Wednesday, July 1, 2009

Polanyi on the market

Karl Polanyi's The Great Transformation is a classic statement of a polar position in the issue of the universality of instrumental rationality and market institutions in explaining concrete historical circumstances in the recent and distant past. Polanyi maintains that the concept of economic rationality is a very specific historical construct that applies chiefly to the forms of market society that emerged in Western Europe in the early modern period. Market behavior came to replace other forms of motivation within European society in this period, and individuals came to act more and more on the basis of a calculation of self-interest. However, Polanyi holds that this form of behavior, like the economic institutions of the market within which it emerged, is highly specific to a particular time and place. To make use of this model of action as though it were a universal feature and determinant of human behavior is as unjustified as it would be to extend medieval chivalry to all times and places.
No society could, naturally, live for any length of time unless it possessed an economy of some sort; but previously to our time no economy has ever existed that, even in principle, was controlled by markets. . . . Gain and profit made on exchange never before played an important part in human economy. (Polanyi 1957:43)
While history and ethnography know of various kinds of economies, most of them comprising the institutions of markets, they know of no economy prior to our own, even approximately controlled and regulated by markets. . . . The role played by markets in the internal economy of the various countries . . . was insignificant up to recent times. (Polanyi 1957:44)
Against the idea that it is "natural" for men and women to be motivated primarily by self-interest, Polanyi writes:
For, if one conclusion stands out more clearly than another from the recent study of early societies it is the changelessness of man as a social being. His natural endowments reappear with a remarkable constancy in societies of all times and places; and the necessary preconditions of the survival of human society appear to be immutably the same. (Polanyi 1957:46)
The outstanding discovery of recent historical and anthropological research is that man's economy, as a rule, is submerged in his social relationships. He does not act so as to safeguard his individual interest in the possession of material goods; he acts so as to safeguard his social standing, his social claims, his social assets. He values material goods only in so far as they serve this end. Neither the process of production nor that of distribution is linked to specific economic interests attached to the possession of goods; but every single step in that process is geared to a number of social interests which eventually ensure that the required step be taken. . . . The economic system will be run on non-economic motives. (Polanyi 1957:46)
Thus Polanyi maintains that it is socially motivated behavior -- ¬™behavior motivated toward the interests of one's family, clan, or village” -- rather than self-interested behavior that is "natural" for human beings; rational self-interest is rather a feature of a highly specific society: market society. Instead, Polanyi's account urges that the analysis pay primary attention to patterns of reciprocity and redistribution, shared values, traditions, and the determining role of community and politics. And he argues that virtually every society – traditional as well as modern – depends upon these sorts of social motivations.

In place of economic rationality and the market mechanism providing the basis for organization of the premarket economy, Polanyi argues that communitarian patterns of organization are to be found in a range of traditional societies:
The premium set on generosity is so great when measured in terms of social prestige as to make any other behavior than that of utter self-forgetfulness simply not pay. . . . The performance of all acts of exchange as free gifts that are expected to be reciprocated though not necessarily by the same individuals--a procedure minutely articulated and perfectly safeguarded by elaborate methods of publicity, by magic rites, and by the establishment of 'dualities' in which groups are linked in mutual obligations--should in itself explain the absence of the notion of gain or even of wealth other than that consisting of objects traditionally enhancing social prestige. . . . But how, then, is order in production and distribution ensured? . . . The answer is provided in the main by two principles of behavior not primarily associated with economics: reciprocity and redistribution. (Polanyi 1957:46-47)
Finally, Polanyi identifies the same element of materialist rationality in common among neoclassical political economists and Marx. Polanyi argues that Marxism analyzes the historical process in terms of individual self-interest, conceived largely in terms of material well-being.
There is the equally mistaken doctrine of the essentially economic nature of class interests. Though human society is naturally conditioned by economic factors, the motives of human individuals are only exceptionally determined by the needs of material want-satisfaction. That nineteenth century society was organized on the assumption that such a motivation could be made universal was a peculiarity of the age. It was therefore appropriate to allow a comparatively wide scope to the play of economic motives when analyzing that society. (Polanyi 1957:153)
All this should warn us against relying too much on the economic interests of given classes in the explanation of history. Such an approach would tacitly imply the givenness of those classes in a sense in which this is possible only in an indestructible society. (Polanyi 1957:155)
What kind of theory is this? And how should it be evaluated?

First, it is a hypothesis in historical sociology about institutions. Polanyi is asserting that history and ethnography provide a wealth of variety of fundamental economic and social institutions. Market institutions are historically specific -- there are periods of time in human history in which market institutions were barely present, and other periods in which they were essentially ubiquitous. And, though Polanyi doesn't do much with this, there is also the point that market institutions themselves show substantial variation across time and place. That said -- trade, artisanship, commodities, and production for the market appear to be activities that have very ancient roots in human societies. These kinds of economic exchanges are well documented in ancient China, Europe, and the Americas, and we can understand very well how they would emerge again and again out of ordinary human activity and interaction. So markets are surely not the nearly unique historical creation that Polanyi maintains them to be. Moreover, we can distinguish among "market" institutions (as Marx and Weber both do) according to whether they are organized around use or around accumulation; consumption or profit. (A neo-Polanyian might put forward a more limited claim: a market system aimed at accumulation is a historically recent institution.)

Second is a hypothesis about "human nature". Polanyi takes issue with a vulgar economism, according to which the most fundamental human motivation is rational self-interest. On the contrary, Polanyi maintains, this social psychology of "possessive individualism" (as C. B. Macpherson called it in The Political Theory of Possessive Individualism: Hobbes to Locke) is itself a very specific historical product -- not a permanent feature of human nature. In fact, Polanyi goes a step further and argues that the "social motivations" are more fundamental than rational self-interest. But here again, it seems likely that Polanyi puts his case much more absolutely than is justified. Being prudent and goal-directed -- paying attention to "costs" and "benefits" of various human activities -- is not simply a historical accident of the early modern period; it is a more or less permanent feature of the human species.

How should Polanyi's theory be assessed? There is an obvious risk of romanticizing human society that is implicit in Polanyi's reading of pre-modern societies -- expressing a moral preference for social cooperation and community, harmony and sharing, over competition, conflict, and self-striving. But romanticizing the past is not the same as understanding it factually and objectively. And it is my impression that anthropologists and historians would now be more inclined to find a mix of social and self-regarding motives in the contexts they study -- from contemporary Thai villages to the Greek polis to labor unions or environmental action groups. So Polanyi's black-and-white distinction between the past -- communitarian and social -- and the present -- egoistic and market-driven -- is too stark.

But at the same time, Polanyi's guiding intuition seems correct: human social behavior is influenced by more than simple self-interest, and human institutions are more varied than the vocabulary of the market would suggest. Human deliberativeness and purposiveness goes beyond maximizing rationality; it includes a broad range of "social" motivations and emotions. And a more adequate social psychology requires that we arrive at a better understanding of the motives that underlie cooperation and reciprocity. This is Amartya Sen's central conclusion in “Rational Fools" (link), and it is surely correct: "The purely rational economic man is indeed close to being a social moron”.

(The connection between Polanyi's theories and the terms of the moral economy debate are evident (discussed in prior postings).)


Jon Fernquest said...

"Thus Polanyi maintains that it is socially motivated behavior -- ¬™behavior motivated toward the interests of one's family, clan, or village” -- rather than self-interested behavior that is "natural" for human beings..."

But there is also self-interested socially motivated behaviour, people working in the interests of their family and then if you work for the family's company working for the family interests too, kind of an adopted family, so to speak. Look at the Brooker Group's huge reference work on the business groups of Thailand. The table of contents is just a list of the wealthiest family names in Thailand.

Also teasing evidence of markets out of pre-modern Burmese historical sources like inscriptions is difficult and tendentious but there is evidence of reciprocity and redistribution (the other economic phenomenon that Polanyi discussed in his writings) almost everywhere, donating land to the Sangha in inscriptions and awarding fiefs in the chronicles, etc, etc

Dan Little said...

Jon, Thanks for the useful comments. I think the overall assessment that we could reach is that human action can't be reduced to any single framework -- egoist, altruist, family, etc. -- but rather that deliberative rationality incorporates a heterogeneous mix of considerations including all of these. So there is a basis for reciprocity and cooperation; there is a basis for free-riding; there is a basis for Hobbesian competition. And what emerges in a particular historical context depends a lot on the specific features of institutions and social relations that are current.

M. B. Drapier said...

Have you read Prehistory: the making of the human mind by Colin Renfrew?

I think what he summarises there is essentially much more fundamental statement of the "not natural" argument based on archaeology. He points out that as far as we can tell, the human genome hasn't changed for 60,000 years yet we only show signs of sentience 20,000 years ago and we only show signs of wealth inequality within social groups from some 5,000 years ago which seems to coincide with the abstraction of wealth in the form of money, yet archaeology shows that societies had accumulated goods long before. The idea of personal possession itself takes a while to develop. He discusses trade as well. This clearly existed even in neolithic times with stone tools travelling far from where they were made, much further than social groups themselves moved but he characterises this as something very different to our modern understanding of trade. (years might be wrong I'm going on memory of the argument but you get the implication)

Not being an academic I can't vouch for the validity of this although the book is convincing enough to me. It suggests that virtually nothing seem to be hard-wired, that is nothing is truly natural. Rather it is a bit closer to Searl's social reality or Marx's historical materialism (although now I confess to talking about what I know too little of to confidently comment).

Essentially we are rather more social construct than we are brought up to believe.

I agree about Polanyi's romanticism. I read the Great Transformation wondering if pre-modern life was a time of full employment where well fed health educated serfs discussed philosophy over a pint at the parish tavern after the end of a 6 hour working day so I'm glad someone else got the same.

Facetiousness aside I'm interested in your line here because you seem to lay down these conflicting motivations as time constant and present throughout human history. For you what emerges at any time depends on institutions at that time. The line of some other thinkers on this is that the motivations are institutions in themselves i.e. Renfrew, Searl, Marx, etc.

However there is always a tendency to assume that the present state of things is somehow natural.

In as much as Polanyi points out that this is not the case he is probably another in the line of thinkers I mention even if he over states this in the particular historical context he discusses in the Great Transformation.

Ben Oz said...

I am very pleased to see you (or anyone really) writing about Polanyi. He seems to have been forgotten. Yet his thesis has never been so important.

Maybe one reason for that is that he is not easy to read, and his ideas are spread across publications that need to be read together to really get it.

Actually, he does not say that markets are unusual. In fact he says that they are almost universal. Just that they were never so important before. They were not socially integrative. If you were to remove them from a given society, it would not fundamentally change it.

In The Economy As An Instituted Proces, he identifies three types of exchange: Operational exchange (which is movement in location through trade); Decisional exchange (which is exchange at a fixed price like a local market); and, Integrative exchange (at a bargained rate - in other words what we today call markets). He also draws the distinction between ritualised market bargaining in which participants really know the final price that will be agreed and actual price-making markets (like a stock exchange).

The important thing is that the other forms or market at not integrative. The prices are fixed by other factors, and those other factors integrate society. And even price-making markets are only integrative if they link up in a system that tends to spread the effects of prices to other markets.

So it is important to understand what he means by markets. He is not concerned with markets that merely facilitate the movement of goods from one place to another. This is very common throughout history, and not what he is concerned about.

He is also arguing that the focus of economics (and psychology) on the individual is wrong, and that to understand economics we need to understand not individual actions themselves, but what motivates them. This is the important thing. And the sources for that action are not individual, but derived from social structure. You cannot share on your own. And you cannot trade on your own. He is not saying that premodern people were all delightful and that modern people are all selfish etc. He is just saying that motivations for action are socially derived, and that the claim that homo economicus is 'natural' is clearly disproved by the historical evidence in which communistic action is more common than individualism.

So I think that you have been a bit harsh on those two points, but it is not suprising as it's hard to follow him sometimes.

In any case, the main thesis of the Great Transformation is that the growth and spread of markets (integrative exchange) was not 'natural' or 'inevitable' as seems to be assumed. Why did it not happen earlier? Polanyi shows that it was through the exercise of state power in the deliberate reshaping of social institutions that this new market society was born. And that there was a 'double movement' following the Great Depression, markets were curtailed and factors other than market competition were given priority in key aspects of livelihood.

And he argues that the movement towards a fully market sociey in the 19th century was a fatally flawed plan because if it were to be successful it would leed to the destruction of both the society itself and the environment on which the society depends for subsistence.

Of course, since his death we have seen the retreat of the welfare state and movement back towards the 19th century vision of market society. And look where that got us! He was right.

Dan said...

Excellent post on Polanyi, and I agree with the above commenter that it's nice to see him talked about (as a plug - Fred Block and Peggy Somers are right now finishing a book about Polanyi, drawing together their existing essays with some great new stuff!).

I don't entirely agree with your two criticisms of Polanyi, however. I think the second (about the universality of self-interest) rests on the classic slipperiness between "rationality" in the technical, nearly tautological sense of weighing costs and benefits and being consistent, and "rationality" in the normative, me-first sense associated with the kinds of utility functions that end up in most economic models. John Quiggin, of Crooked Timber, said it nicely: "First, most rational actor models assume that “rationality” can be represented as “maximization of self-interest”. This assumption is either false or vacuous. Those committed to egoistic rationality tend, when challenged, to oscillate between the two definitions, in much the manner of the function sin (1/x) as x approaches zero."

I don't think Polanyi is in dialogue with the vacuous sense of "maximization of self-interest", but rather with the substantive, false sense that economists invoke when they actually want to derive predictions from the "axioms" of rationality.

As to your first criticism, that markets are more common and important than Polanyi suggests, I don't think you really refute his claim. Polanyi acknowledges that markets play a role in many or even most moments and places in history, but he argues that this role was incredibly limited. Adam Smith makes some of the same points - markets were kept out of the interiors of nations for centuries. There were markets for long-distance trade (in towns) but the most important parts of the economy (in Polanyi's substantive sense, of the way in which a society organizes itself to sustain itself and provide the necessities) were relatively devoid of markets. Exchange existed, but was limited; redistribution (or reciprocity) dominated.

One of Polanyi's central contributions is that the change from markets as a subordinate institution not essential to the functioning of society into the dominant paradigm for organizing everything (running society as an adjunct to the market) is not simply an evolutionary process of markets creeping into everything. Rather, it was a painful, contested, and heavily ideological battle won at various moments by the free-marketeers who rejected the reality of society in favor of the stark utopia of the self-regulating market. And it was the attempt to implement this idea - that society could be run as a self-regulating market in which no one had power - that invokes the double movement that leads to fascism, communism and the welfare state. For a full version of this argument, I recommend chapter 1 of Block and Somers (forthcoming)!

But anyway, I hope I made my point: Polanyi is not talking simply about a quantitative shift in the amount of market (or exchange), but rather the transformation of society into one run by and for markets (with a focus on the creation of markets for fictitious commodities which heretofore were explicitly protected from the market, i.e. land, labor and money). These markets - not the medieval town fair - are the historically unique development.

Simon Halliday said...

Sam Bowles, in his graduate microeconomics text (Microeconomics: Behavior, Institutions, and Evolution), refers to The Great Transformation and other work by Polanyi as precursors of contemporary work by Fehr, Gintis, Gaechter, Fischbacher, Henrich, Boyd and many others on other-regarding preferences, reciprocity motives, and inequity aversion. I just wanted 'Ben Oz' and 'Dan' to be certain that Polanyi isn't entirely excluded from modern economics education.

Unknown said...

Great post. Only tangentially related: Foreign Affairs just released a reading list on States and Markets. I'm curious about what you think about it and what you would add. Varieties of Capitalism just screams to be on there.

thinkahol said...

I feel compelled to add, that Polanyi was very clear in illustrating that a self-regulating market is an oxymoron. It is not only that humans and our environment cannot bear the strain of being subordinated to the market, but that the so-called free market itself can't withstand its own unregulated vicissitudes. We're very much witnessing this today.