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Transformations, Then and Now: The Appeal of Karl Polanyi

Karl Polanyi's views on the nature of "pre-market" society are influential not only among historians but also among economists concerned with present-day transitional and developing economies. This paper examines Polanyi's arguments about the "Great Transformation" from traditional to market society in the light of recent advances in economic theory and empirical evidence from a range of European and non-European societies. These theoretical and empirical considerations provide little support for Polanyi's views concerning fundamental discontinuities between traditional and market societies. The paper concludes that Polanyi's rosy view of pre-market society provides an inappropriate historical basis for addressing the challenges faced by present-day transitional and developing economies.


Transformations, Then and Now: The Appeal of Karl Polanyi

Ajit Karnik

Karl Polanyi’s views on the nature of “pre-market” society are influential not only among historians but also among economists concerned with present-day transitional and developing economies. This paper examines Polanyi’s arguments about the “Great Transformation” from traditional to market society in the light of recent advances in economic theory and empirical evidence from a range of European and non-European societies. These theoretical and empirical considerations provide little support for Polanyi’s views concerning fundamental discontinuities between traditional and market societies. The paper concludes that Polanyi’s rosy view of pre-market society provides an inappropriate historical basis for addressing the challenges faced by present-day transitional and developing economies.

I would like to thank Sheilagh Ogilvie for reading earlier versions of this paper and offering detailed comments. Thanks also go to André Carus, Arindam Dasgupta, Partha Dasgupta, Tracy Dennison, Jeremy Edwards, and Lejla Vrazalic for reading earlier drafts and offering very helpful feedback. I would also like to express my gratitude to Tracy Dennison for letting me read her unpublished PhD dissertation. Comments of an anonymous referee are gratefully acknowledged. I would also like to thank Mangesh Kulkarni for kindling my interest in Polanyi by asking me, many years ago, to write a small note on The Great Transformation. This paper was written during my stay in Cambridge as Smuts Visiting Fellow at Wolfson College and the Faculty of Economics and Politics, University of Cambridge. The research facilities provided by the college and the faculty as well as generous financial support from the Smuts Memorial Fund are gratefully acknowledged. Of course, none of the above is implicated in any deficiencies that remain in the paper.

Ajit Karnik ( is currently with the University of Wollongong in Dubai.

ince the early 1980s, many economies previously dominated by state-led approaches to economic development have begun to move towards a more market-oriented a pproach. While the collapse of the communist regimes of eastern Europe has been most dramatic, gradual but fundamental changes have also been occurring in developing countries such as China, India, and Sri Lanka. As economic transformation has seeped through these societies, apprehension has been expressed at the changes that are being wrought. Particularly acute has been the disquiet occasioned by the increasing role of market forces and the probable impact of this transformation on traditional, non-market societies.

A number of economists – some of them very distinguished – have turned to history to draw lessons from similar transformations that may have taken place in the past. One specific work that has commanded much attention over the last decade has been Karl Polanyi’s book, The Great Transformation: The Political and Economic Origins of Our Time (1957 [1944]). The “great transformation” about which Polanyi wrote was the shift from a premarket to a market-driven society in Britain, which he regarded as having occurred around the middle of the 19th century: according to Polanyi, “in 1834 industrial capitalism was ready to be started” [Polanyi 1957: 102]. A number of modern economists have traced similarities between Polanyi’s “great transformation” and more recent ones. Thus, for instance, Eric Hake and Walter Neale write that: “Karl Polanyi’s The Great Transformation analyses two transformations: the first, in Britain …; the second, in Europe…between the 1st and 2nd World Wars. To these we propose to add…the transformations in central and eastern Europe since the demise of the former Soviet Union” [Hake and Neale 2001: 27]. Nobel Laureate Joseph Stiglitz also enthusiastically e ndorses Polanyi’s work as deeply relevant to present-day policy challenges: “Because the transformation of European civilisation is analogous to the transformation confronting developing countries around the world today, it often seems as if Polanyi is speaking directly to present-day issues” [Stiglitz 2001: vii].

Some other economists have found merit in Polanyi’s description of pre-market society. Douglass North argues that “Polanyi’s concepts of reciprocity and redistribution…have characterised…a great deal of resource allocation”, and theorises that these “transactional modes” (reciprocity and redistribution) evolved because they reduced the transaction costs of accessing price-making markets [North 1977: 706, 712-15]. Brad de Long (2003) discovers considerable merit in Polanyi’s concept of embeddedness of markets: “what happened in economic transactions

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[in pre-market societies] was in large part determined and guided by sociological and political relationships, the principal direction of influence is reversed”. Santhi Hajeebu and Deirdre McCloskey (1999: 310) believe that The Great Transformation “could induce economists … [to turn] toward a better and fully embedded economic science”. The resurgence of vigorous interest in Polanyi’s work is very evident from a number of r ecently published books about Polanyi himself, and from the r ecent publication of a new edition of The Great Transformation [Mendell and Salée 1991; Clark and Rosicka 2001].

Given the influence of Polanyi’s historical narrative on modernday economists, it is clearly important to ask what lessons can be drawn from Polanyi’s view of history for current economic transformations in eastern Europe and the developing world. Since markets occupy such a central position in Polanyi’s description of the great transformation, this paper begins (in Section 1) by clearly explicating and analysing Polanyi’s conception of the market. A salient characteristic of Polanyi’s view of history is that economic transformations take place suddenly and can be dated precisely. By discussing markets for inputs and goods (Section 2) over a long historical time-span, this paper demonstrates that economic transformation has generally taken place as a gradual evolution rather than an abrupt “transformation”. After looking at the weak historical basis for Polanyi’s characterisation of traditional non-market societies, the paper then explores the reasons for the enduring influence and appeal of Polanyi’s work among development economists and economic historians. Through e xamining “social embeddedness” of markets (in Section 3) and non-market allocation mechanisms (in Section 4), the paper finds Polanyi’s claims concerning the contrast between market and non-market societies to be exaggerated. Finally, the paper examines (in Section 5) the application of Polanyi’s historical i deas to the problems faced by modern transition economies. The paper concludes that Polanyi’s view of history and his analysis of markets provide questionable guidance to economies currently undergoing economic transformation.

1 Polanyi’s Conception of the Market

Before beginning to evaluate Polanyi’s ideas about pre-market economies, it is important to spell out clearly his conception of the market. This is particularly important because Polanyi’s idea of the market is very different from an economist’s understanding of that term. According to Polanyi, the market economy is a self-regulating system in which the regulatory mechanism consists solely of prices: “…it is an economy directed by prices and nothing but market prices” [Polanyi 1957: 43]. An economy of the kind Polanyi has in mind would require the completely unfettered operation of the forces of demand and supply, with prices as the only source of information available to consumers or producers.

The market prices to which Polanyi refers are nothing other than the “invisible hand” that, according to Adam Smith, guides economic decision-makers. But there is a difference between Smith’s conception of the invisible hand and Polanyi’s. Smith’s conception is a nuanced one, with numerous caveats constraining the operation of the invisible hand. Smith recognises an i mportant role for the government for activities that the market

102 will not perform, particularly in the provision of public goods and infrastructure [Smith 1976: 687-88, 723]. Thus Polanyi’s characterisation of market society is much more extreme than that of Adam Smith. An economy directed by nothing but prices is Polanyi’s caricature of how the market system works and cannot be construed to be its description [Braudel 1985: 227]. The economist’s understanding of the market system is far more c ircumspect, with a clear recognition that the information c ontent of prices is substantially diluted in the presence of market failures, such as monopolies or externalities (spillover effects of others’ actions, such as pollution).

Polanyi’s views about the functioning of a market economy – and hence the views of his modern disciples – are thus based not on how market economies really work or even on how economists think they ought to work, but rather on a simplistic caricature. A more differentiated view of the market economy – and the one accepted by a majority in the discipline of economics – accepts that even if all the conditions underlying the first fundamental theorem of welfare economics1 are satisfied, there may be need for government intervention for contract enforcement and protection of property rights. Not only is Polanyi’s description of a market economy profoundly inaccurate, but the deeper understanding of markets developed by modern economics has made his analysis of markets completely anachronistic. As we shall now see, this renders his analysis of the differences between premarket and market societies fundamentally misleading.

2 ‘Fictitious’ Commodities

According to Polanyi, for the “self-regulating” market to work, there must be markets for “every element of industry” including land, labour and money [Polanyi 1957: 71-72]. But land, labour, and money are “obviously not commodities”, Polanyi contends, since none of them is produced for sale (ibid: 72; emphasis in the original). In Polanyi’s view, “the commodity description of labour, land and money is entirely fictitious” (ibid) and, before the 19th century, there were no markets for land, labour, and money (ibid: 75). How accurate is Polanyi’s historical narrative about the sudden eruption of markets into a fundamentally non-market society, which exercises such influence over modern development economists? In spite of the continuing popularity of P olanyi’s narrative, it has been well-accepted that the historical basis for Polanyi’s narrative was weak [Hajeebu and McCloskey 1999: 289]. We present below a quick retelling of these historical inaccuracies in The Great Transformation.2

Historical evidence shows that labour has been sold on markets for wages for thousands of years. Silver (1983: 809) notes that ancient Egyptian craftsmen were paid wages in silver. In somewhat more modern times wage-earners comprised a significant proportion of the taxable population in early 16th century England [Clark and Slack 1976: 112],3 and in 18th century Maritime Flanders they made up almost 38 per cent of the labour force [Mendels 1975: 185, 189-90].4 Time series data on the wages of various categories of worker in the western Netherlands are available from 1,500 onward, covering a continuous period of more than three centuries [De Vries and Van der Woude 1997: 610-11]. There were active markets even for agricultural labour in

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south-west Germany between 1600 and 1800 [Ogilvie 2003: 17, 160-61, 238, 299], in 18th century Maritime Flanders [Mendels 1975: 189-90], and in England well before the parliamentary e nclosure that took place between 1700 and 1850 [Shaw-Taylor 2001: 640]. Serf economies in 16th and 17th century Bohemia [Ogilvie 2001: 436] and 19th century Russia [Dennison 2003: 133] also reveal evidence of wage-workers hired by peasants to c ultivate land.

What of markets for land? Evidence for the sale and purchase of privately held land is available from a wide variety of different geographical locations and historical periods dating back long before the 19th century. In Salland, Drenthe and Friesland in the Dutch republic, peasant landownership increased at the expense of the nobles and the church from the beginning of the early 16th century [De Vries and Woude 1997: 543-48].5 There is evidence of active land markets in south-west Germany in the late 16th century [Ogilvie 2003: 160, 237, 299], and even in the relatively less developed parts of Europe such as Russia under serfdom in the early 19th century [Dennison 2003: 113-18].6 Apart from sale and purchase, renting also provides another form of market transaction for land. Historical evidence from the 15th to the 18th centuries shows a fully developed rent system in crown prussia [ Kaminski 1975: 257]. Bohemian serfs in the early 17th century very well understood that investments clearly improved the value of land for which a higher rent could be charged [Ogilvie 2001: 439]. Finally, rents in the Russian serf village of Voshchazhnikovo in the early 19th century displayed considerable variation, s uggesting strongly that the rental depended on both quality and demand [Dennison 2003: 117].7

History of Money

Money and credit, too, are portrayed by Polanyi as absent from economies before the 19th century. Money was present in premarket economies, Polanyi admits, but it was not used as a medium of exchange; rather it was part of “reciprocity”, a fundamental concept in Polanyi’s system.8 Reciprocal exchange requires that an individual return the favour of someone who has shared his or her produce.9 The presence of money destroys reciprocal e xchange since, once goods are exchanged for money, the parties to the transaction need never meet again: the acts of giving and receiving take place simultaneously and individuals do not have to seek out their benefactors to return the favour [Latham 1996].

Polanyi was, of course, aware of the existence of for thousands of years and had to offer a reason for the existence of money, one that was not related to the exchange process. He therefore claimed that money in traditional societies was used not for e xchange, but for establishing the status of individuals. This e nabled him to sustain his view that market exchange itself was absent before the 19th century and that reciprocal exchange was the sole allocation mechanism in traditional economies [ Silver 1983: 817].

But is Polanyi’s account of the history of money accurate? Careful examination of the historical record reveals that money in a variety of forms has been used for the purpose of exchange for at least the last four to five thousand years.10 Silver money was used to facilitate exchange in the late third millennium BC in Babylon

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[Silver 1983: 817]. Cowries were used as exchange-type money as far back as, at least, 600 BC in Africa, India, China, the middle and the far east [Latham 1996]. Copper or brass rods, described by Polanyi as “status” money, were used as general-purpose e xchange currency in Calabar in Nigeria in the 17th century. Spanish evidence reveals that excess supply of money stoked i nflation in 17th century [DuPlessis 1997: 99]. There is also strong evidence for the prevalence of lending and borrowing in wellfunctioning money and credit markets many centuries before the Polanyi narrative describes exchange-type money as making its appearance.11

Goods Market

Having dealt with Polanyi’s views on land, labour, and money markets, let us now turn to his somewhat more nebulous position on goods markets. According to Polanyi, the market economy was an unprecedented institution: “previously to our time no economy has ever existed that, even in principle, was controlled by markets… Though the institution of market was fairly common since the later Stone Age, its role was no more than incidental to economic life” [Polanyi 1957: 43; emphasis added]. Trade, too, was unprecedented: “gain and profit made on exchange never played an important part in human economy” (ibid, emphasis added). The difficulty with Polanyi’s characterisation of the role played by goods markets in pre-market societies is that it is stated in such imprecise terms. Each of his statements is hedged about with such qualifications as to make absolute falsification impossible [Hajeebu and McCloskey 1999: 301 and North 1977: 707]. Given the very imprecise nature of Polanyi’s claims, no evidence can conclusively refute them. However, it is possible to cast sufficient doubt on them to make Polanyi’s description of pre-market societies seem implausible.

What can we say about Polanyi’s claim that gain and profit made on exchange were not important before the mid-19th century and that markets were incidental to economic life? Rising output of dairy farmers in the Netherlands during the 15th to the 17th centuries12 and food farmers in England during the 16th to the 18th centuries [Clark and Slack 1976: 19, 27, 48-49] led to the expansion of market towns and the facilities provided in them. The importance of markets was not confined to the now developed countries of Europe, but extended to those areas of the world, such as Nigeria, India, China, Indo-China and Siam, which are still involved in the development process: in many of these countries, consumers enthusiastically purchased cheaper i mported goods even though it brought ruin on domestic producers who produced similar goods [Latham 1986: 202, 206, 20910]. Not only were goods markets active, but there was widespread commercialisation of household services, such as cleaning, laundry, and caring, by early modern women [Ogilvie 2003: 446]. The commercialisation of household services, such as cleaning, laundry, and care is a significant development, since it meant that there were households which valued their time sufficiently highly to buy such domestic services on the market rather than perform these tasks themselves.

There is no dearth of historical evidence showing that for h undreds of years before Polanyi’s assumed date for the c ommencement of a market economy, societies were dense with markets and market transactions, and ordinary men and women actively sought gain in market activity.

3 Socially Embedded Markets

So far we have shown that history provides scant support for P olanyi’s claims about the contrast between pre-market and market societies. There was no dramatic shift from a pre-market to a market economy – whether after 1800 or at any other identifiable historical juncture. For centuries – in some cases, millennia – s ocieties have been dense with transactions in factor and goods markets, men and women have been active participants in such transactions, and money has been widely used for exchange. The lack of evidence for any sudden “great transformation” from premarket to market-dominated society at any specific historical juncture indicates that Polanyi’s historical analysis does not hold reliable lessons for modern economic transformation. But perhaps Polanyi has important analytical insights into the functioning of pre-market societies which can help us understand and tackle the challenges faced by modern developing economies.

One of Polanyi’s ideas which is most often celebrated as an important analytical insight that takes us beyond the explanatory capacities of modern economic approaches is that of “social embeddedness”. In Polanyi’s view, a distinguishing characteristic of a market society is that “instead of economy being embedded in social relations, social relations are embedded in the economic system” [Polanyi 1957: 57]. Polanyi’s views about the ubiquity of “social embeddedness” in traditional economies and its absence in modern economies have been widely approved by sociologists, anthropologists, political scientists, and historians [Granovetter 1985: 482], and are central to the “moral economy” literature.13 It is Polanyi’s “embedded economy thesis” which leads Brad de Long (2003), for instance, to view him as an unjustly neglected theorist with important insights to impart to modern economists and economic historians. Essentially the “social embeddedness” thesis consists of the view that in traditional societies markets are deeply embedded in social relationships, resulting in an allocation system in which transactions are governed by customs, traditions, and non-market institutional forms. In market societies, by contrast, transactions are supposed to be governed exclusively by the forces of supply and demand with little recognition of any role for norms, social relationships, or non-market institutional rules [Scott 1976: 29-34; Booth 1994: 654].14 If true, this insight might carry important analytical lessons for understanding the nature of economic transition.

But how justified is the stark contrast drawn between the ubiquity of “social embeddedness” in traditional economies and its absence from market economies? We have already seen that markets were not peripheral to pre-modern societies and hence that the degree of social embeddedness of economic behaviour in such economies must have been much lower than Polanyi asserted. We will now see that the degree of social embeddedness of economic behaviour is much higher in market economies than is a llowed for by Polanyi. Changes in the degree of social embeddedness of economic behaviour occurs much more gradually than is recognised by Polanyi and his disciples and (as discussed

104 at the end of the essay) this may have important implications for how we think about the process of economic development.15

Once one begins to look for it, there is a great deal of evidence showing that transactions in modern market economies are often governed by social considerations. George Akerlof, for instance, analysed workers in American firms who “gifted” more labour than was required by their contracts, and analysed firms that only mildly rebuked anyone falling short of work standards. The reason for this was that “persons who work for an institution … tend to develop sentiment for their co-workers and for that institution” – a clear instance of social embedding in a developed economy [Akerlof 1982: 550]. Akerlof also drew a key distinction between economic decisions (e g, the choice between apples and oranges) and social decisions (e g, decisions regarding education, marriage, and child-bearing): the latter, he argued, were strongly influenced by the impact of the decision on other people [Akerlof 1997: 1006]. Factors other than market prices, supply, and d emand play an important role in social decision-making in modern economies, and this is recognised and dealt with by economic theory. Even for what Akerlof calls “economic decisions”, consumers may be influenced much more by their perceptions of the seller than the prices of the goods [Okun 1981: 140]. Kenneth A rrow (1997) also recognised that mere forces of demand and supply are not adequate for markets to function: “Regardless of our all-embracing market theories … there are goods that might be bought and sold but aren’t … Judicial decisions and votes are not to go to the highest bidder” (ibid: 765).16 Even in modern d eveloped market societies, social norms play a crucial role in determining which markets come into existence and which do not.

4 Reciprocity and Redistribution

A second analytical insight by Polanyi which has attracted attention from modern economists and economic historians relates to his ideas of “reciprocity” and “redistribution” which are supposed to demonstrate the irrelevance of mainstream economics for analysing behaviour in traditional and transition societies. Douglass North (1977: 703) goes even further and argues that Polanyi’s work shows that the theoretical apparatus of economics is inappropriate not only for historical and developing economies but for also modern, developed economies.

Citing “recent” historical and anthropological research, P olanyi argues that pre-market or traditional societies are distinguished by the absence of any motive of gain, any principle of l abouring for remuneration, any principle of least effort, and any separate and distinct institution based on economic motives. I nstead, production and distribution are ensured by two principles of behaviour: reciprocity and redistribution [Polanyi 1957: 45-47]. Reciprocity means that members of one group act towards members of another group as members of that group or a third or fourth group act towards them. Redistribution means that a m ajority of what is produced is delivered to a “chief” who keeps it in storage for later distribution. The essence of reciprocity and redistribution is that “the supposed propensity to barter, truck and exchange does not appear” (ibid: 49).

Redistribution takes two distinct forms in Polanyi’s analytical system. The first is no different from the redistributive activities

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of modern governments, the analysis of which is standard fare in mainstream economics (ibid: 50-52). The second (and more interesting) involves the delivery of the output of collective effort, such as hunting, to a chief who shares it out among group members (ibid: 49). What is analytically interesting about this form of redistribution is how to deal with shirking when group size and complexity increases beyond the scale at which it is easy to monitor the effort of each individual and penalise those who freeride. Polanyi does not recognise the problem of freeriding since, in the social organisation described by him, “no shirking of personal effort need be feared” (ibid: 49). But, empirically, shirking does occur, and economic theory has devoted analytical attention to devising institutional rules – whether through differential payments or repeated-game commitment mechanisms – that create incentives for individuals not to shirk. Economic history suggests that such analyses are important: thus, for instance, early modern European communities engaged in redistribution by providing poor relief to indigent inhabitants, but also closely monitored recipients’ labour market participation, diligence, and consumption patterns in order to prevent freeriding [Ogilvie 1997: 60-5]. Here markets and something Polanyi would describe as “redistribution” coexisted.

Coexistence of Market and Non-market

Contrary to the position taken by Polanyi, market and non-market allocation mechanisms need not be antithetical. Reciprocity and redistribution can coexist with market allocation, and, in fact, the two systems have coexisted since historical records began and continue to do so even today.17 It is, of course, possible that in some societies market allocations may dominate, while in others, the reverse may be true. But Polanyi makes no attempt to quantify the distribution between market and non-market transactions, which would enable us to classify a society as either predominantly market or predominantly pre-market.

For Douglass North, however, the “transactional modes” of reciprocity and redistribution have a different appeal. He views them as providing an “alternative analytical framework to a ccount for past and present institutional organisation” [North 1977: 704, emphasis added]. Clearly, North views reciprocity and redistribution as having a useful role to play even in modern societies as an alternative to market transactions. The appeal of these modes for North lies in their transaction-costs-minimising aspect. Thus, “reciprocity societies can be considered as a least-cost trading solution where no system of enforcing the terms of e xchange between trading units exists” (ibid: 713).

This raises the question – which is deeply relevant to the challenges facing developing economies – of whether Polanyi or North would regard reciprocal exchange as preferable to market exchange, if an enforcement mechanism were available. Such a preference would clearly not be economising. Insisting on reciprocal exchanges in the presence of appropriate institutional safeguards would unnecessarily prevent welfare-improving market exchanges from taking place. In fact, it is important to recognise that the presence of reciprocal exchanges in pre-market or traditional society is often not a solution that is more efficient than market exchange would be, but rather a reflection of very poor

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supporting institutional structure. In that case, it is surely inappropriate to celebrate the “reciprocity” solution, and a government that sought its citizens’ well-being would have good reason to make efforts not to enhance reciprocity but to improve the institutional infrastructure. It might well be the case that, in the presence of poor institutional infrastructure, such informal e xchange mechanisms may offer some benefits, but, as Partha Dasgupta has put it, one should not be “distracted from asking if their continued existence could prevent more productive social arrangements from becoming established, say, in the shape of formal markets. One can even ask whether informal institutions were ever as good as they are frequently made out to have been” [Dasgupta 2003: 310].

For too long, even in mainstream economics, the importance of “enabling institutions” in promoting economic development has not been adequately recognised. Developing economies, which are, by and large, peasant societies, are widely described as a completely separate world, governed by a completely different set of rules, and imbued with a set of values different from those associated with modern market economies. Peasants are supposed to shun the market since they have very little to gain and much to lose from market interactions. A quaint romanticism has been associated with the peasants’ struggles in which cold rationality is said to play no role: peasants are supposed to be, if not irrational, differently rational. Given all of this, standard economic assumptions are supposed not to be applicable to peasants since they are not integrated into markets and therefore cannot calculate their costs and benefits in terms of money. Scholars such as Walter Neale, a disciple of Polanyi, have presented descriptions of the Indian village economy in terms of reciprocity and redistribution. This description of a developing society finds an echo in the writings of scholars working on less developed countries. Much of this literature goes under the name of “economic dualism” that describes a developing economy as one where a traditional sector, in which “rational” economic calculation does not occur, coexists with a relatively modern one in which it does [Lewis 1954; Polanyi 1957: 43-47; Neale 1957: 223-28].

More recent developments in economics have now brought home to us that this idea of a cultural opposition between a traditional sector governed by redistribution and reciprocity and a modern one governed by market mentalities is unfounded. The major obstacles to market-oriented economic development are a matter of institutions rather than non-market mentalities and cultures.18 This casts doubt on the extent to which Polanyi’s strict opposition between “market” and “non-market” modes of operation provides any useful lessons for understanding the process of economic transition.

5 Problems of Rapid Transition

A final reason Polanyi has attracted so much admiration is his view of the process of economic transition. Joseph Stiglitz (2001: x-xi), for instance, regards Polanyi as shedding important light on the dangers of rapid transition, especially in Russia but more generally in all reforming economies: “the manner in which and the speed with which reforms were put into place… eroded social relations, destroyed social capital… Rapid transformation d estroys old coping mechanisms, old safety nets… before new coping mechanisms are developed” (italics in the original).

Stiglitz’s reference to social capital is clearly a reference to P olanyi’s non-market allocation mechanism of reciprocity. Stiglitz credits Polanyi with pointing out that the market destroys social capital, which he regards as the main problem confronting economies undergoing rapid economic transition. It is true that for a number of reforming economies the interregnum between pretransition and post-transition phases has been characterised by significant welfare losses – high unemployment, plummeting wages, and political and social turmoil. But while this is certainly one of the most fundamental challenges facing transition economies, it is not clear whether there are any lessons for them that can be learned from Polanyi’s work.

Polanyi regarded the market economy as “unprecedented” [Polanyi 1957: 43]. His view was that at a particular point in time, a cataclysm occurred which completely transformed pre-market societies into market societies. This essay has already discussed the wealth of historical evidence clearly showing that societies were always dense with market transactions, that the market principle always operated, and that men and women have always pursued gain and profit from market transactions. This was as true for the goods markets as it was for factor markets. It seems plausible that in most societies the sphere of influence of market transactions gradually expanded over time, as the commercialisation of household services in early modern Europe shows, but there does not seem to have been a time in history over the past several millennia when goods and factor markets were nonexistent. The move towards the market economies of today has been evolutionary and incremental rather than revolutionary or catastrophic. Hence, Polanyi’s characterisation of a market e conomy as unprecedented is historically inaccurate.

Modern Transition Economies

The changes taking place in eastern Europe since 1989, by contrast, have been truly unprecedented. Events in the first half of the 20th century effectively destroyed markets in these countries, so that these economies could be truly called non-market – to a much greater extent than in pre-19th century Europe, judging by the evidence examined above.19 Hence, the changes that o ccurred in the early 1990s in eastern Europe did genuinely represent a “great transformation” from a society in which markets did not exist (and were not permitted to exist) towards a society in which markets were not only to be tolerated but actively encouraged. These changes of the late 20th century have almost nothing in common with those Polanyi claims to have occurred in the early 19th century. Given this fundamental difference between the transformation that Polanyi wrote about and current transition in eastern Europe, it is not clear what meaningful lessons can be gleaned from Polanyi that will prove useful to the transitional economies.

With little history to fall back upon, the modern transition economies have had to plough a lonely furrow as they moved t owards market economies. No ready-made theories existed about the effects of liberalisation in socialist economists with no pre-existing markets [Roland 2001: 29]. In this process, huge mistakes have been made which have imposed an enormous cost in terms of human suffering on many transition economies, notably Russia.20 Broadly speaking, two opposing views have emerged on how transition is to be achieved. The first is the “big bang” a pproach which calls for the simultaneous introduction of all r eforms, while the second is a gradualist approach which emphasises sequencing of reforms [Dewatripont and Roland 1995: 1207]. The “big bang” approach seeks the widespread introduction of markets into an institutional vacuum: markets are expected to appear as deus ex machina once the dominating influence of the intrusive, socialist government is removed. The gradualist approach lays greater emphasis on the creation of marketsupporting institutions (some of which may be remnants of erstwhile socialist regimes) and clearly recognises that governments are required to protect property rights and enforce contracts if markets are to deliver. The big bang approach in Russia was f ollowed by the tragedy to which Stiglitz refers [Stiglitz 2001: xi], while the more circumspect, gradualist approach has been f ollowed in China over the last two decades [Roland 2001: 39] and in India since 1991 [Jenkins 1999: 12-41].

Even if the evidence shows that the gradualist approach seems to impose a lower cost on the transitional economies, not enough is yet known about the sequencing of reforms, the speed at which reforms have to proceed, and how market-supporting institutions are to be introduced and nurtured. These are grave issues, which need to be addressed in the transforming economies of the world, but unfortunately history is silent here. So, too, is Polanyi, with his view that all transformation is abrupt and revolutionary and that markets are fundamentally antithetical to all the other institutions of a society. Counter to the inflated claims recently made for him, the work of Polanyi is of little relevance for transition economies as they make these difficult choices on their paths of reform.

6 Summing Up

Before I set out the main conclusions to flow from the paper, I would like to digress for a while to discuss some issues related to history and historical processes.21

6.1 A Digression

Bernstein (2000) points to a crucial problem regarding history: “Whether dealing with students or with general readers, historians confront a vexing problem – the belief that history had to happen the way it did happen. Responding to this problem, historians seek to demonstrate the power of the contingent and u nforeseen – in other words, to show that the history that has happened is only one of a myriad of possible ways it could have happened”. Exploring the myriad possible ways in which history could have played out goes by the name of counterfactual history which has gained respectability in the last few years [Ferguson 1997, 1998] despite the unease of traditional historians.

Cowan and Foray (2002) suggest two views of counterfactuals: counterfactuals as non-actual possible worlds and counterfactuals as branches not taken in the tree of history. The second of these views is particularly important since it is closely related to the concept of path dependence22 that has gained wide acceptance in economics. The branching view looks at history as a tree in which each decision taken represents a branching point. Actual history

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proceeds on the tree in a sequential process of decision-making only in one direction, namely, upwards. Counterfactual analysis involves moving back down the tree to some branching point and examining a branch not taken. However, it is not always easy to pick a branching point and examine an alternate history. As C owan and Foray (2002) point out, if there is randomness and positive feedback, the links between historical antecedents and consequents may be rendered weak and the alternate historical outcomes may be under-determined.

The purpose of this rather long digression was to alert the reader to the possibility of alternate historical outcomes that might have been experienced had a different branch in the tree of history been chosen. But such counterfactuals are not to be c reated casually lest they attract E H Carr’s charge of “parlour games” [Bunzl 2004]. This paper’s position has been that the market process has become the dominant form of resource allocation and that markets have been in existence for centuries. It could well be that this progression of the market process has been path dependent and that a counterfactual could be constructed in which alternative allocation mechanisms prevail. The difficulty lies in creating a plausible counterfactual which involves identification of crucial decisions taken on the tree of history and then examining alternatives to these decisions. Social processes are generated by the actions of dispersed individuals acting in an u ncoordinated manner and it might well be impossible to identify branching points from which a counterfactual may be created.

6.2 Concluding Remarks

The transition to market-led development currently taking place in many transitional and developing economies has raised fears regarding the likely consequences for their societies. Many scholars have tried to draw lessons from similar transformations that may have occurred in the European past and the work of Karl Polanyi has commanded particular attention in this context.

Those who see merit in Polanyi’s views of the transitions and transformations taking place in the modern world must answer a profoundly important question: Is it possible to ignore Polanyi’s flawed reading of history and flawed analysis of “pre-market” s ocieties and yet offer his vision as relevant for the modern transformations? Can the flawed thesis of the “great transformation” that never was, be willy-nilly imposed on a transformation in former planned and developing economies that is still taking place? This author’s position is that one cannot be captivated by Polanyi’s apocalyptic vision when his entire edifice is constructed on shaky foundations.

Polanyi’s descriptions of pre-market and market societies have been grist to the mill of those opposed to recent reform and transformation in transition and developing economies. His characterisation of “market society” has provided support for a view a ccording to which the market system is demonised as the “satanic mill” which leads to the subjugation of society and the people i nhabiting it, and a destruction of reciprocity and social capital [Polanyi 1957: 33]. His characterisation of “pre-market society” has provided support for a romanticised view of pre-transition societies as ones in which “man’s economy, as a rule, is submerged in his social relationships” and there is no threat of starvation

Economic & Political Weekly

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(ibid: 46). This, it was believed, made the pre-market society more humane than a market society (ibid: 164). Specious but i nfluential parallels are drawn between Polanyi’s idea of the abrupt break in European economic history shortly after 1800 and present-day transformations in eastern Europe and the d eveloping world.

This paper has found that the shift from a pre-market society to a market society was not a catastrophe or a sudden change, but that, even in what Polanyi described as “pre-market” societies, markets were very active. Societies were dense with markets centuries or even millennia before the date Polanyi specified for their sudden materialisation in his “great transformation”. Polanyi’s account of European industrialisation is thus deeply inaccurate and holds no empirical lessons for modern transition.

Modern social scientists have evinced a striking admiration for Polanyi’s idea of “social embeddedness” and claimed it holds i mportant analytical lessons. According to Polanyi, pre-market society was characterised by socially embedded markets, but this social embeddedness disappeared totally and abruptly in the transformation into a market society. Careful examination of h istorical and modern empirical findings, however, casts doubt on this dramatic view of events. There is little evidence that there was any revolutionary change in the degree of embeddedness of economic behaviour at any point in history. Indeed, economic b ehaviour continues to be socially embedded in very significant ways even in modern societies.

Polanyi’s ideas of reciprocity and redistribution have been viewed as fundamental and significant alternatives to the market mechanism. But a closer examination of the evidence suggests strongly that market allocation mechanisms are not antithetical to reciprocity and redistribution: in both historical and modern societies there are and always have been significant spheres of activity where such allocation mechanisms coexist with market ones. Furthermore, in many developing economies the presence of reciprocal exchange results not from alternative cultural prefer ences but rather from weak institutions and lack of government safety nets. Such economies are likely to be better served by the creation of formal insurance markets and responsive safety nets than by a perpetuation of the reciprocal exchange mechanism.

Finally, Polanyi’s description of the apparent havoc wrought by the introduction of markets has been viewed by some as an i mportant lesson for the rapidly transforming economies of eastern Europe and the developing world. But, as this paper has shown, Polanyi was historically inaccurate in describing the market economy as unprecedented. Societies have always been dense with markets and the movement towards the developed market economies of today has been evolutionary rather than revolutionary. On the other hand, the changes taking place in the current transition economies have been truly unprecedented. Hence, drawing parallels between Polanyi’s “great transformation” and the transitions of the late 20th century is unjustified.

No Single Model

It would therefore be misleading to draw any lessons from P olanyi’s great transformation for the modern transitional and developing economies. This, of course, does not mean that history has no lessons to offer the reforming economies, but rather that are three. First, the path to a developed market economy is likely these lessons must be based on an accurate understanding of the to be gradual and evolutionary rather than revolutionary. historical development of regions such as western Europe, North S econd, there is no fundamental opposition between market and America, and east Asia. The diversity of this historical experience non-market activity and the institutions that sustain them: suggests that there is no single development model that will be market and non-market institutions have always coexisted and appropriate for all the transforming economies. The gradual evo-the challenge for development is to devise the ways in which lution of economic institutions played such an important role in they can do so most productively. The third lesson to emerge historical development experience that it seems probable that from our examination of Polanyi is that market-orientation is not they will also mould a unique development process for modern unique but cuts across diverse cultures, implying that there reforming economies which, while they may learn from the cannot be a set cultural pattern for market-led development to d eveloped nations, will never replicate the path followed by lead to success. them. Drawing non-existent lessons from a romanticised version The final lesson from history is that economic development of a pre-market society and a demonised version of a market does not reside in a once-and-for-all, inevitable shift from “nons ociety will only serve to make the task even more difficult than market” to “market” culture, along the lines sketched out by it already is. Transitional and developing economies might be P olanyi, but rather of a much more complex, gradual, and differbetter advised to seek their guidance from the deep understand-entiated process of institution-building. The task of economists ing of both market and non-market institutions that economists and other social scientists must be not to romanticise either prehave developed in recent years. market or market society, but rather to analyse those specific

The exploration of Polanyi’s “great transformation” in this i nstitutional frameworks that promote or inhibit economic e ssay has broader implications for the process of economic devel-growth and human well-being. Such an approach is likely to opment. Confronting Polanyi’s conceptual system with the his-prove far more rewarding than the search for some romanticised torical and analytical realities suggests that the lessons of history pre-market society that never was.


1 These conditions are (1) all economic agents take prices as given, (2) there is a complete set of markets, and (3) there is perfect information.

2 As I begin this narrative, the reader may want to bear in mind the possible path dependence of some of these historical developments. It may be worthwhile to re-examine this section after the reader has seen Section 6.1. I thank an anonymous referee for advising about the possibility of alternative, but unseen, variants of history.

3 The wage-earning class was as large as 43 per cent of the taxable population in Leicester and 48 per cent in Salisbury.

4 The size of the labour force was large in other parts of Europe as well. See Kisch (1972: 365-67, 376) for details of employment in the Wupper V alley of Germany in the 17th century; and T homson (1982: 154-55 and Table 17 on p 309) for the labour force of Clermont-de-Lodève in France in the 18th century.

5 Peasant ownership of land was high in other l ocalities, as well: it ranged from 100 per cent on the north Holland islands of Texel and Wieringen to 8 per cent on the south Holland islands. In 1546, peasant proprietors in the Friesian village of Kornwerd owned 25 per cent of the land they worked and owned a further 20 per cent that they rented to others [De Vries 1974: 222].

6 In addition to land, Voshchazhnikovo serfs owned houses and other buildings, including threshing barns, bathhouses, icehouses, sheds, and stalls on the local market square.

7 Rental values showed wide differences across different soil quality in northern Netherlands as well [De Vries 1974: 186-89].

8 I discuss reciprocity below. For the moment, it is sufficient to note that reciprocity was the principle on the basis of which, Polanyi argued, exchange takes place in pre-market economies.

9 Failure to engage in reciprocal exchanges led to social sanction and loss of prestige [Polanyi 1957: 48], which blunted the incentives to freeride.

10 I have been cautioned by an anonymous referee that there is no conclusive evidence that the usage of money in the past is necessarily identical to its usage in modern times.

11 The puritanical approach to monetary policy of the Mercantalists [notably Colbert; see Thomson


1982: 137] of the 17th century is well-known. M onetary policy without exchange type money is meaningless.

12 De Vries (1974: 159-60) gives details of the expansion of market towns such as Alkamaar and G ouda in the Netherlands.

13 A moral economy is supposed to be submerged in a moral universe in which justice is central and there is a moral expectation based on the right to subsistence. The classic reference for a discussion of the moral economy is James Scott (1976). See also Booth (1994), pp 653-54; Arnold (2001), p 85; Granovetter (1985), p 482; Popkin (1979), p 10.

14 North (1977) finds much merit in reciprocity as a system of allocation from the point of view of transaction-cost minimisation. We discuss this in Section 4.

15 See Granovetter (1985), pp 482-83.

16 For similar reasons, there do not exist legal markets for child adoption or human organs.

17 North (1977) has a different view, which is also discussed in this section.

18 See Bauer (1954) for west Africa, Ortiz (1973) for Colombia, and Popkin (1979) for Vietnam. For more recent arguments along the same lines, but dealing with societies of a few 100 years back, see Ogilvie (2001) for 17th century Bohemia, Dennison (2003) for 19th century Russia, and Hatekar (2003) for 19th century India.

19 Markets were destroyed even in China after the revolution, while they were highly restricted in countries which implemented socialist planning, such as India.

20 Mark Almond (“1989 Without Gorbachev: What If Communism Had Not Collapsed?”) in Ferguson (1997) examines an interesting counterfactual history. See Section 6.1 for a discussion of counterfactual history.

21 I would like to thank the editor and an anonymous referee for pointing me in this direction.

22 Path dependent processes are easily understood by reference to the logical opposite: path-independent processes whose dynamics guarantee convergence to a unique, globally stable equilibrium configuration [David 1997]. North (1990: 94) describes path dependence as the consequence of small events and chance circumstance that, once they prevail, lead to a particular path.


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