JOURNAL OF ECONOMIC ISSUES Vol. XLV No. 1 March 2011 ISSN 00213624/2011 $9.50 + 0.00 DOI 10.

2753/JEI0021-3624450110

Karl Polanyis Institutional Theory: Market Society and Its Disembedded Economy
Michele Cangiani

Abstract: A fundamental principle of Karl Polanyis institutional outlook is that any economic system has to be considered as a whole and as a historically specific social organization. This principle implies a comparative method and a critique of conventional economics. Besides, the problem of the interrelation between the economic system and other aspects of social life cannot be avoided. On this basis, Polanyi points out the peculiar economic nature of the market-capitalist society and explains the institutional transformations characterizing its history. The opposition embedded/disembedded, used by Polanyi to distinguish pre-modern economies from the market economy, has been widely adopted in recent times, particularly by economic sociologists, as a key for understanding current complex economic phenomena. However, the reference to Polanyi often presupposes a distorted interpretation of his theory, and a different kind of institutional approach. Keywords: comparative economics, embedded/disembedded economy, institutional method, market society JEL Classification Codes: A12, A13, B15, B52, P50

Karl Polanyis analyses of the rise, fall and transformation of nineteenth century civilization, and, at a lower level of abstraction, of current political and economic events,1 are meaningful within the more general frame of his theory and his political philosophy. This paper will attempt to clarify Polanyis theoretical approach, whose meaning and relevance continue to be the subject of a debate between divergent interpretations. Polanyi is concerned with a theory of those general traits of modern capitalist society that accompany it throughout its history, are still in place, and distinguish it from any other society. This attitude links him to the great tradition of European

Michele Cangiani is an associate professor of economic sociology at Universit Ca Foscari Venezia.

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social thought of the second half of the nineteenth century and the beginning of the twentieth. Polanyi explicitly refers, for instance, to Karl Bcher, Henry Sumner Maine, Bronislaw Malinowski, Karl Marx, Ferdinand Tnnies, and Max Weber. Daniel Fusfeld (1977) includes Polanyi among these and other scholars American institutionalists in the first place2 who tried to build a comparative theory of economic systems and institutional change. The institutional structure of modern capitalism cannot but be, in Fusfelds opinion, a pivotal issue in this regard. The problem is, however, that institutionalism has a long and complicated history and is divided into diverse and even contrasting tendencies. Recently, for instance, Rick Tilman (2008) has opposed the Veblenian-radical-normative outlook, which he shares, to neo-institutional tendencies. The post-1939 generation of institutionalists had already been divided by Allan Gruchy (1982) into four groups, namely, mainstream, general, radical, and applied institutionalists. My account of Polanyis theory and method implies his affinity with the mainstream group, including such scholars as John K. Galbraith, Karl W. Kapp, Adolf Lwe, Gunnar Myrdal, Franois Perroux, and J. Ron Stanfield, but also with the radical group, characterized by its interest in Marxian theory. In Gruchys opinion, in fact, there is much in common between Marxian and mainstream institutional economics, especially in their criticism of conventional economics and in their analysis of the working of the capitalist system (235). Since 1982, when Gruchys essay was published, further developments of neoinstitutional tendencies have originated brilliant analyses of economic processes. Both this neo-institutional approach and economic sociology go beyond the abstract categories and deductions of neoclassical economics; both consider economic choices and relationships as complex phenomena, conditioned by cultural, sociological, political and psychological factors. The term embedded having been increasingly employed to connote economic reality in this sense, a correspondence has erroneously been supposed with Polanyis embedded/disembedded distinction, which is only meaningful within his wide-range comparative analysis of economic systems. This misunderstanding tends to put in the shadow Polanyis main theoretical and methodological achievements. In fact, as Ill try to show, there is a gap between recent developments of neo-institutional and sociological economics, and the approach Polanyi shares with older radical and mainstream institutional economics which Gruchy (1947) calls holistic economics. Comparative Analysis of Economic Systems In current economic sociology, social organization commonly means the set of social institutions, political constraints, and other circumstances constituting the context of individual economic behavior.3 Thus the latter tends to be conceived as such and in general, according to the neoclassical formal definition. Polanyis theory concerns instead economic systems, and economic activity as itself socially and historically characterized. He speaks in this sense of the social organization (or integration) of the economy, conceived as an instituted process. The question he raises is: how is

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individual economic activity valuable and meaningful, indeed defined and possible, in any given social system? And vice versa, how are social systems able to reproduce, by reproducing a coherent and lasting division of labor? Diverse forms of social organization of the economy are possible. One of them, the market system, is characterized by the fact that, with exchange becoming the prevalent form of integration, the market becomes the specific institution through which the economy is socially organized. The opposition embedded/disembedded concerning the economy in its relation with the whole society is meaningful, for Polanyi, at this most abstract conceptual level, where the organization of market society is defined in its general traits and in comparison to other social forms. Labor and land human beings and the natural surroundings in which society exists are not produced for sale; they are not commodities, Polanyi writes (2001, 75). But, in the market society, they have been organized in markets, as never happened before. Given the vital importance of economic activity, Polanyi observes, its control by the market means no less than the running of society as an adjunct to the market. Instead of economy being embedded in social relations, social relations are embedded in the economic system (60). The break a violent break (Polanyi 1977, 10) with pre-modern societies appears as a true overturn. The way the economy is instituted makes it autonomous, and its autonomy gives it a dominant position in society. Thus, the emergent human aggregation was an economic society to a degree previously never even approximated (Polanyi 1947, 111). This kind of social system originated, at the earliest and in limited areas, during the Industrial Revolution. Only at this moment did the market as a system, as an integrating institution which in Polanyis view is inseparable from capitalism and develops together with it become the general social form of economic organization. Weber affirms, in this sense, that the satisfaction of daily needs by capitalistic methods is typical of the Western world alone, and only from the middle of the nineteenth century has it become so predominant as to characterize an epoch as a whole (Weber 1961, 207). This makes a difference, from the point of view of the institutional analysis of social systems. That difference remains invisible for those historians but also economists and sociologists of the longue dure, who adopt a formalist method, based on individualism and non-institutional economic generalizations. For them, the establishing of a market system does not represent a difference involving the social organization as a whole, but only a difference in the degree of expansion of the market as a universal phenomenon. This explains, for instance, Fernand Braudels refutation of Polanyis concept of the market system as deriving from a theological taste for definitions rather than from historical evidence (Braudel 1979, 195-196). Douglass North too, makes his opposition to Polanyis method explicit. In the method of New Economic History proposed by North, not only is economic behavior endowed with invariable norms and motives of its own, but pre-modern institutional setups and changes are basically explained with reference to their function of allowing relatively lower transaction costs and better opportunities for

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economic development, in the absence of the market and well defined and enforced property rights (North 1977, 711), which he assumes to be the most efficient solution. Polanyi, in reality, justifies his historical-comparative account not by theological principles, but by an analysis of facts, in the Veblenian sense of an empirical study of the institutional features of the economy as a social process. Local markets, external trade, and money existed in almost all societies. But the market system as a form of social organization is quite different, and it coincides with capitalism. When the use of human and natural resources Polanyi maintains was organized in industrial units under the command of private persons mainly engaged in buying and selling for profit, the commodity fiction, as applied to labor and land, transformed the very substance of human society (Polanyi 1977, 9). The peculiarity of modern society is similarly stressed by Marx: the great majority of goods become commodities he writes ([1867] 1979, 184) only on the basis of an absolutely specific mode of production, the capitalist one, which is characterized as an epoch of the social processes of production by the fact that the owner of the means of production and subsistence finds the free worker selling his labor power in the market. Institutional analysis is suitable, in Polanyis opinion, for studying both past economic systems and the market economy, because it is able to show the differentia specifica distinguishing systems from each other, and, in particular, the market system from any other. This would be impossible with the tool of the catallactic definition, which generalizes the meaning and the unity characterizing trade, money, and market, when they become elements of the market system: previously, they generally had separate origins and different functions and meanings, according to the specific way in which they were instituted. Such theoretical and political proposals imply a critique of economics, going so deep as to require a different definition of economy. The substantive meaning of economic Polanyi writes (1957, 243) derives from mans dependence for his living upon nature and his fellows. It refers to the interchange with his natural and social environment, in so far as this results in supplying him with the means of material want satisfaction. A similar definition can be found in Marx ([1953] 1974, 9): Every process of production is an appropriation of nature by the individual within and through a determinate social form (Gesellschaftsform). Veblen ([1898] 1994, 75) speaks, in his turn, of the the communitys methods of turning material things to account. Polanyi opposes his substantive definition to the formal definition, by which economic action or, more precisely, economizing action, the essence of rationality is regarded as a manner of disposing of time and energy so that a maximum of goals are achieved (Polanyi, Arensberg and Pearson 1957, 239). The formalist approach posits a type of action . . . as sui generis economic (240); an immediate link is thereby established between the general issue of the economy as a man-nature relationship and an attitude which is supposed to be typically economic and pertaining to human individuals in general, but is in reality peculiar to a given

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institutional setup, the market society. Polanyi calls this the economistic fallacy, the logical error by which a broad, generic phenomenon [is] somehow taken to be identical with a species with which we happen to be familiar (Polanyi 1977, 5-6). Such false generalization results in repressing the issue which is instead (or should be) the primary object of institutional analysis: the issue of the social-historical organization of each economic system, considered as a whole. An Economic Society The Marxian concept of social organization (Gesellschaftsform) of the economy can be considered as the origin of the institutional method. Marx works it out through his analysis of the form of value in the first chapter of Capital, where the world of commodities is deciphered, that is, explained as a specific social organization. Both the further theoretical development of Capital and the critique of economic theories are grounded on that analysis. In order for the capitalist mode of production to be fully defined, and the critique implemented, the theory of the forms of money and capital is also required. However, it is at the first and most abstract level of the analysis, that of the simple circulation of commodities, that the new institutional paradigm is adopted and explicitly stated; there Marx demonstrates the purely social nature of exchange value, in a society where, in fact, the relationship of human beings to each other as owners of commodities is the dominant social relationship (Marx 1955, 273-274). The analysis of the form of value is the starting point of the explanation of the capitalist mode of production as a specific sort of social production (Marx [1867] 1979, 95 n. 32; see also 1955), or, in Polanyis words, as a historically given social organization in which price-making markets are the dominant, indeed typical, institution. In the society of commodities, the social nexus connecting the work of different people that is, the social acknowledgment of their work and the value of their products consists, according to Marx, in human labor in general (abstract labor). This is a peculiar characteristic of the institutional setup whose substance is the cash-nexus, as Polanyi says.4 Both Marx and Polanyi contrast this kind of society with preceding societies, where the social acknowledgment and value of any single act of working was not determined by its abstract character, but by its being concretely pre-defined within given cultures, which set steadily and in detail what had to be made, by whom, how, and why. This analysis, allowing the distinction between capitalism and all preceding societies at the most general level of abstraction, constitutes the basic statement of Marxian critique; it has to be kept as the indispensable foundation of the institutional and comparative analysis of economic and social systems. It is at the level of that distinction, and with reference to it, that the meaning of Polanyis distinction between all preceding systems, where the economy was embedded in social, political, religious relationships, and the market system, where it is disembedded, has to be found. In market-capitalist society the economy is differentiated and can be defined as such because it tends to be autonomous. Therefore, as Polanyi observes,

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given its importance for the very survival of individuals and society, it makes up the organizational structure of society. In preceding societies, by contrast, the economy used to be a means for the existence and reproduction of an otherwise determined social organization. The economic structure was not basically autonomous and thereby dominant; the economic function was performed by other dominant structures, such as kinship, political hierarchy or religious tradition (Godelier, 1978; Neale 1964). Thus the economy has, as Polanyi would say, changed its place in society. The parallel between Polanyis theory and Marxian analysis of the world of commodities can be extended to Veblen, according to whom the price system has to be understood as a social situation, which is characterized as a business situation with its pecuniary exigencies (Veblen [1901] 1994, 286; [1909] 1994, 245). Similarly, in Polanyis view, what is important, concerning the price-making market, is not the price formation as such within more or less competitive market structures, but the fact that a specific social system is thus defined: a specific way of organizing economic activities and the whole society. It is in a given form of society, in a given institutional situation that individual economic behavior acquires the form of rational choice, of economizing, aiming at maximizing the result, understood in quantitative, monetary terms. In fact, money becomes the means for day-to-day living and the medium of social relationships. Being the measure of how successful an economic activity is, it becomes the end of that activity. On the one hand, it becomes possible to employ money to acquire more money, as Polanyi observes, by purchasing the use of labor on the labor market. On the other hand, the livelihood and security of individuals are no longer assured by community ties; their reciprocal obligations and their needs are no longer traditionally defined through kinship, religious, and political institutions. Therefore, everybody must economize and maximize, be their purpose to augment capital or to earn a living. When economic activity is directed to monetary gain, it follows norms of its own, its own rationality; it becomes differentiated and relatively autonomous from other aspects of social life, thereby leading to that process of rationalization and differentiation of social functions, which is, in Webers view, typical of modernity. The connection between the existence of a separate economic sphere and the principle of gain and profit as the organizing force in society is emphasized by Polanyi (2001, 178). Where capitalist and market institutions prevail, Veblen similarly maintains ([1901] 1994, 286), economic activities are typically pecuniary, oriented to profit through market transactions, and organized as business; these connotations he continues are handled by conventional economics as incidental features of the process of social production and consumption . . . instead of being dealt with as the controlling factor about which the modern economic process turns. The autonomy of the economy reveals and reproduces itself also through the motives of individual economic behavior: fear of starvation with the worker, lure of profit with the employer would keep the vast mechanism running (Polanyi 1977, 11). These motives, Polanyi observes, are considered as the true economic motives in

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general, whereas they are actually determined by a specific institutional situation, in which the economy is economically organized. There is a further reference to Weber, who says that hunger and gain become the decisive incentive of economic behavior (1978, 110). Polanyi insists on the fact that labor has been separated from other activities of life, to be subjected to the laws of the market; thus all organic forms of existence were annihilated and replaced by a different type of organization, an atomistic and individualistic one (Polanyi 2001, 171). The institution of the labor market implies the smashing up of social structures in order to extract the element of labor from them (172), and to use it as a factor of a disembedded economic activity. Marx writes that wage work presupposes the separation of free work from the objective conditions of its realization; posing the individual as worker he continues in such a naked form . . . is a product of history (Marx [1953] 1974, 375). Previously, the laborer had instead an objective existence independently from working, in the sense that both his livelihood and his participation in social production were assured in advance to him by his culture, by the given social organization of which he was a member. It was as members of a community that individuals could dispose of means of production and actually work (385). On the contrary, in modern society peoples integration into society depends on their productive activity, consisting in their ability to supply a commodity to the market whether the product of their work or the use of their labor power. Clearly, the opposition embedded/disembedded, in the sense Polanyi gives it, can originally be found in Marx. Continuity and Transformations of the Market Society Two levels of conceptual abstraction are interwoven in The Great Transformation (Polanyi [1944] 2001). At the more general one, at which the wide-ranging comparison with primitive and ancient societies is relevant, the issue is modern society and, in particular, its market-capitalist form, as we have seen in the preceding sections. Besides, it is at this level that the basic principles of economics can be questioned. A less general level regards the transformation of capitalist society; at this level, the concept of market system is to be understood in its narrower sense, denoting the institutional mechanism of liberal capitalism, which Polanyi also calls nineteenth-century or Victorian capitalism. In the first page of his book, Polanyi points out the four fundamental institutions of that mechanism: the balance of power system among European nations, the international gold standard, the self-regulating market, and the liberal state (Polanyi [1944] 2001, 3). The crisis of these institutions, starting in the last decades of the nineteenth century and culminating with the First World War, brought liberal capitalism to an end. The self-regulating market fount and matrix of the system (Polanyi [1944] 2001, 3), at least as a normative utopia was demolished by capitalist concentration and organized labor representation, by the inevitable social defense against the market mechanism, by protectionism and imperialism. The war was the outcome of the end of the balance-of-power system.

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The tentative restoration of a reformed gold standard, after the war, was illusionary; indeed, it paved the way for the Great Crisis of the 1930s. The destiny of the liberal State, and in particular of the formal institutional separation between the economic and political spheres, was linked to that of the self-regulating market. Moreover, liberal democracy, the typical constitutional setup of the liberal state, did not survive the widening of suffrage conquered by the labor movement; indeed, the fear of a popular government woke up the fascist virus.5 The crisis of liberal capitalism made clear that the economy could no longer function without a conscious control. Technological development itself involved the need for a new and purposeful organization, as Veblen maintains. Many projects were advanced, from Walther Rathenaus new economy, planned by enlightened industrialists, to Otto Neuraths natural economy, where market transactions and money itself were to be replaced by a direct social management of natural, technical and social resources. American institutional economists advocated social engineering. Weber was trusting in a constant and fruitful reciprocal nourishing of sociological knowledge and political choices. In his opinion, it is typical of modern society that problems have a social political character, in the sense that their solution is neither traditionally given nor merely technical, and it is always necessary to raise further problems and to put again and again the question of ends (Weber 1968, 153). Polanyi was inclined toward socialist tendencies deriving from the idea of industrial democracy, such as Guild Socialism in England and Otto Bauers functional socialism in Austria. Interesting similarities, principally concerning socialist democracy and the development of a corporative society after the crisis of liberal capitalism, can also be found between Polanyi and Antonio Gramsci (Burawoy 2003). In his 1922 article on the organization of a non-centralized socialist economy, Polanyi writes that the capitalist mode of production cannot by nature be guided toward social utility; indeed it lacks the sense organ through which to perceive social needs and evaluation. Not only that, but productive activity has a retroactive effect on the community. Individual needs can be corrupted or artificially created, while individuals and organizations seem always to be short of means to pursue higher cultural and moral ends, such as education or international solidarity.6 Needless to say, questioning the market systems social efficiency is a constant of the institutional outlook, beginning with Veblens analysis of the divergence between profitability and serviceability for society at large. That divergence was not peculiar to nineteenth century liberal capitalism; indeed, it has continued to widen, up to our times of enhanced autonomy of the economic system, as a consequence of technological advance, of the dramatic growth and qualitative change in financial business, and of the world-wide strategies of giant corporations, heavily influencing not only the markets but also governments and international organizations. In Polanyis opinion, the social efficiency of any organization a factory, or a party, or the economic system as a whole is proportional to its degree of living democracy (Polanyi [1925] 2005, 124). At present, we have to admit that not only has democracy not been made substantive through a widespread, informed and

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responsible participation by citizens in public choices, but even formal democratic institutions tend to be bypassed, if not undermined, under the pressure of corporate power and populist leadership. Colin Crouch (2000) has called such a minimalist model of democracy post-democracy. When Polanyi was writing The Great Transformation, the political and cultural situation was different from that he had experienced in postwar Red Vienna. The institutional crisis had not given rise to a socialized economy, but to fascism and war. Polanyis aim in writing his book was to explain the origin of these dreadful outcomes and to raise again the issue of modern politics, understood as the trend toward democratic control of social processes of the economic process in the first place. This way, the freedom of individuals could be fully realized through their political responsibility. Polanyi always remained faithful to these ideals; and the continuity of his theoretical work is connected to the continuity of his political philosophy. This is also clearly shown by the anthropological and historical research he carried out after his appointment at Columbia University in 1947. His purpose was to demonstrate the uniqueness and contingency of capitalist society in order to refute both neoclassical economics and neoliberal attempts to confirm the market system as the only solution to the problem of how to organize human life in a machine society (Polanyi 1947, 109). That continuity does not conflict with Polanyis capacity to realistically analyze economic and political change: on the contrary. Early in the 1920s he was aware that the balance of power had again turned in favor of the ruling classes, under whose leadership economic and political institutions would be reformed. For instance, with regard to this, he immediately understood the importance of the reforms proposed in the 1928 report of the Liberal Industrial Enquiry, Britains Industrial Future, to which John M. Keynes contributed.7 In the 1930s, Polanyis articles analyze the corporative transformation in the United Kingdom and the United States; the main issues dealt with are economic planning, governmental intervention, industrial reorganization, and the new collaborative attitude in industrial relations. The purpose of industrial rationalization involved that of social peace.8 The crisis of the institutional arrangement of liberal capitalism cannot be remedied, Polanyi observes; epochal reforms are to be set up, but capitalism continues its existence unscathed under a new alias, in its non-Liberal, i.e. corporative, forms (1935, 367). Such awareness was rare among observers of the day. One need only think of Joseph Schumpeter, who, in spite of his sociological and historical interests, and his contributions to the study of economic dynamics, did not grasp the question of the transformation. Unlike Polanyi, he did not go into the question of the various institutional structures that capitalist society assumes, passing through crises that are not reducible to the effect of economic cycles of different periodicity. Even after the Second World War, Schumpeter expresses the fear that the private-enterprise system would not be able to endure. In his opinion, the decay of the system is the consequence of such political interventions as stabilization policies, income redistribution, price regulation and anti-trust measures, public control over labor and

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money markets, and the creation of public enterprises for the satisfaction of social needs, together with welfare legislation (Schumpeter 1950, 448-450). On the contrary, while remaining loyal to the ideals of Red Vienna, Polanyi, unlike Schumpeter, knew the diffusion of organized and managerial capitalism and the forms of political intervention in the economy adopted by the New Deal were not destroying the private-enterprise system. Only the market system in the narrower sense of liberal-competitive capitalism, together with liberal democracy came to an end. Polanyi fully endorses, for example, the opinion of the Secretary of Agriculture, Henry Wallace, that Roosevelts policy and even the principle that industry is a public matter, allowed capitalism to persist, reinforce itself, and develop.9 Schumpeter, by contrast, was hostile to the New Deal precisely because he could not understand the significance it had. The Limits of Democracy After WWII, a new phase of capitalist development started in the name of market freedom, though checked as it was by the reforms carried out by the Labour Government in England and diverse neo-corporative arrangements in continental Western Europe. The United States consciously assumed the leadership of that renewed free-market tendency. The New Deal had been forgotten; now internal and international policies were dominated by the ideology of liberal universalism and the reality of universal capitalism (Polanyi 1945), bringing with them such nonliberal consequences as the Military-Industrial Complex, Cold War, and McCarthyism. In fact, the ideal of freedom, as Polanyi specifies in the last pages of The Great Transformation, degenerates into a mere advocacy of free enterprise which is today reduced to a fiction by the hard reality of giant trusts and princely monopolies ([1944] 2001, 265). In a subsequent article, Polanyi again proposes his conception of a truly democratic society, where the economy would be organized through the planned intervention of the producers and consumers themselves (1947, 117). But he fears that the opposite tendency would prevail toward a society more intimately adjusted to the economic system: more embedded in its own disembedded economy. This tendency is supported, he says, by those who wish to maintain the economic system unchanged in its fundamental traits: those who believe in elites and aristocracies, in managerialism and the corporation. The nineteenth-century institutional separation of the economic and political spheres ended with a period of crisis and balance of power between the classes, which led eventually, with the strengthening of the ruling class, to the undermining of democracy even where fascism did not prevail. Polanyi analyzes in this sense the transformation of the 1930s in the United Kingdom in a series of articles for Der sterreichische Volkswirt,10 where he clearly shares the criticism the Labour Left addressed to the Trade Unions and the Labour Party. He considers the political line followed by those organizations as democratic-corporative: a good basis for meeting bourgeois theorists and politicians halfway, and moving away from the socialistdemocratic line.

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After the war, the working classes regained some power in many countries, as Crawford B. Macpherson observes; but democratic-corporative society asked people to forgo any fuller measure . . . of democratic control. Organized group interests were allowed to seek to maintain their slice of the pie, but not to question the methods of the bakery (Macpherson 1987, 52, 128). Later, in the 1970s, as in any period of systemic crisis precluding an institutional transformation, there were again two alternatives. The first outcome, Macpherson says, would be a genuinely democratic participatory system; the second one, a further weakening and even a destruction of democracy by some kind of corporative plebiscitarian state (127). In fact, in the neoliberal age, the managerial, elitist, and authoritarian aspects of post-war corporatism increasingly replaced the pluralist, cooperative, welfare aspects. This age could be understood, in Polanyian terms, as a new institutional arrangement allowing the market system in its wider sense to persist, at the cost of further deteriorating democracy.11 A well-known Polanyi thesis is that the market system has been politically instituted, and that the scope and relevance of political intervention grow along with capitalism, assuming diverse historical forms. But democracy is necessarily bounded; the mere risk that it could break the constraints imposed by a disembedded economy triggers more or less dramatic reactions from capital flight to fascism, from deregulation to war. The failure of the nineteenth-century attempt to keep the economic and political spheres institutionally separated from each other does not imply the end of the tendency of the economy to be autonomous. In fact, this tendency is inherent in the market system (in its wider sense) throughout its history. From fascist corporatism, or the democratic corporative reforms of the 1930s in the United Kingdom and the United States, to the neo-corporative democracy of the second postwar period in Western Europe, to neoliberalism, and to the prospective evolution toward a Mafia capitalism and a Mafia political system (Stiglitz 2001, xv), the economy, unchanged in the most general traits of its organization, remains disembedded. Indeed, society seems increasingly embedded in its economy. Economic elites prove able to directly condition and even occupy political institutions, and to manufacture consent.12 Freedom in a Complex Society Polanyis theory of transformation shows how relevant the conception of the marketcapitalist economy as disembedded can be for understanding the institutional evolution of the market society. This result is possible precisely because that conception is worked out at the most abstract level, where the general traits of market society are defined. At this conceptual level, the condition of being disembedded means that the economic system, grounded as it is on the institutions of the market and capitalist production, is economically organized. Consequently, the economic system tends to be self-reflexive, that is, open to information coming from its environment only if it is able to acknowledge it and work it out according to the most general features of its own organization, with the view of preserving them.

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To hold to this general meaning of the distinction of embedded/disembedded is important, also, because it is related to other general characteristics of the modern development of society, such as Weberian rationalization, and the process by which social subjects become individuals. Moreover, that meaning clarifies the peculiarity of the modern place of the economy, not only in the sense of its becoming autonomous and dominant, but also as related to the complex articulation of different social functions and dynamics. Typically, in modern society, the fundamentally economic setup and dynamics of social organization do not determine all aspects of social life and their evolution, but constrain them, leaving them a relative freedom. In Webers theory of modern capitalist society, the process of rationalization and differentiation of diverse social aspects and functions consists primarily in the rationalization and differentiation of the economy. This process is the ground on which the modern problem of giving a sense to a disenchanted world grows. Weber, as well as Richard Tawney, undoubtedly influenced Polanyi, who deals, in his turn, with the modern need to explicitly raise the problem of the economy, and of society itself. This is what he calls the discovery of society. But, in a society that was going to be characterized by a disembedded economy, that discovery prevalently took the form of the discovery of the economic society, which paradoxically seemed subject to laws which were not human laws (Polanyi 2001, 131). A non-fetishist approach would instead give mankind the opportunity to strive for the fulfillment [of freedom] in society. This achievement has become possible as a result of living in an industrial complex society, which brought the knowledge of society to mankind (267-268),13 and, together with it, the acknowledgment of the reality of society. This means that, on the one hand, the behaviors and attitudes of every individual exert an influence on society; and, on the other hand, social organization constitutes an unavoidable though mutable constraint on individuals, and, at the same time, the means to realize their potentialities, including their ability to participate as free individuals in choices concerning both the functioning and the organization of their society (cf. Marxs social individual). At this point, we can better grasp the sense of Polanyis insistence on the radical break represented by modern market society. The irreversibility of this historical threshold implies, in Polanyis view, that the economy should again be controlled by society, but in a modern form: not within a traditional cultural totality, but on the basis of modern, rational, differentiated, open and dynamic social life, and, primarily, through political institutions, allowing individuals freedom insofar as they are democratically instituted. The need to get beyond the disembedded economy cannot be understood as a return to an embedded economy in the proper sense.14 This is probably the reason why Polanyi rarely speaks of re-embedding the economy in society; and when he does so, he gives that expression a definite meaning, that of a social control over economic processes, capable of preserving and developing modern liberties, and of questioning the institutional constraint constituted by the market system.15 Today, both alternative movements all around the world and theoretical contributions look

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for a way out of the ruinous consequences on human, social, and natural environment of the current neoliberal phase, and, more in general, of the capitalist market economy. Convincing proposals make reference to Polanyian ideas of reembedding, and of democracy as a condition for efficiency. For example, Fikret Adaman, Pat Devine and Begum Ozkaynak argue that participatory planning, organized as a process of democratic decision making (2007, 106), would be more efficient than other (capitalist or socialist) solutions, if social welfare, social justice and environmental sustainability are to be realized. Two problems may be raised at this point. The first is that the need for reembedding the economy can also be faced in illusionary ways that can even have the opposite effect. In the closing pages of The Great Transformation Polanyi alludes to the Fascist solution in this sense, as a regressive and perverse alleged escape from the market mechanism:16 the crisis of liberal capitalism was overcome at the price of freedom. In fascist regimes, he says, not only is capitalism preserved, but, the democratic political sphere having been abolished, capitalism as organized in the different branches of industry becomes the whole of society, and human beings are considered as producers, and as producers alone (Polanyi 1935, 392-393). Thus the economy can be regarded as even more disembedded, although this seems paradoxical in a totalitarian political regime. In Polanyis opinion, the fascist virus constitutes a permanent menace to freedom and democracy, and therefore to modern political life, throughout the history of capitalism. We may add that the attempt at a perverse re-embedding of the economy does not belong exclusively to fascism in its historical forms; it can also be traced in our times, in fundamentalism of diverse brands, and, primarily and more generally, in those softer but not less pernicious forms of power that undermine or bypass democratic institutions and are supported by mass media and mass ignorance. It is true that, in twentieth-century corporative capitalism, new efficient tools to defend society from market mechanisms have been implemented: but the dominant function of the corporative transformation has been to enroll the growingly complex organization of social life and public opinion in the service of the dominant economic interests of the market system, of a disembedded economy. In conclusion, there is evidence in Polanyis writings that both his generalcomparative theory and his analysis of the transformation imply the impossibility to re-embed the economy as long as it keeps its market-capitalist organization, which is able to reproduce itself through a continuous renewal of its economic, political and cultural institutions. The second problem is precisely that we also have to analyze the complex and changeable setups of market societies at a level that is still less abstract than the intermediate level of the transformation. Polanyi was himself engaged in this kind of analysis. For example, in 1934 he dedicated some articles to the Lancashire cotton industry,17 then in crisis after having been the driving force of the industrial revolution, of British supremacy, and of liberal ideology. These articles examine both the causes of the crisis and some measures proposed to face it. Polanyi includes, among the former, obsolete manufacturing and

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sales techniques, financial difficulties, and the small dimensions of the firms; and, among the latter, wage agreements, moves toward limiting competition, and governmental interventions. Moreover, he analyzes the commercial, financial, organizational technical and also political and cultural factors of the winning Japanese competition. For instance, he compares the urban working class of Lancashire, predominantly composed of skilled male breadwinners, with the young women constituting the bulk of labor supply to Japanese cotton factories. The persistence of traditional rural culture, and in particular of family hierarchical relationships, Polanyi observes, already gives Japanese entrepreneurs the opportunity of relying on that corporative and authoritarian mentality that industrialists and politicians are trying to reintroduce in Europe. It is evident that Polanyi pays attention to diverse and complex aspects of the case under observation. Moreover, we notice a stratification of more or less abstract concepts. The particular case of the crisis of the English cotton industry is considered not only as a multifaceted problem, but also within the framework of the World Crisis beyond which we discern a larger and deeper perspective on the shift from one institutional structure of capitalism to another and on the historically varying connection between capitalism and modern ideals of liberty and democracy. Polanyi addresses himself to the question of whether an analyst of industrial activity is allowed to deal with such general issues. His affirmative reply implies an even higher level of conceptual abstraction concerning capitalist society and its disembedded economy: yes, he says, an economist cannot ignore those issues in an epoch that has raised the economy to a fate (Polanyi 2002, 236). Polanyis approach invites us to acknowledge that general problems of this sort are not alien to institutionalism, or at least to its Veblenian origins and radical tendencies. This sort of institutionalism as a theory of the general characteristics and transformations of the market-capitalist system, and not merely as applied economics trying to include social and political contextual phenomena into the analysis does constitute a theoretical alternative to conventional economics. This quality is denied to institutionalism by those who consider it anti-theoretical (see Coase 1984, 230); and it is underrated if we identify a science only on the ground of its being capable of empirical estimation and testing (Rutherford 2000, 299) and not of the problems it is able to raise. The Sociologistic Fallacy The term embedded has been frequently employed by contemporary economic sociologists and neo-institutional economists in their analyses of the actual operation of contemporary capitalism. John Ruggie (1982) introduced the idea of embedded liberalism, Mark Granovetter (1985) that of the embeddedness of economic action. Sharon Zukin and Paul DiMaggio offer us a synthetic but comprehensive definition of the new sociological wave: the crisis of neoclassical economics, they say, creates a gap for economic sociology to fill; in fact, economic action is characterized by four kinds of embeddedness cognitive, cultural, social,

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and political that neoclassical economics tends to ignore (1990, 3). As behavioral economics shows, neoclassical rationality can never fully capture actual human behavior. Furthermore, the market could not work without a complex institutional framework; and everyday economic life is conditioned by cultural survivals, vested interests, social networks, personal relations, and psychological and cognitive biases. Diverse forms of governance of organizations, power strategies, and various kinds of public interventions do interfere with the functioning of the market. Polanyi has been frequently mentioned in the discussion of these issues, principally because he worked out the distinction between embedded and disembedded economies and used it as a tool for his critique of neoclassical economics. But the reference to Polanyi seems improper to me in this case. If my interpretation of Polanyis theory, as expounded in the previous sections, is correct, it should be clear that his conception of embeddedness has a different meaning from that of contemporary economic sociology and neo-institutional or however revised economics. Obviously, it is not possible to banish the use of the term embedded in socioeconomic analyses. The problem is to distinguish different meanings, in order to avoid an improper reference to Polanyi, resulting in the entanglement of his embedded/disembedded distinction in the sociological concept of embeddedness. The consequence of the entanglement is that Polanyis general theory of marketcapitalist society disappears, and his theory of the transformation turns out to be impoverished. In order to avoid confusion, an obvious premise is that the concept of disembedded economy is not coincident with the pure economy of abstract neoclassical models. The fact that being disembedded constitutes a general and permanent feature of the market economy does not clash with the fact that a perfectly self-regulating and perfectly competitive market never existed and could not exist. Polanyi explains that the tendency to purposefully influence the working of the market is traceable from the beginning, principally owing to 1) the need for protection and the countermovement it has originated, and 2) the dynamics of capitalism, involving changes of the markets structure, and conditioning the evolution of all social institutions. It is precisely the general characteristic of the economy of being disembedded that, on the one hand, makes state regulation and social intervention unavoidable, and, on the other hand, gives the social system its typical dynamism and complexity. In any case, in spite of the limited control that society is able to adopt, labor, land, and money continue to be commodified; indeed, knowledge has been added to them as a fourth fictitious commodity.18 Fred Block, in his Introduction to the 2001 edition of The Great Transformation, opposes the need for strong regulatory institutions to the utopian vision of neoliberals, that is to say, to the project of a disembedded, fully self-regulating market economy (Block 2001, xxxiv, xxxv and xxiv). Blocks intention is worthy of praise, but his confusion between disembedded and self-regulating weakens his argument.

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His polemic against anti-state neoliberal tendencies leads Block to generalize the concept of the double movement as the characteristic and decisive feature of market societies. The alternative prevalence of the market or state regulation determines, in his vision, the shift from one phase to another and can be conceived as an oscillation between a more or less embedded economy. Disembedding, Block argues, can never be thoroughly successful, owing to the tensions it generates: at a certain moment, the economy will revert to a more embedded position (Block 2001, xxv). The consequence of the entanglement of different meanings of the opposition embedded/disembedded, which is evident here, is that Polanyis general theory of market society and its disembedded economy is overlooked. Block alludes to that theory as to an early Marxist ideology, laid aside in the process of writing The Great Transformation, when Polanyi would have moved to the concept of the always embedded economy (Block 2003, 297). Several objections may be addressed to Blocks argument. 1) The continuity of Polanyis thought is evident not only in The Great Transformation, but also in his subsequent comparative analysis of economic systems, where the opposition embedded/disembedded is central. 2) In contemporary society, the alternative is not simply between market and state. The intervention by the state and other social agencies can, to some extent, contrast the self-reflexiveness of the economic system and its tendency to externalize social costs (Kapp [1963] 1978). However, the actual function of interventions may also, or principally, be that of regulating economic and social processes in order to avoid major breakdowns and reinforce the hegemony of the (economic) ruling class. As we have seen, Polanyi interprets in this sense the crisis of liberal capitalism and the corporative transformation. 3) The history of capitalism cannot be reduced to a mechanical oscillation from a less to a more embedded economy, and vice versa. For instance, similarities between the current neoliberal phase and nineteenth-century liberalism are less interesting than differences (concerning technological development, the structure of the market, the role of the state, the representation of group interests, the quality and perspectives of democracy, and so on). Why, for example, does a re-regulation of finance comparable to that realized by the Glass-Steagall Banking Act of 1933 (whose repeal began in 1980 and, in spite of the following savings-and-loan crisis, was achieved in 1999) seem improbable, in the United States or elsewhere, even though the current crisis and, more generally, continuously renovating and enormously increased financial activities make it more necessary than ever? The history of our society is to be considered as an irreversible process of institutional change, which is complex and indeterminate, but constrained by the need to reproduce its most general institutional features, that is, market- and capitalist relations, and therefore a disembedded economy. Yet, the responsibility of moving Polanyi into the mainstream of socioeconomic discourse (Polanyi-Levitt 2006, 387) is probably to be imputed to Block less than to others. There is a place for sociologists in the study of economic life writes Granovetter (1985, 507), concluding his illustration of the embeddedness approach. He considers economic behavior in view of a broader formulation of rational

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choice (505), one capable of taking into account not only strictly economic goals, but also moral and social motives (such as social approval, or power). Individuals are neither utilitarian atoms nor mere actors playing a culturally predetermined part. Their behavior can instead be explained through the analysis of concrete, ongoing systems of social relations, of personal relations and structures (or networks) in which it is embedded (487, 490). For instance, trust or malfeasance in market transactions, and the efficacy of hierarchical power within organizations (499) are influenced by that embeddedness. This hint at Granovetters theory may be sufficient to make clear what its subject is, and how different it is from Polanyis. Granovetter has himself recently observed that his 1985 article focused on a somewhat narrow range of problems, on social networks as an intermediate level (Krippner et al. 2004, 114-115) between individual behavior and macroeconomic phenomena. In fact, also in the final pages of that article, Granovetter (1985, 506) maintains that his analysis does not concern largescale questions about the nature of modern society or the sources of economic and political change. Thus the case could have been settled. In the following years, however, the good money of Granovetters distinction of questions according to their scale or level of generality has been driven out by the bad money of the first part of his article, where he includes Polanyi and the substantivist economic anthropology in the oversocialized conceptions of human action he criticizes. Here, placing himself at the level of a large-scale comparative analysis, Granovetter belittles the difference between market and non-market societies, maintaining, in particular, that Polanyis embedded/disembedded opposition is largely exaggerated. The argument developed in the rest of the article has generally been considered capable of supporting this thesis. But this opinion is inconsistent, because, in reality, Granovetter addresses his analysis to such concrete, small-scale issues as morality and opportunism in economic behavior, transaction costs, social networks and personal relations originating in colleges or country clubs, and so on. At this micro-sociological level, individual behavior cannot but be considered in its embeddedness. Polanyis embedded/disembedded opposition concerns instead, as we have seen, capitalism as a historically specific social system, its dynamics constituting a constraint for the development of the whole society and its transformation from one institutional structure to another. To bypass and/or repress this kind of question, at this level of conceptual abstraction, seems to be a major concern of contemporary social sciences. A pillar of this tendency is the attempt to undermine Polanyis theory by social scientists and historians maintaining that the economy has always been and continues to be embedded. This attempt generally follows one of three ways, which can also partially overlap. The first way consists in confusing two sets of different order that of embedded economies with that of instituted economies, which includes the former. Kurtulus Gemicis interesting article on the antinomies of embeddedness, for example, begins with the statement that [a]ll economies are embedded since economic life is a socially instituted and organized process (Gemici 2008, 9). Polanyi, on the contrary, clearly distinguishes between embedded and instituted. Market society is instituted as disembedded.

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The second way consists in simply avoiding the analysis of the social system as such. Bernard Barber correctly criticizes in this sense those sociologists new economic sociologists in particular who limit themselves to special topics and are not receptive to social system analysis (Barber 1995, 405-406). Their work, Barber continues (407), is limited to bits and pieces of the going economic system. Barber himself is a good example of the third way. All economies are embedded in complex larger social systems, he writes (Barber 1995, 408), clearly referring to Talcott Parsons theory. Market behavior too exists only in the context of a definite set of social structural and cultural arrangements in the social system (399). Moreover, reciprocal and redistributive exchanges flourish also in the modern world (397). Thus Barber declares his opposition to the absolutization of the market and to Polanyis general and sharp distinction between market society, with its disembedded economy, and previous societies. I have tried to show that Polanyis embedded/disembedded distinction is inherent in his comparative explanation of the historical general traits of the market (capitalist) system; that it is a fundamental element of a theory which allows a better understanding of that system while remaining grounded on evidence and perfectly falsifiable (in Poppers sense). Thus Polanyi follows C. Wright Millss principle: [t]he general problem of a theory of history can not be separated from the general problem of a theory of social structure (Mills [1959] 2000, 47). Grand theory, a generalgeneric theory of the social system, tends to remain the night where all social systems are black. Moreover, Barbers reasoning about inescapably embedded economies and the co-existence of all forms of integration in any social system results in supporting the sociological approach he criticizes. We have seen that the economistic fallacy consists in the false generalization of economic categories drawn from the functioning of the market economy. Thus it becomes difficult to understand the specific features differentiating economic systems from one another. In particular, the very conception of market society as a unique historical-institutional arrangement vanishes. This same result is obtained by the sociologistic fallacy consisting in the thesis of the always embedded economy. Again, the specific difference characterizing the market system, and therefore the most general institutional traits of our society and its dynamics, tend in this way to be excluded from the horizon of social sciences. Will future historians consider this elusive attitude, and the misunderstanding concerning Polanyis theoretical achievements, as a revealing aspect of our age of neoliberal consensus? Notes
1. 2. See his 250 articles for Der sterreichische Wolkswirt (1924-1938), in part republished in Polanyi 2002 and 2003. Joseph Dorfman (1970) illustrates the link between European and American economic and social thought in the last decades of the nineteenth century and beyond, and in particular the link between the German Historical School and Thorstein Veblen. The convergence of Polanyi and American institutionalism is highlighted by Walter Neale (1990).

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195

5.

6.

7. 8. 9. 10.

11.

12. 13.

14. 15.

16. 17. 18.

The social organization of the economy is, for example, the subtitle of an influential book: Structures of Capital (Zukin and DiMaggio 1990). Liberale Sozialreformer in England, Der sterreichische Volkswirt, February 25, 1928; now in Polanyi 2002, 96. Polanyi refers here to the exchange wages/labor power, and to Thomas Carlyle, who uses the expression cash-nexus in his Chartism (1840). The Fascist Virus is the title of two manuscripts, composed by Polanyi presumably at the end of the 1930s (Karl Polanyi Archive, 18-28). They have been published, translated into German, in Polanyi 2005. Polanyi [1922] 2005, 83-84. It is possible to find a similar criticism of the functioning of the market, when capital calculation and the aim of profitability dominate, in Webers Economy and Society, published the same year 1922 (see in particular Weber 1978, 99). Both Weber and Polanyi based their economic knowledge on Carl Mengers and Friedrich Wiesers works, where that criticism can already be traced (see Cangiani 2010). See Liberale Wirtschaftsreformen in England and Liberale Sozialreformer in England, Der sterreichische Volkswirt, February 11 and 25, 1928; now in Polanyi 2002, 90-103. It is possible to find a selection of these articles in sections V and VI of Polanyi 2002. On Polanyis articles of the inter-war period, see Cangiani 1994. Arbeitsrecht in U.S.A., Der sterreichische Volkswirt, February 13, 1937 (Polanyi 2002, 290). See e.g., Demokatie und Whrung in England, September 19, 1931; Labour und Eisenindustrie, August 25, 1934; Gewerkschaftstagung in Weymouth, September 22, 1934. (Now in Polanyi 2002, 120-128, 251-252, 253-255). The volume Reading Karl Polanyi for the Twenty-First Century, edited by Ayse Bugra and Kaan Agartan (2007), contains illuminating analyses on the recent history of our society and in particular, as Bugra writes in her Introduction, on the contemporary dynamics of the commodification process (2). The authors of the book consider the concept of disembeddedness as an important basis for their inquiries. The reference is to Edward S. Herman and Noam Chomsky (1988). Chomsky has continued to analyze the manufacturing of public opinion as a main aspect of contemporary democracy, which is increasingly conditioned by mass media and public relations professionals. See also Polanyi [1927] 2005. Polanyi studied Marxs theory of fetishism, and correctly interpreted it as a criticism of the incapability of seeing the social-historical form, the relation between man and man, behind the exchange of commodities and the use of means of production in the productive process. See Christianity and Economic Life, ms., n.d. (probably 1937), Karl Polanyi Archive, 19-22 (published in German in Polanyi 2005, 252-264, and in French in Polanyi 2008, 447-456). See Polanyis comment to Tnnies ideal of a restoration of community (1977, 49). For an analysis of the relationship between Polanyis and Tnnies thought, see Gareth Dale (2008). In his Notes on the Draft Program of the CPSU (ms., 1961, Karl Polanyi Archive, 38-1), Polanyi interprets this document as a possible sign in the direction of re-embedding the economy in society in the Soviet system. To this end, the state should give space to new complex social entities resulting from the conscious producing, distributing, checking, controlling and accounting activities of groups and even individuals. Louis Dumont (1983) correctly interprets Polanyi on this point, but within a general conception of modernity as illusionary and even regressive, which is the opposite of Polanyis. See in particular Lancashire als Menschheitsfrage, Der sterreichische Volkswirt, June 23 and 30, 1934; now in Polanyi 2002, 236-248. See e.g., the contributions by Virginia Brown-Keyder, Grol Irzik, and Bob Jessop, in Bugra and Agartan, eds. (2007).

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