The Great Transformation Part 2: More on Markets

The first two posts in this series are:

The Great Transformation: Mainstream Economics and an Introduction to a New Series

The Great Transformation Part 1: The Market

In Part 1 I discussed the definition of markets in The Great Transformation, and noted that Karl Polanyi gives a definition, while mainstream neoliberal economic theory doesn’t. The absence of a definition in neoliberal theory is crucial to its success. Neoliberal economists do not have to account for the vast differences among markets: they can treat all markets as identical for purposes of their mathematical edifices.

Polanyi’s simple definition enables him to discuss the differences among markets and the different purposes they serve in different societies. In the Mercantilist era, say up to about the early 1800s, Polanyi identifies three different kinds of markets: external, internal and local. Local markets serve the local community as in the case of householding societies. Polanyi says they are not intrinsically competitive, nor are they focused on gain. P. 61

External markets are for long-distance trade, what Polanyi identifies as the carrying trade. They form at natural stops along the trails of transport, at river crossings and ports. They do involve gain, and the propensity of some people for truck and barter, but they are limited to specific sites and specific goods. They are not essentially competitive, Polanyi says. Over time, long-distant market sites turn into towns, and their principle purpose is to manage external trade. They are not a function of the nation state, but of those towns, which work to keep their long-distance markets apart from the lives of those in the countryside.

The [Hanseatic League] were not German merchants; they were a corporation of trading oligarchs, hailing from a number of North Sea and Baltic towns. Far from “nationalizing” German economic life, the [Hanseatic League] deliberately cut off the hinterland from trade. The trade of Antwerp or Hamburg, Venice or Lyons, was in no way Dutch or German, Italian or French. London was no exception: it was as little “English” as Luebeck was “German.” The trade map of Europe in this period should rightly show only towns, and leave blank the countryside—it might as well have not existed as far as organized trade was concerned. P. 66.

The third kind of market, the internal market, is a deliberate creation of the nation-state. As Polanyi explains it, the towns worked to maintain the separation between long distance and local markets, as a matter of self-protection of the town and of the town officials and elites. They feared the destructive impact of mobile capital on their existing institutions, and on their prerogatives and status.

Deliberate action of the state in the fifteenth and sixteenth centuries foisted the mercantile system on the fiercely protectionist towns and principalities. Mercantilism destroyed the outworn particularism of local and intermunicipal trading by breaking down the barriers separating these two types of noncompetitive commerce and thus clearing the way for a national market which increasingly ignored the distinction between town and countryside as well as that between the various towns and provinces. P. 68-9.

This classification of markets by their reach is convenient for the story Polanyi is telling, but there are modern counterparts. In many cities around the country, but especially in Europe, say Paris, there are local market streets, where you can find your daily food and your minor needs, like a plate to replace the one that mysteriously broke. There are weekly or bi-weekly markets where you can find all sorts of things, from a sweater to a giant vat of choucroute garnie, with nearly black juniper berries punctuating the Toulouse sausages and the hunks of pork. These are just like the local markets Polany describes, and just as important to daily life in these otherwise impersonal cities.

Scattered throughout the city, there are stores focused on specific area of France, Auvergne butchers, stores selling Charolais beef, Perigord stores, with their jars and cans of confit du canard, and many others, wine shops specializing in Champagnes or wines from Burgundy. These stores connect people to their roots in the country, and might be regarded as internal markets.

In the wealthier parts of the city there are other kinds of markets. You can find African, Indian and Near Eastern textiles and jewelry, and lots of similar things. There are shops selling Italian shoes and clothes, branded and unbranded. There is fantastic jewelry and jeweled pieces from world makers, and at prices that bug out the eyes. Each of these kinds of stores are grouped together, so that a person searching for antique French furniture only has to visit a few streets to get a good sense of what is available. This view of consumer culture reinforces Polanyi’s view that a market is a place.

Of course, standard economics rejects this simple definition. Here’s a typical reaction, from Santhi Hejeebu & Deirdre McCloskey (H/T commenter Alan)

…Polanyi never got over the noneconomist’s inclination to think of markets as literal marketplaces, rather than relationships among people in many different places…

The authors are both economists, so this is not a mistake. Their definition of a market is “relationships among people in many different places. Let’s try an example. In BKB Properties, LLC v. SunTrust Bank, (MD Tenn. 2011) the owners of the plaintiff wanted a fixed rate loan from SunTrust Bank to build a new building for their car dealership. SunTrust would only agree to a floating rate loan, and offered to sell plaintiff an interest rate swap to create a synthetic fixed rate. Plaintiff agreed. Several years later, when interest rates fell in the wake of the Great Crash, BKB’s owners wanted to refinance the note, and when SunTrust refused, plaintiff exercised its right of prepayment. SunTrust refused to accept the prepayment and release the mortgage on the land unless the plaintiff paid a stiff penalty to cancel the interest rate swap, which had a 10 year term, while the note was prepayable. The Court ruled for SunTrust, saying that this is just a routine contract case, and that the parties are assumed to understand the terms of the documents they signed.

Note that SunTrust could have purchased a swap to protect its interests more intelligently than BKB Properties, Ltd., a shell corporation set up by a car dealer. SunTrust could have canvassed offers from several banks and hedge funds, which at least sounds like a market.

But on the given facts, was this a market transaction? In the world of Hejeebu and McCloskey it certainly is. After all, these are two parties with some kind of relationship who are in different places. Swap creators don’t post prices, don’t disclose transactions in any usable way, and according to the Court don’t have any duties to their customers. The relationships that Hejeebu and McCloskey talk about are limited to Buyer Beware, and that’s good enough for them.

In Polanyi’s world, maybe not. At that time, there was no physical place one could go to buy and sell swaps, at least if you were a car dealer in a suburb of Nashville, TN. Specifically, there was no analogue to the stock market, or an electronic exchange. There was no place to find data, no place to find alternative bids, no quote sheets, and there was often negotiation over the terms of a swap which affected its value to both parties, again with no transparency to outsiders who might have learned of its existence. In sum, there was no place for any activity that sounds market-like.

Definitions matter. Polanyi’s definition gives us a good idea of what he is talking about, and his three kinds of markets are useful and convenient in his analysis. How do we talk sensibly about the “swaps market”? In what way is it like the market for choucroute garnie?

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.

20 replies
  1. earlofhuntingdon says:

    Dierdre McCloskey is conservative. Her critique of Polanyi comes as no surprise, neither does the subtle personal attack of Polanyi as a “noneconomist”. Even if true, she attacks the intellectual rather than what he says, just as she deligitimizes all critics who are not “economists”.

    Here, she criticizes one of many definitions of the “market” for being inadequate because it’s not one she and her peers have chosen. Polanyi’s discussion focuses on a real world situation – a physical market at a real place at which real people exchange real goods for credit, purchase or trade. McCloskey’s preferred market is an unreal and abstract one, which allows for greater conceptual manipulation and the use of acutely unreal assumptions (a la Friedman, the less real the better) to “prove” points that are in fact open to dispute.

    Examples would include notional supply and demand curves, whether marginal utility always declines, whether individual behavior can be aggregated to make true statements about markets, and whether such markets can be aggregated to make true statements about an economy.

    • bevin says:

      I agree entirely. Polanyi wasn’t an economist. He was very proud not to be one. He defines markets on the basis that-historically- they have served as a vent for surpluses. And that is all that they should do.
      His criticism of political economists is that they assign to the market and the economy and autonomy which neither has ever had.
      McCloskey is defending her profession and that of Mill the elder, Ricardo, Malthus and their successors from the subaltern status which Polanyi assigns it.
      The Great Transformation was an absolutely brilliant book, chock full of original ideas, flashes of insight, prophecy and intellectual energy but, as one might expect from a Hungarian financial journalist just passing through England., (he edited a collection on Christian Socialism with WH Auden) his history is not very good. His analysis of Speenhamland, for example, is both brilliant and idiotic in its rehearsal of the arguments put forward by Martineau and other apologists for the 1834 law.
      I suspect that, apart from this book Polanyi’s greatest work was oral and lost forever in the lecture halls which he graced.
      But Polanyi was essentially a moralist, who believed that humanity’s first duties were to itself (in the form of social solidarity) and to nature. He really was a Christian Socialist.

      • Alan says:

        Is McCloskey is defending her profession, Economists? She makes endless fun of the Chicago School and in this particular article takes a fairly savage swipe at George Stigler (something she does elsewhere as well). She’s not a fan of utilitarianism or neoclassical economics. She makes endless nasty jabs about mathematical models, chalk board economics, etc. What I took away from her is that Polanyi gets lots of historical details wrong but he’s going in the right direction i.e. “embedded economics”. This is essentially what people like Sahlins and others (in anthropology) and presumably economic historians and others did later on (but not Economists with a capital E). Also note the parting shot that TGT could help economists recognize the imbecility of Benthamism.

        • bevin says:

          You may well be right about McCloskey. I may be mistaken but I seem to recall that she did a fine job reviewing Clark’s weird and self indulgent Farewell to Alms.
          However, while she is right about Polanyi’s history being very thin and sometimes wildly wrong (although I would argue that it doesn’t matter very much because his theory doesn’t need the empirical basis that he cobbles together for it), she is wrong, at least on my cursory reading, in her importation of economic historians such as Rostow and neo-liberal econometricians as better authorities. For all their faults I’ll take the Hammonds and Tawney over the Cold War ideologists who waxed in the 50s and grew fat in the sixties. Polanyi would have benefited by reading Rude or Thompson or others on the left – he’d have enjoyed Peter Linebaugh for example. But his arguments would not have changed much.
          The truth is that the data in socio economic history is so unreliable and its collection has been so ideologically driven that literary sources are often far superior to what appear to be carefully constructed empirical researches: I don’t care how many footnotes there are in a piece demonstrating that the English people benefited from enclosures, farm consolidation, the game laws and all the other ‘reforms’ that came with the ‘Agricultural Revolution’ I know that the conclusions are mistaken. John Clare and William Cobbett tell me as much. So, in a round about way, did Richard Jefferies, George Bourne and Thomas Hardy.

  2. earlofhuntingdon says:

    Being a Christian Socialist – once a majority political group in Europe – would condemn Polanyi in the eyes of Hayek and his progeny. Being a moralist alone would earn him condemnation because it presupposes he would put some purpose ahead of short-term profitability – disguised behind notions of efficiency – and further enabling already tightly concentrated wealth.

    • Ed Walker says:

      It’s interesting that Krugman praised Deaton, but clings to his models, including his trade models. I’ve been thinking that change was not likely to come out of the establishment economists of any stripe, including liberals. It will come from the young economists who are in some places rebelling against the constraints of their teachers, or from outsiders, like Polanyi.

      • orionATL says:

        for me, the key to any science is measuring and interpreting (what i called guess and test :) ). the guessing of course must be informed. the more the more precise and meaningful the measuring, the better the chance of describing how some corner of reality works.

        from my remove, it is not so important exactly what theory an economist pursues, with whatever political implications, as that it involve measurement that is carefully articulated and made available for others to examine.

        deaton appeals because he seems to have taken a “wait a minute, here. let’s take a closer look” approach to some guesses (theory) that lay behind public policy prescriptions.

        it was this quality that led me to comment “in line with the spirit of these essays” a propo your work here.

        the reference to more numbers i tossed in because that is my strong bias,not in any magic of numbers butcin thecmagical insights a scientists can get from combining careful measurement and insightful interpretation. i was thinking, to, of some of the first large-scale public policy and economics experiments of the ’70’s, e.g.,
        http://www.irp.wisc.edu/research/nit.htm.

        this is a particularly important confluence of economics and policy that will continue whether we will it or not and which can cost billilons while failing, e.g., “trickle-down economics” and the bush disguised tax cuts for the wealthy of 2000 ff. and its repetition in today’s republican candidates’ tax policies.

        in any event, a belated thanks for bringing to the emptywheel site a very attractive format for discussion that contrasts pleasingly with the site’s day-to-day events mainstay.

      • Alan says:

        “change was not likely to come out of the establishment economists of any stripe, including liberals”
        *
        I think that’s true. But as I’ve pointed out before there is a whole alternative and long-established field of economics that exists outside the discipline of Economics and spends a good amount of time laughing at the stupidity that is neoclassical economics (i.e. see my long post in Part 1). It’s not that a real economics is missing.
        *
        But merely having better explanations doesn’t bring about change. It’s doesn’t even mean people outside your own little community will read you, never-mind take you seriously. Neoclassical economics and neoliberalism are ‘true’ because they are embedded in social relationships and practices that keep them in place.
        *
        What’s the inflection point (if there is one)? How does one get there? And what comes after? (It isn’t necessarily better.)

        • haarmeyer says:

          Alan, I read your long comment on the Part I, and your comments here. But I don’t think that some uses of the term market that are common to economists are necessarily at odds with yours, with which I agree. One can abstract from your definitions based on exchange and its extensions, a viewpoint to observe those exchanges collectively and define the market as the entity that establishes the value of whatever is exchanged. That doesn’t let anyone off the hook to describe what a market actually looks like or how they arise, or to ground their descriptions of how markets emerge in sociocultural and anthropological fact, but it does allow the commonly viewed use of the term to be an abstraction of the well-grounded anthropology.

          Such an abstraction process is common in mathematics, and is subject only to the restriction that what you empirically define to be a market also be a market under the abstraction, not that whatever else the abstraction may encompass must fit your definition. It’s known as generalization in mathematics, my anthropology is too old and too rusty to know what it might be called there.

          • Ed Walker says:

            The question of abstraction in the definition of the term market is, I think, helpful. I don’t think economists have done this properly. My reading says that they prefer not to define the term. They want to rely on a vague understanding common in routine discourse, so that people can think they are talking about the same things. As an example, the business press commonly writes lazy sentences like: The markets responded negatively to the decision of the Fed to do X at its last meeting.
            .
            There’s another example in your comment. You write that a market is the thing that sets “values”. I think most economists would say that markets only set prices. Values are set by the participants.
            .
            The question of price setting is also more complicated than you suggest. Consider the BKB case I describe in this post. What is the price-setting mechanism for interest rate swaps, and how does it work? It has the strong feel of “how much can I squeeze out of these people before they refuse to buy.
            .
            Here’s another example. Two people want to buy the same make and model of a car. We can be sure they won’t pay the same price. How is the price established?
            .
            I think there is substance here, but I don’t see how to create rules for it.

            • jonf says:

              CNBC takes it as their job to explain what is happening in the market. When the Fed was considering raising rates they thought the market would go down, but when the Fed didn’t and the market went down, it was clearly the fed had disappointed everyone. And Rick Santelli can never be wrong on his prognostications. China has mostly been the cause of market downturns, a convenient shill. And it works.

              On price and value, Oprah Winfrey just bought 10% of a stock and the stock went up 75%. So, some prognosticators would say she unlocked the value. At the same time, some are selling it short. Go figure. It’s all in the eye of the beholder. If you like your car, it has value to you, if not, not so much. you can chase whatever “value” is around forever with never coming to a clear conclusion.

  3. Ed Walker says:

    As you can see from the constant returns to a discussion of Markets, I am obsessed with the issue. It lies at the heart of neoliberal economics, and at the heart of what Polanyi calls “liberal economics” which is the predecessor. Philip MIrowski says that neoliberals refuse to define the term.
    .
    I have searched the internest several times looking for a definition better than the one offered by Hejeebu and McClosky, or by Mankiw or Samuelson, and I have not succeeded. I used Google Scholar, and did some other searches, but I am feeling frustrated by this.
    .
    If anyone as any suggestions, either for materials or places to search, I’d appreciate hearing either here or at masaccio68 on the gmail.

    • Alan says:

      Ed,

      why do you need to define this thing called a market? Maybe it doesn’t exist as a distinct thing that can be clearly defined across cultures and historical periods. Maybe it’s mired in ideology. Maybe that’s why you are having such a hard time coming up with a satisfactory definition. Putting my anthropologist’s hat on, why don’t you just back up and start looking at social relationships, culture and different types of exchanges? I’m not sure market is a useful analytic term. Rather it’s the term that begs for analysis. What does it’s use accomplish for different users in different social contexts at different times?

      • Ed Walker says:

        Of course that is exactly what I think, that the term describes a number of different social and institutional arrangements, and has always done so. It seems to me that the idea of “market’ is the foundation of neoliberal economics, and that it presents a good way of hacking at the roots of that ideology. If markets are not the same, then they cannot be treated as though they were, and this hits at the heart of the idea of free markets as a proper basis for a society. I take that to be the point of The Great Transformation, just as the idea of free markets lies at the heart of the analysis of Jevons’ and the other economic theorists of what Polanyi calls Liberal Economics.
        .
        I keep working to see if somehow I am wrong about this, but so far, I feel vindicated so far. I’m hoping that this will be useful in an assault on the economic discourse that is poisoning the political areaa. Of course, I am not optimistic that persuasion based on logic or clear thinking works any more..

        • earlofhuntingdon says:

          I agree that a vague concept of “market” is essential to the NTC, as is its reduction of all human interaction to so-called market exchanges. This denies the legitimacy of working in community, whether Amish barn building, pre-enclosure English village life, even the idea that people can and ought to join together to meet common needs as they arise in their own time and place.

          Market reductionism denies the legitimacy of such things. This is startlingly hypocritical, in that the NTC is a splendid illustration of effective enduring networking, diverse people acting together in pursuit of a common purpose, well-resourced and acting over generations in time. The NTC is engaged in a culture war, extolling their own Joint efforts but claiming as illegitimate those of public employees, students and faculty, average citizens and voters. Unions are bad; cartels and joint lobbying efforts such as the US Chamber of Commerce are good. Four legs bad, two legs good. A splendid case of special pleading that would leave only one team on the field, and the results of the game a foregone conclusion.

  4. bevin says:

    “Hobbes’ grotesque vision of the State-a human Leviathan whose vast body was made up of an infinite number of human bodies- was dwarfed by the Ricardian construct of the labor market: a flow of human lives the supply of which was regulated by the amount of food put at their disposal. Although it was acknowledged that there existed a customary standard below which no laborer’s wages could sink, this limitation was thought to become effective only if the laborer was reduced to the choice of being left without food or of offering his labor in the market for the price it would fetch..” Page 164

    “The three or four large famines that decimated India under British rule since the Rebellion were thus …a consequence…of the new market organisation of labor and land which broke up the old village without actually resolving its problems.” (Polanyi wrote this during the last of these ‘famines’ in which millions of Bengalis died) Page 160.

    Polanyi saw the ‘market’, so lovingly described by economists, a maelstrom into which the flotsam and jetsam from the smashed communities of rural England and Ireland, were atomised and whirled away to their fates. He regarded the ‘market’ as a deliberate creation of the State which had carefully- through game laws, enclosures, anti trade union laws, the New Poor Law, even the long campaign, began in the Reformation, against holidays, feasts and customary doles, laws against gleaning etc and the substitution of animal and machine labour- pared away the labourer’s ability to survive outside of the labour market, leaving him entirely at the mercy of employers.

    Polanyi was very interested in the history of markets in all their wide variety, but he saw the C19th Liberal constructed market as a terrible engine of social destruction against which society’s instinctively sought to protect themselves. No doubt he was right about the instinct in question but he was very optimistic- perhaps a creature of the times- in his view that the resistance had been successful. He did not live to see Pinochet, Thatcher and his old antagonist Hayek being empowered.

  5. bevin says:

    I should add to ‘the State’s careful campaign’ to break popular resistance to the market, the introduction of police by Peel and the employment of large detachments of London police (including many spies undercover) to crush resistance.

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