different schemes. In some societies, all production from hunters and gatherers is shared as needed, a principle of reciprocity. In some, all such production is given to one person, a headman or a chief, whose responsibility it is to distribute them properly, a principle that Polanyi calls redistribution. The third principle is householding. In these societies, the basic unit of production is the household which may be as small as an extended family or much bigger. Each household is responsible for providing itself with its needs. In each society, the motives of production and of exchange of products are different, and each shares some facets of each of these three principles. Here’s Polanyi:

Broadly, the proposition holds that all economic systems known to us up to the end of feudalism in Western Europe were organized either on the principle of reciprocity or redistribution, or householding, or some combination of the three. These principles were institutionalized with the help of a social organization which, inter alia, made use of the patterns of symmetry, centricity, and autarchy. In this framework, the orderly production and distribution of goods was secured through a great variety of individual motives disciplined by general principles of behavior. Among thee motives gain was not prominent. Custom and law, magic and religion cooperated in inducing the individual to comply with rules of behavior which, eventually, ensured his functioning in the economic system. P. 57

Polanyi says that Aristotle drew a distinction between householding and production for gain. The household produced for its own needs. When production exceeded its needs either accidentally or purposefully, it sold the remainder for money to buy things it could not produce. Aristotle and Polanyi do not see this as a movement away from the basic system of householding, so long as the excess production could otherwise have been used by the household.

The genius of Aristotle is his recognition that the sale of the excess was motivated by a search for gain, not by the relations inherent in the society itself or in any household. Inside the groups, the basis of exchange remains what it was before, such as distribution by the head of the household. But gain was the primary motive for activity in the open markets. Here’s Polanyi on this difference:

In denouncing the principle of production for gain as boundless and limitless, “as not natural to man,” Aristotle was, in effect, aiming at the crucial point, namely, the divorce of the economic motive from all concrete social relationships which would by their very nature set a limit to that motive. P. 57.

It’s here we find Polanyi’s definition of the term “market”:

A market is a meeting place for the purpose of barter or buying and selling. P. 59

Polanyi explains that standard economics is based on some other understanding of the term markets, and that his research shows that the facts contradict every element of the standard definition and the role of markets in society before Mercantilism took over.

The reasons are simple. Markets are not institutions functioning mainly within an economy, but without. They are meeting place of long-distance trade. Local markets proper are of little consequence. Moreover, neither long-distance nor local markets are essentially competitive, and consequently there is, in either case, but little pressure to create territorial trade, a so-called internal or national market. Every one of these assertions strikes at some axiomatically held assumption of the classical economists, yet they follow closely from the facts as they appear in the light of modern research. P. 61

He goes on to show that as markets began to form, society began to regulate and control them. In some societies, the tools were custom and ritual. In larger societies, governments took over control, along with other institutions.

Polanyi says that markets are not part of a society, but outside it. Societies impose controls to protect themselves from these intruders.

As a side note, this simple definition coupled with the discussion of social control fits pretty well with my definition, and with my motivation for the definition, which is set out in that post. Perhaps that explains why I like this book.

A market is the set of social arrangements under which people buy and sell specific goods and services at a specific point in time.

Social arrangements means all of the things that constrain and organize human action, including laws, regulations, social expectations, conventions, and standards, whether created or enforced by governments, institutions or local traditions.

This summary of the early history of markets in The Great Transformation gives, I hope, a good sense of the basis of Polanyi’s argument. It differs from the standard economics version, where markets arose spontaneously out of people’s general love of truck and barter, and the introduction of coinage to ease the problems of different levels of value. There are substantive criticisms of Polanyi’s history, one of which was suggested by commenter Alan: The Reproving of Karl Polanyi, Santhi Hejeebu; Deirdre McCloskey Critical Review; Summer 1999, I’ll discuss some of the criticisms, but for now let’s take time to think about this alternative history. We know a lot of the support for neoliberalism arises from the story of the evolution of the market system in what seems to be a natural and inexorable process from the earliest times to the present. It makes it seem so natural, so obviously human and desirable. Polanyi asks us to consider this simple question: What if standard economic history is just plain wrong?

Notre Dame undergrad (math); JD, Indiana University at Bloomington; 1st Lieutenant, US Army.; private practice in corporate and securities law; Assistant AG in Tennessee for consumer protection and securities; Blue Sky Securities Commissioner, Tennessee; private practice, bankruptcy and corporate law.

I have had a lifelong interest in economics. For most of my career, that interest was practical, focused on the problems in front of me. Lately I have been more interested in economics as a theory, especially its impact on the lives of people like those I met in my bankruptcy practice, and on the politics of money in the US. I also enjoy reading philosophers, starting in college and steadily expanding my reading ever since. I wrote at FireDogLake for a number of years.

Generally, I think the problem facing the US is the dominance of neoliberal discourse. I think it clouds the vision, and limits the kinds of problems that can be identified and solved. For example, the existence and danger of climate change can easily be identified in a scientific discussion. However, the problem does not fit the neoliberal discourse because science insists that the pursuit of individual and corporate self-interest will lead to devastation. In neoliberal discourse, the pursuit of self-interest always leads to Eden.

The neoliberal project has two prongs. One is the police function of crushing dissent and alternative views. The police function is provided by government agencies and private and institutional actors. The counterpart is the economic system , which is operated by government and by private and institutional actors. Some of these actors operate in both spheres. I focus on the second prong.

5 replies
  1. bevin says:

    The stadial theory of progress from hunter gatherer, to pastoralist, to agriculturalist to industrialism is the great underlying problem. And not just with economic history. Built on this intellectual base are a number of theories, including liberal utilitarian imperialism and what has come to be known as Marxism, which justify just about every crime in the calendar because they end up in progress or growth.
    These ideas dominate our culture and account for its suicidal course. There is no form of economic determinism less subtle and more amoral than the idea of capitalist development.

    Polanyi believed that the market utopianism which he saw as the Victorian English model was being replaced in his lifetime by a rejection of its anti-social imperatives. Clearly he was wrong, in the short term at least: we are still living through a revival of market triumphalism which has re-instituted almost all of the features of the laissez faire economy which shocked Dickens and his peers.

    The “welfare state’ which Polanyi saw as a social reflex against the callousness of capitalism is being demolished, the worst aspects of both Speenhamland and the 1834 Poor Law have replaced it; the regulatory systems which were always a part of capitalism are being dissolved, practically through regulatory capture while the intelligentsia jeers at the impracticality of ‘red tape’, discouraging ‘wealth creation’ (the idea that wealth is created by speculators rather than labour was never more than an obscure heresy before our era).

    And Malthusian ideas are being revived, not because they explain anything but because they distract from the reality that we are here by choice, rather than the victims of providential dispensation. We live in this sort of society because we do not change it, not because there is no alternative to it. Because we allow the Koch Brothers and Governor Walker (or Stephen Harper) to rule not because their ideas are irrefutable or their publicity mesmerising, but because we aren’t angry enough or broke enough to slough them off.

    By cutting the ground out from those who insist that all is for the best, that we are evolving constantly towards a just and decent future; that the ‘market’ in its various forms spares us from risking the casualties that are inevitable in experimentation, struggle, democracy, Polanyi performed an enormous service. Small wonder that his critics are at such pains to discredit his insight that no society could possibly thrive under the rule of the ‘invisible hand.’ His argument depends not upon the broad range of anthropological and historical anecdotes that illustrate his position but upon the self evident fact of human solidarity, co-operation and community.

    • Jim Hicks says:

      Who is bevin? Because I’m not a scholar I’m really taken by someone who can “sum up” in a few words what is a vast and complex issue. Well maybe it isn’t as vast and complex as I think and my sense of “fair” encompasses all the vastness & complexity but because I can’t put it to words I am dazzled. I mean it just isn’t fair that they are taxed at a different rate than I am. I mean what would be fair would be that Google employees should have to pay a toll to be able to walk out of their office on 8th & 15th & use our sidewalks that OUR taxes have paid for.

  2. earlofhuntingdon says:

    Neoliberal descriptions of the market appear to be hypothetical and opportunistic, not analytical. They seem to change with the political opportunity. Samuelson’s simplistic definition is especially artful in what it doesn’t say:

    “A market economy is an elaborate mechanism for coordinating people, activities, and businesses through a system of prices and markets. It is a communication device for pooling the knowledge and actions of billions of diverse individuals. P. 26.”

    Samuelson’s uninformative definition seems intended to lull the textbook reader to sleep, to encourage her to skip the issue and move on to how to price widgets for profitability and bonus purposes. His “mechanism”, for example, is undefined but assumes an intentionally created device (unless we’re talking about god-as-watchmaker), designed by specific actors to achieve certain ends. Samuelson does not pursue them; he encourages dismissal of such inquiry. He avoids describing, for example, a “market’s” principal participants – governments and corporations. He lists only “individuals,” who are least among a “market’s” participants. Saying that a “market economy” is a “market”, like the rest of the definition, is circular in a male boarding school sort of way. Such artful “definitions” bore students. They get them to accept phrases as not worthy of thought or debate, and make further inquiry a useless reinvention of the wheel.

    In reality, every market is the outcome of political choices made by resourceful, enduring, politically-connected advocates intent on creating a system of winners and losers. Hamilton’s creation of a market for American government debt is a classic example. Subsistence economy farmers were clear losers; their resistance was labeled rebellion and put down with armed force. Wealthy inside speculators were the clear winners.

    Samuelson’s and similar textbook definitions deny agency and the utility of researching who are the actors, what interests they pursue, to whose benefit and detriment. Avoiding agency undercuts organized opposition to those choices. It denies government a regulatory role, except to enforce the choices made by the most powerful actors. It leaves the playing field to the largest, most powerful actors, unopposed by competing interests.

  3. Alan says:

    I think one thing we need to keep in mind is that TGT was published in 1944. That’s 71 years ago. As Hejeebu and McCloskey point out there’s a lot of work in the history of economics that has happened since, some in response to Polanyi. I would add that the same is true in economic anthropology. We shouldn’t lose sight of this fact.
    *
    Polyani plays down market type exchanges in other places and times. The market becomes a place that’s external and is tacked on to the true nature of society that operates through other types of exchange relationships. What, I think we end up with , is a set of overdrawn distinctions.
    *
    Anthropologists in the past have focused on gift exchange, and certainly this is the sort of work, Polanyi was drawing on (e.g. Malinowski, Mauss, etc.). What you see in more recent anthropology is the integration of political economy (Smith, Marx, et al.) with earlier anthropological work. See for example Gregory’s Gifts and Commodities. In chapter 1 he writes:

    With the publication of Trade and markets in the early empires, edited by Polanyi, Arensberg, and Pearson (1957), the so-called “substantivist” school of economic anthropology emerged. Polanyi distinguished between the two meanings of economic, the “substantive” and the “formal.” “The latter” (i.e. neoclassical economics), he argued (1957: 243), “derives from logic, the former from fact.” He set out to build a “substantive” theory of economics from the historical and anthropological record. Perhaps the most significant advance made by this school is the theory of modes of exchange they have developed. Sahlins’ Stone Age economics (1972) contains the most mature version of this theory. One of the important points he made was that the distinction between gift exchange and commodity exchange should not be seen as a bipolar opposition but rather as the extreme points of a continuum. The key variable in the movement from one extreme to the other is “kinship distance” (ibid.: 85–276): gift exchange tends to be between people who are relatives; as the kinship distance lengthens, and the transactors become strangers, commodity exchange emerges. This argument, which is based on a wealth of anthropological evidence, is a sophisticated restatement of Marx’s distinction between commodity exchange and noncommodity exchange. (Emphasis added)

    (And in fact, one could conceive of the kinship continuum more broadly. If you keep extending the distance you get to people who are enemies, people with whom the relationship is one of death and plunder, completely anti-social.
    *
    So what are the implications for a critique of neoclassical economics? Gregory, in the conclusion to Gifts and Commodities:

    In 1871 Jevons ([1871] 1970: Preface) complained that Ricardo shunted the car of economic science onto a wrong line. However, the conclusion that emerges from this book is that it was not Ricardo but Jevons who misdirected things. By developing the economics approach in opposition to the political economy approach, Jevons has led a generation of scholars into a cul-de-sac. He developed a closed system of thought, where subjectivist concepts, such as “modern” goods or “traditional” goods, derived from axiomatic premises, are mechanically applied to whatever new data emerge. These categories fail to describe even the basic features of a gift or commodity economy, let alone explain their interaction; they cannot even establish the elementary distinction between gifts and commodities, let alone a framework for classifying the many different types of gift and commodity economies. Indeed, as has been seen in Chapter V, they may even positively hinder the perception of reality by blinding their user to what is really happening. Jevons’ misdirection of economic analysis has had major social and political consequences because, being the dominant orthodoxy in university economics departments, it has had a major impact on economic policy making both in Europe and in the non-European parts of the world. (emphasis added)

    *
    He goes on to explain:

    The way out of the cul-de-sac, it has been argued here, is the political economy approach. The system of analysis developed by Quesnay, Smith, Marx, and others offers an open system of thought, free from the dangers of academic specialization, capable of expansion and modification in the light of new historical and anthropological data. It does not [226] provide a list of mechanical rules for applying to the data but rather a framework within which relevant questions can be posed concerning the social relations of reproduction: How are the means of production distributed between various groups that make up the society? What social form does the surplus-product take? How is this produced, exchanged, redistributed, consumed, and reproduced? And so on. The early political economists have not by any means provided all the theoretical answers to these questions. The state of the world is such that these questions can never be answered once and for all: new historical epochs and new anthropological data render old theories obsolete or, at best, limited in their applicability. The political economy approach must, therefore, be constantly changing and evolving to keep pace with the changing historical circumstances. The twentieth-century anthropological approach to the economy founded by Morgan, Mauss, and Lévi-Strauss, I have argued, expands and develops of the historical and comparative tradition of nineteenth-century political economy. The theory of commodities developed by the latter is compatible with the theory of gifts developed by the former, and a synthesis of the two in the light of evidence from PNG provides a constructive alternative to the theory of goods presented by the economics approach. This alternative is superior on all counts: it provides better concepts for describing the indigenous economy, and classifying its various types; as a consequence, it is able to provide a better explanation of the historical changes that have occurred in colonial PNG. (emphasis added)

    *
    So let’s go back to Hejeebu and McCloskey, who make a similar point:

    In matters of method, modern economics would do well to relearn Polanyi’s lesson that (of course) an economy is embedded in a society. All behaviour is embedded in ethics, the language and culture of a commercial, or an anticommercial, society.(304)

    That is to say, there isn’t some predefined model (Gregory’s “mechanical rules” “mechanically applied”) that can be meaningfully imposed endlessly on every case. There are many types of socio-economic systems. The nature of such systems at any given time and place is a matter of investigation i.e. what historians, anthropologists, and other social scientists do and economists have forgotten how to do. That’s the lesson to be learnt but, as Hejeebu and McCloskey point out, Polanyi himself is still doing something of a “chalkboard exercise” (305).
    *
    Note also that the notion of different types of exchange occurring in relationship to kinship distance is already there in Smith’s Theory of Moral Sentiments and The Wealth of Nations. Even in the famous and much quoted butcher passage in Wealth: “In civilized society he [Man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons….But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only” (emphasis added), a passage that points back to discussion in Moral Sentiments (e.g. see Sentiments Part VI Section II). Add to that Smith’s focus on institutions, laws, ethics; the need to understand the messy context of social relations; and his eschewing of “tedious or doubtful calculation”. As Gregory comments in an essay On money debt and morality, “economic anthropology is the bastard offspring of this unacknowledged father.”

    • earlofhuntingdon says:

      Nice comment. I especially liked the emphasis on commercial practices varying with kinship distance. The “extreme” of predatory relations – whether with a six-gun or a fountain pen, in Woody’s phrase – is quickly reached in practice. Those within kinship bounds exchange via mutual extensions of credit more than barter. Corporations, on the other hand, make an art of severing commercial practices from any relationship that would limit their profit-taking. Supposedly this is in aid of the false claim that shareholder interests come first. That’s not correct, but is assiduously put forth by corporate-sponsored intellectuals. In reality, it is in aid of executive power and compensation, which is greatly assisted by the corporation’s ability to act indefinitely, from management generation to management generation.

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