From My Notebook no.8: Karl Polanyi on Adam Smith
Karl Polanyi: The Great Transformation, 1944 Chapter Four: Societies and Economic Systems
Markets are self-regulating directed by market prices and nothing else. - “without outside help or interference”
Polanyi, writing in the 1940s, takes ‘economics’ as expressed in the 20th century and its alleged close relationship to Adam Smith, which ignores the wide variation between the ideas of Adam Smith and those classical 19th century and 20th-century modern ‘neoclassical’ miss-presentations of his ideas (see Kennedy, Adam Smith’s Lost Legacy’ 2005).
Polanyi’s summary of Smith’s ideas of markets as “self-regulating directed by market prices” and nothing else - “without outside help or interference" is to be at variance with Smith’s views. However, markets operate in historically developed detailed legal systems that “interfere” necessarily in markets, which Smith details in his “Lectures On Jurisprudence” (1763). These lecture notes by students are followed closely in several extracts in the text of Wealth Of Nations (1776), where they were quoted word-for-word, showing their authenticity. Smith also insisted the need for regulations to correct the proclivities of “merchants and manufacturers” to introduce monopolistic practices to raise prices and narrow the competition. He did not think it safe to leave markets to self-regulation and ‘nothing else’ and he gave examples in banking and fire safety (party walls).
“no economy has ever existed” that “was controlled by markets”
No economy before or since has been “controlled” solely by markets. Polanyi confuses assumptions that modern economists made in their attempts to model their economic theory in the 19th century, especially after 1870 using elementary calculus and algebra. Smith was not guilty of such mistakes (though he was an accomplished mathematician by 18th-century standards).
“gain and profit made on exchange never before played an important part in human economy”
Polanyi runs aspects of exchange transactions together. Mutual gain has played a role in human sociability since human societies evolved from the speciation of hominids from the Common Ancestor. Co-operation always benefits both sides of any exchange transaction whether the terms are voluntary or involuntary. Otherwise the transaction would not occur, or be stable. It is common among some anthropologists to write of the exchange transaction in its modern forms as being about who gains the most - this is a function of their poor understanding of mutual exchange and not just in modern economies.
“Though the institution was fairly common since the latter Stone Age, its role was incidental to economic life”.
This shows a highly limited understanding of Smith’s concept of exchange. When hominids (along with Homo sapiens) exchanged their contributions to the group, band, or tribe, for their shares of the benefits of their simple societies, they engaged in their society’s ‘economic life’. This relationship is not ‘incidental’ – it is total.
Polanyi restricts Adam Smith’s “propensity to truck, barter and exchange” to “markets” [!!!]. This role led to the concept of “Economic Man”. (p 45).
Smith did not equate “the propensity to truck, barter, and exchange” to ‘markets’. He illustrated the “propensity” by applying it to a specific case related to the theme of his Wealth Of Nations” using 18th-century language that his readers would understand and recognise. ‘Truck’ meant payment of wages or rewards in the form of goods (think of the ‘16 Tons’ song from the 1970s – “oh, Peter don’t yer call, ‘cos I can’t go/ I owe my soul to the company store’). The UK Truck acts were made illegal in the 1820s.
‘Barter’ was an exchange of goods for goods; now often used for any haggle over price). “Exchange” means any transaction in which the parties might haggle, 'higgle’, persuade or negotiate; it was not to Smith exclusively about commercial bargaining. In fact, his entire philosophical approach to exchange was widely applied and very general: see James Otteson’s “Market Place of Life”, 2002 (Cambridge).
“Whether this propensity be one of those original principles in human nature, of which no further account can be given; or whether, as seems more probable, it be the necessary consequence of the faculties of reason and speech, it belongs not to our present subject to enquire.” WN, Book 1.chapter 2.
Smith was not an “evolutionary psychologist”, nor an “anthropologist” (these specialties did not exist when he was alive). He was asserting a conjecture he had formed from the knowledge available to him. His claim that the propensity to exchange has existed since humans acquired “the faculties of reason and speech” (man did not conform to the biblical explanation of the Eden Garden). In his essay: “Considerations Concerning The First Formation Of Languages and the Different Genius Of Original And Compounded Language , he attempts an imaginary order in which “two savages” would agree to speak a commonly agreed set of sounds that would develop into a language. Now skipping the realism issues, it clearly shows that Smith considered exchange a behaviour that operated from long before civilization as it was understood in the mid-18th century. Smithian exchange was not connected solely to markets. Polanyi disagrees and he invented a connection that post-dates Adam Smith. Polanyi pre-rejected Smith before he understood his contributions and attributed to him ideas he never held.
Polanyi “Equates Herbert Spencer and later Ludwig von Mises and Walter Lipman with the “same fallacy”; they followed “in Smith wake – “his established a paradigm of the “bartering savage as a axiom” (as “false as Rousseau’s”).
Set aside the “bartering savage” and focus on the “savage” engaged in exchange relations, which exchanges take on a wide array of forms. Human relations are based on exchanges, if wrapt in social norms, most of which in their original forms evolved over tens of thousands of years from speciation. Given that our predecessors among the hominids had complex forms and the observed individual and the social behaviours of our nearest relatives, the chimpanzees all engaged in their groups , and the chimpanzees continue to engage, in complex forms recognisable as exchange. I suggest Adam Smith is closer to the evolutionary science of the longevity of exchange than is Polanyi’s contrived ideological hostility to “markets” in the 1940s.
I have argued this case for many years. In fact I wrote a long essay (unpublished) on the “Pre-history of Bargaining” necessitating a reading of primate reports and anthropological works. I often refer to the early origins of reciprocity among chimpanzees related to grooming as a form of exchange, a primitive precursor to bargaining. In reciprocal grooming exchanges chimps perform grooming services within alpha male-dominated societies. They also perform discretionary grooming outside alpha male sanctioned behaviour with males and females that continues as exchanges for as long it is reciprocated; when the exchange is not reciprocally undertaken, they cease to groom the offender. (Consult "Grooming, Gossip, and the Evolution of Language", Prof. Robin Dunbar, 1998. Harvard). Reciprocation preceded bargaining and continues today in complex societies (See Kennedy: Influence 2003, Pearson/Edinburgh Business School). The difference was one of the time between the completion of the exchange of grooming: in reciprocated exchanges there is a longer time delay to that common to bargaining exchanges, when the exchange takes place in the simultaneous bargain. Polanyi was oblivious to that relationship.
“Division of labour” as “old as society” based on “springs from sex, geography, and endowment”.
Yes, of course, that is exactly what Adam Smith said clearly in Wealth Of Nations (WN I.ii).:
“This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.”
Polanyi suffers from ideological blindness. He has a political point of view that denies the very evidence he quotes! In the forest, the band sticks together to get the subsistence they need. Everybody must contribute to band's subsistence and in exchange they receive their share of the subsistence. They also share their experience, and natural proclivities for certain actions are shared to the benefit of others. In exchange they benefit from others' skills in tracking game or finding seasonal plant foods. Some share their imagined explanations for natural phenomena (lightning, floods, fire, and events) and in return they receive their share of the hunting output of the trackers and fastest chasers, or good skirmishers when a kill attracts rival predators. Finding water in the dry season is a premium contribution, and so on. They didn't need a theory of exchange to engage in exchange!
This is shown in the next sentence I have quoted:
“19th century prejudices” underlay “Smith’s hypothesis about primitive man”
[An astonishing assertion!]. I think Adam Smith was closer to the facts that Polanyi. The “corrective” for such mistakes would have been “linking up economic history with social anthropology “ a course which was consistently avoided”. Economists “abandoned” interest in “primitive man” as “irrelevant to the “understanding of the problems of our age” [p47].
Yet Smith started from linking deep history to “understand the problems” of his age. We can do exactly that too, but with incomparably more information and knowledge than was never available to Adam Smith.
“man’s economy was submerged in his social relationships”.
I agree completely and Smith addressed these issues in his Theory of Moral Sentiments (1759).
“man’s natural endowments reappear with a remarkable consistency in all societies and all times a places” and “the necessary preconditions for survival of human society” are “immutably the same” “code of honour”, “generousity” , “social obligations” are “reciprocal” “fulfillment” of “give-and-take interests best” (p48]
Exactly and its called within the meaning of “exchange”!Overall my comments on these few pages of The Great Transformation are not encouraging for regarding Polanyi as a major and reliable source for the solutions he gives for the problems he perceives. He had an agenda. It is poor history and poor Smithian intellectual biography.