It’s a truism that materials and resources are not scattered uniformly about the earth’s surface. Due to the geological formation of the earth, resources are scattered widely in geographical space. Some places have petroleum, others not; some places have ores, others not; some places have gemstones, others not; some places have quarrying stone, others not; some timber and some not; and so forth.
Similarly, geographical features vary widely. Different places have different climates, soil types, rainfall, native plants and animals, prevailing winds, and so forth. This means that certain crops can only grow in certain locations (wine grapes, for example). Even within small societies, a coastal village will trade products with a forest village which has different resources (one has twine for fishing nets and wood for boats, the other fish, shellfish, and pearls, for example).
Similarly, there exists a division of labor between people. Potters, builders, and metalworkers are just a few examples of people who specialize in one task in complex societies. As society learns to do more, people need to specialize. This means that some sort of exchange must take place, although as we saw previously, that typically took the form of reciprocity, redistribution and householding, rather than buying and selling in “free and open” markets.
We earlier cited Çatalhöyük as an example. Built near a volcano, it was a source of rare and valuable obsidian. It was also the convergence of several different cultures and trade routes. Thus, a proto-city, with a sedentary population, was formed, one of the earliest such places that we know of. Michael Hudson claims that early cities formed in locations where disparate groups came together to conduct trade. Because such places were likely to have permanent occupation, it’s possible that this was the impetus to cultivate and store crops to feed people year round – Catalhoyuk was one of the earliest areas of grain cultivation. Thus, Jane Jacobs’ ideas about intensive agriculture developing as a way to feed cities may not be so far-fetched after all.
Catal Huyuk, located near rivers in a flat, game-filled plain, was an ideal trading site for the obsidian. In “The Time Falling Bodies Take To Light”, W.I. Thompson likens the obsidian to “a dark, cthonic milk which flowed out of the breast of the volcano, Hasan Dag,” and suggests that “Even as far back as the neolithic, religion was good for business…. The relationship between neolithic religion and economics may have been as intimate as the more familiar ‘Protestant Ethic and the Spirit of Capitalism,” Thus, Catal Huyuk was perhaps built on religion and obsidian, and very probably on the “Religion of Obsidian.”
Jericho, which began as a village in about 9,000 B.C.. is also sometimes called the first city. A thousand years before people set foot in Catal HUyak, Jericho was surrounded by walls ten feet thick and fifteen feet tall. But neolithic Jericho at its biggest was substantially less than half the size of Catal Huyuk, and it was clearly only an armed trading post and village, a secular place very different from the unwalled Temple City of Catal Huyuk. Jericho and Catal Huyuk seem to have formed the two ends of a trading network that made possible the spread of agriculture, pottery, durable buildings, and metallurgy (and possibly philosophy, religion. and the crude beginnings of writing, mathematics, and astronomy) throughout the Mediterranean basin, and eventually into Mesopotamia to the east.
The key driver of the expansion of international trade appears to have been the discovery of bronze, which is why the Bronze Age sees the formation of the earliest vast, complex trade routes:
…it was the introduction of metal and the development of metallurgical science that more than anything else made trade essential. The smith had no time for anything outside his own profession, and he was manufacturing things which other people could not make but everybody needed; exchange therefore was a mutual necessity. But the smith’s raw material was seldom to be found close at hand; he had to rely upon large-scale imports, which again had to be paid for, and that meant organization of a far-reaching sort; the retail trade with his neighbors at home was easy enough, but the importation of ore or crude metal from abroad was a business with which he could not cope himself. 
All this is to say that trade has been going on since time immemorial. Sometimes that trade has been organized into markets, where large numbers of people come together to buy and to sell. This is not in dispute.
But a common misunderstanding of Polanyi’s ideas is a misunderstanding of what he means by Market*. He does not mean the above, he means the internal self-regulating market as the sole organizing principle of society. Based on his studies of anthropology and history, it was clear to him that this was not a “natural” development emerging out of earlier markets, but something entirely new and different which had to be imposed from above by the power of organized elites. In order to do this, the previous social order had to be broken down and swept away. This could only be accomplished by state violence, direct and indirect.
Also, Polanyi does not argue that people never, ever acted for the rationale of gain, or that they never calculated profit and loss. Rather, only that these were not the primary motivations of most people prior to the early modern period in Western Europe. Where you lived and what you did for a living were not just arbitrary things subject to the impersonal market forces beyond your control; they were determined by ancestry, tribe, nation, guild, custom, tradition, and so forth. Until relatively late in the modern era, economic subsistence rather than pecuniary gain; in his words, “habitation versus improvement,” was the driving force behind economic activity, as Mark Blyth describes:
Until relatively recently then, the economy was not a separate sphere of activity governed by laws of supply and demand. Rather, market forces were “embedded” in a series of social relationships that facilitated subsistence. Reciprocity, householding, and redistribution existed alongside exchange undertaken for gain; and in such an Aristotelian world, trade and profit were the exception rather than the rule. 
Embeddedness is a crucial concept for Polanyi and something often difficult to comprehend in our modern market-dominated world. According to Wikipedia: “Embeddedness refers to the degree to which economic activity is constrained by non-economic institutions…in non-market societies there are no pure economic institutions to which formal economic models can be applied. In these cases economic activities such as “provisioning” are “embedded” in non-economic kinship, religious and political institutions. In market societies, in contrast, economic activities have been rationalized, and economic action is “disembedded” from society and able to follow its own distinctive logic, captured in economic modeling.”
Alienability is another important concept. In traditional cultures, land, labor and even certain goods were intimately bound up with the people who made them, essentially forever. The Crown Jewels are often used as an example. They are part of the very existence of England; they cannot simply be sold off to a willing buyer. They are not for sale at any price, and even if they were sold, they would always be associated with England no matter who happened to own them. In the past many items were like this–they retained intimate connections to their owners and makers, even after exchange (such as in the Kula Ring). Certainly land was associated with the people who had lived on it for generations, for example (which is why to the Native Americans “selling” land made no conceptual sense to them).
A market society, by contrast, requires everything to be alienable. If I buy a house or a car from you, you have no claim on, nor connection to those things from this point forward. The same can be said for the work you do every day – it is just something to be bought and sold. This is what Marx meant by the “alienation” of labor as one of the defining features of capitalism. The framers of the U.S. Constitution argued that certain rights were inablienable – they cannot be bought and sold at any price but are simply a part of being a human being. Libertarians disagree; to them, everything should be alienable. Many of them argue that you should be able to sell yourself into slavery, for example.
Polanyi additionally distinguishes between two different modes of social relationship: status and contractus. Status is a way of relating to people based upon your relative social position. Contractus is relating to people through some sort of formal legal agreement. Both often co-existed in the past, but the prior one was primary mode for most of human existence.
Those are some of the crucial differences between societies with markets and a market society. In one markets are run as an adjunct to society, in the other, the whole society is run as an adjunct to what Polanyi called the “One Big Market.” This second definition of market necessitated the demolition of all social institutions that had hitherto served as the foundations of society, and this was brought about deliberately by the state power. It was anything but a “natural” outgrowth of previously established markets and trading.
Another common mistake is to see prices and wages in past historical eras and assume that this meant that such societies were also market societies and that markets were central to how they operated. Hence, the thinking goes, the modern world is simply a change of degree, not kind, and people in the past lived much the way we do today; buying and selling for profit and working for wages. This, too, is misunderstanding of Polanyi’s thesis. Mark Blyth responds to criticism of Polanyi by two prominent free-market economists:
…is evidence of prices evidence of either gainseeking, or indeed, of a market society? A thought experiment problematizes this evidence. Imagine that the USA and the USSR had a nuclear exchange and both civilizations were destroyed. Now, 1000 years later, archeologists dig down and find a supermarket. In the supermarket there are thousands of tins and boxes with prices on them. Clearly this shows that markets existed. Or does it? For if this was a Soviet supermarket (yes, they did exist) then does the existence of prices prove that the USSR was a market society? Does it demonstrate that Soviet individuals engaged in gain seeking? Prices are simply signals, and like all signals they are ambiguous at best and do not telegraph how an economy is constructed.
But what of evidence concerning motives? After all… Mayan Obsidian manufacturers exhibited cost sensitivity; Seventeenth century husbanders wrote allegorical verse about financial prudence; and even Roman intellectuals opined that buying a house was a risky proposition. But once again, what does this show us, or rather, what does it allow us to claim? For Obsidian workers, scarcity is an issue. Hence if Obsidian is scarce, price goes up. Price is a rationing device. Yet does this make Mayan society capitalist? Similarly, profit and loss aphorisms…in the seventeenth century are indeed evidence of cost-benefit thinking. Yet such statements are replete throughout the Bible, for example; so are we to conclude that King David et al., were the antecedents of Adam Smith? Likewise, it appears that Cicero was worried about negative equity in his new home. Does this make the Roman Empire was a capitalist market economy? Indeed, what is the point of making such a claim? Hejeebu and McCloskey seem to be saying that if prices and notions of gain have always been around, then QED, markets have always been around; and if markets have always been around, then there cannot have been a great transformation. But this runs into two rather obvious objections.
First of all, regardless of when its dated, the proposition that there was a fundamental transformation in the way the world economy was organized in the nineteenth century is relatively uncontestable. And Polanyi tells us how: the rise of One Big Market where everything is for sale since – the commodification of all factors. This was a qualitatively new development. If this was not, then we have really misunderstood a lot of history. For example, were slavery and feudalism vastly overblown or otherwise restricted to small segments of the population? Were they aberrations of otherwise functioning capitalist labor markets? [Slaves] had prices to be sure, but it is perhaps better to think of a slave society as one of domination than one of capitalism. What Polanyi was suggested was that it is not the presence of markets in goods that matters, but the presence of relatively complete markets in factors that make a market society. All of Obsidian manufacture and Roman house trading in history is simply different in kind.
While gain seeking has indeed existed throughout history, …the historical oddity was that gain-seeking became equated with market transactions only relatively recently. This was a qualitative and not a quantitative change; otherwise Incas, Mayans, Romans, and contemporary Britons were/are all living is societies that were more or less similar in their economic structure, despite the differences in, for example, the presence of slaves. Painting the history of all hitherto existing societies as the history of capitalism in vitro probably obscures more economic history than it illuminates…
This comment gives additional information on what Polanyi meant by markets and embeddedness:
Actually, [Polanyi] does not say that markets are unusual. In fact he says that they are almost universal, just that they were never so important before. They were not socially integrative. If you were to remove them from a given society, it would not fundamentally change it.
In The Economy As An Instituted Process, he identifies three types of exchange: Operational exchange (which is movement in location through trade); Decisional exchange (which is exchange at a fixed price like a local market); and, Integrative exchange (at a bargained rate – in other words what we today call markets). He also draws the distinction between ritualised market bargaining in which participants really know the final price that will be agreed, and actual price-making markets (like a stock exchange).
The important thing is that the other forms or market at not integrative. The prices are fixed by other factors, and those other factors integrate society. And even price-making markets are only integrative if they link up in a system that tends to spread the effects of prices to other markets.
So it is important to understand what he means by markets. He is not concerned with markets that merely facilitate the movement of goods from one place to another. This is very common throughout history, and not what he is concerned about.
He is also arguing that the focus of economics (and psychology) on the individual is wrong, and that to understand economics we need to understand not individual actions themselves, but what motivates them. This is the important thing. And the sources for that action are not individual, but derived from social structure. You cannot share on your own. And you cannot trade on your own. He is not saying that premodern people were all delightful and that modern people are all selfish etc. He is just saying that motivations for action are socially derived, and that the claim that homo economicus is ‘natural’ is clearly disproved by the historical evidence in which communistic action is more common than individualism.
Polanyi on the market (Understanding Society)
Polanyi distinguishes between three different kinds of trade:
- External (a.k.a export or long-distance) Trade
- Local Trade
- Internal (or national) Trade.
The first two he describes as essentially noncompetitive. They were not about maximizing profits or competition, rather they were simply procuring goods which were not available locally, either due to geography or economic specialization (as described above). We’ve already seen them at work a far back as ancient Mesopotamia/Egypt. However, he points that all of these existed external to the societies in which they operated. That is, they did not effect the underlying social relations.
Long-distance trade was primarily conducted in places where traders came together to conduct business, usually on seaports and waterways, or where overland routes converged (as with the Silk Road). Medieval Champagne fairs are one example of this. But strict protections were put in place to prevent this type of trading from affecting the underlying society. This took the form of designating specific trading times and places and enforcing strict rules on commercial behavior. The commercial sphere was kept separate and distinct from the governing sphere. Markets did not affect fundamental social relations. This can be seen, for example, by the many sumptuary laws put in place, which lasted through Elizabethan times.
In fact, early cities seem to have been expressly designed to keep trading at arm’s length, as Sir Leonard Wooley describes of ancient Mesopotamia (emphaisis mine):
Outside of the eastern rampart of the walled native town of Ganeš there stretched a built-up area of rather more than a kilometer’s length which was for the exclusive use of the merchants of Assur. Clearly they were not allowed to live inside the town but were isolated and kept at arm’s length–probably as much by their own wish as by the prejudice of the Anatolians; the Karum, as their quarter was called, might be compared with the ‘factory’ established by the old East India Company outside Calcutta, or…with the town of Naukratis which the Egyptian government assigned to the Greek traders of the seventh century BC…Their main business was the export of copper and as the tablets found in their archives prove they had by their strict application to the business brought their commercial technique, also the legal practices arising from their profession, to a stage even more advanced than that of their colleagues at home.
Kultepe is not the only Anatolian site where a Mesopotamian trading outpost has been discovered; there was one at Bogazköy, and there were probably others conforming more or less to the same pattern. For the pattern has its analogies elsewhere. At Ur itself there was a karum lying outside the walls of the city, and as appears from one of the phrases used, administratively distinct from it; merchants were members of the karum, they settled their accounts there, they could keep their business assets there and if they managed their assets from there they did so as members of the merchants’ guild. It was not a residential area as the Ganeš karum was forced by local conditions to be, but more like what the Royal Exchange was for eighteenth-century London, and a member of it was supposed to act ‘like a gentleman’–mâr awēlim–that is, to observe certain ethical and social standards of conduct; all agreements were made and contracts lodged in the local temple of Shamash the Sun god, so that religious sanction re-enforced the moral code.
Which reinforces Polanyi’s claim that cities and ports were designed as much to protect societies from trade as to encourage it. Japan’s confinement of foreign trade to specific ports during the Sakoku period is another prominent example.
Local trade was the exchange of surplus commodities that took place among specialized producers in shops and market halls on specific days and times. This is the fabled “farmer’s market” of the fair, souk and bazaar. What took place there, however, didn’t much affect your day-to-day life (unless you were a trader, that is). The average person did not need to interact with the market to survive. That is, markets were established to cater to wants, rather than needs. So rather than trade starting out between local villagers and expanding from there to grow into world trade, long-distance trade was primary and slowly seeped down into the daily life of the average person as trade expanded. That is, the history of markets is trickle-down, not percolate-up.
…from the economic point of view external markets are an entirely different matter from either local markets or internal markets. They differ not only in size; they are institutions of different function and origin…
External trade is carrying; the point is the absence of some types of goods in the region; the exchange of English woollens against Portuguese wine was an instance…
Local trade is limited to the goods of the region, which do not bear carrying because they are too heavy, bulky, or perishable.
Thus both external trade and local trade are relative to geographical distance, the one being confined to the goods which cannot overcome it, the other to such only as can. Trade of this type is rightly described as complementary. Local exchange between town and countryside, foreign trade between different climatic zones are based on this principle. Such trade need not involve competition, and if competition would tend to disorganize trade, there is no contradiction in eliminating it…
It might seem natural to assume that, given individual acts of barter, these would in the course of time lead to the development of local markets, and that such markets, once in existence, would just as naturally lead to the establishment of internal or national markets. However, neither the one nor the other is the case. Individual acts of barter or exchange…do not, as a rule, lead to the establishment of markets in societies where other principles of economic behavior prevail. Such acts are common in almost all types of primitive society, but they are considered as incidental since they do not provide for the necessaries of life.
Indeed, on the evidence available it would be rash to assert that local markets ever developed from individual acts of barter…Obscure as the beginnings of local markets are, this much can be asserted: that from the start this institution was surrounded by a number of safeguards designed to protect the prevailing economic organization of society from interference on the part of market practices...Towns, insofar as they sprang from markets, were not only the protectors of those markets, but also the means of preventing them from expanding into the countryside and thus encroaching on the prevailing economic organization of society.
In other words, both these types of trade existed for thousands of years without sacrificing all of society to the Market god. They are not the source of the “Market” as described by economists today. Governments commonly enforced a “wall of separation” between external trade and internal markets. For example, the following description of the port of Whydah on the Guinea coast illustrates the role of markets in a traditional society:
At Whydah, the isolation of places of trade from market place is the basis for the administrative divisions of the town. Each of the European forts, with its surrounding native settlement, constitutes a separate town under administration…All of these separate quarters have their own governors, under the jurisdiction of the Viceroy of Whydah. While the governors of European towns are usually of their respective European nationality, the caboceer of the Market Town is a native official [compare to Mesopotamia, above- CH]
These administrative divisions facilitate the regulation of trade. Access to trade at the European forts is permitted only to those natives authorized to trade. Since exports must be licensed, and an export duty paid by the seller, the royal officials who ‘exercise the refusal of all commerce;’ have the means to control dealings between natives and Europeans. Any indiscriminate traffic with the Europeans..brought immediate reprisal…that is, the cutting off of trade with the fort in question.
This physical separation of trade and market emphasizes the difference in function. Trade in stocks the palace, the army, and the houses of the great. The market caters to the common wants of the population. The great ones of the lands have no needs to resort to the market place for their provisions. Their tables are supplied from their own plantations, and their cloth and military stores from the warehouses of the Europeans in return for slaves.
The market is for common folk and, in the port of trade, also for the foreigner. It is the “working man” taking his breakfast and dinner “in the alley,” or the women selling in the market place, who have need of the piece of firewood or the two-cowrie mouthful of cooked meat. The resident native population of Whydah, belonging to one or the other European forts and subject to labor service for their masters, are “hired out” in menial capacities to the traders and receive “subsistence,” partly in kind and partly in cowries, with which they can feed themselves in the market.
There is also the large floating population of a port town to be supplied with food and neceassaries [sic], men with no hearth or kin to care for them in Whydah; canoemen and carriers from other points on the coast, temporarily beached in Whydah; fishermen from the rivers and lagoons; and, after Britain’s abolition of the slave trade, the liberated slaves dumped in Sierra Leone and finding their way back by stages to their native countries.
We can envisage a similar scene, then, in trading ports in various times and places, from the Mesopotamian entrepôt of Dilmun, to the Roman port of Ostia, to the medieval quays of Antwerp, London, and Genoa. None of these indicated the presence of a market society in the modern sense, however.
Internal markets, however, are a totally different story. These did not “grow out of” the previous two types of markets. It is here where we have multiple sellers and buyers competing against one another for profit. This was not a “natural” outgrowth of either local or long-distance trade. Rather, this was a creation of the state from the very beginning:
These three types of trade which differ sharply in their economic function are also distinct in their origin…even where the towns were founded on the sites of external markets, the local markets often remained separate in respect not only to function but also to organization. Neither the port nor the fair nor the staple was the parent of internal or national markets.
In contrast to both external and local trade, internal trade…is essentially competitive; apart from complementary exchanges it includes a very much larger number of exchanges in which similar goods from different sources are offered in competition with one another. Accordingly, only with the emergence of internal or national trade does competition tend to be accepted as a general principle of trading.
The typical local market on which housewives depend for some of their needs, and growers of grain or vegetables as well as local craftsmen offer their wares for sale…are not only fairly general in primitive societies, but remain almost unchanged right up to the middle of the eighteenth century in the most advanced countries of Western Europe…they nowhere show any sign of reducing the prevailing economic system to their pattern. They are not starting points of internal or national trade…neither long-distance trade nor local trade was the parent of the internal trade of modern times—thus apparently leaving no alternative but to turn for an explanation to the deus ex machina of state intervention…
Internal trade in Western Europe was actually created by the intervention of the state. Right up to the time of the Commercial Revolution what may appear to us as national trade was not national, but municipal…Trade was limited to organized townships which carried it on either locally, as neighborhood trade, or as long-distance trade—the two were strictly separated, and neither was allowed to infiltrate into the countryside indiscriminately…An increasingly strict separation of local trade from export trade was the reaction of urban life to the threat of mobile capital to disintegrate the institutions of the town.
In practice this meant that the towns raised every possible obstacle to the formation of that national or internal market for which the capitalist wholesaler was pressing. By maintaining the principle of a noncompetitive local trade and an equally noncompetitive long-distance trade carried on from town to town, the burgesses hampered by all means at their disposal the inclusion of the countryside into the compass of trade and the opening up of indiscriminate trade between the towns of the country. It was this development which forced the territorial state to the fore as the instrument of the “nationalization” of the market and the creator of internal commerce. Deliberate action of the state in the fifteenth and sixteenth centuries foisted the mercantile system on the fiercely protectionist towns and principalities…
Fundamental to this change was the “great transformation” of land, labor and capital into commodities.
For Polanyi, commodities are things produced expressly to buy, sell, or trade. Land and labor are decidedly not commodities– they are the very foundations of human life itself. Transforming them into chattel to be sold in markets was profoundly unnatural, despite its normalization in our world. Similarly, there is nothing “natural” about capital; it is entirely a creation of state finance, and was brought about by specific decisions and institutional arrangements. For this reason, Polanyi calls these things “fictitious commodities:”
Production is interaction of man and nature; if this process is to be organized through a self-regulating mechanism of barter and exchange, then man and nature must be brought into its orbit; they must be subject to supply and demand, that is, be dealt with as commodities, as goods produced for sale.
Such precisely was the arrangement under a market system. Man under the name of labor, nature under the name of land, were made available for sale; the use of labor power could be universally bought and sold at a price called wages, and the use of land could be negotiated for a price called rent. There was a market in labor as well as in land, and supply and demand in either was regulated by the height of wages and rents, respectively; the fiction that labor and land were produced for sale was consistently upheld. Capital invested in the various combinations of labor and land could thus flow from one branch of production to another, as was required for an automatic leveling of earnings in the various branches.
But, while production could theoretically be organized in this way, the commodity fiction disregarded the fact that leaving the fate of soil and people to the market would be tantamount to annihilating them.
Polanyi goes deep into the history and sees that it was a rewriting of society’s rules, primarily to benefit the elites, was the source of the change, not some “natural’ evolutionary process. Concerning land, for example, Polanyi declares:
What we call land is an element of nature inextricably interwoven with man’s institutions. To isolate it and form a market for it was perhaps the weirdest of all the undertakings of our ancestors. Traditionally, land and labor are not separated; labor forms part of life, land remains part of nature, life and nature form an articulate whole. Land is thus tied up with the organizations of kinship, neighborhood, craft, and creed—with tribe and temple, village, guild, and church.
Economic historian Douglass North describes how land in the Middle Ages was not owned outright, but subject to the needs of a variety of overlapping stakeholders:
…Feudal law did not recognize the concept of land ownership. It basic characteristic was that several persons had jurisdiction or held and shared particular rights to the same piece of land. The [kings, the lords and the peasants] each held particular rights to receive income, called incidents, from the land.
There existed two ways to transfer land, by substitution, or by subinfeudation. The former required that the land be surrendered to the lord who would in turn grant the land to another, and the second, that the tenant in turn grant the land to another, the tenant becoming the lord of the person to whom he conveyed the land. The incidents or obligations of the land remained in either case. Sub-infeudation, however, added another tenant to the feudal chain. The lord, in the event of a dispute, could move only against his tenant and not his tenant’s tenant. Should his tenant disappear, the higher lords were apt to lose their incidents since they had no legal recourse against the person actually in possession of the land.
The rising real value of land provided incentives to establish, re-establish and define the claims to land by rival groups in the society. Two key statutes in this regard were: Merton in 1235 and Westminster in 1285. These permitted the manorial lord to enclose wasteland so long as sufficient land was left to the tenants. Thus the lords obtained the exclusive right to substantial areas of the manor’s land formerly belonging to all of the inhabitants.
It is revealing to inquire how the freeholders in England acquired the right to alienate their lands in sum, obtaining a property right approaching fee-simple ownership. The Norman conquest had resulted in a stronger central government in England than existed in the rest of the feudal world. The centralized authority of the king’s court in England had no exact parallel on the continent. During the thirteenth century the King’s Court gradually expanded its jurisdiction relative the the seigneurial courts. One of the key precedents that emerged from this struggle was the recognition that the King’s Court held jurisdiction over free men. A freeman came to be defined as a man whose obligations were strictly defined. As the manorial lords lost jurisdiction over the freeman, they also lost control over his land holdings. 
Thus we see once again that is was a strong government, not a weak one, which was required to bring about the state project of capitalism.
Labor, too, became a commodity to be bought and sold, rather than something done for its own sake. This was partly accomplished by the destruction of the guild system, which had put in place very strict safeguards as to both internal and foreign competition, quality control, and best practices. Rather than work on your own behalf, work would be done by contract:
Of the three, one stands out: labor is the technical term used for human beings, insofar as they are not employers but employed; it follows that henceforth the organization of labor would change concurrently with the organization of the market system. But as the organization of labor is only another word for the forms of life of the common people, this means that the development of the market system would be accompanied by a change in the organization of society itself. All along the line, human society had become an accessory of the economic system.
To separate labor from other activities of life and to subject it to the laws of the market was to annihilate all organic forms of existence and to replace them by a different type of organization, an atomistic and individualistic one. Such a scheme of destruction was best served by the application of the principle of freedom of contract. In practice this meant that the noncontractual organizations of kinship, neighborhood, profession, and creed were to be liquidated since they claimed the allegiance of the individual and thus restrained his freedom. To represent this principle as one of noninterference, as economic liberals were wont to do, was merely the expression of an ingrained prejudice in favor of a definite kind of interference, namely, such as would destroy noncontractual relations between individuals and prevent their spontaneous reformation.
Lewis Mumford describes the medieval guild system and what replaced it:
The prime agents of this industrial freedom were the craft guilds: independent self-governing bodies, established typically in equally self-governing cities, which provided for the education, the discipline, and the sustenance of their members, from youth to old age, in sickness and health, and cared for the widows and orphans of their brothers in need. Not least, the guilds set for themselves standards of qualitative performance: quantity production, as such, did not play a part except where the guild system itself had broken down.
Even before the mechanization of production, some of this freedom had been whittled away by the mercantile practices that favored the bigger masters in the wholesale trades, who formed a ruling oligarchy and who, after the sixteenth century, farmed out work to unprotected handicraft workers in the rural or even suburban areas outside the jurisdiction of the guild. The legal abolition of the guilds, which followed, opened the way for the dehumanized practices of early machine industry. Thus the new freedom proclaimed by the advocates of ‘laissez-faire,’ like Adam Smith, was freedom to abandon the medieval system of guild protection and social security and to be exploited by those who owned the costly new machinery of production.
By a mental sleight of hand, this accompaniment of mechanical progress was minimized by those committed to the system: in proclaiming the immense economies of mass production, they ignored the fact that the landless and the homeless proletarians, forced into the new factories by the price-undercutting of handicraft labor were worse off, in food, sanitary facilities, water supply, and environmental amenities than the agricutural workers of their own time: a fact established by the English life-insurance tables, which show that farm laborers still have a notably higher expectation of life. The factory system degraded the worker into a wage slave instead of using its power machines to abolish slavery.
The Enclosure movement turned both land and labor into commodities to be bought and sold. As common land became enclosed, and with no other means to support themselves, the deracinated laborers had no other choice but to sell their labor at a rate (wage) to those willing to buy it in order to procure the necessities of life. That is, they must be compelled to work for others by depriving them of self-sufficiency. This catastrophic process was hardly as “natural” as libertarians claim:
Enclosures have appropriately been called a revolution of the rich against the poor. The lords and nobles were upsetting the social order, breaking down ancient law and custom, sometimes by means of violence, often by pressure and intimidation. They were literally robbing the poor of their share in the common, tearing down the houses which, by the hitherto unbreakable force of custom, the poor had long regarded as theirs and their heirs’. The fabric of society was being disrupted; desolate villages and the ruins of human dwellings testified to the fierceness with which the revolution raged, endangering the defences of the country, wasting its towns, decimating its population, turning its overburdened soil into dust, harassing its people and turning them from decent husbandmen into a mob of beggars and thieves.
Though this happened only in patches, the black spots threatened to melt into a uniform catastrophe. The King and his Council, the Chancellors, and the Bishops were defending the welfare of the community and, indeed, the human and natural substance of society against this scourge. With hardly any intermittence, for a century and a half—from the 1490s, at the latest, to the 1640s they struggled against depopulation…
Polanyi sees the same principle at work during Europe’s colonial expansion. In traditional societies, no individual starves; rather the whole society maintains food reserves and tightens their belts. But to get people to work, there needs to be the whip and the lash of hunger and destitution to get them to sell their labor to the highest available bidder, part of the same carrot-and-stick approach that compels us to work today. To accomplish this, traditional social bonds, which made sure no one went hungry, had to be destroyed. The “starving African” cliche is entirely a creation of Western colonialism:
This effect of the establishment of a labor market is conspicuously apparent in colonial regions today. The natives are to be forced to make a living by selling their labor. To this end their traditional institutions must be destroyed, and prevented from reforming, since, as a rule, the individual in primitive society is not threatened by starvation unless the community as a whole is in a like predicament. Under the kraal-land system of the Kaffirs, for instance, “destitution is impossible: whosoever needs assistance receives it unquestioningly.” No Kwakiutl “ever ran the least risk of going hungry.” “There is no starvation in societies living on the subsistence margin.” The principle of freedom from want was equally acknowledged in the Indian village community and, we might add, under almost every and any type of social organization up to about the beginning of sixteenth-century Europe, when the modern ideas on the poor put forth by the humanist Vives were argued before the Sorbonne…
It is the absence of the threat of individual starvation which makes primitive society, in a sense, more humane than market economy, and at the same time less economic. Ironically, the white man’s initial contribution to the black man’s world mainly consisted in introducing him to the uses of the scourge of hunger. Thus the colonists may decide to cut the breadfruit trees down in order to create an artificial food scarcity or may impose a hut tax on the native to force him to barter away his labor. In either case the effect is similar to that of Tudor enclosures with their wake of vagrant hordes.
A League of Nations report mentioned with due horror the recent appearance of that ominous figure of the sixteenth-century European scene, the “masterless man,” in the African bush. During the late Middle Ages he had been found only in the “interstices” of society.” Yet he was the forerunner of the nomadic laborer of the nineteenth century…There is close analogy between the colonial situation today and that of Western Europe a century or two ago. But the mobilization of land which in exotic regions may be compressed into a few years or decades may have taken as many centuries in Western Europe.
Internal markets can only exist in a “market society” where everything is for sale. In such a society, land and labor must no longer be “embedded,” but must be separated. They must alienable from their owners. This leads to the creation of an “economic” sphere totally separate from the social and political spheres.
A self-regulating market demands nothing less than the institutional separation of society into an economic and a political sphere…True, no society can exist without a system of some kind which ensures order in the production and distribution of goods. But that does not imply the existence of separate economic institutions; normally, the economic order is merely a function of the social order. Neither under tribal nor under feudal nor under mercantile conditions was there, as we saw, a separate economic system in society…Such an institutional pattern could not have functioned unless society was somehow subordinated to its requirements.
A market economy can exist only in a market society…A market economy must comprise all elements of industry, including labor, land, and money…But labor and land are no other than the human beings themselves of which every society consists and the natural surroundings in which it exists. To include them in the market mechanism means to subordinate the substance of society itself to the laws of the market.
The crucial point is this: labor, land, and money are essential elements of industry; they also must be organized in markets; in fact, these markets form an absolutely vital part of the economic system…The extension of the market mechanism to the elements of industry labor, land, and money— was the inevitable consequence of the introduction of the factory system in a commercial society. The elements of industry had to be on sale…But labor, land, and money are obviously not commodities; the postulate that anything that is bought and sold must have been produced for sale is emphatically untrue in regard to them…But the fiction of their being so produced became the organizing principle of society.
What was the reason for this fundamental change? There are many answers, but in Polanyi’s view, the primary cause was the application of machines to the production process. This new production process required the creation of universal markets where land, labor, and capital were the necessary inputs:
We submit that an avalanche of social dislocation, surpassing by far that of the enclosure period, came down upon England; that this catastrophe was the accompaniment of a vast movement of economic improvement; that an entirely new institutional mechanism was starting to act on Western society; that its dangers, which cut to the quick when they first appeared, were never really overcome; and that the history of nineteenth-century civilization consisted largely in attempts to protect society against the ravages of such a mechanism. The Industrial Revolution was merely the beginning of a revolution as extreme and radical as ever inflamed the minds of sectarians, but the new creed was utterly materialistic and believed that all human problems could be resolved given an unlimited amount of material commodities.
The story has been told innumerable times: how the expansion of markets, the presence of coal and iron as well as a humid climate favorable to the cotton industry, the multitude of people dispossessed by the new eighteenth-century enclosures, the existence of free institutions, the invention of the machines, and other causes interacted in such a manner as to bring about the Industrial Revolution. It has been shown conclusively that no one single cause deserves to be lifted out of the chain and set apart as the cause of that sudden and unexpected event.
But how shall this revolution itself be defined? What was its basic characteristic? Was it the rise of the factory towns, the emergence of slums, the long working hours of children, the low wages of certain categories of workers, the rise in the rate of population increase, or the concentration of industries? We submit that all these were merely incidental to one basic change, the establishment of market economy, and that the nature of this institution cannot be fully grasped unless the impact of the machine on a commercial society is realized. We do not intend to assert that the machine caused that which happened, but we insist that once elaborate machines and plant were used for production in a commercial society, the idea of a self-regulating market system was bound to take shape.
As for ‘capital’, this was entirely a creation of the state as we saw last time. Money issued by the state and demanded for the extinguishing of tax liability was the driver of internal markets, rather than government “stealing” from the merchants. Governments do not need the taxes in order to operate, rather they require taxes to facilitate market operations. Government financial operations were used to create the “capital.” on which the merchants depended for their enterprise. Chartered corporations such as the Dutch East India company, were entirely the creations of central governments. The creation of these companies gave rise, in turn, to stock markets. One prominent example is the use of money to commercialize labor in Africa. Here markets, unlike the one described above in Dahomey, were entirely creations of the central state:
In his study of colonial Africa, Forstater similarly concludes that by imposing a debt obligation (taxes) on colonial Africans denominated in foreign currency (British Pounds), the British were able to dismantle the pre-existing economic structure in Africa and to monetize its whole economy and population (2005). In other words, the British government succeeded in creating a new money of account (British Pounds) in colonial Africa by coercively indebting the population and demanding British Pounds as the only means of payment to extinguish the Africans’ liabilities to the colonial government. This effectively moved the African labor power to production desired by the British colonizer since the only means to acquire British Pounds were to work at British farms or mines (Forstater, 2005). British Pounds immediately became the new money used by the colonial Africans. Hence, levying a tax liability denominated in foreign currency was sufficient (though not necessary) not only to compel the population to use new money but also to move labor power to desirable areas. Note that in this process the British Pounds must first be spent into the hands of the colonial Africans to allow for any tax payment.
Vincent Huang: On the Nature of Money (Naked Capitalism)
But demolishing society and turning it all into One Big market threatened to tear the very fabric of society apart. To cope with this, societies fought back against the social engineering of market liberals. This took the forms of rebellions and social movements, which raged throughout the nineteenth century and beyond. For Polanyi, these “double moments” were the defining events of the previous 150 years of European and world history (also argued by Eric Hobsbawm):
To allow the market mechanism to be sole director of the fate of human beings and their natural environment indeed, even of the amount and use of purchasing power, would result in the demolition of society…While on the one hand markets spread all over the face of the globe and the amount of goods involved grew to unbelievable dimensions, on the other hand a network of measures and policies was integrated into powerful institutions designed to check the action of the market relative to labor, land, and money…Society protected itself against the perils inherent in a self-regulating market system—this was the one comprehensive feature in the history of the age.
Government’s job had been relegated to merely being a hands-off manager for the markets. But as the common people became subject to near-constant booms and busts, leading to poverty, destitution, and even starvation for large swaths of the population (conveniently exorcised from the official history of capitalism), they demanded the authorities step in and rein in the abuses of the Market, preventing the “pure” market of libertarian dreams from ever coming to fruition. This is what Polanyi calls the “double movement” – the closer authorities try to get to the “pure” market economy, the more society pushes back against it, as Fred Block describes: “In this sense one might say that disembedding the market is similar to stretching a giant elastic band. Efforts to bring about greater autonomy of the market increase the tension level. With further stretching, either the band will snap—representing social disintegration—or the economy will revert to a more embedded position.” 
As long as the economy is not totally “pure” that is, not free from government “interference,” libertarians can chalk up any sort of market failure to government intervention, exactly as they do today. To them, any role for government whatsoever becomes an all-purpose “get out of jail free” card: “crony capitalism.” Indeed, most “burdensome regulations” are put in place to deal with market failures, and then libertarians turn around blame the regulations for the failure of markets in the first place! But as Polanyi argues, abolishing the government and leaving it all up to the market is impossible:
Modern economics starts by pretending that these fictitious commodities will behave in the same way as real commodities, but Polanyi insists that this sleight of hand has fatal consequences. It means that economic theorizing is based on a lie, and this lie places human society at risk.
Even though the economy is supposed to be self-regulating, the state must play the ongoing role of adjusting the supply of money and credit to avoid the twin dangers of inflation and deflation. Similarly, the state has to manage shifting demand for employees by providing relief in periods of unemployment, by educating and training future workers, and by seeking to influence migration flows. In the case of land, governments have sought to maintain continuity in food production by a variety of devices that insulate farmers from the pressures of fluctuating harvests and volatile prices. In urban areas governments manage the use of the existing land through both environmental and land-use regulations. In short, the role of managing fictitious commodities places the state inside three of the most important markets; it becomes utterly impossible to sustain market liberalism’s view that the state is “outside” of the economy.
The fictitious commodities explain the impossibility of disembedding the economy. Real market societies need the state to play an active role in managing markets, and that role requires political decision making; it cannot be reduced to some kind of technical or administrative function.” When state policies move in the direction of disembedding through placing greater reliance on market self-regulation, ordinary people are forced to bear higher costs. Workers and their families are made more vulnerable to unemployment, farmers are exposed to greater competition from imports, and both groups are required to get by with reduced entitlements to assistance. It often takes greater state efforts to assure that these groups will bear these increased costs without engaging in disruptive political actions. This is part of what Polanyi means by his claim that “laissez-faire was planned”; it requires statecraft and repression to impose the logic of the market and its attendant risks on ordinary people.
Because societies invariably draw back from the brink of full-scale experimentation with market self-regulation, its theorists can always claim that any failures were not the result of the design but of a lack of political will in its implementation. The creed of market self-regulation thus cannot be discredited by historical experiences; its advocates have an airtight excuse for its failures.
As Michael Hudson has said, “all economies are planned, the only question is who does the planning.”
David Harvey in “A Short History of Neoliberalism,” summarizes the many ways in which government action creates the market, both back then, and now more recently under Neoliberalism:
…These include the commodification and privatization of land and the forceful expulsion of peasant populations; conversion of various forms of property rights (common, collective, state, etc.) into exclusive private property rights; suppression of rights to the commons; commodification of labour power and the suppression of alternative (indigenous) forms of production and consumption; colonial, neocolonial, and imperial processes of appropriation of assets (including natural resources); monetization of exchange and taxation, particularly of land; the slave trade (which continues particularly in the sex industry); and usury, the national debt and, most devastating of all, the use of the credit system as a radical means of accumulation by dispossession. The state, with its monopoly of violence and definitions of legality, plays a crucial role in both backing and promoting these processes.
Comments on David Harvey’s “A Brief History of Neoliberalism” (Naked Capitalism)
Which brings us to today. Now the needs of the Markets dominate the world, all of us need to sell our labor to survive as Naked Capitalism points out:
What is remarkable is how we’ve blinded ourselves to the coercive element of our own system. From Robert Heilbroner in Behind the Veil of Economics:
“This negative form of power contrasts sharply with with that of the privileged elites in precapitalist social formations. In these imperial kingdoms or feudal holdings, disciplinary power is exercised by the direct use or display of coercive power. The social power of capital is of a different kind….The capitalist may deny others access to his resources, but he may not force them to work with him. Clearly, such power requires circumstances that make the withholding of access of critical consequence. These circumstances can only arise if the general populace is unable to secure a living unless it can gain access to privately owned resources or wealth…”
“The organization of production is generally regarded as a wholly “economic” activity, ignoring the political function served by the wage-labor relationships in lieu of baliffs and senechals. In a like fashion, the discharge of political authority is regarded as essentially separable from the operation of the economic realm, ignoring the provision of the legal, military, and material contributions without which the private sphere could not function properly or even exist. In this way, the presence of the two realms, each responsible for part of the activities necessary for the maintenance of the social formation, not only gives capitalism a structure entirely different from that of any precapitalist society, but also establishes the basis for a problem that uniquely preoccupies capitalism, namely, the appropriate role of the state vis-a-vis the sphere of production and distribution.’
What struck me about Heilbroner’s discussion, as if he was tip-toeing around the issue, and it was not clear whether because he could not formulate a crisp description of the power relationships, or that it was clear to him but he really didn’t want to come out and say what he saw.
Ian Welsh ventures where Heilbroner hesitated to go:
“The fundamental idea of our current regime is one that most people have forgotten, because it is associated with Marx, and one must not talk about even the things Marx got right, because the USSR went bad. It is that we are wage laborers. We work for other people, we don’t control the means of production. Absent a job, we live in poverty. Sure, there are some exceptions, but they are exceptions. We are impelled, as it were, by Marx’s whip of hunger. It took a lot of work to set up this system, as Polyani notes in his book “the Great Transformation”, but now that it has happened, it is invisible to us.”
We have to sell our labor (or be supported by someone who does that) as a condition of survival. Now that may not seem peculiar since that has been the state of affairs in most advanced economies for generations. The seeming exceptions, like farmers and even fishermen, are now little capitalists; they own equipment and sell their goods to wholesalers of various sorts. This order was imposed after the feudal era. As Yasha Levine explained, citing Michael Perelmen’s The Invention of Capitalism:
“Faced with a peasantry that didn’t feel like playing the role of slave, philosophers, economists, politicians, moralists and leading business figures began advocating for government action. Over time, they enacted a series of laws and measures designed to push peasants out of the old and into the new by destroying their traditional means of self-support.”
“‘The brutal acts associated with the process of stripping the majority of the people of the means of producing for themselves might seem far removed from the laissez-faire reputation of classical political economy,” writes Perelman. “In reality, the dispossession of the majority of small-scale producers and the construction of laissez-faire are closely connected, so much so that Marx, or at least his translators, labeled this expropriation of the masses as ‘‘primitive accumulation.’'”
“Perelman outlines the many different policies through which peasants were forced off the land—from the enactment of so-called Game Laws that prohibited peasants from hunting, to the destruction of the peasant productivity by fencing the commons into smaller lots—but by far the most interesting parts of the book are where you get to read Adam Smith’s proto-capitalist colleagues complaining and whining about how peasants are too independent and comfortable to be properly exploited, and trying to figure out how to force them to accept a life of wage slavery.”
And this might put the “failure of capitalism” theme in context. If you have a system that requires that people sell their labor as a condition of survival, yet fails to provide enough opportunities to sell labor to go around, you have conditions for revolt. Hungry, desperate people having nothing to lose. That, and not charity, is the root of the welfare state, to provide a buffer for when the capitalist system chokes up and presumably on a short-term basis, fails to provide enough jobs (that and to provide for people who are infirm, handicapped, or otherwise cannot work, which communities in England did in the early modern era).
So you can see the obvious tension: the capitalist classes in America, to increase their riches further, have been squeezing workers harder by not hiring as they did in the past. We’ve never had a “recovery” in the post-WWII era with so little of GDP growth going to labor (meaning both hiring and wage increases). In the past, the average was over 60% and the lowest was 55%. I haven’t seen a recent update, but the last figures I saw was that the level for this “recovery” was under 30%. Yet simultaneously, there’s a full-bore effort on to gut the remaining safety nets. If this isn’t a prescription for social and political instability, I don’t know what is.
The Coercive Power of Capitalism (Naked Capitalism)
Which brings us to the crisis of the modern world. We’ll be talking about that next time.
* I often capitalize the word Market to make this distinction. In English, we unfortunately have the same word for these different concepts. Places where goods are bought and sold is a small-m market, like a farmer’s market. The big-M Market is the One Big Market who must be constantly be appeased and whose “demands” we must carry out. That’s the other reason I like to capitalize it – to emphasize the fact that it has become the quasi-deity of the modern world: omniscient, all-powerful, capricious, inscrutable, unfathomable, and never to be questioned, with economists as its high priests. Polanyi points out that the dramatic swings and cycles in the One Big Market are the equivalent to floods and famines in ancient times, except ours are self-inflicted.
 Sir Leonard Wooley; The Beginnings of Civilization, p. 321
 Mark Blyth; The Great Transformation in Understanding Polanyi: A Reply to Hejeebu and McCloskey, p. 3 http://www.markblyth.com/wp-content/uploads/2013/08/BlythCR.pdf
 ibid. pp. 7-9
 Wooley, p. 335-336
 Polanyi, K. ed.; Trade and Markets in Early Empires, pp. 182-183
 Douglass North, The Rise of the Western World: A New Economic History, pp. 63-64
 Lewis Mumford; The Myth of the Machine, Vol. 1, pp. 133-134
 From the introduction, see http://dieoff.org/_History/TheGreatTransformation.htm