Rational institutionalists tend to confine the study of economy interactions to allocational choices between scarce means for preferred ends. By contrast Karl Polanyi showed how economies exist because humans need to produce things to sustain themselves, and these things come from nature. The rationale was to show that the economy should not be exclusively equated with the market, but is a sub-set of possible kinds of economic interactions. As he writes, “To narrow the sphere of the genus economic specifically to market phenomena is to eliminate the greatest part of man’s history from the scene.”
Basically, Polanyi wants economists to give due acknowledgement to the role of politics and other kinds of social interactions. This is best seen in The Great Transformation, where Polanyi explained the chaotic disruptions in the first half of the twentieth century—colonialism, world wars and the Great Depression—by pointing to the “self-regulating market” established in Britain in the nineteenth century. The general orientation was that the market had become the prime institution in society, subjugating other kinds of social institutions and interactions, and ideologically justified through a “stark utopia.”This transformation was a qualitative change from traditional society to a market system, politically induced through the “fictitious commodification” of “land, labor and money,” with a concurrent resistance movement. This process is best encapsulated by the phrase, the “double movement.”
Against this backdrop, Polanyi concludes that the economy is both the process by which persons relate to each other and to their surroundings, and that it is an institution. To this end he offers a theory of trade, markets, and the market society in an effort to describe market capitalism. Polanyi is not interested in economic history per se, but rather an attempt to trace how modes of allocation co-articulate with institutional changes, i.e. not a history of prices, but rather how prices come to exist.
Polanyi chides rational institutionalists for believing that the market is the rational way of circulating goods or allocating resources. The market society, rather than inevitable outcome, like all economies, is a mere historical contingency. Historical and anthropological evidence shows how reciprocity, redistribution and exchange have mixed and co-existed with social arrangements, and that each one of these interactions has taken on different forms, meanings and social functions for the participants. These economic interactions were often governed by social status or kinship. There are also differences between local and long-distance trade, and they are governed by different values. There is something else, market exchanges require “written records and elaborate administration” to track exchanges (1957, 48.) In contrast reciprocity and redistribution do not require such a complex organizational ambit. He writes “the need for trade or markets is no greater than in the case of reciprocity and redistribution” (1957, 53.) Thus, it makes no sense giving priority to one of these forms. Further, it would be a mistake to presume to analyse other kinds of economic allocations from this vantage using it as a ruler.
By inference Polanyi does not let orthodox Marxists off the hook either. Nowhere does he argue that that a division of labour automatically lead to a market society. Conversely, the division of labour exists in societies where reciprocity and redistribution exist. The same can be said for property rights. Stated simply, the presence of property rights, the division of labour, trade, exchange, nor their regulation or economization do not necessarily entail the market society. Throughout history, many societies have traded and exchanged, but not all have developed a market system.
One should also distinguish between markets and the market system: Sometimes exchanges are not over-determined by economic motives, or have any semblance of economic motives at all. Even markets can be subordinated to cultural norms. Therefore, the market is but one kind, one way, of trading. Polanyi puts this logic further. By relying upon anthropological evidence he argues that trade is not predisposed to creating a market system. If the market system does not arise from an evolution from the assemblage of individual exchanges and trades, then the best explanation is that it is an instituted order arising from the commodification of labor, land and money. Rather it is the institutionalization of ‘scarcity’ which had to be taught (1957, 216.) For example “Laissez faire was planned” (1957, 141.) A market society tends to ever expanding the range of commodification, and is not exclusively economic, but rather a particular institutionalized kind of economy, one that rests upon power differentials and the ability to use force, that is specific social relations that spring from the commodification of property and production. In summary, not every economy is capitalist market; not every exchange is a market exchange. Subsequently, this calls attention to understanding the institutionalization of the market system.
For Polanyi a market system begins when land and labour become commercialised. In other words when reproduction almost always hinges upon the market thereby “subordinate[s] the substance of society itself to the laws of the market.” When human life to overly exposed to market fluctuations, well-being and survival are market-conditioned. In these conditions, suspending this kind of exchange would threaten the society itself. Polanyi’s hostility towards liberalism is because its promotion of individualism—a misguided philosophical anthropology—that neglects that humans are social creatures. He forcefully argues that the market society rather than being the epitome of human nature, corrodes it. Accordingly, persons should seek protection. Petitioning and demanding institutional security against the market system is thus rational self-preservation. Collective organizing to form a resistance movement to the market society, is the second movement. In his mind, this organizing is a matter of life or death.
Notwithstanding the value that Polanyi offers with correctly rendering reciprocity and redistribution as social, he incorrectly fails to label the market economy as stemming from the same social system. Instead he views it is as disembedded and distinct, thus able to devour the social. But it is obviously apparent that social groups can undergo strife. In this respect Polanyi neglects to address differentials in power and the role of particular interests. In other words, his historical account lacks the actions of persons. Absent too is a theory of commodification, private property and wage-labor as either a pre-requisite for the transformation, or entailed within the transformation. Further, he fails to adequately acknowledge the origins of crisis in the feudal mode of production and its political precipitation.
Polanyi is certainly not a Marxist. His analysis did not rely upon categories such as surplus value, socially necessary labour time, exploitation, or class struggle between capitalists, the bourgeoisie and the proletariat. He was critical of what he perceived to be it economism and lack of cultural understanding, and instead insisted upon an institutional approach that prioritized the embedding and disembedding of the market economy from society. In this respect, Polanyi would deny that the history of all hitherto existing society is the history of class struggle, but rather the motor of history is transformations that make the reproduction of life hinge upon market logic. Still, despite these oversights, I think there is much political economists can learn from him.