The history of markets: lessons from the past for the future

What is a market? What do we mean when we talk about a market economy? How and when did markets emerge? These rather ordinary questions, at the crossroad between many disciplines fo social sciences, are among the most important issues in contemporary Political Economy. They have a crucial impact not only on our understanding of modern economic systems but also on the way we envision economic reforms. In this regard, Karl Polanyi was not the first scholar to build bridges between Economic History and Political Economy, but he certainly was one of the most influential. Ancient history, he believed, ‘may prove to be one of the most urgently needed toolboxes for the conceptual mastery of the problems of everyday life’. When at Columbia University, he thus dedicated a lot of his research to the so-called oikos controversy on the economic organization of ancient societies like Greece and Babylon. Put simply, the stake of this academic controversy was to determine whether primitive societies had already developed complex economic structures, as the modernist side argued, or if they knew so such thing, as the primitivists held (this a rather simplistic account of the debate, for a more detailed overview see Gareth Dale’s paper on the matter). In essence, the debate was as much about Economic History and Anthropology as it was about justifying or challenging the modern market economy. Indeed, many historians and economists regarded the existence (or not) of complex economic organization in ancient societies as a proof of man’s inherent inclination for barter and trade that constitutes the premises of the modern market economy.

The truth, Polanyi argued, was that both sides were wrong. Not because they did not get the fact rights, but because they were not looking at the right element: the market. Primitivists failed to distinguish between the presence of trade and money in the one hand, and their organization by the market mechanisms as in modern societies on the other. Conversely, modernists wrongly inferred the existence of market mechanisms from the presence of sometimes sophisticated monetary and commercial organizations. There undoubtedly were local markets in these societies, there had been since the Neolithic, but their existence is of little significance for our modern understanding of markets. Indeed, marketplaces do not presuppose any kind of economic (as in utility-maximizing) behaviour that modern economists tend to assume. Local market exchanges can be rather based on reciprocity, kinship or numerous other motives that are not economic per se.

Modern markets, that is markets coordinated by the price mechanisms, only appeared a few millennia later in classical Greece. These types of market, Polanyi acknowledged, is more controversial since it cannot be simply identified by archaeological works:

‘a market mechanism is beyond the most nimble spade. While it may be comparatively easy to locate an open space where, sometime in the past, crowds were wont to meet and exchange goods, it is much less easy to ascertain whether, as a result of their behaviour, exchange rates were fluctuating and, if so, whether the supply of goods offered was changing in response to the … up or down movement of those rates’.

In The Livelihood of Men, Polanyi determines that some form of market mechanisms emerged in Ancient Greece, notably for the organization of army supplies, but that they remained fairly isolated. Trade, for instance, was never subject to a market mechanism in Athens (Polanyi summarized his contribution to the oikos debate in a lecture - never delivered - that can be found in this collection of unpublished essays)

The ‘jig-sawed’ intertwining of market and non-market elements described above continued to dominate the organization of human societies for more than two millennia. In the mercantilist age, the scope of markets increased dramatically. Medieval town-markets were progressively merged into larger and larger integrated markets. However, in Polanyi’s view this tremendous expansion of market and trade was in no way forewarning of what would happen during the industrial revolution:

‘There was nothing in mercantilism, this distinctive policy of the Western nation-state, to presage such a unique development. The "freeing" of trade performed by mercantilism merely liberated trade from particularism, but at the same time extended the scope of regulation. The economic system was submerged in general social relations; markets were merely an accessory feature of an institutional setting controlled and regulated more than ever by social authority.

Then came the next stage -  the ultimate stage - of market expansion: the advent of ‘One Big Market’ in which all barriers to the market mechanism were progressively brought down in the name of self-regulation and where the price mechanism came to dictate all aspects of human life, including labour, land and money. ‘Market economy’, Polanyi explains, ‘implies a self-regulating system of markets in slightly more technical terms, it is an economy directed by market prices and nothing but market prices. Such a system capable of organizing the whole of economic life without outside help or interference would certainly deserve to be called self-regulating.’ The market economy also entails no less than a radical transformation of society. Indeed, a market system can only exist in a market society in which men and women act upon economic motives, in which moral or social ends are subjected to economic means. To readers of The Great Transformation, the effect of this is rather familiar: the – utopian – attempt at organizing the whole of society through markets resulted in an unprecedented civilizational crash and the subsequent replacement of the market society by various, more or less radical, political-economic systems.

Markets as human constructs

It is very tempting to read this history of the gradual expansion markets as a natural evolutionary process. After all, since markets are efficient in determining the price of goods and services why not extend them to all aspects of life? To Polanyi, this logic was simply wrong:

‘The nineteenth century—whether hailing the fact as the apex of civilization or deploring it as a cancerous growth—naively imagined that such a development was the natural outcome of the spreading of markets. It was not realized that the gearing of markets into a self-regulating system of tremendous power was not the result of any inherent tendency of markets toward excrescence, but rather the effect of highly artificial stimulants administered to the body social in order to meet a situation which was created by the no less artificial phenomenon of the machine.’

Indeed, the evolutionist explanation, a central axiom of the liberal creed, crucially overlooks the complex set of institutions that is required to make such markets work and, more importantly, to protect the self-regulating markets from destroying itself. The gold standard system established by Western economies in the 19th century was a perfect illustration of this argument. On this first instance of a globalized monetary market, the purpose of Central banks was not only to allow coordination to take place but also to provide ‘protection without which the market would have destroyed its own children, the business enterprises of all kinds’. The ‘stages’ of market expansion are thus far from natural or self-evident. Each requires a more extraordinary human endeavour to harness the disruptive strains of the market.

Through this research Polanyi wasn’t only contributing to Economic History, he was also making a crucial political-economic statement. The underlying message in Polanyi’s history of markets is that markets should not be regarded as mystic or god-given creatures. Contrary to what many economists professed at that time – and some continue to profess today, the market is not a mechanism that is beyond human control or understanding. Markets are human constructs that require our active intervention and dedication to come into being and function. The ensuing logic is equally powerful: if markets were built by men, they can also be overcome by men.

The future of market society

We now reach the final part of our reasoning with a last question: are markets any good? And, perhaps to the surprise of some, Polanyi’s answer is yes. As Gareth Dale writes ‘All too often, critics infer from Polanyi’s hostility to modernity’s “One Big Market” an antagonism to all forms of market and commerce’. In an unpublished article entitled Pure Economic Theory, Polanyi praised the market system for the ‘individual liberty assured to its members as against the lack of freedom in a planned economy’ as well as the ‘rationality and precision of its movement as opposed to the inadequate oversight and arbitrary methods of a planned economy’.

Following their (re)discovery of the extraordinary precision of the price mechanism, some economists (and politicians) started advocating it as a one-size-fits-all solution to all issues faced by human action, following the aforementioned rational: since markets are efficient in determining the price of goods and services why not extend them to all aspects of life? In a famous interview with the Business and Society Review, Milton Friedman sought to demonstrate how, thanks to the precision of its movement, the market could produce better outcomes than any political systems:

‘If a chemist feels it is immoral to make napalm, he can solve his problem by getting a job where he doesn’t have to. He will pay a price. But the ultimate effect will be that if many, many people feel that way, the cost of hiring people to make napalm will be high, napalm will be expensive, and less of it will be used. This is another way in which the free market does provide a much more sensitive and subtle voting mechanism than does the political system’

To Polanyi, this would have been completely wrong. In his view, the market system does not provide adequate information with regards to the social effects and moral consequences of one’s actions (something that neoclassical / marginalist economists themselves acknowledge since they are primarily concerned with efficiency, not morality or equality). Worse, markets often blur the lines of individual responsibility and thereby precludes the very possibility of moral action (The idea of moral economics is a vast, complex and fascinating topic to which I intend to dedicate a future post so I will not go into further details in this article). Therefore, the market, Polanyi claimed, is unable to account for the whole range of existing human motives (social, moral, religious, etc.) and that is why it should not be the main driver of human action. Markets are efficient and therefore desirable to organize some aspects of economic life. But they can also produce fundamentally immoral or unjust equilibriums that we should not accept in the name of market efficiency or self-regulation.  

To conclude, the main takeaway from Polanyi’s work on markets and their history is that markets can prosper but should never be allowed to become the organizing principle of human life. For as long as markets remain embedded in the social, political, religious and moral frameworks that must govern society, they can make genuinely positive contributions to our freedom and wealth. Thus, in the final pages of The Great Transformation, Polanyi summarizes in a few lines what is certainly his most powerful political statement and his most meaningful teaching:

‘The end of market society means in no way the absence of markets. These continue, in various fashions, to ensure the freedom of the consumer, to indicate the shifting of demand, to influence producers' income, and to serve as an instrument of accountancy, while ceasing altogether to be an organ of economic self-regulation.'