Was there a fundamental divide between the kinds of economic behavior found in

‘pre-capitalist’ and ‘capitalist’ societies?

Modern neo-classical economics “describes how consumers, based on their preferences,

maximize their well-being by trading off the purchase of more of some goods for the purchase of

less of others” (Pindyck and Rubinfeld 2005, p. 4). This is the utility maximization which is held

to motivate economic behavior. “Of course there are exceptions to this general principle”, Hal R

Varian writes, “but they typically lie outside the domain of economic behavior” (Varian 2006, p.

3)

But is this behavior a constant, inherent in humanity and applicable as an analytical concept

across time and space? Karl Polanyi argued (1977) that there were, in fact, four distinct modes of

economic activity; Reciprocity, Redistribution, Households, and Markets. The first three were

embedded in a social setting and, Polanyi argued, they had predominated throughout history;

“up to the end of the Middle Ages, markets played no important part in the economic system;

other institutional patterns prevailed” he wrote (Polanyi 1944, p. 55). A number of studies of

ancient and contemporary tribal societies were produced to demonstrate this (Polanyi 1957,

Oppenheim 1957, Arnold 1957, Chapman 1957).

According to Polanyi the ascendancy of the fourth mode, the impersonal market exchange of the

neo-classical conception, was a recent aberration stemming from the Industrial Revolution, “the

sudden changeover to an utterly new type of economy in the nineteenth century” (Polanyi 1944,

p. 55) which he characterized as The Great Transformation. From this it followed that neo-

classical tools of analysis were specific to the modern period, could not be generalized to the

period before the Transformation, and, thus, were inappropriate for analyzing economic

phenomena from that period.

Polanyi’s thesis has been attacked on several grounds. Some have questioned the methodology

of Polanyi and his followers and the notion of ‘economic anthropology’ more generally. Others

have seen a greater continuity in economic behavior than Polanyi’s thesis suggests. Some have

argued that Polanyi underplayed the amount of market activity which was present before his

Great Transformation. Others have said that much of the behavior in Polanyi’s three non-

market modes of economic activity can actually be reconciled with neo-classically conceived

economic behavior.

Rothbard (1961) argued that the study of contemporary tribal societies like the Trobriand

Islanders tells us nothing about the tribal societies which were transformed by Polanyi’s

Transition. The tribal societies which exist today must have differed in some crucial way from

the ones which Transformed to explain the fact that one set transformed while the other set

didn’t. As Rothbard argues “To scoff, therefore, at the idea that our ancestors among primitive

tribes engaged in barter, then in monetary exchange, etc., on the basis of the magic and games

indulged in by present-day primitives, is a blunder of the highest order”

Silver (1983) also challenged Polanyi on methodological grounds. He examined a number of

assertions that Polanyi made about the non-market nature of economic activity in the ancient

near east and found that, on closer inspection, there was much activity in the Market mode. He

wrote “the oldest of recorded civilizations experienced lengthy periods of unfettered market

activity, interspersed with periods of pervasive economic regulation by the state. Our own times

are little different” (Silver 1983, p. 827)

Indeed, pre Transition history is littered with examples of economic behavior seemingly in the

Market mode, examples which, like the Athenian agora, Polanyi appears to have been aware of

and at great pains to recast in one of the other three modes. As Richmond and Todd (1995)

wrote of Roman Britain “in the Malvern Hills and in the South-east there are indications of

centralized Iron Age industries which exported their products over long distances”

This is an argument developed by Hoffman et al (1999) in their discussion of the credit market

in Paris before Polanyi’s Transition. Observing the large scale mobilization of credit Hoffman et

al concluded that “the problems in early modern finance often turn out to be the same as in the

modern world, and when trained upon them, the economists’ lenses…make many things come

into clearer view” (Hoffman et al 1999, p. 91). It is explicit in Silver and Hoffman et al that they

regard the economic environment of the relatively distant past as sufficiently similar to the

current environment that modern tools of economic analysis can be deployed. The neo-classical

assumptions are universal.

A further argument against Polanyi’s thesis came from North (1977) who argued that much of

the behavior cited in support of it could be explained by the tools North himself had developed

to explain the continued existence of non-market institutions within a market framework. The

reciprocal giving and receiving for no apparent gain which Polanyi proposed as an alternative

mode to market exchange was, according to North, simply a mechanism to lower the transaction

costs which arise as trade extends over space and through time.

But as Polanyi may go too far in embracing social embeddedness so many of his critics go too far

in rejecting it. Lamoreaux (2003) argues that by expanding utility beyond “profits or income or

wealth or any other purely economic magnitude” (Lamoreaux 2003, p. 450) we can reconcile the

socially derived aspect of economic activity observed in the farmer of the early American north

east (presented as non-market in Polanyi’s terms) with the more economic behavior observed

among merchants and manufacturers.

In truth, Lamoreaux argues, this divide between farmers and merchants/manufacturers is no

neater than that between pre and post Transition. There are elements of economic behavior

found among farmers (a readiness to go to court over debts) and non-economic behavior found

among the merchants and manufacturers (close relations between merchants in cities and

suppliers in the country and appointment of family members).

But we still have seemingly socially embedded behavior and seemingly economic behavior to

integrate. Taking her lead from Michael C. Jensen and William H. Meckling Lamoreaux

jettisons some of the unrealistic assumptions of neo-classical theory, namely perfect

information. This allows us to observe that “If a business’s owner and manager are one and the

same, the owner will make decisions not only on the basis of profit but also ‘on the utility

generated by various non-pecuniary aspects of his entrepreneurial activities such as the physical

appointments of the office...the kind and amount of charitable contributions, personal relations

(‘love’, ‘respect’, etc.) with employees...purchase of production inputs from friends etc’ This

divergence from pure profit maximization is likely to be even greater where the manager’s

ownership stake is small or nonexistent, because the manager will ‘then bear only a fraction of

the costs of any non-pecuniary benefits he takes out in maximizing his own utility’” (Lamoreaux

2003, p. 451). This being so “Henretta’s description of farmers as persons for whom ‘the

maximization of profit was less important…than the meeting of household needs and the

maintaining of social relationships within the community’ is perfectly consistent with neo-

classical theory” (Lamoreaux 2003, p. 450).

Accepting this broadening of ‘utility’ to include the socially embedded pay offs as well as

pecuniary rewards risks becoming tautological; anything can be defined as utility so anything we

do increases utility.

It does, however, move us closer to the position of Holton (1992) who argued that

“embeddedness and differentiation are not to be regarded as mutually exclusive options

(because)…embeddedness and differentiation are omni-present features of most if not all

societies – even though the scale of each may vary” (Holton 1992, p. 45) (By ‘differentiation’

Holton means a conception of the economy as separate from society, the neo-classical position).

The choice “between two great myths…Polanyi’s myth of the loss of embeddedness and the

challenge of differentiation (and) the rational choice myth of Economic Man bent on individual

acquisition, and the evasion, where possible, of social control” (Holton 1992, p. 45) is not the

choice we face. Contrary to North, Hoffman et al and Silver there was a fundamental divide

between the kinds of economic behavior found in ‘pre-capitalist’ and ‘capitalist’ societies but,

contrary to Polanyi, it was not fundamental and it was not a Great Transition in the sense that it

was complete or sudden. The tools of economic analysis can be applied to different epochs but

they must be used in conjunction with tools of social and cultural analysis.

References

Hoffman, Philip T., and Gilles Postel-Vinay and Jean-Laurent Rosenthal. 1999. “Information

and Economic History: How the Credit Market in Old Regime Paris Forces Us to Rethink the

Transition to Capitalism.” The American Historical Review Volume 104, Issue 1, pp. 69 - 94.

Holton, Robert J. 1992. Economy and Society. London: Routledge.

North, Douglass. 1977. “Markets and Other Allocation Systems in History: The Challenge of Karl

Polanyi” Journal of European Economic History 6 (3) pp. 703 – 716.

Pindyck, Robert S., and Daniel L. Rubinfeld. 2005. Microeconomics. London: Pearson.

Polanyi, Karl. 1944. The Great Transformation. New York: Rinehart.

Polanyi, Karl. 1977. The Livelihood of Man. New York: Academic Press.

Richmond, I.A., and Malcolm Todd. 1995. Roman Britain. London: Penguin.

Rothbard, Murray N. 1961. “Down With Primitivism: A Thorough Critique of Polanyi” The

Ludwig von Mises Institute, September 17, 2004. http://mises.org/daily/1607.

Silver, Morris. 1983. “Karl Polanyi and Markets in the Ancient Near East: The Challenge of the

Evidence” The Journal of Economic History Volume 43, Issue 4, pp. 795 - 829.

Varian, Hal R. 2006. Intermediate Microeconomics – A Modern Approach. New York: Norton