Q.

Compare and contrast the Formalist and

Substantivist approaches in Economic Sociology.

INTRODUCTION:
The terms 'Formalism' and 'Substantivism' relate to two schools of thought in
Economic Anthropology that were divided into these two groupings in the mid-1950s.
Karl Polanyi, a Hungarian economist, proposed the difference between "formal" and
"substantive" economies.
Karl Polanyi suggested that economics may be described in two ways, formal and
substantive, based on the work of German sociologist Max Weber, who distinguished
between formal and substantive rationality. Based on two methodological
disagreements, this divergence resulted in the establishment of two schools of thought
in Economic Anthropology and Sociology, namely substantivist and formalist
approaches. Formalism is centred on deductive and logical reasoning, whereas
substantivism is descriptive and experiential.
Formalists believe in the economic rationality of maximising people, but
substantivists, such as Karl Polanyi, believe that the economy is entrenched in social-
cultural circumstances. Paul Bohannan, Pedro Carrasco, Louis Dumont, Timothy
Earle, Maurice Godelier, Claude Meillassoux, John Murra, Marshall Sahlins, Rhoda
Halperin, Eric Wolf, and George Dalton are among the famous members of
the'substantivist' viewpoint, which Polanyi founded.

The core meaning of economics stems from man's reliance on nature and his fellows
for survival. It relates to his interaction with his natural and social surroundings
inasmuch as it results in the provision of material want fulfilment.
The formal definition of economic originates from the logical nature of the means-
ends connection, as seen by words like "economical" or "economising." It refers to a
specific scenario of choice, namely that between the many uses of means caused by a
scarcity of those means. If we name the rules guiding means selection the logic of
rational action, we may refer to this kind of logic as formal economics.
The substantive and formal root meanings of "economic" have nothing in common.
The latter is derived from reasoning, whereas the former is derived from fact. The
formal definition suggests a set of principles pertaining to the selection of insufficient
methods. The substantive definition involves neither choice nor inadequacy of means;
man's livelihood may or may not need choice, and if choice is required, it does not
have to be driven by the restricting impact of "scarcity" of means. The laws of the
mind govern the one, while the rules of nature govern the other. The two meanings are
diametrically opposed; conceptually, they point in opposing directions of the compass.

FORMALISM:
Formalism is related with the principles of the capitalist economy, which differs
significantly from pre-capitalist economies. It also implies that the principles of
capitalist economy are regarded as universal, so subordinating non-industrial
economies to market economy principles. Formalists contend that the formal
principles of neoclassical economic theory, which are generated primarily from
research on capitalist market systems, can be applied to describe the nature and
dynamics of non-capitalist economies.
In his important work The Great Transformation, Karl Polanyi detailed the emergence
of such theoretical paradigms throughout the great shift of European civilization from
the preindustrial to the industrial age. The industrial revolution represents a significant
movement in manufacturing methods, as well as shifts in ideas, ideologies, and social
and economic policies. In Great Transformation, he examined the effects of market
capitalism on early nineteenth-century England and the rest of the industrializing
globe. According to him, market capitalism commodified and commercialized all
products and services in terms of a single monetary standard, but in the pre-capitalist
economy they were neither monetized nor commoditized but were immersed in social
interactions. This is not to say that markets did not exist in pre-capitalist economies.
Several pre-capitalist civilizations had markets, but they were not managed by ‘self-
regulating market' laws based on ‘supply-and-demand' factors. Market capitalism, in
addition to commoditizing things, commoditized labour.
According to Polanyi, capitalism has prioritised profits and the market over society
and human values, transforming everything (land and labour) into commodities that
can be bought and sold. According to him, a market economy is "an economic system
controlled, managed, and directed only by markets" and is based on the "fictitious
commodification" of land, labour, and money. In a market economy, society is
subjected to market laws. He believed that economics evolved with market capitalism
and is just a part of the system that helps keep capitalism going by making it appear
normal.

SUBSTANTIVISM:
In The Great Revolution, Karl Polanyi traced the evolution of current market
capitalism from earlier systems, predicting the impending "breakdown of human
society." According to him, contemporary capitalism prioritised profits and the market
over society and human values, transforming everything into a commodity that could
be bought and sold. He believed that economics had evolved as a servant to market
capitalism and was simply a component of the system that kept capitalism going by
making it appear normal.
In his subsequent work, Polanyi partnered with anthropologists, archaeologists, and
historians to explore further back in time at past empires, attempting to understand
how civilizations created their economies in methods other than market capitalism.
One of Polanyi's pieces in Trade and Market, titled "The Economy as Instituted
Process," specified two senses of the word "economic": formal, which refers to the
study of rational decision making, and substantive, which refers to the tangible actions
of earning a livelihood. He went on to say that only in the contemporary West's
historical growth had the two come to imply the same thing, because only in modern
capitalism was the economic system (substantive) linked with logical economic logic
(formal) that maximised individual self-interest.
Only capitalism, via the channel of the marketplace and the flow of money,
established formal concepts in this way. Many sorts of economic activity take happen
in precapitalist societies, but not within the framework and values of formal rational
economic reasoning, which are features of the competitive marketplace. According to
Polanyi, the economy is embedded (submerged) in the institution of the marketplace in
modern capitalism. But, in other cultures' economic systems, the economy is
integrated in other social institutions and functions on different principles than the
market. In certain cultures, the economy is integrated into familial relationships, but in
others, religious organisations manage the economy.

Polanyi remarked that economies that are not based on market principles are not
focused on the logic of individual choice, which is the foundation of modern Western
economic theory. Formal economics has no relevance in the absence of markets.
Further concepts are required to examine these various cultures, and they will vary
depending on how the substantive economics of making a livelihood is arranged in
each location. Polanyi stated that economics should aim to understand how the
economy is integrated in the matrix of various cultures. This "substantivist" economics
should look first at nonmarket economic institutions (such as temples and tribute) and
then at the mechanisms that connect the social and the economic in various
circumstances. For this reason, Polanyi's economic followers were known as
"institutionalists." In his historical and cross-cultural research, Polanyi proposed that
there are three fundamental ways in which cultures integrate the economy into society
—modern formal economics only analyses the third and is unable to grasp the first
two due to different logics.

There are three types: reciprocity, redistribution, and exchange. Reciprocity is a

broad category of assisting and giving that is founded on a shared feeling of
commitment and identity. Individuals support one other because they share cultural
and social bonds; they are members of the same family or clan.
Redistribution is a system in which a central authority of some kind, such as a priest,
temple, or chief, collects from everyone and redistributes various items back to them.
Some individuals, for example, offer grain to the temple and receive cloth in return,
while others give fabric and receive grain, and the temple utilises part of both for
ceremonies and to keep the temple in excellent condition. According to Polanyi,
exchange is calculated transaction that comes in a variety of forms. Contemporary
market trade, in which money and negotiation are used to establish prices, is a
relatively unique instance that has only lately become important to the European
economy. Polanyi believed that diverse mixtures of these three types of economic
logic could be found in all civilizations, but that one of them was dominant in each.
This substantivist paradigm is deeply relativist; it asserts that the economy in various
countries is founded on totally different logical premises. As a result, the tools for
comprehending capitalism are as worthless for researching the Aztecs as a flint knife
is for repairing a jet engine. Each system must be comprehended on its own terms.
And Polanyi's substantivism leaps from relativism to evolutionism in an instant. He is
not merely identifying types, but also demonstrating how those kinds evolve in a
historical series, with reciprocity being the simplest and exchange being the most
complicated.

The Formalists Strike Back

Anthropologists were growing dissatisfied with the idea of culture being used to
explain everything. What about individuals' roles? Anthropologists such as Frederik
Barth argued, focusing on politics and fast cultural change, that people did not just
obey the laws of their culture but, as individuals, helped shape it. When these
anthropologists went to the field, they observed invention, ingenuity, disagreement,
and logical thinking rather than passive "sticking to tradition." It should come as no
surprise, therefore, that the substantivists faced a storm of criticism and attack in the
years after Polanyi's manifesto from anthropologists who borrowed Polanyi's name for
the study of rational decision making and called themselves formalists. They wanted
to look outside of anthropology for models of rational choice. Robbins Burling,
Harold Schneider, Edward LeClair, Frank Cancian, and Scott Cook were prominent in
the first wave of formalist reaction.

These formalists put forth many propositions upon which they mutually agreed.
1. The substantivists got their microeconomics wrong; they did not understand that
“maximizing” (as used by economists) does not require money or markets. Anything,
even love
or security, can be maximized.
2. The substantivists were romantics engaged in wishful thinking, not realists.
3. Formal methods work in non-capitalist societies because all societies have rational
behaviour,
scarce ends, and means. Formal tools may have to be adapted and improved but
should not be
discarded.
4. Substantivists are inductive butterfly collectors, who try to generalize from
observation,
instead of using deduction to explain each instance as an example of a general law of
human
behaviour. Deduction is better.
5. Polanyi got his history wrong; markets, exchange, and trade are found in many early
empires
and “primitive” cultures. And anyway, most of the societies in the world are now
involved in a
cash economy, so substantivism is no longer relevant.

The formalists shifted focus away from economic institutions and their categorization
and history and towards universal economic behaviour, with a particular emphasis on
decision making and choice. They argued their point with brilliant arguments and
logical gymnastics, but they also wanted to show that conventional economic
techniques might be effective in a series of case studies.
They investigated everything from marriage markets among Australian aborigines to
Pomo trading feasts in California. They broadened their formal analytic approaches to
include game theory, linear programming, and decision trees.
The formalists did show that economics might be applied to non-capitalist systems.
They intended to dispel myths about non-Western economic behaviour and
demonstrate that people are, in fact, reasonable. This was an important message to
convey to government officials and politicians, who had a propensity to disregard
impoverished people's and ethnic minorities' conduct as "irrational," "sunk in
tradition," or "just plain foolish." Formalists advocated that there was reason and
reasoning behind a lot of weird conduct to outsiders; you only needed to learn more
about the world individuals lived in to realise what their resources and limits were.
Then, even by the rigid laws of Western economics, you would see their behaviour as
entirely rational and understandable. The problem was not with Western economic
science but with ignorance about the real circumstances that framed people’s lives.

CONCLUSION:
Formalists likened individuals to societies, whereas substantiveists related societies to
persons. The substantivists argued from social structure to individual behaviour,
whereas the formalists argued from individual choice to the overall dynamics of
economic systems. On the one hand, you could argue that society determines the rules
of the game and that people have few and restricted options in their life. On the other
hand, you might just as well argue that society is formed by the structured acts and
decisions of individuals, and that people influence society via their choices. If we look
closely, we can see that formalists and substantivists are trapped in the same
intellectual dances that have ran deep in the Western philosophical tradition since the
Enlightenment. These are questions regarding reason, truth, and development.