Karl Polanyi’s Economic sociology

HSS203 Lecture 3-1 Jan 22 2008

Karl Polanyi’s Economic sociology

Classic and neoclassical economical view (Chicago school) on market is that:

• Market arise spontaneously from the human propensity of exchange
• All social exchange is based on the norm of reciprocity, economical exchange similarly involves reciprocity
• Voluntary agreement between buyer and seller forms the basis of all markets, both buyer and seller benefit from the exchange
• Laissez faire: that state should leave market alone because intervention distorts the beneficial effects of free markets.

Karl Polanyi disagreed with above view, he suggested:

1. Markets are meeting place for the purpose of buying and selling. Modern market represents a new institutional arrangement, only created recently.
2. Using substantivist approach, he suggested that the economy is embedded in social relations.
3. The origin of modern capital market.

Typology of institutional orders
• Reciprocity, barter, where exchange good for profits is restricted.
• Redistribution, state socialism
• Exchanging, price making market.

Polanyi argued that modern markets did not evolve naturally, they required the conscious construction of a new institutional framework. The market in fact is a political construction, not self-regulating.

In order to have the market, price-making is the first step. That faces two problems 1). Information to determine the price, such as the production cost, other seller’s price; and 2) Opportunism.

Such endeavours can only be done by state institutions. For example, before a company can be listed in the stock market, it has to comply with the government requirement in releasing relevant information. Government is also able to punish opportunism behaviour by restoring legal action. Further more, such rule and regulation is established and maintained by the state.

Therefore, market is by no means “free” or “Laissez faire” the state’s intervention is not only constant but also necessary, especially when market failure in Great Depress etc.

Neoclassical economic defines “economic” as “the most efficient use of scarce resources to achieve a given end.” In formal economic analysis, it is assumed that economic actors behave the same way in a market and non-market economy.

Karl Polanyi’s substantive definition of economy is “an institution process of interaction between man and his environment to meet material needs.”

“The human economy is embedded and enmeshed in institution”. Since market mechanism liberates greed in human nature, self-regulating market is utopian, uncheck and unrestrained greed can lead to disastrous effects to our society and environment. E.g. China with new open market economy is now facing grievous environmental problem. Market society requires an institutional order that calls for a socialist society. Society must protect itself from the ravages of market

The difference between Karl Marx and Karl Polanyi:-
o Polanyi was influenced by Marx. Like Marx, he viewed the early capitalist firm as a “satanic mill”;
o He conceived the free market as Prometheus unbound; society needs to keep market in check
o His research on the origin of capitalist markets was motivated by the search for social institutions to tame the market, in order to solve the problems caused by capitalism.
o While Marx ultimate goal was to abolish private ownership, therefore abolish market, Polanyi was to establish state regulated market mechanism i.e. welfare capitalism society.

Polanyi’s concept of embeddedness is a foundation for economic sociology. A market society is an institutional framework that supports a market economy. The modern markets are political constructions.


The substantivist position, first proposed by Karl Polanyi in his work The Great Transformation, argues that the term 'economics' has two meanings: the formal meaning refers to economics as the logic of rational action and decision-making, as rational choice between the alternative uses of limited (scarce) means. The second, substantive meaning, however, presupposes neither rational decision-making nor conditions of scarcity. It simply refers to study of how humans make a living from their social and natural environment. A society's livelihood strategy is seen as an adaptation to its environment and material conditions, a process which may or may not involve utility maximisation. The substantive meaning of 'economics' is seen in the broader sense of 'economising' or 'provisioning'. Economics is simply the way society meets their material needs