Karl Polanyi and the Challenge for Economic History

For a long time now there has been a debate within economic history about the question whether the usual tools of neoclassical economics for understanding historical change, such as utility maximization by individuals within a market context, can be fruitfully applied to premodern or precapitalist societies. Ever since Karl Polanyi argued in his seminal work The Great Transformation that “the role played by markets in the internal economy of the various countries (…) was insignificant up to recent times, and the changeover to an economy dominated by the market pattern will stand out all the more clearly”, it has been a hotly debated item whether the societies preceding our market capitalist one can be said to have been ‘market societies’, and if not, what this entails for the nature of economic behavior under such societies.¹ Polanyi himself argued that the formation of a ‘market economy’ implied a ‘capitalistic psychology’, but that the pre-capitalist societies were characterized by structures he defined as being either based on the principle of reciprocity, such as gift economies, or on the principle of redistribution, such as the palace redistribution societies of the ancient Near East, or on ‘householding’ in the style as described by Aristotle. The motives of these societies were not primarily those of gain, but motives of “custom, magic and religion”.² In his book Polanyi describes the gain-oriented motives of market economies, assumed (according to him) by economists’ prejudices to have held throughout history, as evolving as a result of state interventionism by absolutist states in the early modern period.³ This in turn evolved into a “self-regulating market” on the basis of competition, which brought with it the mindset of individualism and “economic liberalism [as] the basic organising principle of society” in the view of the capitalists.⁴ This again leads to the “tradition” or “prejudices” of the classical economists, which “attempted to base the law of the market on the alleged propensities of man in the state of nature”, namely man as gain-oriented, individualist, market exchanging etc.⁵

It is important to note in this context that Polanyi’s book is however not primarily a description of the change from premarket society to market capitalism in psychological-behavioral terms. The ‘great transformation’ of his book is not the ability of market society to disembed itself from society, thereby allowing everyone to behave according to the rules of liberal thought to the benefit of all – his argument is precisely that this cannot be the case, because a society that actually entirely consists of market interactions following market behavior would cease to exist entirely very quickly. The ‘great transformation’ Polanyi describes in his book is in fact the recognition in the 20th century that the basis of capitalist society as laid down in the 19th century cannot be allowed to continue, because it is based on requiring a type of economic behavior that is incompatible with the survival of civilisation. This is the qualitative change to capitalism, and it is in his view a negative and disastrous one. As he explicitly says: “Nineteenth-century civilization alone was economic in a different and distinctive sense, for it chose to base itself on a motive only rarely acknowledged as valid in the history of human societies (…) namely, gain. The self-regulating market system was uniquely derived from this principle.“⁶

Since the publication of this thesis much ink has been spilled about whether Polanyi was right in his broad historical analysis. Although Polanyi appears to entertain the idea of trade being extant to a serious degree in past societies, he nonetheless explicitly claimed that trade did not depend on markets, that markets were “local” and “had no tendency to grow”, and that the division of labor did not originate or exist in exchange, and that international trade up until recently was not trade between individuals.⁷ Many recent economic historians have contested aspects of this story. The impetus for this was to respond to a 1977 article by the famous Douglass North, reviving Polanyi as a challenge for economic historians, to see whether economic history done in the neoclassical mode could explain these precapitalist societies. As North put it: “I wish to make the affirmative point that as yet we have not even tried to see how far economic analysis will take us in explaining institutional arrangements”, whereby the “institutional arrangements” meant are those economic allocation mechanisms that are seemingly not analogous to capitalist, individualist markets.⁸ Sheila Ogilvie has done – and pointed to – studies which show that peasants in rural economies in the premodern era have clearly displayed “economic mentalities”, with “the poorest groups showing careful economic calculation and maximization”, and peasants “responded to market prices” and “transacted eagerly in markets”.⁹ Morris Silver has challenged his description of the societies of the ancient Near East as being free of market allocation of land and labor, by arguing that although there were prolongued periods of state regulation and redistribution in this area during this period, there were also long periods of “unfettered market activity”.¹⁰ Silver’s evidence is perhaps not as strong as he presents it, but the point of these and other rebuttals is clear: Polanyi was wrong in saying that precapitalist societies did not display ‘economic mentalities’, and markets in land and labor did exist. It would seem then that the economic historians have met the challenge: ‘economic mentalities’ and the corresponding markets can be found throughout history.

The interesting question is really not the question whether it is empirically correct or not that certain types of markets in land existed at a certain time or that certain risk-bearing initiatives were undertaken by peasants or merchants in a certain place. For the purposes of this article we shall assume that Polanyi’s critics are broadly right, and that in fact gain-seeking behavior by individuals has existed throughout history (which seems plausible) and that market-based trade has existed in almost every society, leaving the debate about gift societies aside (which is almost certain). Rather, I would argue that both Polanyi and his critics like Ogilvie are mistaken in their understanding of how economics can be applied to precapitalist history, but for different reasons.

Polanyi based his case on the wrong foundation when he argued against the Whiggish view of history as being the history of capitalist individualism coming into its own by arguing that this was impossible because significant market activity and gain-oriented behavior did not exist earlier. This was not an effective criticism, not just because it was empirically wrong, but because it took neoclassical economics‘ assumptions at their face value. By effectively assuming that the relevant question was whether “economic behavior” existed in the past, and by assuming that such behavior can be understood in terms of “economic calculation”and markets sec, he opened the door wide for ‘formalist’ economic historians like Ogilvie and others to criticize him by ‘finding’ such instances in the past. What Polanyi should have done, and what would turn the discussion in a direction that has not been discussed by Polanyi’s recent critics, is to criticize the implicit assumption in such thought that the understanding of the economic structure of past societies depends on individual behavior in exchange. Because this is what the formalists mean, and what they want to formalize, when they speak about “economic behavior” as such: they do not mean the whole range of behavior in past societies that in some way interacted with economic institutions, since that would be virtually everything, but they mean specifically the behavior of indidivuals insofar as they took part in market exchange.

But there’s the rub: why should we take this as the main explanandum? I would argue that we can save a substantial degree of Polanyi’s thesis about a significant qualitative change between capitalist society and precapitalist society by focusing not on this narrow neoclassical concept of “economic behavior” in the past, but by understanding such behavior as being part of a wider system of economic production and reproduction of society. The relevance and irrelevance of the evidence regarding markets then comes nicely into view: although, say, ancient Athens definitely had individual international trade, and although it had substantial markets in which no doubt the individual actors behaved according to economic calculation, ancient Athenian society as such did not reproduce itself by means of these market activities; it reproduced itself first and foremost through the Aristotelian oikos subsistence agriculture.¹¹ Similarly, feudal society had significant trade, both local, international and long-distance, but again whether or not economic calculation was shown can be taken as an irrelevant given: the question is whether feudal society reproduced itself qua feudal society by such trade, and the answer is no. It was manorial agricultural production that reproduced feudal society.¹² Under capitalism markets and trade also exist; but capitalism is the first society that reproduces itself through commodity production, which exists only in and through markets. This is the qualitative difference, the Great Transformation.¹³

People always and everywhere have had interaction with each other, trade and gift economies alike. It is precisely a sign of the narrowmindedness and limited nature of neoclassical understandings of what ‘economic behavior’ is that they worry about whether such economies can be understood as ‘utility maximizing’ and the like. One can always make any society fit these definitions simply by expanding their meaning to cover the behavior shown – this, pace North, has absolutely no value whatsoever for understanding them. To understand the economic structure of societies one should not search for psychologizing explanations about whether individuals showed ‘economic behavior’, which is either tautological, when taken in terms of utility, or irrelevant, when taken in terms of maximization within a market structure. One should look at how the means of survival of a given socio-economic structure, including its cultural elements, were (re)produced and distributed. Markets in virtually all societies have played a role in this, but when looked at from this angle, it becomes clear how despite the transhistorical persistence of markets, a market under capitalism simply is not the same economic phenomenon as a market in ancient Athens. Capitalism is a qualitative change, and in the long run a negative one. To understand this is truly Polanyi’s challenge for economic historians.