Economy as an Instituted Process

Karl Polyani

Economics has two main meanings. The substantive derived from man's dependence
on nature and his fellows, an interchange between his natural and social environment.
The formal meaning is from the logical nature of the means-ends relationship,
apparent from the words economical or economizing. The two concepts have little in
common.

Polanyi's proposition is that the substantive meaning of economics is the only relevant
one in understanding the empirical economies past and present.

The Formal and Substantive Meanings of "Economic"

Rational action is the choice of means in relation to ends. Formal economics refers to
a situation of choice that arises out of an insufficiency of means. It is concerned with
action within a market, where conditions of choice and action are quantifiable via
prices (of all commodities - products, land, labor, etc.). This system loses relevance
outside of the price-making markets.

The substantive concept is based on the empirical economy, defined as an instituted

process of interaction between man and his environment, with results in a continuous
supply of want satisfying material means.

The instituting of the economic process gives it unity and stability, producing
something with a definite structure in society. The human economy is imbedded in
institutions, both economic and non-economic.

Reciprocity, Redistribution, and Exchange

These three patterns are characteristic of instituted economies, though they don't
constitute it. But aggregates of personal behaviors based on these three patterns by
themselves create an economy. There need to be pre-conditions in society that allow
these patterns to be established. Only in a symmetrically organized environment will
reciprocative behavior result in economic institutions of any importance. Only when
allocative centers have been set up can individual acts of sharing produce a
redistributive economy. And only in the presence of price-making markets will
exchange acts of individuals result in fluctuating prices that integrate the economy.

Factors like kinship, neighborhood, etc. are more likely to bring about reciprocating
behavior. Division of labor or temporal issues may cause redistributive behavior. In
early societies there was often a ban on haggling and barter, which precluded a price-
based economy.

Reciprocity was more dominant in older societies (notably in the Pacific Islands,
though not for basic consumables). Redistribution is still common in both old and
modern societies, with Russia being an extreme example.

Forms of Trade, Money Uses, and Market Elements

Trade is ancient, but markets in the formal economic sense are relatively new. Yet
they have formed a stereotype from which all forms of trade are erroneously viewed.

1. Forms of Trade

Trade is a two-sided affair, and relatively peaceful. In ancient societies trade was
either a noble thing done by those respected in society for honor, or a despised act
where the primary motive was profit. There were no middle-class traders. There are
three main types of trade -- gift trade, administered trade, and market trade.

Gift trade involve more ceremony and politics. Administrative trade involves treat and
government-controlled channels. Haggling is permitted only on things other than
price. Market trade is highly adaptable as it can be applied to all parts of the
production process.

2. Money Uses

The exchange use of money arises out of a need for quantifiable objects for indirect
exchange. Such use didn't arise from random acts of barter but from the deliberate
establishment of a market system. Early money was special-purpose money, and often
not something that was exchanged in an open market but was used for accountancy
purposes.

3. Market Elements

The market is the locus of exchange. Exchange is the economic relationship, and the
market is the economic institution. Remember the exchange occurs under different
institutions (reciprocal and redistributive, but only under set rates).

In summary, the market can't be superseded as a general frame of reference unless the
social sciences succeed in developing a wider frame of reference to which the market
itself is referable.