Reconsiderations: 'The Great Transformation' by Karl Polanyi

By GREGORY CLARK | June 4, 2008

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Book Review
The Great Transformation
by Karl Polanyi
Karl Polanyi's "The Great Transformation" (1944), published in the same year as Friedrich Hayek's "The Road to Serfdom," is as
sacred a text to the opponents of free-market capitalism as Hayek's is to the Chicago School.
To his devotees, Polanyi showed the free market to be the enemy of humanity in "The Great Transformation." It was an alien
form of social organization, he argued, created in 18th-century England only by state action propelled by ideologues. By
displacing the natural social state — an idyllic system of mutual obligations that bound and protected individuals — the free
market brought inequality, war, oppression, and social turmoil to just and peaceful societies.
"The Great Transformation" has attained the status of a classic in branches of sociology, political science, and anthropology.
Stacks of it await undergraduate initiates each year in college bookstores. Citations to the work continue to accumulate in
scholarly articles. Yet in economics the work is unknown — or, when discussed, derided. Thus the cruel irony of the term "social
sciences."
It is understandable that Polanyi believed that free markets would lead to political and social collapse. Born in 1886 in Vienna
and raised in Budapest, he had, by 1944, witnessed World War I, the Russian Revolution, revolution and terror in his native
Hungary, hyperinflation in Austria and Germany in the 1920s, the collapse of the international gold standard, the Great
Depression, the rise of Nazism, the New Deal, and World War II — an era of unrest unprecedented in the modern world. The
book begins portentously, "Nineteenth-century civilization has collapsed."
Polanyi identified four pillars of this dying civilization — the international balance of powers, the gold standard, the liberal state,
and the self-regulating market economy. By 1944 these all seemed to have been swept away. But, in truth, the first three were
derivative of the fourth, the self-regulating market — the true fundament of this civilization. "The Great Transformation" of the
title, Polanyi believed, was the imposition of the free market, an imposition that in turn spawned these other institutions, which in
turn produced the collapse of 19th-century civilization. Hitler, Mussolini, and Stalin, Polanyi suggested, were the monster
children of the free market.
History has not been kind to these prognostications. Free-market capitalism is a resilient and stable system in much of the world
— particularly in English-speaking countries. It is the policy of world bodies such as the International Monetary Fund and the
World Bank. It is conquering vast new domains in places such as China, Eastern Europe, and India. International trade barriers
have been substantially reduced. The gold standard is gone, but has been replaced by floating exchange rates, set by market
forces. Better monetary management has greatly reduced business cycle severity. Between the traditional enemies of Western
Europe — Germany and France — all is gemütlich.
Further, while free market capitalism has its troubles, radical alternatives no longer beckon. The meliorist liberalism of John
Maynard Keynes has proven sounder than the millennialist fervor of Polanyi. Measured by the success of markets, 19th-century
civilization seems to be enjoying a renaissance.
The great puzzle of Polanyi's book is thus its enduring allure, given the disconnect between his predictions and modern realities.
The fans of Polanyi seem to be responding to his general belief that markets corrupt societies, and his assertion that free market
economies are a shocking recent departure from a socially harmonious past. His great criticism is that by breaking the social
connections between individuals, by reducing everyone to an isolated atom, markets create inequalities that previously did not
exist.
But Polanyi was no better a historian than a prognosticator. Indeed, the more we learn of history, the more evident it is that the
free market was not an 18th-century innovation, but one of mankind's oldest social institutions. Medieval England, for example,
had elaborate free markets in goods, labor, capital, and land. Forget groaning serfs, over-weaning lords, the lash of the whip;
think private property, wage labor, market incentives, and social mobility. By 1200, a large class of landless laborers worked for
cash, bought their food in markets, and rented their dwellings. The free market indeed has some claim to be the natural habitat of
modern people, not a perverse and unnatural innovation. (We have evidence for extensive markets long before the time of Christ:
in the Roman Empire, in ancient Greece, and in ancient Babylon.)
The Industrial Revolution in England did not represent a trade-off between gains for plutocrats and the horrors of poverty and
unemployment for the poor. Instead, the greatest beneficiaries of the Industrial Revolution were the unskilled; this truly great
transformation reduced the terrible inequalities that existed since at least the Middle Ages. The elaboration of the modern credit
nexus eventually produced cyclical unemployment, but the Industrial Revolution also reduced the enormous annual shocks to
income pre-industrial workers endured because of harvest successes and failures.
It is probably true, as Polanyi asserts, that hunter-gatherer and shifting cultivation societies were more egalitarian than later
market societies. But he hopelessly romanticizes that world: "The Great Transformation" makes pre-market societies seem like a
band of idyllic Christian brothers endlessly extending the helping hand, to background choruses of "Kumbaya."
More dispassionate analysis by anthropologists writing since 1944 has shown that such communities were generally violent and
sexist, with significant status differences, often including systems of slavery. Tight community bonds did not prevent assaults,
murder, and sexual violence from being commonplace. In some societies, elaborate witchcraft superstitions led to lives lived in
fear of denunciation and death. Recent accounts of the hill tribes of Papua New Guinea, the Ache of Paraguay, the Bushmen, the
Hadza of Tanzania, and the Yanomamö show complex mixtures of compassion and cruelty, sympathy and indifference. This is
no pre-market Garden of Eden.
Polanyi's popularity thus represents the triumph of yearning and romanticism over science in disciplines like sociology. "The
Great Transformation" ultimately offers more insight into the nature of the professoriat than it does to societies they study. As
entertainment, while it has its moments of elegance, it lacks the perverse majesty and literary sparkle of other critiques of market
society, such as Marx's "Kapital." Nor does it have the whacked-out crazy energy of Naomi Klein's recent "Shock Doctrine." But
still those stacks of books await the undergraduates, proving that the free market in goods works better than that in ideas.
Mr. Clark is a professor of economics at the University of California, Davis, and the author of "A Farewell to Alms: A Brief
Economic History of the World."

Correction from June 5, 2008:

Friedrich Hayek is the correct spelling of the name of the economist and political philosopher. The name was misspelled in an
article on page 11 of yesterday's Sun.
Polanyi's "The Great Transformation"
Economist Greg Clark and sociologist Fred Block, both of UC Davis, illustrate some of the tensions among the social sciences as
they discuss the work of Karl Polanyi and the desirability of a free market system. First, Greg Clark with a review of Polanyi's
The Great Transformation:
Reconsiderations: 'The Great Transformation' by Karl Polanyi: Review of: The Great Transformation, by Gregory Clark, NY
Sun: Karl Polanyi's The Great Transformation (1944), published in the same year as Friedrich Hayek's The Road to Serfdom, is
as sacred a text to the opponents of free-market capitalism as Hayek's is to the Chicago School.
To his devotees, Polanyi showed the free market to be the enemy of humanity... It was an alien form of social organization, ...
created in 18th-century England only by state action propelled by ideologues. By displacing the natural social state — an idyllic
system of mutual obligations that bound and protected individuals — the free market brought inequality, war, oppression, and
social turmoil to just and peaceful societies.
The Great Transformation has attained the status of a classic in branches of sociology, political science, and anthropology. Stacks
of it await undergraduate initiates each year in college bookstores. ... Yet in economics the work is unknown — or, when
discussed, derided. Thus the cruel irony of the term "social sciences." ...
The book begins portentously, "Nineteenth-century civilization has collapsed." ... Polanyi believed ... the imposition of the free
market ... produced the collapse... Hitler, Mussolini, and Stalin, Polanyi suggested, were the monster children of the free market.
History has not been kind to these prognostications. Free-market capitalism is a resilient and stable system in much of the world...
It is conquering vast new domains in places such as China, Eastern Europe, and India. International trade barriers have been
substantially reduced. The gold standard is gone, ... replaced by floating exchange rates, set by market forces. ...
Further, while free market capitalism has its troubles, radical alternatives no longer beckon. ... Measured by the success of
markets, 19th-century civilization seems to be enjoying a renaissance.
The great puzzle of Polanyi's book is thus its enduring allure, given the disconnect between his predictions and modern realities.
The fans of Polanyi seem to be responding to his general belief that ... free market economies are a shocking recent departure
from a socially harmonious past. His great criticism is that by breaking the social connections between individuals, by reducing
everyone to an isolated atom, markets create inequalities that previously did not exist.
But Polanyi was no better a historian than a prognosticator. Indeed, the more we learn of history, the more evident it is that the
free market was ... one of mankind's oldest social institutions. Medieval England, for example, had elaborate free markets in
goods, labor, capital, and land. Forget groaning serfs, over-weaning lords, the lash of the whip; think private property, wage
labor, market incentives, and social mobility. By 1200, a large class of landless laborers worked for cash, bought their food in
markets, and rented their dwellings. The free market indeed has some claim to be the natural habitat of modern people, not a
perverse and unnatural innovation. (We have evidence for extensive markets long before the time of Christ: in the Roman
Empire, in ancient Greece, and in ancient Babylon.)
The ... greatest beneficiaries of the Industrial Revolution were the unskilled; this truly great transformation reduced the terrible
inequalities that existed since at least the Middle Ages. ... It is probably true, as Polanyi asserts, that hunter-gatherer and shifting
cultivation societies were more egalitarian than later market societies. But he hopelessly romanticizes that world: The Great
Transformation makes pre-market societies seem like a band of idyllic Christian brothers endlessly extending the helping hand,
to background choruses of "Kumbaya."
More dispassionate analysis by anthropologists writing since 1944 has shown that such communities were generally violent and
sexist, with significant status differences, often including systems of slavery. Tight community bonds did not prevent assaults,
murder, and sexual violence from being commonplace. ... This is no pre-market Garden of Eden.
Polanyi's popularity thus represents the triumph of yearning and romanticism over science in disciplines like sociology. The
Great Transformation ultimately offers more insight into the nature of the professoriat than it does to societies they study. As
entertainment, while it has its moments of elegance, it lacks the perverse majesty and literary sparkle of other critiques of market
society, such as Marx's Kapital. Nor does it have the whacked-out crazy energy of Naomi Klein's recent Shock Doctrine. But still
those stacks of books await the undergraduates, proving that the free market in goods works better than that in ideas.
And here is Fred Block's response:
No Such Thing as a Free Market, by Fred Block, Longview Institute: It is hardly surprising that the neo-conservative New York
Sun chose to publish a reconsideration of Karl Polanyi's, The Great Transformation, written by Greg Clark... Polanyi was one of
the last century's most articulate critics of "free market" ideology--an ideology that is on the defensive today... Following the old
maxim that the best defense is a good offense, Clark’s strategy is to change the subject by attacking critics of the free market as
wooly headed, naïve, and in energetic denial of “historical reality.”...
Clark’s denunciation is a way to get at his real targets-those lesser social sciences such as sociology, political science, and
anthropology--that have found Polanyi’s work to be extraordinarily useful in analyzing the last three decades of destructive
market fundamentalism. He writes:
The Great Transformation has attained the status of a classic in branches of sociology, political science, and anthropology. Stacks
of it await undergraduate initiates each year in college bookstores. Citations to the work continue to accumulate in scholarly
articles. Yet in economics the work is unknown or, when discussed, derided.
This last assertion will come as a surprise to Joseph Stiglitz, the 2001 Nobel prize winning economist, who wrote a foreword to
the most recent edition of the book. Rather than deriding the book, Stiglitz insists that “Economic science and economic history
have come to recognize the validity of Polanyi’s key contentions." (p. xiii) [Full disclosure: I wrote the introduction for the
edition that includes Stiglitz' foreword.]
But Clark's piece also fails to grasp one of Polanyi's most important distinctions. According to Clark: "Indeed, the more we learn
of history, the more evident it is that the free market was not an 18th century innovation, but one of mankind's oldest social
institutions." Clark's insertion of the four letter word "free" into that sentence is the issue. In fact, Polanyi spent years
documenting that markets are indeed one of humankind's oldest institutions, but markets thrived historically because they were
controlled by social institutions such as kinship, religion, and politics. What was novel at the beginning of the 19th century was
the invention of the "free market"--the idea popularized by Malthus and Ricardo that human society should be organized around
an integrated system of self regulating markets ... free of any kind of social control. ...
History in fact has shown us again and again that market-based societies only work because markets are embedded within legal
and political rules that prevent opportunistic and predatory behaviors... According to the Polanyian view,... the last two hundred
years has involved systematically increasing the state's economic role in order to make markets work. ...
But Clark ... insists that:
"Free-market capitalism is a resilient and stable system in much of the world--particularly in English-speaking countries. It is the
policy of world bodies such as the International Monetary Fund and the World Bank. It is conquering vast new domains in places
such as China, Eastern Europe, and India."
In short, Clark's definition of "free-market capitalism" is so broad and undifferentiated that it includes China under the
dictatorship of the Communist Party. Whether he wants the role or not, Clark effectively becomes an apologist for the most
reactionary global interest groups that routinely use the ideology of the free market to resist and oppose necessary regulatory
measures. Both hedge fund managers and big oil companies insist that any increase in government regulation violates the logic of
"free-market capitalism".... It is puzzling-- at this late date--that Clark can not understand that the mindless celebration of the free
market comes with huge costs in economic dislocation and environmental degradation.
Karl Polanyi Explains It All
Robert Kuttner
April 15, 2014
Want to understand our market-crazed era? Rediscover the 20th century’s most prophetic critic of capitalism.
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In November 1933, less than a year after Hitler assumed power in Berlin, a 47-year-old socialist writer on Vienna’s leading
economics weekly was advised by his publisher that it was too risky to keep him on the staff. It would be best both for the
Österreichische Volkswirt and his own safety if Karl Polanyi left the magazine. Thus began a circuitous odyssey via London,
Oxford, and Bennington, Vermont, that led to the publication in 1944 of what many consider the 20th century’s most prophetic
work of political economy, The Great Transformation: The Political and Economic Origins of Our Time.
Polanyi, with no academic base, was already a blend of journalist and public intellectual, a major critic of the Austrian School of
free-market economics and its cultish leaders, Ludwig von Mises and Friedrich Hayek. Polanyi and Hayek would cross swords
for four decades—Hayek becoming more influential as an icon of the free-market right but history increasingly vindicating
Polanyi.
Reluctantly, Polanyi left Vienna for London. Two of his British admirers, the Fabian socialist intellectuals G.D.H. Cole and
Richard Tawney, found him a post at an Oxford—sponsored extension school for workers. Polanyi’s assignment was to teach
English social and economic history. His research for the course informed the core thesis of his great book; his lecture notes
became the working draft. This month marks the 70th anniversary of the book’s publication and also the 50th anniversary of
Polanyi’s death in 1964.
Looking backward from 1944 to the 18th century, Polanyi saw the catastrophe of the interwar period, the Great Depression,
fascism, and World War II as the logical culmination of laissez-faire taken to an extreme. “The origins of the cataclysm,” he
wrote, “lay in the Utopian endeavor of economic liberalism to set up a self-regulating market system.” Others, such as John
Maynard Keynes, had linked the policy mistakes of the interwar period to fascism and a second war. No one had connected the
dots all the way back to the industrial revolution.
The more famous critic of capitalism is of course Karl Marx, who predicted its collapse from internal contradictions. But a
century after Marx wrote, at the apex of the post–World War II boom in both Europe and the United States, a contented
bourgeoisie was huge and growing. The proletariat enjoyed steady income gains. The political energy of aroused workers that
Marx had imagined as revolutionary instead went to support progressive parliamentary parties that built a welfare state, to
housebreak but not supplant capitalism. Nations that celebrated Marx, meanwhile, were economic failures that repressed their
working classes.
Half a century later, the world looks more Marxian. The middle class is beleaguered. A global reserve army of the unemployed
batters wages and marginalizes labor’s political power. Even elite professions are becoming proletarianized. Ideologically, the
view that markets are good and states are bad is close to hegemonic. With finance still supreme despite the 2008 collapse, it is no
longer risible to use “capital” as a collective noun. The two leading treasury secretaries during the run-up to the 2008 financial
crash, Democrat Robert Rubin and Republican Henry Paulson, were both former CEOs of Goldman Sachs. If the state is not
quite the executive committee of the ruling class, it is doing a pretty fair imitation.
Yet Marx, for all of his stubbornly apt insights about capitalism, is an unreliable guide to its remediation. Polanyi, with the
benefit of nearly a century’s worth more evidence, has a surer sense of how markets interact with society. More humanist than
materialist, Polanyi did not believe in iron laws. His hope was that democratic leaders might learn from history and not repeat the
calamitous mistakes of the 19th and early 20th centuries. Polanyi lived long enough to see his wish fulfilled for a few decades. In
hindsight, however, the brief period between the book’s publication and Polanyi’s demise is looking like a respite in the socially
destructive tendencies of rampant markets. In seeking to understand the dynamics of our own time, we can do no better than to
revisit Polanyi.

The Great Transformation, written for a broad audience, is witty and passionate as well as erudite. The prose is lyrical, despite
the fact that English was Polanyi’s third language after Hungarian and German.
Contrary to libertarian economists from Adam Smith to Hayek, Polanyi argued, there was nothing “natural” about the free
market. Primitive economies were built on social obligations. Modern commercial society depended on “deliberate State action”
by and for elites. “Laissez-faire” he writes, savoring the oxymoron, “was planned.”
Libertarian economists, who treat the market as universal—disengaged from local cultures and historic time—are fanatics whose
ideas end in tragedy. Their prescription 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.”
Like Marx, Polanyi begins in England, the first fully capitalist nation. In Polanyi’s telling, the slow shift from a post-feudal to a
capitalist economic system accelerated in the 18th century, when the enclosure movement (“a revolution of the rich against the
poor”) deprived the rural people of historic rights to supplement incomes by grazing domestic animals on common land, and the
industrial revolution began to undermine craft occupations.
For a time, social cushions left over from feudalism sheltered ordinary people from the turbulence of markets. “England
withstood without grave damage the calamity of the enclosures,” Polanyi wrote, because protections guaranteed by the Crown
could “slow down the process of economic improvement until it became socially bearable.” Conservatives understood this better
than economic liberals. Polanyi invokes the views of George Canning,* a Tory who served as foreign secretary and later prime
minister, that the poor laws—traditional relief payments that protected the rural working class from periodic destitution—“saved
England from a revolution.” But in the early 19th century, the rising merchant class, the emergent Liberal Party, and the ideology
of laissez-faire together produced a social order based on a self--regulating market.
The old poor laws were abolished in 1834 in favor of the poorhouse, an institution designed to be so degrading that workers
would accept the dismal labor-market wages in William Blake’s dark, satanic mills. Meanwhile, free trade became the norm,
meaning lower grain prices in the short run (and depressed wages) but increased volatility in the price of food. In the same
period, the rise of a rigidly enforced gold standard limited the state’s ability to temper periodic downturns.
An economy oblivious to social consequences had to engender backlash. The sponsors of protective measures were often
conservatives concerned about social stability, such as the English Tory Benjamin Disraeli and the Prussian Iron Chancellor Otto
von Bismarck. “The [English] Ten Hours Bill of 1847,” Polanyi writes, “which Karl Marx hailed as the first victory of socialism,
was the work of enlightened reactionaries.” But by the late 19th century, periodic financial panics and depressions menaced both
society and the market system. This got displaced into nationalism, culminating in World War I.
After that war, the victorious nations tried to restore the trinity of free trade, the gold standard, and unprotected labor markets.
Obsessed with sound currency, market ideologues and bankers demanded austerity policies leading to both mass unemployment
and episodes of hyperinflation. Given the legacy of war debts and dislocations, all this was more than the economy or society
could bear. Market institutions, Polanyi writes, “broke down in the twenties everywhere—in Germany, Italy, or Austria, the event
was merely more political and more dramatic.”
In a few places, politics produced a third way—neither the hegemony of the turbulent market nor the grim security of the total
state. Social-democratic Sweden and New Deal America devised a mixed economy that civilized the brute energy of capitalism.
At the time Polanyi was writing, others converged on the same aspiration. In Britain, Lord Beveridge was composing his
blueprint for a postwar welfare state. Part II, published in 1944, carried the Polanyian title Full Employment in a Free Society. At
Bretton Woods, also in 1944, John Maynard Keynes and Harry Dexter White were inventing a postwar international financial
system that made room for domestic social democracy freed from the pressures of gold and deflation. A few months after
Polanyi’s book went to press urging that “rights of the citizen hitherto unacknowledged must be added to the Bill of Rights”
including “the right of the individual to a job,” Franklin Roosevelt delivered his “Second Bill of Rights” speech in January 1944,
calling for exactly that. Polanyi was not formally a player in the planning for Bretton Woods; he does not cite Beveridge, nor
could he have known about FDR’s coming speech. But in the aftermath of depression, dictatorship, and war, the shared vision of
managed capitalism was in the air. Nobody gave it context and gravitas better than Polanyi.
For three decades, the success of a social settlement between labor and capital seemed to vindicate both Polanyi’s critique and his
hopes. But the compromise did not stick. The path of capitalism since the 1970s has repeated the 19th-century hegemony of the
market and is beginning to resemble the darker history of the 1920s and 1930s.

How did Karl Polanyi become the great non-Marxian synthesizer of the tragic interplay of markets, society, and politics? He was
born in Vienna in 1886 during a short era known as the “Great Generation,” when the decaying Austro-Hungarian Empire was a
center of intellectual and political enlightenment. His Hungarian father, Mihaly Pollacsek, with a Swiss engineering degree, was
a designer of Vienna’s rail system. The family’s surname, of Polish-Jewish origin, was magyarized to Polanyi after Mihaly’s
death in 1905,** and the family ceased identifying as Jews. Polanyi grew up mostly in Budapest, where his Russian-born mother,
Cecile, ran a literary and political salon, and he attended the elite Trefort Street Gymnasium. The illustrious family included his
younger brother Michael, a chemist who became a libertarian political philosopher, and Michael’s son, John, who won the Nobel
in Chemistry, as well as the artist Eva Zeisel.
Expelled from the University of Budapest in 1907 after a brawl in which anti-Semitic right-wingers harassed a popular socialist
professor and Polanyi and his friends rushed to his defense, he repaired to the provincial University of Kolozsvar (today Cluj in
Romania) to finish a doctor of law degree. While still a student, Polanyi helped found the left-wing Galilei Circle, serving as its
first president and editor of its magazine. After a flirtation with Marx, Polanyi was drawn to the more temperate Socialism of
Robert Owen, Richard Tawney, and G.D.H. Cole and the British Fabians. In today’s language, he was a social democrat.
Polanyi served in the world war as a cavalry officer. He contracted typhus and came home to find Budapest torn between
nationalist right and far left. At the time of the aborted Hungarian Soviet revolution of 1919 (which he opposed), Polanyi left
Budapest for Vienna. His war experience, illness, and the destruction of liberal Budapest left him frail and emotionally
exhausted. But in 1920, he met the love of his life, a petite firebrand named Ilona Duczynska. Her biographer called their union
“a marriage between an anarchist world revolutionary and a reclusive liberal scholar.” Ilona was expelled from the Communist
Party that year for her independent views. The couple had their only child, Kari, in 1923. Soon, Polanyi was contributing to local
journals and running an informal economics seminar from the family apartment on the Vorgartenstrasse.
To provide a counterweight to neoliberal dystopia, Polanyi believed the working class needed to be mobilized politically, in a
robust democracy. He arrived at this conclusion not merely from theory but from his worker-education efforts at the Galilei
Circle and by living in one of the most successful social-democratic epochs of the European experience, Red Vienna in the 1920s
and early 1930s—red as in social-democratic, not communist. There, after World War I, socialist municipal governments in
power for 15 years built model low-rent housing financed by taxation. Parents received kindergartens, day care, and a family
allowance in the form of a “clothes package.” Gas, water, and electricity were provided by publicly owned utilities. Taxes on the
wealthy included surcharges on the use of servants. Generous unemployment insurance strengthened workers’ bargaining power.
Polanyi viewed Red Vienna as a hopeful counterpoint to the Dickensian poorhouse on one extreme and fascism on the other. The
perverse reforms of early-19th-century England were products of the weakness of the working class, he wrote, but Red Vienna
was a badge of its strength: “While [English poor-law reform] caused a veritable disaster of the common people, Vienna achieved
one of the most spectacular cultural triumphs of Western history.” But as Polanyi appreciated, an island of municipal socialism
could not survive larger market dislocations and rising fascism. Four months after he departed Vienna in 1933, the right took
over.
The nature of the times caused Polanyi and his wife Ilona to be twice separated, first when he moved to England and she stayed
behind as part of the anti-fascist underground until 1936 and again for more than a year, when Polanyi backed into a wartime stay
in America. He had been on a lecture tour of U.S. colleges, his third such visit. Peter Drucker, a friend from Vienna and later an
influential theorist of corporate management, invited Polanyi to spend the summer of 1940 in southern Vermont with him and his
wife. With the support of Drucker and another émigré scholar and friend, economist Jacob Marschak, then teaching at the New
School, Polanyi applied for a Rockefeller Foundation fellowship to stay at Bennington to complete his book. Among his
references were prominent London acquaintances, including a young war correspondent named Edward R. Murrow.
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In the 1944 catalog of publisher Farrar & Rinehart, the entry for The Great Transformation appropriately compares it to Keynes’s
succinct 1919 classic, The Economic Consequences of the Peace. But while Keynes’s book was a best-seller, turning its author
into a celebrity, The Great Transformation sold just 1,701 copies in 1944 and 1945.
The New York Times reviewer, John Chamberlain, was savage: “This beautifully written essay in the revaluation of a hundred and
fifty years of history adds up to a subtle appeal for a new feudalism, a new slavery, a new status of economy that will tie men to
their places of abode and their jobs.” If that sounds just like Polanyi’s nemesis, Hayek, it was for good reason. Chamberlain had
just written the foreword to Hayek’s The Road to Serfdom, also published in 1944. While Hayek’s book was adapted in Reader’s
Digest and became a best-seller, Polanyi’s languished.
By 1946, however, Polanyi had been reviewed, mostly favorably, in major newspapers and social-science journals, and he was
slowly attracting a following. At 61, Polanyi was offered his first real academic job in 1947 at Columbia, where he taught until
1953. But in the Cold War chill, the State Department refused to give a permanent visa to Ilona, and she relocated to Canada.
After attempting to commute from Toronto, Polanyi spent his final years settled there, returning to an early scholarly interest in
economic anthropology.
Temperamentally, he was both a work obsessive and a romantic. His habit of phoning former students at odd hours to discuss
arcane ideas was part of his charm. Polanyi’s letters to his wife and daughter are filled with tenderness. One of his great essays is
on Hamlet, and his last work, published in 1963, was a jointly edited book with Ilona, The Plough and the Pen, with an
introduction by W.H. Auden, on the struggles of modern Hungary as rendered by Hungarian poets and essayists.

Fred Block and Margaret Somers, both economic sociologists, have been Polanyi admirers for more than three decades. In The
Power of Market Fundamentalism: Karl Polanyi’s Critique, they aim to reintroduce him in an era of resurgent laissez-faire and
political blockage that he could have scripted. “Our focus,” they write, “is on the rebirth in the 1970s and 1980s of the same free
market ideas that were widely assumed to have died in the Great Depression.”
Block and Somers provide a thorough reprise of Polanyi for readers new to him and careful analysis for specialists. The best part
of their book is its introductory chapter, a well—integrated and brisk summary of the man and his ideas. Other chapters provide
useful discussions of what Polanyi’s social history gets right and slightly wrong, as well as astute comparisons of Polanyi with
Keynes and Marx.
Unlike Marx, Polanyi viewed the transformation of a more balanced commercial society into a market-dominated one as neither
natural nor inevitable. For Polanyi, as Block and Somers observe, “progress could only come through conscious human action
based on moral principles.” Though there was a logical pattern to capitalism’s overwhelming social structures, we were not
doomed to repeat our mistakes. Polanyi was a huge fan of Roosevelt’s New Deal, which he saw as the sane alternative to laissez-
faire dystopia on the one side and totalitarian anti-politics on the other. “The eclipse of Wall Street in the 1930s,” he wrote,
“saved the United States from a social catastrophe of the Continental type.”
Polanyi rejected both Marxists and economic libertarians for their shared premise that the state should or could wither away.
Marxists assumed the state would be redundant after the workers’ revolution. Libertarians saw (and see) the state as interfering
with the genius of the market. Polanyi embraced democratic politics, both as an end in itself and as the necessary precondition for
taming the economy. Despite his gloomy rendering of history, Polanyi remained an optimist.
Block and Somers also re-examine Polanyi’s research. A key section of The Great Transformation pivots on a local English
ordinance known as the Speenhamland law, which Polanyi treats as an emblematic shift in emergent capitalism. Approved by the
justices of Berkshire County at a May 6, 1795, meeting, Speenhamland increased the worker protections of the old Elizabethan
Poor Law of 1601. With wages falling, pauperism spreading, unrest increasing, and the English gentry all too aware of
revolutionary events across the Channel in France, the law provided that any worker who could not earn enough to feed his
family was entitled to supplemental relief from the local parish tied to the price of bread—“a minimum income should be assured
to the poor irrespective of their earning.”
But the law, like a badly designed modern welfare program, backfired. Many employers reduced wages, knowing that the parish
would make up the difference. Some workers, disdaining the wretched pay on offer, became idlers. Costs to taxpayers increased.
The dysfunctional system led to outcries from welfare reformers of the day, culminating in the infamous report of the 1832 Royal
Commission, which, in turn, led directly to the reform of 1834 and the poorhouse.
Block and Somers find that Polanyi overstated the ubiquity of the Speenhamland system. In practice, poor-relief formulas in
England varied widely. What Polanyi did not overstate was the dislocation of the working poor—first by the enclosure
movement, then by the industrial revolution—and the perverse response of economic liberals.
A weakness of the Block-Somers book is that several chapters are based on published journal articles, insufficiently blended into
a new whole. As a consequence, the tone is uneven, and the book has a fair amount of repetition. Nor do Block and Somers offer
much on Polanyi’s personal journey. They include just four pages of summary on his life. The British social scientist Gareth
Dale, author of the fine 2010 book Karl Polanyi: The Limits of the Market, and Berkeley Fleming of Mount Allison University in
Canada are currently working on the first comprehensive Polanyi biographies.
Fortunately, a good deal on the connection between Polanyi’s life and his work has already been written by his daughter and
literary executor, Kari Polanyi Levitt, an emerita professor at McGill University in Montreal. In Polanyi Levitt’s most recent
book, From the Great Transformation to the Great Financialization, she provides fascinating new material on Polanyi’s debate
with Mises and Hayek. From the time he worked at the Österreichische Volkswirt in the mid-1920s, Polanyi engaged Mises and
Hayek both ideologically and technically, arguing over pricing mechanisms under democratic socialism and the emergent
dangers of the libertarian system then strangling Europe’s postwar recovery. Polanyi viewed Mises and Hayek as modern
counterparts of Adam Smith, David Ricardo, and the social Darwinist Herbert Spencer, punishers of the poor in the name of
market incentives. “Inside and outside England,” he wrote in The Great Transformation, “from Macaulay to Mises, from Spencer
to Sumner, there was not a militant [free-market] liberal who did not express his conviction that popular democracy was a danger
to capitalism.”
Hayek contended in The Road to Serfdom that even democratic forms of state planning were bound to end in the totalitarianism
of a Stalin or a Hitler. But 70 years later, there is not a single case of social democracy leading to dictatorship, while there are
dozens of tragic episodes of market excess destroying democracy. “The fascist solution of the impasse reached by liberal
capitalism,” Polanyi wrote, “can be described as a reform of market economy achieved at the price of the extirpation of all
democratic institutions.” Polanyi surely had the better of the argument. But Hayek had more influence over prevailing ideology
and practice. Polanyi and Marx might converge on the inference that Hayek’s views were more useful to the ruling class.

Though slow to win recognition, The Great Transformation became a modern classic. After the neoliberal assault on the grand
compromise of the late 1940s, Polanyi seemed not just prescient but prophetic. Because he was a political organizer, journalist,
self-taught historian, and economist, Polanyi, in moral philosopher Albert Hirschman’s metaphor, could be a trespasser across
academic disciplines. Though Polanyi is one of the most cited of social scientists, he is not widely read among economists. The
mainstream of the profession has largely stopped teaching the history of economic ideas. Nor do most economists today study the
relationship of economics to politics and social history.
Like other free spirits such as Hirschman, Joseph Schumpeter, or John Kenneth Galbraith, Polanyi had relatively few graduate
students, and there is no formal Polanyi “school.” Rather, a wide spectrum of thinkers found their way to him. He’s prized by
social historians and economic sociologists, and his brand of inquiry fits squarely into the tradition of American institutional
economics associated with John R. Commons and the great debunker of free-market cant, Thorstein Veblen. Since 1988, thanks
to the efforts of his daughter Kari and her colleague Marguerite Mendell, there has been an active Karl Polanyi Institute of
Political Economy, which holds regular conferences, including an anniversary event planned for this fall.
A 1982 article by the international-relations scholar John Gerard Ruggie helped rekindle interest in The Great Transformation.
Ruggie, paying homage to Polanyi, refers to the great postwar social compromise as “embedded liberalism,” meaning it squared
the circle of a basically capitalist (liberal) economy with plenty of social protections (embedded). A few social scientists of the
first rank, including the late sociologist Daniel Bell, political historians Ira Katznelson and Jacob Hacker, and economists Joseph
Stiglitz, Dani Rodrik, and Herman Daly, explicitly cite their intellectual debt to Polanyi. Paradoxically, Polanyi also appeals to
some Burkean conservatives, with their regard for the social order. John Gray, a recovering Thatcherite and author of the best-
selling critique of neoliberalism False Dawn: The Delusions of Global Capitalism, is effusive in his praise of Polanyi. Martin
Anderson, advising Ronald Reagan on welfare reform, drew extensively (if misleadingly) on Polanyi to warn that the wrong sort
of poor relief backfires. Yale political scientist and anthropologist James C. Scott, author of notable books on the failures of
grandiose state projects, said in a 2010 interview that he read The Great Transformation the summer before starting graduate
school, “and I think it is, in some ways, the most important book I’ve ever read. … The struggle that Polanyi points to is a
struggle that we’re still engaged in.”
At the same time, many public intellectuals working in the tradition of Polanyi don’t have him on their conceptual maps. Michael
Walzer’s classic Spheres of Justice, on necessary boundaries between market and non-market institutions, is quintessential
Polanyi, but Walzer never mentions him. Elinor Ostrom, a political scientist whose work on strategies to avoid environmental
catastrophe—the modern tragedy of the commons—made her among the first non-economists to win the Nobel Prize in
Economics, echoes Polanyi but doesn’t invoke him. In reading the works of Galbraith, the consummate historical and
institutional economist of the 20th century, one searches in vain for Polanyi.
As more of us are having second thoughts about the second coming of the primal market, it is as if Polanyi is somewhere in the
ether. Rereading Polanyi at a time when events vindicate his vision, one has to be struck with the eerie contemporary ring.
Polanyi is startlingly 21st-century in addressing how the private rule of global finance puts public policy in a straitjacket. Back in
the era of the gold standard, if a government tried to combat unemployment, Polanyi wrote, “any governmental measure that
caused a budgetary deficit might start a depreciation of the currency.” That analysis could describe contemporary Argentina or
Indonesia, except that the discipline of today’s bond market is even more relentless than the classical gold standard.
Polanyi also sounds like today’s news when he explains how the state’s doing the bidding of private capital (rather than providing
a democratic counterweight) undermines politics. In the 1830s, he explains, the British state served the interests of the rising
merchant class. The result, he wrote, was “the hatred of public relief, the distrust of state action, the insistence on respectability
and self-reliance” on the part of the English working class. He could be describing members of the Tea Party, the same
demographic that once voted in large numbers for FDR, and the tendency of citizens throughout the West to give up on
governments in the pockets of the rich.
The European Union’s austerity follies are recapitulating the perverse policies of the 1920s and inviting the same brand of know-
nothing backlash. In the upcoming elections to the European Parliament, voters disgusted with the failure of politics to remedy
the prolonged recession are poised to deliver big gains to nationalist far-right parties. In Polanyi’s beloved Budapest, where he
and Ilona are buried, the right already governs.
His discussion of the influence of ideas, likewise, is all too contemporary. In the 1920s, as in the 1830s, the intellectual
dominance of free-market economists gave elites pseudo—scientific cover to pursue brutal and perverse policies, with a studied
myopia about real-world consequences. In our own time, market fundamentalism is again the dominant ideology. The latest great
transformation, from a balanced social market economy to a dictatorship of the invisible hand, has weakened the power of the
polity to restore balance and undermined the confidence of the working and middle classes in the use of the democratic state to
counter market excess. One must hope, with the optimistic Polanyi, that capitalism can be fixed.
*CORRECTION: An earlier version of this piece referred to George Canning as "Lord Canning." George Canning's wife
was given the title of "Lady" after his death, and thus he was not referred to as "Lord" during his lifetime.
**CORRECTION: An earlier version of this piece stated that the family’s surname was magyarized in the 1890s; it was
magyarized in 1905 after Mihaly Pollacsek's death.
RECONSIDERING THE ECONOMIC THOUGHT OF KARL POLANYI IN 2009

ADAM LARRAGY

Senior Sophister

Economists and their theories, like governments, come and go. But during
times of change, in particular, people are wont to look to the past to shed
light on current challenges. In this essay, Adam Larragy examines Karl
Polanyi’s critique of market liberalism in general and the self-regulating
market in particular. Polanyi’s advocacy of a democratic socially planned
economy flies in the face of the last twenty years’ experience, but - along
with the ever-changing relationship between political ideology and the
market – this is worth reassessing in light of recent global events.

Introduction

‘Our thesis is that the idea of a self-adjusting market implied a stark

utopia. Such an institution could not exist for any length of time without
annihilating the human and natural substance of society; it would have
physically destroyed man and transformed his surroundings into a
wilderness.’
(Polanyi, 2001: 3).

The above statement, an extract from Karl Polanyi’s The Great Transformation, would
have sounded discordant and out of sync with what J.K Galbraith called the ‘conventional
wisdom’ if it had been quoted only one year ago.

Since the mid-1980s, most Western countries experienced ‘a substantial decline in

macroeconomic volatility’ (Bernanke, 2004), as unemployment, economic growth and
inflation seemed to become more stable, in marked contrast to the turbulent 1970s. The
electoral victories of Margaret Thatcher and Ronald Reagan in the 1980s signalled the
end of the post-war economic consensus in Britain and of the New Deal in the United
States as laissez-faire economic thought guided, or at least legitimised, the economic
policies of both governments. The end of the Communist experiment in the Soviet Union
in 1991 supposedly signalled the ‘end of history’, leaving no alternative to a liberal
capitalist economic and social structure that had proved itself as more successful than any
other social and economic system or ideology (Fukuyama, 1993). By the 1990s, even the
largest labour and socialist parties in Europe, which were brought into existence to
protect workers from the depredations of the market economy, had accepted the idea that
market relations and the market economy had to be extended and often proved more
zealous advocates of privatisation and market liberalisation than their predecessors.

However, the ‘Great Moderation’ only applied to Western economies, as industrialising

nations experienced ‘exchange rate, stock market, and interest rate volatility’ due to ‘the
volatility of ever-growing private capital flows’ unleashed by financial liberalisation both
within developing and developed countries (Wade, 2006:122).1 Even within Western
economies, the experience was one of stagnating real wages and greater inequalities in
both wealth and income (Dumenil et al., 2004). However, it is the current crisis that has
created the opportunity to raise fundamental questions about the desirability and scope of
free-market policies, the assumptions behind such policies and the limitations of neo-
classical economic theory. In this context, the work of Karl Polanyi, an ardent critic of his
contemporaries, Ludwig von Mises and Friedrich von Hayek, should be reconsidered and
his critique of market liberalism and classical economics re-examined.

Karl Polanyi: activist and economist

Karl Polanyi, economic historian and anthropologist, was born in Budapest in 1886 and
grew up among a radical bourgeois Jewish intellectual milieu in which he played an
active role. Polanyi moved to Vienna in the 1920s and it was here that he was introduced
to the ideas of Mises and Hayek, who were engaged in a project to rehabilitate market
liberalism (Polanyi, 2001: xx). Polanyi formulated his critique of market liberalism in
response to their ideas, and advocated a democratically planned socialist economy on the
grounds of ‘social and moral superiority’ rather than efficiency (Humphreys, 1969: 169).
With the ascent of the Nazis in 1933, Polanyi’s Judaism and socialism made his position
in Vienna untenable and he was forced to resign from the newspaper Der Osterreichische
Volkswirt. He immigrated to England where, like many socialists of his generation, he
became involved in adult education, lecturing with the Workers’ Educational
Association. In the 1940s, he was a visiting scholar to Bennington College in Vermont,
where he wrote The Great Transformation. He was appointed visiting Professor of
Economics at Columbia University in 1947 where he taught General Economic History,
characteristically redefining it as ‘the place occupied by economic life in society’
(Polanyi, 1971: v). At Columbia, he studied the economic aspects of institutional growth,
producing Trade and Market in Early Empires (1957).

Polanyi is usually placed within the institutional school of economic theory, and his
former students have made a strong case for Polanyi to be considered one of the key
contributors to the ‘old institutional’ school (Stanfield, 1980; Fusfeld, 1988). The key
concern of institutionalism is the impact of human institutions on economic behaviour.
However, it must be noted there is a dividing line between the ‘new institutionalism’ of
Douglass North and Ronald Coase and the ‘old institutionalism’ of Polanyi and Thorstein
Weblan; for example, North emphasised that the market economy requires certain
preconditions that can only be provided by the state, private property rights and
constitutional protection of markets while Polanyi believed there was ‘an impossible
separation between markets and politics’ made by market liberals (Davis, 2008: 1102).

The critique of neo-classical economics by the old institutionalists centres around what
they see as the key mistake of separating man from his surrounding institutions, whether
it is the state or any other social institutions created by man. Though such an analysis

1
Notably, China still controls capital flows.
would usually be classed as political economy, many of the old institutionalists would
have viewed this approach as the only way to analyse economics. Commenting
favourably on Schumpeter’s Capitalism, Socialism, and Democracy, noted institutionalist
Warren J. Samuels asserts ‘the inseparability of economy and politics, that is, the reality
of a legal-economic nexus’ (Samuels, 1985: 67). In terms of Polanyi’s economic thought,
The Great Transformation is his formulation of this critique, and constitutes his response
to Hayek and Mises and what he saw as their fatal conceit, the belief in the self-
regulating market.

The Great Transformation

The Great Transformation was published in 1944 in the same year as Friedreich van
Hayek’s Road to Serfdom, though characteristically of our age, rather more has been
heard of Hayek’s work of political economy in recent years. Polanyi’s argument
constitutes both history and theory, as he and his central European contemporaries
(including Hayek) would have seen any attempt to construct theory without history as
impossible. The book is divided into three parts; the first an account of the ‘international
system’ resulting from the ‘Great Transformation’ of the nineteenth-century in which the
market economy came to dominate Western societies and, through imperialist conquest,
the world. The second part constitutes a historical narrative of the ‘rise and fall of the
market economy’ (drawing on his historical research into English economic and social
life while teaching in the 1930s). The third is a commentary on ‘transformation in
progress’ in reference to current and future processes, from his contemporary viewpoint,
such as the rise of fascism and possibly of socialism.

Though structured in part as a historical narrative, The Great Transformation is best

examined in terms of its broader themes: the critique of the classical concept of
‘economic man’; the moral and intellectual fallacy of treating as commodities land,
labour and money; the impossibility and fatal effects of ‘disembedding’ economic life
from social life, and the related phenomenon of the ‘double movement’; and the
importance of understanding the historical processes of social and economic change.

Economic Man

As previously noted, the key to classical and neo-classical economic theory is the idea of
‘economic man’: a being whose utility-maximising behaviour enables the market
mechanism to function by responding to price changes rationally, thus allowing the co-
ordination of supply and demand. The historical origins of the concept can be traced
further back than Adam Smith (usually Mandeville’s Fable of the Bees) but his
observation that man’s nature is to ‘truck, barter and exchange’ is its most famous
expression (cited in Polanyi, 2001: 45). This concept was based on ideas of how man
would behave in a state of nature (in a curious parallel to Rousseau, though with the
opposite implications) and as such could be examined in historical terms. Polanyi, who
had an interest in early economies, opposed the concept by claiming that ‘economic
motives spring from social life’ (ibid.: 49).
He contended that empirical evidence showed that early societies tended to organise their
economic life around four principles: reciprocity, redistribution, householding (using
Aristotle’s definition of oeconomica as ‘production for use’) and barter whose
corresponding patterns were symmetry, centricity, autarky and the market pattern
respectively (ibid.: 55). Polanyi reversed the classical view that man’s ‘propensity to
barter’ leads to local markets, the division of labour, foreign trade and eventually long-
distance trade. Even in the case of long-distance trade, barter was embedded in relations
bounded and regulated by custom, magic and religion whereas ‘national markets’ were a
creation of the powerful centralising monarchies of Western Europe in the 15th and 16th
centuries, driven by the imperatives of war and the need to unify their kingdoms.

The industrial revolution of the 19th century, with the introduction of the factory system
into a commercial society, may have enabled the development of the vision of ‘economic
man’, but everywhere this was contradicted by the mutualism of rural areas, of the new
trade union and Chartist movements (ibid.: 78). Polanyi located the modern conception of
‘economic man’ in Joseph Townsend’s Dissertation on the Poor Laws (1786), in which
Townsend infamously claimed men were beasts and subject to the same laws of Nature;
in Smith’s formulation there was never any question that moral law and political life were
excluded from the self-interested butcher’s life (ibid.: 117). Malthus, Ricardo, Burke and
Bentham all believed that ‘economic society was subject to the laws of nature’ (ibid.:
130). Polanyi’s entire historical narrative implicitly affirms the contingency of human
behaviour on history, that is, the contingency of human behaviour on the social, cultural,
political and economic institutions that give rise to social life. ‘The behaviour of man
both in his primitive state and right through the course of history has been almost the
opposite implied in this view [that of the existence of an ahistorical rational man]’ (ibid.:
258).

The Fictitious Commodities: Land, Labour and Money

‘Laissez faire was planned, planning was not’; Polanyi used this phrase to describe the
‘birth of the liberal creed’ in the 1820s, the decade in which it was to take on its full
meaning. Labour must find its price on the market; money should be subject to an
automatic mechanism (the gold standard); and the removal of impediments to the
international free flow of capital and goods should occur (encapsulated in the political
slogan ‘free trade’) (ibid.: 140-144). Central to economic liberalism was the conceit that
land, labour and money were commodities, much the same as any other good or service
produced for exchange. This presented both an intellectual and in the case of land and
labour, a moral problem; the commodity labour is of course work provided by human
beings, who by their very nature (which does not correlate historically with that of
rational optimising man) cannot be expected to behave as a commodity. Land is the
natural substance of the world and the basis for man’s existence rather than a commodity.

European economic life in regard to land and labour was embedded in social life until the
19th century; feudal relations or older custom rights were prevalent on the land and land
was often held in common. In England, elaborate social legislation under the Elizabethan
Poor Laws, the Statute of Artificers and the 1662 Act of Settlement regulated economic
life. Legitimised by Malthus’ Law of Population, Ricardo’s ‘iron law of wages’ and
Benthamite utilitarianism (which provides what amounts to the ‘moral philosophy’
element within classical economics) the creation of a labour market was accomplished by
means of the 1834 New Poor Law, which ‘for the sake of industry’ removed any succour
for those deemed capable of working (ibid.: 150). Rational man would react to the threat
of starvation and hunger would drive him into the factories and work-houses of the liberal
society (ibid.: 120).

The Gold Standard was the medium by which the market liberals thought to extend the
self-regulating market throughout the world (with the addition of international free trade).
Each nation’s currency being backed by gold, a deficit in the balance of payments of a
country would lead to gold flowing out of that nation leading to a contraction in the
money supply, rise in interest rates, fall in prices and wages and thus a rise in exports. At
least that was the theory. By the 1850s the four institutions of the 19th century could be
fully discerned: a balance of power between nations, the liberal state, the gold standard,
and the self-regulating market. Polanyi emphasised that ‘budgets and armaments, foreign
trade and raw material supplies, national independence and sovereignty were now the
function of currency and credit’ (ibid.: 18).

The ‘double movement’

However, Polanyi asserted that as soon as the economy was ‘disembedded’ from
economic life, a counter movement emerged which had diverse origins. The decade of
the introduction of the New Poor Law saw the rise of the first working-class political
movements, the Chartists. In the 1830s industrialist Robert Owen experimented with new
co-operative organisations and in this decade the formation of the modern trade union
movement, which arose to protect working-class people, is discernable. Market liberals
such as von Mises and ‘social Darwinist’ and liberal Herbert Spencer identified the
decades of the 1870s and the 1880s as those in which the counter-movement became
discernible, and they termed them the ‘collectivist’ decades. The introduction of social
insurance in Germany was a response to the rise of the Social Democratic party and trade
unions and recognition of the need to protect labour. In Britain, following the defeat of
the Chartists the trade union movement was less political than their continental
counterpart, but it still achieved official recognition.

Across Europe, from Hapsburg Austria to Republican France, governments and

legislative bodies intervened in economic life, to place tariffs on agricultural and
industrial goods, and to mitigate the effects of the gold standard (ibid.: 150). The gold
standard had proved too difficult for nations to bear - the adjustments to balance of
payments were too severe, as wages and prices would suddenly fall. Polanyi also argued
that the new imperialist urge came from the needs of businesses to get around the self-
regulating market and gold standard; this need created imperial zones protected by tariffs.
Elaborate legislation in France, Germany and Britain (and in Ireland) was introduced to
protect peasants from losing their land as a result of destitution, or to protect them from
eviction. However, this movement, which arose to protect man and nature, also
disintegrated the four institutions of the 19th century (ibid.: 257).

Polanyi contested that the forces of countermovement arose from the mistaken treatment
of land, labour and money as commodities and the attempted creation of a self-regulating
market and the integration of said ‘fictitious commodities’ into that market. He identified
the ‘conservative 1920s’ as an era in which governments attempted to return to the pre-
war world of the gold standard and free trade. This placed such a strain on society that the
counter-movement took the form of fascism, which ‘emerged as an alternative solution to
the problem of industrial society’ (ibid.:250).

Polanyi believed that socialism was the only moral response to the failure of the self-
regulating market, and possibly saw the New Deal continuing after the Second World
War, providing a basis for a new society. He identified socialism as simply ‘the tendency
inherent in an industrial civilisation to transcend the self-regulating market by
consciously subordinating it to a democratic society’ (ibid.: 242). The post-war world in
the West was indeed constructed on the basis of a controlled currency system (Bretton
Woods), and widespread control of the labour market by means of nationalisation of
industry and the creation of the welfare state - though it fell somewhat short of Polanyi’s
vision.

Conclusion

It is important to remember, given the current crisis, that Polanyi - a refugee fleeing
fascism - recognised fascism as offering an alternative to liberal capitalism, but one that
rejected ‘the postulate of freedom… and of the oneness of mankind’ (a tradition he
ascribes to Christianity) while ‘[glorifying] power which is the reality of society’ (ibid.:
268). It is worth quoting the final lines of The Great Transformation, which could be said
to offer a prescient rejoinder to Hayek’s Road to Serfdom and guidance for today’s
economic policymakers and politicians:

‘Uncomplaining acceptance of the reality of society gives man indomitable

courage and strength to remove all removable injustice and unfreedom. As
long as he is true to his task of creating more abundant freedom for all, he
need not fear that either power or planning will turn against him and destroy
the freedom he is building by their instrumentality. This is the meaning of
freedom in a complex society; it gives us all the certainty that we need.’
(Polanyi, 2001:268).
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Socio-Economic Review (2008) 6, 5–33 doi:10.1093/ser/mwl034
Advance Access publication May 23, 2007

Karl Polanyi and the antinomies

Downloaded from https://academic.oup.com/ser/article-abstract/6/1/5/1698585 by guest on 12 November 2018

of embeddedness
Kurtuluş Gemici
Department of Sociology, UCLA, Los Angeles, CA 90095-1551, USA

Correspondence: kgemici@ucla.edu

While Polanyi argues that all economies are embedded and enmeshed in social
relations and institutions, he tends to see market economy as disembedded,
which reveals a tension in his thought. The main motivation for this paper is to
understand the origins of this tension. On the basis of a systematic formulation
of Polanyi’s work, it is argued that Polanyi employs embeddedness in a dual
manner: (a) as a methodological principle akin to methodological holism, and
(b) as a theoretical proposition on the changing place of economy in society.
These two formulations of embeddedness contradict each other. After tracing
out the origins of this contradiction, this paper concludes by considering the
implications of this analysis for economic sociology. It is argued that embedded-
ness as a methodological principle is the only acceptable usage of the term. Yet, in
this capacity, embeddedness falls short of economic sociology’s goal of providing
a theoretical alternative to neoclassical economics.
Keywords: embeddedness, economic systems, economic sociology
JEL classification: A12 relation of economics to other disciplines, B25 historical,
institutional, evolutionary, Austrian history of economic thought, Z10 cultural
economics, economic sociology, economic anthropology

1. Introduction
Schumpeter (1954, p. 21), in a frequently quoted passage, presents the intellectual
division of labour between economics and economic sociology in the following
manner: ‘Economic analysis deals with the questions how people behave at any
time and what the economic effects are they produce by so behaving; economic
sociology deals with the question how they came to behave as they do’.
Karl Polanyi would disagree. He would argue that the real distinction between
economics and any other social science concerned with economic life is that
economics dictates an image of the economy derived from a utopian ideal on

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6 K. Gemici

all empirical economies in history. Such an ideology, according to Polanyi, is not

only obsolete but also destructive in its promotion of self-regulating markets,
simply because economies—past and present—are embedded and enmeshed in
social relations and institutions. Economics and its ‘obsolete mentality’ are
valid as long as one is sufficiently myopic to see the unsustainable market
system of the 19th century in all economic life. The ‘self-acting device’ of the

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19th century—the market system—cannot be the reference point for grasping
‘the reality of society’ in economic life because, before its rise, markets were
isolated and regulated by other social institutions.
Polanyi’s critique of economics is enduring; his embeddedness concept is the
foundation for social scientists’ criticism of the homo economicus in neoclassical
analysis. Block (2001) argues, in his introduction to the 2001 edition of The Great
Transformation (p. xxiii), ‘The logical starting point for explaining Polanyi’s
thinking is his concept of embeddedness. Perhaps his most famous contribution
to social thought, this concept has also been a source of enormous confusion’. The
second part of Block’s assertion can easily be witnessed by the number of
interpretations that the concept of embeddedness has provoked (Reddy, 1984;
Granovetter, 1985; Stanfield, 1986; Zukin and DiMaggio, 1990; Lie, 1991;
Barber, 1995; Beckert, 1996; Krippner, 2001; Le Velly, 2002; Block, 2003; Krippner
et al., 2004). In this article, I argue that the confusion follows from a central frac-
ture in Polanyi’s thought. While Polanyi offers a vision of all economies
‘embedded and enmeshed in institutions’ (Polanyi et al., 1957), he tends to see
market exchange and market economy as self-regulating and disembedded.1
This is an ostensible contradiction, and it leads to ‘what Marx really meant’-
style debates. We can never know what Marx, Keynes or Polanyi thought when
they were composing their ideas; hence, such debates are sterile, fruitless and—
most importantly—endless. In this article, instead of taking an approach that
professes to know what Polanyi really meant, I address the confusion over
embeddedness through a close textual analysis of Polanyi’s writings.
Such a textual analysis reveals that the ambiguity in the embeddedness concept
is genuine to Polanyi’s thought; the confusion springs from the double role the
concept plays in Polanyi’s oeuvre. On the one hand, Polanyi uses embeddedness
as an analytical construct to discern the changing place of economy in society
throughout human history. Polanyi, in an unequivocal manner, employs the
concept to specify the degree to which economy is ‘separated’ from the rest of
society. Here, embeddedness is a historical variable; the market economy is an
anomaly since it is the first ‘disembedded’ economic system in history. On the

1
The following abbreviations are used for Polanyi’s works: GT, The Great Transformation; TM, Trade
and Market in the Early Empires; PAME, Primitive, Archaic, and Modern Economies: Essays of Karl
Polanyi, edited by George Dalton; LM, The Livelihood of Man.
 Polanyi and the antinomies of embeddedness 7

other hand, embeddedness is a methodological principle positing that economy

and society can only be analysed through a holistic approach; economic life can
be analysed only through the examination of how it forms a part of social
relations and institutions. Here, embeddedness is neither a variable nor a chan-
ging characteristic of economic systems in history. Accordingly, Polanyi oscillates
between a holistic and a restrictive institutionalism. He derives his famous

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vision—all economic life as embedded in social relations and institutions—
from a holistic view of economy and society. However, he switches to a restrictive
institutional analysis when he compares the market system with other economic
systems throughout history (i.e. household, reciprocity and redistribution); here,
he reduces economic life to socio-spatial patterns in the circulation of goods and
services. This results in conceptualizing embeddedness as a gradational concept,
one that varies throughout history, which is in clear contradiction with embedd-
edness as a universal methodological principle.
This paper unravels the discord in the following manner. In the first section,
I present the dual role embeddedness plays in Polanyi’s work. The second
section traces the origins of the embeddedness concept to some of Polanyi’s key
preoccupations early in his intellectual career and analyses how these preoccupa-
tions influence the conceptual precursor of embeddedness in The Great
Transformation, the notion of institutional separation of the economy from the
rest of society. I then focus on how Polanyi formulates his thesis on the changing
place of economy in society through his studies of past and present economic
systems. In the fourth section, I look at Polanyi’s formulation of embeddedness
as a methodological principle akin to methodological holism. I then explain the
antinomy between the two conceptualizations of the embeddedness concept by
a shift between a holistic and a restrictive view of economy and society. I conclude
with a critical discussion of Polanyi’s two notions of embeddedness and their use
in contemporary economic sociology, arguing that embeddedness as a gradational
variable is a misleading venue for studying economic life and that the only
acceptable usage of the concept is as a methodological principle.

2. The duality of the embeddedness concept in Polanyi’s work

The Great Transformation and Polanyi’s later comparative studies of economic
systems throughout history suggest two different interpretations of the embedded-
ness concept. On the one hand, Polanyi puts forward a thesis about the impossi-
bility of separating economy from society because all economic systems are
embedded in social relations and institutions (TM, p. 250; GT, pp. 60, 73, 279).
On the other hand, he envisions, in numerous places, the market economy as
separate from social institutions, functioning according to its own rules; therefore,
markets and market economy are disembedded (PAME, pp. 120–22; LM, p. 47;
8 K. Gemici

GT, pp. 60–61). It is not the case that one interpretation grasps what Polanyi really
meant; there is sufficient support for both.
The contrast between embedded and disembedded economic systems arises
in the most dichotomous manner in the writings of Polanyi’s followers in econo-
mic anthropology. Their research programme exerted considerable influence in
the 1970s and 80s and was marginalized in the 1990s in economic anthropology

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(Dalton, 1968, 1971, 1981; Firth, 1972; Godelier, 1972, 1986; Jenkins, 1977;
Sahlins, 1981 [1972]; Dalton and Köcke, 1983; Plattner, 1989; Somers, 1990;
Narotzky, 1997; Gudeman, 2001). Substantivism, as it is advanced by the
Polanyi group, posits that the differences between pre-modern and modern
economies are substantial enough to render the vocabulary of modern economic
life and economics inaccurate and misleading in studying ancient and tribal
societies (Dalton and Köcke, 1983, p. 26).2 In such societies, technology, pro-
ductive equipment and accumulation are limited; the division of labour is deter-
mined by social patterns such as age, sex, kinship and marriage; competition is
social rather than economic; exchange exists, even under competitive markets,
but the goods offered are produced for subsistence rather than for sale.
Therefore, the integration of economic life takes place through patterns of
reciprocity and redistribution (Forde and Douglas, 1967, pp. 15 – 22; Nash,
1967). There is no separate sphere of economic activity. While the economy
inhabits a separate and autonomous sphere under capitalism, it is enmeshed
in society under pre-modern economies in such a manner that studying the
economy apart from ‘the tissue of relationships’ that constitutes ‘the reality of
society’ would be erroneous (PAME, p. 117; Dalton, 1968; Dalton and Köcke,
1983, pp. 26 – 27). Thus, economic anthropology inspired by Polanyi portrays
a highly dichotomous view of different economic systems in history (see
Table 1).3
Although Polanyi’s own analysis is more refined than this dichotomous view
of economic systems throughout history, his comparative studies of ancient and

2
However, as early as the first half of the 1970s, the emerging consensus rejected the more extreme
assertions by the followers of Polanyi. As Firth (1972, p. 470) observes: ‘It has now become clear
that the original issue, as it took shape between “substantivists” and “formalists” . . . as to whether
economic theory could be applied to primitive economies, was largely sterile. The issue was rather
where, how far, and with what modifications and additions economic theory could be found
appropriate to interpret “primitive” systems’.
3
Polanyi and his substantivist approach to economic life exerted an even larger and more important
influence in classical studies, especially through Finley’s adoption of Polanyian analysis (Finley, 1973,
1975). A discussion of Polanyi’s influence, particularly in the analysis of the ancient Greek economy,
would be of considerable value in highlighting the fertility as well as the shortcomings of his research
programme. See Humphreys (1978), Moseley and Wallerstein (1978), Figueira (1984), Mann (1986),
Nafissi (2004) and Morris and Manning (2005).
 Polanyi and the antinomies of embeddedness 9

Table 1 The dichotomous view of different economic systems throughout history

The place of economy in society

Embedded Disembedded

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Type of economy Pre-modern Modern
Integrative system Household/reciprocity/redistribution Market

modern economies offer a similar thesis on the changing place of economy in

society: the market economy tends to self-regulate and become separated from
the rest of society. There is a movement and an ideological project to disembed
the economy from society, but it is met with a protective response from society
(GT). Here, embeddedness arises as a gradational concept; the disembedded
economy is not possible, but some economic arrangements are more absorbed
in social institutions and relations than others.
However, programmatic statements on the study of economic life present a
different conceptualization of embeddedness. Polanyi proposes the thesis that
all empirical economies are ‘embedded and enmeshed in institutions, economic
and noneconomic’ (TM, p. 250). Furthermore, he emphasizes the importance of
grasping ‘the reality of society’ (i.e. that it is an instituted relationship of persons)
in studying economic life (PAME, pp. 117– 119). This reveals the two conceptua-
lizations of embeddedness simultaneously at work in Polanyi’s thought (see
Table 2). The first is a universal statement on the relationship between
economy and society. It suggests that all economic life is subject to the ‘reality
of society’. The second, which sees embeddedness as changing from one economic
system to another, entails a gradational concept of embeddedness; although it is
impossible to disembed the economy fully from the rest of society, an economy
can be relatively disembedded. Clearly, the two conceptualizations contradict

Table 2 Two notions of embeddedness in Polanyi’s thought

Always embedded Gradational embeddedness

All economies are embedded since
economic life is a socially instituted
and organized process
The degree of embeddedness changes from one type of
society to another, depending on how the economy is
integrated. If integrated as a result of operations with
non-market ends, it is embedded. If integrated as a
result of operations with strictly market ends, it moves
towards being disembedded through the commodifi-
cation of labour, land and money
10 K. Gemici

each other, which reveals a ‘central ambiguity’ in Polanyi’s approach to studying

economic life (Jenkins, 1977, p. 70).
Several commentaries on Polanyi observe this ambiguity (Garlan, 1973;
Jenkins, 1977; Dupré and Philippe-Rey, 1978; Lie, 1991; Booth, 1994; Barber,
1995; Krippner, 2001; Block, 2003). Krippner (2001, p. 782) deems it a reconcila-
ble contradiction; it arises from Polanyi’s objective of refuting analysis based on

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homo economicus while at the same time ‘portraying the market . . . as an
inextricably social object’. Barber (1995) criticizes Polanyi’s gradational embedd-
edness notion, and he advocates the always-embedded view of economic
systems.4 Lie (1991, p. 219) notes that, despite emphasizing ‘the embeddedness
of economic activities and institutions’, Polanyi ‘fails to embed the market
concept’. Yet, these authors do not investigate the cause of the ambiguity itself,
nor do they see the ambiguity as symptomatic of a deeper fracture in Polanyi’s
thought.5
To comprehend the origin of the ambiguity requires investigating the intellec-
tual sources from which Polanyi derives the embeddedness concept.6 For this
purpose, I investigate how Polanyi conceptualizes the relationship between
economy and society in different parts of his work.

3. The early formulation of the embeddedness concept

Embeddedness is not a pivotal concept in The Great Transformation; Polanyi only
uses the term twice (Barber, 1995, p. 401; Krippner, 2001, p. 779). Furthermore,
he chooses to employ other terms such as ‘absorbed’ and ‘submerged’ to describe
the relationship between economy and society, even when he could readily utilize
the term embeddedness (Barber, 1995, p. 401). The Great Transformation, despite

4
Barber (1995, p. 400) offers the following comment on the gradational view of embeddedness: ‘While
Polanyi’s analysis of the different types of economic exchange is very valuable, as we have seen, he is
less helpful, indeed misleading, when he goes on to discuss the matter of their differential
embeddedness. Polanyi describes the market as ‘disembedded,’ the other two types of economic
exchange as more ‘embedded’ in the other social-structural and cultural-structural elements of
society’.
5
I should mention four additional works in this context: Jenkins (1977), Dupré and Philippe-Rey
(1978), Booth (1994) and Block (2003). These authors develop important lines of criticism and
anticipate some of the arguments I advance. Yet, with the exception of Block (2003), none of the
articles investigate the origins of the ambiguity in the embeddedness concept.
6
It is remarkable that despite the importance of embeddedness, I know of no analysis that investigates
the development of the term in Polanyi’s thought. Barber (1995) gives a history of the concept, but he
does not delve into where Polanyi’s idea originates. Krippner (2001) advances an ‘historical sociology
of concept formation’ but her argument is a critique of how the concept is used in new economic
sociology; thus, she just traces out how Granovetter (1985) builds his own formulation.
 Polanyi and the antinomies of embeddedness 11

its centrality in Polanyi’s oeuvre, contains neither a definition nor an extended

discussion of embeddedness. However, Polanyi’s intellectual preoccupations in
the years before the publication of The Great Transformation and his argument
in the book indicate that the underlying idea of embeddedness is there. Indeed,
the notion of institutional separation, an important component of Polanyi’s
argument in the book, contains the essence of embeddedness as a historical

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variable.

3.1 The Great Transformation and the notion of institutional separation

As early as the 1920s, Polanyi writes about the ‘self-regulating market economy’,
‘separation of society into political and economic spheres’ and ‘“economistic
prejudice” that confused economy with a self-regulating economy’—themes
that mark his scholarship in the later part of his life (Mendell, 1990,
pp. 71 – 73).7 However, Polanyi’s encounter with an ailing capitalism during
the 1930s in England, after the Polanyi family left Vienna in 1933 due to the
rising tide of fascism in Austria, equally seems to have influenced the tone
and themes of the book.8 The Great Transformation is a book devoted to his-
torical analysis not solely for the sake of understanding the past, but also for
making an argument about the present and future. The nature of fascism
and socialism, the causes of their rise and what lies after unfettered liberalism

7
The intellectual roots of Polanyi’s thought would take a study in themselves. See Drucker (1979),
Polanyi-Levitt (1987), Vezér (1990) and Duczynska (2000) for the influence of family on Polanyi’s
intellectual development and a general sketch of his life. It should be observed that these sources
are not always consistent on the details of Polanyi’s life. See Humphreys (1969) and Gábor (2000)
for Polanyi’s activities in the Galilei Circle. Polanyi’s socialism in his school years and in exile in
the early part of his life is discussed by Litván (1990, 1991) and Múcsi (1990). Humphreys (1969)
remains the best discussion of the origins of Polanyi’s thought in his early utopianism and
romanticism (despite the relations, her suggestions are not universally accepted). Congdon (1990),
Mendell (1990) and Rosner (1990) trace the influence of G. D. H. Cole’s Fabianism and guild
socialism on Polanyi; they further offer highly informative readings of Polanyi’s writings and
participation in the socialist planning debate during his stay in Vienna in the early 1920s.
Additional sources on Polanyi’s Vienna years can be found in McRobbie and Polanyi-Levitt (2000).
The impact of Polanyi’s years in England on the subsequent development of his thought can be
found in Somers (1990), Hann (1992) and Duczynska (2000). The relation between Polanyi’s ethics
and his historical scholarship is analysed in detail by Baum (1996). See Polanyi-Levitt (1990) and
Salsano (1990) for a discussion of the place of The Great Transformation in Polanyi’s thought.
8
As his wife, Duczynska (2000, p. 311) writes: ‘Stronger than any intellectual influence was the trauma
which was England. It was his encounter with full-fledged capitalism—of which he had imagined that
we knew all that is worth knowing! Yet the houses which Engels had described were still standing;
people still lived in them. Black hills of slag stood in the green landscape of Wales; from the
depressed areas, young men and women who had never seen their parents employed, drifted away
to London’.
12 K. Gemici

are interpreted through the historical forces that led to the rise and fall of the
market system.9
In The Great Transformation, Polanyi undertakes an interpretation of the
transformation of modern civilization in the 19th century and its inevitable col-
lapse in the 20th century.10 Polanyi’s main thesis is that the institutional foun-
dations of 19th century civilization (i.e. the balance-of-power system, the

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international gold standard, the self-regulating market and the liberal state)
stood on two contradictory forces: (a) the organization of production by the
market, and (b) society’s countermovement to protect itself against the intrusion
of the market. These contradictory forces constitute Polanyi’s famous double
movement, around which he constructs the historical narrative of the book.11
Thus, the narrative traces (a) the extension of the market to spheres of social
life previously untouched by it, (b) the materialization of society’s self-protection
in the form of interferences with market mechanisms, and (c) the consequences
of the clash of the two contradictory forces. Polanyi analyses the expansion of the
market and the regulatory countermovement in the context of England because
‘market society was born [there]’ (GT, p. 32). He shifts his attention to the inter-
national arena to examine the consequences of the double movement and the
ultimate collapse of 19th century civilization.
Polanyi operates with a particular theory of industrialization, commodifica-
tion and society. In his theoretical framework, the rise of the factory system,
liberal market ideology, of state intervention and the concurrent commodifica-
tion are focal points in understanding the expansion of the market. The merchant
in the 18th century foments the factory system through the introduction of

9
See Hexter (1945), Williams (1945), Hildebrand (1946) and Humphreys (1969). The following quote
from Drucker (1979, p. 136) is illuminating in understanding the role of historical analysis in The
Great Transformation, despite its slight exaggeration: ‘Economic history was, however, only the
vehicle for Karl’s search for the alternative to capitalism and communism, and for a society that
would provide at the same time economic growth and stability, freedom and equality’. Further
evidence on this point is given by Polanyi himself in The Great Transformation (p. 4): ‘Ours is not
historical work; what we are searching for is not a convincing sequence of outstanding events, but
an explanation of their trend in terms of human institutions. We shall feel free to dwell on scenes
of the past with the sole object of throwing light on matters of the present’.
10
Since there are excellent discussions of the historical narrative of the book, I focus on the structure of
Polanyi’s theoretical analysis at the expense of simplifying the historical analysis. See especially Block
and Somers (1984). Sievers (1949) has a very detailed account of Polanyi’s historical analysis.
11
In his words (GT, p. 135): ‘For a century the dynamics of modern society was governed by a double
movement: the market expanded continuously but this movement was met by a countermovement
checking the expansion in definite directions. Vital though such a countermovement was for the
protection of society, in the last analysis it was incompatible with the self-regulation of the market,
and thus with the market system itself’.
 Polanyi and the antinomies of embeddedness 13

‘elaborate . . . specific machinery and plant’ (GT, pp. 77– 78). This intensifies
specialization; thus, it requires long-term investment for the continuation of pro-
duction, which leads to the evolution of the merchant into the industrial capital-
ist. Industrial production with specific machinery and plants requires a
continuous supply of factors of production, the most important of which are
land, labour and money. Such necessity implies that the ‘elements of indus-

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try’—land, labour and money—are subject to market mechanisms: production
for sale, exchange through the contact of buyers and sellers and supply and
demand finding equilibrium through prices (LM, p. 6; GT, pp. 71 – 72, 75).
The commodification of land, labour and money occurred through state inter-
vention and the influence of liberal market ideologies in 19th century England.
Hence, industrial production that resulted from the introduction of the factory
system redounded to a new organization of production based on the commodi-
fication of land, labour and money. Concomitantly, it led to the shift from
isolated markets to a market system (pp. 59 – 60).12 Industrial production,
state intervention and liberal market ideology elevated the logic of the
market—otherwise isolated, simply ‘a meeting place for the purpose of barter
or buying and selling’—to the entire sphere of economic activities, creating
‘one big market’ (pp. 59, 75, 280– 285).
The peculiar character of this change in the organization of production is that
it draws labour, land and money—which are not produced for sale—into its
sphere. But, ‘Labor, land, and money are obviously not commodities’, according
to Polanyi: labour is ‘human activity in life’, land is ‘nature’ and money is ‘a token
of purchasing power’. Labour, land and money serve a multitude of other pur-
poses in life; constricting their essence to ‘production for sale’ is fiction (GT,
pp. 74 –76). Yet, under the market system, it is exactly upon this fictitious
ground that the organization of production functions. Production in the
market system exhibits a character markedly different from other systems,
because the market is self-regulating. Under the market mechanism, the distri-
bution of goods and services—hence of factors of production—is automatic:
the exchange of goods and services follows the law of supply and demand.
Seeking profit, the gain motive, ensures that the contact of buyers and sellers
moves towards an equilibrium through fluctuations in supply, demand or
prices (GT, pp. 71 – 72, 75, 210). In such a system, ‘Order in the production
and distribution of goods is ensured by prices alone’ (GT, p. 72). Thus, the

12
Historical developments that led to the rise of the market system—the creation of ‘one big market’—
are complex, as can be seen in Polanyi’s historical analysis. However, commodification is the hub of the
rise of the market system. Polanyi makes this point clear in his posthumously published The Livelihood
of Man (1977, p. 10) by identifying commodification of land and labour as ‘the crucial step’ in the
transmutation from ‘isolated markets’ into ‘a self-regulating system’.
14 K. Gemici

organization of production under the market system does not rely on the inter-
ference of other social institutions such as household and manor; accordingly, it is
not ‘regulated’ by social institutions other than the market.13 The economy
becomes ‘institutionally separated’ from other social institutions (GT, pp. 74,
205, 220).
Such an organization of production—which is self-regulating, based on the

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commodification of labour, land and money, and separated from other social
institutions—is destructive to ‘the fabric of society’ (GT, p. 135). Labour, land
and money being subject to the market mechanism through commodification
is fiction that violates the essence and substance of society; its full realization
entails the annihilation of society. Accordingly, the expansion of the self-regulated
market to fictitious commodities spurs self-protection in society. Movement in
the form of the market’s expansion finds its opposite in protective regulation
and interference—self-protective countermovement. The rise of the market
system thus involves a double-movement; the self-regulated market always
engenders regulation by other spheres of social life. It never materializes in the
utopian form envisaged by classical economists such as Malthus and Ricardo.
However, regulation of the market mechanism impedes its proper functioning;
it is against the nature of the market system. Thus, the expansion of the
market and society’s self-protection are contradictory and their clash is
destructive.
On the basis of this discussion, Figure 1 presents the relation between commo-
dification, institutional separation and the protective countermovement. To reca-
pitulate, institutional separation rests on the idea of the market being dominated
by the gain motive, cleared by the price mechanism, and being free from the inter-
ference of other social institutions. The destructive effect of the market is derived
mainly from the commodification of labour, land and money; their meeting
point—fictitious commodities being subject to the market mechanism—leads
to the protective countermovement.14
Commodification does not in itself imply separation of the market economy
from other institutions, but the idea of the self-regulating market entails such

13
See Garlan (1973) for an excellent reconstruction of the self-regulation idea in Polanyi. In her
colourful language (1973, p. 120): ‘L’économie est, dans ce contexte [l’économie de marché],
comme une machine qui tourne par elle-même et pour elle-même: nous vivons à son heure’.
14
See Hildebrand (1946), Humphreys (1969), Kindleberger (1973), Block and Somers (1984), Baum
(1996), Hejeebu and McCloskey (1999) and Block (2001) on the importance of the concept of
commodification in explaining the market system’s destructive impact on the fabric of society.
Baum (1996, p. 4) is especially clear on this point; as he puts it: ‘Polanyi analyses the destructive
impact of the new economic system by focusing on the transformation of labour and land into
market commodities’. See also his comments on the centrality of the idea of the self-regulating
market in Polanyi’s thought (p. 5).
 Polanyi and the antinomies of embeddedness 15

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Figure 1 The determinants of protective countermovement.

separation. For Polanyi, markets always clear and they are dominated by the gain
motive, with the important qualification that its mechanism functions only in the
case of ‘real’ commodities (Block, 2001). Accordingly, markets for real commodi-
ties are separated from other social institutions. In other words, the institutional
separation does not directly result from commodification, but from the logic of
the market. The moment of institutional separation in modern society comes
when isolated markets become ‘one big market’ incorporating labour, land and
money as fictitious commodities; this is when the economy is disembedded
from society. Yet, such separation is a utopian project rather than the reality.
The classical political economy of Ricardo and Malthus wanted to attain this
ideal of markets governing all areas of social life, but the idea never reached
maturity since society interferes through regulation. The separation of the
market system from society was never complete. Table 3 summarizes Polanyi’s
argument in The Great Transformation.

4. Embeddedness as a variable: the changing place

of the economy in society
The idea of institutional separation occupies a central position in Polanyi’s
thought, and this explains why a central part of The Great Transformation and
Polanyi’s later research programme explore the exceptionality of markets in
history. However, the notion of institutional separation itself is vague in The
Great Transformation. As argued in the previous section, Polanyi sees the
market as self-regulating through the institution of supply and demand; nonethe-
less, it is not clear yet why this system is separated from the rest of the society.
Only later does Polanyi offer a clear foundation for the idea of institutional
separation.
Polanyi approaches this task by developing an analytical framework to
compare and contrast different economic systems in history. The fundamental
aspects and elements of his approach are developed in The Great Transformation
(chapters 4 – 6), but the detailed theoretical development through comparative
16 K. Gemici

Table 3 The historical movement towards an institutionally separated economy

Economy embedded in Double movement Institutionally separated

other social institutions economy

Non-market ends dominate Expansion of self-regulated Production for sale, gain

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economic life
Integration through recipro- Protective response from
city and redistribution
Land, labour and money
(purchasing power) regu-
lated through
non-economic institutions
market to fictitious motive, scarcity-induced
commodities (labour, land rational calculus of means
and money) and ends dominate
economic life
Integration through market
society exchange
Labour, land and money
subject to self-regulating
market
Destructive to the social
fabric; thus, full realization
is impossible

historical studies occurs in his later work. Here, unlike in The Great Transforma-
tion, embeddedness takes a central role.

4.1 Status-community, contract-society and embeddedness

Polanyi’s first analytical attempt to expand on the relationship between economy
and society appears in the essay Our Obsolete Market Mentality, originally
published in 1947:
The market mechanism, moreover, created the delusion of economic
determinism as a general law for all human society. Under a market-
economy, of course, this law holds good. Indeed, the working of the
economic system here not only “influences” the rest of society, but
determines it—as in a triangle the sides not merely influence, but deter-
mine, the angles. Take the stratification of classes. Supply and demand
in the labor market were identical with the classes of workers and
employers, respectively. The social classes of capitalists, landowners,
tenants, brokers, merchants, professionals, and so on, were delimited
by the respective markets for land, money, and capital and their uses,
or for various services. The income of these social classes was fixed
by the market, their rank and position by their income. This was a com-
plete reversal of the secular practice. In Maine’s famous phrase, “con-
tractus” replaces “status”; or, as Tönnies preferred to put it, “society”
 Polanyi and the antinomies of embeddedness 17

superseded “community”; or, in terms of the present article, instead of

the economic system being embedded in social relationships, these
relationships were now embedded in the economic system. (PAME,
p. 70, original emphasis)

The above passage elucidates the conceptual pillars upon which Polanyi builds

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the embeddedness concept. Polanyi begins his exposition with the question of
economic determinism, explaining it as a ‘delusion’ originating from generalizing
the market economy to ‘all human society’. He contrasts social stratification
in market societies with ancient societies: while a market society rests on the
supply-demand mechanism that operates through contracting, pre-market
societies operate through status in determining social position and income.
The prevalence of status or contract indicates how economic life is institutiona-
lized and organized in a given society. Status establishes the rights, duties and
economic behaviour of individuals through their belonging to a social group
(Graveson, 1941; PAME, p. 197; LM, p. 48; Maine, 1970 [1864]). In status
societies, economic transactions are determined by sundry motives arising
from social position: ‘The individual’s motives, named and articulated, spring
as a rule from situations set by facts of a non-economic—familial, political or
religious—order’ (PAME, p. 85, original emphasis). Accordingly, economic
transactions proper do not exist where status is the predominant mode of
social organization. Polanyi calls the exchange and movement of goods and
services under such social organization ‘status transactions’ and argues that
they have a different nature than the ‘economic transactions proper’ of the
modern era (PAME, pp. 90 –91, 160).
Polanyi contrasts status with contract as bases of social organization, where the
movement of goods and services is freed from the rigid rights, obligations and
customs of status societies. Contract is individualistic; it subjugates economic
transactions to the free will of individuals that are manifested in a legal agreement
(Tannenbaum, 1950, pp. 186 – 187). It supposes that ‘the legal situation of the
individual is no longer dependent upon his social status in a hierarchic system
of order but, instead, is determined by his efficiency and capabilities in a capita-
listic economy, an economic order that places the institution of contract at his
disposal as the instrument of free and responsible determination of legal
relations’ (Rehbinder, 1971, p. 942). Polanyi sees the development from status
to contract in social structure as ‘enslavement’: ‘Our animal dependence upon
food has been bared and the naked fear of starvation permitted to run loose’
(PAME, p. 72). Thus, under contract only two motives—‘fear of hunger and
hope of gain’—determine the course and nature of economic exchange
(PAME, p. 82; LM, p. 47). The economic system under contract is ‘motivationally
distinct’; individuals’ motives in economic transactions do not originate from the
18 K. Gemici

social tissue and position, but from the bare motives of hunger and gain (PAME,
p. 82; LM, Chapter 4).
Furthermore, under the influence of Tönnies (1957 [1887]), Polanyi views
status as characteristic of community (Gemeinschaft) and contract as characteri-
stic of society (Gesellschaft) (PAME, pp. 82 – 84; LM, pp. 48 – 49). As a result,
Polanyi establishes an equation between status/community, contract/society,

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and the level of embeddedness: ‘Status or Gemeinschaft dominate where the
economy is embedded in non-economic institutions; contractus or Gesellschaft
is characteristic of the existence of a motivationally distinct economy in
society’ (PAME, p. 84, original emphasis).

4.2 Economic systems, past and present

Polanyi builds his famous analysis of different economic systems—household,
reciprocity, redistribution and exchange—on the above outlined analytical
approach (Garlan, 1973; North, 1977).15 He sees different systems of allocation
as ‘forms of integration’ that bring unity and stability to an empirical economy
(TM, p. 250). These forms of integration are themselves ‘a combination of a
very few patterns’ (TM, p. 250):
Reciprocity denotes movements between correlative points of
symmetrical groupings; redistribution designates appropriational
movements toward a center and out of it again; exchange refers here
to vice-versa movements taking place as between “hands” under a
market system.
Reciprocity, redistribution and exchange as forms of integration all depend on
distinct ‘institutional supports’. Each institutional support is a combination of
distinct patterns (TM, p. 251). Polanyi (TM, p. 251) also uses the term ‘insti-
tutional arrangement’ to characterize a combination of patterns. In each
case, what defines an institutional arrangement is not a type of individual beha-
viour but the characteristics of the ‘structure’. Thus, reciprocity integrates an
empirical economy not because of interpersonal relations characterized by
mutuality, but because of ‘symmetrically organized structures’, such as a
‘system of kinship groups’ (TM, p. 251). In redistribution, it is the existence of
the centre and its role in coordinating the movement of means to satisfy wants
(TM, pp. 248, 251); in exchange, it is the price-making market—an institutional
arrangement with three determining characteristics (i.e. supply crowd, demand
15
While Polanyi analyses the household as an economic system, it receives considerably less attention
than reciprocity, redistribution and exchange. See The Livelihood of Man for Polanyi’s most detailed
examination of the household as an economic system.
 Polanyi and the antinomies of embeddedness 19

Table 4 The foundations of the gradational embeddedness concept

The place of economy in society

Embedded Disembedded

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Social structure Community Society
Basis of exchange Status Contract
Form of integration Household/reciprocity/redistibution Market
Motives Motives arising from social position Hunger and gain
Institutions Family, kinship, polity and religion Supply and demand

crowd and fluctuating rate of exchange)—that brings about integration (TM,

pp. 251, 266– 268).
The three forms of integration may coexist. What matters is which one leads
to the integration of the empirical economy; the dominant allocation system or
arrangement is the one that has the central role in achieving integration (TM,
pp. 253, 256). Polanyi (TM, p. 256) also argues that ‘forms of integration do
not represent “stages” of development’. There is no definite movement from
one form of integration to another as societies evolve. Often, the three systems
of integration coexist. However, reciprocity and redistribution have been the
dominant forms of integration for the majority of human history. Market as
the dominant form of integration is a relatively recent phenomenon (TM,
p. 257), a point which Polanyi repeatedly stresses (GT, p. 40): ‘[Market] system
is an institutional structure which, as we all too easily forget, has been present
at no time except our own, and even then it was only partially present.’
In line with his thinking on different forms of integration, status corresponds
to ancient economic systems (i.e. household, reciprocity and redistribution),
whereas contract corresponds to a modern market economy (PAME, p. 84).
Table 4 summarizes Polanyi’s development of the embeddedness concept using
the above outlined logic.

5. Embeddedness as a methodological principle: the substantivist

approach to studying economic life
However, the above outlined schema is not the only formulation Polanyi offers on
the relationship between economy and society. Drawing on what he calls ‘the
societal approach’ (PAME, pp. 122– 123), Polanyi conceives of economic life as
a totality of relations and institutions that goes beyond transactions of
goods and services. Here, rather than investigating the changing place of
economy in society, Polanyi offers a method for studying economic life that is
20 K. Gemici

in contrast with the methodological individualism of economics. As a result,

embeddedness emerges as a methodological principle, and not as an analytical
proposition.
As early as in The Essence of Fascism (Polanyi, 1936), the philosophical under-
pinnings of Polanyi’s predilection for a societal, institutionalist and historical
approach can be ascertained. In this work, Polanyi (p. 365) develops a criticism

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of fascism, seeing it as a ‘radically anti-individualist philosophy’. Fascism’s
fierce anti-individualism is based upon denying the essence of society, rejecting
the notion that it is a relationship of persons. Instead of seeing society as a
relationship of persons, fascism envisions society as an independent actor, with
its own will and consiousness; it is above and beyond the individuals who ulti-
mately constitute it. Polanyi is adamantly opposed to fascist philosophy,
arguing that it is catastrophic precisely because it denies the reality of society
as a ‘relationship of persons’ (Rotstein, 1990).
Methodologically, Polanyi is influenced by a diverse array of authors including
representatives of The German Historical School, such as List and Schmoller, as
well as Marx, Weber and Lukács. Polanyi sees these authors as exemplifying a
societal approach—‘the broad view that fixes on society as a whole’ (PAME,
p. 124). As Lukács (1971 [1923], pp. 9– 10) famously states as the methodological
principle of Marxism, such a view posits that ‘[isolated partial categories] can
really only be discerned in the context of the total historical process of their
relations to society as a whole’. The analysis in The Great Transformation is an
example of this approach, with its focus on the institutions that underlie econo-
mic and political life. Block and Somers (1984, pp. 62 –63) call this approach a
holistic view of society:
Polanyi seeks to demonstrate the structural relationship among all parts
of the social whole, while rejecting the genetic determinacy of any one
aspect. For Polanyi, all human behavior is socially shaped and defined;
whether a person is trying to make money or achieve inner peace, the
source of the action is in a set of socially created definitions that make
one or other goal appear rational or desirable. The proper distinction is
not between different types of interests, but among different social
arrangements that generate different belief systems and different struc-
tural possibilities.
Thus, the starting point for Polanyi’s analytical approach is a conception of
human beings that is in sharp contrast with homo economicus, a model of beha-
viour based on the postulates of material interest, rationality and atomism (LM,
pp. 12 – 13). The economistic model places all types of human behaviour ‘in the
frame of reference of the market’ (LM, p. 14). Yet, a wealth of incentives, goals and
means– ends relations characterizes human beings (LM, pp. 12– 21; PAME,
 Polanyi and the antinomies of embeddedness 21

pp. 68 – 69). In economic life, ‘The means, not the wants, are material’; human
beings seek material gain and possessions for social purposes (PAME, p. 65;
LM, p. 20; GT, p. 48).
To overcome the limitations of rationality and atomism, Polanyi distinguishes
between substantive and formal meanings of the term ‘economic’. The distinction
contrasts the use of the term to denote human activity in securing a living with

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economizing behaviour, where human beings face choices arising from scarcity,
or ‘insufficiency of means’, to attain wants or needs (TM, pp. 243– 245; LM,
p. 13). The substantive approach, for which Polanyi finds inspiration in Aristotle
(LM, pp. 29 – 30), rejects the idea of choice induced by scarcity and insufficieny of
means; choice might as well arise from abundance or ‘the intent . . . to do what is
right’ (PAME, pp. 78 – 115; LM, p. 25).16 He explicitly states that only the substan-
tive meaning of ‘economic’ is useful to social science, which takes the study of ‘all
the empirical economies of the past and present’ as its subject matter (TM,
p. 244). The formal meaning of ‘economic’ is useful only for the study of the
market economy (PAME, p. 61). Thus, ‘economic’, in its substantive sense,
refers to all interactions with nature and other human beings in the pursuit of
livelihood, and not to a specific type of behaviour; therefore, the analysis
of economic life should focus on this interaction. Polanyi proposes the concept
of the empirical economy for this purpose.
The concept of the empirical economy is defined as ‘an instituted process of
interaction between man and his environment, which results in a continuous
supply of want satisfying material means’ (TM, p. 248). Hence, the notion of
‘economy’ that the substantive meaning of ‘economic’ is built upon puts the
emphasis on the interaction with nature and other human beings in the supply
of material goods and services: ‘The substantive meaning of economic
derives from man’s dependence for his living upon nature and his fellows. It
refers to the interchange with his natural and social environment, insofar as
this results in supplying him with the means of material want-satisfaction’
(TM, p. 243).
Polanyi is partly inspired by Marx, as can be seen through his emphasis on the
interaction with nature and human beings in economic activities. As is well
known, the beginning point for Marx in conceptualizing economic life is pro-
duction. In The German Ideology, Marx defines production with respect to the
intercourse with nature and other human beings (Marx, 1978a, pp. 149 – 150).
In The Grundrisse, the intercourse with nature and other human beings is
depicted in reference to social organization and human needs (Marx, 1978b,

16
For an interpretation of Aristotle from the viewpoint of modern economics, see Schumpeter (1954).
Finley (1970), who agrees with Polanyi’s interpretation of Aristotle, rightly criticizes Schumpeter for
reading Aristotle through the lens of modern economics.
22 K. Gemici

pp. 226 – 227): ‘All production is appropriation of nature on the part of an indi-
vidual through a specific form of society. . . . In production the members of society
appropriate (create, shape) the products of nature in accord with human needs’
[my emphasis].
However, Polanyi also shows an attempt to move beyond the emphasis on
material production by stressing that this activity is culturally instituted. He con-

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sciously dwells on concepts such as ‘social tissue’ in his characterization of the insti-
tutionalization of economic activities. Polanyi argues that ‘the social process is a
tissue of relationships between man as biological entity and the unique structure
of symbols and techniques that results in maintaining his existence’ (PAME,
p. 116). Unlike the above noted narrow view of institutions as pertaining to how
goods and services move within an economy, here Polanyi offers a broader—
despite being underdeveloped—notion of ‘institutionalization.’ As a result,
Polanyi’s holistic approach aims to study economic life as it is submerged in and
intermeshed with social relations and institutionalized ways of interaction with
nature.
Polanyi’s holistic approach posits the fundamental aspect of embeddedness as
a methodological principle. The holistic approach does not specify the relation-
ship of the parts to the whole, nor does it construct a scheme of how social
relations and institutions constitute and structure economic life. Instead, this
approach shows what the unit and object of analysis are in studying economic
life; it argues that focusing on atomistic behaviour by discarding the influence
of social institutions and relations is misleading. In Polanyi’s work, this methodo-
logical principle inspires the notions of livelihood and the substantive meaning
of the economic. Table 5 shows the contrast Polanyi draws between formal
economic analysis and his substantive approach.

6. Restrictive and holistic institutionalisms

While Polanyi leans towards a restrictive view of economy as comprising the
exchange of goods and services in his formulation of embeddedness as a

Table 5 Polanyi’s conceptual framework: formal versus substantive analysis

Formal analysis Substantive analysis

Human nature Homo economicus Homo socius

Level of economic analysis
Motivation in economic life
Object of economic analysis
Individual choice Supra-individual
Scarcity-induced Procurement of material means for
wants and needs
Market exchange, its Livelihood, empirical economy
regularities
 Polanyi and the antinomies of embeddedness 23

proposition regarding the changing place of economy in society, he contradicts

such a view in his historical analysis as well as in some of his programmatic
texts. The result is a fundamental ambiguity regarding the relationship between
economy and society. Under the restrictive institutionalism he adopts,
economy and society emerge as separable spheres of activities; Polanyi’s analytical
efforts focus on the changing place of economy in society. Under his holistic

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institutionalism, economy is by definition enmeshed in social relations and insti-
tutions. Hence, the demarcation between economy and society is absurd; what
changes in history as well as from society to society is how these activities are
institutionalized and organized.
The source of Polanyi’s views on the changing place of economy in society can
be traced back to the influence of Henry Summer Maine and Ferdinand Tönnies
on Polanyi’s understanding of ancient and modern societies. Along with a great
majority of 19th century social thinkers and academics, Polanyi contrasts ancient
societies based on status with modern societies based on contract (Springborg,
1986). The contrast springs from a distinction made between two types of
human will: one emanating from instinct, feeling and custom (Wesenwille) and
one emanating from rational decision (Kürwille) (Heberle, 1937; Tönnies, 1957
[1887]; Aron, 1964 [1936]). Gemeinschaft corresponds to Wesenwille, and
Gesellschaft corresponds to Kürwille. Tönnies (1957 [1887]), although cautious
in noting that each social entity contains elements of Gemeinschaft and
Gesellschaft, sees a historical evolution from Gemeinschaft-like (Gemeinschaft-
liche) social entities to Gesellschaft-like (Gesellschaftliche) ones. Polanyi’s theory
of the extension of the market to previously untouched spheres of social life
borrows heavily from Tönnies’ theory of historical evolution. As Heberle (1937,
p. 20) puts it, ‘Tönnies conceives capitalism as an outgrowth of trade, in particu-
lar of large scale and foreign trade . . . The infiltration of this kind of trade into
the realms of industrial and agricultural production in the shape of the
plantation-economy, home-industry, the sweat-shop and the factory, tends
to burst all the old traditional, ‘community’ conditions of economic life’. The
parallel to Polanyi’s theory of the rise of ‘one big market’ is evident.
Polanyi develops Tönnies’ evolutionary schema into a general proposition
about the changing place of economy in society. There are two distinct problems
associated with such a generalization. First, it implicitly assumes that capitalist
societies are based on contract and interest, whereas ancient societies are based
on feeling, custom and instinct. Contrary to this assumption, it suffices to
point out that every contract contains non-contractual elements (Durkheim
1964 [1897]; Parsons 1960) and that the theoretical distinction between status
and contract is misplaced. Consequently, it is not surprising to find that the
hypothesized historical change from community to society is not corroborated
by evidence. On the one hand, historical research shows that the common
24 K. Gemici

acceptance of ancient societies as status societies is ill-founded and rather mythi-

cal; it discards evidence indicating that even friendship or familial relations could
have been contractual in the ancient world (Springborg, 1986). On the other
hand, comparative empirical examination of social entities at different levels of
economic development presents a picture that is considerably more complex
than the hypothesized movement from community to society as industrialization

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and capitalism develop (Clark, 2001).
Second, Polanyi’s proposition on the changing place of economy in society—
in the sense of the hypothesized institutional separation of the market economy
from the rest of society—is valid as long as the economy is viewed solely in terms
of the exchange of goods and services. It is only within this framework that the
movement from status to contract—the movement from exchange embedded
in other institutions to exchange separated from them—implies an economy
institutionally separated from society. Hence, it is not surprising to see Polanyi
utilizing a highly constricted view of economic life (Berthoud, 1990, p. 179) as
he attempts further analytical refinement of the notion of the changing place
of economy in society. In this view, institutions are defined in terms of ‘physical
operations’ (PAME, p. 307): ‘I prefer to deal with the economy primarily as a
matter of organization and to define organization in terms of the operations
characteristic of the working of institutions’. As Berthoud (1990, p. 181) notes,
‘To consider an institutional form essentially as an ‘operational device’ leads to
a restrictive institutionalism’.
By adopting a holistic approach, Polanyi arrives at a methodological principle
that is at odds with the notions of ‘institutional separation’ and ‘the changing
place of economy in society’, as such a principle suggests that the nature of the
market economy is determined through the particular relations it has with
other social institutions, not because it is separated from these institutions.
Hence, Polanyi’s conceptualization of the economy in terms of the exchange of
goods and services is at odds with his detailed analysis of the organization of pro-
duction in The Great Transformation. Furthermore, it contradicts his definition of
livelihood as the institutionalized procurement of want-satisfying means as a
result of continuing interaction with nature and human beings.
Thus, the fundamental fracture between the two formulations of embedded-
ness arises as a consequence of a shift in Polanyi’s conceptualization of economic
life. When he formulates embeddedness as a gradational variable, Polanyi’s analy-
sis rests on a restrictive institutionalism which understands economic life as the
exchange of goods and services. On the other hand, embeddedness as a methodo-
logical principle is derived from a holistic view of society, from looking at the
various ways economic life is structured and shaped by social institutions and
relations. Table 6 gives a schematic outline of the fracture in Polanyi’s analytical
framework.
 Polanyi and the antinomies of embeddedness 25

Table 6 The fracture in Polanyi’s analytical framework

Elements of analysis

Theoretical approach Conceptualization of

the economy

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Embeddedness as a variable
Embeddedness as a
methodological principle
Restrictive view of insti-
tutions and society
Holistic view of economy
and society
Exchange of goods and
services
Livelihood, empirical
economy, organization
of production

This antinomy—that the embeddedness concept is used in two contradictory

ways in Polanyi—clarifies a central shortcoming in Polanyi’s entire oeuvre: that
his powerful critique of homo economicus and his vision of economic life as
‘embedded and enmeshed in institutions’ do not apply to the market economy
because he takes it as disembedded, institutionally separated from society.
Indeed, the moment Polanyi steps out of his methodological principle of the
economy being embedded in social relations, what he offers are categories of analy-
sis constructed in opposition to a sociologically thin notion of market economy. As
Mann points out (1986, p. 61), ‘This is ironic, as Polanyi’s principal mission was to
liberate us from the modern market mentality!’ Instead of being liberated from the
concept of the market, Polanyi’s thought is plagued by opposition to it.

7. Ramifications: the antinomies of embeddedness

This paper attempts to show that Polanyi operates with two different notions of
embeddedness: embeddedness as a historical variable and embeddedness as a
methodological principle. The duality that is at the heart of Polanyi’s embedded-
ness concept manifests itself in the following manner. First, embeddedness as a gra-
dational concept, as a variable pertaining to economic systems in history, is a
theoretical proposition in the sense of arguing a separation between economy
and society as the market economy becomes the dominant economic system in
history. Second, the general and abstract concept of embeddedness—all economies
being embedded in social institutions—is not a theoretical proposition, but rather
a methodological principle. The metamorphoses of embeddedness—the two vari-
ations that are found in Polanyi’s oeuvre—have important ramifications for con-
temporary economic sociology. First, embeddedness as a theoretical proposition
on the changing place of economy in society is misleading, since it presupposes
economy as an autonomous sphere without social content. This is paradoxical
26 K. Gemici

since embeddedness is defined as a reaction to the economistic model of behaviour

that denies the social character of human action. Second, the usefulness of embedd-
edness is limited to its methodological function because it is not more than a ‘con-
ceptual umbrella under which one should look into and think about what are the
connections between economic activity and the social, the political, the insti-
tutional, the historical, the cultural elements that economic activity is mixed up

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with’, as Granovetter states in a symposium on embeddedness (Krippner et al.,
2004, p. 133). Yet it should be recognized that embeddedness in this capacity
falls short of providing a theoretical alternative to mainstream economics.
The gradational concept of embeddedness, through which Polanyi offers a more
elaborate picture of how he conceptualizes economic life, is erroneous because it
reifies the market economy in the way mainstream economics conceptualizes it;
it purports an image of past economies where all economic activities are carried
out in the name of non-economic ends; it contradicts the general proposition
that all economic activity is embedded in social life.17 The problem is that this con-
ceptualization of embeddedness naturally leads to the notion of social life consist-
ing of separate spheres; the market becomes a social sphere devoid of social content.
Such a view is untenable. The physical notion of a ‘sphere’ is a misleading way of
thinking about economy and society because neither is a physical entity with a defi-
nite shape and boundary; rather, they are the accumulation and patterning of social
relationships in a given time-space regionalization (Giddens, 1984). As such, any
recourse into conceiving of these entities as physical spaces constitutes a form of
reification. Strictly speaking, economy and society as bounded ontic entities do
not exist. As a result, one cannot be embedded in the other, nor can the embedd-
edness level change over time.
Polanyi’s gradational concept of embeddedness is a historical one because
Polanyi sees the institutional separation of economic life from social life as a his-
torical process. This historical dimension of the concept is lost in Granovetter’s
revival of embeddedness (1985), but conceptualizing ‘economic’ and ‘social’ as

17
See also Barber (1995, pp. 400 –401) on this point: ‘While the modern market system may appear to
be more differentiated from other social system structures, somewhat more concretely separate, this
image diverts attention from the basic fact of its multiple and complex interdependence with the
rest of the social system. Calling the market “disembedded” leads analytic attention away from just
what this interdependence is. Insofar as the market is considered coterminous with all economic
exchange, it leads attention away, further, from looking for the existence of some amount of
reciprocal and redistributive exchange in so-called market economies and away from understanding
how the three types co-exist and interact. It gives the market a false kind of analytic as well as
concrete independence. And this image of the market may lead to yet a further common error: that
the market is not only disembedded and independent but also that it is the part of society which
determines all the rest. This absolutization of the market, this implicit reductionism, leads on to
the analytical and concrete errors of seeing the market and its close theoretical companion, rational
choice, as the sole explanations of social behavior’.
 Polanyi and the antinomies of embeddedness 27

belonging to different social spheres remains alive (Krippner, 2001). Unlike

Polanyi, who is inspired by Maine and Tönnies’ ideas on the historical evolution
of societies, Granovetter’s reformulation carries the influence of Parsons and
action theory (Krippner, 2001). Curiously, although with a different logic, the
mistake is the same. In arguing that ‘economic action is embedded in structures
of social relations’ (1985, p. 481), Granovetter too elicits the physical imagery of

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economic and social spheres.
Evoking physical imagery has consequences. In a careful analysis of
Granovetter’s (1985) appropriation and reformulation of the term, Krippner
(2001) demonstrates the antinomies of Granovetter’s reformulation by pointing
out: (a) how it assumes an ontological distinction between economic and social
spheres, and (b) how this prevents economic sociology from asking important
theoretical questions. She substantiates these points by showing how such a
formulation cripples the study of the market in sociology (2001, p. 801):
In attempting to steer an intermediate course between the twin perils
of under- and oversocialized views of action, Granovetter has run the
ship aground on a conception – common to both – that insists on the
separate nature of economy and society. This problem manifests itself
in the perverse symmetry that exists in the discipline: researchers either
study economic processes in social terms, in which case they abandon
the sphere of the market; or, they study the market as a theoretical
entity in its own right, in which case they purge all social content.
Krippner’s astute observation on the study of the market in economic sociology
is important; it implies that economic sociology motivated by the embeddedness
concept faces considerable difficulties in showing how economic processes and out-
comes are social. This is not surprising. Embeddedness, unintentionally assuming a
demarcation between the economic and the social, leads researchers to ask ques-
tions in the form of how ‘economic’ is related to ‘social’. As a result, it creates a
tendency to analyse economic phenomena either qua social by de-emphasizing
economic phenomena or qua economic by discarding social factors. This is para-
doxical, since the main aspiration of the embeddedness concept is to reject the
alleged demarcation between economic and social phenomena.
At its best, as a methodological principle, embeddedness invites the researcher
to look for the social processes that structure and shape economic life. However,
embeddedness itself is not a causal force or mechanism, nor does it specify how
economic activities are structured by social factors. Hence, the quintessential
limitation of embeddedness as a paradigm for contemporary economic sociology:
while it provides a powerful critique of the neoclassical model of behaviour and
while it points out how that model violates the true nature of economic activities,
it does not provide an alternative theoretical framework capable of demonstrating
28 K. Gemici

how social factors enable and structure human action.18 At its worst, embedded-
ness misguides economic sociology if it is taken as anything other than an abstract
methodological principle, as can be witnessed by the common interpretation of
embeddedness as indicating that ‘economic’ is submerged in ‘social’. The
concept of embeddedness is thus limited.
To be sure, embeddedness is useful as a method of inquiry into economic life.

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All human activities are structured by social factors, and economic activities are
not an exception to this rule. In this capacity, as Beckert (2003, p. 796) puts it,
‘[Embeddedness] points to the indissoluble connection of the actor with his or
her social surrounding’. It is precisely in this manner that embeddedness opened
venues for empirical research after the publication of Granovetter’s classic article
(1985), motivating economic sociologists to find social processes where neoclassi-
cal economists simply see self-interested behaviour. As a result, in contrast to what
Schumpeter purported, economic sociology overcame the intellectual division of
labour between economics and sociology by undertaking the task of determining
what economic outcomes social processes produce. However, a theoretical vacuum
characterizes economic sociology. Economic sociologists often stay on the familiar
ground of ‘social’ and shy away from ‘economic’; they focus their empirical studies
on meso- and macro-level social processes (Collins, n.d.) and rarely ask the tra-
ditional questions that have preoccupied economics for centuries, despite being
united in their criticism of mainstream economics.
Thus, simply assuming ‘the indissoluble connection of the actor with his
or her social surrounding’ is not sufficient; rather, it is necessary to advance
this methodological principle by developing theoretical frameworks that show
how economic activities are social in the first place. Embeddedness does not
have the potential for such theoretical progress, despite its importance as a meth-
odological principle.19 Consequently, the analysis presented in this article joins
the recent calls in economic sociology (Krippner, 2001; Beckert, 2003) to under-
line the limitation of embeddedness as a paradigm for economic sociology and
the necessity of developing new paradigmatic approaches.

18
See Beckert (2003, p. 796) on this point: ‘It has been given little notice, however, that the critique of
the economic model of action on one hand and the sociological concept of embeddedness on the other
are situated on two different conceptual levels. While the former refers to the question of how to
conceive of the structure of action, the latter tells us about external variables which influence the
action process and outcome’.
19
Hence, as Collins (n.d.) recognizes, the radical challenge to mainstream economics does not come
from the embeddedness paradigm. Instead, it comes from economic sociologists such as Zelizer (1997)
and White (1981, 1993), who ‘go beyond embedding’ and develop sociological frameworks on the
‘home grounds’ of mainstream economics (Collins, n.d.). Not incidentally, these are the rare
approaches in sociology that can offer alternative answers to fundamental economic questions such
as economic value and the operation of markets.
 Polanyi and the antinomies of embeddedness 29

Acknowledgements
The author thanks César Ayala, Ahu Gemici, Robert Jansen, Greta Krippner,
Michael Mann, Gabrielle Raley, Bill Roy and two anonymous reviewers for
suggestions, criticisms and other help.

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